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!