The Magic Money Tree: The case against Modern Monetary Theory

A new paper by Professor Antony P. Mueller, a German professor of economics who currently teaches in Brazil, unpacks the logic behind Modern Monetary Theory:

• Modern Monetary Theory (MMT) contends that government can spend without restraint and large deficits and debt don’t matter when the economy is not at full capacity. It asserts that the state, as the issuer of the nation’s currency, cannot go bankrupt because it can just keep creating and printing money; taxation exists not to obtain revenue but to oblige people to use a nation’s currency and control inflation; and that all public expenditure can be financed by debt or creating money.

• MMT, whose theoretical foundations can be linked to the Marxist economic theories of Michal Kalecki, have come to prominence in recent months because of advocacy by the far-left of the Democratic Party in the United States and some left-wing commentators and campaigners in the United Kingdom.

• MMT advocacy, particularly in the political sphere, is often driven by Utopian thinking by those who want massive unaffordable public spending programmes.

• MMT is rejected by most economists. A recent survey by the University of Chicago found that no economic expert thinks that countries that borrow in their own currency need not worry about deficits because they can print money to finance debt. Similarly, none thought that it is possible to fund as much real government spending as you want by creating money.

• There are a number of serious flaws in MMT:

  • MMT asserts, with limited evidence, that there is substantial unused economic capacity that government spending can activate. However, in practice, when government excessively expands the monetary supply (prints money) the impact is inflationary, if not hyperinflationary - as was the case in the Weimar Republic, Zimbabwe, and today in Venezuela.

  • MMT depends on governments knowing much more than they possibly could and acting more rationally than politics allows. It depends on government knowing precisely the natural rate of unemployment, and therefore when to spend, to stimulate activity, and when to tax, to drain the excessive inflationary impact of creating money. This ignores ignorance.

  • MMT is premised on substantial public employment policies to create economic activity for the unemployed. This policy underestimates the bureaucratic costs and the coordination problems that come with public employment policies. Only autocratic governments would have the means to enforce such policies.