Constantly over the past decade, progressive economists and econo-bloggers have called on Democrats to spend boldly, run trillion-dollar deficits, and not worry about balanced budgets.
Modern Monetary Theory is the idea that has been behind these calls for New Deal-type expansions of government. “The very words ‘debt’ and ‘deficit’ have been weaponized for political ends,” wrote liberal economist and leading MMT evangelist Stephanie Kelton in 2017 in the New York Times. “They serve as body armor to politicians who would deny resources to struggling communities or demand cuts to popular programs. … The deficit itself could be deployed as a potent weapon in the fights against inequality, poverty and economic stagnation.”
The short version of MMT is that taxes don’t really fund government spending; government covers its spending by making money and then giving it to recipients. A government deficit, when the government spends more than it takes in, is a “private sector surplus” since the rest of the economy will have taken in more than it paid in taxes.
During the pandemic lockdowns in 2020, Kelton wrote in the Times how MMT could “free policymakers not only to act boldly amid crises but also to invest boldly in times of more stability. It matters because to lift America out of its current economic crisis, Congress does not need to ‘find the money,’ as many say, in order to spend more. It just needs to find the votes and the political will.”
After multiple massive COVID spending bills and the passage of the “American Rescue Plan,” Kelton again took to the pages of the Times, painting the road map for how “Biden Can Go Bigger and Not ‘Pay for It’ the Old Way.”
Yes, after spending $6 trillion in emergency spending in addition to the ordinary trillions, MMT economists and liberal politicians were calling for Biden to spend even more. He didn’t have to “pay for it” with spending cuts or tax hikes, they argued.
And the MMTers won out. They converted Biden to be one of their own. “He is owning this,” Kelton said of Biden and MMT.
It probably wasn’t too hard to convince Biden of an argument that effectively amounted to: You can give money freely to your constituents and donors without having to raise taxes on your rich constituents or corporate donors.
But here’s the thing: MMTers have another part of their economic theory. It’s not just government can spend what it wants because it can issue as much money as it wants. MMTers understand that excess government spending, particularly if it’s not tied to productivity, can spur excess inflation.
Inflation, not revenue, is the constraint on government spending from the MMT perspective. And this is why MMT was always a bad idea: Its practitioners and its evangelists were never going to do anything about inflation.
They weren’t going to stop pumping money into the economy, even when the economy was running very hot and the conditions for inflation were already there. They weren’t going to advocate any real anti-inflation measures because real anti-inflation measures would be politically unpleasant.
So the condition in which “Spend Big And Don’t Pay For It” could be justified was vigilance against inflation, which we never had.
Biden was never going to take steps to dampen consumption — not even three years out from his reelection. Democrats always say that the middle class and the poor have a greater propensity to spend a marginal extra dollar, and so taming inflation might require a middle-class tax hike. Biden won’t even admit to wanting to hike taxes on most six-figure earners, much less middle-class families.
When Kelton spoke about anti-inflation measures in 2021, she skipped over tax hikes. Instead, she offered some central-planning industrial policy such as manufacturing subsidies or “even more ‘carrot’ incentives like direct federal procurement, grants, and loans.” A looser immigration policy was one suggestion, and a lower Medicaid-eligibility age was another. In other words, put out policies progressives want anyway, rather than anything with real teeth.
In the end, what Biden is giving us is the fun part of MMT, hand out gobs of cash to whomever you want to reward or bribe, without the anti-inflation part, which could be a bit of a bummer. Call it semi-Modern Monetary Theory.
