Modern Monetary Theory

As beach season gets into full swing, we’ll try and keep your brains from going all washed-up-jellyfish. And we’re starting big - economic theory big.  

Have you heard of Modern Monetary Theory (MMT)?  It’s all the rage right now and is completely absurd.  Why, you may ask? Good question! Let’s take a whirlwind tour through the history of economic theory to find out.

Starting with the industrial revolution, economic theory was dominated by the Austrian School (so named because it originated in, wait for it...Austria).  Austrian thinking is all about free markets and the idea that the business cycle is both driven by supply and self-correcting.

But then the Great Depression happened, which gave rise to the Keynesian School (named for John Maynard Keynes), which basically said nein you Austrians, supply-side is the wrong focus; you need active government intervention (“spending”) to pull the demand-side lever and get any recovery when you’re in a depression.

So of course the government started profligate spending any time there was just a slight economic hiccup, which caused massive inflation in the 1970s.  Some guys from the University of Chicago showed that government spending doesn’t impact growth and that controlling the money supply was the best way to regulate business cycles.  This is called the, wait for it again...Chicago School.

Theoretically, that’s where we are today: Chicago-style monetary policy (run by the Fed), with some bastardized Keynesianism (fiscal policy) thrown in when things get especially bad - remember that “shovel-ready” stimulus package in 2009?  

In practice, however, we’re keeping rates artificially low while tightening monetary policy in a low inflation environment and simultaneously running record deficits 10 years into a recovery.  That counts as “doing it wrong” no matter which school you subscribe to. 

Next up in “doing it wrong” will be MMT.  Austrianism, Keynesianism, and the Chicago School all frame policy within the context of supply and demand.  The key insight of MMT is that the laws of supply and demand are irrelevant at a national level; budgets and debts don’t matter.  You can never go bankrupt because you can just print more money.  

Government spends as much as it wants on whatever (universal income, Medicare for all, a massive border wall - there’s something here for everyone!) and then prints enough to cover said spending.  Naturally, unlimited money printing causes inflation, so the way you remove money from the system and keep inflation in check under MMT is: taxation. That’s right - if inflation gets out of hand in the MMT economy, politicians must raise taxes.  Good luck with that. 

In all seriousness, there is a sound-ish theoretical basis here.  Money has no intrinsic value, so under MMT, you would probably link money to labor; a dollar is worth 4 minutes of labor, say.  That’s a $15/hr minimum wage, with a government-guaranteed job plus healthcare and education for everyone. You’d also need price controls - a gallon of milk is ten minutes of labor, a pound of meat costs half an hour of labor, etc.  Conceptually, one could imagine a labor-based society dominated by central planning in which MMT is a perfectly descriptive framework.

As Ms. Ocasio-Cortez has said, it’s a question of what kind of society we want to live in.  Just keep in mind as you hear about this magical utopia that there has been maybe one successful case study of central planning in history.  Maybe. And regardless of any sound theoretical basis, the transition from our current economic system to an MMT-descriptive system would hurt more than any sunburn you’re going to get this summer.