Introduction
This article is for those who want to understand a relatively new economic theory called Modern Monetary Theory (MMT) which is seemingly getting popular amongst the intelligent people in the Economics sector. An increasing number of people are now talking about this because this theory might be the saviour of this stagnant economy since roughly the end of the 1990s. Therefore, many overlaps can be seen if you have already read about MMT on this site. However, I think this is worthwhile reading again because it is more organised. This is the summary of what I have written about MMT.
What is MMT?
MMT says it is acceptable for governments to expand their expenditure without considering its primary balance if necessary, especially when the economy has a destructive deflationary spiral. It is also assumed that the government deficit is simply a log of how much money is spent on the private sector.
This policy tries to maximise its potential and reach the physical limit of the production in the economy to get out of the stagnant economy or the economy in a deflationary spiral.
The way it works
In a policy under MMT, the government gives money to people by expanding its deficit and spending it. People will buy things or government bonds with allocated funds. People have now increased demands, creating jobs and increasing productivity until it reaches a physical limit of the economic system. In the conventional theory, people pay taxes before the government spends money because we conventionally regard a government as a household or a company. On the other hand, in the MMT theory, the government simply spends money before people pay taxes, and the purpose of collecting taxes is only to prevent inflation. The theory thinks that the government and the central bank are where the money comes from.
Important questions.
1. MMT causes Crowding out. Will it be a problem?
First, the term crowding out is; If the government issues plenty of its bonds for its expenditure, the abundance of the bonds leads to a decline in Bond prices which also necessarily causes an increase in interest rates. This naturally affects interest rates to become higher in the private sector, which means it becomes harder for people to use money more than they have. Simply, it becomes harder for people to make a loan. That is crowding out when the government spends money on whatever it wants while citizens become unable to spend money without heavier restrictions or higher interest rates.
It, however, will not necessarily be a problem because if a government has a deficit, that means someone in the private sector is in surplus. Therefore, the government spending money to expand its debt means that it also is making someone's surplus bigger. MMT is more like helping the private sector rather than causing damage to the economy by crowding out. It is unsure whether MMTers would argue that MMT does not cause crowding out or insist that MMT causes crowding out, but it is not a massive problem because it has the systematical countermeasure.
2. Will MMT cause hyperinflation?
An MMTer would say no, it does not cause hyperinflation because MMT is forming a pair with the method of preventing inflation. The technique is mainly raising the tax rate.
Also, it is said that in a policy under MMT, inflation should be addressed case-by-case. For example, suppose it is detected that the inflation rate of housing prices is relatively higher than in other sectors. In that case, the government should address this issue by probably building more houses or simply raising the housing tax to prevent inflation.
3. What is the relation between the conventional theory and MMT?
MMT is some form of a combination of conventional theories but what it sees is opposite to what the traditional approach does.
In Keynesian economics, more government spending is considered an excellent stimulus to the economy. And in Trickle-down, economics attempted to enhance its production in the economy by spending money on rich people regarded as Job-creators.
Two of the theories above are partially combined in MMT. Instead of only rich people, the government spends printed money on general or targeted people who are possibly able to increase the demand with given money, and it is assumed that the demand is the best job creator.
4. MMT does not increase any actual assets or resources in the real economy.
How does it affect the actual economy?
First, it is not a problem for, at least, the U.S. government to give money to random or targeted people. Still, the problem is whether or not the system has enough ability to provide products to people who have increased demands due to given money?
About the influence of MMT on the real economy, by increasing demands by given money, the demand will create jobs which possibly can boost productivity. Also, the needs possibly lead to enhanced efficiency of, for example, digging up resources and planting and cutting processes of wood. Therefore, in theory, eventually, it will increase tangible assets to some extent.
If given money increases people's demands, it all makes sense. However, if it isn't the case, MMT is merely an empty theory.
5. Is a policy under MMT sustainable?
MMTers would say that if a government expands its expenditure and deficit to the direction of infinity, it will reach the equilibrium, meaning it will stop growing because it will cause inflation to some extent. People will then change their behaviour of buying things, and The authority will change the policy along with that:
- Inflation stops people from spending, reducing surpluses in the private sector. This naturally decreases the government deficit.
- People's behaviour changes if there is more money than enough because people would stop spending when their potential demands are satisfied.
- The government would change its policy to reduce its deficit when it thinks the policy fulfilled its purposes enough.
MMT is theoretically good to go, but it might ethically become wrong because money will be spent by human beings ultimately. Therefore, it might be rational to think that there would be corruption.
6. Is Japan implementing MMT unintentionally?
No, roughly speaking, Japan is executing mainly monetary policy, which is related to manipulating policy rates and buying financial assets with government money called Quantitative Easing (QE). On the other hand, MMT mainly utilises fiscal policy to stimulate the economy. Therefore, they might seem similar in that both try to promote the stagnant economy but are essentially different. The case in Japan, however, suggests good signs for MMTers. For example, the Japanese government's relatively excessive deficit has not led to inflation at all, and Japan appears to be OK with that deficit so far. This partly indicates that MMT might be correct in theory.
The problems with MMT
MMTers overlook something.
First, MMT is basically to maximise the economy's productivity, which is nice. Still, it also means more exploitation of resources from the earth might be necessary to maintain enhanced productivity. Also, there might be worsened general pollution because MMT naturally increases demands for environmentally destructive factories, things, behaviour and so forth as it increases demands for others as well. It does not seem like a perfect plan in terms of preserving our environment.
MMT is suitable for making everyone happy with the technology invested in human history. However, suppose MMT is combined with a sustainable and green economy. In that case, it can be the following ideology after Capitalism which has been perfect-fit for making human beings grow unbelievably and exponentially. Therefore, the conclusion is that MMT appears to be the future standard, probably the following ideology after Capitalism.
Another aspect of this is that while Capitalism focuses on boosting the economy's efficiency, MMT focuses on causing everyone's happiness with abundant resources. MMT seems to put less importance on efficiency. If it is the case, MMT will likely be followed by a correction, recession or even depression because they are meant to fix inefficiency in the economy.