What if I told you that the government can always spend as much money as it wants because it can always print as much money as it needs?
You’d probably say that that’s all well and good, but it doesn’t exactly sound like the best way to run an economy. Just ask Zimbabwe, which followed this philosophy, if you want to call it that, until prices there were eventually doubling nearly every day in the second-worst hyperinflation in history.
For a new generation of Democrats, though, this is a much more remote concern than the lived experience of the past 10 years, when the issue has very much been that the government has spent too little rather than too much. Not to mention that they are tired of being asked how they’re going to pay for things like a Green New Deal or Medicare for all when, say, increased defense spending or tax cuts for the rich never seem to receive the same kind of scrutiny. And so some of them, like freshman Rep. Alexandria Ocasio-Cortez (D-N.Y.), now seem willing to entertain this notion, which goes by the name of Modern Monetary Theory, or MMT, that we should stop worrying about deficits, in part, because of the government’s ability to print money.
It’s a useful idea if you don’t take it too far, but a dangerous one if you do. That’s because it only works as long as you don’t consciously try it.
What do I mean by that? Well, it turns out that there are more and less responsible ways to print money. All you have to do is look at Japan and Venezuela to see that. Indeed, while their policies have seemed the same — both have run fairly sizable deficits at the same time that they have printed quite a bit of money — their outcomes could not have been more different. Inflation isn’t even 1 percent in Japan, while our best guess is that it’s around 80,000 percent in Venezuela.
The important thing to understand here is that how you print money matters more than how much you print. Japan, for its part, has a (mostly) independent central bank that has made clear it is printing money not because the government needs it to, but rather because the economy does. In other words, it is not trying to bail out a government that is spending too much, but stimulate an economy that isn’t spending enough. To that end, it has announced in advance how much money it will print at one time, under what conditions it will continue to do so, and precisely what it will use all this money for.
This has reassured investors that what seems like the most reckless thing possible — cranking the printing presses — is being done with all the care and sobriety you would expect of an institution that has been tasked with safeguarding price stability. The result has been the closest thing there is to a free lunch in economics: Japan really has been able to “pay” for some of its spending without having to increase its taxes, increase its borrowing, or suffer increased inflation. It’s the Holy Grail of MMT supporters. . .
. . . Which would make Venezuela their poisoned chalice. Its problem is simple: Venezuela’s central bank is subservient to a bankrupt state. So it’s printing money not out of economic necessity, but political desperation. And not even ordinary levels of it, either. More like world-historical. Venezuela, you see, never had an economy so much as an oil exporting business that subsidized everything else.
Even that, though, never worked as well as it should have because the Chavista regime made those subsidies bigger than it could afford even when oil prices were high. Which is to say that it really doesn’t work now that crude prices are so low. That’s why there has been no limit to how much money it has printed, or how much value its currency has lost. In fact, it’s down more than 99.999 percent, going by black market rates, since the start of 2012.
Here’s why his matters. MMT thinks that it can get better results than Japan has by using slightly more responsible methods than Venezuela has. Specifically, it would make the Federal Reserve permanently keep interest rates at zero to make it easier for the government to afford more spending, and even print money if necessary to pay for things.
So why wouldn’t this potentially unlimited money-printing turn into hyperinflation like it has in other places? Because, MMT supporters say, the government would increase taxes at the first sign that prices were beginning to rise any faster. The idea being that this would suck enough dollars out of the economy to make up for all the ones that were being created. It’s a complete inversion of the way things normally work, where fiscal policy is primarily about funding the government and monetary policy is about keeping inflation under control.
But, as New York magazine’s Josh Barro points out, there’s every reason to think that this would fail, practically speaking. While it’s true that the Fed has been slow to do the right things the last 10 years, Congress has more often than not done the wrong things. It’s a problem of perverse incentives: With the parties so polarized, there’s no reason one would help the other when it controls the White House. And so we’ve seen Republicans in Congress do the exact opposite of what textbook economics would tell you, trying to cut the deficit when unemployment was high under President Barack Obama, but expanding it when unemployment was low under President Trump.
The idea, then, that fiscal policymakers would ever be able to overcome all of these conflicts that come with having so many veto points in the process, and do a good job of stabilizing the economy all by themselves, is simply a fantasy. And even if they could, do you really think politicians who have a hard enough time raising taxes to pay for popular programs would do so to stop inflation from going up?
But for everything MMT gets wrong, it does get one big thing right: Mainstream economists have spent too much time worrying about hypothetical debt and inflation problems, and not enough time worrying about actual unemployment ones. So in that sense it’s a welcome corrective — and one that’s starting to make some headway. No less an authority, after all, than former International Monetary Fund director Olivier Blanchard has recently said that higher debt levels might not cost us as much as we thought. And the Federal Reserve has admitted that the trade-off between lower unemployment and higher inflation is so small right now that it can afford to raise rates at a much more measured pace than it had assumed.
If this ends up being MMT’s sole legacy, it will be a very good one. But if instead, as its most enthusiastic supporters are wont to do, it becomes an excuse to say that there’s as much free money as we want to pay for as much government as we want, well, it will be the opposite. That’s because these benefits — being able to sustain bigger deficits and lower interest rates ― are only available if you act like there is some limit to them. If you don’t, it will change how people respond to what you’re doing, and they will disappear. Which is just another way of saying that expectations matter.
Although you don’t have to be an economist to know that something that sounds too good to be true almost always is.