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Modern Monetary Theory: Economic Savior Or False Prophet? Madeleine Roberts

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Modern Monetary Theory: Economic Savior Or False Prophet? Madeleine Roberts Modern Monetary Theory: Economic Savior or False Prophet? Madeleine Roberts rom all the confusion that swirled been developing for the past decade or so, it around the 2008 financial crisis and has in the past few years entered the public the unexpected economic trends consciousness on never-before-seen levels, Fin the recovery, a novel way of looking largely because of its recently gained foothold at the American economy was born. A with progressive Democrats: major MMT hodgepodge of Keynesian principles and proponent Stephanie Kelton, for example, outside-the-box economic rationalization was Bernie Sanders’s economic advisor, and built on an unconventional interpretation Representative Alexandria Ocasio-Cortez of deficits, Modern Monetary Theory has advocated for implementation of the (MMT) emerged as a theoretical solution theory to fund the healthcare and climate to unemployment. Though the theory has change programs proposed under her The JOURNAL of The JAMES MADISON INSTITUTE Green New Deal (Mayeda and Dmitrieva). government need not worry about escalating Though not always mentioned by name, levels of debt as long as inflation is kept in MMT principles have become ingrained in check insomuch as the government cannot the country’s political consciousness, and legally declare involuntary bankruptcy MMT-leaning lingo has become more and (Coy et al). This is true, but what advocates more common in light of the downturn of MMT fail to realize is, inflation aside, triggered by COVID-19. Indeed, some excessive money creation in this manner believe it may be America’s economic savior. does not actually provide a “free lunch,” as MMT has also received significant IMF’s chief economist Gita Gopinath put it criticism from multiples sectors, ranging (Harvey; Mayeda and Dmitrieva). from Lawrence Summers, a former Secretary Kelton argues that economists’ tendency of the Treasury under President Obama, to shy away from deficits is simply a matter of who accused MMT of being “fallacious perception, claiming they merely represent at multiple levels,” to Larry Fink, CEO nongovernment surpluses. In other words, of BlackRock, the largest asset managing deficits are an account of how much money company in the world, who labelled it the government paid into households and “garbage” (Mayeda and Dmitrieva). Not did not tax back out (Kelton, “Sanders’ surprisingly, fierce debate swirls around 2016”). This, however, is precisely why MMT and whether it is a viable alternative government money creation will not have to fiscal austerity in the U.S. economy. the desired effect of free funding. If the Economist and George Mason University government needs additional funding and professor Scott Sumner once remarked on decides to issue more currency through the debate, “MMT has constructed such a the Treasury, according to Kelton, this bizarre, illogical, convoluted way of thinking extra money finds its way into households. about macro that it’s almost impervious to MMT proceeds on the assumption that attack” (Coy et al). this money will be spent and subsequently Indeed, Modern Monetary Theory is boost production and the economy; built on several fundamental economic however, it is not unreasonable to assume errors, including its conception of how the public will deposit much of the excess government money creation works, why in commercial banks. Now banks have government deficits matter, and the causes extra currency, which they deposit in the and prevention of inflation. These glaring Fed as bank reserves. The Fed, like in most issues are proof that voters should be mindful countries, pays a market interest rate on of what economic policies, not merely these bank reserves. So in this scenario, the candidates, they are voting for on election extra government expenditure is financed day, especially in this unprecedented and by “forced borrowing from the banking uncertain time in American history. system,” and the government still ends up MMT, at its core, is the belief that the paying interest on its debt, merely through government has access to nearly unlimited a different process than usual (Grenville). If funding. Since it can create its own currency, the government still must pay for its debt, The JOURNAL of The JAMES MADISON INSTITUTE it makes more sense to do so through the to a sovereign government” such as the established method of issuing US Treasury United States (Wray). This statement is true notes than through burdening the Fed with in that the government cannot go bankrupt extra expense. Indeed, unlike what MMT but, on a global economic scale, foreign proposes, there really is no “free lunch” for investors tend to shy away from excessively the American government. increasing deficits. The reality is, even if A common misconception of MMT, the U.S. government can handle excessive stemming from its seemingly haphazard deficits, the country could be