WHY IS MODERN MONETARY THEORY WRONG?
It has always been thought that fiscal responsibility and a balanced budget were adjacent ideas to right- wing or economically liberal political programs. That has been the majority case, as the social-democratic left has found it pretty difficult since the 70s or 80s to justify their Keynesian economic policies, which were clearly a complete failure in the decades previous to the arrival of the Washington Consensus, when inflation went up to more than 25% in some developed countries, as was the case of the UK. But a new policy has become famous and widely popular in some sector of the left over the last few years. This is the case of Modern Monetary Theory (MMT). MMT has permitted economists and politicians to think that they can forget about budgets, fiscal equilibrium and budgetary responsibility. It has been their supposed relief from the fight against “austerity” and fiscal tightness. It is normal, and even very positive that when one of these policies gets to be well-known by a wider public, academic economists start investigating further about it and developing new ideas on it. However, the issue is, that even though a large list of negative effects and imminent risks from the practical application of MMT have been published in several academic papers and studies, the mainstream media just show the supposedly positive near-term effects it could have, without taking into account the tremendously negative secondary effects that could destroy our whole economic and financial system, which MMT carries along with it.
Many left-wing politicians as John McDonnell or neomarxists as Paul Mason have expressed their public support for MMT and have asked for its practical application in nowadays politics and economics. Across the Atlantic, the case hasn’t been different, and several Democrats, as Alexandria Ocasio-Cortez and Bernie Sanders have “contacted” several economists from different universities around the UK to help them develop and introduce these ideas into their personal ideological programs. MMT has apparently appeared as an easy and quick solution for Ocasio-Cortez when having to justify the numbers and financial imbalances of her “Green New Deal”, which, according to one study by the Foundation for Economic Education, could cost nearly $95trn over 10 years. This has been the most exaggerated study I have found, but the minimal cost for the Green New Deal that economists have published is certainly near to $60trn over a 10 year period.
But… do we really understand what MMT is? To explain it plainly, MMT is a theory that supports the idea that governments can freely create money out of thin air. Governments do this through central banks, that are normally backed by government’s assets or just by the legality of the fiduciary media. MMT has been promoted for situations when tax revenue is not enough to pay for certain programmes, or for cases where the government wanted to produce larger and faster economic growth without resorting to structural reforms. MMTers see money as a construct of modern capitalist states that can be perfectly controlled and managed by the government; or central bankers in defect, without affecting equilibrium or the stability of the economic system. MMT turns the whole system around. Instead of having to tax people and spend afterwards according to the level of tax revenue (being fiscally responsible), MMT argues that spending should be a previous process before taxing. So, basically central banks will expand the monetary mass vigorously, and after that money has been spent and has supposedly generated larger economic growth, it will be that activity which will be taxed. MMT supporters promote the idea that there’s no need to balance the budget, and that restrictions and constraints on deficit levels will fetter the economy and worsen its indicators. MMT is terrifying, it’s the bad old story of sovereign states being able to print all they money they want, to later on accumulate huge deficit and debt levels, debt which tends to be normally defaulted by countries prone to ultra-expansionary monetary policy.
It is actually more complicated than this. MMT presents government budget deficits as a positive factor for growth and development. They should love Trump in that case, as he has increased the budget gap by over 77%, as Professor Steve Hanke asserts in one of his latest articles. Pure MMT will lead to the impossibility of defaulting, as supposedly countries will be financed by their own money, but this will also drive society towards an autarchy as a certain currency would be so devalued that it won’t be able to access bilateral or multilateral trade with other countries or economic agents, as has happened with nations suffering from hyperinflation all the way throughout history.
MMT is a complete utopia as it makes countries completely dependent on themselves, wiping out also the private sectors, as they won’t be able to compete freely in a system with an extremely devalued currency which doesn’t allow for international trade or has no utility as a store of value, destroying saving by making it impossible, and consequently contracting investment levels to minimum. I’ll extend on this point. We have to understand first of all that money is not wealth. Money is just a medium of exchange or a store of value that facilitates transactions by stablishing a common unit of exchange and storage. If the value of this currency id constantly being devalued, entrepreneurs won’t be able to save money for five or six months without it losing some of its value, and therefore not allowing an efficient allocation of resources in the economy. Let’s put a simple example. Imagine that the value (not the cost) of a new machine is 10, that value nowadays equals 15,000 dollars. You want to save up for that new machine which will increase the productivity of a firm, so you decide to save 5,000 dollars a month to be able to invest in that machine after 3 months. Now imagine that country is following MMT procedures and expanding constantly its monetary mass. This will cause the monetary unit to devalue largely, as I’ve commented previously. So now, instead of 15,000 dollars representing a value of 10; that value of 10 now costs 25,000 dollars, making all that saving futile, and incentivising a greater and faster expenditure in the economy, instead of promoting saving and capital accumulation, which is what really leads to growth by generating knowledge and innovation in production techniques.
Furthermore, everything previously stated makes a case for a stable and continuous monetary policy, prolonged through time and without great changes in the levels of interest rate, or money creation. People tend to think that monetary policy is the magic wand of economics, but it’s not. Monetary policy was responsible for the Great Depression of the 30s, and it was also partly guilty of the effects of the 2008 financial crisis. One common factor is that expansionary monetary policy incentivised the bubbles that lead to these two crises. Economic liberals/libertarians should make the case for fiscal responsibility, for tax revenues being equal or greater than government expenditure, for low and stable inflation, and overall for a coherent monetary policy accompanied by structural reforms that incentivise investment, employment and growth from the supply-side.
In conclusion, and in my humble opinion, MMT is just one more rhetoric to fight ideologically against the “savage austerity” that “menaces” our economies nowadays. But we shouldn’t forget that structural reforms in Europe since 2010 haven’t been austere at all, and that thanks to the few austerity policies that were launched in Europe, we were able to get out of the Great Recession. MMT simply means giving the government greater power and control over a nation’s resources. And we all know how that tale ends up.