For all the vitriol that President Trump has directed at freshman congresswoman Alexandria Ocasio-Cortez, a self-described democratic socialist, the president and AOC actually have more in common than either of them might care to admit.
Both are, in effect, subscribers to a relatively new economic theory, known as Modern Monetary Theory, or MMT. As theory, it’s been around for several years but operated mostly at the lefty margins in a world otherwise dominated by the macroeconomic views espoused nearly a century ago by British economist John Maynard Keynes.
Keynesian theory has formed the basis of western fiscal policy since the 1930s, advocating government stimulus (through deficit spending or middle-income tax cuts) during periods of economic weakness, followed by fiscal restraint (through higher taxes and lower spending) during periods of strong growth. It was, in theory, a means of achieving a kind of Goldilocks economy, neither too hot nor too cold. While most politicians naturally favor strong economic growth, Keynesian economists have argued for decades that a super-heated economy, fueled by fiscal profligacy, will generate too much inflation pressure, excessive government debt, higher interest rates, and speculative bubbles, hence the need for restraint in the use of stimulus during periods of robust growth.
In recent years, however, Keynes’s theory has been challenged, originally by some on the left, who felt that the government could actually do more to improve economic conditions for lower-and-middle income Americans and reduce income inequality in the process. Ideas originally espoused by Vermont Independent Sen. Bernie Sanders, such as free public college tuition, universal health care, a higher minimum wage, and concepts like the Green New Deal and a federal jobs guarantee, espoused by AOC, were some of the ways that those on the left hoped to boost opportunity for Americans on the lower and middle rungs of the economic ladder.
Such ideas, which many assumed would be financed either through higher taxes or higher deficits, have been questioned by many mainstream (read: Keynesian) economists, many Democrats, and almost all Republicans, as unaffordable or likely to spark inflation and higher interest rates.
Keynesian theory would suggest those critics are right. It’s the economic reality of the past few decades, however, that suggests it was Keynes who may have shot wide of the mark.
Here’s an illustrative story that comes from Scott Pelley, the CBS newsman who recently wrote the book “Truth Worth Telling: A Reporter’s Search for Meaning in the Stories of Our Time.”
In a chapter about the 2008 financial collapse, he wrote about then-Fed chairman Ben Bernanke. As a student of the Great Depression, Bernanke was petrified that the global financial system was going to seize up in 2008, prompting a repeat of the 1930s. In order to inject liquidity into the global financial system, he simply inflated the balance sheets of every major bank in the world with a U.S. Federal Reserve account. He didn’t print more money. Instead, he directed Fed staff to type bigger balances into the accounts of banks around the world. The Fed, in effect, created trillions of dollars with little more than a few key strokes on a computer.
Bernanke, a Keynesian himself, quite naturally worried about the risk of inflation, but felt at the time that the risks of financial collapse were far greater.
Of course, Bernanke wasn’t acting alone. At the same time, the Obama administration passed a massive fiscal stimulus package designed to inject money into the U.S. domestic economy through both infrastructure spending and tax cuts geared toward the middle class.
The combined actions had their intended effects. The financial system reeled, but didn’t collapse, and the stimulus package, much decried at the time by Republicans, provided the jolt the economy needed to end the freefall that President Obama inherited, and laid the groundwork for the longest economic expansion in American history.
Economic growth would have been faster had Obama kept applying the gas through fiscal stimulus, but the GOP takeover of the House in 2010 cut the spending tap and put a focus back on deficit reduction. The Fed did continue its loose monetary policy, through record low interest rates and quantitative easing, which at least kept the economy moving forward.
While the economy continued to expand, its modest pace and the inconsistency of the recovery laid the groundwork for Trump to take the Rust Belt and win the White House in 2016.
Since then, Trump has thrown the old rules, and economic orthodoxy, out the window, by adopting much of the toolkit espoused by proponents of MMT. Trump, from his first day, was determined to throw gas on an already expanding economy, when traditional economic theory argued for restraint. He’s done so mostly by significantly increasing government spending while simultaneously cutting taxes, which has sent the federal deficit skyrocketing. He has also consistently argued for the loosest possible monetary policy.
Despite such policies, inflation has remained remarkably flat, as it has for the past quarter century. Obama’s 2009 stimulus had no effect on prices, either, nor did Bernanke’s injection of trillions of dollars into the balance sheets of financial institutions in the wake of the 2008 crash. And interest rates have remained historically low even as the country has run historically high federal deficits.
All of which has helped make the case that, perhaps, Keynes had it wrong. Maybe, in a country like the U.S., that controls its own currency and that is not overly dependent on foreign debt, things like deficits and high government spending don’t really matter— at least not at the levels we’re experiencing today.
If we believe that the government must either tax or borrow to pay its bills, there would seem to be an argument to keep spending in check. But what if the government isn’t entirely dependent on those sources of revenue? As Bernanke showed, the U.S. can create new money at the stroke of a computer key.
Proponents of MMT, in fact, believe that the U.S. government doesn’t really need to run “deficits,” per se, since it has control of its own currency and is perfectly able to create funds at will to fuel the economy and achieve full employment, which is their primary goal. It doesn’t even require printing money, since most financial transactions today are entirely digital in nature.
Just as the Fed simply typed extra zeros into the balance sheets of banks in 2008, the federal government could do the same with its Social Security payments, tax refunds, or payroll disbursements. Who needs tax dollars, when you can create at least a portion of your funding stream out of thin air to advance your goals?
For those of us schooled in traditional economics, it sounds like madness that will surely lead to very painful consequences. And even its proponents acknowledge that there is a limit to this method. Eventually, if you create too much money, the value of a dollar will decline, but MMT proponents say we’re nowhere near that point, and they can cite decades of low inflation and interest rates, as well as the strength of the dollar internationally, as proof. They also point to a number of other controlling mechanisms, such as taxation, which can be applied to restrict the money supply if inflation were to reappear.
While President Trump would undoubtedly disavow any belief in MMT, his economic policies are largely in sync with those espoused by supporters of the theory, in that he’s happy to boost government spending, cares little about deficits, and advocates the loosest possible monetary policy, all for the purpose of juicing the economy— which he hopes is his ticket to re-election.
The primary difference between Trump and MMT believers on the left is a question of priorities. Trump has focused his government profligacy on a senseless military buildup and corporate tax cuts, which has sharply limited the economic impact of his government largesse.
Those on the left would focus the government on providing universal health care, affordable housing, educational opportunity for low and middle-income Americans, and on advancing solutions to climate change— and argue that such investments will help expand the economy more evenly and boost incomes from the bottom-up.
While most economists still dismiss MMT as crank theory, it has obvious appeal in the political sphere, which is where economic theory ultimately translates into actual policy. And, at some point, as traditional economic theory continues to prove a mismatch with economic reality, new ways of thinking about spending, deficits, and monetary policy are certainly in order.