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Yves here. We were comparatively early to discuss Modern Monetary Theory, back in the days when a small group of scholars and economic writers like Randy Wray Stephanie Kelton, Scott Fulweiler and Warren Mosler were trying to get it out of an academic backwater into the mainstream. The fact that some libertarians mention it with a lot of choler and not much understanding says that this group of advocates has raised its profile.
But why the intense reactions? The response are often visceral, as if Modern Monetary Theory, which says that a sovereign currency issuer is not constrained by its ability to tax but the productive capacity of its economy (and the government can spend to marshal that to the extent the private sector is failing) is fiscal immorality. In fact, as Richard Murphy explains below, a more basic reason is Modern Monetary Theory upsets power dynamics via showing how currency issuing governments don’t rely on bond investors to spend. That means financial markets and banks wield much less power that the press and officials lead us to believe.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future
Modern Monetary Theory (MMT) significantly alters the economic power dynamics by shifting control from banks to democratic governments, emphasising people and full employment. Critics misunderstand its implications, but MMT asserts that governments with sovereign currencies aren’t dependent on financial markets because they can create currency to fund spending. Taxation plays a crucial role in controlling inflation, reshaping the focus of economic policy towards full employment and addressing inequality, ultimately empowering citizens over finance.
Some people argue that modern monetary theory is irrelevant or that it changes nothing. They’re wrong. MMT fundamentally reframes the power relationships within our economy, moving power away from banking and the City and towards democratic government control whilst prioritising people and full employment instead. No wonder so many people don’t like it: MMT challenges all the privileges they enjoy at cost to the rest of us.
The audio file is here:
The transcript is:
Why is modern monetary theory so important?
I made a video on MMT recently and explained what it is. But knowing what it is isn’t sufficient to explain why I think it is so important.
Critics of MMT say that it doesn’t really change anything because, as they point out, and as I agree, MMT says that a government must tax a sum broadly equal to the amount of its spending if it is to control inflation.
If so, they say, so what? Does it matter whether we think that tax comes before spend or spend comes before tax? What’s the consequence, they say, when, as a matter of fact, the books will be broadly balanced inside any macroeconomic system, whether it’s using the principles of MMT or not? And my point is that, oh yes, it really does matter.
Their question is naïve; it’s rather like a physicist saying, “We don’t need Einstein and all that nonsense about the theory of relativity and everything else. What we can do is use Newtonian physics, which is an approximation to the truth in 97 per cent of situations, and that will do well enough for us.”
Except, of course, it isn’t. The three per cent of situations when Newtonian physics might well not provide a good approximation are where most of the important decisions need to be made.
And the same is true with regard to economics. It may be that MMT does really say that taxation is fundamentally important and that we must raise a great deal of it if we want to spend a large part of the national income through the government. But, understanding what MMT says makes an enormous difference to the way in which we interpret that spending and the relationships that exist within the economy.
Let me explain. First of all, understanding that the government is not beholden to financial markets, which is one of the core messages of MMT, is fundamental.
Modern monetary theory says that any government with its own sovereign currency that is internationally accepted and its own central bank can never be dependent upon the financial markets for money because it can always ask its own central bank to create the new currency that is required to enable government spending to take place.
As a matter of fact, we know this is true. It happened in the UK and in many other countries after the 2008 financial crisis, and it happened again during COVID. Quantitative easing tried to disguise that fact, but it failed in the real sense that we know that the amount of money in circulation created by the Bank of England or other central banks rose enormously.
So, that dependency on financial markets is not true. in existence, and MMT acknowledges that fact, which other theories of macroeconomics do not.
Being aware, as a consequence, that the government doesn’t borrow from financial markets but does instead provide financial markets with the opportunity to save fundamentally changes the power relationship between the City of London and the government in the UK and similar relationships elsewhere.
The bankers don’t rule. That is one of the messages of MMT. And it’s got to be understood. But no one else is saying it but MMT and, therefore, that makes modern monetary theory really important.
Secondly, tax is fundamentally important in MMT. Anybody who says it isn’t is wrong. Tax is, inside modern monetary theory, the principal tool used to control inflation. There is no other tool that can do it as well as taxation. Let’s be clear about it.
And what MMT says, as a consequence, is that the whole of this myth of central bank independence and the whole role of interest rates in controlling inflation, which has imposed so much pain on so many people as a consequence of unnecessary increases in interest rate over the last couple of years, is not true. Instead, tax has that role. So, this again shifts the balance of power.
