A problem with Modern Monetary Theory

Jim Grant of Barron’s tackles the latest fad popular among those who think governments can spend as much as they want with impunity.

Modern monetary theory is not so theoretical anymore. In all but name, it’s the description of Republican fiscal policy in this living moment. “Federal Borrowing Soars as Deficit Fear Fades,” said the headline on page one of Tuesday’s Wall Street Journal. For the second year in a row, the Trump administration is spending $1 trillion more than the government expects to extract from the taxpayers. …

… The stakes are higher for all who live under the influence of the 20th-century progenitor of MMT, the economist Abba Lerner.

You can boil down MMT … to a few handy precepts. The first is that money is the government’s creation, not society’s. It derives its value from the fact that you can pay your taxes with it.

Right away, you understand the political foundation of the body of ideas associated with Lerner, an avowed Marxist. But MMT is a big tent, and there’s plenty of room for Republicans. …

… Lerner failed to anticipate today’s looming entitlements crisis, the falling national birthrate, and the striking decline in the rate of private saving these past 10 postcrisis years. The empirical fact … is that “large indebtedness eventually slows economic growth as resources are transferred from the highly productive private sector to the government sector.” …

… Hume, steeped in the classics, reminded his readers that Roman emperors stored up treasure against some future day of peril. The “modern” expedient, Hume disapprovingly continued, “is to mortgage the public revenues, and to trust that posterity will pay off the encumbrances contracted by their ancestors: and they, having before their eyes so good an example of their wise fathers, have the same prudent reliance on their posterity; who, at last, from necessity more than choice, are obliged to place the same confidence in a new posterity.”

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...

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