MMT is challenging the orthodoxy
The theory is called Modern Monetary Theory (MMT).
It is challenging the neoliberal economic orthodoxy that has dominated policymaking in Australia, the United States, the United Kingdom and many other countries since the mid-1970s.
The reigning orthodoxy assumes a couple of things.
Firstly, it assumes every country has a “natural rate” of unemployment and it’s unwise to try to force the jobless rate below the natural level because inflation (and wages) will rise too quickly. Therefore, it assumes it’s better to accept a certain amount of unemployment to keep prices stable (and to keep wage demands weak).
At the moment, Australia’s natural rate of unemployment is assumed to be somewhere between 4 and 5 per cent.
Secondly, the economic orthodoxy holds that the national government needs to collect taxes, or borrow from savers, before it can spend money.
Politicians repeat this point incessantly.
When you hear a politician saying the government must “live within its means,” what they’re really saying is the government mustn’t spend more than it collects in taxes or borrowings.
However, MMT economists want to turn these orthodoxies on their head, among others.
What is MMT?
MMT is a school of economic thought and a political project (more on this later).
Its proponents are not shy about their intentions to shake up the establishment.
The people who developed it have been working on the body of theory for decades, quietly, in countries such as Australia and the United States, but their ideas have recently burst out into the open as global leaders search for fresh ideas to deal with the unprecedented economic crisis of 2020, and the lingering effects of the global financial crisis in 2008-09.
MMT economists make several claims:
Firstly, they say we’ve been thinking about budget deficits incorrectly.
They say budget deficits are not always bad. In fact, deficits are often necessary and beneficial. A budget deficit is merely evidence of extra government spending, and government spending boosts the wealth of private sector businesses and households.
They say it depends what deficit spending is used for. Increasing the deficit to finance a war is not the same thing as increasing the deficit to build more hospitals and schools.
They argue investments that will enhance productivity through better health, greater knowledge and skills, improved transport and the like are worth funding, even if it results in a budget deficit.
Secondly, MMT economists say we’ve been thinking about government spending incorrectly.
They say the argument (promoted famously by British prime minister Margaret Thatcher) that national governments must tax or borrow before they can spend is wrong.
MMT argues it’s the other way around — national governments have to spend money into the economy before they can tax or borrow. Government spending actually precedes taxation.
Accepting this proposition is key to embracing MMT.
Thirdly, they say taxes are necessary, but not for the reasons you may think.
They say government taxes can be used to keep inflation under control, to control our behaviour (via fees and levies and rates), and to get us to produce things the government needs.
MMT economists draw on the ideas of chartalism to make this last point. They say governments use taxes to create demand for their own currency — that is, if a citizen has to pay tax then they’re going to have to work to earn the currency to pay the tax in that currency.
Essentially, governments use taxes to put everyone to work.
“At the end of the day, a currency-issuing government wants something real, not something monetary,” writes Professor Stephanie Kelton, one of the highest-profile MMT economists and a senior adviser to Bernie Sanders in both his 2016 and 2020 Democratic presidential primary campaigns.
“It’s not our tax money the government wants. It’s our time.
“To get us to produce things for the state, the government invents taxes or other kinds of payment obligations.”
Fourthly, MMT economists say countries that issue their own fiat currency can afford to buy anything that’s available for sale in their own currency, and they can never go bankrupt in their own currency.
“Fiat” money is government-issued currency that isn’t backed by any commodity, such as gold. It’s paper or digital money that has no intrinsic value. We’ll return to this point later too.
Fifthly, MMT economists say “full employment” is not only possible, it’s a moral imperative. Anyone who wants a job should have one.
They say we must prioritise genuine full employment and governments should spend whatever is necessary to achieve it — no matter the debt or deficit.
Sixthly, MMT economists say the national government should run a permanent “Job Guarantee” (JG) program to provide a job to everyone who wants one.
They say it could be linked to other economic and social programs, such as a “Green New Deal” — a policy advocated by MMT proponents linked to the US Democratic senator Bernie Sanders, to create jobs by shifting to zero-emissions technologies.
What’s so special about fiat currencies?
MMT’s theorists say world leaders still haven’t come to terms with the demise of the Bretton Woods monetary system in 1971.
During that era (1945 to 1971), certain currencies were pegged at agreed fixed rates against the US dollar, and the US dollar was supposed to be backed by gold reserves so it could be exchanged on demand for a fixed amount of gold held by the US government.
But that system was abolished by US president Richard Nixon in 1971 when the US admitted it did not have enough gold to back its currency.
After that, the US and other major sovereign currency issuers (including Australia) adopted “fiat” currencies — currencies with no intrinsic value, that aren’t backed by gold — with floating exchange rates.
MMT economists say this is significant because it means those countries (such as Australia, the US, Canada, the UK, Japan) no longer have to fear a shortage of gold, and that leaves them free to print as much money as they need to fully employ their “real” resources — workers, factories, machines, raw materials — within limits.
That insight is not new, nor particularly radical.
In a speech in 1997, then-US federal reserve chairman Alan Greenspan said central banks in the modern era could issue currency without limit.
“When there is confidence in the integrity of government, monetary authorities — the central bank and the finance ministry — can issue unlimited claims denominated in their own currencies and can guarantee, or stand ready to guarantee, the obligations of private issuers as they see fit,” Greenspan said.
“Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit.”
Criticisms of MMT
There are many criticisms of Modern Monetary Theory.
But at this point, it’s difficult to tell how many mainstream economists are making criticisms in good faith.
MMT has ruffled lots of feathers. It’s clear some orthodox economists don’t want to cede territory to the upstarts. Others won’t have wrapped their heads around the MMT logic yet. And there’d be some professional jealousy and rivalry behind the scenes.
However, some economists have scrutinised MMT seriously. Stephen Grenville, a former deputy governor of the RBA, being one of them.
While open to some of its ideas, he, like many other mainstream economists, argues it has fundamental flaws.
There’s no free lunch: Grenville says the chief vulnerability of the MMT narrative, and where MMT economists “are a little vague, even slippery,” is the MMT assumption, sometimes implicit, that budget deficits can be funded without adding to official debt.
“The government might get the cash to spend in its deficit by giving the central bank a bond in return for the cash,” Grenville wrote in the Eureka Report.
“But the bond is just a government debt which it owes itself, so in the view of many MMT supporters, the bond could be deleted from the central bank balance sheet by offsetting book entries in the accounts of the government and the central bank.
“In spending the cash to implement its deficit, the government shifts the economy to full-employment … GDP has increased without either debt or interest rates rising. This seems to be ‘free money’,” he said.
“It’s hardly surprising that this is an attractive narrative […] [but] this is clearly wrong.”
Human Behaviour: A major criticism of MMT has to do with the assumptions it makes about human behaviour, particularly about the way politicians “should” behave.
Professor Kelton, in her book The Deficit Myth, says unelected central bankers shouldn’t have so much control over the economy, and the responsibility for economic management should rest with elected representatives.
“We must end the cruel and inefficient practice of relying on democratically unaccountable central bankers to target the ‘right mix’ of inflation and unemployment,” Kelton wrote.
“To build an economy for the people, responsibility for maintaining full employment and income security must become the responsibility of elected representatives of the people.
“Congress, with its great power over the federal budget, must play an active and permanent role in stabilising output and employment through time.”
Cynics say handing that type of responsibility to politicians could be a recipe for disaster.
Would politicians have the ability to know when the economy has reached full capacity?
Would they have the backbone to raise taxes, perhaps during an election year, to keep inflationary pressures down? Would they have the discipline to stop spending?
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