MODERN MONETARY THEORY The advocates of MMT Rely on one essential fact That keeps the theory intact And that is that the currency Your print is the reserve. Men flee Red ones in doubt, to buy the black And printing more to pay them back Keeps them contented, painlessly. How nice to think it might be true And make the world benevolent; To disregard how much was spent Because the printing presses spew The fiat currency that gives Whoever wants, the means to live. As the Professional Politicians in Washington scramble to complete the next round of coronavirus relief before their annual August vacation, the partisan fight over the size and terms of this borrowed benevolence has become contentious. If compromise proves impossible, perhaps it is time for something different. Maybe it is time for a real test Modern Monetary Theory (MMT). By way of introduction, economics is known as “the dismal science” partly because the brooding Market it portrays tends to operate like men before Leviathan, but also because economists speak through equations to say things almost incomprehensible to average people. And, like most specialties dominated by experts, Economics tends to evolve with the evolution of the financial world, far faster than the economic notions of the average person. Among the most recent is MMT. Under MMT (the extravagant extension of Keynesian economics) debt financing through fiat money is essentially unlimited for the issuer of the reserve currency. This theory is currently being tested by the coronavirus and the US dollar. So far, it seems to be true. I personally think it is not true, but assuming the experts are right, I propose a test which would be more palatable to the average person than the current partisan bickering over the conditions of the next coronavirus relief legislation. Instead of having professional politicians choose winners and losers, how about making every US resident a winner? The deficit this fiscal year (which ends September 30) is already set to exceed $3 trillion (trillion, with a “t”). Nancy Pelosi, probably anticipating the upcoming election, has already passed in the House of Representatives, another coronavirus relief bill with an estimated $3.5 trillion cost. So it is apparent that our political leaders do not blanch at the figure of $3 trillion, and neither the deficit nor the new proposals have seemed to harm the dollar overmuch, so why not have the Fed print an extra $3.3 trillion immediately for distribution to the approximately 330 million US residents. It should be residents, not citizens, to avoid all the acrimony about immigration laws and whose voters benefit. This would amount to about $10,000 per individual resident. (None of this would go to corporations, trusts, governments, institutions or anyone other than a resident individual) The amount paid to minors would go to their parents or guardians to be held for them. Imagine, if you can, the economic consequences of such a program. The residents who need the money most would likely spend all of it which would in turn, be a gigantic economic stimulus. Unlike “incentives” behind most government expenditures, residents would spend their money on things they wanted or needed. Those who support “sustainable” businesses would spend there, if they could, and those who do not care would probably spend where they found the best price. Those who are charitable could support their favorite causes. There would be competition for this money because no favored group or cause would be “entitled” to any of it. The residents who chose to save or invest this money would also add stimulus. With an extra $3.3 trillion in circulation, interest rates would likely remain low, so it would not necessarily provide a boost to banks, but it might to other businesses. Certainly, some of it would flow to banks or the stock market, and perhaps entrepreneurs or small businesses. Some would just be spent on debt reduction, like paying off credit cards or prepaying mortgages. No downside there either, and possibly many success stories. Plainly, there would be no losers at all in this experiment, except perhaps, MMT theory, if it fails. But even that might be beneficial, if only to establish the practical limits on printing fiat money. And when you think about it, most governmental incentive programs funded through tax deductions, exemptions, exclusions, credits or preferential rates are experiments, just like MMT. Many fail to achieve their goals and the professional politicians are happy to pass the costs of such failures on to the taxpayers. But in this case, since all residents benefitted equally, passing the costs of failure back to them harms no one because everyone already benefitted equally, but since we have progressive tax rates the poorest beneficiaries will pay back little or nothing, and the richest, who can best afford the cost of failures will pay back the most. Again, no downside there. So why, you might ask, have they not done this already? The short answer is our entrenched political duopoly; the long answer is too long to cover here. This idea (sometimes referred to as “Helicopter Money”) is basically just another form of stimulus. It differs from traditional monetary stimulus in that it bypasses the traditional financial system (in which banks create money by extending credit) with direct transfers of money by the central bank or the Treasury Department. Curiously, as a part of the establishment of the new federal government of the United States, Congress did something quite similar in 1790 on the advice of one of our founding fathers, Alexander Hamilton. Under the provisions of The Funding Act of 1790, the federal government assumed all the revolutionary war debts of the former colonies (now states) of the United States, the Continental Congress and the confederate states under the articles of confederacy. In effect, it was Helicopter Money dropped in this instance on