The Rise and Fall of Modern Monetary Theory (MMT)
politics and economics; conceptual creation and discreditation; (second part of essay) a politically unassailable way forward
Modern Monetary Theory (MMT) got its start in the 1970’s in the U.S. It was developed, not by economists, but primarily by accountants, with some contributions from lawyers who specialized in financial matters and were interested in the subject. [As someone with an M.A. in economics, I can vouch that for decades few students in economics ever heard about it.]
Like any concept, MMT has developed over time. The impetus for it was an attempt to describe better than economists did how the monetary system actually works. MMT has emphasized how, when it comes to money, the central government and the central bank form, not just a working partnership, but an amalgamation: functionally, they are two parts of a single entity necessary to supply the money for each to fulfill its duties and material obligations to the nation.
For a central bank those obligations are given in the charter issued by the central government that created it. The specific obligations vary from nation to nation, but all central banks are there to maintain the functional integrity of the banking system: keep it solvent and stable. Whether officially or not, most central banks serve as a lender of last resort for the central government and act as necessary for the nation to avoid ‘too much’ unemployment on the one hand or inflation on the other.
The material obligations of a central government might be given to it in a general way in a constitution (written or not), but it gives its specific obligations to itself in its Acts that establish the laws, policies, and programs it must enforce/bring into existence. From the end of World War II to the middle of the 1960’s central governments had ‘fiscal policies’ intended to optimize the performance of the economy: maximum employment consistent with ‘acceptable’ inflation. Those policies might include raising taxes if inflation were getting ‘too high’. By the end of the 1960’s in the U.S. conservatives/Republicans had already made raising taxes for any reason all but politically impossible, rendering any such thing as a coherent fiscal policy null and void. (Though we must note that the other option, cutting spending by the central government, was just as politically unfeasible, that option’s effects on inflation were also less certain, unless it were an across-the-board cut, which neither side would tolerate.)
One can see in that political development the conceptual seeds of MMT. It is a way of explaining the economic role of a central government in the contemporary world where fiscal policy as a means of micro-managing, if you will, the macroeconomy was no longer a real thing. That function was handed over entirely to the central bank. The central government would continue to undertake obligations and would continue to levy and collect taxes, and its actions could be influenced by what was happening in the economy as a whole, but as a matter of course it would not be concerned with ‘managing’ the economy in the way that the old ‘fiscal policies’ had been.
It is hard for people to get their brains around it, but according to MMT a central government creates money in the process of meeting whatever commitments for monetary outlays it has given itself. The act of spending money by the central government creates it.
The function of taxes, according to MMT, is to withdraw money from the economy. The purpose of taxes is to keep the ongoing creation of money by the spending of the central government from overwhelming the economy. In MMT, like payments on a debt to a bank, taxation ‘destroys’ money.
Selling bonds and shorter-term debt (bills and notes) is another way for a central government to pull money from the economy. Taxes might be aimed at any group in the economy, but selling debt instruments targets, especially, large corporations in the financial sector, as well as drawing in money from around the world. To be sure, all of that money must be repaid with interest, but compared with using taxes for that purpose, it can have the advantage of being flexible, immediate, and, above all, certain: in the U.S., as ‘lender of last resort’, the central bank is explicitly obligated by law to ensure that all debt issued by the central government will be bought, even to the point of creating money ‘out of thin air’ (solely at the central bank’s discretion) in the process. (Central banks also lean on large financial institutions to buy the central government’s newly issued debt whether they want to or not.) [In MMT terms, those debt instruments are ‘assets’ to be ‘swapped’ for a denominated amount of money.]
MMT remained as an explanatory idea mostly ignored by economists until well into the 2000’s. By then the debts of many central governments had become so large — not only in absolute terms, but as percentages of nations’ GDP (the value of everything produced by the economy as a whole), even exceeding 100% of it — that it had laid to waste conventional economic thinking: such levels of public debt should have been having tremendous effects on those nations’ economies, but such effects were nowhere to be found. One argument is that debt creates a need for ‘stimulus’ — specifically, in the form of spending by the central government — to maintain economic growth, which increases levels of public debt, thus necessitating yet more debt if economic growth is to be achieved; in the event, the rate of growth of the GDP remained on its historic path, making the economy appear ‘normal’ despite that growing overhang of debt: like snow piling up high upon a mountain, stable enough until it is no longer is (when ‘the avalanche will bring you down’, to paraphrase Stevie Nicks). As long as that disaster can be avoided, that argument becomes a case for MMT.
[Again, in MMT ‘debt’ is ‘assets’ created by the central government to be ‘swapped’ for money.]
At the same time, MMT had gone from being purely descriptive to being, at least in some quarters, ‘normative’, from describing ‘what is’ to urging ‘what should be’. If MMT is correct, then debt on the part of the central government — the total of outstanding bonds, etc. — can be virtually any amount. Yes, there can (probably) be still a thing as too much, but what that might be has become a whole new matter of speculation. The implication is that there is virtually no limit to the obligations the central government can assign itself: there can be practically no policy or program that must be renounced for lack of funds.
