This article was originally published by Kellen McGovern Jones at The Foundation for Economic Education.
Modern Monetary Theory (MMT) was the “Mumble Rap” of politics and economics in the late 2010s. The theory was incoherent, unsubstantial, and––before the pandemic, you could not avoid it if you wanted to.
People across the country celebrated MMT. Alexandria Ocasio-Cortez, the Democrat Congresswoman from New York heralded MMT by proclaiming it “absolutely [must be] … a larger part of our conversation [on government spending].” The New York Times and other old-guard news sources authored countless articles raising the profile of MMT, while universities scrambled to hold guest lectures with prominent MMT economists like Dr. L. Randall Wray. Senator Bernie Sanders went as far as to hire MMT economists to his economic advisory team.
The most fundamental principle of MMT is that our government does not have to watch its wallet like everyday Joes. MMT contends that the government can spend as much as it wants on various projects because it can always print more money to pay for its agenda.
Soon after MMT became fashionable in the media, the once dissident economic theory leapt from being the obscure fascination of tweedy professors smoking pipes in universities to the seemingly deliberate policy of the United States government. When the Pandemic Hit, many argued that MMT was the solution to the pandemics’ problems. Books like The Deficit Myth by Dr. Stephanie Kelton became New York Times bestsellers, and the United States embarked on a massive spending spree without raising taxes or interest rates.
Attempting to stop the spread of Covid, state and federal governments coordinated to shut down nearly every business in the United States. Then, following the model of MMT, the federal government decided to spend, and spend, and spend, to combat the shutdown it had just imposed. Both Republican and Democrat-controlled administrations and congresses enacted trillions of dollars in Covid spending.
It is not hard to see that this spray and pray mentality of shooting bundles of cash into the economy and hoping it does not have any negative consequences was ripe for massive inflation from the beginning. Despite what MMT proponents may want you to believe, there is no way to abolish the laws of supply and demand. When there is a lot of something, it is less valuable. Massively increasing the supply of money in the economy will decrease the value of said money.
MMT economists seemed woefully unaware of this reality prior to the pandemic. Lecturing at Stoney Brook University, Kelton attempted to soothe worries about inflation by explaining that (in the modern economy) the government simply instructs banks to increase the number of dollars in someone’s bank account rather than physically printing the US Dollar and putting it into circulation. Somehow–– through means that were never entirely clear–– this fact was supposed to make people feel better.
In reality, there is no difference between changing the number in someone’s bank account or printing money. In both cases, the result is the same, the supply of money has increased. Evidence of MMTs inflationary effects are now everywhere.
Prices are skyrocketing. The most striking monuments to the failures of MMT are the price tags on every good you pick up at the grocery store. The Consumer Price Index has recorded an 11 percent increase in the price of food and a 33 percent increase in the price of energy. Housing prices are through the roof, while every economic indicator signals that the US economy is sliding into a recession. The once “transitory” inflation has become a long-term state of malaise for the economy.
Ironically, now that MMT has been implemented, no one wants to talk about it anymore. Since the first signs of inflation began to surface in late 2020 and early 2021, there has been a nosedive in the discussion of MMT. According to Nexis Uni, there were around 5,000 mentions of MMT in the news and academic articles et al. between 2019 and the end of 2021. This year, there have only been around 700 mentions. The economic fashion de jure has quickly become the emperor’s new clothes.
However, even midway into the pandemic, MMT’s architects were unrepentant. Kelton credited MMT with delivering “the shortest recession in US history,” which was true only to the degree that a Band-Aid covers a stab wound. MMT masked the symptoms of the Covid recession, while the wound festered and became gangrenous. Now, around a year after Kelton gave her lecture bragging about the “success” of MMT, the American economy is contracting.
MMT may be “modern,” but it has done nothing but revive old problems. Stagflation has returned. People have been paid not to work while businesses struggle to find employees––and, the financial markets now sit atop numerous bubbles. In many ways, MMT has proven to be nothing more than a Super-Market Sweeps style grabbing of all the worst economic phenomena of the 1970s, social welfare, and the 2008 crisis.
The only responsible choice is to discard MMT, now clearly a disproven theory, to the trash heap of history. Kelton, in her Ted Talk, quoted Margaret Thatcher in an attempt to display fault and antiquation in the Iron Lady’s thinking, but Thatcher’s quote is more relevant to MMT and economics today than ever.
“Let us never forget this fundamental truth. The state has no source of money other than the money people earn themselves,” Thatcher observed. “If the state wishes to spend more, it can do so only by borrowing your savings or by taxing you more. There is no such thing as public money, there is only taxpayers’ money.”