The Political Alchemy Called Modern Monetary Theory

The new kid on the economics block is something called modern monetary theory. The name is new, but the "theory" is not.

Proponents adamantly claim that it is both new and a theory of economics. To make it appear this way, they dress the ideas in unusual-sounding jargon and use rhetorical tricks. For example, instead of presenting actual arguments or responding to direct questions, they present a circular flow of deepities. To top it off, they, at least in my humble experience, usually lack fundamental economic literacy. This can make rebutting their nonsensical claims a challenge and, as a result, debates with this crowd typically go nowhere. mmt

In order to figure out what exactly they are claiming—beyond the deepities—I decided to acquaint myself with the prominent proponents. I read "founder" Warren Mosler’s so-called white paper on MMT, but it’s not very helpful: there is little by way of theoretical explanation, other than redefining if not obscuring the meaning of common concepts in economics. Mosler also seems overly eager to move from explanation to instead argue for his preferred policies.

I hoped for (and got) more from listening to a TED Talk by Dr. Stephanie Kelton, an economist and professor at Stony Brook University who was the senior economic advisor to Bernie Sanders's presidential campaign and author of The Deficit Myth (reviewed by Bob Murphy here). TED Talks are only fifteen minutes long, but it turned out to be a very painful experience.

It’s All About Spending

Judging from Kelton’s presentation, MMT boils down to a description of how the fiat currency system works under a central bank. Kelton explains:

MMT provides an accurate description of how a fiat currency like the US dollar or the British pound actually works. It reminds us that we are no longer on a gold standard, so finding the money to pay for the things we need is never an issue for countries like the US or the UK.

The implication of having a monetary monopoly is that the “[t]he federal government can never run out of money” (all quotes are from Kelton’s talk unless otherwise stated). This is obviously true, but only because Kelton (and MMT) does not distinguish between money in the real sense (the valued medium of exchange, i.e., purchasing power) and the currency issued by government and banks (the dollars or pounds, whether physical or digital). But that’s not always true. For example, the government of Venezuela was not running out of bolívars, but from this it did not follow that the currency would retain its purchasing power (as, obviously, it didn’t) or even retain its status as money (which it also didn’t). Venezuela is one recent example, but the claim is universal. (For more examples, see Zimbabwe/Zimbabwean dollar or the Weimar Republic/papiermark.)

So, in a strict sense, it is certainly true that the federal government “can afford to buy whatever is available or for sale in its own currency.” However, while proponents of MMT often emphasize and extrapolate from the word “afford” to make it appear as if there were no end to government spending, it is really “for sale in its own currency” that is key. This means there is indeed a limitation. Kelton realizes this but fails to mention it until the very end. Her point here is to delink government spending and taxation:

If you got a $1,400 check from the federal government earlier this year, or if your company received money to help cover payroll and other expenses, then you received some of the newly minted digital dollars that were created to support our economy. No taxpayers were involved in that process. It was all done using nothing more than a computer keyboard.

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