Modern monetary theory
Modern monetary theory or modern money theory (MMT) is a heterodox[1] macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.[2][3] According to MMT, governments do not need to worry about accumulating debt since they can create new money by using fiscal policy in order to pay interest. MMT argues that the primary risk once the economy reaches full employment is inflation, which acts as the only constraint on spending. MMT also argues that inflation can be addressed by increasing taxes on everyone to reduce the spending capacity of the private sector.[4][5]
Not to be confused with Modern portfolio theory.MMT is controversial, and is actively debated with dialogues about its theoretical integrity,[5] the implications of the policy recommendations of its proponents, and the extent to which it is actually divergent from orthodox macroeconomics.[6] MMT is opposed to the mainstream understanding of macroeconomic theory and has been criticized heavily by many mainstream economists.[7][8][9][10] MMT is also strongly opposed by members of the Austrian school of Economics, with Murray Rothbard stating that MMT practices are equivalent to "counterfeiting" and that government control of the money supply will inevitably lead to "runaway inflation."[11]
Foreign sector[edit]
Imports and exports[edit]
MMT proponents such as Warren Mosler say that trade deficits are sustainable and beneficial to the standard of living in the short term.[57] Imports are an economic benefit to the importing nation because they provide the nation with real goods. Exports, however, are an economic cost to the exporting nation because it is losing real goods that it could have consumed.[58] Currency transferred to foreign ownership, however, represents a future claim over goods of that nation.
Cheap imports may also cause the failure of local firms providing similar goods at higher prices, and hence unemployment, but MMT proponents label that consideration as a subjective value-based one, rather than an economic-based one: It is up to a nation to decide whether it values the benefit of cheaper imports more than it values employment in a particular industry.[58] Similarly a nation overly dependent on imports may face a supply shock if the exchange rate drops significantly, though central banks can and do trade on foreign exchange markets to avoid shocks to the exchange rate.[59]
Foreign sector and government[edit]
MMT says that as long as demand exists for the issuer's currency, whether the bond holder is foreign or not, governments can never be insolvent when the debt obligations are in their own currency; this is because the government is not constrained in creating its own fiat currency (although the bond holder may affect the exchange rate by converting to local currency).[60]
MMT does agree with mainstream economics that debt in a foreign currency is a fiscal risk to governments, because the indebted government cannot create foreign currency. In this case, the only way the government can repay its foreign debt is to ensure that its currency is continually in high demand by foreigners over the period that it wishes to repay its debt; an exchange rate collapse would potentially multiply the debt many times over asymptotically, making it impossible to repay. In that case, the government can default, or attempt to shift to an export-led strategy or raise interest rates to attract foreign investment in the currency. Either one negatively affects the economy.[61]
Economist Stephanie Kelton explained several points made by MMT in March, 2019:[62][63]
Economist John T. Harvey explained several of the premises of MMT and their policy implications in March 2019:[64]
MMT says that "borrowing" is a misnomer when applied to a sovereign government's fiscal operations, because the government is merely accepting its own IOUs, and nobody can borrow back their own debt instruments.[65] Sovereign government goes into debt by issuing its own liabilities that are financial wealth to the private sector. "Private debt is debt, but government debt is financial wealth to the private sector."[66]
In this theory, sovereign government is not financially constrained in its ability to spend; the government can afford to buy anything that is for sale in currency that it issues; there may, however, be political constraints, like a debt ceiling law. The only constraint is that excessive spending by any sector of the economy, whether households, firms, or public, could cause inflationary pressures.
