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When in Doubt, Print Money

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When in Doubt, Print Money

Advocates of Modern Monetary Theory want us to believe that debt doesn’t matter and that government can spend endlessly. Summer 2019
Economy, finance, and budgets
Politics and law

Eleven years ago, the 2008 financial crisis transformed politics, creating the conditions for a new crop of national-profile candidates who are throwing the old rules away, from Donald J. Trump to Alexandria Ocasio-Cortez. Now, insurgent academics have come forward with a seemingly elegant theory to revolutionize economics, underpinning the profligate spending impulses of many of these newly minted politicians. This framework, “Modern Monetary Theory” or “Modern Money Theory,” has a simple premise: the U.S. and other Western countries can offer government-funded, good-paying jobs to anyone who wants one and pursue any other public-policy objective as well, through vastly increased spending. The outlays for such ambitious efforts, the theory holds, won’t result in high deficits, high interest rates, or inflation—the bugaboos, typically associated with runaway spending, that haunted Western policymaking on both sides of the aisle from the 1970s to the early 2000s. Those risks are exaggerated, MMT maintains, and can be mitigated through prudent government action.

Extravagant as they sound, MMT’s prescriptions resemble how the U.S. and other Western governments have approached economic and monetary policy in the years leading up to and following the financial crisis. That’s hardly a comforting feature of MMT, though. This upside-down theory matches reality only because reality is upside-down. Western governments have used their power over the past decade to inject trillions of dollars’ worth of government distortions into a supposedly free-market financial system, where the values of stocks, bonds, and real estate have become increasingly hallucinatory. Expanding the MMT model would drive the West only further from reality. MMT promises not a free lunch but a lifetime engorging feast, assuming that because the normal rules of economics don’t apply now, they will never apply. That’s a perilous assumption.

Over the past four decades, a broad economic consensus emerged in the United States, and in the West generally. Harvard professor N. Gregory Mankiw’s 1997 Principles of Economics textbook, long a bible for econ students, with 2 million copies sold, perfectly expresses the traditional view. The 2007 edition, out shortly before the crisis hit, says that taxes are “inevitable because we . . . expect the government to provide us with various goods and services,” which have to be paid for, but they come at a cost. Taxes “have deadweight losses,” Mankiw explains, “because they cause buyers to consume less and sellers to produce less.” And if a “tax gets large enough, tax revenue starts to fall.” As for budget deficits, while they may be unavoidable, particularly during a recession, the “most basic lesson,” Principles observes, is that, as national savings are reduced, “the interest rate rises, and investment falls”—and since investment is important for long-term economic growth, this is harmful to national prosperity.

The consensus feared inflation, as it eroded people’s savings and harmed business’s ability to plan for the future. The Principles text quotes President Gerald Ford deeming it “public enemy number one,” and it points out that “in almost all cases of large or persistent inflation, the culprit is growth in the quantity of money.” More money chasing roughly the same supply of goods means rising prices. In Weimar-era Germany, for instance, the government tripled money quantities every month, and inflation tripled each month. As Milton Friedman famously put it in 1970, “inflation is always and everywhere a monetary phenomenon.”

American and other Western governments have sometimes betrayed the consensus in practice, funding tax cuts and spending with deficits, for example. But they honored the ideal. During the 1980s, President Ronald Reagan promised to balance the budget; two and a half decades later, President Barack Obama created a deficit-reduction commission. During the mid-1990s, Bill Clinton’s administration, worried about rising interest rates, reined in spending to appease “bond vigilantes.” Were he reincarnated, “I would like to come back as the bond market,” Clinton advisor James Carville joked. “You can intimidate everybody.” In 2016, presidential candidate Hillary Clinton’s spending and taxation proposals adhered to the old consensus. These principles—as well as the existence of a central bank, the Federal Reserve, which is independent of the Treasury and can’t print money on demand to fund deficits—constrained government’s ability to spend.

