Democrats Get Ready for MMT Spending

Never Bark at the Big Dog. The Big Dog Is Always Right.

I have warned for two years now about the dangers that Mad Monetary Theory presents to our nation’s economy. I have warned that it gives green light to unhinged spending under a Democrat-led Congress. That monetized spending spree will go on steroids with a Democrat administration in the White House.

Well, get ready for it. The Democrats just changed a list of rules on how legislative bills are processed by the House of Representatives. One of the rule changes relates to the budget-balancing PAYGO rule, namely that every new spending initiative must be fully funded by either tax revenue or cuts in other spending programs.

Not anymore. From One America News:

Another rule change is new exemptions from PAYGO, or Pay As You Go, provisions. The rule previously kept lawmakers from spending more than the budget allowed by requiring spending cuts in other parts of the overall budget. However, the new rules offer an exception for PAYGO, but only for programs related to public health and climate change. This is specifically consequential as Democrat proposals like Medicare for All and the Green New Deal come with very large price tags.

This means two things. Over the short term, they can roll out their Green New Deal spending in rapid-fire appropriations and the Treasury will simply call the Federal Reserve and request the necessary cash. This means that Congress will expand its current monetization of spending and deficits proportionate to its Green New Deal.

What exactly does this mean in terms of inflation pressure in the economy? Subscribe to our Economic Newsletter and get exclusive access to a report that will answer this question in detail.

Over the long term, the end to Congressional PAYGO sets a fiscal precedent. It means that Congress can now part with it for other purposes as well. Social Security, for example, is in deep trouble and expected to de facto go bankrupt in just over a decade. It is not beyond the realm of impossible that Congress simply decides to replenish the system over the next few years with newly printed cash.

Of even greater concern is the unending desire among liberals to create a Medicaid-for-All socialized health care system. If the Democrats do indeed get control over Congress as well as the White House, we can expect this to be at the top of their agenda. Since PAYGO has now been suspended on one item of health care spending – public health – but once it is established that you can exempt some health-care spending from PAYGO, you can expand that exemption to cover all of it.

In other words, with Democrats in control of both Congress and the executive branch we should expect a single-payer health-care system that is backed by the printing presses over at the Federal Reserve.

This is also something we can put numbers on. In a coming issue of our Economic Newsletter we will estimate the quantitative effects of the PAYGO suspension. We will do so using our exclusive model for the monetized inflation pressure in our economy.

It is not surprising that the first order of business for the Democrats, once the 117th Congress convened, was to partially suspend PAYGO. Their economists have been touting Mad Monetary Theory for many years. The theory itself was developed 20 years ago by a group of economists at the University of Missouri, Kansas City. Since then they have brought more and more of it into the mainstream, with proponents among influential Congressional staffers and presidential campaign advisors.

Mad Monetary Theory is not nearly as sophisticated a theory as it has been made out to be. All it says is that Congress does not have to worry about collecting enough tax revenue to pay for its spending. It can bankroll as much of its outlays as it wants to simply by having the Federal Reserve print money. While MMT proponents often initially deny that deficit monetization causes inflation, when pressured they will acknowledge that this is a real problem. Therefore, they have included a feature into MMT that supposedly will dampen any inflation pressure: when inflation is high enough they raise taxes and withdraw money from the economy.

There are several crazy aspects to this that we will not go into here (although a future article, exclusive to Economic Newsletter subscribers, will explain MMT in detail); what matters for now is that the PAYGO suspension just passed by the House of Representatives is perfectly in line with a roll-out of MMT as the new theoretical foundation for government spending. Therefore, it is logical to expect more of this – and to expect that it will be the new normal for Congressional appropriations. Long term, expect a redesign of the role of taxes, from its current function of collecting revenue to an inflation management tool, and that this tool will fail catastrophically.

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