What Leftists Need To Understand About MMT…

It’s no secret that Modern Monetary Theory has become quite popular with many on the Left. At least part of its appeal can be attributed to how it seems to say that governments can simply print whatever money they want to spend. Indeed, to many, MMT boils down to “free money is available!”

To be fair, MMT economists have long admitted that governments are in fact limited in the amount of MMT money they can spend. Stephanie Kelton acknowledged as much in this 2016 interview. You see there are times (certain economic conditions) when MMT spending makes sense and other times when it doesn’t.

It just so happens we are currently living in one of those times (COVID-19) when the MMT approach does make sense as a fiscal option. With the economy seriously under-performing, there is a great need for the government to spend a lot of money right now to keep the economy from getting much worse.

And yet, in spite of this endorsement, I‘ll be arguing in this article that it is a mistake for Leftists to view MMT as anything other than an emergency option; one they should hope they’ll never have to turn to if and when they finally gain control of the federal government some day.

Why would I make such a statement? The answer is revealed when one ponders the question: Why is it good to use MMT sometimes but not other times?

Think It Through…

Let us go ahead and imagine a future in which most members of Congress have embraced MMT. We’ll assume the economy’s in a recession when this happens.

Congress decides to:

1. Cut to zero the amount of taxes it collects from all sources,
2. Pay off all of the government’s debt, and then
3. Ramp up its spending on infrastructure, etc., in a big way

(*Note: No MMT economist advocates such a dramatic list of changes, but 1) MMT does allow that they could be executed w/out damaging the economy, & 2) they serve me as simplifying assumptions that make it easier for me to communicate a couple of important points.)

The result: a massive economic stimulus, an historic economic boom, and the complete elimination of all unemployment. Everything is working according to plan.

But then, the next year comes around…

Since there are no tax revenues coming in, the federal government will have no choice but to create another trillion+ dollars just to maintain in the following year the same level of government spending as the previous.

That’s a massive injection of ‘new money’ into an economy that will not be absorbed by a matching increase in productive output, since everyone is already working. In a full-employment economy, the injection of an additional trillion+ dollars into the economy would be purely inflationary.

But no worries. MMT theorists have acknowledged this and allow that there is still a role for taxation in the MMT scheme of things since it is necessary to remove any excess MMT dollars that are spent into the economy in order to minimize inflation. So the question then becomes, how much money would the government need to collect in taxes in this scenario to prevent inflation?

The answer: an amount equal to the total amount of money that the government wants to spend in the coming year. Right? In other words, the government in this situation would need to collect taxes to pay for everything it wants to spend money on.

What that ultimately means is — all else equal — when the economy has finally managed to achieve the ultimate goal of zero unemployment, there is actually no longer any role for MMT to play in the government’s budgeting decisions since all the government’s spending plans in this situation would need to be ‘funded’ entirely by tax collections if inflation is to be minimized.

Achieving The Goal Of Zero Unemployment

Whether or not MMT is useful in a full-employment economy is a matter of special significance to me, since I have argued at length that 100% Full Employment — indefinitely maintained — is an economic goal society should not hesitate to commit itself to.

It would bring a final end to the phenomenon of periodic economic recessions and the misery of involuntary joblessness. It would be the economic salvation of the Working Class.

It is the reason why I say economic Leftists need to focus their attention on how a Leftist government should manage the economy when/if Full-Employment has been achieved. Once we get there I see no reason for MMT to even be mentioned, except in theoretical discussions re: the kinds of options that fiat currencies make available to governments that are in crisis.

It is not controversial to point out that the #1 concern any Leftist government will face, if it has brought about a Full-Employment economy, is inflation. This is indeed the reason why a good part of my extended analysis is devoted to the topic. I explain what inflation is, what it is not, and how it can be controlled if and when the economy is humming along in an economic boom.

In the final analysis, once we’ve achieved a full-employment economy, it would be best if Congress were to view its budget decisions through an “old school” lens, where the members assume they must remove from the economy via taxation any money that they want the government to spend in the coming year.