The balance of power now lies with the Treasury and its decisions over taxation, including short-term changes that it can make if necessary to control inflation, like changing the basic rate of VAT, which is entirely possible at any time within any economy the central bank suddenly becomes just a regulator of banks and not a controller of the whole of economic policy, which is the status we’ve given it for the last 25 odd years, wholly mistakenly.
And then the role of tax is also different. Instead of tax being just about revenue raising, with the obsession being whether a particular tax is good at raising money or not, tax is seen as something much bigger in terms of the delivery of government policy.
It’s about the delivery of policy to tackle inequality.
It’s about the delivery of policy to change the way in which the economy runs, by providing subsidies, for example, to those things that the government wants to happen, and by charging tax on those things that it doesn’t want to happen. It’s about, therefore, charging tax on those things which are bad, let’s call them gambling, alcohol, carbon, whatever you wish, and it’s about not charging tax on things that are good, like education books and so on.
It’s also about building a relationship between citizens and government because it’s vital that people understand how tax works because they pay it, and that is one of the ways in which they can decide how to hold government accountable. In other words, tax is a fundamental driver of democracy.
MMT makes all these things clear.
And it also makes clear that the government need not obsess about inflation, because inflation always goes away of its own accord. That’s what history tells us, since 1210, when we’ve got data for that period in the UK. And, instead, the focus of government economic policy should be on things that are much more important.
Things like full employment, which MMT prioritises. Or investment, or inequality, or climate change.
All of those things could become the focus of attention rather than inflation, which has become so destructive as a goal, much more destructive, in fact, than inflation itself.
So, what MMT does is fundamentally change the description of how the economy works – the government spends and its taxes. Others would argue that the government taxes and it spends. And the sums of money will not necessarily alter greatly as a consequence of MMT. But what it does do is change our understanding of the power relationships around that.
This, then, is a political economic theory, because political economy is all about power relationships. And MMT puts the power back with democratic government, the Treasury, and the choices that it has to make about how to meet the needs of people, in particular by delivering full employment.
This makes MMT powerful, radical, different, and fundamentally important because it puts people, and not money, and not bankers, and not finance, at the centre of its economic policy. And that, I believe, is what has to happen now.
Thanks. I still have moments of uncertainty when trying to explain MMT to friends who are thoroughly indoctrinated with the traditional model. However, perhaps the biggest issue is its name. I *think* I get that there are some value judgments (perhaps pertaining to the job guarantee though am happy to be corrected) but the core of MMT is not a theory at all.
MMT is a description of how things work. It is more akin to the identity relationship in mathematics. At least, that was how it was described using national income equations in its early days. If I understand it correctly, you cannot disprove MMT (if your economy satisfies the core features like monetary sovereignty etc). Again, happy to be corrected, but my more educated friends always latch on to the “theory” moniker. I personally feel that if the “theory” idea had been shot down at the get go then the true political nature of much of the discourse might have become more apparent.
It is a description of how things work, but it has policy implications when set against policies that are based on an incorrect understanding of how things work. For example, the household budget analogy would suggest that the government needs to tighten its belt during a recession and balance the budget. This has generally been counterproductive any time it’s been tried and has made things worse, to the point where it became well established empirically that governments need to deficit spend in a crisis or recession to mitigate the impact. The austerity/household budget view of government spending has never been able to satisfactorily account for this, but it’s completely explained (and predicted) by MMT.
As the whole Covid debacle shows, theories have implications in terms of what should or shouldn’t be done, and that can very quickly get into political territory, or become politicized even if it’s a purely scientific matter.
Thanks. Your last paragraph (to me anyway) sums up my point. A theory can and likely will get into political territory. I think the core tenets of MMT should never be able to be politicised and should be no more in the discourse than flat earth stuff. I take your point that certain add-ons might be political but the MMT crowd should have separated those out.
I came from economics and I can count on one hand the number of “Nobel” prize winners who deserved recognition of the kind given to winners of proper Nobels. Pointing out an identity relationship should never be “open to discourse” any more than allowing people to have their own facts. I’m probably in old man shouting at clouds territory but once we give an inch they’ll take a mile.
The other problem is the name “modern”. As the article says, the data for it goes back to 1210.
Too bad numismatics has already been taken. We obviously need a portmanteau of nomismata (money) and exēgéomai (explain)…
I think Terry Flynn’s friends are confusing hypothesis and theory, though. In the term “Modern monetary theory” the theory refers to a set of observations and tested prepositions to explain those observations.
