Nicholas Gruen Evaluating MMT with Open Eyes
Neither Villain nor Saviour
A debate has recently unfolded about Modern Monetary Theory (MMT) and its potential implications. The heterodox economic theory has gained increased attention, with both supporters and critics weighing in. Economist Nicholas Gruen offers a nuanced view of MMT.
As Gruen explains,
"Money is a human creation, a social creation, a sort of social agreement on a common hallucination."
This aligns with the MMT view that money derives its value from the state's authority, not physical properties. MMT argues that as the monopoly issuer of the currency, the government faces no inherent financial constraint on its spending capacity since it can create currency at will. However, this applies primarily to nations with their own free-floating currency rather than fixed exchange rates.
Weighing the Risks
According to Gruen, MMT is more relaxed than other economic schools about using money financing and deficits to fund government programs.
However, he cautions MMT does recognise inflationary risks if spending exceeds productive capacity.
The inflation constraint, not abstract debt or deficits, serves as the main limit in MMT's eyes. As Gruen puts it,
"The MMT idea, the modern monetary theory idea that inflation, you should be happy to print money, except for the capacity of that money to generate inflation, at which point you stop."
Gruen's characterisation aligns with that of MMT economist Scott Fullwiler, who argues that blanket money printing is not promoted within MMT.
Rather, Fullwiler explains that detailed metrics are used to assess inflation risks tied to resource utilisation and production capacity.
The focus is on real economic constraints rather than a fixation on debt levels or money printing.
Assessing the Benefits and Concerns
Gruen astutely observes that ‘massive money printing’ during COVID-19 has not caused high inflation due to low demand, fitting with MMT's logic.
He also identifies that MMT places greater emphasis on fiscal policy options over monetary policy alone.
At the same time, Gruen levels some fair criticisms towards MMT. He argues it does not adequately address the dangers of asset price inflation and financial instability.
MMT economists counter that targeted financial regulation and oversight can help stabilise markets.
The Value of Open-Minded Analysis
Without fully rejecting or embracing MMT, Gruen offers a nuanced view appreciating both its novel insights and limitations in certain areas. His account illuminates both the potential usefulness of MMT in reframing deficit spending and the need to consider its impact on power balances.
Gruen advances the public discussion and underscores the importance of subjecting radical new economic theories to rigorous scrutiny. As we contend with MMT and its growing popularity, Gruen's perspective offers a thoughtful model for constructive engagement and debate.
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