If you prefer to listen rather than read, this blog is available as a podcast here. Or if you want to listen to just this post:

Or download the MP3


One of the things lacking in modern political discourse are good-faith attempts to truly understand the other side. Anyone who doubts this need merely look at any of the many political fights over the last few years, including the Kavanaugh nomination I talked about last week. As an antidote to this, several solutions have been offered. The first, is what’s called an Ideological Turing Test, and it was proposed several years ago by Bryan Caplan, a noted libertarian economist. His idea was that someone could demonstrate that they truly understood their opponent’s position if they could explain it well enough to be indistinguishable from an actual supporter of the position. Much in the way that a computer could be said to have passed the original Turing Test by being indistinguishable from a human.

Another proposed solution was offered up by Scott Alexander of SlateStarCodex, who urged people to engage in steelmanning. On the internet it’s common to see people strawman their opponents argument, which is to offer up the weakest and most ridiculous version of it, and attack that. To steelman their argument is the opposite, it’s to offer up the very best version of their argument.

Both of these are very similar ideas, and both are things I should do more often. It could be argued that last week’s post might have benefited from a little more steelman. Though I really think last week there were actually three sides. The two sides that are sure that they know what happened, (and what should happen now) and a third side which is sure that no one knows what really happened, and that the first two sides are just displaying their built in political biases, and then attempting to make what little evidence there is seem ironclad. But while I have no desire to go back and revisit last week’s post (okay I have some desire to do that, but I’m also kind of sick of the topic) I can do better this week. And fortunately this week’s post is more amenable to steelmanning or an Ideological Turing Test as well, because this week, unlike last week, my certainty level is high, but there are people who are are just as certain I’m wrong. Accordingly, this week, it’s my intent to discuss one of the opposing arguments, hopefully in a manner which is indistinguishable from an actual supporter.

I suspect I will not do as well as either Caplan or Alexander would hope. Also, if I’m being honest much of the post will be devoted to showing how, even with this new, updated understanding I still think they’re wrong, but I hope, at least, to have moved the debate closer to their actual position. Actually “wrong” is not the word I’m looking for. I actually think they may be right in the abstract, but foolish in the implementation. But I’m getting ahead of myself, I haven’t even said what the subject is. This week we’re going to return to talking about the national debt and the federal budget deficit.

I’m not sure where the national debt would rank on my list of “issues I’m interested in” but it would probably be pretty high, I’ve mentioned it quite a few times, perhaps most notably in my post The National Debt in Three Lists of Six Items. Looking back, the first of those six item lists was a list of reasons why people say we shouldn’t worry about the debt, so it’s not as if I’ve entirely ignored opposing arguments on this subject in the past, but it could certainly be argued that I treated them too flippantly. Perhaps this post will fix that, perhaps not.

To start with, let’s just, ever so briefly, review my position: The national debt is over $20 trillion dollars. This is probably the largest accumulation of money into a single bucket in the history of the world. Insofar as money acts as a proxy for nearly everything, we’ve put, as they say, a lot of our eggs into a single basket. And if this basket/bucket fails in some fashion it would be catastrophic. I’m not sure exactly how it will “fail” but there is significant historical precedent for things failing even if no one could see in advance exactly how it was going to happen, until it did. And that’s being charitable. Currently there are numerous people with equally numerous theories who feel very confident they can see how it will fail. Maybe one of them will turn out to be right, or maybe it will be something no one saw coming. Or maybe nothing will ever go wrong with the debt, but my position is that this is not the way to bet.

If you take a look at the comments on my “Three Lists” post (which unfortunately didn’t make it over to the new site, so you’ll have to go here.) You’ll see that Boonton disagrees with me on this, and I’m grateful to him for pushing me on it, because otherwise I might still think those on the other side of this issue are being hopelessly ahistorical, when in reality they’re probably just too optimistic. So what is their position? What are people really saying when they say that the debt and by extension the deficit doesn’t matter? Let’s start with the six reasons not to worry I mentioned in that last post. To briefly review:

  1. The government does not have an ironbound debt contract. The size of the debt and the payments change as the economy changes.
  2. The national debt is not money we owe to other people it’s money we owe to ourselves.
  3. Our debt to GDP ratio is not that bad when compared to other countries
  4. Borrowing money is currently a very good deal. Interest rates are near historic lows.
  5. Our debt is in dollars, and we can print dollars. Making it literally impossible to default.
  6. Our assets greatly exceed our liabilities.

