Investing,  Markets and economy,  Modern Monetary Theory

The so what of MMT

The most important insight MMT provides is that a government that controls its own currency can never run out of that currency, therefore it cannot be financially constrained. It is instead constrained by having the resources to back the spending it proposes.

That means government spending, and consequently policy, doesn’t begin with the question of ‘how do we pay for it’, instead it starts with ‘do we have the resources required to do this?’

That critical difference means the scope for policy action is on a vastly different scale. For example:

  • Dental, optical and hearing can easily be included in Medicare – provided we have enough dentists, optometrists and audiologists that prices don’t go rocketing up
  • There is no need at all to charge for tertiary education – this is central to MMT’s assertion that human capital is the most valuable asset an economy has, and by denying ourselves more engineers, scientists, doctors, teachers and what have you is simply reducing the level of innovation we could otherwise enjoy
  • Welfare can be set at a level that is not punishingly low and provide a decent standard of living, especially when combined with MMT’s only policy recommendation of a full employment policy
  • It could bring an entirely new dimension to the climate debate. For example, the government could announce it is spending $10 billion to establish the Renewable Energy Research Institute in northern Queensland, which could provide economic benefits to communities that would suffer with the closure of the coal industry. The government could also tell coal workers it will match their current salary for, say, two years while they retrain and get re-employed.

Over the past 100 years, the greatest industrial and scientific advancements have come when governments throw massive resources into backing research. Whether it be during wartime, such as developing the jet engine or radar, or the Manhattan Project, or in the 1960s with the Apollo Mission, which gave us computers, semiconductors, satellites, software, GPS, and any manner of material science advancements, much of the technology we use in our day to lives now would not be here if not for government spending.

The development of effective COVID vaccines has shown us again what can happen when governments throw resources at a problem, and the same could happen with addressing climate change.

Many of those suggestions speak to why MMT has become associated with the left, or progressive, side of politics, especially in the US. It advocates for a much bigger role for governments, which is anathema to conservative politics. That MMT has been roundly criticised by conservative, classically trained neoliberal economists who currently dominate academia should come as no surprise, since if they were to acknowledge the inherent logic of MMT, it would all but be an admission that their life work has been wrong.

Likewise, conservative politicians have described MMT as ‘magic money tree’ economics, but again the criticisms are more reflective of partisan politics than any rational argument.

However, MMT is completely politically agnostic, it is simply an explanation of how money works in an economy: how it’s working right now. It doesn’t matter one jot if money is being spent by a conservative government or a progressive government. The way that spending is financed is identical.

In fact, there are all kinds of things about MMT that should appeal to conservatives: it can reduce taxes or help subsidise industry and promote business.

A legitimate issue that is raised about acknowledging MMT and explicitly embracing it as the basis for government policy, is how do you stop politicians from going crazy on the spending. The only way is to make sure there are checks and balances in place. For example, not only an office of Auditor General to check that spending plans have been determined through correct processes, but a federal integrity commission with a mandate to examine for corrupt, as well as criminal activity. Plus, incorporating a spending review process that assesses whether there are sufficient resources available to back spending commitments without increasing inflation.

There are many other entirely fair questions that MMT raises, but it is a discipline that now boasts a large a rapidly growing body of academic literature across the world, which addresses all of the practical issues in detail. A quick Google or YouTube search will leave you in no doubt that very smart people have been giving a lot of thought to how things should proceed under an MMT-guided model.

I hope this series of articles has helped you to understand the unquestionable logic of MMT. What is perhaps the best part of it is once you get it, it becomes clear that one of MMT’s greatest attributes is optimism. Instead of couching government spending in terms of scarcity, it’s a narrative of opportunity.

This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product.

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