Modern Monetary Theory and Behavioural Economics

A collision course beween theories of human behaviour

I bought a copy of Stephanie Kelton’s best seller “The Deficit Myth” which is likely the closest thing to a bible for theorists who support modern monetary theory (MMT). Last year, I spent hours reading wonderful books on behavioural economics by authors such as Nobel laureate Richard Thaler and the late pyschologists Daniel Kahneman and Amos Tversky. The contrast could not be more striking. Behavioural economists consider what motivates people. MMT more or less ignores individual motivation as a factor in economic outcomes.

MMT attacks the conventional belief that governments must “live within their means” and not run large fiscal deficits, arguing that fiscal deficits are a good thing and that governments can spend as much as they want bridled only by the degree to which government spending triggers inflation, and then argues inflation can be controlled if it emerges by raising taxes - the reverse of increasing deficits in Kelton’s world. Kelton is right that inflation is the real limit on governments creating more money, whether they just “print” it or do so by selling bonds to the Fed through quantitative easing (QE). Kelton calls bonds “yellow money” versus “green money” created by increasing the money supply, differentiating the two only by the interest paid on bonds and not paid on greenbacks, claiming they are otherwise the same - pieces of paper issues by government. Again, she is right on that. But if people lose confidence in bonds or money, they depreciate that paper quite quickly and whether you call the result “losses” on the value of bonds or “inflation” which is in essence a tax on everyone as the “value” of hard assets rises in “money terms” but remains identical to what it was before inflation in “real” terms - real meaning the utility of the hard assets. Very high devaluation of a currency (high inflation) causes economic chaos. In the absence of an orderly monetary system, no one is motivated to work.

What Kelton pays lip service to but fails to address is motivation and behaviour. She argues that people will work and create things to earn money to pay taxes, when in reality people will go to great lengths to avoid paying taxes. People wanting to improve the quality of the lives don’t really want “money” - they want homes, cars, furniture, clothing, groceries, toiletries, recreational equipment, vacations, education for their kids, access to health care, etc. Money is just a means of exchange of no particular value in its own right. Motivation and self-actualization come from sources unrelated to “money” except tangentially. Our satisfaction in having repaid our mortages and owning our houses outright has nothing to do with money - it has to do with security, a place to raise a family, and pride of ownership of something real and not something either given to use or taken away by any government. The harder we have to work to achieve it, the more satisfaction we get from it.

Kelton ignores the behaviour of those on the receiving end of money they have not worked for or the behaviours of those who have worked hard to advance their incomes only to see others benefit from the largesse of the incumbent government through whatever programs they distribute the monies contributing to what she argues is the “beneficial” deficit. Kelton sees MMT as providing a solution to the two most pressing societal problems she thinks exist - climate change and income inequality.

I think she must be the reincarnaton of Karl Marx or Fredreich Engels.

People who receive “something for nothing” don’t value it. Humans are conditoned from birth to seek to advance - get better grades, win sporting events, get a promotion at work, receive a pay raise, move to a better home, put their kids in a better school. The sense of satisfaction from achievement through work is what makes life worth living. As Scott Galloway commented in an interview I watched on YouTube “ . . . we are raising the most obese, anxious, depressed, suicidal generation in history”. Galloway, a professor at the Stern school of NYU, blames the “boomer” generation for benefiting from rising home prices, low capital gains taxes, and calls their wealth accumulation an “elegant transfer of wealth” from young to old.

Really?

Income Inequality

Obesity, anxiety, depression and suicide are symptoms of problems that reflect choices young people have made in a society where they have been conditioned to believe everyone deserves a trophy, everyone gets a gold star, everyone is “entitled” to an equal share of whatever is going around, and personal responsibility and effort are unnecessary since the “world owes them a living”. That lack of values is on them and with respect on their teachers most of whom are socialists if not communists, and on their parents not for having the wisdom to buy a home but for failing to give the kids a cuff on the ear for not doing their homework or skipping school.

The wealth of the older generation from high home prices did not come from any transfer from younger people, who were uninvolved. It came from a decline in the value of money caused by inflation fueled by policies that embrace large deficit spending whether through an embrace of MMT or just leftist stupidity. Homes did not rise in value, money declined, and MMT is institutionalizing that decline as policy rather than the adverse outcome of poor government.

