Using modern monetary theory to finance the plan will only create inflation

Some GND [Green New Deal] proponents have attempted to circumvent this obvious fiscal problem by arguing that the massive government borrowing required to finance the GND can be repaid through money creation. (A variant might be that no actual borrowing would be necessary: The Federal Reserve could simply create money through a keystroke, literally, to pay the GND bills.) The government can always print dollars to repay its (dollar) debts, a policy stance commonly referred to as Modern Monetary Theory, although government use of the printing press to acquire resources is old and familiar. Modern Monetary Theory is little more than the latest example of the old argument that there is available a free lunch, as illustrated by the argument from a prominent proponent that “anything that is technically feasible is financially affordable.”123 Some critics of this argument note that it is correct narrowly— yes, government can repay its nominal debts if it creates the currency in which the debt is denominated—but that it would represent poor policy for various reasons.124 The critics clearly are correct that government debt denominated in dollars can be “repaid” through money creation. But that observation is independent of the larger issue of whether the government borrowing needed to finance a GND would be possible in a world in which the market believes that the resulting debts will be repaid through money creation. Consider the dynamic effect of such government borrowing on the interest rate that it must offer.125 • A basic condition for the stability of government borrowing is that the real rate of return to government debt must exceed the growth rate of real government debt in the long run. If the market expects the debt to grow over the long term more quickly than the real return to the debt, then interest rates sufficient to induce the market to offer real resources to the government must increase, perhaps massively. • The credibility of the government promise to repay its debts in real terms cannot be assumed to be independent of the magnitude of the debt itself, in that incentives to renege on promised debt service must rise as the debt rises. Moreover, potential lenders to the government would assume that dollar-denominated debts promising extremely high interest returns (say, 50 percent) in fact would not be repaid in real terms, as the incentive to renege would become overwhelming. • • If incentives for the government to use money creation to repay nominal debts are seen as strengthening significantly, interest rates would rise to reflect the risk of default in real terms, that is, repayment in dollars buying fewer real goods and services. This last point brings us to the obvious inflation problem attendant upon Modern Monetary Theory. Unless massive money creation is assumed to lead to a decline in the income velocity of money— crudely, the rate at which dollars are spent—which is a deeply problematic assumption, then a sharp increase in the money supply must create an inflation, unless somehow there is an increase in the real resources available to the private sector.126 But the GND assumes a massive resource shift toward the government, in this case through the mechanism of government borrowing. Accordingly, a sharp increase in inflation is the inexorable implication of Modern Monetary Theory. To the extent that an inflation is anticipated, it is a tax on non-interest-bearing money, which is another way of seeing that a GND financed through borrowing to be repaid with money creation must increase velocity, as individuals attempt to avoid this tax by reducing their holdings of money. To the extent that the inflation is not anticipated, it is a subsidy for nominal debtors, financed by a tax on nominal creditors, who would receive debt repayment in nominal dollars that purchase less than anticipated in real goods and services. Notice that government is always a net monetary debtor, so the upshot of Modern Monetary Theory is a massive wealth transfer to the government—that is, to the interests benefiting from government borrowing.127 The proponents of Modern Monetary Theory as a financing mechanism for the GND respond that the inflation problem can be avoided by using taxes to remove money from the economy, thus easing the inflationary effect, a proposed transformation of fiscal policy into a substitute for monetary policy.128 This is little more than saying that the GND borrowing would be financed through explicit taxation, with the large adverse excess burden effects discussed above. At a more general level, the proponents of GND finance with a system of debt “repayment” through money creation are arguing in a nutshell that the government will be able to borrow real resources from the private sector and then repay the debts without transferring real resources in return. No one can believe that markets are that myopic. There are no free debt lunches.