MMT has emerged in recent times as a supposedly feasible alternative to modern economic conventions, some proclaiming it as the answer to our economic ills. Conceded or not, what MMTers advocate is what every Marxist, socialist, or big government adherent relishes – a further loosening of the unwieldy, insatiable government beast from its financial moorings - in effect, a Soviet style monetary system and its unproductive, squandering sham of an economy.
The mystical tenets of MMT are partially plausible and partially absurd. MMT is essentially Keynesian economics with a frightening twist. The grand claims are that money is wealth, that deficits do not matter, and that government, if possessed of a sovereign currency, may borrow all that it requires from the central bank.
MMTers, like Keynesians, suggest that in addition to monetary action in times of inordinate unemployment, that is artificially depressing the borrowing rate to encourage investment, government should embark on a multitude of spending programs. They urge government to devise make-work projects and manufacture the funds required in order to put idle or sub-optimally utilized resources to work. If the project should mitigate the unemployment problem and achieve its goal, then the government may ease its spending impulse. If the project surpasses expectations, generating full employment attended by inflationary pressures, the government would apply an economic brake by imposing taxes to ease the elevated activity.
It’s all very Keynesian in that government engineers a deterioration of the monetary unit by flooding the markets with easy money and generally worthless public expenditures. In effect, supply of goods remains unaltered amid an enlargement of the money supply. With the true or real cost of labour and material artificially reduced via inflation, employers expand production and create the illusion of a booming economy, which easily belies the pathetic reality of wasted resources, rising prices, and impoverishment for most.
MMT does diverge from Keynesian principles in the means used to raise funds for public expenditures. Keynesians use traditional sources of borrowing in private markets, banks, individuals, pension funds, etc.
Advocates of MMT instruct government to avoid financial markets and borrow all that it requires from central banks. They advise the US Federal Government to fund its expenditures, roughly $4 trillion per year pre-Covid, through Federal Reserve loans. Briefly, the Federal Reserve maintains the US Government’s account as well as the accounts of all member lending institutions such as Bank of America, CitiBank, etc. on the liability side of its Balance sheet. The addition of US Treasuries to the Fed’s asset side means adding the equivalent in reserves to the banking system, specifically a deposit to the US Government’s account on its liability side, that when released by government expenditures spreads throughout the accounts of member banks.
If the Government dropped off one year’s funding requirement or ~ $4 trillion in Treasuries at the Fed, it would create banking reserves assuming a 10% reserve ratio to support the creation of an incredible $40 trillion in loans. Currently, total bank loan book value in the US is roughly $18 trillion. It took 250 years to get there. The MMT geniuses propose an increase in reserves to accommodate 2 ½ times that figure in one year. Year 2 would bring another $4 trillion in additional reserves. With reserves exponentially elevated banks would never need to bid for the carefully conserved funds of judicious savers, who, without a compensatory rise in interest rates for inflation, would witness the value of their financial securities and cash holdings sharply erode. A free spending government funded by central bankers could create easily two digit, annual increases in inflation in markets bearing zero or perhaps negative interest rates.
It is a certainty that should the US Federal Government dare borrow directly from the Federal Reserve for all its needs, the destruction of the monetary unit and the collapse of a viable economic system would quickly follow.
MMT is not a complete loss. Its adherents are correct about one thing: deficits do not matter, however, the reasons advanced are inane. They suggest that government has no budget constraint, that it may generate all the money it needs, presumably by Federal Reserve lending, to fund a desired project or solve a deficiency.
Deficits do not matter, but for very different reasons. As I have said repeatedly, government does not fund government. Government has no money or resources. Therefore, the deficit is every dime spent by government, regardless of whether funds or taxed or borrowed. In the US, federally, the deficit, pre-Covid, was ~ $4 trillion or the whole of federal public expenditures. It doesn't matter if $1 trillion were borrowed and $3 trillion taxed, or $3 trillion were borrowed and $1 trillion taxed, the money arrives from sources outside government.
Unfortunately, economic convention has defined the deficit as public expenditures spent in excess of tax revenues, and none has bothered to excise this aged, obsolete, and errant premise from Public Finance theory. Thus, we are entertained by ridiculous and erroneous arguments on the size and peril of the deficit, the size and peril of the public debt. It’s a foolish and irrelevant distraction.
The major issue in Public Finance is not the comparatively small amount of money spent in excess of tax revenues, but rather what the residents of a community derive from the whole of public expenditures. The very best economy, the wealthiest and most productive endeavors to place the community’s resources, its labour, material, equipment into the hands of those who can use them to greatest advantage or profit, thus, enriching all. To have the unemployed dig holes in the morning and fill them in the afternoon is a deplorable waste of resources. It would have been far better to train engineers.
How little we receive for the vast sums, truly resources, commandeered and devoured by government everywhere. The grand miracle is not how to limit or erase the deficit or debt, but how to limit this monstrous waste of resources. There is one coming, and it involves shackling free-spending government with a capital charge.