[A note from Dr. Joe Salerno to our editor Ryan McMaken on MMT, a “new” policy proposal being pushed by economists like Stephanie Kelton and politicians like Alexandria Ocasio-Cortez.]
As I read through articles on MMT (Modern Monetary Theory) this morning, it strikes me that not only is it a recipe for massive inflation but it will also cause chronic depression and capital consumption from the get-go. The newly printed money will not cause an initial economy-wide boom because it will not be injected through credit markets driving down interest rates and stimulating investment. Rather it will go directly into the Treasury, allowing the government to immediately increase its spending on welfare programs, guaranteed-job programs, the “Green New Deal,” and wasted “investment in infrastructure.” It will thus siphon off labor and other resources from productive investment in the structure of production and forcibly increase the consumption/saving ratio and hence overall time preferences, reducing genuine savings and capital accumulation.
Furthermore, as price inflation begins to rear its head, the increase in taxation aimed at “sopping up excess purchasing power” by the private sector, will further increase the public’s time preferences, reduce voluntary saving and eventually cause capital consumption. Everyone will have jobs and rising money incomes and there will be a boom for government contractors so it will not look like a typical depression, but living standards will progressively decline. Also, the private sector will progressively shrink relative to the State sector because BOTH the fiscal inflation AND the later increase in taxes to offset its inflationary price effects will divert resources to the State sector. And of course the recurring increases in taxes will not arrest the inflation, because the government will continue to run fiscal deficits by financing its ever increasing spending with new money. This would be the worst of both worlds: massive inflation proceeding hand in hand with chronic depression.
