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Friday, September 21, 2018

A Path to Endless Government

In a new report on the Governance of Economic Transition, the United Nations proposes a global program for economic central planning. As I explained yesterday on my blog-talk radio show, they use the alleged threat of "climate change" to soften resistance to their real agenda. They also use a particular economic theory to explain why a government-run economy will work this time, as opposed to every other time in history. 

That theory is known by its inconspicuous acronym, MMT, which stands for Modern Monetary Theory. Its main message is that there are no limitations to government debt - government can run whatever deficits it wants, borrow whatever amounts of money it wants and engage in unlimited spending in every cardinal direction.

The theoreticians behind MMT are all deeply rooted on the left side of the political spectrum. From a policy viewpoint, their ideas almost reach the far side of sanity; predictably, during his botched bid for the presidency Senator Bernie Sanders hired Stephanie Kelton as an MMT believer as economic advisor. A former chief Democrat economist with the U.S. Senate budget committee, Kelton is currently a faculty member at Stony Brook University. 

Prior to joining the Democrats in Congress, Kelton was a professor of economics at the University of Missouri, Kansas City. It was there that the Modern Monetary Theory was developed, and Kelton is one of its more passionate proponents. In essence, this theory means that government debt does not matter, because when government is in debt, someone else owns an asset. 

In a recent interview with Kelton for the Financial Times, reporter Matt Klein astutely summed up theentire scholarly foundation for MMT by noting that the theory voids the very concept of debt, at least from an economic viewpoint, because one person's debt is always another person's asset. For those who doubt whether or not that is all there is to MMT, Kelton offers a succinct explanation in a 2012 interview with Russia Today.

In the real world, we would call this kind of theory "trivial", because it states the obvious without adding anything of substance to it. However, it is dangerous to dismiss MMT as just another academic exercise with no real meaning to it. The policy implications of this so-called theory (something that is logically trivial is not a theory) are actually dangerous. Or, in the words of Bill Mitchell, an Australian economist and passionate MMT proponent: 
In MMT, we see public debt as private wealth and the interest payments as private income. The outstanding public debt is really just an expression of the accumulated budget deficits that have been run in the past. These budget deficits have added financial assets to the private sector, providing the demand for goods and services that have allowed us to maintain income growth. And that income growth has allowed us to save and accumulate financial assets at a far greater rate than we would have been able to without the deficits.
Before we even get to the fiscal madness of this reasoning, let us take a quick look at the other side of Mitchell's equation, namely government debt as a source of income for households. 

I have not looked at Australian national accounts data, but in the United States, government debt is not a very large source of income for households. In the latest personal-income data from the Bureau of Economic Analysis - second quarter 2018 - only 15.7 percent comes from assets. Of that, 6.5 percent is from dividends, leaving 9.2 percent as interest.

Of this $1.6 trillion, only a small portion is derived from household ownership of U.S. government debt. According to the Federal Reserve, federal government debt accounts for only 2.3 percent of all financial assets held by the U.S. general public. If we assume that this debt pays a three-percent average interest each year - a very generous assumption - then households only receive about $56.6 billion per year in interest on those Treasuries. 

This means that the income effect that Bill Mitchell talks about, accounts for a bit more than 0.2 percent of personal income in the United States. 

Barely even a blip on the macroeconomic radar. 

To make U.S. debt account for just one percent of personal income, the MMT theoreticians would have to motivate America's families to buy another $9.4 trillion in debt. Surely, the MMTers don't see this as a problem, but households probably do. After all, they own ten times as much corporate equity as they do government debt; they have almost six times more money in time-savings deposits as they have in government debt. They own five times as much in mutual fund shares as they do government debt. 

If the MMTers are going to sell their theory that government debt is good for the general public, they are going to have to do better than the guy who sold the Brooklyn Bridge to an unsuspecting immigrant back in the day.

To be fair, when compared to spendoholic Republicans in Congress, they look smart and informed. At least they try to pretend that there is some kind of scholarly underpinning for their damn-the-deficits pitch for all-out growth in government. As we just saw, that scholarly underpinning falls apart if you as much as look at it, but when someone actually tries to make a coherent argument for his point, you can at least have a productive conversation.
The MMTers are also impressively imaginative when it comes to solving government debt crises. In 2011, Warren Mosler, investor, entrepreneur and co-founder and benefactor of MMT, suggested a creative solution to the Greek debt crisis. The Greek government should, in the case of a debt default, let people usetheir bonds at face value plus accrued interest to pay taxes.
Warren Mosler is the man behind the awesome Mosler MT900, one of the world’s best supercars. That, however, does not mean that his theories of how to "solve" government debt are applicable in the real world. His idea, that I turn in $100 worth of Treasury bonds in exchange for a $100 reduction in this year's tax bill, reduces government's expected tax revenue by $100. This means that today's budget deficit increases by $100, forcing government to go out and borrow that money in order to have cash to pay its bills. 

Since Mosler wants this dollar-for-dollar tax bill writedown to kick in after government has defaulted on its debt, it is not very likely that government will be able to borrow the money, even from the shadiest of loan sharks. Yet he and other MMTers actually say that government can borrow through the roof regardless of the default risk. In fact, Mosler's point is precisely that: to remove the fear of owning government debt even as government defaults on that debt. Don't worry: when government defaults, it will give you a writedown on your tax bill in exchange for the debt you owe.

We should not be so naive as to believe that the MMTers do not understand that a government default means the end to government as we know it. Once government defaults on its debt, there is always a monetary printing press ready to go into action. 

Which is precisely what a statist needs in order to institute economic central planning. The MMTers will never admit that connection, and they probably do not even want central planning, but they have rolled out the red carpet for it. In a free-market capitalist economy, government is restricted by market forces in how big it can become. The restriction applies to taxation, where high taxes depress general economic activity, and to borrowing, where creditors ultimately lose faith in the ability of government to even pay interest on its debt. Creditors simply take their money elsewhere. 

These restrictions are problematic to statists, who have tried for decades to find a way around them. Modern Monetary Theory has done that. Not in reality - no theory, however fanciful, can defy basic laws of economics - but in the mindset of pundits and statist agitators. MMT emboldens radical leftists in their belief that they really can let government grow without restrictions. 

And that is really the biggest danger with flawed theories like the Modern Monetary Theory.  

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