LTC Bullet: Modern Monetary Theory and Long-Term Care

Friday, October 23, 2020


LTC Comment: Finally, a solution for the long-term care financing crisis. Or not? Explanation after the ***news.***

*** TODAY'S LTC BULLET is sponsored by Claude Thau, who provides many unique services to advisors as National Brokerage Director for USA-BGA and to other entities as a consultant, in the individual, worksite and affinity group markets.  For example, his revolutionary “Range of Exposure” tool projects clients’ likelihood (joint for a couple) of spending $100,000; $250K; $500K or over $1,000,000 on long-term care, based on their personal characteristics and estimates how much of their cost in each range would be covered by various traditional or linked insurance designs.  Claude is the lead author of Milliman’s annual Broker World LTCi Survey & a past Chair of the Center for Long-Term Care Financing. You can reach him at 913-707-8863 or ***


LTC Comment: Policy wonks have anguished over how to finance long-term care for decades. Most have concluded (wrongly I think, see Medicaid and Long-Term Care) that the only answer is some form of compulsory, government-imposed LTC social insurance program. But, given the insolvency of all existing social insurance programs (Social Security, Medicare, Medicaid, etc.), voters have not been willing to approve even more of these unfundable liabilities. Result: stalemate, frustration, anger, despair, and, finally, hanging their meager hopes on another hapless experiment in government-designed and –imposed LTC insurance that is already foundering in Washington State. (See “LTC Bullet: The Keystone Kops of LTC Insurance.”)

What’s needed to save the policy pundits’ preferred social insurance model is an economic miracle. What if it were possible to find the unlimited government financing that social insurance would need to survive indefinitely? That’s what “Modern Monetary Theory” (MMT) promises to deliver.

For easy, entertaining access to the principles and arguments behind MMT read Stephanie Kelton’s best-selling book The Deficit Myth. Better yet, don’t invest so much of your precious professional time on that source. You can get more than enough to understand Modern Monetary Theory from a summary of the book here.

But let’s cut right to the chase today. Here’s the essence of MMT and the bottom line on what it means. (If what follows seems too bizarre to be credible, refer to the book summary just referenced. You’ll see I’ve neither mis-stated nor exaggerated MMT’s ideas and claims.)

According to MMT, currency issuers like the USA, can print as much money as they want. They do not have to work within conventional financial limits, with revenue matching outlays over time, as mere currency users, such as families, businesses, or countries borrowing in a currency not their own, must.

The power to spend with no set limits is especially true for the U.S. because the dollar is the world’s reserve currency.

TABS or STAB: Conventional economic theory assumes governments must Tax and Borrow to be able to Spend (TABS), but MMT says what really happens is that governments create money by Spending and then they Tax and Borrow (STAB) to control any resulting excessive inflation.   

Currency issuers, according to MMT, don’t need to collect taxes, in order to be able to spend. Taxes are necessary but not to generate revenue. Rather the purpose of taxes is to compel citizens to work and provide goods and services the economy needs in order to earn the money to be able to pay the required taxes.

Deficits don’t matter per se. The Federal Reserve could print enough money to pay off the national debt and eliminate the interest cost of servicing the debt. No kidding. MMT actually claims this.

Therefore, to achieve any and all social goals, such as controlling climate change, free college, universal health care, or generous long-term care financing, etc., all it takes is for a currency issuer’s government to have the will to spend/create enough money.

The only limit on printing and spending money in one’s own currency is inflation. When too many dollars chase too few goods, prices increase, thus devaluing the currency and leaving people unable to afford goods and services they need.

So, if inflation starts to become a problem, MMT says the government should raise taxes to reduce the amount of money in circulation and thus stanch inflation before it gets out of control.

Crazy? Of course. But seductive? Very. If you trust government to solve problems, Modern Monetary Theory is your key to unlock not just the Treasury, but the entire productive capacity of the national economy.

But here’s the rub. The net effect of Modern Monetary Theory is redistribution by the Marxist principle “from each according to his ability to each according to his need.”

Government spending (money creation) pursues “progressive” goals, i.e. Need, such as financing free health care, free college, the Green New Deal, free LTC, etc. But when all that extra money printing/spending spikes inflation, who gets taxed to tamp it down? People with the money, i.e. Ability, are the only ones who can be taxed.

MMT is “Miracle Gro” for the idea that taxing productive people is the best way to provide for the needs of unproductive people. Unfortunately, this tried and true principle always applies: you get less of what you tax (ability) and more of what you subsidize (need).

In other words, need is unlimited. It always grows to consume whatever ability, always scarce, is able to produce. Subsidize the former by taxing the latter for 85 years and what you get is … 

The whole mess we’re in today including the long-term care financing crisis.