Yet after 2008, the consensus was blown apart. Bank runs, deemed a thing of the past by the traditional textbook, returned with a vengeance. In July 2008, customers formed long lines outside branches of major commercial bank IndyMac in California, desperate to withdraw their money. The government, “citing a massive run on deposits,” the Los Angeles Times reported, shut the bank down. “Please, please, I want to take out a portion,” a customer begged as a branch closed early. (Insured depositors were, after the run, made whole by the government.) That autumn, after the Lehman Brothers investment bank collapsed, the West endured the biggest global bank run ever. “This was a classic financial panic,” observe Ben Bernanke, Henry Paulson, and Timothy Geithner, the crisis-era Federal Reserve chairman and Bush and Obama Treasury secretaries, respectively, in their new book Firefighting: The Financial Crisis and Its Lessons. “The U.S. government . . . had no way to stop a full-blown run” on the global financial system, they recall.

And since then, Western economies and finance have conformed to no pre-2008 model of how markets should work. They’ve run record budget deficits, with record-low interest rates—yet there’s been negligible inflation. Much of the economic world’s response basically has been to ignore a reality that doesn’t meet past expectations. Modern Monetary Theory, though, has taken advantage of the new situation.

“Modern governments don’t literally need to print money, of course; these days, they can create it on computers.”

Throw everything in the old textbooks out, MMT partisans say. The guiding principle of MMT is that modern governments face no pressing constraints on spending—including the need to hike taxes to pay for it. Unlike older-style progressive economists, Modern Monetary Theorists don’t advocate for high taxes. The Robin Hood idea of taxing the rich and giving to the poor is “based on the misunderstanding that we need the taxes,” L. Randall Wray, an academic economist, writes in Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (updated in 2015). Taxes might be useful tools to discourage bad things like smoking and encourage good things like solar power, or to flatten wealth disparities, but they’re ultimately not that important when it comes to budgetary concerns. If government doesn’t need to rely on taxes to pay for its services, though, where will it get the money? Borrowing? Not necessary, either, according to MMT. As Wray puts it, “government never needs to sell bonds before spending.” Bonds “have become anachronistic.” The government can sell bonds for the same reason it sells American Eagle Platinum Coins: because some people like them. But it doesn’t need to.

If the government doesn’t have to tax or borrow to fund its operations, it has only one other option: print the money. For MMT, that’s nothing to worry about. Modern governments don’t literally need to print money, of course; these days, they can create it on computers. “A government always spends by keystrokes,” says the brand-new, first-ever textbook built around MMT, written by Wray and fellow academic economists William Mitchell and Martin Watts, and called simply Macroeconomics (2019). Whatever amount the government wants to spend, the Federal Reserve can just conjure out of the ether and deposit in the Treasury Department’s bank account.

Money-conjuring can apparently bring happy results, starting with a good job at a good wage for everyone who needs one. With no spending limits, a job guarantee—provided, if necessary, by the government as a complement to private-sector employment—“is the centerpiece of MMT reasoning,” Macroeconomics explains. The “JG” will function “as a buffer which employs all job seekers who have not obtained regular public or private sector jobs at a socially acceptable minimum wage,” the authors write. “The government acts as an employer of the last resort. The jobs are available on demand.”

In addition to offering a living wage—the amount needed “for a full-time worker to enjoy an adequate social and material existence”—the government would “supplement JG earnings with a wide range of social wage expenditures,” including child-care and health-care benefits. Though the textbook doesn’t estimate how many Americans might receive a job under JG, Wray’s Primer does: 8 to 12 million people, depending on economic conditions. The authors don’t bother projecting annual spending for the JG program—and why should they, if MMT means that it doesn’t matter how much the government shells out? A reasonable guess, though, is $300 billion a year. With current U.S. government spending on “discretionary” budget items at about $1.3 trillion, that’s a massive new outlay.

