Could it be that Modern Monetary Theory promotes abundance over scarcity?
Everything you’ve been taught about economics is incorrect according to proponents of a new economic theory that may one day replace the current orthodoxy.
This new approach is known as Modern Monetary Theory (MMT), which is an unremarkable name for a set of ideas that seek to upend the way the US federal government thinks about money and manages the economy.
Our current economic model has led to extreme wealth inequality. Large sections of the population are without affordable health care and lack the opportunity for a decent education and a fulfilling life. A number of billionaires have spoken out recently in favor of making our system more equitable for ordinary Americans. I wrote about this here:
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The current orthodoxy is heavily influenced by neoliberalism, which replaced Keynesianism in the seventies. It’s a doctrine that puts free markets at the center of economic life and turns all interactions into market transactions. It promotes tax cuts, cuts to public spending and elevates the shareholder over everyone else. Anything that stands in the way of corporate profits is viewed as unacceptable. I recently wrote about it here:
MMT has risen in popularity among progressive politicians such as Alexandria Ocasio-Cortez and Bernie Sanders, who see it as a way to pay for new social programs such as the Green New Deal and universal health care. It has very different goals from neoliberal economics and has attracted a lot of criticism from defenders of the current orthodoxy.
To see what the fuss is about, I spent some time doing a deep dive into the subject. This article attempts to understand the core of MMT and considers its benefits and criticisms.
What are MMT’s core ideas?
To grasp MMT requires that you temporarily put aside all of your notions about how economics works and how the government participates in the economy. MMT turns conventional economic thinking on its head, which is probably why there is no middle ground with this theory, people either love it or hate it.
To get the ball rolling I’ve created a list of what I see as its core ideas. Before I go too far with this exercise I should note that I’m not an economist, just an interested layperson trying to get clear in my head what’s different about this new approach.
It is important to also recognize that MMT is an evolving set of ideas and proponents occasionally differ on details. I’ve tried to stick to the ideas I see most frequently in writings on this subject:
- A government with its own fiat currency cannot default — This is because a sovereign government can always create more money to pay interest on its debt. Fiat currency just means that it’s not backed by a commodity, such as gold or silver. The dollar is a fiat currency that was originally convertible into gold until President Nixon took it off the gold standard in 1971.
- The government can create new money at will to pay for anything it chooses — It’s not necessary for the government to cut spending, raise taxes or borrow to pay for goods and services. The government is not like a family and does not have to balance its books. In fact, it’s counter-productive to do so. Government debt means there is more money in the private economy.
- Inflation is the signal that the government needs to act — as full employment is reached, inflation picks up as employers have to compete for workers.
- Jobs can be guaranteed by the government employing people as needed — everyone should have a job, provided by the government as a public good. As the economy improves, people can transition from government jobs to the private sector.
- Inflation can be controlled by siphoning money from the economy by either raising taxes and/or selling treasury bonds.
- Fiat currency gets its value because the government accepts it as payment for taxes — of course, a dollar means a lot more to people in the private sector as we can buy cool stuff with it. But, as far as the government is concerned, it’s a way to settle tax obligations.
- The MMT model naturally promotes abundance — this contrasts with the sense of scarcity that neoliberalism fosters.
Where did MMT come from?
Many of the ideas that make up MMT are found in an earlier economic doctrine called Chartalism, developed in Germany in the early 20th century.
The prevailing view of money at that time was that it evolved from a system of barter into a medium of exchange. Chartalism, on the other hand, defined money as something that the government accepts as payment for taxes. In the view of Chartalists, money does not have an intrinsic value, only the value it acquires as a means to settle tax bills.
The driving force behind many recent developments in MMT is Warren Mosler, an economist, hedge fund manager, automotive engineer and politician. Several academic economists have furthered the development of MMT (MMTers), these are Bill Mitchell, Randal Wray, and Stephanie Kelton, an advisor to Bernie Sanders 2016 presidential campaign.
So what does all of this mean?
According to MMT, most people have been conditioned to think that the government should operate a balanced budget in a similar fashion to a family. MMTers believe this is absolutely wrong-headed. In their view, the majority of folk have an incorrect mental model of how the economy works.