[Again, in MMT ‘debt’ is ‘assets’ created by the central government to be ‘swapped’ for money.]
So MMT was starting to gain traction in serious public discourse concerned with matters of public policies (largely due to Stephanie Kelton, an economist who fully embraced MMT, including its normative aspects). That was the late 2010’s.
Then Covid happened. At first, that crisis was a boon to MMT. Here was an extraordinary economic concept that was becoming more widely known just as this extraordinary new threat to society — this ‘known unknown’ — had emerged.
MMT was especially pertinent to central governments’ response to Covid: ‘shutdown’. Governments required citizens to stay at home except for absolutely necessary forays for food, etc. Leaving the house regularly was reserved for people employed in ‘essential work’.
Obviously, that would mean a complete loss of income for many people and businesses. In implementing the policy of shutting down much of the economy for the sake of public health, central governments devised various temporary programs for financial support people and businesses directly affected by it.
MMT was rarely if ever invoked by policymakers as a specific means to their ends, but its presence in the intellectual milieu did serve their purposes well; they were not about to overtly reject it if the topic arose. That contributed further to a rise in estimation for MMT in the general culture.
Then the health crisis passed and people started going back to work. When that happened inflation reared its ugly head in a big way.
The only option for controlling inflation in MMT is raising taxes/cutting spending: in MMT terms, destroying more money than was being created. If that were politically feasible we could still be living in a world with fiscal policies, and MMT might not even exist. The inflation following the Covid shutdowns, for which MMT had no politically feasible answer, rendered it ‘discredited’. Politics had effectively undone once again an idea in the realm of economics.
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Before I’d ever heard of MMT I had developed a monetary paradigm that is an improvement on it. In this paradigm money is created as needed for two specific purposes — only: funding a guaranteed minimum income (that a person could actually live on) and funding government — all government, from local to central (forevermore at the current per capita rate of total government spending). So, like MMT’s take on the existing paradigm, there would be an ongoing flow of money into the economy — but on a vastly larger scale. Here, though, the amount of money to be created is strictly limited. Moreover, it is determined by demographics — and only that: no person, committee, or organization would have any say in how much money would be created. Also, none of the money that is created for those purposes involves debt in any way. While this paradigm does away with taxes/public debt for funding government (as long as spending anywhere does not exceed the allotted amount), a mechanism does exist in it for withdrawing money from the economy. Individuals and businesses would be able to retain plentiful pools of money, however, and, unlike a tax, no money would be collected from any person or business before it could be used for purchases/investment. It is purposefully designed so that any person, however rich or not, would have to be completely indifferent to have any money collected: purchases/investments would always be an option for anyone who had reached the maximum cash to be retained. For corporations, as is the case concerning taxes today, investments in the enterprise would not be restricted any way — to include compensating all employees — but purchases would be limited to legitimate purposes.
The results for society are astonishing. As noted, there would be no taxes or public debt needed for funding government at any level (keeping in mind also that caveat). For adult citizens of the nation there would be absolutely, positively no unemployment or poverty — whatever the level of total output (which would be determined, passively but effectively, by demographics). The political imperative that now exists in every nation to maximize total output in order to maximize employment, total income, and the collection of taxes (at whatever rates are in place) would no longer exist. So sustainability would be increased via ‘de-growth’ — but with only positive effects. Finally, the amount of money created for those two purposes would be self-regulating, and would be sufficient to make the economy as a whole self-regulating. So this paradigm and its outcomes for society would not be subject to the political whims of any faction or party. (Regulation within the economy concerning the environment, consumers, and workers would still be matters of concern within the political process — still a democratic process where one was democratic before the transition to this paradigm.) The amount of the guaranteed minimum income and the extent to which it became the income for employees of businesses and government is TBD. It might (eventually) include all such employees — with or without differing benefits accruing to different positions. In all events, other means of earning an income would be available, such as being ‘singularly self-employed’ (neither an employer nor an employee) or working in a bona fide partnership — either of which could include money from royalties earned from intellectual properties.
All of that is accomplished, however, with the existing economy/economic system (the process of producing/acquiring goods/services and the established institutions through which that process proceeds) in place. Therefore, while this proposal is certainly revolutionary, it is not radical. All of the aforementioned outcomes would be achieved without having to redistribute anything, without imposing any cost on any employer, without imposing any limit on income/wealth, and without requiring people to act or ‘be’ any particular way (such as altruistically or selfishly, cooperatively or competitively, etc.). Other than that last descriptor, which is ideologically neutral, the paradigm is revolutionary in an essentially ‘conservative’ way.
Finally, this proposal could be enacted ‘overnight’, via a single legislative Act. It could be adopted by any nation (though for sure a certain level of financial infrastructure would be necessary) or any group of nations — without compromising the sovereignty of any nation. It could eventually become a single currency shared by every nation on the planet — with the level of material well-being of the best-off nation becoming the level of material well-being of every nation.
For more: “A Most Beneficial Economic Change” is a “2 min read” here in Medium. It emphasizes the benefit to sustainability of this paradigm, with links to more about the paradigm (with nothing I publish here behind the paywall).