Modern Monetary Theory (MMT) has been in the news quite a bit in the last few weeks.¹ It’s refreshing to see this considering how bad the state of macroeconomics is. I say this as someone who has been very critical of MMT for many years. I think they overreach on some items, but I also think they get some things right including:
1) The money multiplier and loanable funds are wrong.
2) High government debt isn’t going to cause a US default.
3) The Phillips Curve (the idea that inflation and unemployment have a stable and inverse relationship) is misleading at best and wrong at worst.
4) NAIRU (the idea that there is a level of unemployment below which inflation must rise) is misleading at best and wrong at worst.
5) The Liquidity Trap ( the idea that monetary policy becomes ineffective because cash and bonds become roughly similar) is wrong.
The first one has largely been settled. It’s becoming conventional wisdom that banks lend first and find reserves later. The last four, however, are still highly controversial. And of those, the second is probably the most important as it has the broadest impact on daily life. Barely a day goes by that we don’t hear about how the US government can’t afford to buy this or that. We can’t afford healthcare. We can’t afford Social Security. We can’t afford education. We can’t afford to take care of the environment. It goes on and on. This narrative is based on a political ideology that wants you to think the government is like a household and it’s wrong. Wrong. Wrong. Wrong.
The reality is that the US government isn’t going bankrupt. We aren’t running out of money. We can’t run out of money. We can pay for anything because the US government can go perpetually into debt without defaulting on itself. Yes, the US government’s money can fail in real terms and that is similar to another form of default, but governments default in very different ways than households do and it’s useful to put those defaults in the proper context so we don’t fall for many of the false political narratives that exist.
That said, I disagree with the way MMT explains some things and I don’t necessarily think those descriptions justify their policy ideas, but you can understand some important elements of MMT without buying into the entire theory. And there’s arguably no more important debate today than understanding the US government’s real budget constraint. So, I think it’s safe to say that MMT is useful to understand even if you don’t agree with it entirely.
¹ – This is a pretty good primer on MMT by Scott Fullwiler if you’re looking for one.