The first diagram illustrates what MMT says is the incorrect view held by many in the public and Congress:
This diagram has two ‘pots’ of money, PS and FG. PS stands for the private sector, which contains all of the national economic activity (GDP) and FG is the federal government, which contains dollars for public spending, including entitlements, discretionary spending and servicing the debt.
The problem with this thinking is it implies that spending by the FG somehow has to come from the PS and that the FG gets this money through a combination of taxes and borrowing, represented by the flows into the FG. Once the FG has obtained the money, it can then spend it on servicing the debt (principal and interest), and paying for entitlements and discretionary spending.
This view of the interaction between the FG and the PS leads to a scarcity mindset that believes we’ve either got to tax or borrow money before the government can spend it.
Members of Congress reinforce this model as they are forever talking about new programs needing to be paid for, which in their minds means new taxes, or increasing government borrowing.
The diagram below shows my understanding of what MMT says actually occurs in the economy (based on my reading of J.D. Alt’s work referenced previously):
In this model, the positions of FG and PS are flipped. Also, the FG is not actually a ‘pot’ of money, it should instead be thought of as an electronic printing press that can create dollars as needed in the PS. (Note: FG in this model includes the Federal Reserve Bank. MMTers have a tendency to lump the FED and the rest of the government together when they talk about ‘government’, which causes confusion.)
MMT considers a dollar to be an I.O.U. that can be redeemed in payment of taxes, thus, the FG has no need to keep them. As a sovereign state that owns its own currency, it can create as many new dollars as it needs, when it needs them, removing the need to keep the ones paid in taxes.
Sovereign spending is everything the government spends money on in the PS, including Medicare, social security, wages for government employees, military equipment, NASA, weather forecasting, and a whole host of other things that keeps America running. This money is created by keystroke into accounts in the PS.
To the left of PS is a new component labeled TB. When people buy treasury bonds, they lock their money up for an agreed time. While the money is locked in the bond, it’s not available in the PS to be spent on goods and services, thus it can’t chase goods and services, which could lead to inflation.
TB is effectively the national debt as it is the accumulation of all government savings bonds. New money needs to periodically flow to the PS from the FG to pay the interest on this debt.
Another change is how taxes are treated. MMTers see the payment of taxes as simply draining dollars from the PS and destroying them. They are not recycled, just canceled. This follows from their belief that dollars are simply I.O.U.’s for tax purposes.
But won’t MMT lead to hyperinflation?
Creating money out of thin air is almost universally considered a bad thing to do by economists. This is drilled into them during their training, with warnings about the hyperinflation that occurred the Weimar Republic and Zimbabwe.
MMTers respond to this by pointing out that governments around the world are creating money out of thin air every day and it’s standard operating procedure. To claim otherwise is to misunderstand how money is created. Randall Wray, an MMT luminary, goes on to say that only countries
“…with fixed exchange rates or other promises to deliver foreign currency or gold (such as debts in foreign currencies) seem to have hyperinflations and currency crises.”
Besides, a prudent government can always use the mechanisms of taxes and treasury bonds to reduce the money in circulation to fend off inflation if needed.
MMT puts the government in center stage
MMT makes the government central to the economy rather than being a side player providing infrastructure and enforcing laws. This is antithetical to neoliberalism which positions the market as the center of the financial universe.
It also proposes an employment guarantee with the government creating jobs as necessary through public works initiatives. When the economy recovers, workers would migrate to the private sector. This idea is also anathema to neoliberalism, which sees the threat of unemployment as a way to keep wages low.
MMT believes that a high level of unemployment is unnecessary and is a political decision rather than an economic one.
Whether you like it or not, MMT does offer a coherent model of money creation and management. It’s an approach to managing the economy that sees money creation as an infinite resource that should be directed to the public good and not to the enrichment of a privileged few.
In light of this, I predict that it will become a central issue in the 2020 presidential campaign. MMT is an idea that is hard to argue against from the perspective of ordinary citizens as it’s based on the idea of abundance rather than scarcity.