The Theory Of MMT Falls Flat When Faced With Reality (Part II)
If you missed Part-1 of our series on the “Theory Of MMT Falls Flat When Faced With Reality,” start there. In Part-2, we complete our analysis of the theory and the potential ramifications. The premise of our discussion was this recent explanation of “Modern Monetary Theory” by Stephanie Kelton.
As discussed previously, economic theory always sounds much better than how it works out in reality. The reason is that in “theory,” supply and demand imbalances always revert to previous norms. However, in “reality,” humans rarely act or react, according to theory.
We left off in Part-1, discussing the similarities between the U.S. and Japan. Most importantly, while MMT suggests that debt and deficits don’t matter in theory, economic realities have been vastly different.
The Productive Debt Of WWII
Let’s pick up with Ms. Kelton’s views on this issue.
“Think about what happened after World War Two when the U.S. national debt went in excess of 100% –close to 125% of GDP. The way we talk about it today as burdening future generations, as posing a grave national security risk, we would have to scratch our heads. Did our grandparents worry about the next generation with all those bonds sold during World War Two to win the war, build the strongest middle class, and produce the longest period of peacetime prosperity?
The Golden age of capital, all of that followed in the wake of fighting World War Two, increasing deficits massively, increasing the size of the national debt. And, of course, the next generation inherits those bonds. They don’t become burdens to the next generation; they become their assets.”
We must address several issues in Ms. Kelton’s recollection of WWII.
The first issue is the amount of deficit. If you take a look at a long-term history of our debts, deficits, and economic growth, we can immediately gain some perspective.