Modern Monetary Theory: Diving into the Discussion

Mar 18, 2019

Modern Monetary Theory, or MMT, has crept into the nation’s political and economic discourse. It’s tailor-made for this era of hot takes and social media. At once, the theory challenges convention and highlights fundamental political divides.

MMT goes something like this: running large deficits shouldn’t concern monetarily sovereign economies like the U.S. because, quite simply, they can just print more money.

That sounds pretty great. But Wall Street teaches you that past is typically prologue. And history says that economies will pay for deficits at some point, in one form or another. That is not to say that progressive economic tactics should be dismissed outright. They can still offer insight and inform better policy.

What MMT supporters say

The onus should be on Congress to steer the economy, not the banking system. MMT would free lawmakers to do more to ensure that economic production is high, unemployment is low and inflation remains in check. It essentially wants to use free public spending to remove uncertainties inherent to market economies.

Deficits can be thought of as healthy, so long as the spending benefits the economy and the common good. For example, the Green New Deal’s1  reportedly high price tag really isn’t that big of a deal in MMT because it’s likely a worthy long-term investment.

MMT backers acknowledge a significant risk of runaway spending is inflation. However, they argue that this risk can be managed through policy, including tax policy. MMT views taxes as a vehicle that creates ongoing demand for the currency and a way to prevent the economy from overheating. Taxes are not a revenue source in MMT; they’re a control.

The availability of real resources like workers and materials should be the only true limits on how the government spends, according to MMT.

What MMT’s critics say

Nothing is free. The idea that deficits can be overlooked is a non-starter for the mainstream economic set. To say otherwise would be naïve. In Fed Chair Jerome Powell’s view, “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.”2

Powell also said that “U.S. debt is fairly high to the level of GDP—and much more importantly—it’s growing faster than GDP, really significantly faster.”2 That implies one of two things, according to Powell: the government either has to spend less or it has to create more revenue.

BlackRock Chief Executive Officer Larry Fink was more colorful in his assessment, calling MMT “garbage.”3 He added that he expected deficits to drive interest rates significantly higher, possibly to an unsustainable level. Former U.S. Treasury Secretary Larry Summers sees MMT as “fallacious at multiple levels.”4

One of those levels is that MMT assumes that the government is actually capable of spending wisely, which is a significant leap of faith. Fiscal responsibility can mean different things, but Nobel Prize-winning economist Paul Krugman highlights the flawed view that the 2018 tax cut would lead to an investment boom. “The moment they had a chance, the very politicians who grandstanded about the need for fiscal responsibility rammed through a huge tax cut for corporations and the wealthy.”5

The tax cut didn’t lead to economic innovation. It led to share buybacks.

The financial crisis as a test case for MMT

The financial crisis could be seen as an interesting wrinkle to MMT’s viability. The story goes that printing money at will would cause runaway inflation. Interestingly enough, the U.S. has printed quite a bit of free money over the last decade to dig the economy out from the financial crisis, yet inflation continues to surprise to the downside.

Former Pimco economist Paul McCulley notes that “the U.S. has missed its inflation target for 10 years running, of which seven or eight were at zero interest rates.”3

In some ways, it could be said that we’ve been living with a type of MMT due to the extraordinary nature of the financial crisis and the coordinated intervention that it required. At this point, it seems markets shrug at such stimulus. Still, the long-term ramifications remain to be seen.

The final word: Shaky logic, but intriguing

Governments should be capable of doing more to help people. But widespread federal spending without regard for deficits rails against common sense. That could make MMT more like economic TNT. Perhaps the best we can hope for is a diligent approach to policies that challenge traditional economic thought, but fully vet the execution which includes a keen understanding of the potential repercussions.

Category: Commentary

Topics: Macroeconomic

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