“For every complex problem,” wrote H.L. Mencken, “there is an answer that is clear, simple, and wrong.”
The issues of “health care, infrastructure, education,” and “climate change” could all be solved — according to Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy” — with one weird trick, as they say on the internet; stop focusing on federal budget deficits.
“I would like to say to Milton and Anna: Regarding the Great Depression, you’re right.”
Kelton is an advocate of Modern Monetary Theory (MMT) which, despite its name, isn’t modern at all. There is nothing new about claims that social ills can be cured by increasing the amount of money in circulation, or assurances that this approach will cause no harm. In 1696 when John Driscoe proposed a land bank to supplement the Bank of England, he said it would create “a new species of money; we may as well fear that we shall have too much money in the nation, which no wise man will complain of.” Two hundred years later, William Jennings Bryan brought delegates at the 1896 Democratic Convention to their feet with his “Cross of Gold” speech, comparing opposition to an expanded money supply to the crucifixion of Jesus Christ. Neither proposal was implemented, and the economies of late 17th century England and early 20th century America did fine without them. (READ MORE from Con Chapman: Horace Mann: America’s Favorite Bigot Who Elevated Educators Over Parents)
Kelton’s detour into this graveyard of bad economic ideas is triggered by a straw woman: she sees a bumper sticker on a Mercedes SUV depicting Uncle Sam with his pants pockets turned inside out to indicate that he has no money. From this she concludes that woman driving the car doesn’t understand the difference between a sovereign issuer of fiat currency and a household budget. A better guess is that someone who can afford to buy or lease a Mercedes does understand the difference but has political views that differ from Kelton’s.
One would expect a writer who accuses others of believing in myths to avoid myth-making herself, but a certain amount of speculation is unavoidable when tracing current economic practices to their root. Kelton — along with other MMT believers — posits that money came into existence by some sort of nefarious plot to permit governments to tax trade, without offering historical evidence for her theory.
While the precise birth date and place of money is unknowable, the earliest form of money in Western civilization appeared in Lydia around 600 B.C. Herodotus says the Lydians “were the first … who coined and used gold and silver currency.” The use of currency spread from its source until over half of the two thousand city-states of ancient Greece issued their own coins, but taxes were rare. In Asia, the history of money goes back even further, 3,000 to 4,500 years, but the conclusion one reaches is the same; taxes were low and infrequent, imposed mainly in times of war. So MMT’s origin myth has things backwards; money preceded taxes, just as trade preceded taxes, and the more plausible explanation is that trade contributed more to the creation of money than taxes. The elevation of taxes over trade is important to MMT because, although Kelton says that taxes aren’t essential to the theory, current tax policy is allegedly responsible for bad things that others would think unrelated — such as poisonous water in Flint, Michigan, a city that has been solidly under Democratic party control for years.
Kelton teaches at Stony Brook University on Long Island in New York, and a little local research might have led her to this alternative explanation. The first Dutch colonists in New York discovered that their Native American trading partners assigned a greater value to wampum — white and purple beads made from shells — than its actual utility, which is the essence of physical money; you can light a fire with a dollar bill, but you’d be better off buying a box of matches with it. While the tribes of Long Island originally used the beaded belts for ceremonial purposes, through trade with the Dutch they came to treat them as currency. Again, it is trade, not taxation, the causes money to come into existence. (READ MORE: Bidenomics: The High Price of Gaslighting)
So if the legs of MMT are knocked out from under it, what is left? Nothing new, just warmed-over Keynesianism. Criticism of John Maynard Keynes’ famous dictum that budget deficits don’t matter because, “In the long run we are all dead” has been condemned as homophobic. Some critics were obtuse enough to imply that Keynes, who was childless, had little concern for the future. But Keynes was in fact bisexual and tried to have children with a ballerina he married late in life. That a budget deficit may be harmless in the short run is no solace to us as we contemplate our children and grandchildren, who we hope will survive into the long run.
In the event, the MMT crowd got their wish. The supply of American money in circulation increased dramatically since Kelton’s book came out to glowing reviews, comparing it to a Copernican revolution. Over the three years beginning in February 2020, “M2,” the Federal Reserve’s estimate of the total U.S. money supply, was multiplied 1.35 percent, a remarkable increase in a time of peace. By comparison, over the five years of World War II (1939-1945), defense expenditures resulted in a 2.5-fold increase in the money stock, according to A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna Jacobson Schwartz.
For the latter, the U.S. defeated the Axis powers and made the world safe for democracy; for the former, we got an 8.5 percent prime rate, the highest in two decades; a 4.5 percent yield on the ten-year Treasury bill, a sixteen-year high; and cumulative price changes of 18.92 percent.
Has any alleged innovation ever had a faster fall than MMT? Maybe cold fusion, or New Coke. Kelton was a frequent guest on television in her heyday, and it’s not difficult to understand why. She is photogenic, and the message that easy money is a good thing goes down smoothly on “lite” business programs such as CNBC’s “Squawk Box.” But perhaps the business media should have dug a little deeper and gone back to Anna Schwartz. Her work has endured for six decades, and she has been called “one of the world’s greatest monetary scholars” by no less a deficit “dove” than Nobel laureate Paul Krugman, recently mocked for saying that inflation was over — if you exclude groceries, medicine, gas, utilities, and mortgages.
In 2002 former Federal Reserve Chairman Ben Bernanke ended a speech by saying, “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We [the Federal Reserve] did it. We’re very sorry. But thanks to you, we won’t do it again.” (READ MORE: Here’s One Way to Demand Rational Government)
Life is unfair, President Kennedy’s father told him, and the fascination with which MMT was greeted by politicians and the media has been unfair to Schwartz and her co-author, whose 1963 observation — “Inflation is always and everywhere a monetary phenomenon” — was greeted with scorn by most economists at the time, but which has proven to be correct in the long run that Keynes preferred.
Since Kelton uses a straw woman to boost her theory, it’s only fair that conscientious objectors to MMT have one too. I’d suggest the woman in the old joke who, when told her bank account is overdrawn, says “How can I be out of money when I still have a lot of checks?”
Con Chapman is a lawyer in Boston specializing in banking. He is a graduate of the University of Chicago.