Published Mar 22, 2024 # Modern Monetary Theory (MMT) ## Definition of Modern Monetary Theory Modern Monetary Theory (MMT) is an economic framework that posits that governments, which issue their own fiat currencies, are not constrained by revenues when it comes to federal budgeting. Instead, the limitation comes from inflation. This theory suggests that such governments can create more money to fund public spending, pay off debts, or achieve full employment, without the need for taxes or borrowing to precede spending. The theory challenges traditional views on fiscal policy and government financing. ## Key Concepts At the heart of MMT is the argument that a country with monetary sovereignty (i.e., that issues its own currency, like the United States with the dollar or Japan with the yen) can never “run out” of money in the same way a household or business can. Instead, the primary economic constraint for a sovereign currency issuer is inflation, particularly if the economy is at or near full capacity. ### Government Budgets MMT suggests that government budgets are fundamentally different from household budgets. While households must fund their expenditures (e.g., loans, income, etc.), a sovereign government funds expenditures by issuing currency. ### Role of Taxes In MMT, taxes do not primarily serve as a way for the government to finance operations. Instead, taxes are tools to regulate inflation, manage aggregate demand, and enforce the use of a country’s currency. For instance, by taxing more, the government can reduce the money supply, curbing inflation. ### Inflation Management MMT recognizes inflation as the primary risk of excessive government spending. It argues that as long as there is slack in the economy (i.e., unemployed labor and resources), the government can spend without causing inflation. Once the economy reaches its productive capacity, however, further spending could lead to inflation. ### Employment MMT advocates for the use of fiscal policy to achieve full employment. One policy proposal from MMT proponents is the Job Guarantee (JG) program, which would provide a job to anyone willing and able to work, thereby establishing a de facto floor on wages and providing economic stability. ## Why MMT Matters Modern Monetary Theory challenges conventional wisdom on the dangers of government deficits and debt. It provides a theoretical backing for expansive fiscal policy, especially in times of economic distress, without the immediate concern for how spending will be “paid for.” MMT has gained traction among some politicians and economists, especially in the context of debates over spending on infrastructure, healthcare, and climate change initiatives. ## Frequently Asked Questions (FAQ) ### How does MMT differ from traditional Keynesian economics? While both MMT and Keynesian economics emphasize the importance of government spending for maintaining full employment and economic stability, MMT goes further by downplaying the role of government borrowing and viewing taxes primarily as tools for controlling inflation rather than funding expenditures. ### Can any country implement MMT principles? MMT applies to countries that have full control over their currency, meaning they must issue and control their own fiat currency that is not pegged to another currency or a commodity like gold. Countries that use a foreign currency or are bound by currency unions (e.g., countries in the Eurozone) do not have the same monetary sovereignty and thus cannot apply MMT principles in the same way. ### What are the criticisms of MMT? Critics argue that MMT underestimates the risk of inflation from increased government spending and oversimplifies the process of controlling inflation through taxation. There is also concern that MMT policies could undermine confidence in a currency, leading to negative economic outcomes like hyperinflation. However, MMT proponents counter that their approach includes safeguards to manage inflation effectively. In conclusion, Modern Monetary Theory provides a distinct perspective on fiscal policy, government financing, and monetary sovereignty. By challenging traditional economic paradigms, MMT contributes to ongoing debates about how governments can best mobilize resources to meet public needs and objectives within the constraints of inflation and productive capacity.
Economics