Last year I read Debt: The First 5,000 Years by David Graeber. I found it compelling and included it in an article I wrote about Puerto Rico (“The Spooky Nature of Debt“), mentioned it in a podcast and included it in the list of books I published in December. Apparently, this was a signal to many of you that I am, or at the very least might be, interested in a strain of economic thinking called Modern Monetary Theory.
The reality is that I’m a deep skeptic of the theory. In fact, I think we should all be reflexively skeptical of any theory that purports to remove burdensome economic constraints and make our lives instantly easier if only society can find the required cultural enlightenment. If you discover a magic pill that is said to solve some complex and ancient problem human societies continually struggle with, you might want to pause before taking it.
My skepticism aside, my goal here is not to convince the passionate supporters of endless federal money printing that this is a bad idea – you’ve got your thing and you really believe it and I don’t want to quarrel over it in this piece – but to point out to you, and especially those sympathetic to the ends if not the means of what you advocate for, that Modern Monetary Theory is not going to solve the problems we are trying to address at Strong Towns.
Like any theory being examined in the framework of politics, economics and society, there is a lot of nuance and varying interpretations. That being said, I think the point of greatest divergence (and popular appeal) of Modern Monetary Theory is described by a sympathetic (though skeptical) Paul Krugman in the opening of a piece he wrote in 2011:
Right now, deficits don’t matter – a point borne out by all the evidence. But there’s a school of thought – the modern monetary theory people – who say that deficits never matter, as long as you have your own currency.
The base concept here is described in a recent article in Truthout, “‘But How Will We Pay for It?’: Modern Monetary Theory and Democratic Socialism.” From that piece:
Governments with their own currency and a floating exchange rate (sovereign currency issuers like the United States) do not have to borrow from “bond vigilantes” to spend. They themselves first spend the money into existence and then collect it through taxation to enforce its usage.
This builds on some of Graber’s insights (FWIW, insights I thought were very worthwhile) about how money is created, circulated and put to use. In many ways, they parallel some of the insights from Chris Martenson’s Crash Course, a series I’ve referred to here before. Martenson has been a guest on our podcast and, while his take on money creation has some similarities with the Modern Monetary Theorists, his take sees it as a constraining mechanism, not a liberating one.
And liberation from constraints is really the central feature of Modern Monetary Theory that gives it its growing appeal, particularly among young, educated progressives. From the Truthout article:
An economic doctrine named Modern Monetary Theory (MMT) is surging in popularity and offering answers. MMT is debunking popular narratives about the harsh necessity of austerity and belt-tightening. It is showing that money is not a finite abstraction, but a limitless public utility that can be used to meet human needs. […]
The state can spend unlimited amounts of money. It is only constrained by biophysical resources, and if the state spends beyond the availability of resources, the result is inflation, which can be mitigated by taxation.
There are many policy implications that will appeal to a portion of our readers. For example, Modern Monetary Theory states that “Medicare for All” – universal health care – is easily possible if we just create and spend the money to make it happen. No need for figuring out how to pay for it – that’s an antiquated way of thinking that fails to grasp the power of a fiat currency and the printing press – and so just decide we want to do it, print the money and make it happen.
Again, not going to debate this concept today – it’s a theory at least somewhat backed by some prominent national politicians and I’m guessing we’re going to have a society-wide discussion on it in the coming years – but I feel compelled, because of how many of you think this is the answer, to point out how, at the local level, this will not solve our problems and runs the very real risk of making things substantially worse.
For the sake of simplification, the core problem we’re trying to address at Strong Towns is the fact that our cities do not have enough wealth to sustain themselves. Stated another way: the development pattern we experimented with throughout the 20th century and into present times generates growth in the economy but creates more long-term liabilities for communities than it generates wealth to meet those commitments.
Consider a standard suburban subdivision on the edge of town. Cities undertake this kind of development, assuming the long-term liability of maintaining all the infrastructure associated with it, because it generates positive cash flow in the short term, even though it causes a huge financial deficit when the maintenance bill comes due. These are bad financial investments.
They are not bad investments because suburban lawns are wasteful, cul-de-sacs are anti-social, commuting culture is destroying the environment and McMansions are ugly. You can believe those things if you want, but what makes the suburban subdivision a bad investment is that it uses more of the community’s resources than it creates. In short, it squanders a community’s wealth.
How does this squandering of resources manifest itself? Well, we can see it in cities like Lafayette, Louisiana, which has squandered two dollars in public investment for every one dollar they have created in private investment. There we see a massive backlog in road maintenance, reduction in critical services such as public safety, increases in taxes and essentially a soft default on the community’s promises to itself and future generations.
Take this a decade or two further and you get to modern Detroit, a place where the city has experienced a hard default bookended by a lot of suffering for a lot of people.
The Modern Monetary Theorist would say – as a number of them have said to me – that this suffering is all unnecessary. We should just print the money to fix the roads, staff the fire departments and police stations, maintain the libraries and parks and do everything else inherent with a social contract. We know what needs to happen, we just need the courage and enlightenment to do it.
However, this does nothing to solve our suburban subdivision problem. Whether we account for our resources – time, land, energy, asphalt, pipe, etc… – in dollars or seashells or bitcoin, if we spend 2X amount of wealth and create only X amount of wealth from that spending, we’re making ourselves poorer with each transaction.
As Modern Monetary Theory suggests, money printing is not creating more resources, it is merely expanding the unit of account. If you believe this, okay, but you’re not solving the underlying productivity problem. And that’s the core problem.
The pain and discomfort we are feeling in places like Lafayette and Detroit is a signal that we’re doing something fundamentally wrong. If we ignore or are too distant from that signal, or worse, respond to it by merely suppressing it, the underlying problem is not going to go away. In fact, it’s going to fester and get worse (as we see it doing now).
I’ve got a lot more to write on this, but I’m going to pause here and let this simmer for a while. Later this week, I’m going to share a pair of videos for those of you that want to get deep into this. I think it is important to hear these ideas from people who believe them and so I’m going to share two competing perspectives, both eloquent and compelling, so you can spend time pondering many sides of these things as I do.