Before you read on: in Modern Monetary Theory, what limits how much a government that issues its own currency can spend?
MMT economists argue that such a government can always pay in its own money. Spend more than the economy can supply, though, and prices rise.
- Emerged
- The mid-1990s, in an online discussion group of Post Keynesian economists
- Key figures
- Warren Mosler, a US hedge fund manager; L. Randall Wray; Bill Mitchell; Stephanie Kelton
- Key works
- Mosler's Soft Currency Economics (circulated in draft from 1996), Wray's Understanding Modern Money (1998), Kelton's The Deficit Myth (2020)
- Roots
- Georg Friedrich Knapp's State Theory of Money, Abba Lerner's functional finance (1943) and Hyman Minsky's employer of last resort
- Where it was debated
- US politics, especially from 2019
What it was reacting to
The usual view held that a government pays for spending by taxing or borrowing first. MMT's founders reversed the order: a government that issues its own currency spends first, creating money, and taxes afterwards.
Its founders rejected the idea that some unemployment must be accepted to keep inflation stable. Bill Mitchell proposed a buffer stock of public jobs instead: a pool of jobs that grows in slumps and shrinks in booms.
The label is contested. Supporters use it for a description of how a currency-issuing state works; critics often use it for paying for spending by printing money, a reading MMT economists reject.
The key ideas
Can you name the four key ideas of Modern Monetary Theory?
MMT economists argue that a government which issues its own currency, lets it float and borrows only in it can always pay its debts in that currency, so cannot be forced to default.
Can you think of an example?
Greece uses the euro, which it cannot issue, so it can run short of money to pay its debts. The UK, which issues pounds, cannot in MMT's view.
Following Abba Lerner's functional finance, MMT judges a budget by its effects on jobs and prices, not by whether it balances. A deficit is too big only if spending outruns what the economy can produce.
Can you think of an example?
With many workers idle, extra spending puts them to work. Near full employment, it mainly bids up prices.
From chartalism, Knapp's state theory of money, which held that money is a creature of law. Taxes payable in the state's currency give people a reason to want it. They also take spending power out of the economy, so tax rises are MMT's tool against inflation.
Can you think of an example?
If spending is pushing prices up, an MMT government raises taxes to cool demand.
A public job at a fixed wage for anyone willing and able to work, a version of Minsky's employer of last resort. MMT economists say the wage also anchors prices.
Can you think of an example?
In a recession, laid-off workers take community jobs at the set wage. As firms hire again, they leave and the scheme shrinks.