Sunday, August 16, 2020
Worried about debt? Not in a world running on MMT
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Today, something slightly different. This is in the nature of an economic version of a request show. I have had many requests to write about what is known as modern monetary theory (MMT) and this is my response. MMT has been around for some time, decades or even centuries according to its advocates, but it is relevant now.

My reluctance to write about it has been partly because its true believers, like some true believers in Brexit, can get very exercised when faced with criticism, even it is constructive. Actually, there is an overlap between supporters of MMT and Brexiteers. If MMT works for anybody, it plainly does not work for countries which have joined the euro because they do not have monetary sovereignty. It would have been of no use to Greece during the eurozone crisis

But I am getting ahead of myself. The reason for writing about MMT now is the recently published book by Stephanie Kelton, professor of economics and public policy at America’s Stony Brook University, and one of MMT’s leading advocates. She advised Bernie Sanders, who ran Joe Biden close for the nomination as Democrat challenger for the US presidency. Her book, the Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, is published in this country by John Murray.

It is proving popular, for good reason. Not only are plenty of people interested in MMT but it is written in a non-technical, accessible, even folksy style. It is being read by non-economists, as all the emails I have received urging me to write about it attest, as well as being on the summer reading lists for many economics’ students. Last time I looked it was Amazon’s bestseller in macroeconomics and within sight of the top 1,000 among all titles.

It is arranged as a series of myth-busting chapters, though I do not know if people who are aware of conventional economics believe many of these myths. The first “myth” is that there the government’s budget is not the same as a household budget, something that I thought had been buried many years ago. The same goes for most of the other myths.

The central idea of MMT is simple. It distinguishes between currency issuers and currency users. The only currency issuer in America is the US Treasury, and the Federal Reserve acting as its agent. Everybody else is a currency user.

As a currency issuer, the government has the ability to print as much money as it needs. The budget deficit itself is not a constraint, and neither is government debt. Some claim, wrongly I think, that MMT has already been adopted, in effect, in response to the Covid-19 crisis.

In the world of MMT the government can print enough money to cover a deficit of any size and in extremis to pay off all the accumulated debt of the past. The only tests of whether a budget deficit is too large or too small are inflation and unemployment. If inflation is low, the budget deficit cannot be too high, and if there is unemployment, the budget deficit must be too low.

Many people will be catching their breath at this point, not least because Kelton claims that this is not just a theory but an explanation of how the world works. But that then requires us to be taken down a rabbit hole of implausibility.

If deficits can be costlessly funded and managed by the simple device of issuing currency, why do governments need to raise taxes? In perhaps the least plausible explanation of the way incentives work, people apparently need to work to meet their tax obligations. If they did not have to pay tax, they would not need to work. I rather think they would, to satisfy their wants. Another reason provided for taxing to redistribute wealth and income, does not wash either. You can redistribute wealth and income within the tax system without raising any net revenues, by taking from the rich and giving it to the poor in tax credits.

Taxation exists in the real world to raise revenue. And borrowing by governments also plainly exists. Her explanation is that this is not to raise money, because governments do not need to, but “to offer people a different kind of government money, one that pays a bit of interest”. Try telling that to American and British governments in the past, which have paid a lot of interest to fund their borrowing and have sometimes struggled to do so.

There is plenty more in the book. Some of it, like the policy of a job guarantee for everybody, is not so much part of MMT but an add-on, though at a time of high unemployment possibly a popular one.

MMT is misnamed because it is not monetary at all but almost entirely fiscal. As Kelton puts it: “MMT requires us to demote monetary policy and elevate fiscal policy as the primary tool for macroeconomic stabilization.”

So what should we think about this? MMT has drawn robust criticism from some of the world’s most eminent economists. Kenneth Rogoff, a former chief economist at the International Monetary Fund, writing last year under the headline Modern Monetary Nonsense, described its central idea as “just nuts”. An exasperated Paul Krugman has described trying to debate with MMT advocates as like playing Calvinball, a game in which players make up the rules as they go along.

Larry Summers, the notable economist and former US treasury secretary, has attacked the “ludicrous claims” by “fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone”.

In response to Kelton’s book Julian Jessop, an independent economist, has written: “MMT is simply a repackaging of some old ideas to appeal to a new audience. There really is no such thing as a free lunch – even from a magic money tree.”

I am going to be polite. We always need new fresh ideas and nobody wants to kill off ideas which are clearly in a state of gestation and are in no way workable in their present form. Some, like the economists above, might say it is necessary to kill off MMT because it is dangerous. There is, however, little chance of it being adopted as real-world policy. Even Jeremy Corbyn and John McDonnell did not embrace MMT, despite being urged to by some of their supporters.

They were wise not to do so, because there are fundamental problems with MMT, which it would take another book to fully address. Kelton has some fun with Margaret Thatcher and what she describes as Thatcher’s backward dictum, because of her tendency to describe the government’s finances in the way you would describe a household’s finances.

But Kelton has more in common with Thatcher than she thinks. In the early 1980s, when the Tory government launched its monetarist experiment, Thatcher thought the key driver of inflation was the budget deficit. Government borrowing had to be reduced to reduce growth in the money supply and bring down inflation. It is why people associated monetarism with “cuts”. Kelton is looking at it from the other end of the telescope but applying the same principle.

The causes of inflation are many and varied, particularly when you do not use the simplifying assumption of a closed economy. Dylan Grice, whose review of Kelton’s book was recently republished by Albert Edwards of Societe Generale, is not unsympathetic but points to the “preposterous” idea that getting the Congressional Budget Office in America, or equivalent bodies elsewhere, to predict inflation will take care of the inflation risk from large budget deficits. Given the forecasting record on inflation, it plainly will not. As he puts it: “In short, MMT is a recommendation that policymakers press hard on the accelerator without knowing where the brake is.”

He is right, and while advocates of MMT like Kelton see it as two-way street, in which spending would be reined back in inflation took off, politicians might see it differently. Would it be a recipe for huge instability in the provision of public services, with public spending cut back in a way that would make George Osborne’s post-2010 austerity look like a tea party? Or would the government decide it could live with a lot more inflation. Either way, it would not be pretty.