Modern Monetary Theory (MMT) is a
heterodox macroeconomic theory that, for countries with complete control over
their own fiat currency, government spending cannot be thought of like a
household budget. Instead of thinking of taxes as income and government
spending as expenses, MMT proponents say that fiscal policy is merely a
representation of how much money the government is putting into the economy or
taking out.
This means that any government spending
can be paid for by the creation of money, with the purpose of taxes being to
limit inflation, by controlling the money supply. In other words, spending
shouldn't be determined by deficit levels but by whether spending is keeping
the economy at full employment and at a reasonable level of inflation.
The central idea of MMT is that
governments with a fiat currency system can and should print as much money as
they need to spend because they cannot go broke or be insolvent unless a
political decision to do so is taken.
Traditional thinking says such spending
would be fiscally irresponsible as the debt would balloon and inflation would
skyrocket.
But according to MMT, a large government
debt isn't the precursor to collapse but countries like the U.S. can sustain
much greater deficits without cause for concern. In fact, a small deficit or
surplus can be extremely harmful and cause a recession since deficit spending
is what builds people's savings.
According to MMT, the only limit the
government has when it comes to spending is the availability of real resources,
like workers, construction supplies and others. When government spending,
meaning the amount of money introduced into the economy, is too great with
respect to the resources available, that's when inflation can surge if decision
makers are not careful.
Taxes create an ongoing demand for
currency and are a tool to take money out of an economy that is getting
overheated, says MMT. This goes against the conventional idea that taxes are
primarily meant to provide the government with money to spend to build infrastructure,
fund social welfare programs and others.
Unemployment is the result of a
government spending too little while collecting taxes, according to MMT. It
says those looking for work and unable to find a job in the private sector
should be given minimum-wage, transition jobs funded by the government and
managed by the local community. This labour would act as a buffer stock in
order to help the government control inflation in the economy.
MMT was developed by American economist
Warren Mosler. Mosler, who has a B.A. in Economics from the University of
Connecticut, was largely ignored by the academic world when he tried to
communicate his theories. In 1993, he published a seminal essay called
"Soft Currency Economics" and shared it on a Post-Keynesian listserv,
which is where he found others, like Australian economist Bill Mitchell, who
agreed with him.
Support for MMT grew in large part
thanks to the internet, where economists explained the theory on popular
personal and group blogs, the idea of a trillion dollar coin was widely
discussed and supporters shared a clip of former Fed Chairman Alan Greenspan
saying pay-as-you-go benefits aren't insecure because "there’s nothing to
prevent the federal government from creating as much money as it wants and
paying it to somebody."
Political leaders like Alexandria Ocasio-Cortez and Bernie Sanders have espoused MMT, and economist Stephanie Kelton, who first came across Mosler's ideas on the listserv and is now arguably the face of the theory, served as chief economic adviser to Sanders during his 2016 presidential campaign.
MMT has been called naive and
irresponsible by critics. American economist Thomas Palley has said its appeal
lies in it being a "policy polemic for depressed times." He
has criticized various elements of the theory, like the suggestion that central
bank interest rates be maintained at zero, and said it provides no guidance to
countries like Mexico and Brazil and does not take into account political
complications arising from vested interests.
Nobel Prize-winning economist Paul
Krugman's views on U.S. debt are like many MMT theorists, but Krugman has strongly
opposed the theory. In a New York Times
op-ed in 2011, he warned the U.S. would see hyperinflation if it was put into
practice.
But hyperinflation is not just a
phenomenon of the distant past. In fact, instances of hyperinflation have
occurred over recent decades in countries like Brazil, Zimbabwe, and Venezuela.
The correlation between currency
printing and hyperinflation is undeniable, the causal relationship intuitive.
Yet MMT proponents continue to contest it. In their canonical MMT textbook
Macroeconomics, William Mitchell, L. Randall Wray, and Martin Watts state that
"[n]o simple proportionate relationship exists between rises in the money
supply and rises in the general price level." Wray, a Bard College
professor and one of MMT's key proponents in academia, has gone on to say,
"there is no empirical evidence to support the belief that raising
interest rates fights inflation." Stephanie Kelton, author of The Deficit
Myth and former advisor to Senator Bernie Sanders's presidential campaign,
argues that inflation is the result, not of monetary policy, but of
"overspending" — spending beyond what it takes for an economy to
reach "full employment" (which she defines not according to the
mainstream economic concept of "natural rate of unemployment," but as
the 0% unemployment rate that would occur under a government jobs guarantee).
Such claims fly in the face of both historical evidence and traditional
macroeconomic theory.
Michael R. Strain, resident scholar at
the American Enterprise Institute, has argued that MMT's proposal that taxes
can be used to reduce inflation is also flawed. "Raising taxes would only
make a downturn worse, increasing unemployment and further slowing the
economy," he said in a Bloomberg column.
The only possible acceptance of MMT is
for the U.S. economy, where timely data and the dollar being the world’s
reserve currency may override any inflationary tendencies. Otherwise, for
countries like Malaysia it is a recipe for disaster. And listening to some
so-called economists suggestion to print out of a recession borders on lunacy.
References:
1.
Deborah
D'souza, Modern Monetary Theory (MMT), https://www.investopedia.com/
2.
Jonathan
Hartley, The Weakness of Modern Monetary Theory https://www.nationalaffairs.com/
3.
Jim
Edwards and Theron Mohamed, Modern Monetary Theory – MMT: Here’s a
plain-English guide to what it is and why it’s interesting, Business Insider
