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The MMT Myth

Nov 3, 2020 Otmar Issing

In today's environment of ultra-low interest rates and massive monetized fiscal deficits, the dangerously naive policy prescriptions offered by Modern Monetary Theory are being realized more or less by default. Whether central banks will be able to regain control after the current crisis is an open question.

FRANKFURT – Many people are now proclaiming that the COVID-19 pandemic has provided proof positive that Modern Monetary Theory (MMT) is the only way forward for governments. To the uninitiated, MMT probably sounds extremely sophisticated – even scientific. Its representatives speak as though they have developed a new economic paradigm comparable to the Copernican Revolution in astronomy. Yet behind the sleek title and confident policy pronouncements lies a message that is as simple as it is dangerous, particularly now that governments around the world are spending freely to keep their economies afloat during the pandemic.

According to MMT, governments can spend what they want on whatever they want until full employment is achieved, and without ever having to worry about the financing, because the central bank will provide the money by simply operating the printing press at no cost to the government. Whether this contribution to economic thought even deserves to be called a new “theory” is debatable, considering the unoriginality (and banality) of its central concept. Indeed, the ideas about government spending date back to the economist Abba P. Lerner’s concept of “functional finance” in the 1940s. MMT has merely tacked on a federal job guarantee.

The first publications on MMT – such as Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, by the economist L. Randall Wray – appeared several years ago, and were met with near-unanimous criticism from economists across the political spectrum. Nonetheless, the debate about MMT continues, primarily because it has been picked up by politicians like the former UK Labour Party leader Jeremy Corbyn and US Senator Bernie Sanders.

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0 Comments on this paragraph, 18 Comments on this article

rich caldwell Nov 22, 2020

Let’s look at the first paragraph of the exposition “According to MMT, governments can spend what they want on whatever they want until full employment is achieved, and without ever having to worry about the financing, because the central bank will provide the money by simply operating the printing press at no cost to the government.“

If the author’s objective is to create a non-existent straw man version of MMT to attack, this is how to do it. Omit a key qualifier, that of needing to carefully watch for resource constraints in the economy when spending. MMT’s proponents are all perfectly open and clear in stating that inflation is a definite limit to spending “limitless money”, and that implementing MMT requires thoughtful management to ensure not dumping too much demand into resource-constrained segments of the economy.

Or perhaps the author is sincere, but so disturbed and upset by the shocking and unthinkable core idea of MMT (that fiat currency is not scarce, but rather limitless) that he was unable to actually bring himself to sit down and read any of its proponents books and articles on the subject? Maybe he only heard about MMT from a friend?

If the former, shame on him. Either way, sad. The central insight of MMT is that the supply of fiat currency is unrelated to and unconstrained by either debt issuance or taxation. Considering that idea sincerely opens a realm of creative thought. Cognitive dissonance is a sign of potential new insights, not a reason to dismiss an idea out of hand.

The stubborn idea that the national governments of countries such as the USA and UK can only spend what they raise through issuing debt or taxation is tightly held and accepted by many as “fact”. Fact as in a belief, asserted by custom, uninspected despite fundamental changes in money itself.

Unfortunately the rule in science that science progresses as old scientists die off seems clearly applicable to economics and central banking. MMT is here to stay.
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Joseph Gaytten Nov 9, 2020

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Claudio Migliore Nov 9, 2020

PS must have been asleep at the wheel printing this piece of abominable neo-liberal conservative capitalistic retrograde trash (kidding).
Unless they let this one through because they expected enough commenters would shoot holes through the insufficiently strong argument. Still, I must commend Mr. Issing for his salmon-like courage in swimming against current.
MMT the theory IS Monetary and it IS Theory, but it is NOT Modern. Print more money and spend it and demand and prices will rise. Tax and burn the proceeds and that will dampen demand and prices (i.e. inflation). Even small kids know that, from Argentina to Zimbabwe. Ignoring that is called monetary illusion.
When you move from theory to MMT the practice, though, it has inspired, and been applied by, politicians since the day money was invented. Invariably, the hard part, the taxing, never seems to be up to the task. That is not surprising, since everyone loves and is inclined to vote Santa over bill collectors.
But the hollowness of the applied part of MMT is clear. If you cannot spend boundlessly because it causes inflation, there is no magic. You have to prevent some from consuming in order to allow others to do it. Furthermore, there is no amount of taxing, short of straight full confiscation, that will make billionaires buy less burgers and automobiles, so progressive taxation limits long term investment, not consumption. Only the middle class (through their taxes) or the lower class (through inflation) can finance spending. And those who believe they can feed millions with the burgers not eaten by a handful of billionaires are fools.
In the end, public spending takes from some burger eaters and, for a "small" fee, passes it on to other burger eaters. In the process, less investment for the future ensues. Nothing new is invented. Perpetual motion and Santa do not exist.
We have government to stay safer from each other and to do together what can be done better together. Some greasing of palms and some waste is inevitable. But when a community starts trusting Greeks with gifts, its demise looms.
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Jos Gallacher Nov 8, 2020

