Proponents of modern monetary theory (MMT) are back in action after a quiet spell during the embarrassing (for them) record price inflation of 2021–23. They are here to tell us that the mountain of government spending and debt is nothing to worry about; the government’s red ink is the private sector’s black ink, they say. Private sector growth emanates from public sector deficits, and since the US government has a gigantic money printer, there’s no reason to ever fear a default or debt crisis.

Frédéric Bastiat, the great proto-Austrian French economist, provided an excellent framework for us to evaluate this claim about the consequences of government spending.

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.

MMT proponents are the ultimate “bad economists” according to Bastiat. They boil everything down to what is merely visible from an accounting perspective. Consider Stephanie Kelton’s analysis of government deficits:

Gov spends $100 (G)

Non-gov sector now has $100

Gov taxes $90 (T) (G-T) = gov deficit = $10

Deficit has added $10 to non-gov

Treasury sells $10 gov bonds

Non-gov swaps $10 for $10 bonds

NET RESULT: $10 increase in net financial assets to the non-gov sector (w/ or w/o bonds)

She concludes that modern economic and political discourse has a major “linguistic problem” because many refer to interest payments by the Treasury as a “burden,” yet do not apply the same terminology to reserves parked at the Federal Reserve (which pays interest on those reserves), even though both are economically equivalent consequences of government deficit spending. The only difference is whether the Treasury sells bonds to cover the difference in spending and taxation. Kelton says, “Without the bond sale, the $10 would stay in bank reserve accounts at the Fed, where it would earn whatever the Fed chooses to pay on overnight reserve balances.”

Of course, one immediate response is that there are many economists, especially the Austrians, who do view the Fed’s actions as burdensome. There is no “linguistic problem” for those who follow Bastiat’s advice and trace the government’s actions (including the Fed’s) to their ultimate consequences.

Astute readers will also notice that MMT proponents reverse the order of taxing and spending. In Kelton’s example, the first event is that the government spends $100. What follows are independent choices by the government to either collect some of those spent dollars in taxes, convert them into government bonds, or leave them in the economy untaxed and unconverted, sitting on the liability side of the Fed’s balance sheet.

MMT holds that these subsequent decisions should be guided by policy goals like full employment and an “optimum” rate of price inflation. The idea is that the government may spend as much as it likes and then put a tamp on any emergent price inflation by neutralizing demand through taxes or by manipulating interest rates.

Let us grant, for the sake of argument, the MMT order of spending first and asking questions later. Does it negate Bastiat’s analysis? What would Bastiat say if he could respond to each step of Kelton’s example?

“Gov spends $100”

Let’s steel man the MMT “logic” by supposing that the $100 is spent efficiently (please hold your laughter) on an important public works project (I said no laughing!). What would Bastiat say?

Bastiat would simply highlight the fact that the labor and resources used in the government project could have and would have been used for profitable and productive employment in the private economy. Viewing the government project as economically stimulating “is nothing else than a ruinous mystification, an impossibility, which shows a little excited labor which is seen, and hides a great deal of prevented labor which is not seen.”

“Gov taxes $90”

Bastiat correctly saw no economic difference between taxes and theft. For him, the alleged benefit of whatever tax revenues are spent on is a separate issue. In this way, his analysis of taxation is quite devastating for MMT, which is somewhat ambivalent about what the government spends money on. MMT is like crude Keynesianism in that what really matters is that the government spends.

Bastiat smashes the view that the government can stimulate employment via taxing and spending.

It is nonsense to say that the Government officer will spend these hundred sons to the great profit of national labor; the thief would do the same; and so would James B., if he had not been stopped on the road by the extra-legal parasite, nor by the lawful sponger.

Said another way, if the government’s spending of taxes provides employment, then a plain thief’s use of stolen cash can be said to do the same.

MMT proponents may respond that Bastiat conflated the spending and taxing actions. It is true that Bastiat wrote under the assumption that the purpose of taxation is to fund government spending, not to mop up an inflation mess as MMT prescribes. Bastiat’s views on inflation will come later, but there is no doubt about his views on taxes, even abstracting from his view that they finance government spending:

Look at the thing as you will; but if you are impartial, you will see that no good can come of legal or illegal plunder. . . .  Here is the moral: To take by violence is not to produce, but to destroy. Truly, if taking by violence was producing, this country of ours would be a little richer than she is.