To be clear all of these are pretty good reasons to not be worried about the debt. However, as I said then, I don’t think they’re sufficient. (If you want to know why you should go back and look at the original post.) Still they are all essentially true and it’s important not to dismiss them, in particular reason number five. The idea that we can print money. Obviously, if you can print money, then you’ll never run out of it, but the problem with that is that if you do too much of it, you’ll get inflation, and too much inflation is bad.

I don’t think there’s any serious disagreement with the assertion that too much inflation is bad (though there might be some quibbling over how much is “too much”.) High inflation is bad because it wipes out savings, and any benefits which aren’t pegged (or are insufficiently pegged) to inflation. It makes the currency going through inflation less desirable. And, in the most extreme cases, such as in the Weimar Republic and Zimbabwe (and currently Venezuela) you can end up in the positive feedback loop of hyperinflation. But for me it all comes down to the fact that too much inflation makes planning for the future hard. It makes doing something today vastly different from doing something later. If you’ll recall my definition of civilization consists merely of having a low time preference, That civilization means there’s very little difference between doing something today and doing something in a year. This makes inflation something which eats away at civilization.

All of the forgoing is to say that inflation is something I am particularly worried about. It is true that inflation does not currently seem to be much of a problem, and if anything we may have too little inflation. But this does not mean that this condition will hold forever, inflation will eventually be a problem, a problem which I felt the “other side” was dismissing far too hastily. (At least as far as I could tell.)

Such was my understanding of the argument until just recently when I heard a podcast from Planet Money, which completely flipped my understanding. They were interviewing Stephanie Kelton who is a big proponent of the view that deficits don’t matter and she made the exact opposite argument: rather than saying that inflation doesn’t matter she basically said that it was the only thing that mattered. Now I know that this is a weird place to mention this given that I’m nearly half way through things, but it was this podcast that made me decide to write a post. (In addition to doing more Ideological Turing Tests/steelmanning in the future I should probably also have shorter intros.) I finally felt I had heard a credible argument for the idea that we shouldn’t worry about the deficit or the national debt, as long as we are worried about inflation.

Kelton was Bernie Sanders economic advisor during his presidential run, and is a major player in the Modern Monetary Theory space. Which is the best known framework on the other side of the debt/deficit argument from me (and many, many others).  Now I already know that I am unlikely to do the field of MMT justice in only a thousand or so words, so I would urge you to not only listen to the Planet Money podcast (it’s short, only 22 minutes) but to also pay attention if you come across other mentions of MMT. (I’ve seen several just recently, including this one from The Nation.) But for me, the key aha moment came during the podcast when they were talking about taxes:

[The government] taxes because it wants to remove some of the money that it spent into the economy so that it can guard against the risk of inflation.

This is one of the big ideas of Modern Monetary Theory. Taxes are not for spending. Taxes are for fighting inflation. And spending – that isn’t just to buy stuff the government needs, but the power of the keyboard – the spending from that – can be put to use for doing all kinds of good things – to put money into the economy to give it a boost or to help get to full employment.

So, on the one hand, you have the traditional way of thinking about things, which says that government spending is limited by government revenue which mostly takes the form of taxes, and that if government spending goes above government revenue for too long or by too much some kind of catastrophe will occur.

On the other hand you have the MMT school of thought which says that government spending is limited only by the amount of inflation it causes, and that taxes only correlate to spending insofar as more taxes can reduce the inflation caused by higher spending. From this it follows, as they say, budget deficits and the accumulating debt that results, don’t matter, because they don’t affect the rate of inflation, and that’s all we care about.

