All the rage in progressive policy and political circles in the United States, but not quite on the radar in Canada, is a fairly new set of ideas and prescriptions called Modern Monetary Theory, or MMT for short.
Critics, somewhat unfairly, say MMT is simply a means of printing money to cover a vast, ambitious array of leftist wishes for their version of a statist utopia.
But it does amount to debt monetization, and we’ve seen how dangerous this can be in the hands of politicians who can’t be relied upon to be disciplined and responsible.
For MMT to be successful, policy-makers are supposed to monitor private sector indebtedness. That indebtedness can become dangerous – certainly it was in 2006 through 2008 in the United States and, perhaps now, in Canada.
Government debt is not inherently as dangerous, MMTers contend, since governments supposedly can’t go bankrupt. Governments are also supposed to identify and fill gaps in the economy with additional spending, borrowing at the low rates they enjoy by virtue of being deemed without risk and having the backing of the central bank to backstop that borrowing.
MMT proponents point out to the massive U.S. federal government spending, borrowing and monetization of debt during and after the financial crisis of 2007 through 2009. That came without the inflation that was predicted by economists, despite the increase in the money supply and the spending flooding the economy.
Their sympathizers say that spending could and should have been even higher, then strong growth would have occurred – reminiscent of the old nostrum from progressive or neo-Marxist apologists that socialism hasn’t really been tried to explain its failures.
MMT fans also note that there were huge budget deficits during the Second World War and inflation didn’t soar out of control, although rationing and price controls were used, as was financial repression to keep interest rates low. The great goal of maximum industrial and armaments production generated ultra-full employment.
However, there’s a big difference between an economy that’s in free fall or well under capacity and one that’s at full employment, as they are in Canada and the United States now.
It’s not clear whether more spending is needed or would actually be harmful.
MMT acolytes in the U.S. want to use it to bring about an environmental nirvana, which will cost trillions of dollars if fully implemented, and cause massive unemployment in fossil-fuel industries and those connected to them.
Papering over these devastating dislocations by giving government money to those affected is certainly tempting but may do serious damage. This huge misallocation of resources could harm growth for decades. Aggressive solar and wind tax and subsidy programs in Germany and Spain brought about higher energy costs and, in the former, a heavier reliance on high-CO2-emitting coal.
While MMT theorists contend that spending more doesn’t have to generate inflation, let alone hyper-inflation, they also stipulate that any huge increase in spending has to add value, not destroy it. Spending must be productive: research and development; putting the unemployed into jobs where they learn valuable skills; refurbishing buildings and other assets; additional education or skills training; and creating new or making existing physical plant, infrastructure and government assets more productive and cleaner.
Paying people to do little or even nothing of value, creating extra capacity in industries where there’s little or no demand for their output at reasonable prices, and other misallocation of financial resources will ultimately reduce the true, viable productive capacity of the economy.
And that will indeed produce inflation based on too much demand for limited goods or services.
The more excessive the spending and monetization of the debt borrowed to finance such spending, the higher inflation will go, as it has in Venezuela and Zimbabwe, and as it began to do in the United States, Canada and other Western nations in the 1970s. The resulting damage has been vast.
There may be good reason for higher national deficits, paid for by central banks, but only in cases of severe economic stress during wars or severe recessions.
MMT may have limited merit to jump-start a stagnant economy but it shouldn’t justify extravagant deficit spending, or finance a dramatic increase in government size, power, control and dominance in our economy and our lives. History and reason indicate that’s a dangerous path to follow.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.