Forbes has what I think is an unintentionally funny article, Watch Out, MMT’s About, As Bernie Sanders Hires Stephanie Kelton, by Tim Worstall.
Worstall spends most of the article giving a cursory description of MMT (Modern Money Theory) in which he begrudgingly admits that the theory is probably correct about what it describes. Then he finally gets to what bothers him about it. The emphasis below is added by me to show the part of MMT that Worstall still does not get. Or maybe that is the part, I do not agree with. In my mind, the evidence shows that the way he differentiates base money from banking system money has no basis in reality. Think dot com bubble. This was not created by the Fed, but it was created by the private sector and its stock market.
And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like. And sure, you could indeed finance government just by printing more money. Print money, spend it, hey presto, you’ve financed government. Standard monetary theory also recognises this: we know that the Fed makes a pretty profit each year from printing Benjamins (20 cents of paper and 3 cents of ink really is worth $100 these days) and that’s worth perhaps $20 billion a year to the US government in seignorage. We really don’t complain about it either. That standard monetary theory then also says that doing too much of this (in more detail, printing or creating lots of base money, rather than the creation of credit in the manner that the banking system does) will be highly inflationary. Standard theory points to Wiemar Germany, post WWII Hungary and modern Zimbabwe as examples (that last so fun that the end series of banknotes were only printed on one side as they didn’t have enough “real money” left to buy ink).
At which point the MMT crowd say ah, but yes, that’s what taxes are for. Print the money, spend it, thereby injecting it into the economy, and if inflation rises then taxes are what sucks that money back out of the economy and thus kills off the inflation. And it’s that bit that absolutely terrifies me. The effect that idea has on the incentives for politicians.
I have to agree that worrying about what politicians will do to pervert an idea is always something that needs worrying about. But that horse is already out of the barn. The politicians are basically using MMT to enrich the rich. The real worry is that the public will find out what the rich already know. They will realize that there is no need to “balance the budget” on the backs of the poor. Furthermore the public will be mighty angry that they have accepted unnecessary suffering because the rich, who knew it wasn’t true, made them think that there was a good governance reason to accept the rigging of the economy to transfer middle-class wealth to the rich.
What truly frightens the rich is that Bernie Sanders understands the scam and he is trying to explain it to the rest of us. He has hired an expert in the theory, Stephanie Kelton, to be his economist for the minority on the Senate Banking Committee. Imagine what will happen if 2016 brings that minority into the majority, and they still have Stephanie Kelton as the chief economist.