There is one other, critical piece of the MMT approach. You not only have to be able to increase the amount of money at will, you also can’t have any debts which are denominated in a currency other than the one you can create. As long as this is the case, they reject, as both unrealistic and unserious, any potential fears of MMT policy leading to hyperinflation like the classic examples of Weimar, Zimbabwe and Venezuela.  Because in each of the cases mentioned, the countries had debts to other countries that were denominated in currencies other than their own. (Weimar owed France money for war reparations and Zimbabwe and Venezuela both had/have debts that are denominated in dollars.)

If things still seem a little nebulous, they offer another way of looking at it in the podcast which may be more concrete. Imagine that the economy has a certain ability to absorb money and turn it into goods and services. The MMT economists compare this to a speed-limit. Returning to the podcast:

The speed limit has to do with what economists call real resources. An economy is not just money… If you want to build a hospital, you can’t build it out of money. You need… those IV bags that hang on those sort of rolling coat-rack things…

So say the factory that makes those wheeling coat-rack things is running at, like, half the capacity that it could. Then, if the government decides to place a big order for those coat-rack things, nothing bad really happens. They just buy them at the normal price, put them in the hospital – great.

But what if the factory is at full capacity? Then, the government has to say, hey, sell to our new hospital instead of to your other customers. And to get them to do it, they’ll have to pay more. That is inflation. Prices just went up.

[Kelton] says that’s what the government should think about – not whether they have enough money, but whether there are enough resources in the economy to soak up that money.

There is more to MMT than the elements just mentioned, but before I move on I should say that the core idea makes sense. Which is to say I don’t see any mistakes from a theoretical standpoint. And the appeal of having more money to do the kinds of things we want to do like fund schools, care for the poor, maintain global military hegemony and rescue the states from their pension crises, is obviously appealing. Probably too appealing, and here’s where we get to my criticism of MMT. (I realize this wasn’t the most comprehensive steel-manning, and if anyone thinks I left anything out, I’m looking at you Boonton, please let me know in the comments.)

The first criticism is brought up in the Planet Money podcast itself, and comes from another left-leaning economist, Tom Palley. Palley also feels that mainstream economics is flawed, particularly its obsession with having a balanced budget, and thus there are some elements of MMT he really likes, but he doesn’t think it’s practical to use taxes to fight inflation:

Politics doesn’t work like that. Taxes are very, very contested. No one wants their taxes raised. It’s very hard for politicians to raise taxes. They’re very slow to do it because guess what? They don’t get re-elected if they do.

Kelton has an answer for that, build in automatic changes to taxation as the economy changes, so that you’re not counting on congress to raise taxes when inflation starts going up, it happens automatically. It’s a clever idea, but it’s not necessarily any more politically feasible to pass a law that automatically raises taxes, than to pass a law which just raises taxes at the time, and it might, in fact, be a lot more difficult, given that congress doesn’t generally like to give away their power.  Also there’s the principle of legislative entrenchment which means they can’t bind a future congress to do anything even if they want to.

The problem, of course, is that any form of tax increase is difficult, even if it’s in the future, and any form of spending is easy. And if MMT’s only contribution is to make it easier to increase spending and harder to increase taxes, then it will almost certainly end up being viewed as a net negative when the full history of this age is finally written.

For the sake of argument let’s assume that we can effortless raise taxes in response to inflation, as effortlessly as the Federal Reserve changes the short-term interest rate. How do we know what level to raise the taxes too? Are we sure we understand inflation and the enormously complicated chain of incentives and behaviors and chaos that comprise the modern economy well enough to not dramatically undershoot or overshoot the mark? Let’s just start with inflation how well do we even understand that? Well interestingly enough, in the podcast I’ve been referencing they quote Kelton as saying:

..nobody has a good model of inflation right now. And she thinks the government could spend a lot more money right now, and we’d still probably be fine.

(Am I the only one who thinks that first “and” should be a “but” and that the word “probably” is worrisome?)

