Modern Monetary Theory (MMT) is in the news a lot lately. And that has resulted in a number of “critiques”. Most of these critiques are, to be blunt, trash. You see, the thing is, MMT is really, really confusing and most people don’t get it right at first. So we tend to see lots of “critiques” of MMT that aren’t based on a sound understanding of it. I know this because I went through a phase almost 10 years ago where I first encountered MMT, thought it was largely right and then realized it had some potential problems. I critiqued it and learned along the way that some of my early critiques were wrong. I’ve learned a lot over this time and I still think there’s a lot more good than bad in MMT. But for those interested, here’s how I see the good, the bad and the ugly in MMT.
First, it’s useful to provide an overview of what MMT actually is because this is what trips most people up. MMT is a macroeconomic theory of full employment and price stability that argues that the government is the monopoly supplier of money. Because it issues THE money (currency) it can always afford to spend in nominal terms. In other words, the government cannot run out of money. This also means that the traditional idea that the government needs money before it spends is misleading. The government doesn’t need our tax dollars to spend money because it can literally print money if it has to.
Further, the government causes all sorts of problems by creating a currency. This includes the need to obtain money from the government to pay taxes in the money that it creates as well as the need to obtain jobs so we can obtain an income denominated in the currency that the government requires those taxes to be paid in. So, MMT argues that unemployment and a shortage of desired financial assets can result if the government does not spend enough into the economy. They propose to resolve this mainly through a Job Guarantee program that would provide full employment to everyone willing to work. The Job Guarantee is an essential part of the theory because it is the element that supposedly solves the problem of full employment and price stability.
Importantly, MMT does not say deficits don’t matter or that the government has NO constraint. While the government has no nominal budget constraint it does have a real budget constraint (ie, inflation).
Okay, I don’t agree with all of that, but it’s a decent general description of how the monetary system works. Anyhow, moving on….
- MMT gets banking right. This is a biggie because mainstream economists have had this confused for a long time and it’s distorted the way we emphasize certain policies and ideas. The traditional money multiplier is wrong and MMT advocates have long emphasized endogenous money.
- Governments have more capacity than we think. This is arguably MMT’s most important insight. There is growing evidence that governments, especially those in productive capitalist economies, have much more capacity for spending and debt than we think. This again is no small matter as it could push us towards having a much broader set of public policies that benefit society more broadly.
- Governments have an inflation constraint and not a nominal constraint. This is important because most people think of the government like a household. When a household runs out of income it probably cannot spend. It has a true nominal budget constraint. When a government wants to spend and doesn’t have enough income it just runs a deficit. The only thing that stops the government from spending too much is when its spending causes out of control inflation. Again, this is useful because it gets people out of the mentality that deficits are necessarily bad or that the government can’t “afford” things just because it doesn’t cover them entirely with current tax receipts. As mentioned before, it also gets us out of the mentality that all government spending and debt is going to cause hyperinflation.
- MMT plays A LOT of word games. For instance, they redefine private sector net saving as saving net of investment. They also redefine full employment to mean zero involuntary unemployment. They also use the term “sovereign currency issuer” in a manner that is nearly useless since they can’t define when a country is sovereign or not or how various economic environments might reduce or even eliminate sovereignty. All of this makes for a slippery sort of understanding of things and can lead to some very bad conclusions such as this prediction about the sustainability of Turkey’s budget.
- MMT has an excessively state-centric view of the world. The entire theory can be summarized as an excuse for government spending and a government job program. I don’t necessarily think this is wrong. There are good reasons for the government to spend money or provide jobs. But MMT tortures and twists reality to try to make a coherent economic argument for why the government NEEDS do these things. I don’t find it as convincing as they seem to think.
- MMT tries to claim they are describing reality when they’re really describing an alternative reality. MMTers sometimes claim that they’re just describing how things actually work. But MMT is based on several controversial claims such as the idea that the government causes unemployment by creating the monetary system. This is not merely an operational description. This is a controversial description that is central to how their world view is constructed. In reality, no government or economy runs a full MMT style regime with a consolidated Central Bank and Treasury managing a large scale Job Guarantee. So, they don’t merely describe reality. They describe what they believe is reality and provide proposals for how to conform to that reality with certain policy ideas that are directly intertwined to that controversial operational description.
- The Job Guarantee is a virtually unproven program. MMT claims that a large scale JG is needed to solve the problem of unemployment that the government causes. They also claim this program can provide price stability. This is a claim I have always been skeptical of. It’s not that I think it’s necessarily wrong. It’s more so that the evidence supporting these claims is non-existent. I have a hard time supporting a large policy idea that isn’t well supported by actual real-life data.
- MMT advocates are often combative and cultish. I’ve greatly enjoyed learning from and interacting with many MMT advocates over the years. Others are, um, more problematic. I critique a lot of things here with the goal of being constructive, but the MMT people have a uniquely combative mentality when confronted with criticism. One of their founders once wrote an entire blog post about me where he started by claiming to have no idea who I was before jumping into a literal 10 paragraph lie about my character as a “neocon”. Anyone who is remotely familiar with my work knows that calling me a “neocon” is laughable and misleading to the point of being embarrassing. But this is the kind of crap you often run into with MMT and I think it’s a major red flag because the theory is so delicately intertwined that weaknesses in it are exposed as potential fatal flaws. I think they all know this and so they have to defend all facets of the theory as though it is airtight even though they know it isn’t. This results in an often hypersensitive type of response that helps no one.
To summarize, there’s a lot of good in MMT and I’ve always maintained that, but it’s foolish to think that MMT is a panacea for a period where people think mainstream economics hasn’t served us well. There is, after all, a lot more right with mainstream econ than most people want to admit and this “burn it all down” mentality is not constructive. That said, I am glad MMT is part of the new narrative, but I do hope they defend that narrative with more empirics and less combativeness.