If you want to understand the economic policies of the Biden administration, do not dig up your macroeconomics textbook from your college days because the monetary and fiscal policies of the current administration are not based on traditional economic theory, but on “modern monetary theory” or MMT for short. This is the macro-economic theory embraced by Bernie Sanders and others on the far left, and it is well outside the mainstream of economic thinking.
To begin with, there are two main branches of economics: microeconomics and macroeconomics. Microeconomics is the study of how rational individuals make decisions and how markets work to coordinate those decisions and allocate scarce resources. For example, when Southwest Louisiana was hit by Hurricane Laura, the demand for workers and building materials suddenly soared. People here drove up the prices of building materials and labor as they competed with one another to repair their homes. When people in other areas saw the high prices here, they recognized an opportunity to make a profit, and workers and materials poured into Southwest Louisiana. At the same time, residents here delayed any plans they may have had for other building projects until the rebuilding surge from the storm was over and prices returned to their normal levels. This is how market prices direct resources to their highest and best use, and it is very predictable.
Macroeconomics, on the other hand, is concerned with the performance of the overall economy, and factors such as economic growth, boom-or-bust business cycles, unemployment and inflation. Here, the government plays a major role, with its fiscal, monetary and regulatory policies. Although economics as a science should be concerned with making predictive statements, such as “if A happens, then B will result,” rather than making policy recommendations, it is nearly impossible for macroeconomists to keep politics out of their analyses.
During the past half-century, the big debate in macroeconomics was between the Keynesians and the monetarists. The Keynesians (named for the British economist John Maynard Keynes) believe governments can prevent business downturns from turning into full-blown depressions by pumping money into the economy through deficit spending (that is, the government spends more than it received in taxes, thereby boosting demand). Monetarists, on the other hand, believe economic contractions are primarily caused by high interest rates, and that deficit spending by the government will lead to inflation and higher interest rates. They argue that the best thing a government can do to promote stable economic growth is to maintain a balanced budget and stable money supply. Most Democrats favor Keynesian policy, while most Republicans favor the monetarists’ approach.
MMT rejects both these models and offers a new way of looking at government involvement in the economy. It challenges conventional beliefs about the way the government interacts with the economy, the nature of money, the use of taxes and the significance of budget deficits. These beliefs, MMT says, are a holdover from the gold standard era and are no longer accurate, useful or necessary. Monetarily sovereign countries like the U.S. that spend, tax, and borrow in a paper currency they fully control, are not operationally constrained by revenues when it comes to federal government spending.
In other words, according to MMT, our government does not rely on taxes or borrowing to finance its spending because it has a monopoly on what its citizens use as money and our government can just print as much as it wants with no negative consequences. Therefore, there is no need to worry about the growing federal budget debt.
There are many, many examples throughout history of what happens when a government turns on its printing press and starts printing as much money as it wants. The result is invariably that the currency becomes worthless and people either stop using it or spend it as quickly as they can to get rid of it, which leads to hyperinflation.
MMT maintains that the U.S. has a monopoly on money creation because its money is the legal tender in the U.S. and people in this country must use U.S. dollars to buy goods and services and pay their taxes and other debts. But this ignores the fact that more than 60 percent of our dollars in circulation are held overseas, and these people don’t have to hold them. As our government prints more dollars, backed only by a promise to give them an I.O.U (that is, a government bond), they may decide the US dollar is not the best way to store their wealth and they would rather place their stock in another nation’s currency or in a commodity like gold (that has gone from $35 an ounce in 1971 when Nixon took us off the gold standard to $2,000 an ounce today) or even in a cryptocurrency that no nation owns.
How would these countries redeem our dollars? They could exchange them for tangible assets in the U.S., such as commodities, real estate, land or ownership of US companies. This is the formula for inflation.
Is there any evidence that the U.S. is somehow exempt from this law of supply and demand when it comes to money (that is, if you increase the supply of something, its value will go down)? I suppose the MMTers can point to our soaring national debt and say “people still want our dollars.” But this is like the alcoholic when he’s warned that if he keeps driving while he’s drunk, some day he’s going to kill someone, and responds by saying, “well, I haven’t killed anyone yet.”
Unfortunately, Republicans lost the moral high ground on the debt issue when, after highly publicized filibusters against raising the debt ceiling under Obama, they sat quietly by as the debt ceiling was raised during the Trump administration. If they protest the increase in the debt ceiling proposed by Biden, it will seem like they are saying only that Democrat debt is dangerous.