In a February blog, I mentioned an economic idea beloved by the far left called Modern Monetary Theory. (MMT) It posits that a country with its own currency needn’t worry about accumulating debt because it can print money to pay off its interest. Sounding too good to be true, I promised to look into it, as the notion it is likely to surface in the 2020 elections. I don’t propose to be an expert on finance. My credentials are from other fields. Nonetheless, citizens should have an inkling about why they pay their taxes and what they are getting in exchange. Humbly, I propose to lay out some of the basic tenets of MMT. Sharper minds are free to correct what I’ve written below.
Tenet 1: As long as inflation is kept in check, meaning that as long as there are enough workers and equipment to meet demands, the government can spend what it likes to achieve its goals. That might include medical coverage for all, free higher education, guaranteed employment and low-cost housing. Surprisingly, that can be done without taxing the rich because deficits don’t matter as long as inflation is kept in check. When Richard Nixon took the country off the gold standard in 1971, he freed the government from the restraint of needing gold to cover its debts. Now it can print what it needs.
Tenet 2: Those who believe in MMT oppose the country’s current strategy of maintaining its economic health by lowering and raising interest rates, an issue the Federal Reserve Bank considers at its meetings. Those who support MMT argue the rate for fiat money should be set a 0% and that not to do so rewards the investor class.
They also argue tweaking interest rates is ineffectual because businesses seek to borrow money on prospects for growth rather than the rate.
Bottom line: MMTers want the Federal Reserve Bank to be under the control of the government and argue that deficits do not increase interest rates. To the contrary. “When the government spends more, the private sector gets money, and puts it into the banking system. With more money in the system and no increase in demand for it, interest rates will tend to fall, not rise…” (A Beginner’s Guide to MMT,” by Peter Coy et al, Bloomberg Businessweek, March 25, 2019, pg. 30.)
Tenet 3: Taxes don’t go away under MMT. They become a tool for pulling money out of the system to keep inflation in control.
Tenet 4: Inflation isn’t the result of rapid growth but of rapid greed. In response, MMT followers would break up monopolies and prevent banks from making too many loans.
Of course, the arguments against MMT are many, but entropy may be its biggest obstacle to overcome. Implementing a wide, sweeping policy like MMT would tip financial institutions on their heads and threaten those who benefit from the current system. Making this theory clear to most of us may also prove to be a challenge. To help, I’ve provided two clips. The first is a two-minute video. The second extends to six.
After doing some reading and watching the films, I have reached one firm conclusion about MMT. We voters have some homework to do.