A recent survey of economists posed two questions about the recently popular Modern Monetary Theory (MMT). The results were clear. Three out of four economists strongly disagreed with its central premises, and one out of four merely disagreed. Precisely zero survey respondents agreed or strongly agreed with the fundamental predictions of the theory. This was wholly unsurprising, as MMT is nonsense, but it caused me to think about the way economists discuss ideas that are politically popular yet have been proven false. The most obvious example of that, other than MMT, is modern supply-side economics. Indulge me in some musing on how these two ideas continue to have legs after being rejected by careful research using abundant data.
MMT concludes that government debt does not matter and, as long as government can print money, it need not collect taxes. This would be a political panacea, of course. We could finance the building of the interstate highway system, World War II and the modern welfare state simply by printing money. It is absurd.
Modern supply-side economics argues that large tax cuts, like the recent Tax Cuts and Jobs Act would actually generate more tax revenues because they would lead to higher economic growth. This would be a political panacea as well. We could finance the building of the interstate highway system, World II and the modern welfare state simply by cutting taxes. It is just as absurd.
I’ll scare many a reader by noting that both MMT and modern supply-side economics have people in Congress who believe them, some even from Indiana. But before I recount the wrongness of both ideas, it is good to expose the hint of truth that allows folks to tout ideas that are demonstrably false.
It is true that sovereign nations controlling their own currency can sustain large debts for decades. This is especially true if the debt is in their own currency. The U.S. cannot go bankrupt while we have a printing press with which to pay off our debts. All of these truths are used to justify MMT, but a partial truth is not sufficient for a theory to hold (after all, the earth looks flat), and that brings us to supply-side tax cuts.
Tax cuts spur economic activity by allowing households and firms to buy more goods and invest in more new business. When marginal tax rates are very high, say over 60 or 80%, a tax cut may cause more new economic growth than the revenues lost by the rate reduction. That is the Laffer curve. The problem is that there are no taxes at that rate anywhere in the world, much less the US. The recent Tax Cut and Jobs Act reduced corporate tax rates from 35% to 21%. That is much too low to be as “revenue neutral” as far too many in Congress claimed.
It turns out that wild claims like the MMT and supply-side tax cuts have, like conspiracy theories and cults, just a tad bit of truth to them. Unlike conspiracy theories and cults, there is an enormous treasure trove of data from which to calculate their actual effects. Data on national and sub-national tax rates and economic performance exist for most of the world for 50 years. Some nations, like Great Britain, have some of this data back a millennium. This allows us to test the effect of MMT and tax cuts on literally tens of thousands of observations.
MMT is harder to wholly reject as a theory since only a few hundred national or sub-national governments have been willing to wreck themselves with debt. But, the capacity of a nation to self-finance a debt without taxation, a hallmark of MMT has yet to occur.
The supply-side argument of a revenue-neutral tax cut has yet to occur in tax rates beneath the high double digits. We’ve seen high taxes and big tax cuts, but a revenue-neutral tax cut is as common as a unicorn.
This prompts me to ask why these ideas remain popular and hold currency in the political debate. I cannot be certain, but nearly 35 years of public policy leads me to believe that most political leaders stop asking questions as soon as they hear the answer they like. This absence of curiosity is deadly to good government, but it is the rule rather than the exception. It is also the sign of deeply unserious men and women.
It is also difficult to rule out pure duplicity. Like politicians, voters ask too few questions, and the promise of costless public policies is seductive. As economists are fond of noting, there is no free lunch. We cannot get something for nothing. Let me conclude with something that is both true and unpopular with the unicorn watchers from both the Left and the Right. The politicians who proclaim MMT is a magic bullet that will allow for the funding of a Green New Deal are misleading you. In exactly the same way, the politicians who told you the Tax Cuts and Job Acts would pay for itself through new tax revenue are untruthful.
I don’t have windows into the souls of these politicians. I don’t know if they are simply uncurious and are able to wish away unhappy facts like a child, or if they think voters are uncurious and childlike. But, that’d be a great question to ask for the next election.