Hamilton Beats MMT

Todd G. Buchholz

SAN DIEGO – Was Alexander Hamilton a fool? Modern Monetary Theorists must think so. Hamilton, whose story is now sung by millions of schoolchildren, persuaded the young United States to absorb state debt, pay it back, and build a trustworthy reputation. “If we assume the debts,” goes a lyric from the musical Hamilton, “the union gets a new line of credit, a financial diuretic. How do you not get it?”

Should Hamilton have simply torn up the states’ Revolutionary War debt? MMTers seem to believe so, arguing that countries can often print money and ignore debt with little pain. I wish I could believe that government debt doesn’t matter (or that Elvis is still alive). But debt matters a great deal, and we should be thankful that US President-elect Joe Biden’s presumptive treasury secretary, Janet Yellen, is not an MMT acolyte.

Nonetheless, MMTers have been picking up ever more support. Ultra-low interest rates have fueled a growing temptation to keep printing money and ignoring debt until the very moment inflation flares up. Whenever that moment comes, MMTers assure us that the government will simply cut spending to cool off the economy. They present a neat argument if you ignore history and common sense by trusting politicians to do precisely what they are most averse to doing.

This is not to suggest that governments should slash spending during the COVID-19 Great Cessation, which has pushed the US jobless rate close to 7%. I support big deficits now, but eventually the US and other governments will need to rein in their raging budgets. In ten years, the Medicare and Social Security trust funds will run dry, triggering 10-25% cuts in health and pension benefits for the elderly.

The age-old refrain from debt apologists is, “We owe the money to ourselves.” But we don’t just owe money to ourselves: about one-third of US debt is held by foreigners, including around $1.1 trillion that is in China’s hands. Moreover, even if we consider only the debt held by Americans, we must ask, “Who is ‘we?” Lenders who bought US Treasuries in good faith are not the same individuals who would benefit from tearing up the bonds or inflating away their value.

Today’s debt apologists have many forerunners, some buried in the rubble of ancient Greece, where fourth century BC municipalities defaulted to the Temple of Delos. In 1793, Louis XVI lost his head while trying to placate the French monarchy’s creditors. In the 1920s, the Weimar Republic experienced devastating hyperinflation until the central bank gained enough freedom from freewheeling politicians to stabilize a new currency. More recently, Chile, Peru, Zimbabwe, Argentina, and Brazil have all met with near ruin after implementing MMT. Venezuela’s debt is now twice its GDP, and its inflation rate is best expressed using scientific notation.

Of course, MMTers dismiss these cases as exotic examples from the dizzy tropics. As MMT popularizer Stephanie Kelton of Stony Brook University tweeted in 2012, “People who scream, ‘Zimbabwe!’ have no idea what caused hyperinflation there…”

Fine, then, let’s look instead at “advanced” economies. In the 1970s, the United Kingdom was the “sick man of Europe” (a phrase first applied by Czar Nicholas I to the crumbling Ottoman Empire), suffering explosive inflation and a sinking currency. In 1976, following an extraordinary conversion, Labour Prime Minister James Callaghan begged the International Monetary Fund for a bailout, performed a fiscal about-face, and declared to debt apologists, “I tell you in all candor that that option no longer exists.”

Fortunately, responsible budgeting can indeed revive a country’s prospects. During the 1990s, Canada and Sweden faced dreadful economic crises that wiped out millions of jobs. In 1992, Sweden’s central bank raised interest rates to 500% to protect the currency from collapsing after politicians had more than doubled the country’s level of borrowing. Both Sweden and Canada adopted responsible measures to slash spending, and their economies soon boomed. For its part, the US created about 18 million net new jobs in the 1990s – a bonanza kicked off by a spending pact between President Bill Clinton, a Democrat, and congressional Republicans.

Faced with all of these examples, MMTers’ only response is to claim that their approach has worked for Japan. Never mind that the Japanese have in fact rejected MMT in both word and deed. Bank of Japan Governor Haruhiko Kuroda specifically calls MMT “an extreme argument that won’t be accepted.”

Why does Japan not fit the MMT model? For starters, 90% of Japanese debt is Japanese-held, most of it by branches of government, not by private institutions. Second, Japan has doubled its consumption taxes to pare the debt, and reduced per capita spending for the elderly in recent years. Would MMTers support either of these policies?

In any case, even if we were to pretend that Japan is following the MMT playbook, why would anyone want to take credit for the results? The country has experienced 20 years of stagnation, with GDP growing at less than 1% per year, and private investment as a share of GDP eroding. Two decades ago, Sony and Toyota led the world; today, Apple and Tesla overshadow them.

Former IMF Chief Economist Kenneth Rogoff scoffs that MMT is neither modern, monetary, nor a theory. That is too harsh. MMT is indeed modern, but modern like a Jackson Pollock painting – colorful, hypnotic, and a mess. It may be alluring, but it is not safe for work or for school. Instead, children should rap to the wisdom of Hamilton.

Todd G. Buchholz, a former White House director of economic policy under President George H.W. Bush and managing director of the Tiger Management hedge fund, was awarded the Allyn Young Teaching Prize by the Harvard Department of Economics. He is the author of numerous books, most recently, The Price of Prosperity.

Copyright: Project Syndicate, 2020.