And MMT reasoning would support calls for even higher spending. In 2016, Democratic presidential primary contender Bernie Sanders took advice from economist Stephanie Kelton, a top MMT researcher at Stony Brook University on Long Island. Her MMT book, The Deficit Myth: Modern Monetary Theory and Creating an Economy for the People, comes out next summer, right before the 2020 election. Three years ago, Sanders at least nodded at finding ways to pay for his ambitious initiatives. Current progressive calls for a Green New Deal have pointedly not outlined how to pay for it—or, for that matter, attached a price tag. With Green New Deal advocate Alexandria Ocasio-Cortez open to MMT, that’s not surprising. Hard numbers aren’t a feature of MMT economics.

It’s tempting to dismiss MMT as a kind of fever dream. The problem with this dismissal is that MMT basically describes how the American economy has been operating, post–financial crisis. “When MMT says that government spends by ‘keystrokes,’ this is a description, not a prescription,” Wray avows. After all, the U.S. government no longer relies on tax revenue to pay for its spending. In what is now the tenth year of an economic expansion, Washington is running a $900 billion annual deficit—about one-fifth of its total spending. In August 2018, the Wall Street Journal ran a piece titled “Why Trillion-Dollar Deficits Could Be the New Normal.” The United States is issuing debt, as the former consensus would expect: Treasury obligations have blasted from $9 trillion in 2007 to $21.5 trillion today. Yet interest rates remain near record lows.

Under orthodox economic theory, record government borrowing would drive up interest rates, with a glut of bonds hitting the market and pushing prices down (when bond prices fall, interest rates rise). A big reason it hasn’t happened: those “keystrokes” that the MMT authors described. The Federal Reserve owns $2.1 trillion in U.S. government securities and $1.6 trillion in federally backed mortgage securities. Before the financial crisis, it owned less than $900 billion in total securities. Where did the Fed get the money to buy those bonds and mortgages? From thin air. As Wray, Mitchell, and Watts recount, “Federal Reserve Chairman Bernanke explained that all central bank spending and lending to bail out the failing Wall Street investment banks during the [financial crisis] occurred by using keystrokes”—for which “there is no technical or operational limit.” That’s a lot of keystrokes. In 2009, Bernanke told CBS News’s Scott Pelley that the resources used to bail out the banks were “not tax money. . . . We simply use the computer to mark up the size of the account. . . . It’s much more akin to printing money.”

In other words, the government—as well as the European Central Bank and other Western powers, which are doing the same thing—is using keystrokes to hoover up the governments’ bonds, creating artificial demand that keeps interest rates low.

MMT gains plausibility by exploiting not only the economic dislocations caused by the financial crisis but also the political failure to address a different crisis—that of work. In April 2019—again, a decade into an economic expansion—America’s labor-force participation rate (the percentage of adults working or actively seeking work) was just 62.9 percent, well below the 67.3 percent rate of April 2000. With most politicians blind to the problem—in 2016, Democratic candidate Hillary Clinton even promised “to put a lot of coal miners . . . out of business,” a tin-eared promise to people struggling in a dying industry—Donald Trump pledged to bring jobs, including dirty jobs, back to the U.S., and won.

To its credit, MMT emphasizes the importance of work. “Offering a job is a hand-up, not a hand-out,” says Wray. “It is consistent with American values. We have a half-century of experience with hand-outs instead of hand-ups. Hand-outs have not reduced poverty.” As Wray and his coauthors echo in the textbook, “sustained unemployment” imposes “personal and social costs,” ranging from “social exclusion and the loss of freedom” to “skill loss” to “psychological harm” to “ill health and reduced life expectancy” to “the undermining of human relations and family life.”

The tech community and the Davos elite, foreseeing a massive disintermediation of work due to artificial intelligence and robotics, have increasingly embraced the theory of a “universal basic income,” a blanket welfare payment. The UBI proponents don’t grapple with how people might react to discovering that they no longer have value in the labor market. On this score, MMT seems far more grounded in reality.