"...knows no limits" is where the argument departs from MMT. Advocates of MMT (I am not one) make clear that government spending is constrained in the first instance by inflation, and at a deeper level by the resources available for production. As I read the case they make, government spending is constrained but not by a classical "budget constraint".
Misrepresenting MMT case opens the door to straw man arguments.
- Claudio Migliore Nov 9, 2020
  
  Agree. Another misrepresentation is the fact that MMTers would worry about inflation only after it flares. It allows fans to counter that inflation can be monitored and averted by taxing in a timely manner. Of course, it is nonsensically optimistic, but this obscures the main point, which is that there are no programs to lose weight without diet and exercise and no way to print prosperity. If some catastrophic event keeps unutilized factors of production for a long time, governments can and have spent to prop up demand, without the need of the theoretical imprimatur of MMT: in a sense, the Central Bank mandate to keep inflation stable already does that. Certainly there is no need to give politicians the fig leaf of MMT to support a never-ending printing party.
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Frans Withofs Nov 8, 2020

I agree with O. Issing. We see already MMT put in practice currently by central banks. Frankly speaking, already now I don't see how central banks can regain control of their balance sheet. To my opinion , central banks lost indeed their status of independence, central bankers have become merely civil servants in order to obey to their political masters. I can only regret that the checks and balances which were buildin have gone by the board.
- Alexandros Aslanidis Nov 29, 2020
  
  "..central bankers have become merely civil servants in order to obey to their political masters.."
  
  Which is exactly how it should be. Money (and the goods and services that it funds) should be treated like a public commodity.
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Muhammad Ali Nasir Nov 8, 2020

Not found of MMT but the first couple paragraphs just opinions, arguments no warrant. There has been a lot of monetary expansion and no inflation rather deflation in EU so don't think the idea of inflation has much weight.
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Ramon Tarrago Nov 8, 2020

Once that faucet opens, closing it becomes a political endurance test. Politicians on their side forget about the required adjustment, and if it has to do with major fiscal matters to achieve some sort of fiscal consolidation; deferral is the policy. At certain point in time, there has to be an impact on wealth.
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James Weir Nov 8, 2020

MMT is simply the application of accounting rules to explain how money works in an economy where the government has sovereignty over the currency. It is not a policy prescription and it is politically indifferent. To describe it as a theory is not unlike the 'theory' of gravity, which is simply the application of the rules of physics. Thus, to say the world is now embracing MMT is like saying as of next Tuesday we'll apply the theory of gravity - it's already there.

Furthermore, MMT explicitly acknowledges the risks of inflation, and yes, taxation is a suggested remedy. However, it also offers the insight that while a government that controls its currency cannot be insolvent (it can always print more money), it can go bankrupt (the currency becomes worthless).

A government is constrained by the resources of the overall economy, if it overspends, it will eventually debase its currency. Where the limit for that is in an economy like the US, Japan or China is impossible to pinpoint, but as we've seen it's obviously very different to an economy like Zimbabwe or Venezuela.

How a government chooses to spend its resources will be instrumental in determining the economy's future. It can blow $1.2 trillion on tax cuts or it can use those resources to rebuild dilapidated infrastructure and so reinvest in the economy's resources. It's not unlike an individual spending their money on consumption versus investment.

While Mr Issing's article misrepresents MMT in some respects, his observation that if MMT's insights become generally accepted, then a country's resources could easily be squandered by politicians seeking re-election is true. It is arguably one reason why an economy that is run according to rolling five year plans, rather than an election cycle, stands a very good chance of coming out ahead.
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Adrian Wu Nov 5, 2020

With the US dollar's reserve currency status, the MMT experiment could probably go on for a lot longer than one expects. The habit of using USD for international trade, esp. in commodities, will prove sticky, thus ensuring a constant demand for newly minted dollars. There is no alternative reserve currency for foreign countries, except perhaps the Euro and Yen to a lesser extent, but both of these currencies suffer the same expansionary pressure. And in the worst case scenario, the US can always use its military might to coerce countries to continue trading in US dollars. The only problem with debt monetisation is that it always benefits the rich disproportionally. Politicians such as Sanders would try to drop money into households with schemes such as universal basic income, but this is still political poison, even in highly progressive countries such as France. And in the US, we are already seeing the fruit of a decade of monetary expansion, with a huge wealth gap creating opportunities for populists such as Trump. I would argue that it will be social disintegration that puts an end to the MMT experiment, not hyperinflation.
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S T Nov 4, 2020

Airplanes fly not because they were invented but because aerodynamics is a feature of the World. Quantum computing exists not because it was invented but because quantum mechanics is a feature of the World. MMT exists not because it was invented but because it's a feature of the World. MMT describes how the World works, but for some reason, some people prefer to live in fantasyland instead of acknowledge of how the World works and acknowledge those who accurately describe it. By the way has anyone in E.U. noticed the massive inflation in asset prices such as housing? Maybe Q.E. has something to do with it?
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Mirek Fatyga Nov 4, 2020

I think that the whole MMT thing is rather comical. MMT is printing money, which rarely leads to prosperity. If it did, Soviet Union would still be a superpower, as would Zimbabwe. MMT proposals attempt to solve a real problem in the economy through roundabout ways. Why not attack the real problem head on?

