It seems the very last thing you want to hear about the economy is steady as she goes, that the economy is finally stable. As soon as top economists or a respected government official makes this type of declaration hold on to your hat, a downturn is just around the corner. Just ask Ben Bernanke. In 2004 he did just that and a few short years later the worst recession in history was upon us. There was Irving Fisher a prominent economist in the late 20's who declared the stock market had reached a permanent plateau, it would never go down again. We all know what happened in October '29.
In the Obama economy I doubt we'll hear any such talk - but that doesn't mean a financial disaster isn't just around the corner. Not much has changed in the structure of the economy since the 2008 meltdown. We are seeing a re-inflation of the real estate bubble which is exactly what we don't need. The Fed pump priming to re-inflate of the stock market has done little to nothing for the prospects of Main Street America. Besides higher taxes and the specter of the Obamacare boom being lowered on the fragile recovery not much has changed in the base economy. The American economy is still almost totally reliant on real estate - home ownership. There's nothing inherently wrong with home ownership, but you need good paying jobs to make it work. There just aren't enough of them.
The hiring that has happened in the past few years has been mostly low paying service jobs, not the type that can sustain suburbia or even the gentrified neighborhoods in the city. As well, there are millions of kids sitting on billions in government student loans and low prospects of getting those good paying jobs they were counting on. As a result there will be a large delay in the next generation of home owners. According to the well known reactionary blogger Dennis Mangan this is indeed the next bubble to burst. A student loan bailout is on the way.
Is there a better way? Perhaps not, but there is a monetary theory called MMT that claims there is. MMT has fascinated me for years. They say Modern Monetary Theory was born when President Nixon took the U.S. off the gold standard. Since the 70's we have been using a fiat currency, currency that a government has simply declared to be legal tender, but is not backed by any physical commodity. Because fiat money is not linked to physical reserves there is always risk that it could become
worthless due to hyperinflation or loss of confidence. In theory if we should lose faith in paper currency our dollars will no longer hold any
value. For the government to insure that the fiat currency has some intrinsic value it demands tax payments in dollars. If this seems sketchy - it kinda is. But wait...
MMT theory states because our money is created by fiat, by printing press or a spreadsheet at the Federal Reserve the U.S. government can never truly run out. MMT says if properly managed our money should always retain value through all the inevitable economic ups and downs and inflation and unemployment would always be held in check.
What do they mean by properly managed? It could be as simple as significantly raising government spending and significantly lowering taxes during economic downturns. Looking back over the decades we see how this has worked - or not.
In the early 80's the economy was terrible. Inflation was high. interest rates were high, government spending was low and taxes were very high. President Reagan oversaw a significant raise in government spending and a significant lowering of taxes. The economy recovered and sustained good employment and low inflation all the way through the 90's. There was the inevitable recession in the late 80's, but it was shallow and short. The Clinton administration enjoyed strong growth and low inflation as they embarked on a significant reduction in government/military spending. They also raised taxes. Still the economy was poised to cycle down in the late 90's and another small, short recession hit, merely proving downturns are normal. Bush II raised government spending and significantly lowered taxes and the economy recovered nicely just as the theory claimed. However, when the economy was humming in the Bush years government spending never moderated and taxes stayed low. When the credit market collapsed the country was in an inverse position according to the MMT theory and the great recession hit.
What has happened since? The great recession was deep and significant which according to MMT theory called for increase government spending. Obama obliged, government spending sky rocketed. On the other side Obama did not lower taxes - he increased them as well as significantly increased regulation which is a type of a tax. Much of the spending was unproductive and frankly wasteful (fraudulent) and only bred government dependence on food stamps and unemployment payments. This while regulation and often hostile anti-business overtures led to slow job growth and even slower economic growth. In short we have the mess we all see before us.
MMT also advocates the government directly hire the jobless during significant downturns so that unemployment stays very, very low. Simply giving out food stamps and unemployment checks is counter productive. Eventually those government created jobs (we'd presume infrastructure projects would be the focus of these jobs programs) would decrease as the private sector began hiring again. Inversely government spending would decrease. We would see higher progressive taxes as the economy boomed to keep inflation in check.
There is also a share of MMTers who advocate doing away with the payroll tax altogether. The lie that FICA is funding retirees now is only putting a huge drag on incomes and the ability for private business to hire. This is an idea whose time has come. What about the "deficit"? The government will never default on its payments to retirees due to lack of money, there is simply no such thing with an entity that issues the currency.
The downside of MMT is the over the top arrogance of it's advocates. These people are positing a theory - perhaps a very valid one - but you'd think that everyone else is crazy (mainstream economists and the Fed) and/or evil (Republicans and capitalists). They align with socialists and against capitalists at every turn. The hostility toward anyone with a different view is breathtaking. Deficit hawks are in for a special kind of wrath. They seem to hate Wall Street and CEO's, blaming the system the government has allowed to operate instead of the government officials who made it so. As if socialist government officials haven't contributed to the whole unstable mess. In short , MMTers do a very, very poor job of selling their theories.
There's a lot to consider, a lot to actually like about MMT. But I can't help but wonder why it is such a secret? Is it being taught in college? Is it holding conventions, writing books, marketing itself like the Austrian, Keynesian and Chicago School of economic theories?
If you can get past the arrogance MMT is fascinating.