Modern Monetary Theory, aka MMT, has hit the mainstream and some Liberal politicians like AOC are giving it full-throated endorsements. I need to stop playing Mr. Politically Correct with this idea – it is dangerous and we need to start saying that outright.
Now, I’ve been generally fair over the years. I was very critical of Conservative Austrian style economics for years when they were pushing the narratives about how QE would bankrupt us and cause hyperinflation. If anything, I’ve probably leaned closer to the Left than anywhere else over the last 10 years because I called for $2 trillion deficits coming out of the crisis. So, I don’t think I can be fairly accused of political bias here since I am criticizing a left-wing school of economics 10 years into a recovery when they’re calling for a massive expansion of government.
Now, as a risk manager I tend to always be on the lookout for tail risks so there’s a chance that I am overreacting here, but not without merit. After all, MMT has shown its cards in recent months and they look a helluvalot like 2-7 offsuit.
First, there was their endorsement of the Green New Deal, the rollout of which, we can charitably describe as a dumpster fire. Remember, this plan has been estimated to cost anywhere from $6-90 trillion. It is, by any measure, a massive increase in the size of the US government.
As this policy was debated the discussion turned to how MMT would control inflation if all this government spending happened to cause it. MMT didn’t have a very coherent answer because they don’t have a very coherent theory of inflation. MMT rightly says that the US government is constrained by inflation and not by how much money it has, but they don’t really know what that inflation limit is. In this sense, they’re like the person who knows that they’ll be bankrupt when their bank account hits $0, but they can’t count so they’ll never know when they’re bankrupt.
For years MMT has been coy about their theory of inflation and what they would actually do if inflation got high, but this morning we got a FT op-ed by three MMT thought leaders specifying their response and boy is it a doozy. Here are some snippets about how they’ll control inflation:
- “if inflation is rising because large corporations have decided to use their pricing power to increase profit margins at the expense of the public, reducing demand may not be the most appropriate tool.”
- “we must also confront the fact that the fossil fuel, real estate, defense, and financial industries are too large, too dirty, and eat up too much of our national resources. They must be shrunk one way, or another.”
- “another way to offset excessive demand pressure is to tighten environmental and other forms of regulation”
- “To address this failure, the Congressional Research Service (as well as other budget advisory organizations) will need to be enlarged to do the analysis necessary to find the right mix of inflation offsets that best move forward the task of decarbonizing our economy.”
- “our principal policy recommendation is a Job Guarantee”
- “That said, we are not against one or more agencies being given additional tools to collectively manage demand on a discretionary basis.”
- Price controls.
- Actively busting up the largest parts of the US economy.
- Lots more regulations.
- More government agencies.
- A Job Guarantee.
- Full discretion for price setting by more government agencies.
I am not even sure what to say. They think they can control high inflation through price controls, more government and a Job Guarantee? Is there any evidence that all of this would work? We know from South American economies that have attempted similar policies that the results tend to be mixed if not disastrous. I am tempted to throw the big bad S word at them, but that might be too much. But make no mistake – if this smells a helluvalot like South American style Socialism then you’re right. That’s exactly what this is. And we need to recognize that this is an extremely dangerous view.¹
¹ – I did it. I guess I couldn’t control myself. This. Is. Socialism.
NB – People sometimes complain to me saying “well what’s your solution?” Frankly, I’ve been saying for the entire existence of this website that inequality is a huge problem and that the government should be changing the tax code and providing middle class (not upper class) tax breaks. I’ve advocated for larger deficits, smarter redistribution and better regulations. I am not just bashing bad ideas. I am bashing extremist ideas.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.