The false promise of modern monetary theory

Once upon a time, not that long ago actually, the federal deficit and national debt mattered.

In 2008, then-presidential candidate Barack Obama said, “We’re just taking out a credit card from the Bank of China, essentially. We’re borrowing that money. And we’ve added $4 trillion worth of debt since George Bush took office. Keep in mind, just to give you some perspective, the first 42 presidents amassed $5 trillion worth of debt.”

During his two terms, Obama added $8.6 trillion to the national debt — more than double his predecessor. President Trump added $6.7 trillion. In one term.

As of this writing, the U.S. national debt stands at $28.1 trillion. In 1960, the U.S. national debt was $286 billion. In 1980, it increased to $908 billion. By 2000, it grew to $5.6 trillion. In 2010, it ballooned to $13.5 trillion. Just seven years later, it crossed the $20 trillion threshold.

America’s debt-to-GDP ratio is also on an unsustainable trajectory. In 1960, it was 53 percent. In 1980, it decreased to 34 percent. In 2000, it ticked up to 58 percent. As of 2020, it had skyrocketed to 129 percent — exceeding the previous high of 118 percent, set at the end of World War II.

This is significant. And ominous. We can blame our debt debacle on many things: decades of out-of-control entitlement spending, the pandemic, costly wars in the Middle East, to name a few.

However, let’s not overlook the meteoric rise of modern monetary theory (MMT).

For those unaccustomed with MMT, in essence it states that the U.S. government can print and spend money limitlessly. Deficits don’t matter. Neither does the national debt.

MMT has several high-profile adherents, from Sen. Bernie Sanders (I-Vt.) to Rep. Alexandria Ocasio-Cortez (D-N.Y.).

Many books have been written on MMT, most famously “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy,” by Stephanie Kelton.

In a nutshell, MMT true believers claim that age-old economic dogma is backwards. MMT turns traditional economic theory on its head.

According to Investopedia, “The central idea of MMT is that governments with a fiat currency system under their control can and should print (or create with a few keystrokes in today’s digital age) as much money as they need to spend because they cannot go broke.”

Actually, governments can and do go broke when they defy the rules of commonsense economics.

However, MMT advocates claim they have the secret recipe to avoid the pitfalls of currency debasement and mountains of debt. Once again, as Investopedia explains, “[A]ccording to MMT, large government debt isn’t the precursor to collapse we have been led to believe it is, countries like the U.S. can sustain much greater deficits without cause for concern, and a small deficit or surplus can be extremely harmful and cause a recession since deficit spending is what builds people’s savings. … MMT theorists explain that debt is simply money the government put into the economy and didn’t tax back.”

This is ludicrous. Government deficit spending is not an economic boon. It is a hindrance to economic growth that impoverishes future generations.

Furthermore, despite what MMT supporters claim, printing huge sums of money will cause inflation.

As Jonathan Hartley writes that the claim “ignores the dark history of debt monetization leading to hyperinflation … printing money and monetizing debt — even when that debt was partly denominated in local currency — led to devastating inflation in Austria, Hungary, Poland, and Weimar Germany during the first half of the 20th century.”

The same thing has occurred more recently in Brazil, Venezuela and Zimbabwe.

Modern monetary theory is far from groundbreaking, let alone modern. It is simply a failed idea that has been tried many times and has led to economic destruction in every case.

Although MMT proponents would like us to believe that it is a contemporary economic breakthrough, don’t believe the hype. Commonsense refutes MMT on its face.

Chris Talgo (ctalgo@heartland.org) is senior editor at The Heartland Institute.