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The New Economics

Greg Spears

FROM THE TIME I started covering Washington as a reporter in 1980, politicians have been condemning the federal budget deficit. Ronald Reagan was running for president that year. He excoriated his opponent, President Jimmy Carter, for increasing the federal debt by—brace yourself—$55 billion in 1979. These days, that wouldn’t pay a week’s bar tab for Uncle Sam.

With the sole exception of Bill Clinton, every president for 40 years has added to the federal debt, all while campaigning loudly against deficit spending. It’s like seeing the Saturday night drunk singing in the church choir on Sunday morning. Lord be praised, the sinner is saved. Or not.

But nothing compares with the bender we’re on today. There’s a new economic theory in Washington, and it contends that deficits don’t matter. You won’t hear many politicians saying that out loud, but their votes suggest we’re in a new economic era governed by Modern Monetary Theory (MMT).

Standard Keynesian economics calls for the government to run a deficit when the economy is depressed. That’s what happened in 2009 when Congress passed a $787 billion stimulus bill to fight the Great Recession. Government deficits can create demand for goods and services when the private sector is struggling, thus restoring the economy to its normal function.

Since COVID-19 hobbled the world economy in March 2020, Washington has run deficits of incredible size. Over the past year and a half, Congress has passed six major bills providing $5.3 trillion in rescue spending, according to the deficit-hating Peter G. Peterson Foundation. Still on the runway is a $1 trillion infrastructure bill, which is expected to pass into law this fall. Behind that is a $3.5 trillion Democratic wish-list proposal.

Washington is spending as if it can simply print more money to pay its obligations. That, in a nutshell, is the theory behind MMT. Let me try to explain. The dollar has a value because we all agree that it does. But it hasn’t been backed by anything tangible since Aug. 15, 1971. That’s when President Richard Nixon suspended the right of other nations to convert their U.S. dollars into gold.

“Today we have a strictly fiat currency. That means the government no longer promises to turn dollars into gold…. With a fiat currency, it’s impossible for Uncle Sam to run out of money,” writes economist Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.

Kelton preached MMT as the Democratic staff economist on the Senate Budget Committee, which she joined in 2015. She told senators that the U.S. government wasn’t like a family or a small business that has to keep its income and spending in balance. Instead, the government can simply create all the money it needs by applying a few keystrokes to a Federal Reserve computer file.

Deficit hawks have long wrung their hands over the terrible things that’ll happen if the government continues to overspend. Interest rates will soar. The value of the dollar will crumble. Grandma will lose her Social Security. Yet, after decades of deficits, none of this has come to pass. Under the new thinking, the federal government has actually spent too little. In the MMT view, government debt is actually an asset to investors.

Here is Kelton again, referring to a running tally of the federal debt on display in New York City: “The debt clock on West 43rd Street simply displays an historical record of how many dollars the federal government has added to people’s pockets without subtracting (taxing) them away. These dollars are being saved in the form of U.S. Treasuries. If you’re lucky enough to own some, congratulations! They’re part of your wealth. While others refer to it as a debt clock, it’s really a U.S. dollar savings clock.”

MMT can sound like Alice in Wonderland to conventional economists. When governments print too much money, the currency can be degraded to the point of worthlessness. John Kenneth Galbraith tells the story in his book Money of a Harvard graduate student who lost a packet of toilet paper to a pickpocket in a crowded Moscow subway. The student was amused that the thief missed his cash, held in Soviet currency.

“Only later did the young scholar come to realize that the gentle product stolen was more valuable than the packet of notes in the other pocket,” Galbraith dryly observed.

Perhaps MMT is right. It would be the answer to every politician’s prayer to be able to spend with abandon. They can just never admit to it.

Kelton explained MMT to her local congressman when she was teaching economics at the University of Missouri-Kansas City. He listened for 45 minutes, but his twisted posture displayed a deep unease. Finally, he straightened up in his big chair. Kelton thought he finally understood that deficits don’t matter. “I can’t say that,” he told her quietly.

Pay attention to what politicians do, not what they say. By that rule, it seems that MMT is carrying the day. Will all of this lead to higher inflation? None of us should get into the predictions business—but we all need to be in the risk management business. Ponder what higher inflation might mean to your financial future. If the consequences would be dire, consider hedging that risk.

Inflation-indexed Treasury bonds and Series I savings bonds, anyone?

Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg’s earlier articles.

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