Newtonian Theory of Gravity
Einstein’s Theory of Relativity
Darwin’s Theory of Evolution
I don’t know if you are supporting or refuting me….. but all of those theories are potentially refutable at a given level of statistical significance. Which is my point.
In mathematics an identity relationship is true by definition. If a balance sheet doesn’t balance then it is not a balance sheet. If the three deficits in MMT don’t sum to zero then something is amiss.
If the best-minus-worst scores in my field don’t sum to zero then someone miscounted. I’m an identity guy not a theory guy.
Gravity is only a theory
OK I am first to say I over simplified. I referred to the quantification of gravity and its exact place in the “table of universal forces” rather than its existence. My bad.
I also think that Covid was a massive double edged sword for MMT.
On one hand it demonstrated that governments do have freedom to achieve outcomes that are generally considered “impossible” (like halving child poverty overnight) but on the other hand there was massive inflation and that is the takeaway that everyone has, across the spectrum.
Trying to counteract that with pointing to a combination of supply chain disruption due to overoptimized globalization, profit gouging, fraud and not using taxes effectively to soak up liquidity among the rich — plus a widespread spend like there is no tomorrow attitude – is an exceedingly difficult task.
I think that’s true, and doubly unfair when you consider the superior predictive record of MMT-literate economists with respect to the GFC etc. People can’t look past “inflation has occurred, therefore it must have been because of all the government spending that just took place, even though such a monocausal explanation for inflation doesn’t really stand up to scrutiny. People love to lap up the slop.
Obfuscation is the game to allow the can to be kicked down the road.
One can make the analogy with how hard and long a slog has been the battle against tobacco companies to proove that actually tobacco kills. Same with Purdue Pharma and oxycontin…
I think this insistence of MMT as being a description of how things work is both correct, but also very confusing. With something as complex as an economy, you can’t disaggregate the underlying processes from the active attempts to pilot those processes (this is one reason why systems theories tend not to work in reality).
A huge problem for MMT is that its fighting against some very core underlying assumptions which most people find very difficult to shrug off, because it conflicts with our everyday experience. It always reminds me as a child when I saw my father writing cheques. Since he seemed to be able to pay things by just writing lots of zeroes, I asked why he didn’t buy a bigger car. The way my older brothers laughed nearly scarred me into becoming an economist….
Systems like Thermodynamics?
> If I understand it correctly, you cannot disprove MMT (if your economy satisfies the core features like monetary sovereignty etc).
IIRC (from reading, a decade or more ago, Randall Wray’s MMT Primer at the NEP website), monetary sovereignty is not a requirement for MMT to be valid; the theory is broader than that, and includes description of the monetary operations of governments that rely on external currencies (like the Euro for Eurozone countries or the USD for states of the US). In the Primer, there are chapters that survey how the fiscal policy space available to a government depends on a whole range of factors including monetary sovereignty, convertibility of the currency, size of the economy, character of the economy (ie., dependence (or not) on external sources of materials or goods), status of the export/import balance, etc. With respect to the specific State characteristic of monetary sovereignty or lack thereof, MMT affirms that non-monetary-sovereign states must obtain currency through taxation or borrowing in order to spend. This significantly reduces their fiscal policy freedom compared with monetarily sovereign States.
MMT describes the monetary operations of Eurozone states, which are not monetarily sovereign as well as the monetary operations of monetarily sovereign states like US or UK. It’s a general description of State monetary operations.
A valuable insight that I think may be unique to MMT (not necessarily unique in the sense that this can be discerned only in MMT; I think conventional economists could notice this too, but they seem to never do) is the direction of causality of State deficits. Wray’s Primer argues (persuasively, IMO) that the US Federal deficit is controlled more by private sector savings decisions than by Federal tax/spend decisions. The Federal government sets its fiscal policy plans, but the domestic non-government sector gets a vote, and will adjust its consumption and savings decisions to achieve its savings goals.
This view (which is not necessarily alien to all non-MMT people; I think that the “dynamic scoring of tax policy” takes a similar view) leads to a policy recommendation that Federal fiscal policy should accommodate private savings preferences; try to discern the size of the surplus that the private sector wants and target the net results of fiscal policy to match that.
But even if MMT described the monetary operations of Eurozone states, the description is one of “prison”.
The Eurozone states are not sovereign in the Euro, they cannot print Euros and – and this is more important because this is what traps them in prison – they have no right in EU law to create their own national money-like scrip like the Woergl Stamp Scrip in inter-war Germany and other examples of Silvio Gesell’s Freigeld. Under the ECB, there is no chance of Germany issuing MeFo bonds to fund rearmament or simply to reflate its economy….