anyone who had advanced funds or services, on credit, to the revolutionary cause. All received payment, in full (at par) either in cash or as bonds of the new federal government bearing the same interest rates to which the creditor was entitled. Helicopter Money has rarely if ever been employed since 1790 because Congress very quickly perceived that its members would personally benefit much more from targeted local grants or payments than they would from merely “promoting the general welfare” as the Constitution authorizes. “Pork Barrel” legislation (later euphemistically revised to “earmarks”) was the word for such local payoffs, and it used to be a significant item in every budget. But the local aspects of all spending were generally taken into account in tradeoffs, such as, for example, the location of military bases, defense contractors, retired veterans, etc., in the negotiations to approve the defense budget. (And you probably thought it was all about national security…) This local payoff process biased all successful professional politicians towards targeting all federal largesse through themselves and to their local patrons or donors. The big, national budget items, like entitlements, were somewhat harder to associate, but were generally divided up evenly, so that each lawmaker could explain to his constituents that he had demanded a fair share of increases and improvements for them, and had fought successfully for them to resist impairments or reductions. The main point is that lawmakers got into the habit of limiting government largesse to many managed programs with which they would be associated, and which would have to be supported, sustained and protected (by them) ensuring lots of local votes in every election. Helicopter Money would not follow this pattern. If it is given to everyone, it is hard to argue that there is any local advantage. People would no doubt try. for example, an advocate for reparations might oppose the proposal because Helicopter Money would not be limited appropriately to victims. An advocate for a carbon tax might be opposed because Helicopter Money might be spent on fossil fuels. In either case it is doubtful that constituents would be happily deprived of their $10,000 because their representative told them they, or someone else or something else is entitled to more. Representatives of urban voters could argue their constituents should get more because of their higher costs of living, but it would not be a winning argument to tell them that is why they must accept nothing. Finally, Helicopter Money would demonstrate one truth about MMT, which is that although federal largesse is mainly financed by government borrowing, it is not necessary (or even contemplated) that the money will ever be paid back. It need not be paid back because whenever the government bonds creating the money in the first place mature, they are just paid back with newly printed money, and then new bonds of a greater amount are sold to recover at least as much cash as the newly printed money. This is called “rolling” the debt, which is the polite term for not paying it back but rather borrowing more. When money is disbursed this way through the financial system, Wall Street, other financiers, bureaucrats and “donors” all extract cuts, adding, coincidentally, to income and wealth inequality. Helicopter Money, which also need not be paid back, goes directly to the recipients, without the cuts or fees extracted by all those unnecessary middlemen, and so provides not only a much greater stimulus but also a significant reduction in wealth and income inequality. These last benefits would remain, even if Helicopter Money proves that MMT is false. Since I am no expert, nor an economist, financier or politician, you might easily dismiss my suggestion as a dangerous delusion. But remember the indisputable facts. The deficit this year is going to be at least $3.3 trillion and so far, nothing catastrophic has occurred because of it. Nancy Pelosi, who surely is a consummate professional politician has already enacted legislation to spend more than $3.3 trillion without any catastrophic consequence. So the amount is neither a delusion nor seemingly dangerous. As to other dangers, the question for every individual is Dangerous to whom? Certainly, Helicopter money would be dangerous to professional politicians. It might be dangerous to Wall Street and the financial industry, who would not be privileged in the distribution, and might suffer from lots of debt repayments or payoffs, but almost certainly would benefit from any individuals who chose to save or invest, as well as from the management of a vast number of custodial accounts. It might be dangerous to corporations and insolvent state and local governments (who would get no direct payments) but who would nonetheless benefit indirectly from the additional prosperity of customers and residents. Would you, as an individual recipient feel endangered by receiving $10,000? Do you reasonably expect benefits worth more than $10,000 for you and all your family members from any of the current legislative proposals? If your favorite political desires must be deferred for one year, is that worth more to you than $10,000 immediately? Think about it. Finally, if MMT is proved false by this experiment, the value of that knowledge would be at least equal to $3.3 trillion. Debt financing with debt that need never be repaid would cease. The government would have to learn to budget more like ordinary families must budget, not borrowing more than they can actually repay. It would have to use current tax revenues for actual current needs rather than futuristic fantasies or friendly favorites. And in the best of times, when such favorites and fantasies appear most affordable, the individual voters of America would remember, for a long, long time, the more attractive alternative of Helicopter Money. © 2020 frankcmcclanahaniii
