Mises Wire

No, Conservatives Should Not Embrace MMT

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Reading Jonathan Culbreath’s “Modern Monetary Theory for Conservatives” one can’t help but think of Murray Rothbard’s quip that “it is not a crime to be ignorant of economics … but it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.“

Culbreath’s case for modern monetary theory (MMT) rests on an ignorance of basic economic principles regarding the role of money in a free market economy. Money—whether precious metals, fiat currency, crypto, or some other good—is more than the unit of account that makes exchange possible. Money is also a key part of the equation of the price system, which allows market participants to discover the highest use of goods and services as determined by the demonstrated preferences (i.e., what they willing to spend their money on) of consumers, investors, workers, and business owners. A freely functioning price system and a stable currency are thus the key to a proper functioning market. 

The most important information conveyed by prices is the price of money itself, which is the interest rates. When central banks increase the money supply to facilitate government spending, they artificially lower interest rates. This distorts the information interest rates convey to market actors. This results in investors sinking money into projects not supported by underlying market conditions. This leads to a boom which is inevitably followed by a bust. MMT’s policy of never-ending increases in the money supply would create more (and bigger) bubbles, leading to more (and bigger) busts.

Culbreath, like most “mainstream” economists, misidentifies inflation as a “rise in the price levels.” But rising price levels are an effect, not a cause, of inflation. Inflation is the very act of money creation by a central bank.

Inflationary policies, such as those embraced by proponents of MMT, benefit those already at the top of the economic and political ladder. This is because those at the top of the financial pyramid are the first to receive the newly created money. This means they enjoy an increase in purchasing power before the central bank’s actions cause prices to increase. In contrast, by the time middle- and working-class Americans see a (nominal) boast in their incomes, the Fed’s inflationary policies have already caused prices to increase. These price increases are usually greater than the increase in wages. So, their real wages decline. This “inflation tax “is the most insidious tax of all, because it is both regressive and hidden.

Contrary to proponents of MMT, inflation’s pernicious effects are not limited to times of “full employment.” Instead, they are felt any time the central bank artificially lowers interest rates. Full employment itself is nothing but an arbitrary number chosen by economists and bureaucrats and is thus easily manipulated to make the economy seem stronger than it is.

Government statistics can also be manipulated to understate the true unemployment rate. One way this is done is to not count people who have given up looking for a job in the headline rate. Instead, one must delve deeply into the data to discover the extent to which discouraged workers have been forced out of the labor market. 

Government statistics also understate the effects of inflation. One way they do this is via the Chained Consumer Price Index. The Chained CPI does not consider an individual to be negatively impacted by central bank–caused price increases if they can still afford lower-priced “substitute” goods. So even if you can no longer afford steak, you have not been negatively impacted by rising prices if you can still buy hamburger. Of course, if hamburger were really an adequate substitute for steak, individuals would have been buying cheaper hamburger when they were able to afford both hamburger and steak.

MMT Relies on Trusting Government “Experts” to Plan the Economy

The way government officials manipulate economic statistics points to another major flaw in Culbreath’s case for MMT: accepting it requires placing an enormous amount of trust in the integrity and wisdom of government officials.

For MMT to work, the Federal Reserve must have the ability to know exactly how much the money supply needs to increase in order to support expansion of government without damaging the economy. Congress, with the help of government “experts” must know when the economy has reached full employment. When the economy reaches full employment, Congress must be able to determine exactly how much to increase taxes and which taxes to increase to keep inflation from damaging the economy.

The great Austrian economist Ludwig von Mises demonstrated that government planners could not manage the economy without damaging people’s standard of living. This is because the only way to know the value of goods is by how much individuals pay for them. Government’s use of force to take control of those resources makes it impossible to know their true value, thus making it impossible to perform rational economic calculation. Mises’s student, Nobel Laureate F.A. Hayek pointed out that there is no way central planners—including democratically elected politicians and central bankers—could have the knowledge necessary to effectively manage an economy.

One need not have read the works of Mises, Hayek, and other Austrians to understand the folly of thinking government “experts” (much less politicians) can successfully run the economy. A cursory exclamation of the numerous failures of attempts at central planning throughout history will show that government “management” of the economy inevitably fails.

As should be obvious, the critique of modern monetary theorists’ claim that an expansionist monetary policy can fund the government is not an endorsement of “paying for” big government via income or some other form of taxes. Taxation also distorts the economy, making rational economic planning impossible.

Pandering to Conservative Fears of Economic Stagnation

Mr. Culbreath urges conservatives to embrace MMT in order to free themselves from worrying about the debt and instead join a conservation effort about what programs the government should spend the newly created money on. Culbreath seems unaware that Republicans only concern themselves with deficit spending when a Democrat sits in the oval office.

Culbreath also seems to think that this “conversation” will result in more spending benefiting the “average American.” But even assuming MMT works as promised, the fact is that those already tied in with the political class—which means crony capitalists and other special interests—will still be the ones with the time and resources to devote to influencing government policies. So, the result of Mr. Culbreath’s “conversation’ will be a corporatist system that benefits the military-industrial complex, Big Pharma, big banks, Wall Street, and other special interests, leaving welfare crumbs for the ordinary Americans. 

Mr. Culbreath also ignores how MMT, by encouraging a more “active” federal government, violates the principles—embedded both in the constitutional doctrine of federalism and the Catholic doctrine of subsidiarity—that social programs should be provided by the level of government closest to the people. Of course, the best way to provide education, healthcare, and charity is through private and religious institutions.

The Federal Reserve’s currency deprecation undermines the virtue of thrift and encourages short-term thinking. The growth of the welfare state that MMT is designed to facilitate undermines the virtues of self-reliance and reliance on family, friends, private charities, and churches and replaces them with reliance on government welfare. Expansion of government-provided welfare also encourages the mentality that one is entitled to live off the fruits of their fellow citizens’ labor. These seem odd goals for a conservative to be promoting.

It also seems odd for a conservative Catholic to promote expansion of the role of the same government that funds abortions and is aggressively waging war on religious believers who refuse to live by their beliefs, even it if means refusing to bake cakes for same-sex couples or objecting when boys demand to play girls sports.

Modern monetary theory is nothing more than a new version of the old myth that governments need not worry about restraining spending because a government-controlled central bank can pump money into the economy.

MMT suffers from the same flaws as every other version of this fairy tale. The only long-term benefit of the adoption of MMT is that it will hasten the inevitable collapse of the welfare-warfare fiat money system.

Instead of trying to create conservative justifications for destructive monetary policy, conservatives should join libertarians and classical liberals in working to limit government power while restoring sound money and greater market freedom. Libertarians and conservatives should also work together to restore responsibility for education, charity, and other “social welfare” programs to local communities, churches, and families. Restoration of a free society will not only enable all to achieve prosperity, but will also create the conditions to allow individuals to pursue virtue.

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