The importance of MMT is that it enables a country to escape financial economy constraints. It is still bounded by real economy constraints, of course.
And now for an analgous computer science joke: the definition of a mainframe is a device for turning a computationally bound problem into an input/output bound problem. :-)
What I would like to understand more about MMT and the real constraints is the effect of trade. I worry that for a small and open economy, financing expendture on MMT principles just results in the export of demand for the free-riding Austerians and mercantilists. I believe MMT requires active policies of import substitution (and investment in production capacity) at the same time but these additional elements of the MMT package are not discussed as much as the headline-grabbing “print the money” element.
You have just raised the exact questions that friends of mine raise and which lead me to realise I’m out of my depth.
When I preach the “stay in your lane” philosophy I feel like a hypocrite when I can’t answer those more esoteric questions about MMT.
Hi Terry,
Don’t judge yourself, I don’t think they are esoteric, I think that they are fundamental and that the fact that we cannot answer them after MMT 101 here at NC demonstrates a need for MMT 102 or 201 or however US Universities increment their sequences! MMT Part IB to you and me :-)
When you look at the successful implementations of MMT, you see a strong economic nationalism:
– Japanese Empire pre-1945
– Japan post 1945 (or at least after US formal occupation ended)
– S Korea post Armistice
– France post WW2 until 1970’s act forbidding Banquet de France from monetary financing
The other question I have is with the job guarantee. Bill Mitchell insists this is required, other players claim a minimal MNT definition excludes it. If I understand Bill Mitchell’s position, it is that without a job guarantee (I.e. loading the duce towards labour) , finance capital will load up on “free” money.
I would love it if Michael Hudson or another good economist would summarise these freshwater/saltwater MMT disputes for the layman. Bill Mitchell’s blog is huge so I don’t know where best to start and he is very partial to his own view….
In my heart, I think it is all very simple and best explained by Keynes: “whatever we can do, we can afford”.
Clearly there will be distributional consequences of our actions but they are simple in the first order. If we need imports as inputs to our programme if works, we will export demand. If we need local manufactures as inputs, we will stimulate local demand (and should therefore invest in capacity building prioritised by the critical paths). If we need land as inputs we will enrich the rentiers. If we allow the demand we inject to be capitalised in asset prices, we will enrich the rentiers. So we should have wealth and land taxes and import duties (perhaps only on substitutable goods) and no labour or sales taxes….
Sounds good. Why can’t we do that without right now?
Many thanks. Bill Mitchell was my entry point and I immediately got some red flags regarding his exposition.
Kelton has done a LOT to address the “gaps and controversies” but I still feel uneasy about my ability to explain MMT and really cheer lead for it,
I am keen to understand MMT because it seems obvious that the current economic models are illiterate and do not work. Although that may be because they do not prioritise things like full employment and reduced inequality. But then, the current models don’t seem to work even on their own terms.
What I am keen to learn is, if the limit to money printing is “the productive capacity of the economy” as Yves says, how does the Govt. know what that limit or capacity actually is?
I imagine I am like a lot of readers here who like the sound of MMT but are struggling to understand it. Basically because economics is, for me, hard to understand anyway. I did like that video and I read a lot of Richard Murphy’s stuff. He has enlightened me quite a bit but on this subject I think we need a better, more basic explanation so we can get our heads around this.
I am currently reading “Bill and Warren”s Excellent Adventure” by William Mitchell and Warren Mosler which is not bad although occasionally strays into the more esoteric economic realms.
I don’t just want to ask for something complicated to be explained in a simple way for an idiot like me but if more people understood this idea I’m sure it would be a lot more popular. It certainly has radical and positive potential.
For example, I have learnt from Michael Hudson the radical importance of debt and the uselessness of traditional Ways to measure GDP. So, complicated things that overturn years of conditioning can be explained, even to economic illiterates like I am. Maybe we just need a better teacher? (No insult intended to Richard Murphy).
For me the critical understanding was that banks ‘print’ money through ‘fractional reserve banking’, i.e., loaning other people’s money at interest (‘tax’) + profit. Why can’t governments do that? Why must governments issue bonds??
I get it that if you’re living in the eighteenth century, you need galleons to transport the gold for your foreign purchases, and your government might still need recourse to the bankers’ gold, but today???
If a bank’s loaning of money exceeds the ‘productive capacity of its economy’, it has printed too much money, and it must it raise its interest rate; if a government exceeds the productive capacity of its economy, it must raise its tax rate.