Climate change

Kelton’s book reeks of her embrace of leftist ideology. Climate change may well occur but is unrelated to carbon dioxide emissions - something Kelton seems ill-educated to understand or wilfully ignores, since the theory that increasing CO2 emissions cause global warming is outright nonsense inconsistent with laws of thermodynamics. I have no doubt she is firmly in the camp that thinks taxation can change the weather, and am thankful she seems to have avoided the traditional but similar beliefs that child sacrifice (Incas and Aztecs) or burning “witches” at the stake would improve the weather. Her concept that governments can simply spend whatever is necessary to invest in wind, solar, batteries, carbon capture, to reduce CO2 emissions is not only nonsense, it is dangerous, since if atmospheric CO2 levels ever fall below 150 ppm (a virtually certain outcome of NetZero if ever achieved) all plant life on Earth would begin to fail and with it human existence would indeed be threatened.

Lessons from history

As with many topical theories, including MMT, they really don’t break new ground, they just sell new books. The theory that governments can spend whatever they want bridled only by inflation has precedents - Argentina, Turkey, Venezula, Mexico, Zimbabwe and the German Weimar Republic. Paying lip service to the “risk” of inflation but claiming that once it emerges it can be controlled through taxation is just silly. Inflation is a de facto motivation to spend money today since it will be worse in the future and you are driven to fund your needs through borrowing since your loans will be easier to repay with depreciated money.

Monetary systems are in essence Ponzi schemes. They work only as long as people believe they will get a return on their money and the elegance of the Ponzi scam is they do get the promised reward oblivious to the reality that it comes from the money put up by the next sucker. The music stops when they run out of suckers and the scheme collapses. Nations run large and long-lived Ponzi schemes when they run large deficits - Bernie Madoff quipped that the U.S. government was the largest Ponzi scheme on Earth, once Madoff was exposed and convicted of his crime.

Deficit spending commits a government to inflation since it is plain and obvious they cannot deal with the mounting debt unless the value of the currency is debased through inflation. U.S. inflation from 1789 to 2014 (a period of 125 years) averaged 0.10 percent, during which time no taxes were charged. Income taxes were enacted in 2014 as a temporary measure to pay for the War and became the center of government finances thereafter.

A good friend challenged me on the issue of infrastructure in a country that operated without taxes, asking me “were there any hospitals back then?” as if without taxes the nation would have no hospitals. In fact, the first hospital in the United States was built in 1751 in Pennsylvania, twenty-five years before independence and 161 before the first incomet tax legislation passed into law. He suggested there were probably no roads or bridges. The first highway built in United States was the Cumberland Road, built in 1806, a century before income taxes were first enacted. Eight bridges were built in the 1700’s that are still in operation today.

The propaganda that taxes are necessary to support social services, build infrastructure, or fund pensions is just as incorrect. The use of taxation for these purposes is a decision taken by government, the result of politicians wishing to intrude into personal freedom, private enterprise and free markets to attract votes to obtain and keep themselves in power. My family moved to Moose Creek, Ontario from Ireland around 1790 to the early 1800’s and lived well and safely for over 100 years before Canada levied income taxes. They are their neighbours built homes, cleared roadways, established schools, etc. and didn’t need any government help to do so.

Whether monarchs, emperors or elected representatives, governments are a creation of society that reflects the desire of individuals for power, and society welcomes governments to instil a sense of order and certainty into what were savage, brutal lives throughout most of history. But the desire for power perverted the benefits of order and certainty leading to upheavals with the loss of millions of lives. Most of history’s wars resulted from conflicts brought by those seeking more power.

In our democracy, the attraction of buying votes to get and retain power was hard for those seeking office to resist, so when the programs they promised cost more than the taxes they received, they didn’t cut back on the programs, they ran deficits and borrowed. Every time government borrows it needs a lender to buy the debt. Kelton’s says no - in essence, she says, just print the money. That simple solution virtually destroyed the economy of Germany during the Weimar Republic and more recently contributed to the destruction of the economy of Venezuela. There is a limit and inflation results when you overstep that limit.

MMT and Climate Change alarm have one thing in common - they are tools for the left to shift North American economies towards Communism, a system of government that has failed throughout history, cost millions of lives, and remains popular with people who think they shouldn’t have to work hard, study hard or make any contribution to society - someone else will pay the freight. Good luck with that.