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Rising stock and real estate values assume an American renaissance based on a renewal of the nation’s hard and soft infrastructure. It requires, in the absence of legislatively challenging tax increases, an expansion of deficits and public debt.
In this context, the attractions of Modern Monetary Theory (MMT) for politicians irrespective of ideology are obvious. It allows near-unlimited spending financed by central banks and money printing, largely avoiding the scrutiny and discipline of markets and bond vigilantes. The promise of full employment, an expansion of government services and resurgent prosperity is irresistible.
Events have given MMT momentum. Since 2008, the global economy has been trapped in a protracted semi-slump managed by ever-lower interest rates, repeated bouts of quantitative easing and bursts of fiscal stimulus. More recently, the public health cost of the COVID-19 pandemic and the need to support economic activity has exacerbated the debt overhang. U.S. president Joe Biden is reliant on the support of more progressive members of his party, some of whom believe in the new magical economics.
Nowadays the theory already offers cover for key policies. Central bank debt purchase programs that absorb all- or a high-percentage of new issuance, effectively financing government spending, looks a lot like “MMT-lite.”
There are several concerns. First, MMT justifies greater government intervention in economic activity. The Biden administration, consistent with the prevailing global post-pandemic political dogma, has boasted that big government is back.
But MMT encourages lazy policymaking. It does not address key structural issues, such as excessive debt, sectoral and cross-border imbalances, industrial structure, trade policy, wage levels and demographics. It neatly avoids having to deal with messy and controversial matters, such as the appropriate distribution of income and wealth or systemic inequalities. It ignores how wealth is created. It wants to wish away resource scarcity, environmental and growth constraints, as well as the economic relationships between countries.
Second, while not central to the theory, the ability to use MMT to finance universal basic income (UBI) is politically attractive. Emergency pandemic income support measures, especially the one-off payments and increases in welfare entitlements, may foreshadow more permanent arrangements.
The traditional objection to UBI is its cost and funding. In the U.S., for example, $1,000 per month per person would equate to a total cost of around $4 trillion per year, about the size of the pre-pandemic U.S. federal budget. The Organization for Economic Cooperation and Development found that income tax would have to increase by almost 30% to fund a modest UBI. MMT removes this financing barrier.
UBI can address poverty traps inherent in welfare systems, the declining share of income going to labor and increasing threats to employment from automation. It may improve government assistance programs by minimizing bureaucracy, the administrative costs of delivery, and drainage of resources through political exploitation or benefit fraud. Yet its full economic and social impact, especially on work incentives, remains fiercely contested.
Third, it risks undermining the role of money. MMT, irrespective of whether it funds a job guarantee or UBI, might create unease in citizens. Instead of spending the money made available, they may question a world where governments print money and give it away. In the most extreme case, history shows that the population may simply stop trusting or using the currency.
Finally, it alters power relationships and reduces checks and balances. Banker Mayer Amschel Rothschild understood this: ‘Permit me to issue and control the money of a nation, and I care not who makes its laws!’
Proponents of MMT want elected politicians, rather than unelected central bankers, to be responsible for economic management. This perhaps explains its political following. But elected representatives may be poorly equipped to establish when the economy is at full capacity or the deficit level required.
Political rather than economic considerations and cronyism may drive decisions. Deadlock would be problematic. The U.S. Congress last completed all budgetary bills on time more than two decades ago. As a result of the frequent gridlock, congressional budgets now require appropriations and continuing resolutions simply to keep America operating.
Like all economic theories (Keynesian, Monetarist or Marxist), MMT is ultimately political. The problem is that excessive government and central bank intervention may ultimately undermine the key mechanisms of markets. There are already ominous signs: irrational valuations; bizarre investment metrics; odd investor behaviors; prices ceasing to be a meaningful signal; diminished trading liquidity and poor capital allocation. In parallel, smart money has moved away from public markets into opaque private domains.
Investors would do well to understand that the factors underlying their rising paper wealth today bring considerable long-term economic and political risk.
Satyajit Das is a former banker. He is the author of ”A Banquet of Consequences – Reloaded: How we got into this mess we’re in and why we need to act now’ (Penguin 2021).
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