Supporters of Modern Monetary Theory say the brand of economics signals a brave new world, but detractors fear it could lead to fiscal calamity.
“I’m not sure any White House economists would describe themselves as MMT adherents, but the policies they are pursuing sure do look a lot like MMT or MMT-lite,” said Tyler Goodspeed, a Stanford University economist and former chairman of the White House Council of Economic Advisers.
The core principle of Modern Monetary Theory is that a government that controls its money, and thus has what is known as a “sovereign currency,” will never default because it can print as much money as necessary to cover its debt. Should the money supply trigger inflationary pressure, the government can mop up the excess dollars through higher taxation.
In other words, the concept of “spending too much” is antiquated.
Mr. Biden‘s $6 trillion budget proposal, on the heels of trillions of dollars in COVID-19 relief bills, seems to reflect MMT’s philosophy that the government does not need to put a brake on spending. The theory seems tailor-made for fulfilling a liberal wish list, but economists across the spectrum believe the school is rooted more in politics than economics. At some point, they warn, the old rules about printing money and inflation are sure to apply.
“There’s this fundamental tension between ‘this is a bold new world, the second coming of FDR or LBJ,’ and the fact they are looking only in the recent rearview mirror on inflation,” Mr. Goodspeed said.
Consciously or not, Washington seems to have embraced the idea that government spending binges are no cause for concern.
“There seems to be a presumption we could just get anything,” said Joel Griffith, an economy and taxation expert at the conservative Heritage Foundation. “Just in the past year, during COVID and since, we’ve seen an implementation of some of the ideas of MMT on a monumental level.”
Mr. Griffith pointed to the explosion in the federal deficit from $2.4 trillion in 2019 to $5.1 trillion in the last quarter of 2020.
Yet Congress has gone on a series of bipartisan spending binges in the 21st century, and inflation has remained a lurking rather than pressing issue.
“There is a ‘boy who cried wolf’ negative aspect to all this,” said Scott Sumner, an economist at George Mason University’s libertarian Mercatus Center who opposes MMT but is not unduly alarmed that inflation will spike. “People who have been warning about this or that might lose some credibility, and now the more dovish sorts have got the upper hand at the Fed.”
Mr. Sumner says he thinks several factors in addition to MMT have contributed to the spending frenzy that has gripped the Biden administration and took hold in the administrations of Presidents Obama and Trump, leaving the U.S. more than $26 trillion in debt.
“There’s been a real change in the thinking about how much we have to worry about deficit spending,” Mr. Sumner said. “You could certainly tell a story of fiscal stimulus without MMT, and there is this perception now that we are comfortable with much bigger deficits.”
Indeed, the national debt grew robustly under President George W. Bush, and Democrats and Republicans in Congress have shown no appetite for curbing spending. Mr. Bush created a Cabinet-level agency — the Department of Homeland Security — and added $5.85 trillion to the national debt. Mr. Obama then blew it out with $8.59 trillion more.
Under Modern Monetary Theory, those enormous spurts in spending are no problem. Low inflation rates in the past decade have played into MMT proponents’ hands, economists said. The “quantitative easing” used to counter the Great Recession from December 2007 to June 2009, followed by trillions of dollars in COVID-19 relief bills in the Trump and Biden administrations, seem to lend credence to MMT’s laissez-faire philosophy on the government’s checkbook.
Biden administration officials did not respond to questions about how big a role MMT has played in the administration’s economic thinking and to what extent Mr. Biden ascribes to the theory.
MMT proponents have circled the president. One of the school’s most influential members, Stephanie Kelton, a professor at Stony Brook University in New York, was a longtime economic adviser to Sen. Bernard Sanders, a democratic socialist from Vermont, and became a key member of what the combined Biden and Sanders presidential campaigns called the “Economy Unity Task Force.”
In that role, Ms. Kelton was asked to “identify ways to transform our country,” according to her webpage.
Ms. Kelton did not respond to questions from The Washington Times.
Another high priest of MMT, Bard College professor L. Randall Wray, confirmed that he and other MMT economists have been working closely with lawmakers in Washington.
“MMT has definitely influenced the Dem side of the budget committee as well as some others,” Mr. Wray said. “I recently gave a presentation to the [Congressional Budget Office], and I think Stephanie Kelton did too, or is set to do one — by invitation, so they are at least interested.”
Mr. Wray said it made sense for lawmakers to embrace MMT because its tenets are not hypothetical.
“MMT is not chiefly a theory; it is a description of reality,” he said. “Sort of like evolution versus creationism. We do have some policy prescriptions, but most of our work is simply describing the way sovereign government spends. The ‘creationists’ — deficit hawks and doves — are describing a world that does not exist.”
Ms. Kelton has pushed MMT as a viable concept for Washington. She wrote that “Biden could go bigger and not ‘pay for it’ the old way,” and other pieces. Her idea that unrestrained federal spending can be modulated by ratcheting up taxes, if necessary, also has been embraced by far-left members of Congress such as Rep. Alexandria Ocasio-Cortez, a New York Democrat who says MMT is the ticket to a Green New Deal and other enormous projects.
MMT has lurked among academic economists for some 40 years. American economist Warren Mosler is generally regarded as its father. Still, most economists across the spectrum remain unconvinced.
Although MMT can be found in some textbooks, it remains a fringe notion that some scholars find intellectually ham-handed. Even Nobel Prize-winning economist Paul Krugman, a supporter of more spending, has labeled MMT “Calvinball,” a reference to the comic strip “Calvin and Hobbes.” The characters sometimes played a game in which they made up beneficial rules as they went along.
A relatively novel ivory tower theory with shifting principles should not leave Americans comfortable with ever-increasing debt, even if it has proved appealing to both sides of the aisle in Washington, many economists say.
“There needs to be a very stern warning sent to Republicans and Democrats that if you’re going to dramatically grow the size of government by printing money to buy government debt or spend it, you are simply going to run the risk of higher inflation,” Mr. Griffith said. “This is not a new thing. They’ve just given it a new name. And there’s no doubt these theories have worked their way into this administration.”
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