• Jim Kelly

Can we just print more money? Getting smarter about MMT.

Updated: Apr 19, 2020

If you are an ambitious politician with a Green New Deal, or if you're a progressive who wants to see a lot more social spending, you will love Modern Monetary Theory. It explains why we should all stop worrying and love government spending.

Modern economies run on fiat currency, which defies our intuition from household economics. In a country like America where the government issues debt in its own currency, there’s no need for the government to balance its books, because it can never run out of money. The US has more latitude to spend without running into trouble than is generally imagined, so we should get on with important programs and not fret over meaningless questions like where the money will come from.

You'll find plenty of people offering this view on social media or on a presidential debate stage. But even if you know nothing about economics, that same voice that cautions you to delete emails about Nigerian fortunes is probably telling you to file this in the too-good-to-be-true basket.

Humanity has struggled against resource scarcity since history began. In a market economy where you can buy what you need, scarce resources express themselves as scarce money. How can a constraint so constant and fundamental just be wished away with the flick of a politician’s pen? And if it can be, why didn’t they flick it long ago?

What is money?

To spot where MMT becomes too good to be true, we need to go back to the basics of what hole money fills in our lives. No matter what currency you're using to represent it--whether it's paper dollars or Euro coins or doubloons--money plays the same role in all market economies.

A market is a network of people mutually dependent on each other. Your survival depends on other people being willing to provide goods and services to meet your needs, and to get them to do so, you first have to meet their needs.

You find someone with needs you can help fill--maybe trimming their hedges or making a pastrami sandwich or composing a Powerpoint deck. You may not know them or have any relationship to them, but you're still willing to do some work for them because they will give you money. And the money is useful to you because you can then trade it with other people in exchange for goods or services from them.

In other words, money is a labor voucher. It's proof that you did useful work for someone, and it’s a claim on a comparable amount of work from someone else.

This is why free trade creates prosperity: it encourages virtuous pay-it-forward behavior. First you do a favor for someone else, then you ask a favor in return. If through working harder or smarter you made more deposits into society’s labor bank, you get to make more withdrawals. And vice-versa: if you enjoyed your leisure and didn’t do as much for others, that’s perfectly okay, it just means you can’t ask as much of them.

Money isn’t the only reason people do things for each other, of course, it’s just a reliable, scalable one. Complete strangers who never met before and will never meet again can safely do business with each other. A widely-used currency means you can rely on a huge network of labor. It’s therefore safe to neglect your farming skills and specialize in dishwasher manufacturing or diseases of the elbow, because you can rely on a vast network of strangers to see to your other needs.

You could never do that in a face-to-face economy, where you could only trust people you had built a personal relationship with. Money has allowed society to evolve beyond villages of subsistence farmers, and to allow us to leverage the talents of people on the other side of the world.

Monopoly Money

Aha, the Modern Monetary Theorist will say, but how did the first customer come by the first money to buy the first favor? The answer is the government spent that money into existence. All currencies in significant use today were created by government monopolies in the process of claiming an initial favor.

For example, suppose I’m Uncle Sam. I want to put in a road, so I hire a road crew and pay them with Federal Reserve Notes--basically checks written against the central bank.

The crew members deposit those in their own banks, which conveys them back to the Federal Reserve, which credits the banks with “reserve” balances in that amount. Reserves were once physical gold in physical vaults, which the government had to mine or plunder to start the process, but today they’re numbers in a computer.

In any case, the workers’ banks now report a balance, which they can withdraw as cash or write checks against, passing the balances to other people with their own banks, and so on. Once the government creates it, the money enters circulation and becomes a medium of exchange for the favor economy.

Notice what didn’t happen. The government didn’t tax anyone to raise the money to pay the workers to build the road. It couldn’t have, because no one had money to pay the tax. The government always spends first, taxes later.

In fact, the MMT-er explains, it need not tax at all. Since the government can simply print money as bills come due, taxing is in a sense optional. There are two reasons to tax, and neither is about paying the bills.

The first is to bootstrap the currency. The road crew might not agree to do the first favor for the first money unless that money had some value.

To impart value to the money--or at least to create a sense of urgency to get some--the government can demand a tax. “Pay me 500 rectangles of green paper by the end of the month,” says Uncle Sam, “or go to prison.”

“By the way, would you like a job paving this road? I’ll give you 2000 rectangles of green paper in exchange.”

