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The MMT-and-Bailey Fallacy

One hears this kind of thing from modern monetary theory (MMT) advocates whenever their economic theories are attacked: “We say not spending constrained,” they grumble, “We don’t mean ‘now spend’.” However, what politicians hear is that they can have anything they really want because they can just print the money for it. “It’s a fact,” an MMTer might say. “Sovereign governments with their own currencies can never go bankrupt. They can always print more money.”

This myopic gibberish is what I affectionately call “the MMT-and-bailey fallacy,” which I named for its similarity to the motte-and-bailey fallacy. In this case, the “motte” is the idea that sovereign governments can’t go bankrupt. It’s technically true. The United States government can always print more dollars. The “bailey” is the idea that printing more money doesn’t mean “spend now” to politicians or that the spending encouraged by telling politicians their budgets are unconstrained doesn’t lead to societal destruction. Let’s be clear: to elected politicians, “not constrained” is the same thing as “spend now.” After all, they’re incentivized to get as many short-term benefits from their limited terms as possible.

On the other hand, history is littered with the remains of regimes that didn’t understand their constraints as well as the abundant number of bodies of innocent people that ended up as collateral damage. When the state fails to understand its constraints, it inevitably collapses its monetary system and its economy, and it turns society into a desperate grab for rapidly vanishing necessities. You might think one 1920s Germany or 2000s Zimbabwe would be enough. Obviously, a sovereign state can print as much money as it wants. The consequences, however, are more complicated and have a much longer reach than many MMTers admit.

Austrian economics teaches that the modern economy is a complex and deeply intertwined collection of production pathways, some short-term, others needing a vast roundabout web of long-term connections to function and produce the consumption goods they aim to create.

When the government decides to produce money out of thin air and buy real goods with that new money, the expected flows of goods are disrupted. Goods that were intended for some long-term projects are now snapped up by the government, which does something else (usually something less profitable) with them. The long-term projects must either find substitutes, accept delays, or increase their spending. Marginal projects become untenable and are scrapped, likely wasting even more resources.

The new money, however, is an excellent tool for the government. Would-be cronies will court the government for its lucrative contracts. Better yet (for the cronies), those contracts will be paid out in new money, and the cronies will have the ability to buy goods at the prices that stand before the inevitable price inflation occurs.

It’s possible that the short-term effects of pulling huge amounts of commodities out of profitable endeavors and devoting them to government boondoggles is not so bad—at first. However, those disruptions, repeated in large amounts over long periods, eventually result in the breakdown of many of the more roundabout processes to which we owe much of our prosperity and comfort.

I’ve heard people use MMT to justify policies like universal healthcare. When politicians and cronies hear this, they spontaneously salivate, like Pavlov’s dogs. Ignored is the fact that the amount of new money that would have to be produced in order to offer free universal healthcare for one year is a fairly large fraction of the total amount in circulation now. That, of course, is with today’s incentives, where the enormity of healthcare costs is already a subject of constant shrieking. With the incentive to conserve removed, healthcare costs would rapidly balloon even larger. The number of resources that would have to be pulled away from other productive pathways is practically unbounded.

This is not to mention the likelihood that government-run healthcare would rapidly become as inefficient as the Department of Motor Vehicles. What about “dealing with” the price inflation that such profligate printing would cause? Well, we’d only need to raise taxes—but to what? 50 percent? 75 percent? 90 percent?

The MMTers admit that the government would need to tax all that money out of productive people to keep price inflation down—every year or maybe every quarter. Every month? It would depend on the current inflation rates! The government would also have to do it forever or until the system collapses, whichever comes first.

A sizable fraction of MMTers, regardless of the “motte” that they provide about money printing, love to ignore and minimize the “bailey” that unrestricted funding of politicians’ pet projects would produce. To call it a feeding frenzy would make a whole school of piranha blush.

These MMTers—the more short-sighted and corruptible ones—are just the latest bunch of court intellectuals who took on the state-sanctioned scholar’s cap. A rash of absurd policies and predictions from the Keynesians and neo-Keynesians stuck them with the jester’s cap. Now politicians want “new ideas,” and the MMTers have stepped in.

They and their “new ideas” still serve the politicians’ selfish interests, as all court intellectuals must, but have not yet been tarnished by the series of major failures the Keynesians pretend they aren’t responsible for causing. If politicians listen to the MMTers, the MMTers will eventually become jesters too. I would be fine with that result, except for the horrific collateral damage that would follow their money-printing schemes.

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