How Modern Monetary Theory Could Become the Left’s Worst Nightmare

By Max Gulker

The notion that government should spend without limit is gaining academic favor among the left. Let’s imagine that the idea wins the debate. Here’s a vision of how this dream of the left could turn into a nightmare.

15 Years From Now

The year is 2034, and America is being led by an administration that we might call neoconservatives on steroids. The nation is bogged down in four wars, in South America, East Asia, the Middle East and Eastern Europe. The ranks of active duty military have swollen to more than 20 million, approaching the percentage of the population who served in the second world war. Protests from citizens of many political stripes that these unprecedented wars have padded the pockets of the defense contractors who underwrote much of the administration’s two hard-fought presidential victories are drowned out by accusations of weakness and lack of patriotism.

How does the administration finance these wars? The answer is that economic thinking has changed since 2019. And for governments, money is no object.

At home, the economy looks like it’s booming, at least on the surface. Unemployment barely exists. Millions work in armaments factories--some who can’t are paid a generous wage by the government to quietly walk around town, taking note of who is dissenting during this time of national emergency. Down south, other workers have finally completed the border wall talked about for decades, a bone that the administration threw to the populists whose votes they needed in the last election. All the while, income and corporate taxes have been slashed to near zero.

The left is down but not out. It was their idea that economists had gotten it all wrong about government budgets, that unlike a household, a government could print money and spend far more than it took in without worries of runaway inflation. A mere six years ago, in 2028, this vision was helping them build their own version of a better society, spending trillions on healthcare for all, renewable energy, and hiring the unemployed to work on their version of the public good.

Then came a terrorist attack right before the 2028 election, and militarism became the order of the day. Because government could now spend without even nominal constraints, the change in course between regimes was like nothing we could imagine in 2019. As both sides prepare for the election in 2036, the stakes have never been higher. Instead of control over an already-large budget, the parties now fight over essentially a blank check. Some worry that it will be enough to threaten America’s mostly orderly democratic process.

Modern Lovers

Perhaps this story is far-fetched, but its catalyst, the idea that governments who print their own money can spend as much as they want, is gaining attention in today’s economic debate. Modern Monetary Theory (MMT), which has roots dating back through the twentieth century but has coalesced in the past couple of decades, says exactly that: if a sovereign government prints its own fiat money, it can spend as much as it wants, as it by definition can fulfill future debt payments. Only when an economy’s resources are fully utilized does inflation rear its head. These are the folks who brought you the job guarantee, and the eye-popping cost of that and other pet programs like Medicare-for-all and the Green New Deal is not something they worry about.

In addition to inflation, if words like “deficits” and “bondholders” are reverberating through your mind, you’re not alone. I’ll leave it to Anthony Mueller, writing for AIER, to put the theory in historical context and debunk it. Plus, bad economics make strange bedfellows. Macroeconomists on the left such as Paul Krugman have been vocal critics of MMT.

If we set aside the macro-financial concerns that economists rightly raise, MMT still provides an important thought experiment. Are budget constraints or the ability to borrow the only reason we don’t want a government that can spend without limit? As a horrified Ian Malcolm, played by Jeff Goldblum said as he saw his first live, cloned dinosaurs in Jurassic Park, “Your scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should.”

Trouble with the Blank Check

Concerns about government spending running amok go well beyond the realm of the budget constraint. One need not be a libertarian to recognize these concerns, or the fact that they demand increasing scrutiny as a government spends more and more.

First, we know that centrally operating authorities unavoidably wear a blindfold when directing an economy’s resources. As exemplified in Friedrich Hayek’s classic 1945 paper, “The Use of Knowledge in Society,” the millions of individual economic actors forming an economy each have detailed knowledge of the circumstances around them that cannot be fully transferred up the ladder to a central planner. By vastly expanding the scope of government spending, MMT allows the government to control an ever-greater portion of an economy’s resources, thus throwing away an ever-greater portion of that economy’s dispersed knowledge. MMT scholars have written papers attempting to rebut this criticism--I’ll be reviewing that work and looking at this problem in greater detail in the coming weeks.

Second, the more a government spends, the greater a target it becomes for influence peddling by corporations, both through corruption and rent-seeking behavior. The reference to defense contractors who contributed to our fictitious administration’s campaigns and are now reaping the rewards recalls the controversy during the Iraq war of the early 2000s, when some accused then-Vice President Dick Cheney of being eager to go to war due in part to connections from his days running defense contractor Halliburton.

People treat the influence of corporations in government as something that will go away if we elect the right people or make the right rules. Quite the contrary--in a liberal democracy run by a big-spending government, the relationship is impossible to sever, and greater spending will likely only intensify it.

Third, one must consider the power of greatly expanded spending not just in the hands of the current government, but future governments as well. Constructing horror stories about the emergence of tyrants is not necessary. Recent history is enough to show that administrations vastly different from each other will likely govern America in the coming generations.

In my lifetime, the political party of the man in the White House has switched five times. MMT is a theory advocated almost exclusively by the left, with dreams of healthcare, employment and environmental spending.

My attempt at dystopian fiction that began this article simply gave that spending power, along with a mandate for war from a frightened public, to an administration that looked more like President George W. Bush.

Politics and history podcaster extraordinaire Dan Carlin has been an outspoken critic of the executive power grabs that have now happened under several administrations of both parties. He urges his listeners who may support the President currently doing the power-grabbing to think about that power not in the hands of the guy they like, but the guy they hate.

Carlin has masterfully framed how we must consider any expansion in government power, including the power of the purse. If those on the left who subscribe to MMT believe political history will end once they finally implement their enlightened government programs, they are guilty not just of bad economics but of astounding political naivete.

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research focuses on two main areas: policy and technology. On the policy side, Gulker looks at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker is interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy. Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.