If we can’t get the rich to pay for all this democratic socialism the Left would give us these days, then how are we going to pay for it? Up pops that other current bright idea, modern monetary theory: We just print the money and go spend it. It is actually true that nobody has ever had socialism paid for by the rich, so it’s good to have an alternative idea out there. It’s even true that modern monetary theory works, in theory.
The only problem is when we add in these odd people, us humans, it fails.
As Stephanie Kelton, one of Bernie Sanders’ advisers, points out, MMT is actually true. Modern money is just something made up by the government so it can create as much as it likes. If the economy is performing below par because of a lack of money, then making up more money will get it trucking again. That’s entirely and completely true. Although my own analogy is that money is the lubricant of the economy, not the power of it. We can certainly damage the performance with too little lubricant, and Milton Friedman would have agreed. But ever more lubricant isn’t going to produce economic growth; it’s something which quickly reaches its limits.
Leave that little quirk of mine aside, and MMT proponents will agree that there are limits even to their version of the story. The real limit to growth and economic performance is unused resources that can be put to use by our addition of more money, more government spending power. Once we run out of those, then any further stimulus just turns up as inflation. We can either then stop adding money or tax it back to kill that inflation. The presence of inflation shows that we don’t have unused resources that can be brought into employment through further money creation.
Okay, there’s nothing there to confront or confound conventional economics, other than those real-world examples of where it interacts with actual human beings, of course, like Zimbabwe. The country had its own sovereign currency and they stimulated the heck out of the economy with it, until that failed in a hyperinflation and they switched to a currency, the USD, the local politicians couldn’t print more of. They didn’t have an intervening period of full employment of all economic resources, sadly, so one part of the MMT argument doesn’t seem to work outside the Ivory Tower.
They also introduced two more new currencies more recently: Real Time Gross Settlements (electronic money settled through the central bank, really) and bond notes. They’ve just agreed that these haven’t worked out quite as hoped and they’re now worth only 25 percent or so of what they were a year ago. For, you see, the government could print more of them in order to stimulate the economy and thus bring into play unused resources to grow the economy, and it didn’t work this time either. That these are worth 25 percent of face value just means that we’ve had lots and lots of inflation in them in the past year. Because the government printed lots of them in order to stimulate — you get the picture.
It’s often said that people disagree just because they don’t understand each other. I do indeed understand MMT, and I don’t think proponents understand humans. The varied “if this, then do that” in the theory all work. It’s just humans don’t tend to do the things the theory requires. Sure, we can stimulate the economy with more money printing. It’s just that people with the taste for that never do stop nor tax back the resultant inflation.
We can even explain this to people who have no idea of economics at all. Here’s one way of putting it: Politicians can spend as much as they like on whatever, and if it goes too far they can just raise taxes. Sound like a deal? It could also be described as follows: Giving politicians a blank checkbook and telling them to go have fun is likely to work out well, right?
Tim Worstall (@worstall) is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
