Did modern monetary theory elect Donald Trump?
Good ideas don't always outcompete bad ones. But willful foolishness usually has a cost.
So it is with modern monetary theory. Ironically, this basket of economic fallacies, embraced by policymakers during the Biden-Harris administration, may have returned Donald Trump to the White House.
Exit polls conclusively demonstrated voters are fed up with the high cost of living. The economy topped their list of concerns; three-quarters of the electorate attributed some degree of hardship to inflation. The de facto embrace of modern monetary theory-style fiscal and monetary extravagance over the past four years explains how we got here.
For the unfamiliar, modern monetary theory is a fringe school of economic thought arguing that the federal government, as the sole issuer of legal tender, can issue virtually limitless amounts of new money to fund itself. Bucking thousands of years of evidence that such reckless policies lead to currency devaluation, advocates shirk all blame when inflation occurs, insisting instead that prices increased due to "corporate greed" and "price gouging."
Perhaps some of that sounds familiar.
Over the last four years, the federal government essentially stumbled into a modern monetary theory-style monetary crisis. The Biden-Harris administration began its term assuming it could "run the economy hot" while also avoiding inflation. They added another multi-trillion-dollar stimulus to Trump-era COVID relief spending, believing they could escape the repercussions of its price tag. Then inflation spiraled out of control.
On the fiscal side, extravagant spending greatly increased government indebtedness. On the monetary side, running the printing press to keep interest rates low flooded financial markets with liquidity. The predictable result was too much money chasing too few goods — the classic recipe for dollar depreciation, better known as inflation.
When the first signs of an inflationary spiral appeared in summer 2021, the White House responded with an official stance of denialism. Price level increases were only "transitory," they assured us, adopting a talking point from modern monetary theory theorist Stephanie Kelton .
As the problem lingered beyond Kelton's predictions, the White House doubled down on fringe theories, such as blaming "corporate greed" instead of its own spending habits. As recently as July 2024, Council of Economic Advisors chair Jared Bernstein adopted the modern monetary theory-aligned inflation narrative of economist Isabella Weber, who contends that producers made an "implicit agreement" to exploit a price shock during the pandemic and extract profits from the public.
Vice President Kamala Harris attempted to turn this conspiratorial reasoning into policy by proposing price controls at the grocery store — a scheme rejected by most economists , but championed by Weber , Kelton and other modern monetary theory advocates on the heterodox periphery of the profession.
Modern monetary theory fooled Washington's elite because its message was seductive: If there's any slack in the economy and the government prints and spends in its own currency, policymakers don't need to worry about price hikes.
The years 2020-2024 provided an unambiguous test of this theory. The answer: It's bunk. Consumer price inflation peaked at 9 percent during the summer of 2022. Central bankers were late to the game to tighten, even adopting the modern monetary theory talking point about "transitory" inflation for a brief but critical moment in early 2021. Elected Democrats scrambled to minimize the role their profligacy had played in forcibly raising the cost of living, culminating in Harris's grocery store price control proposal as the centerpiece of her economic platform.
The flawed narratives of "transitory" inflation and "greedflation" can be viewed as desperate spin attempts in the face of obvious economic reality. Fed officials should have predicted the consequences of keeping money growth above economic growth for so long.
President Biden and Vice President Kamala Harris should have recognized that continued fiscal follies would pressure the Fed to embrace money mischief, and that price controls simply made the administration look economically illiterate and out of touch. This rhetoric began as a convenient political argument for stimulus spending, then morphed into an act of self-deception on the part of the Harris campaign.
As election day exit polling revealed, the electorate repudiated the modern monetary theory narrative. Americans are fed up with over-credentialed experts inventing new reasons to ignore basic economics. The laptop class has only itself to blame for elevating these fringe theories, thereby facilitating Trump's electoral comeback.
Phillip W. Magness is the David J. Theroux Chair in Political Economy at the Independent Institute, Oakland, Calif. Alexander William Salter, an Independent Institute research fellow, is the Georgie G. Snyder Associate Professor of Economics in the Rawls College of Business at Texas Tech University and a researcher with TTU's Free Market Institute.