Maybe this is understood better than I think. Maybe there’s some great way for determining exactly what taxes should be implemented which accounts for tax evasion, and the health of the economy, and all potential black swan events whether positive or negative. But even if we master taxes we would still have the question of what happens to the concept of debt, deficit, government bonds and interest rates? Do we just junk all of it? This hardly seems possible, not without catastrophic consequences. Perhaps if we start by considering something smaller. One big worry that deficit hawks have is that there will be a loss of confidence and the interest rate the government has to pay on outstanding debt will start rising. This would mean a greater portion of the budget would go to servicing the debt, leaving less available for everything else. (As a point of reference we currently spend 6% of the budget on interest payments.)

What happens if interest rates start rising under MMT? Do interest payments continue as normal? Do we stop borrowing altogether? What happens to the $21+ trillion we’ve already borrowed? Do we pay it all off in a vast orgy of money creation? I assume not, surely even if nothing else is, that would have to be inflationary. If we keep everything the same with bonds, but switch to MMT with respect spending and taxes, does that cause interest rates to rise through a loss of confidence? (I mean we have just kind of repudiated the whole concept of debt.) But I guess under MMT as long as inflation is in check we don’t care how much we’re spending on interest? But does that make rates go up even more in some kind of positive feedback loop?

Maybe I’m missing something obvious, and maybe they have some straightforward plan for all of this, maybe I’ll eventually have an aha moment similar to the one I had with inflation. A quick Google search came up with an explanation that bonds are used under MMT as a way of setting the short term interest rate, but I’m still not sure how that applies to the behavior of the already outstanding debt. If anyone wants to point me at something on this topic, I’d be grateful.

If they do manage to clear all the hurdles I’ve mentioned thus far, there’s still one final hurdle, which doesn’t need to be cleared now, but will have to be cleared eventually. I mentioned above that the one big caveat of MMT was that all your debts had to be in the same currency as the one you can create. For the moment the dollar is still the world’s reserve currency, which basically means that all debts are denominated in a currency we can create. (This makes us singularly positioned as an MMT candidate.) Now, imagine that we switched over to using MMT as the guiding ideology for federal spending and taxation, and that it works great. What happens to this system when (not if) the dollar loses its place as the world’s reserve currency? Is there some smooth transition back to the old way of doing things? Or does the entire thing explode in a fiery disaster where the living envy the dead? I suspect neither, but this is not something we have any way of knowing, since we’re deep into speculative territory even talking about switching to MMT, let alone a discussion of how we might switch back.

Additionally, one other interesting thing occurs to me. Does switching to MMT hasten the end of the dollar’s status as reserve currency? Are people going to be more hesitant to enter into contracts denominated in dollars if the US government is on record as saying they’re going to create as many dollars as they feel like? It’s hard to see how it wouldn’t, given the already substantial inclination of people to switch to things like bitcoin. An inclination which would only be enhanced by any movement in the direction of MMT.

It should be noted, here at the end, that there is a lot of space between the modern monetary theorists and the people who absolutely insist on a balanced budget. And I’ve only covered a small slice of it. But in many ways people who are “MMT friendly” without directly advocating for it are actually harder for me to understand. These people seem to be saying that the debt will matter at some point, but despite being over $21 trillion dollars and over 100% of GDP that point is not yet. The MMTers at least have a theory for why it will never matter, and it’s definitely theoretically interesting. But practically, I think it’s a horrible idea.

Perhaps the biggest problem is one I keep coming back to. For a system to work it has to, on some level, make sense to the average person (or the average congressperson which might be an even lower bar.) Particularly in light of the fact that we’ve given that “average person” the power to vote. It’s possible that the understanding of the masses won’t matter in our post-democratic futures when the AI overlords realize that debt and deficit are silly, biological fallacies, but until that time comes, no matter how much you try, you’re never going to convince the average person that $21 trillion dollars of debt doesn’t matter, and on this point, I think they’re right.


If your own budget is balanced and you’re running a surplus (I know pretty rare these days) then consider donating.