The MMT (Modern Monetary Theory) policy, a grand experiment, was tested after the economic shutdown caused by the pandemic.
It failed miserably.
However, before we get to its rejection, we need to review the policy to understand why it didn’t work as expected. In accordance with Investapedia:
The main idea behind MMT is that governments controlling a fiat currency system can and should print (or create with a few keystrokes in today’s digital age) as much money as they need to spend because they cannot go bankrupt or become insolvent if no political decision has been made on this.
Some say such spending would be fiscally irresponsible, as the debt would grow and inflation would skyrocket. But according to MMT:
- High public debt is not the harbinger of collapse we believe;
- Countries like the US can run much larger deficits without cause for concern; and
- A small deficit or surplus can be extremely harmful and cause a recession because deficit spending is what creates people’s savings.
Here is the critical paragraph:
According to MMT, the only limit a government has when it comes to spending is the availability of real resources such as workers, construction materials, etc. If government spending is too large relative to available resources, inflation can rise if decision makers are not careful.
Taxes create a constant demand for currency and are a tool to get money out of an economy that is becoming overheated, MMT says. This goes against the conventional wisdom that taxes are primarily intended to provide the government with money to build infrastructure, fund welfare programs, etc.
With this basic understanding, we can “view feed” to judge whether MMT has been successful in its implementation as an economic policy tool.
$5 trillion was spent and all I got was inflation
At the end of 2019, the federal debt was $23.2 trillion. Of course, three months later, the government decided to shut down the economy to combat the outbreak of COVID-19. This decision was a defining moment that implemented MMT policies with successive rounds of monetary stimulus from direct household checks to expanded government subsidies. By the end of 2021, the federal debt has increased to nearly $30 trillion. This is the largest increase in government spending in US history.
While the massive flow of stimulus temporarily boosted economic growth “pulls forward” being in demand, it also created several challenges.
The most obvious problem was the impact of skyrocketing demand on a supply-strapped economy. With economy “close” due to government-imposed restrictions, the flow of stimulus payments has led to increased demand. Given the basic economics of supply and demand, prices have risen. As expected, the implementation led to a massive spike in inflation. (Given that most Americans have fixed payments for health care and housing during the contract period, the third figure shows the cost of living for most each month.)
Of course, inflation is not a problem as long as wages are holding up.
Wages are not keeping up
However, therein lies the second problem. The economic shutdown forced millions of workers into unemployment benefits and subsidies. However, with trillions in stimulus, the economy quickly began to recover. As the economy gradually recovered, anti-virus mandates and policies continued to affect supply chains. Despite the persistence of the demand imbalance, the demand for workers increased sharply, leading to a surge in the wage pressure necessary to find workers.
The problem, however, is that the surge in inflationary pressures has swallowed up the wage increases that workers have seen.
This is always the problem of injecting money into the economic system.
The repeated argument is that more incentives help “poor working class” is erroneous. As we argued in “Biden’s stimulus will reduce poverty by one year” if you provide “free” money, those who provide products and services raise prices accordingly. A a recent study shows this influence.
“An analysis of Penn Wharton’s budget model found that low- and middle-income households spent about 7% more in 2021 on the same products they purchased in 2020 or 2019, an average of about $3,500.”
In other words, if you provide “free capital,A market economy will adjust prices to compensate for the additional demand for products and services. Those primarily living paycheck to paycheck see them “disposable income” to receive “taxed” far away leaving the standard of living unchanged.
The following chart shows that the average American now has a record deficit, requiring more than $6,350 in new debt each year. That number is up from about $4,500 in early 2022.
This is why socialism in any form does not elevate the middle class, it shrinks it.
While proponents of MMT policies suggest that providing free money will increase economic equality, the opposite is true, as shown by the net worth of the top 10% of the population compared to the poorest 50%.
Debt matters
While MMT’ers believe that debt doesn’t matter and use Japan as an example, the reality is quite different.
The premise is that Japan is successfully running a large deficit and the economy has yet to collapse. So this is a model that the US can follow. However, is it true that Japan’s economy has not collapsed under the weight of debt; he didn’t grow either.
Despite the big surge in Central Bank interventions, it, like the United States, had little effect on economic prosperity. Although the stock markets are doing well, economic growth is about the same as it was at the beginning of this century. Japan continues to suffer from recession, low inflation and low interest rates.
This is hardly a model that I think most Americans want to follow. However, this is what we have been doing for the last 40 years. Huge increases in debt and deficit spending have not led to a surge in economic prosperity.
GDP growth has slowed below the previous long-term trend before the financial crisis and the pandemic.
The failure of MMT is obvious.
In theory, the idea of ​​MMT sounds great. However, he used the debt for non-productive investments such as social security and free college does not provide the promised economic benefit. Instead, the resulting inflation is from inflows “free money” restrains economic growth. In addition, inflation “taxes” 50% of the lowest income earners.
The economic mechanism is broken
The appeal of MMT is strong amid the current economic turmoil. This is especially true because it makes possible all the progressive programs from unlimited public works, federal jobs, uneconomic green energy schemes, “Medicine for all”, free college, free housing and many more. However, as the Mises Institute rightly points out:
“Promising something for nothing will never lose its luster. Therefore, MMT should be seen as a form of political propaganda rather than actual economic or government policy. And, as with any propaganda, it must be fought with an appeal to reality. MMT, where deficits don’t matter, is an unreal place.’
It is noteworthy that “transmission system” the economy remains broken. A large-scale increase in monetary interventions creates inflation, but does not increase the velocity of money. As shown, the wealthy keep cash infusions while inflation taxes them off the poor.
According to MMT, policymakers should raise taxes aggressively to slow economic activity with runaway inflation. However, higher taxes are not “favorable” approaching the mid-term election cycle, and the economy is already reverting to its long-run average as liquidity dries up.
In the end, while MMT sounded great in theory, its failure was inevitable.
However, we will continue to pay the price of flawed economic policies that work only in mathematical formulas created in “Ivory Towers.”
In the village “The Real World,” well-intentioned theories always lead to harmful results for those they were supposed to help.
This time is no different.
Post The MMT policy was tried and it didn’t work. first appeared on RIA.