Yet MMT’s economic vision is ultimately fanciful. The most obvious criticism is the risk of inflation—or even hyperinflation—that MMT poses. One doesn’t have to be a hard-core monetarist to get queasy at the prospect of the U.S. and the European Union “printing” trillions in dollars or euros forever.

Modern Monetary Theorists’ rejoinder is that inflation is really more about resource constraints than the amount of money in the economy. Inflation kicks in, they say, when an economy doesn’t have enough factories, raw materials, and workers to produce the higher output demanded from people who feel richer, for now, because the government has created money to stoke demand. (Of course, resource constraints can happen without money-printing, as when, say, an oil-price shock hits a country that can’t quickly reduce its reliance on oil; here, too, prices will rise. Precisely such a shock helped precipitate the double-digit inflation that the United States saw in the late 1970s and early 1980s.) To guard against inflation, writes Wray, government should “try to ensure that [its] keystroking will not be excessive”—acknowledging, after all, that the money supply could, at some point, matter. He admits that the government might “guess wrong.” If MMT money creation did cause inflation, Wray, Mitchell, and Watts reassure readers in Macroeconomics, “government could engage in a limited austerity policy to lower aggregate demand”—that is, it could raise taxes and reduce spending on programs (other than the crucial job guarantee).

This would require remarkably careful economic management—the kind that multitrillion-dollar governments haven’t been good at. The notion that the U.S. government could “guess” wrong on a massive spending plan and then rapidly shift gears to curb higher spending to ward off inflation, without causing additional real-world social and economic upheavals, seems far-fetched.

Resource constraints would certainly loom with any Green New Deal, which MMT fans in the political arena seem eager to spend money on. Much of the Green New Deal, once you get past the marketing, is a multitrillion-dollar infrastructure plan—complex transit and other projects of the kind that cities and states have proved unable to build quickly and without seeing costs skyrocket. Only so many global companies can bore deep tunnels or erect bridges.

Modern Monetary Theorists also downplay the risk of asset bubbles. Following the extraordinary Fed and other central bank purchases of government debt over the past ten years—made with those keystroked funds—bond prices have never been higher. Indeed, investors are paying such high prices that they’re often earning no interest. As James Grant wrote in Barron’s in May, the “value of negative-yielding debt the world over hit $10.6 trillion the other day.” Yields on Germany’s and Japan’s government bonds, for example, are negative, meaning that investors are paying to hold the debt, instead of getting paid for it. Pre–financial crisis, subzero debt was science fiction. High bond prices and negative yields, though, inevitably cause asset bubbles. Investors who can’t find a decent return on a bond will put their money in stock markets, private equity, and real estate. Keystroking has effects on investors’ “portfolio preferences,” Wray admits in the Primer.

In Weimar-era Germany, the government recklessly printed money until it became almost valueless. (HULTON-DEUTSCH COLLECTION/CORBIS/GETTY IMAGES)

Evidence of such portfolio effects is hard to miss. The S&P 500 stock-market index is up 77 percent since its precrisis high, though the real economy certainly isn’t 77 percent more productive. House prices in global cities are stratospheric partly because they’ve become a store of global asset value. Uber, the car-hailing firm, went public this year at a valuation of nearly $82 billion, even as it projects multibillion-dollar losses indefinitely. Asset inflation distorts the economy in myriad hard-to-calculate ways. Inflated real-estate valuations mean long commutes for millions of priced-out workers and city neighborhoods increasingly hollowed out of long-term buyers and renters. Firms that can borrow cheap money to buy back their stock drive up stock valuations, reducing shareholder pressure to deliver better products and services.

MMT spending would intensify these trends. What would corporate valuations look like if, say, Treasury bond interest rates were negative 14, or if the real estate, bond, and equity markets had even less of a relationship with corporate earnings or personal income? One thing’s for sure: it wouldn’t be good for the people whom MMT says it wants to help—lower-middle-class and middle-class workers and small-business owners, who must compete for resources with better-positioned corporations and large investors.

