Modern Monetary Theory (MMT): Principles, History, and Policy Implications

The beginnings, 20th century

In Full Employment and Price Stability, Warren Mosler published the first genuine MMT article in a refereed journal, the Journal of Post Keynesian Economics (JPKE), in 1997. In this article, he argues that, first, unemployment is caused by too small a government deficit (as taxes minus government spending) and, second, the "value" of the currency is set by government prices. Today's economic policy, he argues, is designed to create unemployment through the central bank's interest rate policy at times when inflation rates are too high. Mosler criticizes this. The state could eliminate unemployment at any time by acting as an "employer of last resort".

This policy measure is now called the "Job Guarantee" and is advocated by Bernie Sanders and others.

According to Mosler's approach, no crisis is so deep that it cannot be overcome by money creation by the state and tax reduction. Fundamental is the view that the state, as monopolist over the currency, does not "finance" its spending, but is the creator of the currency. It is its spending that enables the private sector (households and businesses) to pay their taxes in the first place.

This view was advocated by Georg Friedrich Knapp, among others, as early as 1905. He opened his State Theory of Money with the argument that money - in contrast to the monetary theory of metallism - derives its value from the legal order of the money-issuing state (i.e. from the so-called charter):

According to Knapp, the value of a state-issued gold coin does not lie in the inherent value of the gold from which the coin was minted. Rather, coins are the "disembodied remains" of the monetary system. This becomes clearer even with paper money, which no longer even has any significant material value. Contrary to the metallism argument that paper money is backed by precious metals, all state-issued (chartalistic) money is fiat money, and "[s]tate money is recognized by the fact that it is accepted by the state."

A corollary of this view is the recognition that at the federal level (it is different at the state level) taxes do not finance government spending, but conversely that the emission of government money makes tax payments possible. Because MMT has adopted this view, the school is also described as Chartalist. Its proponents emphasize that Eurozone regulations relegate national governments to the status of federal states, which cannot easily finance themselves.

21st century

Specialist conferences on Modern Monetary Theory were held at the University of Kansas City in Missouri in the 2000s, most recently in 2016 as the 1st International MMT conference, before the conference moved to the New School for Social Research in 2018. The first European MMT conference took place in Berlin at the EBC University of Applied Sciences on February 1-2, 2019 and was organized by the Samuel Pufendorf Society for Political Economy.

In disciplines such as sociology, political science and law, MMT is also dealt with in Germany. Among others, the Hamburg sociologist Aaron Sahr wrote a book on "keystroke capitalism", the Bremen political scientist Wolfgang Krumbein a book on state financing by the central bank, and the Würzburg lawyer Isabel Feichtner an essay on a possible study of money from the perspective of law.

In the USA, political proponents of the theory are located primarily on the left wing of the Democratic Party: Congresswoman Alexandria Ocasio-Cortez, for example, has declared herself in favour of MMT, as has Senator and presidential candidate Bernie Sanders, whose economic policy advisor Stephanie Kelton is a main proponent of the theory.

Criticism

The US economist Paul Krugman criticises Modern Monetary Theory as a "recipe for very high inflation, perhaps even hyperinflation", as soon as the situation of the "liquidity trap" no longer exists: According to Krugman, a constantly increasing money supply leads to a massive, i.e. in any case disproportionate, reduction in the demand for this currency, ultimately to its destruction.

In a working paper of the Hans Böckler Foundation, which is close to the trade unions, the Modern Monetary Theory is described as a "polemical policy for times of depression" that lacks an economic foundation. In particular, there is no justification for the assumption that full employment and stable consumer prices can be guaranteed simultaneously by MMT.

Former Democratic US Treasury Secretary Larry Summers criticizes MMT as "voodoo economics" that stretches some partially valid assumptions to a "grotesque point" beyond the laws of arithmetic. MMT-like policy ideas, he argues, are largely responsible for hyperinflation in Latin American countries (including Venezuela). The concern to make fiscal policy more effective and efficient is justified in principle, but MMT is the wrong instrument for this purpose.

John Mauldin calls MMT "economically ignorant madness". Andreas Uhlig relates this to the "core proposition that government budget deficits and government debt are no cause for alarm, because if government spending is not covered by revenues, it can always be financed by the central bank. No state could go bankrupt, provided it had its own currency and the debt was denominated in it. With this steep thesis, supporters of MMT circumvent the inconvenient fact that governments and states can also come up against economic limits, just like private households and companies."

A survey by the University of Chicago Booth School of Business found that none of the leading economists agreed with the core theses of MMT summarised therein. However, this survey itself was criticised by some MMT representatives, because they themselves would never agree with the two alleged core theses presented for evaluation, as they said they were not in line with MMT at all.

Justification

Representatives of MMT vehemently reject this and similar criticism. In particular, they argue, the thesis of impending (hyper)inflation is absurd, since MMT by no means propagates arbitrarily high government deficits, but calls for precisely coordinated budget deficits of a magnitude that is necessary to close the expenditure gap resulting from the net saving wishes of the non-governmental sector. Measured against this, government budget deficits should not be too low, because full employment is not possible with an insufficient deficit, but also not too high, because in this case demand-induced inflation occurs. This occurs when nominal expenditure in an economy exceeds productive capacity. Representatives of MMT also accuse critics of MMT of attributing to them assertions that no representative of MMT has ever made in this way. Economist Bert Rürup argues in an article on central bank monetary expansion in the wake of the Corona crisis that "the ECB will have to rely, in the spirit of Modern 'Monetary Theory', on the euro area countries adopting a consolidation course via higher taxes and lower spending". This interpretation, however, is strictly rejected by MMT representatives, as it is "a grossly distorted representation of the central statements of MMT".