In other words, the government makes its vendors an offer they can’t refuse, and offers the means to comply with it. By spending at a deficit it puts currency in circulation, and by demanding tax it obliges people to adopt the currency. Once that currency is in common use, people negotiate prices of everything else. But it’s the government’s demand for tax that gives currency its value.

The other reason to tax, according to MMT, is to manage inflation. Government will keep issuing money to pay ongoing expenses, and if that money stays in circulation chasing the same resources, prices will rise. Taxation removes money from circulation and keeps prices stable. In deciding how much to tax, the government manages the inflation rate.

So if tax revenue doesn’t limit how much government can spend, what does? The physical resources in the economy. Money is useful primarily as a claim on physical resources, and those are limited. There are only so many people in the workforce, with only so many cement mixers and laser printers and tons of steel to work with.

The government can’t command more physical resources than there are. And those same resources are in demand by the rest of us to produce what we need. The more government competes for them, the higher it will drive prices. So the practical sign of government overspending is a rising inflation rate.

Many of America’s resources are idle, though, the monetary theorist points out. There’s a 4% unemployment rate, which means millions are out of work. That’s an example of slack in the economy, which government spending can put to productive use. When unemployment reaches a minimum and the consumer price index starts to tick up, that signals physical resources are running short. Government then has a choice to either live with a higher inflation rate, or to drive it back down by raising taxes and shrinking the money supply.

So you see, says the MMT-er, how the government will pay for the Green New Deal is an absurd question. It will do so the same way it pays for rope barriers outside the Washington Monument or the liquor cabinet on Air Force One: by issuing the money it needs. Let’s stop worrying over a non-question and get on with it.

Whose view of money is right?

Most of what MMT says is less a theory than a neutral description of how government finance works. Whereas a labor voucher describes money from the citizen's perspective, MMT is a valid way to look at fiat currency from the point of view of the government issuing it.

But what an aristocratic viewpoint.

Once you understand we value money as a labor voucher that lets us transact with each other, you see a great moral inequity between how someone on the government comes by money and how the rest of us do.

The dollar you hold is a proof of your service to another and likewise a claim on society's labor. A dollar the government printed is likewise a claim on someone else’s work, just without having done anything to earn it. It’s a labor voucher not backed by labor. A withdrawal without a deposit. A fraud.

When you manufacture such a fraudulent labor voucher, it’s called “counterfeiting,” and it’s a serious crime. With good reason: you’re claiming someone else’s labor based on a dishonest representation. You’re freeloading on all the people who really worked for their money.

MMT takes it as a given that the government should freeload as much as it feels like. Many advocates claim the crime of counterfeiting is positively a public service when done by someone in the government, as it provides the rest of us with money we can use to exchange our labor.

In other words, missing from the MMT world view is any notion of equality or human rights. It’s a sharply class-divided world, where your labor and purchasing power--in short, your economic rights--exist only at the state’s whim. To legitimately seize either one, people in government need no more than a rationale about the CPI or a denouncement of “idle resources” in the economy.

What is an idle resource?

If you're looking for a job, you probably don't apply at the first McDonald's you pass. You take the time to learn what opportunities are out there, to find something that makes good use of your skills and pays you for them. Although the census bureau statistics label you unemployed, you're busy. You're learning about the local label market. you're learning how to present yourself in interviews. You're reflecting on your next move. You're enjoying some time off.

Maybe you're unemployable. Your talents are so specialized or so meager that you haven't been able to locate someone with a matching problem. You're indeed idle, but you're unfortunately not much of a resource.

Physical capital likewise idles for a reason. You own a screwdriver that nearly always lies idle in a drawer. In principle it could be freed up for someone else, but in practice the transaction costs are too high relative to its value. Cars sit unused at the dealership while they wait for a buyer. If the dealer thought he could get by with less inventory, he would, but this is his best guess.

Suppose you’re building a grand pottery studio in your backyard. You’ve drawn up plans, prepared the site and are putting in rebar to support the foundation, when you suffer a financial setback and realize you can no longer afford to complete your design. You tell the workers to stop while you regroup and figure out how to scale it down.

At that moment, my government-issued black SUV screeches up your driveway. “Aha!” I say, “I’ve found slack in the economy! I shall start an Infrastructure Project in a politically important district. You men, come with me, and bring those piles of lumber, bricks and concrete.”

When I declare your project “slack,” your resources “idle,” I’m simply slapping dismissive adjectives on things you have perfectly good reasons to value. I'm saying I know better than all of you muggles the best use of your time and resources. Whatever reasons you have for letting them sit are bad ones.

