The analogy with Oz was first provided by none other than the Wizard of MMT, Professor Stephanie Kelton. In her book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, she wrote:
“Like Dorothy and her companion in The Wizard of Oz, we need to see through the myths and remember once again that we’ve had the power all along.”
Kelton was referring to Dorothy’s power to go back home to Kansas simply by clicking the heels of her ruby-red slippers three times. Similarly, Kelton believes that the US government has always had the power to run huge budget deficits and should be doing so now to cure all our ills. As a result of the Great Virus Crisis (GVC), her theory has taken on a life of its own beyond her wildest dreams. Governments around the world are spending massively on stimulative fiscal policies to offset the recessionary forces unleashed by the GVC.
Most of those contractionary forces have been driven by the extreme government lockdown policies adopted to impose social distancing to slow the spread of the virus. So far, all the government stimulus has provided some support for the global economy. But the virus is still out there, and so are the recessionary forces. As a result, price inflation remains subdued even though much of the ballooning fiscal deficits are being financed by central banks’ purchases of government securities, which MMTers also support.
In Kelton’s dreamland, that’s a perfect outcome, because she and her merry band of arm-linked MMTers believe that the only limit on deficit-financed government spending is price inflation. Sure enough, the US government has responded precisely as she advocates, producing one stimulus program after another. Another one is imminent, sized to the tune of $1.0 trillion, which will most likely cause the Congressional Budget Office to raise its current fiscal 2020 budget deficit estimate from $3.7 trillion to $4.7 trillion…click, click, click (Fig. 1 and Fig. 2). No problem: The Fed will continue to buy more Treasuries…click, click, click (Fig. 3 and Fig. 4).
Melissa and I have written previously about MMT. Our latest analysis, titled “Modern Monetary Theory: In Theory & In Practice,” was in our July 8 Morning Briefing. We wrote:
“Kelton argues that the federal government can and should run large budget deficits as long as inflation remains subdued. MMT opponents’ main objection is that the theory provides a blank check for the government to get much bigger. It provides the government with too much power to allocate resources. Free-market capitalists believe that markets do a much better job of doing so than politicians and bureaucrats. Kelton clearly disagrees. … But whether one is for MMT or against it, Kelton’s book leaves no doubt about what MMT is all about: It’s an agenda for more big government and higher taxes.”
In brief, it legitimizes a massive power grab by the government for our own good.
We concluded our analysis: “But remember, the story was all a bad dream Dorothy had after getting hit on the head. Free market capitalists might exclaim: ‘Pay no attention to the professor behind the curtain!’” We like to think of “The Wizard of Oz” as a long episode of The Twilight Zone.