At its core, MMT is the idea that a government can never go broke because it has a monopoly on the power to print money.
That is what lawyers call “putting the rabbit in the hat.” You set up a straw argument, and then you blast it to smithereens. I would offer a more functional nugget:
At its core, MMT is the idea that inflation is the only constraint on monetary and fiscal policy.
Here’s a simple thought experiment. Assume Robin Hood decides to rob from the rich and give to the poor, not by stealing, but by counterfeiting money and dropping it from helicopters in poor neighborhoods. How would that work out?
Level One. Robin drops a few bucks here and there. Presumably, this would have no impact on the macro economy.
Level Two. Robin drops enough money on enough people to cause a meaningful increase in aggregate demand for goods. What happens next? If goods are sufficiently scarce, i.e., if supply is inelastic, prices rise and some people on whose head money is not dropped are squeezed out of the market for some things. They have been robbed. But if goods are not scarce, if there is ample excess capacity in the economy, then the new demand simply elicits more outputs at a lower marginal cost. Average costs fall, prices fall, and not only is no one hurt, but everyone can buy more stuff. This is called economic stimulus.
Level Two Plus. Robin doesn’t drop the money from helicopters. He pays it to people to do useful things, like build up the infrastructure of the poor neighborhoods. The same first-order effects pertain as in Level Two, but now the externalities start to matter. The improved infrastructure not only enhances the quality of life in the neighborhood, but it also lowers the cost of doing business there, lowering prices. Unless the supply of goods is completely inelastic, it is made more elastic by a better infrastructure, making the new money more stimulative than if it were dropped from helicopters.
Level Three. Robin gives out so much money, whether or not by overbuilding the infrastructure, that nominal demand swamps supply, and inflation robs from those not getting money.
MMT merely says that Robin would do good at Level Two Plus, which is to say that the government can do good at Level Two Plus. That’s it. MMT does not defend Level Three. If the government is not competent to cause Level Two to be Level Two Plus, because of waste, abuse and fraud, or is not competent to see Level Three coming, that is not a flaw in MMT. That is a flaw in government. One might as well deny that fire is hot on the grounds that some people will misuse that argument and burn down Notre Dame.
“[i]nstead of bank deposits creating the opportunity for loans, loans create bank deposits,” — that is, “[t]he funds needed to create the loan are manufactured out of thin air when the bank credits a borrower’s account with the amount lent.”
Another rabbit in another hat. “Thin air” has nothing to do with it. You don’t have to be an MMTer to know that a bank loan is the exchange of the bank’s credit for the borrower’s credit. This is a useful exchange because the bank’s credit is recognized in the business community and the borrower’s is not. Thus, the bank’s promises trade as money in the business community. Those promises are denominated in dollars, but they are not dollars. Only the government (or its delegate, the central bank) can issue dollars.
The fact that there are “non-bank banks” — banks that don’t take deposits — proves that banks are not financial intermediaries. Deposits are a source of funds to provide liquidity to the banking system, and they arise from money that was lent by a bank to a borrower, who spent the money with a vendor, who deposited the money in a checking account. We call the accounts created by banks “money” because they trade as money, but they are just debts of the bank, which, like all debt, is created “out of thin air” in recognition of the issuer’s creditworthiness.
MMT is relevant now because supply has become more elastic. More and more goods are available at low marginal cost. That is a new technological fact of life, a change in the environmental constraints on policy. Absent that change, we could assume that supply was relatively inelastic, and so the fiscal deficit could serve as a useful proxy of the relationship between money creation and available outputs. With supply constrained, fiscal restraint makes sense. But as supply becomes more elastic, the idea that government must tax or borrow to pay for things becomes as artificially constraining as the gold standard was in its day.
Gold worked when supply was very inelastic, but we abandoned it when it was no longer needed to prevent runaway inflation. Now, historical debt/GDP ratio limits are imposing the same unnecessary limitations as gold did in 1896. MMT is the intellectual framework for escaping the tyranny of the Debt/GDP standard. It does not say that the sky is the limit. It says that the limit needs to be probed. Maybe we don’t yet have the modeling tools to see inflation coming in a low-marginal-cost world. But that’s not MMT’s fault. That’s our fault. The supply curve has shifted. If we can’t take advantage of that, shame on us.