Modern Monetary Theory: Politically Speaking

Over the past week, I have had a short-lived obsession with Modern Monetary Theory (MMT), the latest economic ideology adopted by left Democrats such as Bernie Sanders and Alexandria Ocasio-Cortez. My tentative conclusion, after learning the contours and policy implications of this “theory,” is that it would be pointless to delve further into MMT’s economic models and to read all that Stephanie Kelton and Warren Mosler have written about it. The reason is that MMT seems functionally equivalent to Keynesianism and is a rehash of other early-twentieth-century economic ideas. This point was made by economist Robert Schiller, who stated, “It seems that modern monetary theory is not so much a recipe for disaster as it is a not entirely original series of ideas that are not well defined or well integrated, and whose implications have been exaggerated.”

As such, MMT cannot provide any lasting answers to the economic strife caused by capitalism. For that, we would need to build a classless society, i.e. socialism, where the working class would be able to set budgetary priorities independent of the parasitism and economic drag that the capitalist class creates by extracting profit from the economy and holding back the development of the productive forces. The purpose of constituting a new theory called MMT is really to provide a bourgeois ideological bulwark for left-Democrats in their efforts to gain acceptance for big-spending proposals such as Medicare for All and the Green New Deal. Modern Monetary Theory, then, is the latest grand reformist scheme presented by the capitalist Democrats that presumes to sustain this decaying order.

In this post, I will not get deeply involved in the economic details of MMT. I have not read Stephanie Kelton’s new book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy and I cannot argue about the minutiae of different types of inflation, largely because I am not a trained economist. This post is more an attempt to understand the political role that MMT plays in the current capitalist crisis. To that extent, I will engage some of the general economic principles espoused by MMT and other capitalist economic ideologies.

In short, MMT states that the budget of a capitalist country that can issue its own currency should be thought of as akin to a central bank’s balance sheet: government spending grows the money supply and stimulates economic growth and taxation shrinks the money supply and slows growth. Since I would be trolled by MMTers relentlessly if I said that they claim deficits do not matter, I will say simply that they believe government debt matters less than pretty much all mainstream economists do.

The main implication for policy is that governments that can issue their own currency should spend as much money as they can to get the economy to “full employment.” Since the central bank can print money to support this spending, taxation is not needed to balance the budget. Nor is borrowing. Instead taxation is the mechanism whereby the government can take money out of the economy in the same way that the Federal Reserve might shrink its balance sheet. MMTers argue that the inflation generated by government spending could be choked off by raising taxes.

In the environment of massive deflationary pressure that has persisted since the financial crisis, and with the rise to prominence of Austrian economics as a way to justify cutting government spending, this theory has gained ground among left Democrats for obvious reasons: they want the government to spend massively to stimulate aggregate demand and counter deflation and along comes a radical bourgeois economic theory that directly counters the Austrians. In light of the ineffectiveness of the Democrat Obama Administration in fundamentally solving any of the economic problems that resulted from the financial crisis, MMT provides theoretical backing to left-wing Democrats who want to spend more money, such as would be entailed in a Green New Deal.

A few words on the Austrians—they are essentially libertarians. I do not have enough knowledge to explain the entire theory (again, I do not see the value of studying the intricacies because it does not seem to be an independent economic theory, much like MMT), but the Austrians seem to completely reject the concept of macroeconomic management and focus instead on maximizing “individual freedom.” Many hail the reactionary charlatan Friedrich von Hayek, whose theory of the state is used to justify the view that government is inherently repressive and should therefore be shrunk to allow the market to provide economic abundance and freedom. Again, there is not much new here when placed in the context of Reaganomics, Thatcherism, libertarianism and even neoliberalism. Like MMT on the left, it just serves to provide a “theoretical” cannon of “scholars” to support the right wing of the capitalist class in their quest to “starve the beast.”

You will find many Austrian economists on the internet ranting about government deficits and inflation as major threats to the economy, for example at ZeroHedge. They often argue that the U.S. is “broke” and is likely to default on its debt if government spending is not reduced dramatically. In regard to debates over the national debt, I have to side with the MMTers. There is absolutely no scenario under which the U.S. government would have to default under pressure from some outside force. As long as debts are denominated in dollars, the Federal Reserve can print money to pay off all debts. Whether that would eventually debase the currency and whether bondholders would like that is a different story. On the other hand, it is possible that the government could voluntarily default, for example, for political reasons. As the trade war with China intensifies, the U.S. could strategically default on its debts with China as an economic weapon. Or the government could choose to default on its debt to Social Security in order to trigger a collapse in this program, thus shrinking “big government.” But the U.S. cannot run out of money.

Back to MMT. At first, I treated it as an actual economic theory because it sounded so novel. However, after doing some digging, I do not see any fundamental difference between it and Keynesianism. The only difference I see is that MMTers seem to show a willingness to spend more than Keynesians because the latter are caught in the framework of budgetary thinking, i.e. the idea that the government should limit what it spends because there is a scarcity of money. I emphasize “willingness” because I do not know if this would necessarily translate into a higher real level of spending by MMTers. While MMT thinks of the government budget in a different way, it shares the fundamental belief of Keynesianism that, left to their own devices, markets do not necessarily allocate resources efficiently and that government spending is needed to stimulate aggregate demand, especially in periods of deflation. While there is nothing new here, this seems like a fair enough argument about the mechanics of a capitalist economy.

