There must be something in the air or water in Washington that encourages politicians and their followers to fall in love with what I call fantasy finance. Also known as making up numbers.
A while back, we had the 2017 tax bill that Donald Trump and his Republican enablers foisted on us, claiming that it would stimulate the economy so much that added revenue would offset the cost of cutting taxes for businesses and high-income people (other than blue-state types who pay lots of state and local taxes). Regular working people would get an average $4,000 annual raise.
As any reasonably numerate person (including me) predicted, this hasn’t worked out. We haven’t seen the capital spending boom the Trumpublicans predicted, either. Nor will we.
Now, fantasy finance is being peddled by left-wing Democrats who are embracing something called Modern Monetary Theory. Which really should be called Magic Money Theory. Or the Lefties’ Laffer curve.
The Laffer curve, you may recall, was created by supply-side economist Arthur Laffer. It predicted that federal tax cuts would more than pay for themselves by boosting economic activity and goosing government revenue.
That didn’t happen, of course. But federal taxes for high-income people have remained a lot lower than they were pre-Laffer.
Okay. Before I get to MMT, let me make two disclosures:
First, I was an English major in college who was also a straight-A economics student. (That’s because I took one course, got an A, and decided to quit while I was ahead.) I’ve learned about business and finance on the job, not in the classroom.
Second, I tried to read some of the key documents underlying MMT but couldn’t finish the job because I found them both dense and nonsensical. An interesting combination.
When MMT first emerged, I did a little research and figured it was so silly that it would have a short shelf life. That’s why I didn’t write about it. But now that MMT seems to be gaining ground and is getting treated with respect, let me offer up a few thoughts on just one aspect of how this theory won’t work in the real world.
These thoughts, by the way, are based on how the financial world actually works. Not on how academic ideologues and other true believers would like the world to work.
Magic Money — I’m sorry, Modern Monetary Theory — adherents claim that federal budget deficits don’t matter. Why? Because our government borrows in our own currency, the U.S. dollar. So if the Federal Reserve can create trillions of dollars out of thin air, why worry about deficits or the national debt? Just have the Fed print enough dollars for the Treasury to meet its obligations. Piece of cake.
Therefore, the theory goes, our government can afford all sorts of expensive stuff — rebuilding our infrastructure, Medicare-for-all (whatever that is), a Green New Deal (ditto), free college tuition and, for all I know, putting a chicken in every pot — without raising taxes, except maybe on “the rich” (whoever they are), or causing interest rates or inflation to rise.
As an example, these folks cite Japan, which has run massive budget deficits without running up interest rates very much or generating much inflation. The Japanese central bank has printed gazillions of yen, and everything is great (except for the fact that the Japanese economy has been sluggish for about 30 years).
But even if you disregard other examples of countries printing their own currency to fund deficits — can you spell Venezuela? — the United States isn’t Japan.
That’s because, among other things, we derive huge benefits from the dollar being an internationally accepted and respected currency.
A major reason — if not the major reason — that the dollar has stayed relatively strong and our interest rates have stayed relatively low is that the dollar is a so-called reserve currency that foreign central banks and other institutions are happy to hold because they trust our government.
Foreigners own about $6.3 trillion of our $16.2 trillion of publicly held Treasury debt. People all over the world happily sell goods and service to U.S. consumers and businesses in return for dollars, which in many cases they prefer to their own currency.
But if the Fed, whose mandate includes protecting our currency’s value, becomes craven enough to print money endlessly, the dollar’s value relative to other major world currencies will drop. Probably rather sharply.
Foreign holders would dump their Treasury securities. Creditors and suppliers from other countries would begin asking for payment in non-dollar currencies that we’d have to buy with ever-shrinking-in-value dollars. Costs and prices in the United States would rise. Good luck with all that.
I despise the 2017 tax bill for many reasons, but primarily because it imposes huge future financial burdens on my kids and grandkids and mortgages our country’s future. But if we get an MMT government, the damage it will do to our country and our future will make the damage the Trumpublicans have done look like a rounding error.
And that, my friends, is the bottom line.