What's Behind the Bipartisan Embrace of "Modern Monetary Theory"?

Alexandria Ocasio-Cortez, a far left US Representative from New York, helped popularize in 2019 a heterodox macroeconomic theory called Modern Monetary Theory. The takeaway from MMT is that the US government can pay for whatever it wants by printing more money. You can read a full explanation on Wikipedia.

“Heterodox” is what mainstream economists call a bullshit idea. But for the past 5 years, under Republican and Democrat control, printing money is exactly how the US has dealt with its problems. It’s not a new idea. Every incidence of runaway inflation you’ll read about was preceded by the government printing money to pay for what it wants: pre-WWII Germany, Zimbabwe, Venezuela, and more. So why has such a spectacularly reckless idea become the bi-partisan consensus in Washington?

First, the non-controversial part. Inflation is sometimes called a “wealth tax.” The way we normally think of taxes, the government appropriates people’s buying power by taking away part of their money. With inflation, the government (in creating too much money) appropriates people’s buying power by making their money worth less.

It’s no mystery that the Left wants wealth taxes. They talk about it in campaign speeches. What’s harder to explain is why the Right also wants a wealth tax. There are two reasons.

First, a wealth tax via inflation falls proportionally on everyone holding the currency. Fortunes all over the world are held in dollars; that’s why we call the US Dollar the world’s “reserve currency.” So US Dollar inflation acts as a tax on foreigners too, not just Americans. Sweet deal!

The trouble is, we can only get away with a wealth tax once - which is why Republicans typically oppose wealth taxes (or why they claim to). After getting burned by US Dollar inflation, the rest of the world will eventually find new ways to store their wealth, ending the US Dollar’s reserve currency status.

Losing reserve currency status is a US policymaker’s nightmare. So why are they willing to risk it? Here’s the second reason: The US Dollar’s reserve currency status is doomed anyway. The US Dollar’s importance is a relic of a time when the US was an economic giant. Now, we’re just big. China is rapidly becoming the world’s largest economy. Bitcoin and other cryptocurrencies threaten governments’ control over the money supply. The writing is on the wall.

To sum it up, Republicans want an inflation wealth tax to shake down the rest of the world. Democrats want a wealth tax to shake down the rich. And voters are sheep - who doesn’t want low taxes and a stimmy check from Uncle Sam?

It’s all a gamble. No one knows how long the US government can print money before having inflation. Nobody knows how long the Dollar will remain the world’s reserve currency, regardless how much money we print. But if there will ever be a time for MMT, this is it. YOLO!

Written on April 1, 2021