Of course if your modern government is not printing enough money for your needs, you may be forced into the clutches of a loan shark; that’s still the plan of the people with galleons of gold.
Fraction reserve banking is a myth. Bank money is created first, then reserve requirements are calculated afterwards. The bank creates deposits when it loans money, it doesn’t need to get the deposits first.
Why must governments issue bonds??
I guess because it is a very profitable way for those buying said bonds – interest assured, nice stream of money. Some bonds issued by the Bank of England during the Napoleonic wars were closed not long ago… A very nice income stream I say… What is not to like it?! One would defend the “right” to be a parasite to such hosts with all their might and viciousness, kind of like Israel defends its “right” to aquire new territory and eliminate the present inhabitants.
First “fractional reserve banking” isn’t exactly correct (it’s orthodox economics). If there’s no reserve requirement–and if I’m not mistaken, there isn’t one in the US–then banks extending credit requires no “fraction” calculation. Their “capital” (for every other type of business this is called “equity”) may have some requirement, but that’s not because they’re lending deposits. They’re not.
Why must the government issue bonds? It issues zero-interest bonds we call “dollars.” “Note” = IOU in legalese, and they are “Federal Reserve Notes.” So I’d suggest withdrawing such notes, part of national debt, may not be “necessary,” but not doing so would be painful. (see Randal Wray’s article about this).
My personal interpretation of the “requirement” to issue bonds is not that a country making its own currency must borrow it, or that dollars grow on billionaires. Government bonds are a safe harbor that pays interest to the titans on Wall St.
You are correct. There is no longer a federal ‘reserve’. Nowadays it’s all fictional reserve banking.
Bonds aren’t needed to raise funds, but they do give the Fed some leverage on interest rates, as well as providing a safe place for the world to park its wealth, which in turn supports the value of the dollar.
Nobody knows that exactly, of course. Everything at the national spending level must necessarily be inaccurate to some extent.
When you throw in considerations like degrowth to counteract global climate change, things get more muddy. Why should governments pay people to produce goods which may force the planet further into overshoot? Jobs like proper forest management to reduce wildfires aren’t seen as “productive”.
And any economy with a major skills mismatch will not respond quickly along the lines of what is “best’. It can take years to train people to be “productive” in the ways that the future needs.
I would say you probably understand it fine. The MMTers have done exceptional work making complex concepts easily understood by lay people via a few simple precepts.
Then, as Richard Murphy shows, you reflect on political economy. A social balance of power. You question whether the nation’s productive capacities are being appropriately allocated.
You can get obscenely into the weeds of how the plumbing of a financial system really works. Or how to calculate output and national income and etc. But really, it’s the purview of expert technicians and not something 99.9% of the population needs to spend significant time contemplating (e.g. I should probably be watching my kids right now).
Since nobody has said it yet: inflation, and possibly credit bubbles depending on how the money is spent. We saw this in action in the 2020s to varying degrees around the world depending on the scale and nature of Covid response.
Injecting money into the economy is usually a lot easier politically than taking it out by raising taxes. A lot of governments took half of an MMT approach in their Covid response by deploying a lot of cash to mitigate impact and support public health measures, but balked at taking that money back out elsewhere (say, by increasing taxes on sectors that saw windfalls from Covid) for political reasons.
The consequence was usually inflation to a greater or lesser degree, exacerbated by changing spending patterns due to Covid (no expensive overseas trips) which funneled the extra money into a few sectors with outsized impact.
In the end, actual economic activity in the form of production, goods, services, labor etc. is what matters and money simply represents a kind of stake in that, like shares in a company. Money spent in different sectors stimulates activity in those sectors – construction if you spend money on road building, military contractors for defense spending, etc. – provided the conditions exist to make use of it. So if you want to improve your health sector efficiency by spending more money on it but have a shortage of trained doctors and nurses, no amount of money will fix that in the short term, unless it’s accompanied by other measures.
It’s certainly important because if we’ve been living under MMT, then the accelerating destruction of the natural world and habitat will also need to be similarly laid at the feet of MMT. You have to own both the pros and the cons. Please don’t tell me that the only side effect of MMT is a bit of inflation.
On the other hand, I also think it’s not important, because human beings will find a way to destroy the world using whatever tool that’s available including economic and political ones. Also the second law of thermodynamics certainly does not give a hoot to what monetary policy that is currently in season.
It’s agnostic. It can be leveraged by both reactionaries who deny its existence and progressives who will argue, essentially correctly, that anything we can do, we can afford (which extends to thing we need to do).