MMT economists advocate a government-funded job guarantee scheme to eliminate involuntary unemployment. Proponents say that this activity can be consistent with price stability because it targets unemployment directly rather than attempting to increase private sector job creation indirectly through a much larger economic stimulus, and maintains a "buffer stock" of labor that can readily switch to the private sector when jobs become available. A job guarantee program could also be considered an automatic stabilizer to the economy, expanding when private sector activity cools down and shrinking in size when private sector activity heats up.[67]
MMT economists also say quantitative easing is unlikely to have the effects that its advocates hope for.[68] Under MMT, QE – the purchasing of government debt by central banks – is simply an asset swap, exchanging interest-bearing dollars for non-interest-bearing dollars. The net result of this procedure is not to inject new investment into the real economy, but instead to drive up asset prices, shifting money from government bonds into other assets such as equities, which enhances economic inequality. The Bank of England's analysis of QE confirms that it has disproportionately benefited the wealthiest.[69]
MMT economists say that inflation can be better controlled (than by setting interest rates) with new or increased taxes to remove extra money from the economy.[70] These tax increases would be on everyone, not just billionaires, since the majority of spending is by average Americans.[70]
Reaction and commentary[edit]
A 2019 survey of leading economists by the University of Chicago Booth's Initiative on Global Markets showed a unanimous rejection of assertions attributed by the survey to MMT: "Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt" and "Countries that borrow in their own currency can finance as much real government spending as they want by creating money".[75][76] Directly responding to the survey, MMT economist William K. Black said "MMT scholars do not make or support either claim."[77] Multiple MMT academics regard the attribution of these claims as a smear.[78]
The post-Keynesian economist Thomas Palley has stated that MMT is largely a restatement of elementary Keynesian economics, but prone to "over-simplistic analysis" and understating the risks of its policy implications.[79] Palley has disagreed with proponents of MMT who have asserted that standard Keynesian analysis does not fully capture the accounting identities and financial restraints on a government that can issue its own money. He said that these insights are well captured by standard Keynesian stock-flow consistent IS-LM models, and have been well understood by Keynesian economists for decades. He claimed MMT "assumes away the problem of fiscal–monetary conflict" – that is, that the governmental body that creates the spending budget (e.g. the legislature) may refuse to cooperate with the governmental body that controls the money supply (e.g., the central bank).[80] He stated the policies proposed by MMT proponents would cause serious financial instability in an open economy with flexible exchange rates, while using fixed exchange rates would restore hard financial constraints on the government and "undermines MMT's main claim about sovereign money freeing governments from standard market disciplines and financial constraints". Furthermore, Palley has asserted that MMT lacks a plausible theory of inflation, particularly in the context of full employment in the employer of last resort policy first proposed by Hyman Minsky and advocated by Bill Mitchell and other MMT theorists; of a lack of appreciation of the financial instability that could be caused by permanently zero interest rates; and of overstating the importance of government-created money. Palley concludes that MMT provides no new insights about monetary theory, while making unsubstantiated claims about macroeconomic policy, and that MMT has only received attention recently due to it being a "policy polemic for depressed times".[80]
Marc Lavoie has said that whilst the neochartalist argument is "essentially correct", many of its counter-intuitive claims depend on a "confusing" and "fictitious" consolidation of government and central banking operations,[17] which is what Palley calls "the problem of fiscal–monetary conflict".[80]
James K. Galbraith, a son of John Kenneth Galbraith and proponent of MMT, wrote the foreword for Mosler's book Seven Deadly Innocent Frauds of Economic Policy in 2010.[81]
New Keynesian economist and recipient of the Nobel Prize in Economics, Paul Krugman, asserted MMT goes too far in its support for government budget deficits, and ignores the inflationary implications of maintaining budget deficits when the economy is growing.[82] Krugman accused MMT devotees as engaging in "calvinball" – a game from the comic strip Calvin and Hobbes in which the players change the rules at whim.[27] Austrian School economist Robert P. Murphy stated that MMT is "dead wrong" and that "the MMT worldview doesn't live up to its promises".[83] He said that MMT saying cutting government deficits erodes private saving is true "only for the portion of private saving that is not invested" and says that the national accounting identities used to explain this aspect of MMT could equally be used to support arguments that government deficits "crowd out" private sector investment.[83]
The chartalist view of money itself, and the MMT emphasis on the importance of taxes in driving money, is also a source of criticism.[17] In 2015, three MMT economists, Scott Fullwiler, Stephanie Kelton, and L. Randall Wray, addressed what they saw as the main criticisms being made.[15]