hurt from attitude towards money creation, is that developing a reputation around the world MMT advocates believe deficits do not for fiscal irresponsibility. If the U.S. loses the matter. Kelton, speaking on behalf of all confidence of international investors, it will MMT advocates, firmly rejected this claim be harder for the country to issue debt, and on Twitter in 2018: international demand for money holdings and debt prices will drop, culminating in the dollar plummeting and wreaking havoc on the economy (Coy et al). Perhaps a successful, longtime implementation of MMT could assure the world that excessive deficits will not trigger inflation and win back the confidence of investors; however, as MMT stands currently, a novel theory many believe to be nonsense, dollar depreciation (a harbinger of inflation) would be a very The misconception stems from why real danger if MMT was implemented. MMT advocates think deficits matter. The notion of a government creating Usually, large deficits precede bankruptcy, its funding at whim depends heavily on but MMT disregards deficits in this sense controlling inflation, which will inevitably because the U.S. is not legally subject to this occur if the government continues to create danger (Harvey). Yet MMT advocates still money past the point where the economy recognize that deficits can trigger inflation, can absorb the excess. Kelton shuns the which they view as the primary hazard of most conventional solution: “I reject the excess government fund creation and thus idea that MMT is about using taxes to have designed plans to keep price levels in fight inflation” (Kelton, “Sanders’ 2016”). check (Kelton, “Sanders’ 2016”). MMT fails Instead, advocates of MMT propose using to consider a third risk to growing deficits, automatic stabilizers to combat demand- however: how they affect the U.S.’s reputation pull inflation. Since the main problem MMT for fiscal sustainability and appeal to foreign seeks to solve is unemployment, the primary investors. The article Kelton attached to stabilizer proposed is a job guarantee for her Tweet claims that “the notion of ‘fiscal all Americans, which has become a central sustainability’ or ‘solvency’ is not applicable tenet of the theory (Harvey; Cohen). This The JOURNAL of The JAMES MADISON INSTITUTE solution, however, would tend to drive system would fail to provide interest-free up inflation, not combat it: if everyone is government funds, rendering it incapable of making at least the minimum wage, the financing excessive government spending minimum wage is worth less in real terms. to boost the economy. Furthermore, should The other method by which MMT the United States adopt MMT principles proposes to curb inflation is by breaking in the long-term, it would struggle to up large businesses, since they attribute maintain the dollar’s international appeal inflation primarily to their pricing power as the global economy recovers. But most (Coy et al). This process, too, would be importantly, MMT has the potential to inflationary because MMT advocates tend to cause a crippling level of inflation, which look at big businesses the wrong way. Many has already begun to take root in the United businesses nowadays become large because States as government spending and the of their ability to compete on price and money supply continue to increase. sell goods cheaper than their competitors, Such issues with economic policies like not the other way around. (Just consider MMT, as well as all other proposed policies, Amazon and Walmart, prime examples should be familiar to voters when they go to of this concept.) Consequently if large, the ballot box. This rings especially true as efficient businesses that can afford to sell the country faces an unprecedented period goods more cheaply were to be replaced by a of major fiscal challenges and potentially number of smaller, less efficient companies, generational changes in government the price of goods would increase, a budget priorities. The stakes are high: the manifestation of cost-push inflation. Thus, future of this country after this crisis will MMT proponents lack a feasible plan for undoubtedly look far different than the lessening inflation effectively, the greatest past, and voters have a significant role to and most inevitable danger of creating play. Indeed, it’s largely up to them to shape government funds whenever needed. this future. Though some may see MMT as a creative Madeleine Roberts is a rising first year solution to the current economic downturn, at the University of Chicago with an interest the risks associated with a full-scale in the intersection of economic theory and implementation are too great. An MMT public policy. The JOURNAL of The JAMES MADISON INSTITUTE WORKS CONSULTED Coy, Peter, et al. “What You Need to Know about Modern Monetary Theory—and Why.” Edited by Cristina Lindblad. Bloomberg, 21 Mar. 2019. Accessed 26 Mar. 2019. Fiebiger, Brett. “Modern Money Theory and the ‘Real-World’ Accounting of 1-1<0: The U.S. Treasury Does Not Spend as per a Bank.” Political Economy Research Institute, Nov.
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