Harley Bassman: ‘Be Prepared For MMT To Be Implemented’
On Tuesday, in the course of making a light-hearted (I swear) joke about the extent to which Carl Icahn's recent derisive comments about modern monetary theory are seemingly at odds with what he told CNBC three(ish) years ago about deficits, I lamented the demonstrable laziness inherent in many MMT critiques.
It's not so much that MMT's (many) critics are silly people. Indeed, many of the biggest names in economics and finance have assailed the theory and, one hopes, most of those people can ac
The problem with MMT is that deficits become structural, and thus excessive debt issuance cannot be turned off when rising rates and inflation signal that debt capacity limits have been reached.
Federal debt service is currently about $480BN annually (FY20) or about 10% of the current federal budget, and represents about 2.65% of the $18.09TR federal debt (not including intra-government obligations). The federal deficit is currently about $1.3TR per year, during what passes for an economic boom, suggesting the deficit may average around $1.6TR per year over a cycle.
In ten years, at a constant deficit level, the debt may be $34TR = $18TR + ( 10 x $1.6TR ). At current rate 2.65% that implies $900BN annual debt service. If rates are a historically more typical 4.00%, we’d be looking at $1.36TR annual debt service, which would be 29% of the current federal budget. The increase in debt service, about $880BN, is greater than the military budget or the Medicare budget, and is not far from the entire Social Security budget.
Since the US is not likely to eliminate the military, Medicare or Social Security, the deficit level will not be constant. The deficit will have to rise rapidly, debt service will also rise faster than shown above, and rates are likely to be higher than assumed above.
Conclusion: within less than a decade, MMT will blow up the federal government. it is not possible for today’s government and electorate can enjoy the alleged benefits of MMT and leave the consequences to the next generation. The consequences will become disastrous in less than two election cycles.
So, I guess the first order of business would be to reverse the 2017 tax cut that made structural deficits far worse. Or maybe it is not the fact there is a deficit, but only the “right” people should prosper from it.
Critiques of MMT that don’t acknowledge that the fiat currency regime it describes have ALREADY been in effect in monetarily sovereign nation states for over 40 years deserve summary dismissal, particularly those which show zero recognition of the difference between its descriptive power and the policy prescriptions offered by some of its adherents.
What we are seeing is the inevitable consequence of what you just described. Forty years ago they made it such that money was meaningless, and they expected everything to continue indefinitely being okay.
They claim there is no “inflation” because they keep looking at the wrong metrics. Wages haven’t risen in those same 40 years…
…and there’s no “inflation”? What do we call it when your money doesn’t go as far as it used to?
My asshole there’s no inflation.
You can’t dis MMT without totally despising supply side economics. At least MMT is unproven, supply side is proven horrible.
How did QE differ from MMT? Fed bought bonds that were issued to fund deficits. MMT started a while ago and after this pause will continue. Does anyone really think a politician will not be tempted to “look at inflation in a different light” rather than take a Volcker moment??? Oh, and how did QE/MMT really work? Half the country still can’t pay an emergency $700 bill and the wealth/income inequality only got worse. Education/productivity is the only answer and more govt spending in education hasn’t worked that well.