Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
—Mr. Micawber in Charles Dickens’ “David Copperfield”
Modern Monetary Theory tells us that Mr. Micawber’s advice needn’t apply to the U.S. Federal Reserve. “Can’t pay for the “Green New Deal” with taxes? No worries—just print more money.”
On its face, MMT—touted by a growing number of progressive politicians—is “just nuts” (to quote a technical economic term used by prominent economist Ken Rogoff. Debt is a bad thing, right? If we “live beyond our means” there will come a day of reckoning with the repo man or a very dour banker. Each of us knows someone who is shackled to college debt or is carrying a crippling credit card balance.
But just as quantum physics doesn’t obey the same rules as classical physics, Mr. Micawber’s advice doesn’t apply if you control the globe’s reserve currency.
Here’s the thing: Currently, everyone loves the U.S. dollar. When the U.S. issues more debt, there’s a long line of individuals, firms and nations ready to buy it. That’s why the federal government pays almost nothing when it borrows. The “real” interest rate paid on U.S. debt—that’s the interest rate minus inflation—has averaged under 1 percent for a decade.
If we print more money as MMT suggests, we do so by issuing debt. And if the world’s appetite for U.S. debt is insatiable, why should we care?
We’ve a modern corollary in business: Amazon’s prominent position in global retail was built on years of meager profits and frequent losses. Investors were so taken by the promise of Jeff Bezos’ firm that it was able to continue growing simply by attracting new investment. Only in 2016 did Amazon begin to report steady profits, rising to a stunning $10 billion in 2018.
This is an imperfect comparison, but instructive. Investor confidence keeps afloat firms like Amazon, Uber, and Theranos that either consistently lose money or earn tiny profits. Amazon’s investors found their confidence paid off. Theranos’ investors did not.
Investor confidence in the U.S. dollar is not irrational. The U.S. economy just clocked the longest expansion in history. Steady employment growth and mild inflation seem likely to persist in the near term. Despite the fact that tax cuts and anticipated expenditures lead the Congressional Budget Office to project an annual deficit of over 4 percent for the coming decade, real interest rates on U.S. treasuries remain at historically low levels.
I agree with MMT enthusiasts that our economy can sustain even larger deficits without catastrophic outcomes, given the current economic climate. The U.S. dollar today has no real competitor. Events of the last decade have shown that the euro is vulnerable to imprudent behavior by a few members. China’s renminbi remains firmly under the thumb of the Chinese state, hardly inspiring confidence. The dollar’s hegemony is built on a strong economy and responsible economic policy, however. If confidence in the dollar is threatened, the global financial system will hedge its bets. Even Facebook’s Libra could displace some of the roles now assumed by the dollar.
As Rogoff and former Treasury Secretary Lawrence Summers have suggested, MMT shares one characteristic with the supply-side economics of the Reagan era: Supply side theory and MMT are true up to a point. Supply siders remind us that high taxes can inhibit growth and that, in special circumstances, cutting taxes can actually increase total tax revenue. The Republican Party has forgotten the “in special circumstances” clause and now blindly supports tax cuts in all times and seasons. If MMT is enshrined by the Democrats, we’ll have both parties fully invested in magical thinking. Katie bar the door!
The issue seems more one of ‘outcome economics’ than analyzing investment practice. If the outcome is ‘good’ (earning a college degree and getting a better paying job) then carrying college debt is worthwhile. If the outcome is ‘bad’ (dropping out of college after two years) then carrying such debt is a mistake. Similarly printing more money — if Honda, hoarding US$, builds a factory in Virginia, ultimate outcome for its US employees is ‘good’ — and the regional economy benefits….and on and on.
Martin, “invest in the country” is a very subjective statement. Is putting hundreds of billions of dollars into health care an “investment”? Maybe, or maybe it’s just consumption. Is wiping out student loan debt an “investment,” because it frees people from the shackles of debt and enables them to either get on with their lives or finish schooling they otherwise couldn’t afford, or is it consumption, because the money has already been spent? Was giving a half billion dollars to Solyndra an investment? If so, it was a bad one; giving tax breaks might have been more productive (and remember that they didn’t just go to the wealthy; every bracket was reduced, and something like 90% of all taxpayers got a cut even with the reduction of deductions like state & local taxes).
Great presentation of the facts Dr. Gardner, but I do not see why you attribute MMT to progressives. For example, several of the 20 or so Democratic pres candidates actually mention raising taxes to pay for their policies. However, none of them use a very sharp pencil in their calculations, and as we all should know by now, statements about the future have a way of turning out differently.
But as you point out, the fact that the $US has no real competitors is really the key. As long as the big recipients of $US keep taking and holding on to them, the US can keep printing away and spending on whatever: give-aways to the rich, tanks and aircraft carriers the military says the US does not need, sending people to Mars, building nuclear powered freezers on Greenland to stop sea level rise…whatever.
But if and when other folks stop being net takers of $US, MMT will have its comeuppance and the USA will be in for a painful period. I find two main possibilities.
1. Super inflation perhaps brought on by China and others buying everything it can using its $US.
2. Something akin to Venezuela when the oil money ran out. Elites kept their power, the poor people got screwed and the middle class left if they could.
T-Bonds. A type of US debt, that gives a return.
The US $ currency. A type of US debt, that doesn’t give a return.
Both issued by, and 100% backed by the government
So, if you have a boat load of $, why wouldn’t you trade them in for T-bonds? Because you are loosing confidence in the US governments ability to repay? The government owns right to ‘print’ dollars, like it did with QE. There is zero…..chance of being unable repay.
So as investor, say you have a billion $, but think that its value is going to plumit, so instead of exchanging them for T-Bonds, you sell them on the foreign market. Sellers require buyers, and whoever bought the dollars now can exchange them for T-Bonds.
The only logical conclusion is that there will always be a market for t-bonds, And the government will always be able to sell them so long the interest rate is above 0, even if this means the investor will loose value since inflation is higher. The investor will loose less if he kept it as $.
I’m puzzled by your comment, Martin. The question at hand is whether the argument that deficits just don’t matter has any substantive validity. My point–in keeping with fellow economists Rogoff & Summers (who is hardly a conservative)–is that gravity hasn’t been repealed. Just as the Voodoo Economics of supply-side economics was valid within a narrow range, so MMT’s prescription can be valid within a narrow range. Let’s just not take this as license to spend whatever we want on whatever Congress thinks is good this year.
I wonder. Who is raising the debit by a trillion dollars a year? It’s the conservatives, not the progressives. At least that’s how it looks to my unsophisticated eyes. It’s what they do with the money that is the difference. Progressives want to invest in the country and conservatives want to pass the money back to the wealthy.