There are actually at least two intertwined economic problems.

The first one is self inflicted. After 40+ years of (so called) Neoliberalism, the world is choking on debt. This is because Neoliberalism was a brave economic experiment which first crushed Labor, and then attempted to replace lost income with debt, to keep consumer markets going. This actually works for a time, until the economy fills with debt to a point when you cannot credibly create new debt that is not self-evidently fraudulent. I recommend listening to an old song entitled "16 tons".

MMT could be a roundabout way of fixing this debt problem, by injecting money into Main Street, hoping that inflation will diffuse the debt bomb. The problem with this method is nicely demonstrated by the covid relief in the US. Wall Street and Corporations (aka Capital) will grab most of the money before Main Street sees a penny. The current debt problem has been caused by the dominance of Capital over the political system in the first place, so MMT without structural reform to support Labor brings no particular relief. How about we start with actually trying to redress the balance of power between labor and Capital?

The second problem is even more serious, because it is actually physical, not political. The physical problem is caused by the pressure on natural resources due to world population growth. It may be solvable, but solutions will take time and money. In the meantime, there are hard barriers to economic growth through growth of consumption of scarce resources, period.

There are no easy fixes, but if we are going to start somewhere, I would start by propping up Labor so it can demand higher share of the profit, either through taxation or higher wages. Governments can inject some amounts of money to aid in innovation (for example electric car) to overcome resource limitations faster.

I don't think anything will be solved by saying that we can just print money, because it is "our money". This all has been tried before and never ended well. Money needs to be at least some store of value, even if gradually losing some of it's value over long periods of time, or else we are removing incentives to work harder than the average block, making the average block a permanent ward of the State, and we are back in the Soviet Union.
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Ralph Musgrave Nov 4, 2020

Otmar Issing doesn’t know much about this subject. First he claims the basics of MMT go back to Abba Lerner in the 1940s. Actually Keynes (in a letter to Roosevelt) in the early 1930s argued that simply creating money and spending it was a way out of a recession. And going back much further, in Ancient Rome, the escaped a credit crunch by raiding the Treasury and spending money freely.

Next, Otman Issing seems to suggest (para starting “Recognising this problem…”) that if the job of raising taxes so as to curb inflation is left to politicians, those politicians will inevitably fall for the temptation of abstaining from raising taxes so as make themselves popular with voters.

Well we all know there have been examples thru history of politicians behaving in that irresponsible way, but actually the evidence seems to be that when politicians DO CONTROL the printing press (i.e. when central banks are not independent), there is no obvious tendency for inflation to rise. Scroll down to first chart here:

http://bilbo.economicoutlook.net/blog/?p=9922

Moreover, it would be perfectly feasible to have an MMT system where politicians DO NOT decide the size of the deficit: e.g. the decision on the size of the deficit could be left to the central bank, a system long advocated by Positive Money and endorsed by Ben Bernanke.

Moreover Issing is quite wrong to say “MMT, however, would revoke the central bank’s control over the printing press, and put that power in the hands of the government.” Actually MMTers are not specific on exactly WHO controls the press: something they certainly ought to clarify.

Next, Otmar Issing says “Even if the politics did work, serious questions would remain. For example, at precisely what rate of inflation should money start to be collected through higher taxes?”

Well what’s wrong with the existing 2% inflation target? In case anyone is interested, it took me about one millisecond to come up with that answer.
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Edwin Hoffman Nov 3, 2020

Henry Ford said, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.“

Well, Mr. Ford, we already had a revolution in America, and our founding fathers made the debasement of coinage punishable by death.

The monetary policy of each respective nation should have never been handed to an international syndicate of private banks, masquerading as public institutions. Those in congress who did, along with the president, reversed the American Revolution, and now look at our predicament.

Congress should reverse this error immediately by shutting down the central banks and return to sound money. End the predatory expansion and contraction of credit. Now would be the time to do it. https://mises.org/
- Michael Public Nov 4, 2020
  
  I have worked in and with a few different industries and once you learn 'the truth' of how the money is made, if you are an honest soul, you will be disgusted. It is like watching sausages getting made.
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Michael Public Nov 3, 2020

The author claims MMT would not work because those implementing it would debark from a point of (leftist) naivety, driving up inflation and saddling us with public works we don't need. While this is probably a correct general assessment of humanity (red or blue) at work with large sums of money - it does not in any way invalidate MMT per se. It is like saying no-one should own a gun because they will leave it lying around the house and the kids will get it - the point is, maybe they won't - and maybe one day it may save their life - the outcome depends on many as yet undecided factors.
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