Since we have granted the MMT spending-first heuristic, it is enlightening to do a similar kind of “government as thief” comparison by considering the government as a run-of-the-mill counterfeiter. I’ll leave this thought experiment to the reader: Does Kelton’s example work the same way if “Gov” is replaced with a criminal who spends counterfeit dollars into the economy and steals money from people as well? Does it matter if the printing happens before or after the theft? If the counterfeiter-thief obtains a loan, does it alter the analysis? Is the economy better or worse off because of the crimes?

“Treasury sells $10 gov bonds”

Bastiat does not have a clear statement on public debt in “That Which Is Seen and That Which Is Not Seen,” but he did cover the topic of government-backed credit with the example of a farmer who receives a loan that would have gone to another borrower.

It is true, I have reduced the operation to the most simple expression of it, but if you submit the most complicated Government institutions of credit to the same test, you will be convinced that they can have but one result; viz., to displace credit, not to augment it.

The same insight can be applied to government bonds. When the government sells a bond, it does not magically increase the amount of savings in the economy. Savings must be diverted from other uses. MMT flatly rejects this incontrovertible notion from Econ 101. According to Kelton, government does magically increase the amount of savings in the economy. Bob Murphy has dealt with this magical thinking here. Regarding the definition of private savings, it is MMT proponents who have a linguistic problem, not their critics.

“Without the bond sale, the $10 would stay in bank reserve accounts at the Fed”

What if the government spends new money into the economy but doesn’t tax it back into their coffers or exchange it for a bond? This scenario is Ludwig von Mises and Murray N. Rothbard’s definition of a “simple inflation.” In a simple inflation, money enters the economy via direct spending and not via credit expansion. Thus, Austrian economists (and proto-Austrians like Bastiat) are immune to Kelton’s accusation that government deficits are only viewed as a bad thing once the Treasury sells debt to the public. Good economists, according to Bastiat, can foresee the unseen consequences no matter what kind of disguises or shell games are employed by the government or MMT proponents.

One of Bastiat’s lesser-known essays, “Maudit Argent,” explodes the view that monetary inflation enriches the economy (an English translation, “What is Money?,” is available here).

Bastiat analyzes the nature of money and inflation through a fictional dialogue between a citizen and an economist. The citizen suggests that more money means that more services may be provided. The economist responds:

Whoever speaks of a service, speaks, at the same time of a service received and returned, for these two terms imply each other, so that the one must always be balanced by the other. It is impossible for society to render more services than it receives, and yet a belief to the contrary is the chimera which is being pursued by means of the multiplication of coins, of paper money, etc.

The economist in Bastiat’s dialogue then equates government money printing with illegal counterfeit, the same exercise that we suggested above:

Why, to force people to take in payment scraps of paper which have been officially baptized dollars, or to force them to receive, as weighing an ounce, a piece of silver which weighs only half an ounce, but which has been officially named a dollar, is the same thing, if not worse; and all the reasoning which can be made in favor of paper money has been made in favor of legal false-coined money. . . .

. . . if it is believed that to multiply the instruments of exchange is to multiply the exchanges themselves as well as the things exchanged, it might very reasonably be thought that the most simple means was to mechanically divide the coined dollar, and to cause the law to give to the half the name and value of the whole. Well, in both cases, depreciation is inevitable. . . .  this depreciation, which, with paper, might go on till it came to nothing, is effected by continually making dupes; and of these, poor people, simple persons, workmen and countrymen are the chief.

Conclusion

MMT argues that government spending, taxation, deficits, and debts can be managed by experts to achieve full employment and sustainable economic growth without nasty side effects. The great insights of Frédéric Bastiat show this to be magical thinking full of errors.

MMT proponents’ use of accounting tautologies is the pinnacle of bad economics. The equations hide the unseen consequences of giving the government control over our scarce resources. No amount of MMT gimmickry can negate the fact that everything comes at a cost. Government spending and taxation divert real resources away from productive uses in the private economy. Likewise, government debt diverts savings away from productive uses. And when the government prints money, it does not add to society’s real wealth.

Reordering the sequence of taxing, borrowing, printing, and spending does nothing to alter the fundamental nature of these government actions. It’s an MMT shell game that deceives rather than enlightens.

If Bastiat were alive today, he would certainly say to MMT proponents: “Your arguments are fashionable enough, but they are too absurd to be justified by anything like reason.”