When this is done, the public — via an [involuntary] “exchange transaction” — buys the services that the government produces, maintaining the circular flow of transactions money within the economy, thereby maintaining relative price stability.

These concerns about inflation, then, are the reason I am not a full-throated advocate of MMT. From my POV, once full-employment is achieved, MMT must be returned to the “toolkit” of options Congress can resort to some day if the economy does ever again suffer from an economic contraction.

The Funding Option That’s Superior To MMT

While I've acknowledged that MMT has value as a last resort during times of crisis, I’m far more enthusiastic about the first resort that I believe all Leftist governments should embrace as their preferred way to fund an economic stimulus during a recession, and that is by heavily taxing the incomes of rich people at steeply progressive marginal rates.

There are two powerful arguments upon which I base this recommendation; one economic, the other political. The economic argument is one that has not yet reached the eyes and ears of MMT economists. I suspect they’ll be receptive to it once they’ve had an opportunity to review the extended analysis upon which it is based.

A brief summary: it can be shown that even after submitting to steeply progressive income taxation, rich people would still continue to enjoy their privileged positions at the top of the economic ladder. They’d lose none of their possessions and none of their purchasing power in the marketplace. Even after paying a top marginal rate of 99% on their gross incomes, they’d still experience no material sacrifice whatsoever.

In the final analysis, rich people have absolutely nothing to fear from heavy taxation by the government since it would not diminish in any way the privileged lifestyles they currently enjoy. So just ask yourself: what better justification could there be for heavily taxing rich people than simply pointing out that it would impose no real harm on them whatsoever?

It’s the type of economic argument that can help The Left to grow some support among those college graduates who’ve taken a course in Economics. While their numbers are few, they are somewhat familiar with the economic theories that influence government policy and they do influence the opinions of others when they repeat the economic arguments they’ve heard.

Strategic Political Considerations

There is ‘Another Level’ of political calculation that is impacted by the “MMT vs Tax-the-Rich” debate. I’m referring to the huge disparity that exists between the $$ resources The Left has at its disposal vs those of America’s Oligarchs.

There is a reason why America’s financial Elites have been able to ‘buy’ themselves an increasing number of minion politicians over the past four decades: back in 1981, they used such influence as they had to get Congress to reduce the top marginal Income Tax rates that were then in effect.

Over the four decades that followed, further tax cuts were regularly gifted to the richest members of our tribe, giving them the stockpiles of $$ they needed to purchase an increasing amount of control over the federal government and the MSM, with the result that today, they’ve acquired effective ownership of both major political parties in America.

Tax Policy is a vital issue for The Left, and not only because the current system is unfair (which of course is reason enough). Equally important is the need to heavily tax the richest members of our tribe in order to deprive them of the massive financial advantages they otherwise wield over us. (Yes, overturning Citizens United is also important for the same reason.)

To put it another way, DEMOCRACY itself requires the heavy taxation of rich people if elected governments are to actually reflect The Will of The People:

Democracy: a form of government that represents The Will of The People, because elections are held to determine who runs the government.

Oligarchy: a form of government that represents The Will of The Elites, because The Elites buy the outcomes of the elections that are held.

The ONLY hope the Left has of turning things around, of replacing our current Oligarchy with a true Democracy is by using the Government’s taxation powers to eliminate the massive $$ advantage rich people have over Average Americans via steeply progressive income taxes.

Conclusion

In summary, if these two observations are true:

1. MMT morphs into tax-funded spending during times of Full-Employment
2. MMT is less desirable to Leftists as a way to fund government spending compared to heavily taxing rich people…

Then it’s difficult to see how The Left can feature MMT as a central element of its economic agenda when a much preferable Alternative is available.

I encourage all those who have a particular interest in Leftist economics to give full consideration to the Tax-The-Rich Alternative that is available:

“Why Rich People Should Insist On A Full-Employment Economy”