If we look at this from a policy standpoint, again it is hard to see much of a difference, simply because the Keynesians like Paul Krugman have been quite vociferous in arguing that the government did not put enough money into the economy in response to the Financial Crisis. Many economists are now calling for some variant of a big-spending approach to deal with the aggregate demand problem. Richard Wolff, a Marxoid Keynesian who argues for increased government spending, has stated that during the New Deal in the 1930s, the government spent several orders of magnitude more than what it has spent in recent years. There is also a scenario called a “Beautiful Deleveraging,” which is advocated by Ray Dalio. In this scenario, the government could pull off an orderly deleveraging of the economy wherein certain entities would be allowed to default, shrinking the debt and the money supply, and the government would strategically put money into the pockets of the working and middle classes, laying the basis for more long-term growth. This scenario implies no significant overall growth of the money supply because the money printing would be in essence replacing money that is disappearing. This is the ideal deleveraging scenario and as such, not the most likely outcome. Nouriel Roubini has argued in favor of using a variant of MMT as a response to the current economic crisis, i.e. spend a lot of money, but he has dismissed it has a more permanent policy fixture of the economy. It is unclear to what degree MMTers believe that massive government spending should be permanent, as Stephanie Kelton has indicated one function of her Government Jobs Guarantee would be to “hand off” employment to the private sector.

Bottom line here: many economists advocate government spending to stimulate aggregate demand and they openly admit deficits are not as dangerous as Austrians and Republicans claim. Fundamentally, I do not see where MMT differs.

To be clear, I have zero problem with the government spending on social programs and I would support a Single Payer/Medicare for All bill if it was robust. But I do not think the left Democrats have found the Holy Grail here. One of the most important insights of Marxism is that, while reforms are possible and supportable under capitalism, they are always reversible. Capitalism itself cannot be reformed. The past fifty years of rollbacks of everything from progressive taxation and welfare to school desegregation and labor rights should make that painfully clear. The political responsibility of Marxists, then, is to not promote illusions in the possibility of reforming capitalism, even if we might support one reform or another. Keynesianism and MMT are grand reformist schemes that presume to solve the cyclical nature of capitalism but end up failing because they do not deal with the underlying problem: the capitalist class. As long as the capitalist class is still in power, reforms can and will be reversed.

This point is even more true for MMT because it has so many moving parts that need to come together for it to work when implemented. To this effect, Thomas Palley writes: “Government does not just push a button so that taxes go up or spending goes down. There are vested interests working to stop their taxes being raised and stop favored spending programs being cut. MMT takes no account of these political complications, which adds a further dimension of critique.” If a hypothetical presidential administration committed to MMT had a supportive congress, it could implement massive spending programs with money printing. However, there would need to be a reliable technocratic agency—independent from partisan politics—that would regulate the budget to measure when to increase spending or increase taxes. The idea that this key component would materialize is absurd knowing the pork-sausage-making process of the U.S. budget. There would be way too many overlapping state-based and class-based demands on Congress to ensure an orderly MMT framework would get implemented.

There are also legitimate questions about the limits of government spending. The economic debate over inflation in the context of MMT is inconclusive. Both sides have formulas and theories to show that the government can spend X vs. Y percent of GDP. This all seems quite speculative, so I will not say anything definite here. However, Krugman makes an important argument, writing that fiscal credibility matters. He states: “The point is that under normal, non-liquidity-trap conditions, the direct effects of the deficit on aggregate demand are by no means the whole story; it matters whether the government can issue bonds or has to rely on the printing press. And while it may literally be true that a government with its own currency can’t go bankrupt, it can destroy that currency if it loses fiscal credibility.”

My interpretation of this is that while spending can stimulate the economy, there is a point at which, even if the mathematically calculated point of excessive inflation has not been reached, if expectations of inflation are raised, this can become a self-fulfilling prophecy as, for example, the public decides to dump dollars in favor of other assets. Some argue that this process is underway now for multiple reasons. If there were a mass exodus from the dollar as global reserve currency, the collapse in demand could crash the currency and cause inflation as foreign currencies rise in value. So, for example, if a foreign power like China became convinced that the U.S. government was committed to implementing MMT, it might anticipate a fall in the value of the dollar and therefore dump dollars in favor of gold and/or cryptocurrency. In the current international context of decoupling of the Chinese and U.S. economies and sanctions on Chinese entities, this scenario becomes even more plausible.

I will keep my eye on this school of thought as it develops. I do believe it is possible that the U.S. government could swing in a left-wing direction in the coming years as self-styled “progressives” win more local and national elections and the AOC faction grows. We will see what implications that has for budgetary policy. I highly doubt any MMT-based policy will hold sway in Washington long enough to show how well it works, but Keynes is always in the back pocket of the capitalist class. Of course, so is fascism.