hamada50_PAUL J. RICHARDSAFP via Getty Images_printing money PAUL J. RICHARDSAFP via Getty Images

The Power and Poison of MMT

The rigid stances of Modern Monetary Theory’s devotees and detractors have not lent themselves to productive discussion. This is a serious loss for policymakers, because MMT includes both problematic propositions and perfectly reasonable – even highly useful – ones.

NEW HAVEN – When Democratic Senator Joe Manchin announced that he would not support US President Joe Biden’s Build Back Better Act – effectively dooming the president’s signature legislative initiative – he cited America’s “staggering debt.” His concerns echoed those of Biden’s Republican opponents, who insist that all that spending would expand the deficit and leave future generations groaning under the weight of a heavy tax burden.

But would it? Proponents of Modern Monetary Theory would beg to differ.

The Build Back Better Act’s detractors subscribe to the conventional Ricardian assumption that, over time, a government must balance its budget, just like a private firm. But MMT holds that, as long as debt is denominated in a country’s own currency, its government cannot default. Excessive government spending can fuel inflation, but as long as prices are stable, governments can spend away, using fiscal deficits – rather than tax revenues – to support employment and finance public goods.