If you have a kid who is trying to figure out where to go to college, you might want to counsel him or her to avoid going to Stony Brook University, at least if he or she plans on majoring in economics. That’s because there is a good chance that your kid will end up having to take economics classes under Professor Stephanie Kelton, who details her modern-day version of voodoo economics in today’s New York Times in an op-ed entitled “Learn to Love Trillion Dollar Deficits.”
In addition to teaching economics at Stony Brook, Kelton informs readers in her op-ed that she previously served as former chief economist for the Democrats on the Senate Budget Committee. For some reason, she failed to note that she also served as an advisor to self-labeled socialist Bernie Sanders in his 2016 race for president.
Kelton’s thesis is that Americans need not be concerned about the federal government’s trillion dollar deficits and its ever-growing mountain of federal debt, which now stands at almost $26 trillion. (See usdebtclock.org, which, if you have never visited this website before, might tend to shock you.)
The reason for Kelton’s lack of concern for these massive deficits and debts is the fact that the federal government wields the authority to simply print money. By being able to resort to the printing press to pay its expenses and debts, everything will supposedly come out hunky-dory. As the title of Kelton’s op-ed suggests, everyone should just learn to love all this massive federal spending and debt.
Taxes and debt
Interestingly, Kelton understands a fundamental truth about government: The ordinary way it gets its money is through taxation and borrowing. That is, the government is not like entities in the private sector, which get their revenues by producing goods and services that other people are willing to pay for. Instead, the government simply seizes people’s income through taxation or sucks savings (and, consequently, productive capital) out of the private sector through borrowing Either way, taxes and borrowing impede the private sector’s ability to raise the overall standard of living in society.
Kelton obviously gets that, but then goes totally off the rails by saying that the federal government’s fiat (i.e, paper) monetary system enables government officials to avoid the harmful consequences of massive taxation and borrowing. She writes:
In 2020, Congress has been showing us — in practice if not in its rhetoric — exactly how [Modern Monetary Theory] works: It committed trillions of dollars this spring that in the conventional economic sense it did not “have.” It didn’t raise taxes or borrow from China to come up with dollars to support our ailing economy. Instead, lawmakers simply voted to pass spending bills, which effectively ordered up trillions of dollars from the government’s bank, the Federal Reserve.
The inflation tax
What Kelton obviously does not understand that is that this inflation of the money supply is not a cost-free activity. In fact, she seems to operate under the assumption that the Federal Reserves’s expansion of the paper money supply and inflation are two separate things. The Federal Reserve’s inflation of the money supply is inflation. When government is inflating the money supply by printing new batches of paper money and injecting them into the economy, it is inflating the money supply.
As fundamental economic principles of supply and demand hold, and as history has repeatedly shown, when governments increase the supply of money, that has a deleterious effect on the value of money. All other things being equal, if you increase the supply of something, its value in the marketplace will fall. If you increase the supply of money, its value will fall. That reduction in value is reflected by rising prices of the things that money is used to purchase.
That’s why the value of the American dollar has fallen, decade after decade, ever since the Fed was established in 1913. Decade after decade, the Federal Reserve has inflated the money supply to accommodate the massive spending and debt that has accompanied what we call the welfare-warfare state. That massive inflation of the money supply has debased the overall value of people’s money. Among the worst hit over the years have been the people on fixed-incomes, who have seen, for example, their pensions drastically reduced in value.
Thus, what Kelter just doesn’t get is that inflation is simply another form of tax, no different from an income tax, excise tax, tariff, or sales tax. It’s just another time-honored way that governments use to seize people’s income or wealth. After all, what difference does it make to a person if he has 10 percent of his income seized by the IRS versus having the purchasing power of his income reduced in value by 10 percent by the Federal Reserve?
Bubbles and bursting bubbles
That’s not all, however. By expanding the money supply through the setting of artificially low interest rates, the Fed has been responsible for the cycles of booms and busts, bubbles and bursting bubbles that have besieged America for more than 100 years. That’s because the interest rate manipulations send warped signals to businesses and investors that have nothing to do with economic reality. Once the malinvestments become apparent, the bust or recession sets in.
In fact, I can’t help but wonder whether Kelter is aware that the 1929 stock-market crash that led to the Great Depression was a direct consequences of Fed monetary manipulation, as even former Fed Chairman Ben Bernanke famously pointed out in an accolade to libertarian economist Milton Friedman, whose work documented the role of the Fed in bringing about the Great Depression.
Gold coins and silver coins
Kelter also gets it wrong with respect to America’s founding monetary system, a system based on gold coins and silver coins. She writes: “The U.S. dollar was convertible into gold, which forced the federal government to constrain its spending to protect the stock of its gold reserves.”
What she obviously doesn’t realize is that the U.S. dollar wasn’t paper currency “convertible into gold” but rather gold coins and silver coins themselves. For example, take a look at this link. It shows a collection of silver dollars from the 1800s. That’s what the U.S dollar was — a silver dollar. Or take a look at this link. It shows a $5 gold coin from the 1800s.
Thus, that’s what official U.S. money was — gold coins and silver coins, not paper currency “convertible into gold.” That gold-coin, silver-coin system lasted for more than 125 years, until President Franklin Roosevelt nationalized gold and made it a felony to own gold coins, which he did without even the semblance of a constitutional amendment.
There were, of course, federal debt instruments. Click on this link. You’ll see a silver certificate. It promised to pay the bearer one silver dollar on demand. Everyone understood that this wasn’t money but rather a promise to pay money.
Unfortunately Kelton failed to explain how her “Modern Monetary Theory” can be reconciled with the financial and economic situations in Greece and Italy, where out-of-control government spending and debt sent regimes in those two countries into bankruptcy or near bankruptcy. She also failed to explain how her theory can be reconciled with countries like Zimbabwe and Venezuela, where hyperinflation has wiped out the value of people’s money.
If it were my kid who wanted to major in economics, I’d be counseling him or her to go to George Mason University or to the Citadel, where the professors in the economics departments have a real-world grasp of economics and monetary principles.