Modern Monetary Theory (MMT) proposes that government spending and deficits do not matter because the government can always print more money.
Anyone who has studied or lived through hyperinflation knows the theory is ridiculous at best, yet it prevails. Venezuela is in hyperinflation right now, but the MMTers reject that as corruption.
Japan remains mired in slow growth after wasting trillions of dollars, but at least Japan has not wrecked its currency, yet.
Brazil may be a better test case, because its government has done just what many of the MMTers want, pass out free money with no tax revenues to pay for it.
Pensions take 43% of Brazilian government revenues and MMTers tend to believe in absurd constructs like living wages.
Mariuza da Conceição Aparecida taught math and science at public schools for 27 years, enough to retire on a full pension in her late 50s.
Last year, more than two decades later, the 80-year-old was forced to wait in line at food banks. Swelling retirement obligations have nearly bankrupted the Rio de Janeiro state government, leaving Ms. Aparecida without her pension checks for as long as four months at a time.
Nationally, more than half of sewage goes untreated. The average adult has just eight years of formal schooling. Retirement outlays already eat up 43% of Brazil’s national budget, and health care about 7%, while two expenditures that are critical to economic development—education and infrastructure—claim only about 3% each.
The social security system’s revenue shortfall widens each year as the worker-to-pensioner ratio shrinks. The United Nations projects that by 2050, the number of potential workers per retiree in upper-middle-income developing countries such as Brazil will tumble from the 2015 figure of seven to just 2.5.
Only Japan has ever faced a shift of this scale in a similarly short period, and it now has one of the world’s most indebted governments.
Credit-rating firms are getting anxious. Standard & Poors estimates that unless there are major changes to publicly funded pension and health-care systems, population aging will help drive net government debt in the biggest emerging economies to extraordinary levels—307% of gross domestic product in Brazil, 274% in China, 262% in Russia and 341% in Saudi Arabia by 2050.
Their sovereign bonds would be rated junk in that scenario, said an S&P analyst, Marko Mrsnik.
Authorities wrestle with a gut-wrenching decision: whether or not to cover aging citizens who didn’t contribute enough to social security.
Such benefits were financially fanciful in that era of raging inflation, but they were increasingly granted under the leftist Workers’ Party government that took over in 2003. Fueled by a commodity boom, it granted pensions to millions of peasants and informal workers who hadn’t paid in. It also nearly doubled the minimum monthly wage, which the constitution set as the floor for retirement checks.
The upshot: Rural workers paid about $3 billion in social-security taxes for the 12 months through September 2017, while rural retirees drew about $36 billion in benefits.
Schools and universities periodically close. Public hospitals are perpetually short on supplies. At one point late last year, scarce funds to maintain police patrol cars kept half of them off the streets.
Investment spending by the state government has ground to a halt. That has left dozens of public works incomplete and decaying in the tropical climate, including sewage-treatment plants, roads and a cleanup of foul-smelling lagoons around Olympic facilities. An unfinished maternity hospital in the poor suburb of São Gonçalo is occupied by squatters.
In the MMT world, government deficits and free money do not matter.
And with all those people struggling in Brazil, MMT theory suggests that government should give away more money.
MMT is absurd.
Mike "Mish" Shedlock