Another danger of MMT is that global investors will revolt against massive deficit financing and money-printing and go on strike, refusing to hold Treasury and other low-risk bonds at today’s low yields. The era of cheap money would be over, with a crash. The MMT answer to this risk is inconsistent. The U.S., remember, doesn’t need to issue bonds, MMT holds, but to the extent that it does issue them, it’s helpful that Chinese and other investors want to buy them at low interest rates. “Every dollar the Chinese ‘lends’ to the United States came from the United States,” writes Wray in the Primer. As for the fear that the Chinese could stop buying our debt, “depreciation of the dollar”—the result of lower Chinese demand for dollar-denominated bonds—“would also increase the dollar cost of Chinese exports, imperiling their ability to continue to export to the United States.” China doesn’t want to stop exporting to us, in other words, so it will keep lending us money to buy its products. This is a variation of Alan Greenspan’s argument, offered by the former Fed chief in his 2007 memoir, The Age of Turbulence.

This strategy works—until it doesn’t. “The US dollar probably will not remain the world’s reserve currency,” Wray concludes. But “in the long view of history, it is inconsequential.” Well, sure—but, as John Maynard Keynes might have said, we’re not in the long view; we’re in the now. In 2008, the economy nearly collapsed as investors tried to resolve massive global imbalances, including China’s financing of America’s record trade deficits. It’s unwise to use higher government deficits to double down on these imbalances.

MMT fails on another practical reality: the mechanics of its job-guarantee program. Modern Monetary Theorists offer few specifics on what minimum wage the envisioned government jobs would pay—only that the jobs would provide recipients “adequate social and material existence.” This rubric is meaningless. Even a minimum wage of $15, guaranteeing $30,000 a year, doesn’t offer people an “adequate social and material existence,” if they wish, say, to live in school districts with top test scores or to access high-quality health care. MMT is also silent on whether its jobs guarantee would be only for U.S. citizens, or for all comers, legal or otherwise. Uncontrolled borders and the U.S. government serving as living-wage employer of global last resort would pose insurmountable challenges.

The MMT’s jobs guarantee would also start to compete with the private sector for entry-level workers. The minimum wage of the JG program “should not be determined by the private sector’s capacity to pay,” the Macroeconomics textbook avers. “Any private operators who cannot afford to pay the minimum should exit the economy.” This category includes not only big employers such as Walmart and fast-food chains—under political and public pressure, and needing to attract qualified workers, bigger employers are already increasing wages—but also millions of small businesses.

MMT’s final failure is the lack of humility of its advocates. Here, by contrast, Bernanke, Paulson, and Geithner have done a service in Firefighting. They were technocratic experts who found themselves, in 2008, navigating a world they had not foreseen. None of them “fully appreciated the vulnerabilities that were building” in the economy before 2008. Yet even had they noticed them, they say, they might not have been able to act. “We should have pushed earlier and harder for reform, but a crackdown on mortgage lending”—a key government-driven cause of the crisis—“would have required a defeat of American political tradition, not to mention the clout of the American real-estate industry.” In the end, Bernanke, Paulson, and Geithner went against their instincts. “We are all believers in the power of free markets,” they write, by way of explaining the tens of trillions of dollars in direct investments and debt guarantees they offered financial markets, but “there’s no way to quell a severe financial panic without government action.”

What comes next? With record-low interest rates, the government has room to borrow, and upgrading infrastructure would be a good idea. As for creating jobs for the unemployable and underemployed, both political parties agree that recently released prisoners and people who aren’t a great fit for four-year college should get into the workforce, with government help. Accomplishing such goals doesn’t require MMT, however—and embracing its ideas could accelerate a day of reckoning for a dangerously out-of-balance global economy.

Top Photo: Economist and MMT advocate Stephanie Kelton advised Bernie Sanders for his 2016 presidential run. (SCOTT MCINTYRE/BLOOMBERG/GETTY IMAGES)

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