[Question] Are we entering an experiment in Modern Monetary Theory (MMT)?

Dis­claimer: Not an economist. Just an in­ter­ested ob­server wish­ing to learn more. Apolo­gies if I man­gle the the­ory here.


One fairly con­sis­tent re­sponse to the COVID pan­demic by na­tional gov­ern­ments has been the in­jec­tion of stag­ger­ing amounts of cap­i­tal into the econ­omy, which is funded by gov­ern­ment bor­row­ing. The US stim­u­lus pack­age, for ex­am­ple, has been val­ued at $2.2 trillion. In Aus­tralia, where I’m from, stim­u­lus so far equates to around 10% of GDP.[1]

To the ex­tent that ex­perts are com­ment­ing on this debt-fi­nanced re­sponse, they seem to be di­vided into highly di­ver­gent camps. Some say that this debt is cre­at­ing a bur­den that fu­ture gen­er­a­tions will need to re­pay—i.e. that we are bor­row­ing from the fu­ture to pay for to­day’s prob­lem [2].

Others, in­clud­ing pro­po­nents of MMT, seem to take the view that gov­ern­ment debt needn’t be thought of as some­thing that re­quires pay­ing down. The only ques­tion rele­vant to this camp is whether the in­jec­tion of money is the right thing to do in terms of man­ag­ing the dy­nam­ics of the econ­omy (con­sen­sus seems to be yes).

MMT is an idea I’d been read­ing a lit­tle bit about prior to this crisis (fur­ther info be­low), but given that most gov­ern­ments seem to now be fol­low­ing its dic­tates—i.e. bor­row­ing and spend­ing be­cause that’s the right thing to do in the pre­sent, rather than wor­ry­ing about how those debts will be re­paid—are we now en­ter­ing a phase where we might learn whether MMT holds? Are we en­ter­ing an ex­per­i­ment in mon­e­tary the­ory that might teach us more about which camp of economists is cor­rect?

Rele­vance to EA:

Given the com­pound­ing na­ture of sus­tained eco­nomic growth, get­ting the set­tings right on mon­e­tary policy seems like it has the po­ten­tial to sig­nifi­cantly im­pact gen­eral welfare in both the near and long term.

Fur­ther, there is already an in­her­ently longter­mist an­gle to this de­bate—with many com­men­ta­tors ap­peal­ing to the im­pact on fu­ture gen­er­a­tions of ex­ces­sive spend­ing in the pre­sent.

On the other hand, if MMT holds, this should be pro­moted by EAs as a guide to how gov­ern­ments may re­spond to other and more se­vere x-risks than COVID-19. MMT has also held out as a ba­sis for a ‘Green New Deal’, which is an in­ter­est­ing prospect.

Pre­vi­ous posts on MMT:

There have been some pre­vi­ous de­bate on this fo­rum around MMT. See this post.

In that post, some­one pointed to an IGM Chicago Sur­vey to sug­gest that se­ri­ous economists uni­ver­sally dis­count the ideas of MMT how­ever, as I point out in the fol­low­ing sec­tion, that sur­vey seemed to se­ri­ously straw­man MMT’s ar­gu­mants.

What is MMT?

As I un­der­stand it, the cen­tral claim of MMT is that there is no need to bal­ance a na­tional bud­get in the way that one might want to bal­ance their house­hold or busi­ness bud­get. In­stead, the role of the re­serve bank is to ‘bal­ance the econ­omy’.

The three core ideas [3] seem to be:

1) Mone­tary sovereign gov­ern­ments face no purely fi­nan­cial bud­get con­straints.

  • NB: We are talk­ing here about gov­ern­ments that is­sue their own cur­rency, have a float­ing ex­change rate and no sig­nifi­cant for­eign cur­rency debt, such as the US, UK, Ja­pan and Aus­tralia.

2) How­ever, all economies, and all gov­ern­ments, face real and ecolog­i­cal limits re­lat­ing to what can be pro­duced and con­sumed.

  • The idea here is that if too much money is in­jected into an econ­omy, then the spend­ing power will even­tu­ally ex­ceed the pro­duc­tive ca­pac­ity of that econ­omy—e.g. will out­strip labour sup­ply or nat­u­ral re­sources. MMT says that this is what causes in­fla­tion, not merely the in­jec­tion of money into an econ­omy.

  • As I men­tioned ear­lier, there was an IGM Chicago Sur­vey where economists ap­peared to quite uni­ver­sally dis­miss the ideas of MMT on the ba­sis that they would lead to ram­pant in­fla­tion—see link. How­ever, when you look at the set up for that sur­vey, it’s clear that they’ve straw­manned MMT by sug­gest­ing that it posits no limits on bor­row­ing and gov­ern­ment ex­pen­di­ture. This sec­ond premise of MMT dis­pels that myth. Un­der MMT there is still said to be a limit on gov­ern­ment spend­ing/​bor­row­ing, but it is defined by refer­ence to the pro­duc­tive ca­pac­ity of the rele­vant econ­omy, rather than by refer­ence to any bal­anced bud­gets or the like.

3) The gov­ern­ment’s fi­nan­cial deficit is ev­ery­body else’s fi­nan­cial sur­plus.

  • The idea here seems to be that there is an in­verse re­la­tion­ship be­tween pri­vate sav­ing and gov­ern­ment spend­ing.

What are the al­ter­na­tives?

The op­po­site view to MMT seems to be ‘mon­e­tarism’. Ad­vo­cates of mon­e­tarism say, among other things, that mar­kets are best at de­ter­min­ing the op­ti­mal al­lo­ca­tion of re­sources, so the role of gov­ern­ment should be min­imised and in­deed fis­cal spend­ing is not only in­effec­tive but ir­re­spon­si­ble. This fo­cus on let­ting mar­kets run free seems to have be­come the norm across most of the de­vel­oped world.

A re­lated idea to MMT is Keyn­si­anism. How­ever, as I un­der­stand it, Keynes was in favour of run­ning a bud­get deficit only dur­ing pe­ri­ods of high un­em­ploy­ment. MMT takes this in­ter­pre­ta­tion of Key­ne­si­anism fur­ther.

Re­lated ques­tions:

It seems trou­bling to me that there is so much dis­agree­ment about the fun­da­men­tals of ques­tions around mon­e­tary the­ory. In fact, the more that I read, the more I feel that there is not even an agreed con­cep­tion amongst differ­ent economists of what is meant by key con­cepts such as ‘money’, ‘sovereign debt’ or the ‘econ­omy’. And each of the view­points seems to be quite ide­olog­i­cally in­fluenced. Is this right? How can it be that, as a so­ciety, we have such a poor grasp on con­cepts about money, and yet our whole so­ciety is or­ganised around money?

Does any­one know of good re­sources (books, pod­casts, ar­ti­cles, videos) where I could learn more about these ideas? Prefer­ably re­sources that aren’t pro­mot­ing a sin­gle idea or ide­ol­ogy, but are fairly ex­plor­ing all rea­son­able view­points.


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