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April 2019
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President's Corner
Money
As baseball season gets started, there is a renewal of the new advanced statistics that many believe will improve the quality of the game. OPS (On-Base Percentage plus Slugging Percentage) and Strikeout to Walk ratio have been around for several years, but new metrics are popping up almost daily. On defense, there are DER (Defensive Run Efficiency), RF (Range Factor), and UZR (Ultimate Zone Rating). Offensive stats include LIPS (Late Inning Pressure Situation), ISO (Isolated Power), and the one I have yet to figure out, WAR (Wins Above Replacement). There are more pitching metrics than Baskin-Robbins has flavors of ice cream and thus are too many to list here.

Not to be outdone, the world of economics has developed a new controversial theory to justify the large amount of long-term government debt. Wikipedia defines Modern Monetary Theory (MMT) as “a heterodox macroeconomic theory that describes currency as a public monopoly for a government and unemployment as the evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.”

That is what my mother would describe as a mouthful. Simply put, unlike a household, the federal government can never run out of money. The debt is a balancing figure of the difference between income tax receipts and spending (we in the CPA world are a little more cynical, referring to the “balancing figure” as a “plug” number.) Government deficits become an asset for the citizens because more money circulating makes the U.S. economy healthier.

MMT proponents claim that public policy can be expanded by more deficits as long as inflation is properly regulated. In other words, free college education, healthcare for all, and the so-called “Green New Deal” are affordable because all the federal government has to do is print more money. These are being sold as investments in the future and therefore potentially good for all of us. Additionally, congressional bills should be scored by the Congressional Budget Office based on inflation rather than the current level of taxes received.

What MMTers don’t do is define how much debt or inflation are considered too much.  Similar to U.S. Supreme Court Justice Potter Stewart who famously said in a 1964 decision that he could not define obscenity but, “I know it when I see it,” the level of excessive debt or inflation will be determined by experts in Washington D.C.

Those espousing MMT say that Japan, which has a debt to Gross Domestic Product ratio twice as large as the U.S., is doing just fine. Japan’s situation is very different, however. They face a serious demographics issue as the population ages, and fertility rates are below the minimum replacement threshold. Their population is projected to fall 30% in the next 40 years, which means taxes used to provide basic services will drop as well. Their debt maintains the standard of living more than investing in the future.

Also, states cannot handle large amounts of debt because they are unable to print money. This situation can weaken the states’ abilities to make independent financial decisions by making them more dependent on federal funds.

Not unlike baseball, economics is a very simple science. Certain assumptions have worked forever; for instance, high demand and low supply increase market prices, and inflation lowers the value of the dollar. But also just like baseball, new economic theories like MMT put the wrong focus which can result in bad decisions for our nation’s financial health.

David M. Green

President/CEO
dgreen@1stnorcalcu.org
(925) 335-3802
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