John Phipps: What if the Voodoo They Do is True?

George H. W. Bush dubbed “Reaganomics”, supply-side theories like the Laffer Curve and trickle-down effect, as voodoo economics and was mostly correct. But overlooked by fiscal conservatives across the political spectrum was the doubling of the federal deficit under Reagan that contributed mightily to the recovery from the stagflation of the preceding years.

Today we have a 21st Century version of voodoo economics – Modern Monetary Theory [MMT]. With tenets like “federal deficits don’t matter, only inflation does”, and “spend first, tax later”, it is clearly nonsense which violates every bedrock principle of economics from Smith to Friedman. Or at least seems to. MMT has one thing going for it, though – reality.

Economics and Common Sense

While it still hurts my brain, MMT may be the Copernican moment in economics when commonsense knowledge (clearly the Earth isn’t moving – the sun is) can’t cope with obvious data (but then stars are moving randomly). We had (pre-COVID) historically low unemployment, zero interest rates, modest GDP growth, trillion-dollar deficits, and no inflation. Eggheads were exploding trying to get those planets to line up under existing macroeconomics.

In addition, how can Japan function, let alone thrive, given their financial heterodoxy over decades?

Issuers Versus Users

MMT offers an explanation. The key realization is this: monetarily sovereign nations cannot run out of money. They are currency issuers, not users. Above all, they are not households, and such comparisons are flawed. For instance, if income (taxes) and expenses have to balance, shouldn’t financial collapse have occurred decades ago? Indeed, the lack of accurate analogies between personal and national finance may prevent popular understanding of MMT, because it is so counterintuitive.

The mind leaps to absurd possibilities under MMT, like why have any taxes? Answer: unlimited money issuance would overwhelm the real resources (labor, raw materials, knowledge, etc.), which are true limiting factors, not budget balancing. The reason we have those economic conditions above simultaneously is the money added to the economy by the Federal Reserve and Congress did not exceed the unused capacity in our economy. I can almost buy this but remain convinced the flood of injected dollars was also poorly targeted and ended up inflating assets, like the stock market and housing.

It is impossible to persuade many MMT might be a step forward in a column this length. But fiscal conservatives – who have been strangely silent recently – cannot explain how national finance works right now. When they try, they are stopped cold by two questions: where is the inflation and what about Japan? MMT offers the first credible answers I have seen.

John Phipps, a farmer from Chrisman, Ill., is the on-farm “U.S. Farm Report” commentator.