This commentary is by Jeffrey Wennberg, recently retired commissioner of the Rutland Department of Public Works. He is former mayor of Rutland, was commissioner of environmental conservation under Gov. Jim Douglas, and was a consultant with the Center for Climate Strategies in Washington. D.C.
Tom Wagner offered a rebuttal to my commentary in which I expressed concern for massive deficit spending on the part of Congress, and its potential for creating an economic crisis.
I want to thank Mr. Wagner for weighing in, because I believe this is an issue that deserves a vigorous public debate.
Mr. Wagner articulately summarizes modern monetary theory, which is the new economic theory that supports unlimited government spending, or at least spending untethered to traditional government revenue, such as taxes.
Needless to say, I am an advocate of the old economics, and fear that MMT is less of an economic theory than a rationalization for limitless deficits because “The federal debt is the private sector’s (corporations and individuals) surplus.”
There are two problems with this.
First, the federal government is obligated to pay interest on the debt. Interest rates are extremely low, but they will not always be so. A small increase in the interest the Treasury must pay to service the debt will dramatically increase required spending.
Modern monetary theory tells us that, since that spending is going back into the economy — into the hands of those holding the treasury notes — it is actually a benefit to the economy. And Congress need not worry about raising taxes to pay for it, because under MMT they can just print more money and issue more debt.
If you think this sounds a bit like the theory that landed Bernie Madoff in prison, you are not alone.
Mr. Wagner acknowledges the second problem: inflation. Modern monetary theory holds that the only constraint on deficit spending is our tolerance of inflation, but as long as there is “underutilized capacity” in the economy for supply to meet demand, inflation will be held in check. “As long as there is this underutilized capacity, we can spend for programs we need without having to find ways to pay for them,” he argues.
It was my concern for inflation that prompted my commentary. And of course, if inflation kicks in, interest rates will rise and the first problem, described above, will occur. Is there “underutilized capacity” in the economy? Apparently not; at least, there won’t be until the unemployed go back to work. As I noted last month, businesses are begging for workers but applicants are as scarce as a Philadelphia Republican.
As long as the government hands out cash for people not to work, a lot of them will do just that. In response, businesses are increasing wages to compete for those who are willing to work. Good for them.
But rapidly increasing wages means rapidly increasing prices. In the insane world of 2021, more government spending means both more demand AND less supply. Inflation is here, and anybody filling up a grocery cart or a gas tank or their Home Depot credit card will confirm it. And don’t even think about buying a home.
The Fed has done such a good job of keeping inflation under control, only us old folks who remember the 1970s appreciate the damage it can do. Keynesian counter-recessionary spending created the stagflation of the 1970s, and will surely do so again unless our leaders resist the siren song of modern monetary theory.
