Beware Woke Economics

Modern Monetary Theory should have been one of the casualties of the Biden-era inflation, the worst in four decades. Instead, the ideas behind the once-fashionable progressive theory are resurfacing just as the national debt crosses $40 trillion.

The Congressional Budget Office projects that the federal government will spend more than $1 trillion on net interest this year, exceeding expected spending on national defense. Yet, as Wall Street Journal columnist Allysia Finley argued recently, the economic thinking the progressive left uses to dismiss concern about enormous deficits is showing signs of life.

Modern Monetary Theory, or MMT, vaulted from academic obscurity into national politics just as progressives were looking for ways to finance proposals on the scale of the Green New Deal. Rep. Alexandria Ocasio-Cortez said in 2019 that MMT deserved to be “a larger part of the conversation.”

In its simplest form, MMT holds that the federal government issues the currency and therefore cannot run out of money the way a household or business can. The government does not need to collect a dollar in taxes before it can spend a dollar.

As a result, MMT theorists hold, the government can spend unlimited sums of money forever with virtually no repercussions. MMT’s appeal is that it gives advocates of massive federal programs an answer to the question, How are you going to pay for it? According to MMT, the answer is simply, Print more money forever.

MMT is essentially “woke” ideology applied to economics. Proponents of MMT, like gender ideologues or open borders advocates, simply ignore uncomfortable realities that they would rather not engage with. MMT treats immovable constraints as though changing the language will change reality. It replaces the question of how government will pay for its programs with vague talk of “productive capacity” and “freeing up” resources.

MMT’s central premise is technically interesting but politically dangerous. MMT takes the existing fact that federal spending is not mechanically limited by prior tax collections and repackages it as a license to spend without accounting for the cost in advance.

The true cost, however, always shows up later in taxes, inflation, additional debt, or some combination of the three.

Sure, the government can create more dollars, but money is a “claim” on real goods and services, not the goods and services themselves. Creating more claims does not create more underlying wealth.

When those claims multiply faster than the things available to buy, inflation occurs.

The pandemic gave Americans a painful demonstration of that constraint. The government spent trillions of dollars while the Federal Reserve rapidly expanded the money supply, even as shutdowns and supply-chain disruptions restricted production. Federal Reserve researchers later estimated that U.S. fiscal stimulus contributed about three percentage points to inflation.

The United States was not formally following an MMT program. But the episode illustrated MMT’s own acknowledged limit: Creating more money cannot produce more goods.

MMT proponents recognize this problem. They accordingly argue that inflation, rather than a lack of dollars, is the true limit on government spending.

Taxes, in the MMT framework, can be used to reduce private demand and “free up” resources for public use. But “freeing up” resources is a rather benign description of what actually happens.

If Washington raises taxes, citizens surrender purchasing power directly. If it creates and spends additional money, citizens lose purchasing power through inflation. Either way, the government gets resources that otherwise would remain in private hands.

MMT places extraordinary faith in Congress. Its proponents expect lawmakers to combat inflation by raising taxes, asking Americans already struggling with higher prices to surrender still more purchasing power. Even Heather Boushey, who later served on President Joe Biden’s Council of Economic Advisers, challenged that logic.

But the political incentives run in the opposite direction. Members of Congress receive credit for spending money and blame for raising taxes. Yet MMT invites lawmakers to dismiss financial constraints before approving new programs, then trusts those same lawmakers to impose unpopular fiscal restraint when inflation looms.

Criticism of MMT is hardly limited to free-market economists. Larry Summers, who served as Treasury secretary under Bill Clinton and later led Barack Obama’s National Economic Council, called the theory “fallacious at multiple levels.” He compared its promise of government spending without corresponding economic burdens to a “free lunch.”

Inflation is not the theory’s only problem. There is also the question of how government officials purport to know which uses of scarce resources are most valuable.

As Friedrich Hayek explained, markets coordinate knowledge scattered among millions of people in a way that no central authority ever could. Government spending gives Washington more power to bid resources away from private uses, but it gives officials no greater knowledge of where those resources ought to go.

Businesses then respond to political demand. Capital, labor and production shift toward industries favored by federal spending. As the government commands more resources, private activity increasingly reorganizes itself around decisions made in Washington.

Beyond its bogus economics, MMT conflicts with the American understanding of the individual’s relationship to government. A free economy begins with the presumption that individuals know best how to use their own time, money and property. MMT reverses that presumption by giving Washington a greater claim on all three.

Ultimately, MMT is just as culturally corrosive as any other pillar of the far-left “woke” agenda. Americans should reject it outright.