As the United States uses deficit spending to stimulate our economy, supporters of unprecedented borrowing refer to a relatively unknown economic doctrine called Modern Monetary Theory [MMT]. Here’s how it works – or, at least, how they say it works.
“In classic or Friedman monetary theory when government creates money it simultaneously incurs a measurable liability which must be repaid. But MMT insists that such new money is an asset which creates jobs, greater economic activity and therefore new liability-free revenue to government….
“The political Left admires MMT because it argues that countries may borrow as much as they desire in their own currency and need not prioritize spending because injecting funds into the economy will create new taxable wealth.” – Bruce Shields, Hyde Park
In the conventional monetary theory most Americans know, Government spending beyond income from taxes must be financed by selling debt, via notes which must be repaid. This may be called the Friedman consensus: government spending beyond income can only be accomplished by borrowing from the private economy. Not only must debt be paid back, the promissory notes themselves become a negotiable form of currency. And so a government which borrows too much either depresses the economy or else triggers inflation if the repayment is financed by further borrowing.
The Friedman mechanisms for the economy are very well studied and are used by the such institutions as International Monetary Fund advising struggling economies all around the world. MMT argues that none of these rules of money apply where an issuer of money is a sovereign nation. Government budget deficits (they argue) do not matter for countries which borrow in their own sovereign currency. The economy and inflation can be managed through fiscal policy (acts of Congress), not monetary policy so that government can put their own people to work
Proponents of MMT tout the method as a bloodless and painless method of injecting funds into a hurting economy without requiring austerity. Especially they argue that MMT directs funds to people in the lowest income bracket because MMT uses not banking techniques but instead fiscal and taxing authority. Because both the credit and debit are in a currency controlled by the government there is no negative overdraft requiring repayment; in effect government spending is merely a ledger entry which later disappears as tax recoveries rise.
Beyond this description MMT becomes almost impossible to characterize briefly. Its basis is a prediction of how an economy reacts when governments inject money. In classic or Friedman monetary theory when government creates money it simultaneously incurs a measurable liability which must be repaid. But MMT insists that such new money is an asset which creates jobs, greater economic activity and therefore new liability-free revenue to government.
Classical objections to MMT are numerous and based on very long observation. MMT is an upgraded revival of Keynesian 1930’s doctrine demanding counter cyclical government spending. An influential group of political theorists are eager to apply MMT to our present economic situation. The experiment is apparently in process as federal debt has exploded by more than $6 trillion in the past half dozen years. Puzzling both sides, inflation has not appeared.
So far in the short term MMT is prevailing in federal handling of the COVID-19 economy. The political Left admires MMT because it argues that countries may borrow as much as they desire in their own currency and need not prioritize spending because injecting funds into the economy will create new taxable wealth. This polarity defines a struggle pending in Congress for the next two years.
The author is an Eden tree farmer, Harvard University graduate, retired college educator, former president of the Ethan Allen Institute, and frequent co-host on Common Sense Radio with Vermont Daily editor Guy Page.
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