As national governments continue to tackle the economic effects of the COVID-19 crisis, a new way of looking at the economy is rising to the surface. Modern Monetary Theory (MMT) is an alternative to neoclassical economic theory, with many of its theories and tenants currently being tested as the world struggles to react to the global pandemic. If MMT's biggest proponents are right, everything we thought we knew about public finance could be wrong.
MMT is a new way to look at government spending and the nature of national debt. Unlike conventional monetary theory, MMT argues for the creation of new money through the use of fiscal policy. With so many national governments forced to unlock funds in this manner at the moment, people are asking questions about the true nature of government debt and what it really means for the future of society. Instead of trying to keep our balance sheet in the black by any means, MMT advocates argue for an entirely new way to limit spending based on inflation alone.
The implications of MMT are numerous and rather profound when you start to take it seriously. Instead of limiting spending on public health, education, and science programs based on an abstract notion of balancing the books, we would be free to spend as long as inflation was kept under control. Unlike the spending free-for-all that MMT opponents would have you believe, MMT simply shifts spending limit thresholds to a measure that is more relevant to human society. While conventional economic theory limits spending at the source, MMT limits spending based on the result.
While aspects of MMT have been around for decades, the first academic textbook based on the theory was only published in February 2019. In many ways, this theory mirrors the "naive" way of looking at the world shared by many children. If MMT manages to prove itself as a working theory, we can simply print more money when needed as suggested by countless young children the world over. Instead of viewing quantitative easing as an emergency monetary policy action, it could become the single most important mechanism of economic production.
According to MMT proponents, budget deficits can actually be a good thing, because they act as a real source of healthy economic growth. As long as national economies keep producing goods and services, the national debt never actually has to be repaid. This is a mind-boggling situation for anyone who has grown up in the modern world, but it's hard to reject outright without giving it closer analysis. If the balance sheet gets out of control, inflation will occur and the government will gather taxes or reduce spending just like they do now.
The difference, and it's a big one, is that spending limits are based on human need rather than potential surplus. MMT proponents say we're using the wrong model for a national economy, with countries that print their own money sharing little resemblance to either households balance sheets or their debt instruments. MMT claims the word "borrowing" is inaccurate on a national level, because nobody can borrow back their own debt. A job guarantee is another central component of MMT, with full employment treated as a national priority as production is prioritised over budget surplus and associated austerity.
MMT proponents say we've never come to terms with the reality of what took place back in 1971 with the demise of the Bretton Woods monetary system. That's when the US finally admitted it didn't have enough actual gold to back its currency. The intrinsic nature of currency changed at that moment, and in many ways, MMT offers a more accurate model of this situation than conventional monetary theory. As national governments continue to spend big to support their citizens and residents during the coronavirus, questions are being asked about the real nature of national debt and what this means for our collective future.