Never mind that I don't know you, haven’t heard your reasons, and can’t even say specifically which resources my program will demand. I should get to decide what to do with them, and you shouldn’t, because I’m in the ruling class and you’re not.

Mistaking Podiatrists for Porkbellies

Like other models of “the economy,” MMT reads crazy fables into averages. The Census Department classifies some number of people “unemployed”--that is, seeking work but not working.

To propose that arbitrary government projects can put the unemployed to useful work relies on a very simple, pre-industrial model of workers as commodities. They’re all more or less capable, have fairly undifferentiated skills that overlap well with what those projects need, they want to work on whatever terms the government might offer, and there’s no particular reason no one has hired them already. That's a lot of assumptions.

Real workers in a post-industrial society are specialized and diverse. The unemployed include ditch diggers and scholars of Elizabethan English literature, yoga instructors and bond traders, personal care aides and Silicon Valley CFOs. Some will eagerly work for $12 per hour, others need $200K per year just to keep up with child care payments.

Meanwhile a real government project will need specific skills in specific jobs, which may have no overlap with the unemployed. Those might include civil engineers and environmental impact project coordinators and public relations liaisons.

Odds are the workers most urgently needed for the government project will be the most sought-after in other sectors too: software engineers, general managers, plumbers. And the people who can't find work in the private sector probably won't produce much in the public either.

Which means “slack in the economy” is simply a myth. As soon as the government launches a program that “creates jobs” for anyone, it will be competing with the private sector for the most valuable workers, driving up costs, and preventing private sector projects from going forward.

If your pipes spring a leak and you need to hire a plumber, but the government has “created jobs” for plumbers, you’re not only competing against the government, but you're doing so on wildly unequal terms. Whatever you offer the plumber you must earn through hours of your own labor, whereas the government can simply print whatever money it needs to outbid you.

MMT advocates and other macroeconomists in the government camp need never care or even notice, because they operate from the stratosphere. They can’t see a shortage of plumbers because they average it out into a general unemployment rate. They can't see what the private sector would have built with those resources, because the Census Department doesn't collect statistics on projects not undertaken. If the government project doubles what you have to pay to get your pipes fixed, they won’t see that either because they average it into a general inflation rate.

At any given time, some corners of the economy have high unemployment, others an acute shortage of workers, and they cancel out in the averages. There's no reason to imagine a government project will even out demand for labor; more likely it will simply make shortages more acute.

How much more peaceful life is when you don’t have to confront specific people with specific struggles, when you can just average them away against other people suffering the opposite and ignore them. See? The labor market's working great. By the way, I’m going to need another trillion dollars.

The Central Planner’s New Clothes

MMT is no more or less than a new disguise for a well-known pickpocket. For centuries, central planners have pitched to wrest resources from their owners. More efficiency, they claim. Economies of scale, they say. For the benefit of the People, they promise.

MMT advocates aren’t even shy about it. “We already live in a planned economy, it’s just done by the corporations. We’re going to need more planning by government.”

You can theoretically make a living by winning on a slot slot machine, but odds are you’ll lose. One could imagine central planning will pay out as well, but it hardly ever does, and the worst gambles on it have killed millions of people.

The reasons are well known. Real resource dependencies are too complex for any central planner to grapple with. Equating unemployment figures with “slack in the economy” is comically reductive, if one can find humor in elites making a toy of the nation’s life support system.

The central planner can't get critical fine-grained data on what tradeoffs citizens prefer, because citizens are never confronted with the tradeoffs. His incentives invite the corrupt and tolerate the incompetent, since he has no skin in the game he oversees. As Democrats know very well, the process for choosing who runs the central planning apparatus does not reliably favor the best and brightest.

The laws of economic gravity are still with us. Humanity has bottomless needs, sky-high aspirations, and limited resources. Figuring out how to use resources more efficiently is our fundamental, eternal challenge. We’ve made the most progress when we’ve encouraged distributed solutions--making everyone responsible for the best resource tradeoffs in their own lives, and allowing them to optimize further through free-market trade with each other.

Yes, the government can print more money, but it can’t print more resources. Nor can it make better decisions about how best to allocate resources against human needs than the humans on the ground can make themselves. Anyone telling you otherwise is trying to distract you, to direct your attention to the benefits they’re promising rather than the costs they’re adding.

MMT is a clever rug to sweep the costs under, but don’t be fooled. Politicians are very good at making nice-sounding promises for which no one is accountable. But they never have and never will do better than the people can achieve themselves, by exchanging honest work using honest money.

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