Why MMT Matters Now
Modern Monetary Theory (MMT) is getting a lot of attention these days. Proponents of MMT tend to be politically liberal, and many use MMT to explain why their schemes for massive government spending won’t bankrupt the country. Of course, those schemes may be bad ideas on their own merits regardless of their monetary and fiscal consequences. Still, critics of the programs seem obligated to be critics of MMT, too, as if MMT implies that the programs are good, as opposed to affordable. I want to isolate MMT’s narrow claims in a way that does not make people’s heads explode on account of what it says is fiscally possible.
Rather than build MMT from first principles about taxation and sovereignty, I want to show instead how MMT explains why recent and ongoing fiscal deficits have not caused unacceptable levels of inflation.
What is MMT?
The ‘Net abounds with articles about MMT for those who want to get into fine points of the theory. In this article I want to deal with one takeaway, the idea that taxes don’t pay for government spending but merely destroy money created by that spending. MMT enables us to redefine “balanced budget” to mean a combination of spending and revenue that results in the politically desired amount of inflation. For MMTers, the question is not whether the government is paying out more than it takes in, but whether it is creating more (or less) net money than the economy can absorb.
MMT is sometimes contrasted to John Maynard Keynes’s prescription that government should run surpluses in boom times and deficits during recessions. I would argue that Keynes’s rule is just a special case of the more general MMT rule. If we assume that supply is relatively static, then recessions are deflationary and booms are inflationary, each demanding the fiscal response that Keynes recommends. If, however, we assume that supply is not static, i.e., that capacity is growing, then the “neutral” point for inflation is not fiscal balance but deficit spending. In that case, Keynes would arguably recommend larger deficits in a recession and smaller ones in a boom.
Too many goods chasing too little money.