15 Things Wrong About MMT
Modern monetary theory (MMT) is often misunderstood by mainstream economists and commentators. In this post, I will clarify some of the major misunderstandings that persist across five key areas:
What is MMT?
This section covers the common misunderstanding about what MMT actually describes and its relationship to economic policy.
MMT Views
Here, I address misunderstandings related to how MMT views deficits, debt, inflation risks, and the nature of its economic analysis.
Policy Implications
This covers misunderstandings around the policy implications of MMT regarding exchange rates, financial constraints, and interest rates.
Fiscal Fallacies
Misunderstandings persist around what MMT says about government deficits, national debt, and macroeconomic trade-offs. I clarify the MMT perspective on these fiscal issues.
Policy Recommendations
Finally, I clear up misunderstandings related to MMT policy recommendations on unemployment, the job guarantee, and monetary policy.
With this comprehensive overview, I intend to demonstrate how MMT both describes modern monetary operations and informs an applicable but flexible policy approach - contrary to many mainstream misconceptions.
The clarity provided across these 15 aspects paints a more accurate picture of this relatively new macroeconomic framework and how an understanding of MMT can then lead to an MMT-informed view of policy recommendations.
Remember MMT itself does not have policies, it is not a manifesto. However, it can inform a manifesto.
1. What is MMT?
The Nature of MMT
Misunderstanding: MMT is a set of policy prescriptions and should be advocated for.
Correction: MMT is described as a theoretical framework for understanding how modern fiat monetary systems operate, not inherently a set of policy proposals. However, MMT principles do inform potential policy options.
Taxation Purpose and Necessity
Misunderstanding: MMT sees taxation as unnecessary.
Correction: MMT sees taxation as important for creating demand for a fiat currency and maintaining its value, not unnecessary. This government spending view of money creation is central to the MMT description of monetary systems.
Money Creation
Misunderstanding: Only the central bank can create money.
Correction: MMT says the government (treasury and central bank together) creates new money when it spends, not just the central bank when it prints money or buys assets. This spending adds net financial assets to the private sector.
2. MMT Views
Deficits and Debt
Misunderstanding: MMT claims deficits never matter.
Correction: MMT argues deficits themselves do not operationally constrain a currency-issuing government's spending. MMT does not claim deficits never matter for inflation or political reasons.
Inflation Risks
Misunderstanding: MMT ignores the risks of inflation.
Correction: MMT links inflation to factors like currency policy, productivity, and resource constraints - not an inherent ignorance of inflation risks.
MMT as Unorthodox Economics
Misunderstanding: MMT relies on unorthodox economics.
Correction: MMT builds on mainstream sectoral balance accounting and monetary operations, not unorthodox ideas.
Quantitative Easing
Misunderstanding: QE stimulates growth.
Correction: MMT views QE as limited for stimulating real production and growth, though it may boost financial asset prices.
3. Policy Implications
Exchange Rates
Misunderstanding: Floating exchange rates restrict a government's policy options and ability to spend. Fixed rates provide more control and stability.
Correction: MMT argues floating rates free up policy space compared to fixed regimes, contrary to some mainstream views.
Financial Constraints
Misunderstanding: Taxes fund government spending. Spending is constrained by tax revenue.
Correction: MMT emphasises that currency-issuing governments are not operationally constrained by taxes or revenue.
Interest Rates and Bonds
Misunderstanding: Interest rates must be kept moderately positive to encourage savings and lending.
Correction: MMT typically favours low or zero rates but acknowledges the potential context-dependent benefits of positive rates.
4. Fiscal Fallacies
Government Deficits
Misunderstanding: Government deficits are inherently bad and should be avoided at all costs. Many believe governments need to balance budgets and reduce deficits.
Correction: MMT sees deficits as providing desired net financial assets to the private sector, which is not inherently bad, as some mainstream views claim.
National Debt
Misunderstanding: The national debt is a burden that governments must repay and reduce over time or else face financial calamity.
Correction: MMT does not view public debt as needing repayment. It represents private savings desires rather than a burden.
Policy Trade-offs
Misunderstanding: There is an inherent trade-off between full employment and inflation - policymakers must choose between one or the other.
Correction: MMT rejects rigid mainstream trade-off thinking about inflation vs full employment policy space.
5. Policy Recommendations
Monetary Policy
Misunderstanding: Interest rates are an effective tool for controlling inflation. Raising rates reduces inflation.
Correction: MMT sees interest rates as a relatively weak inflation control tool but allows some context-dependent usefulness.
Unemployment and Job Guarantee
Misunderstanding: Unemployment is a necessary evil and cannot be eliminated fully.
Correction: MMT advocates a job guarantee to eliminate involuntary unemployment, not all unemployment.
This post aims to unpack the major areas where modern monetary theory is routinely misunderstood. By clarifying MMT's descriptive foundations and flexible policy space, the reader can understand this heterodox macroeconomic approach more accurately.
Shedding light on these 15 aspects provides a launching point for further exploration and reasoned debate on the merits of MMT.
When properly understood, MMT offers a fresh perspective on the workings of monetary systems, deficits, inflation, and full employment policy.
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Very comprehensive and valuable information.