Its main political importance in the here and now, I think, is getting people to understand how factually bankrupt and politically stultifying the “our taxes are paying for…” framework for why we can’t do things, is. I’ve even seen the inverse of this deployed by prog libs who try to make the point “our tax dollars are paying for the genocide and childkilling in Gaza” which 1. jesus effing christ no they obviously are not (at which point I try to remind myself to be reasonable because I essentially believed this when I was younger and knew less) and 2. So what? It’s like by giving themselves some tenuous connection to the atrocity, whether that connection actually exists as a matter of fact or not, gives it some extra morally urgent dimension. It’s an unambiguous moral outrage regardless of where the money for materiel is coming from. It’s grotesque.
You could then say “so MMT is paying for the weapons for the genocide in Gaza then?” well, no, the US Government is. MMT explains how they’re doing it, and it ain’t by collecting taxes. It’s just the way things are, how they work, it can be used for any purpose. Getting people to understand that theoretically grants a certain degree of clear-headedness, and ideally would stop us from making democratic/political choices that aren’t premised on false assumptions. But that ship has probably sailed. And the “your tax dollars at work” cliché is too politically useful, and people are so addicted to it and the sense of entitled outrage it brings them, that it’s pretty hard to disabuse people of that line of thinking.
Correct. As was referenced further upthread this is why macroeconomics has always been “political economy” despite attempts by economists and policymakers to pretend otherwise for their own purposes. Fiat monetary operations can be used for any political end — the operations themselves have no moral valence, only the political ends to which they are put.
And “we can’t afford it” is always a lie — a convenient lie to hide “we don’t want to” or “we would rather do something else.” And the lie gets told over and over again because it preys upon our childhood experiences of money (which trick us into believing money is a thing/object rather than a system of obligations recorded on a ledger) while simultaneously facilitating evasion of accountability by our elected representatives.
One question I have about MMT that I never see being explored in depth is with regards to the core requirement (for its applicability) of sovereignty.
The nominal definition is clear enough, but looking through real world examples and how currencies actually work, one can find plausible arguments that no existing currency is in fact sovereign – not even the USD. To me, it looks like the classification of “sovereign currency” is not as straightforward as it is made out to be.
Can anyone recommend a more detailed exploration of the question of sovereignty? I have searched now and again for years, but never found one.
What do you consider sovereignty to mean in this context?
In the MMT context, to me, it refers to the currency of a country who is a) the issuer of the currency, and b) the currency is free floating (and not pegged)
that means the USD, GBP, Yen, AUD. It means not the Euro (not issued by a country, so member states lack a sovereign currency, and this can be used to subjugate economically weaker states as in the case of Greece) or not the Argentinian peso (a pegged currency), to give two examples.
See Samuel Conner’s fine comment above for something a more technically precise than mine on this subject.
The currency itself isn’t “sovereign” in the sense you reference — the political entity which issues it is; the constraints you are witnessing are those of the currency issuing state itself.
Another good time to recommend this documentary https://findingmoneyfilm.com/
Entertaining and interesting the scene where the filmmaker asks Jared Bernstein “why does the US borrow in a currency it prints” is not to be missed.
At one level MMT seems obvious. Imagine a room where there is a table filled with food, and a man sitting in a chair on the other side of the room who is starving because he can’t pay himself enough to get up and walk to the table. Absurd, yes? One way or another, we should always be able to pay ourselves to do useful work. The idea of the man having to take out a loan at usurious rates of interest so he can pay himself to walk to the table is a scam.
If nothing else, why do bondholders have to be private? I mean, it’s not like they evaluate risk anymore (think 2008). Surely the government could just buy its own bonds, making the entire monetary edifice irrelevant. But there are I think two ways that MMT fails:
1. Trade. If we are running a massive trade deficit, we need foreigners to be willing to exchange useful goods and services for pieces of paper that have a real claim to future assets. I don’t think the present USA could survive without imports.
2. Physical reality. Even the most efficient economic system is still just real people using existing tools and resources to do real things. It’s not magic. And history has shown, over and over, that massive population growth can and does cancel out even the most dynamic real economy. Applying MMT to a place like Yemen or Afghanistan or Egypt will do nothing, it is not currently physically possible for them to make progress. To my knowledge Keynes never said it explicitly, but to me his writing tells me that all economic systems must operate within the limits of what is physically possible with what we have right now.
More imports??? I don’t think the present USA can survive with imports.
As I understand it from reading Hudson, the trade of the United States is always in deficit because the countries it trades with manage to maintain ongoing surpluses (i.e, they have extra US dollars on hand from trade) which is just the means by which the US trade becomes balanced by the surpluses of its trading partners (one of which is Canada, for example).
