Modern Monetary Theory Bites Us In The Ass Again

Dean Baker is back, espousing “Modern Monetary Theory” to claim is his column Wednesday that the current slump in sales of new houses is due to the Trump tax cuts. Yes, those are the same tax cuts that MMT proponents feared would “overheat the economy” but are now, according to Dean Baker, cooling the economy by causing home sales to decline.

MMT, which I call the “Free Lunch Economic Theory,” is the theory which says that “sovereign governments that are the sole supplier of national currency,” meaning that they alone print their nation’s money, therefor “have an unlimited financial ability to pay for the things they wish to purchase and to fulfill promised future payments.” Because, to be perfectly clear, according to the theory they can print as much money as they want to.

Because of that the theory claims that, “it is not possible for a government that issues its own currency to be bankrupt,” and says that collecting taxes is “a policy tool that regulates inflation and unemployment, and is not a means of funding the government's activities.”

Just to be sure you understand all of that; the government collects taxes to prevent consumers from spending too much, which would cause inflation. It does not collect taxes to raise money to operate programs benefiting the poor, for example, because it merely prints money to run those programs. It only collects taxes in order to prevent inflation and “regulate unemployment,” whatever that means.

So how did the “Trump tax cut” cause the decline in new home sales? Well, the tax cut caused runaway inflation, which we didn’t see but Dean Baker and the Federal Reserve did, when it soared to dizzying heights and got all the way up to 1.87% last year.

Never mind that the price of gasoline went up 74%, it’s all in how you measure things. Dean Baker and the Fed only measure the prices of things that people don’t buy. Food, energy and housing are not included, thus 1.87% inflation.

So, since Trump would not raise the taxes back up... (Wait, you get that? Trump didn’t actually cut taxes, and he can’t raise them. Only Congress can do that.)

Anyway, in order to reduce this runaway inflation, the Federal Reserve raised interest rates, which it turns out is another way to control inflation. Actually, MMT is not the only economic theory which claims that interest rates can be used to control inflation; pretty much all of them do that. None of them say why it works; at least not in English. (The words are English, or at least most are, but…)

Some people would say that it was the interest rate increases by the Federal Reserve which caused the slump in new home sales, but Dean Baker would rather blame Donald Trump. He would blame Trump for the Russian Soyuz rocket failure if he thought anyone would believe him.