Modern Monetary Theory (MMT) Is a Reasonable Argument for a Terrible Idea
If we want to combat this pernicious idea, we need to separate the reasonable arguments from the utopian dreaming
When you speak to proponents of Modern Monetary Theory (MMT) they begin with the usual proselytizing. We need to unshackle governments and central banks from a century or more of archaic thinking. It’s time to bust up the lazy consensus of an academic elite. We need to be free to explore exciting new policy options we were previously told were too exorbitant or a risk to our sovereign rating.
Then the conversation turns to the more prosaic issues of inflation and deficits. Here the MMTer changes tack. MMT really centers on some cold hard facts about how the monetary system works in practice. Of course governments cannot simply spend as much as they want regardless of the economic environment: politicians are still subject to economic laws. We needn’t abandon all fiscal norms and political safeguards, simply make some common-sense changes that acknowledge the reality of the global fiat currency system.
The latter form of the argument, while certainly more reasonable, is not the one that excites a general audience. MMT has a large number of hangers-on, and these tend not to be pure economists but policy-pushers of some kind or other who might very well be sick of economists (or capital markets) pouring cold water on their ideas. The fact that MMT makes any idea fundable, if not entirely feasible, is a big step towards realizing their own policy nirvana. Previously, governments might have excused themselves for having to balance the books. Now, they’re being willfully ignorant if not outright vindictive.
What’s so great about classical economic theory?
Well, not a lot. Unfortunately, the public relations problem that conventional economists face is not that MMT is necessarily compelling — in fact, it seems almost to revel in its inconsistencies — but that classical economic theory is hardly bulletproof. After suffering through the GFC and the decade of meager growth that followed, only to be confronted with an entirely new economic crisis thanks to COVID-19, you would be forgiven for wondering what traditional theories — Keynesian, Friedmanite, or otherwise — have really delivered for us.
That MMT has been criticized, mocked or coolly dismissed by some big-name economists like Jerome Powell, Larry Summers, Kenneth Rogoff and Paul Krugman shouldn’t in itself tell us much about its validity. How much more economic pain are we prepared to endure before we start questioning whether the greatest economic minds have really got it right? The mashup of various theories and policies that have come to serve as the tools of economic management have not acquitted themselves so well that we should be preserving them no matter the cost. Meanwhile, extreme money printing has led many to ask why we don’t simply give up the entire charade and start financing our governments like we do when we’re at war.
The real problem, though, is that once the floodgates are open and MMT takes hold as a serious policy alternative, it will give license to every grand vision under the sun. These visions will compete not based on their relative cost and value to society, or their dynamic second order effects on behavior, but — depending on the demands of the macro economy — as equally necessary measures to ensure sufficient demand and liquidity.
A decade of crisis policy hasn’t helped, in fact it may have made things worse
We can likely all agree that, right now, inflation is the last thing keeping investors up at night. Despite what official figures tell us, would anyone be shocked if we discovered we were actually in a period of deflation even before the virus hit? In the current circumstances, MMT might appear to make sense to manage what appears to be purely a liquidity problem. This is indeed what central banks have been trying to address through unprecedented monetary easing. Yet after ten years of operating on crisis policy, a sustainable rate of inflation seems to slip ever further away.
If there are broader trends at play — technology changes, behavioral and cultural changes, or transformations in production — then these developments may need to play out over a longer period of time. Monetary easing can’t fix a broken business model, a lack of customers, or a solvency problem. Neither can MMT. It can, however, allow broken models to persist and necessary change and innovation to be forestalled.
Naturally, the ability to instantly fund any spending measure does not mean that government should spend with total abandon — MMTers are quite right about this. There are indeed natural speed limits — namely price inflation — that make it difficult to keep spending without inflicting real damage on living standards. But when governments take on new spending initiatives, what hope is there really that they’ll step back when required? Or that they won’t embark on programs that have very little to do with economic stability and a lot to do with economic control?
According to MMTers, this will be mitigated through greater unity between Treasuries and central banks, which means more accountability for politicians who control the budget. This is a really nice idea, and you might even think at first blush that this would be something welcomed by any parliament or executive. That would be to forget that central bank independence was an arrangement of political convenience from the very start. Politicians don’t want responsibility for monetary policy — just for spending. In an ideal world, central banks would underwrite the government while also being given the task of managing the consequences.
Don’t give up your financial stake in government
There’s a massive political risk when we abandon fiscal norms. The thing about being a taxpayer is — whether we like it or not — we have a stake in the system. When governments make stupid decisions, we’re more likely to vote them out because it’s our money. Equally for bond holders: they impose discipline on governments and ensure they don’t spend everything on pensions and welfare while neglecting the private sector (like Greece).
To characterize debt as nothing more than a transfer from government to the private sector, which will always use the money productively, is to hide a deeper truth about how governments operate in the real world. We want a government that is reliant on the productive part of the economy, not an economy that is reliant on the government. This is what taxpayers desire, it’s what capital markets demand, and it’s entirely necessary for good government and sustainable growth.
MMT is a revolutionary new theory and a mundane set of facts, depending on which stage of the argument you’ve reached. Either way, it’s hard to imagine what new dawn its supporters have in mind. It has inherently broad appeal to anyone peddling their own policies, and so long as they can provide a convincing story about why it won’t be inflationary, there’s no reason for policymakers to reject them. MMTers might have a more economically nuanced fallback, but it is nonetheless based on a false account of public policy making, and one we should push back on vigorously.