MMT

April 10, 2019

MM-what?

Modern Monetary Theory is sometimes known as the “deficits don’t matter” school of economic thought. This previously heterodox theory, with little to no real-life evidence to back up its message, has hit the mainstream. It’s almost certain to be a feature of the 2020 campaigns for US president. (Bernie Sanders’ former economic advisor, Stephanie Kelton, is one of its biggest fans.)

MMT’s claims are huge—and to some constituencies, hugely appealing: The US government can spend almost whatever it likes by simply printing more money. Any unintended consequences can be fixed by adjusting tax rates.

Head whirling? Let’s get into the nitty-gritty.

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DISAMBIGUATION

5 MMTs we are not addressing here

✈️The Indian travel company MakeMyTrip

💿The Beatles’ 1967 album Magical Mystery Tour

📜The Dead Sea Scroll variously known as MMT, the Halakhic Letter, or the Sectarian Manifesto

🍰The pinky-red clay Montmorillonite, occasionally used as an anti-caking agent

⛽The highly toxic gasoline additive Methylcyclopentadienyl manganese tricarbonyl

Reuters/Michaela Rehle

EXPLAIN IT LIKE I’M 5!

MMT for beginners

To get things done, countries often borrow money. Normally, as with all borrowed things, they have to pay it back.

Few countries are able to borrow in their own currency—many borrow in US dollars. This puts the US in a special position: Because it controls the dollar, if it needs to borrow money, it can simply “print more” (usually not literally, but instead by typing numbers onto a screen).

MMT supporters suggest that this means the US doesn’t actually have to pay back its debt—it can just be something the country lives with. If there are too many dollars floating around, and inflation shoots up, the US can simply put in place policies that bring inflation down, such as increasing taxes or interest rates. (Taxes, rather than funding government spending, would serve as a way to drain “extra money” from an overheated economy.)

If the MMT-ers are right, it means that it’s fine for the US to run large deficits—as long as inflation does not get out of hand.

“If the deficit has to be 4.7% of GDP to create the economy we want, with full employment, low inflation, and poverty going down, who cares?” Kelton told Vox. “The budget outcome isn’t the thing that matters, it’s the real economic conditions.”

With no real ceiling on the deficit, the government could pay for a bunch of things that, at the moment, many people think are too expensive, like aggressively tackling climate change, offering free healthcare and education, and giving a public sector job to anyone who needs one.

No really, I'm literally 5

Download this MMT coloring book from Stephanie Kelton, now a professor at Stony Brook University.

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By the digits

$31.98: Cost on Amazon of the most popular MMT primer, by Kelton’s colleague L. Randall Wray. At press time, it was the fourth most popular macroeconomics book on the site.

3.5 to 4%: Current long-run nominal GDP growth rate—comfortably above the US government’s borrowing cost of around 2.5%

26.9%: Highest ever US deficit/GDP ratio, set in 1943 when the US government spent big on defense during WWII

$1.13 trillion: US debt owed to China. MMT scholars say that these dollars are “nothing more than a balance sheet operation on the books of the Fed” and not worth worrying about.

$543 billion: Cost per year of one MMT proposal, which promises employment for all. Kelton’s own figure is a little over half that.

Haters gonna hate

Chopping down the "magic money tree"

For every MMT superfan, there are at least 10 who think it’s the silliest thing they’ve ever heard of—and don’t understand why we’re even discussing it. As economist and Quartz reporter Allison Schrager says, “it’s worth wondering why we give so much air to a theory that no credible economist thinks is right, and has no data to back it up.”

Here are a few things not to like:

🤑 Using tax policy to regulate the economy seems destined to fail, many MMT critics say. It doesn’t just require the government to respond in record time, but also expects politicians to institute policies that people will hate (such as raising taxes) to do so—a big ask for leaders counting on the same people’s votes. (Some MMT proponents suggest that this should be taken out of the hands of politicians and left to the Fed, as is currently the case with interest rates.)

🤑 Because MMT doesn’t use taxation principally as a way to raise revenue, but rather to adjust spending, it doesn’t make a lot of sense to institute punitive taxes on the wealthy, who tend to invest, rather than spend, their riches. This doesn’t go over well with some critics on the left, who’d like more of a “soak the rich” approach.

🤑It’s not clear how much money we could introduce to the economy without everything falling to bits. MMT proponents say there’s a natural limit, and we’d find it—but critics say the process of delineating that danger zone seems risky and hard.

🤑A country that plays fast and loose with its own currency risks losing the confidence of the world’s investors—potentially sending its currency’s value fall through the floor.

Quotable

“This is the United States government. First of all, you never have to default because you print the money. I hate to tell you. So there’s never a default.”

—US president Donald Trump

“I’m not a fan of MMT—not at all. We don’t need to get into danger zones, and we don’t know precisely where they are.”

—Legendary investor Warren Buffett

“It sounds right if you look at it from a certain angle. But it isn’t.”

—Economist and Nobel laureate Paul Krugman, writing in the New York Times.

Reuters/Jose Luis Gonzalez

Pop quiz

How large is the current US federal deficit?

$1.62 trillionZilch. $16.2 trillion$162 trillion

Correct. The national debt is projected to rise to about 150% of GDP by 2049, from just over 100% today.

Incorrect.

If your inbox doesn’t support this quiz, find the solution at bottom of email.

Brief history

1943: Russian-born British economist Abraham “Abba” Lerner publishes an article on “functional finance,” in which he argues that deficits aren’t important and governments should spend whatever they need to achieve their goals. (It builds on an earlier theory called Chartalism.)

1971: Under US president Richard Nixon, the gold standard is scrapped. This unpegs the dollar from the price of gold, allowing the US to print more money. Inflation skyrockets, then subsides.

1993: After spending an hour in the steam room with US politician Don Rumsfeld, hedge fund founder and economist Warren Mosler writes and publishes Soft Currency Economics, a precursor to MMT inspired by his “direct experience in actual monetary operations.”

2017: The first MMT conference is held in Kansas City, Missouri.

2019: New York congresswoman Alexandria Ocasio-Cortez proposes a kind of watered-down MMT to pay for her “Green New Deal” plan.

Watch this!

Ready to go deep on MMT? This two-hour public debate between MMT fan Warren Mosler and Austrian School representative Robert Murphy may be a good place to start. One spoiler, before you get stuck in: who actually wins the debate is left up to you.

Fun fact!

Though MMT often talks about the Fed “printing money” to spend, 85% of physical currency produced by the Bureau of Engraving and Printing is made to replace notes destroyed through normal use, with the rest going to fill increased demand. There’s about $1.7 trillion in physical US currency circulating around the globe.

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Poll

You down with MMT?

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Yeah, you know me!Smoke and mirrors—I’m not a fan.What are we even talking about again?

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Today’s email was written by Natasha Frost, edited by Jessanne Collins, and produced by Luiz Romero.