The nation which provides the Global Reserve currency must run a trade deficit. This is the Triffin Dilemma.
The Saving Identity notes that certain economic sectors must balance to zero. So any nation running a trade deficit is also doing one or more of 1) destroying citizen savings, 2) destroying business investment, or 3) running a federal government deficit.
For schools of thought like Austrian economics, where running federal deficits is highly discouraged, this means that the pain of the trade deficit is borne by the private sector, as resources available to them get destroyed.
MMT describes which economic levers can be pulled given the current state of a country. It doesn’t just say that every country can spend money willy-nilly and everything will be ok. A country that creates and freely floats it’s currency (e.g. US or Canada) has much more policies open to them than a state that doesn’t (e.g. Greece is on the Euro). Countries that have abundant natural resources have more space to operate in than those that have to import.
Your number 2 point valid, but somehow you have it backwards. MMT says that reality is the only constraint and that monetary accounting is just a convenient fiction.
“The response are often visceral, as if Modern Monetary Theory, which says that a sovereign currency issuer is not constrained by its ability to tax but the productive capacity of its economy (and the government can spend to marshal that to the extent the private sector is failing) is fiscal immorality.”
“In fact, as Richard Murphy explains below. a more basic reason is Modern Monetary Theory upsets power dynamics via showing how currency issuing governments don’t rely on bond investors to spend.”
It is with a wry smile I recall your note about the Library of Congress seeking to archive this site.
Thanks Yves, I love ya. And this site (more than 10 years now I think). I wish I had time to proof read every article posted. Lord knows this site needs that help.
MMT works if
1) it is the people that control the government. Where we live in a true not simulacra of democracy. Where the main goal of the government is the good of its citizens not just a small group of oligarchs.
2) it has a limited foreign policy. Where it’s foreign policy is mainly defensive and cooperative.
3) its currency is respected and has value, rule of law and markets are fair and unbiased, and respect for foreign ownership of private property is inviolable.
These conditions don’t exist in the US currently.
the operational realities that MMT describe actually exist independently of all three of these things. MMT is not a thing that “works” or “doesn’t work”.
Informative article that makes me think of a few concerns.
First, the role of the citizens.
Second, what and who will drive changes to government to implement that?
Third, how will the bankers be dislodged after centuries of integration, or disintegration, of society?
I’m one of those pesky, perhaps ignorant MMT skeptics. But rather than attempting to argue, and hopefully learn, in one huge gulp, let me start with a sip, and pose a relatively narrow question (or two), relating to the above quote from Murphy.
10 GBP in 1923 was worth the equivalent of 500 GBP in 2023. Is Murphy’s argument that had MMT been employed throughout that period, and “correctly”, that there would have literally been no inflation over that period of time? Because one of the obvious problems with the assertion in the quote is that without corresponding deflation, it doesn’t matter if “inflation always goes away of its own accord”, as prices have already been elevated, and remain elevated. Ergo, it doesn’t truly go away at all.
I think the MMT argument is that inflation from monetary causes is within a currency-issuing government’s power to control.
Many things happened between 1923 and 2023. For one, the British Empire dissolved. As a hypothetical example, this would mean that Manchester textile mills would have to pay their Indian suppliers the world market price for raw material, and couldn’t rely on a managed Imperial price. This could have a huge effect on how many pounds sterling it would take to buy something.
Since 1923, the productive capacity of the UK has been run down by war, dismembered by decolonisation and smothered in its old man’s bed by Thatcher’s monetarism and anti-unionism.
However, I am not sure if under MMT the value of a pound matters. The price level is just a denominator. Would you rather work for £100 per annum in 1923 or £20,000 in 2023? The numerator matters too and, overall, Britons are richer in 2023 than in 1923. That wealth is of course a result of the vast petrochemical energy expended since 1923.
Worrying about the “intrinsic” value of a pound (“reification”) when money is fundamentally a social relation is barking up the wrong tree.
What we can do, we can afford. So what are we doing?
(The comment above worrying about the natural limits on growth and the relationship of MMT and the environment is a much sounder worry. I think Steve Keen is working on a thermodynamically founded version of MMT but I don’t know if anybody is including natural capital, which is something we cannot afford to undo when we do the things we can afford…)
It’s not simply a matter of the “intrinsic” value of the currency.
In the U.S, which I know much better than Britain, my mother, in the ’60s and ’70s, was able to raise me, on her own, in a highly desirable location (Evanston, IL), and own a home, while working for a community center as an art teacher.
