Magic money Can we print ourselves rich?
Modern Monetary Theory is the new big idea on the political left, particularly in America
What is the basis of this theory?
In traditional economics, the idea of printing money to solve a nation’s problems is near universally seen as a very bad one. By contrast, Modern Monetary Theory – or MMT – proposes that nations that issue their own currencies can freely create and spend their own money; and that this is a useful economic tool, which need not devalue the currency, create inflation or lead to economic meltdown. In the MMT worldview, the established idea that high public debt is a drag on economies, and a burden on future generations, is turned on its head. Proponents argue that, on the contrary, private citizens and businesses tend to do better in countries running high levels of government (or fiscal) debt. Taken to its logical extreme, MMT allows high spending without taxes or borrowing – a truly radical idea sometimes derided as the “Magic Money Tree”.
Because it’s at least partly true. Governments with their own currencies and central banks do print money, or create it digitally, and in principle never need to default on a debt in their own currency, because they can always print more. In 2005, the former Federal Reserve chairman Alan Greenspan – a symbol of economic orthodoxy – admitted: “there’s nothing to prevent the federal government creating as much money as it wants”. Classical economics tends to see government spending as like a household budget: with income (taxes), outgoings (public spending), and borrowing to balance the former with the latter. MMT argues that the analogy is quite wrong. The economy is more like a basin: the state turns on the tap and pours money in.
Why has MMT’s moment come now?
Since the financial crisis of 2007-08, central banks have created many billions via quantitative easing: the Bank of England has created £895bn. Some thought this would ruin currencies and create high inflation; on the contrary, they’ve had to lower interest rates close to zero to counter deflation. Mainstream economists have become very much more relaxed about debt. “Put bluntly, public debt may have no fiscal cost,” former IMF chief economist Olivier Blanchard told a gathering of American economic wonks in 2019. Blanchard is no fan of MMT, but thinks that governments can maintain very high debt levels in the new lowinterest-rate global economy. Given the IMF’s traditionally tough line on free-spending governments, this was an astonishing thing to say. It was “as if a former pope came out with an endorsement of the devil”, said
Neil Irwin in The New York Times.
What could MMT do for us?
It’s a very appealing solution to the current question of how to pay for record levels of debt incurred as a result of the pandemic – and how to pay for public services without raising taxes. A country could, for instance, create a green energy network, build new hospitals, pay for free university education, or rebuild its transport infrastructure. It could create guaranteed state-funded jobs for everyone who needs them. Cheerleaders for MMT, such as Professor Stephanie Kelton (a former adviser to the left-leaning Democrat Bernie Sanders) and Alexandria OcasioCortez, the progressive Democratic New York congresswoman, argue that targeted, direct spending would ensure a far more speedy and equitable stimulus than quantitative easing (see box).
The most obvious danger is runaway inflation – of the sort seen in Weimar Germany and, more recently, in Venezuela, Zimbabwe and Argentina – and its frequent companion, currency collapse. Another concern is that any government with infinite spending power could hoover up people and resources, thereby crowding out the private sector, reducing the tax take and prompting the printing of yet more money to fill the gap. One reason why printing money is often associated with failing states is that it undermines fiscal responsibility, with big implications for market confidence. Even if money creation doesn’t necessarily create inflation at the national level, runaway inflation might still kick in if foreign investors or the bond markets (for government debt) lose faith in a nation’s economy. This would lead to capital leaving the country, and would devalue its currency – driving up import prices and creating inflation.
How does MMT deal with the inflation threat?
MMT posits that hyperinflation is very rare and won’t occur until an economy’s spare capacity is used up: i.e. it hits full employment and businesses are running flat out. To control inflation, MMTers have a controversial solution. They propose that if there is too much money in the economy, the government should take it out of circulation by raising taxes – on the basin analogy, by opening the plughole. This is an untried strategy that has critics out in droves. Tax policy is difficult to implement quickly, whereas inflation can move fast. And it’s highly questionable whether any government would have the courage to whack its citizens with increased taxes during a period of rapid inflation.
Will MMT ever be adopted?
It remains very much a fringe theory, and the odds are against it becoming a major policy plank. Even Bernie Sanders has never explicitly endorsed MMT – it goes so much against the grain. In economics, as in investing, if something looks too good to be true, people generally think it is. Excessive public borrowing tends to trigger financial crises; and creating money out of thin air tends to destroy confidence in it. These are difficult psychological barriers to overcome. Still, the debate sparked by MMT has highlighted a willingness to push the boundaries of policy in pursuit of faster and more inclusive growth. We may never see MMT in its purest form, but we may see scaled-down versions of it in the years ahead. The genie of “people’s quantitative easing” is out of the bottle.