Back in 2010 I came across Modern Monetary Theory (MMT) for the first time and found it somewhat appealing. This is the theory that Alexandria Ocasio-Cortez promoted along the way to her meteoric rise to Congress. MMT is a theory of economics that says some pretty controversial stuff – the government has a real budget constraint unlike a household, monetary policy is very ineffective and the government should run large scale Job Guarantee programs to ensure full employment. I like a lot of what MMT says, especially on the banking side of things so I’ve always been somewhat sympathetic to it. But I remember the moment where red flags started shooting up.¹
I was talking to Warren Mosler, the founder of MMT, some time in 2011 asking him how he thinks unemployment results. And he told me a story about how he thinks of the monetary system like a room full of people where he forces everyone to use his business cards as money. The room is locked with armed guards at the door forcing us to use those business cards as money. And if you can’t obtain business cards then you’re effectively “unemployed” and you can’t leave the room because you’ll get…shot or thrown in Mosler jail. Kinda creepy, but also kinda logical. The government creates a monetary system, we all have to use it, they impose rules on us requiring us to do things like pay taxes in that money so you’re kinda screwed if you can’t get money. So, in essence, involuntary unemployment is caused by the government. It seems intuitive. Except I’d argue it’s wrong and largely inconsistent with how a capitalist system is naturally designed to work.
You see, in a capitalist system the natural buffer stock is unemployed people. Capitalists manage their risks by employing as many people as needed but no more than needed. And if people can’t get business cards (money) then it is (at least partly) the result of their inability to sell their skills to capitalists or other market participants. In other words, unemployment isn’t really caused by the government in a capitalist economy. It is, as most economists agree, caused by a lack of investment. Some unemployment is the natural result of capitalism because capitalists retain profits to manage risks and they manage those risks by not investing their retained earnings in more employment than they believe is prudent. This results in a persistent shortage of investment. So, the MMT narrative is inconsistent with capitalism and arguably wrong in an empirical sense.²
Now, this doesn’t “debunk” MMT. MMT cannot be debunked because MMT has never been implemented anywhere.³ Yes, some people think MMT has been in place for decades because they advocate persistent deficits, but persistent deficits are not MMT. MMT is specifically a macro theory for full employment and price stability using persistent deficits with a Job Guarantee as a policy tool to achieve those goals. A large scale Job Guarantee used as a price anchor and full employment tool has never been implemented in any developed economy.
I will readily admit that there’s a chance that the optimal implementation of this tool could result in a more balanced and better performing type of capitalist economy than what we have now. I am not closed-minded about something like this. But we really don’t know. I think there are huge potential risks to letting the government become the employer of last resort offering somewhat phony jobs at a living wage with full benefits.4 But this doesn’t debunk MMT because MMT, as its adherents promote it, has never really been tried.
NB – I find that a lot of laypeople are attracted to MMT at first. The idea that a country with a printing press can’t run out of money and doesn’t need to tax for income is logically appealing. But I think most academics find MMT less appealing because a more sophisticated understanding of economics exposes some inconsistencies in the MMT framework.
¹ – I’ve written about some of the pieces of MMT that I like here as well as some of the pieces of MMT that I think are more confused.
² – This narrative is not always consistent across MMT academics. Some of them say the government causes unemployment by enacting property rights and regulations within the monetary system while others argue that unemployment is caused by a lack of government spending to meet private savings desires. MMT also argues that the government has to spend first and tax second to make the money available to pay taxes. These points are all demonstrably wrong and highlight one element of MMT that is very confused.
³ – Some MMT advocates like to claim “but MMT is just a description of the existing system!”. Not really. This is only true if you believe things like “the government causes unemployment”. If you don’t think that’s true then MMT is not just describing the system. They are in fact describing the system erroneously.
4 – Some people have a panic attack when I say things like this. They flail about as though I am some immoral idiot – “but Cullen, unemployment is immoral”, they say. Sure, it is. But it would also be immoral to treat our government like a great big charity that gives free stuff to everybody and causes high inflation. That, after all, is far more damaging and immoral than unemployment because inflation impacts all of us while unemployment impacts only a few.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.