The chances of something similar happening today are near zero. It was the peak of the middle-class experience in the U.S., and the fact the “intrinsic” value of the USD has, due to inflation, eroded tremendously since, has degraded the lives of all but the wealthy.
Inflation doesn’t just “go away”, and it does immense damage to those who can least afford it.
No, that formulation is clearly nonsense.
Policy mistakes or external shocks can absolutely cause inflation. It is simply not possible to know to the precision required, what mix of goods and services would be exactly on the knife edge of zero inflation.
And since deflation is so blindingly terrible and should be avoided, it is proper for central banks to err on the side of “a small amount of inflation” (As with the Federal Reserve’s 2% target), thus yes, inflation once experienced is sticky.
Here’s an MMT elevator speech: mindorenyo.blogspot.com/2019/02/mmt-elevator-speech.html
Just thinking what Richard Wolff said about the need for us to start thinking about different forms of capitalism because industrial and finance capitalism both have their shortcomings. He is always an advocate for tossing socialism into the mix. Which seems like the perfect venue for MMT especially since we have been using MMT for the military for about a century now. So we know we can do it successfully. Even though the military has been profiteering like the godfather, it has also been one of the engines that run the rest of the economy. Funny how when the Cold War ended we began to see homeless people on every street corner. It’s just a slightly more socialist twist to spend for society, for universal health care and free education, proper housing, all of which will stimulate the economy as well.
When I read Michael Hudson’s KILLING THE HOST, he often referenced early classical economists, especially the Physiocrats. They described a circular flow of the economy and noted that certain practices interrupted that flow, such as rent and interest charges.
This came to mind when I learned about MMT. To my way, government spends into the economy and then taxes to remove any money deemed to be in excess, a more or less circular flow.
Thus, with the Reagan tax cuts and those in later years, untaxed money accumulated in the accounts of wealthy men that they used to control politics and government to their financial and ideological benefit. This was especially so in regard to ‘unearned income’ from rent and financial speculation. That is what we have today with our oligarchic billionaires.
I would love to hear objections to my understanding.
Glad the Kleptocracy hasn’t taken a mile. Oh, wait a minute!
MMT has both a functional problem and a semantics problem that needs to be corrected. Sovereign nations can create their own currency through their national treasuries. There is no need for a central bank. The problem with referring to a central bank leaves one to believe that the privately owned central bank is still necessary, which means the nation is still financially captured. If it is the national Treasury that creates the currency, this is the reference necessary to separate MMT from the current financial system and markets. The use of the term central banks suggests there is still a bond auction process baseline. The term “central bank” needs to be removed from the conversation and replaced by the National Treasury.
Another apparent oversight is that a sovereign nation can create currency to loan to the core private economy of small farms, small businesses and primary residential real estate, interest free. The loan remittances can be extracted and destroyed and serve as a way to alleviate taxes, but still control inflation.
The Pennsylvania Colony in the years 1723 through 1764 used such a system. Tracking currency flows in that system found that extracting 100% of the currency to contain inflation was not necessary and in fact, was detrimental to the economy in the early days of implementation, whether through loan remittances or taxation. They used a process of currency destruction and re-circulation to maintained constant funds to support productive assets.
Your assumption is incorrect. The Fed is absolutely not a private bank. Please tell me who owns it. The Federal Reserve Board’s members are appointed by the President and appointed by the Senate. The chair and vice chair of the 12 member banks in the Federal Reserve System are appointed by the Federal Reserve board. The appointment of the President of each member bank is subject to approval of the Federal Reserve Board. These Presidents are nominated by B and C directors who are NOT bank representatives in any way, shape or form.
The B directors are appointed by banks in that regional system. Class C directors are appointed by the Federal Reserve Board.
The preferred shares that member banks own confer no ownership or voting rights and are not tranferrable.
You are also wrong about the Treasury. The Treasury debits its account at the Fed to spend.
MMT no where posits that taxes need to extract 100% of the currency. In fact, MMT advocates regularly present sector balance analyses that show under current practices (the result of private businesses having unduly high return targets; this has been extensively documents by Andrew Haldane, then of the Bank of England, among others) that the federal government needs to net spend, as in run deficits, to prevent the economy from falling into recessions due to business underinvestment.
While you are a new commenter and we like to encourage participation, we are also strict about accuracy and good faith argumentation.
I almost did not release your comment because it is so off base. Please do more homework before commenting again.I will not approve future comments that require me to write long replies correcting your errors.