John Phipps: Why Modern Monetary Theory is Actually Voodoo Economics

June 11, 2019 06:36 AM

There is a new brand of economic theory floating around, supported by left-leaning politicians and economists, and actually put into practice by the Trump administration and formerly conservative Republican legislators. It’s labeled modern monetary theory or MMT. I have read a few efforts to explain this concept and frankly, I would use the late President Bush’s term to best describe it: voodoo economics.

One of its basic tenets is any country that creates its own currency, like most of the world except the EU, can finance unlimited amounts of borrowing. All that I know of economics and believe from experience tells me this is nonsense, and the results could be serious. The only problem with my belief system is it hasn’t been able to match reality. We’ve been running significant federal budget deficits for several years, typically because of wars and the recession. But after our economy climbed to full-employment, we not only didn’t slow our borrowing, we cut taxes to flatten revenue and cause truly enormous deficits (including an all-time record monthly deficit this February of over $270B) In addition, this happened during good economic times. All these actions deserve separate discussion, but my point today is these decisions don’t seem to be generating any of the dire consequences my economic worldview predicts. Inflation has been stuck below 2% for decades and shows no sign of budging. Interest rates on federal debt are not climbing because of excessive borrowing. There is zero evidence that government bonds are crowding out private investment. In fact, the US and the world can’t seem to get enough of our sovereign debt.

Those of us who have been concerned about the federal debt are beginning to look like chicken-littles. And it’s not just laymen who are befuddled. Economists around the world are at a loss to explain what is happening with sovereign debt and economic activity. While I still believe there will be severe consequences, I’ve got no numbers to back that up, only “You just wait!”

Don’t misunderstand. I am truly worried about what I think is fiscal malfeasance by our government. At the same time, I’ve got nothing to prove my worries are likely to come true anytime soon or ever.

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Spell Check

Craigville, IN
6/11/2019 07:23 AM

  John, there is nothing wrong with your economic theory.......except. reality. Not that your wrong, but the drag of explaining debt is , so far, the only thing keeping politicians from spending even more ridiculous amounts of money. If you were to hand power-hungry shop-a-holics a clean, debt free credit card and tell them to go run the household, they would spend with total abandon. However, if they know that the credit card has a boatload of debt already on it, they may feel slightly (hopefully) restrained from buying every new (and old) shiny bauble that catches their attention, or they think will ingratiate the person or group to which they give it to return the gratitude in the form of a future vote, hence keeping them in power. There is nothing wrong with your base theory, but it does fail to calculate the factor of politicians who are not motivated by the altruistic goal of common good. Common good to them is having the power to determine their idea common good for you by purchasing your loyalty with other peoples money.