Modern Monetary Theory (MMT): A Brave New World
MMT, an Introduction
Modern Monetary Theory, or MMT as it is commonly known, is a contemporary economic theory that implies that governments – under certain conditions – can simply create as much money as they like, without fear of consequences. The rise of MMT runs as a direct counter to traditional fears of rising public debt, which have long been used as a means of arguing against large scale government spending. “The essential message of MMT is that there is no financial constraint on government spending as long as a country is a sovereign issuer of currency and does not tie the value of its currency to another currency” (Globerman, 2021).
The key point here is that a country must be the issuer of its own currency. Naturally, this greatly narrows down the number of countries that could feasibly attempt such a policy. Amongst those who could are the US, Canada, Japan, China and the UK. MMT as a principle thus relies upon a given economy having a monopoly on its own money supply. Effectively meaning its own central bank that prints its own currency. Economic tradition dictates that if a government wishes to increase spending, it must do so by increasing taxation, or by borrowing. In the latter instance, largely through the sale of government bonds. (Sumner, 2021). Essentially a government issued I.O.U. to be repaid with interest at a future date. Under an MMT model taxes are employed for the purpose of fighting inflation, rather than funding expenditure as has traditionally been the case (Lockert, 2021).
Inflation as a phenomenon generally arises when an economy’s real and nominal resources are out of sync which means too much money has been printed, or supplied, and there are not enough goods and services available to meet the existing levels of demand. Taxes in this instance serve the purpose of extracting money from the economy. Thus reducing the level of money available and in turn, reducing the level of inflation (Matthews, 2019), at least in theory. Inflation is a after all a complicated beast.
Social Consequences, The Future is Now
The upside, and potential socio economic consequences of an MMT oriented policy model are frankly enormous. MMT has been mooted as a potential cure all for everything from the development of renewable energy infrastructure, to the resolving of income inequality in society (Baker and Murphy, 2020). The logic being that a country that fits the relevant MMT criteria can effectively borrow from, and in turn pay itself back by simply printing more of its own domestic currency. Under this framework, there is no obvious need for previously held concerns about rising budget deficits, or the raising of greater tax revenue in advance of large scale public investment.
On a political footing, MMT has gained significant recent traction as a potential means of paying for a “Green New Deal” in the US – an ambitious proposed overhaul of US energy infrastructure which would see 100% of US energy being produced “through clean, renewable, and zero-emission energy sources” (Kurtzleben, 2019). Rather than raising taxes immediately, in order to fund the proposed infrastructural investment some years or even decades from now, the money required to fund the project could simply be printed right away. In effect hyper-accelerating the progression toward a zero carbon emissions status for the US economy (Horsley, 2019).