What Is Modern Monetary Theory? An MMT Theorist Explains
A resurgence in a popular economic theory might make it possible for Universal Child Care and other programs to actually see the light of day.
The national debt is ballooning, surpassing $22 trillion. Conservatives and progressives alike, are aghast at the number and different political parties will use this number to different ends, but all will say the debt is immoral and that we are leaving our kids with an untenable fiscal situation. So, therefore, when programs like the Green New Deal or Medicare for All, or a Universal Childcare Program are proposed, an obvious question is asked: Okay, but how do we pay for it?
Conservatives say we should cut taxes so private corporations and billionaires will put more money into the economy. Many progressives abide by the pay-go rule and say that we have to levy taxes to pay for programs and to pay down the debt. Elizabeth Warren herself just proposed a huge plan — the Universal Child Care Act — and a way to pay for it by taxing the uber-wealthy, which would put some $1.75 trillion into the economy over the next decade.
But what if all of them were wrong? What if we’ve all been thinking of taxes and that funny little pay-go rule the wrong way all along? What if the national debt doesn’t actually matter, and taxes don’t pay for anything?
That’s what Modern Monetary Theory, a niche economic theory that has gained ground with the introduction of the Green New Deal, argues. The complex theory works on the idea that because the U.S. can borrow in its own currency, it can therefore continue to borrow on itself. Some argue that MMT presents a solution. But what might that solution be? To gain more information, Fatherly spoke to Fadhel Kaboub, an MMT theorist, president of the Global Institute for Sustainable Prosperity, and professor at Denison University, to put it into perspective.
For those who are unaware, what is Modern Monetary Theory?
The people who usually try to find the bumper sticker description of MMT end up with something very simplistic and misleading, which is, sovereign governments can print their own money so they can spend it on anything they want. That’s technically true, but it’s not what MMT is all about.
So what about that isn’t true?
Well, let’s talk about what we mean by a sovereign government. It’s not really sovereign in the political sense, which is what most people are really thinking about the government that has independence and territory, a military, a flag, and all that stuff.
We’re talking about monetary sovereignty. A monetary sovereign government is a government that issues its own currency. Most governments do that. It’s also a government that taxes its population in that same currency, which most governments can do. The third condition is that it’s a government that issues debt denominated in its own currency. So when the treasury issues government bonds, they’re all denominated in U.S. dollars. The Japanese debt, for example, is also denominated in Japanese yen. But if you look at developing countries, they issue debt denominated in foreign currencies, which is where they lose their monetary sovereignty.
The fourth is related to the third. It’s the idea of governments not fixing the value of their currency to a foreign currency or taking their currency to gold, silver, or any specific commodity. In other words, monetary sovereign governments don’t follow the gold standard or fixed exchange rate regimes. For developing countries, sometimes they have to, because of the structural conditions they have. But the U.S. has all four conditions of monetary sovereignty.
So you need monetary sovereignty to live under the MMT. So, if the U.S. is a monetary sovereign nation, what next?
MMT re-establishes a logical foundation for understanding the monetary system. In the mainstream understanding of the monetary system, we have it backwards. We usually say that taxpayer money pays for the infrastructure, the war, the education, and the fire department. That’s illogical when we think of it from the federal government perspective. It’s true at the local, state level, but it’s not true at the federal level.
MMT makes a distinction between the issuer of the currency, which is the federal government, and the users of the currency, which is everybody else. States, municipalities, us, individuals, families, households, and companies, and the rest of the world. Once we look at that distinction, it becomes illogical to say the government needs to borrow money in order to spend it. In order for the U.S. dollar to exist in circulation in the economy, it must come from the only source: the federal government.
What do you mean?
The federal government spends money into existence. That’s what allows for the circulation of currency in the system, so that the rest of us can use, spend, borrow, and lend it to each other and use it to pay taxes back to the government. So, in MMT, first, the government spends, then taxes some of it back. Then the question becomes: if taxation doesn’t fund government programs, what’s the purpose of taxation?
MMT’s explanation: Because taxation is required for everyone, it creates demand for an otherwise useless piece of paper. The US dollar is not backed by gold or silver. So that in and of itself gives it value. It’s required via the coercive authority of the government. It’s required for the payment of taxes.
Okay, so taxation gives money value, but it isn’t required for enacting new programs that would require a lot of federal spending. So, why are taxes still important in the MMT framework?
Taxation also withdraws money from the system. So, yes, the government can spend anything it wants, but that would put too much money in the system, which would allow consumers to go on a shopping spree and could cause inflation. So taxation takes some of that money out of circulation. It can tame inflation.
What’s stopping us from adopting an MMT mindset and just going right into funding a huge social program right now, tomorrow?
Inflation is the limit. Let’s say, tomorrow, we decide as a nation that dental care is a human right, and we are going to provide it to every person in this country. Anyone can call up their dentist and schedule an appointment without insurance. The government is going to pay for it. I call my dentist and say, ‘I’d like to schedule an appointment.’ They say, ‘Sure. We’ll put you on the list and we’ll see you in 2035.’ And I say, ‘Why?’ They’ll say: ‘Because everyone is calling and everyone is scheduling because they were excluded before that.’
What good does it do for us, having the government pay for dental care, if we don’t actually have the physical resources and productive capacity to provide those things? The dentist will say, ‘By the way, we have this premium platinum service where you pay $7,000 and we put you in an elite club and you can schedule your appointment next week.’
If you have a shortage of productive capacity, and a huge amount of demand, regardless of whether we have the money or not, that will cause inflation. MMT says let’s increase the productive capacity of all the things that we care about: renewable energy, medical services, whatever the national priorities are. The good thing is those resources are producible. Dentists can be trained.
So, obviously MMT became newsy when Alexandria Ocasio-Cortez brought it up when being pressed on how we would pay for the Green New Deal (GND), which appears to be an infrastructure plan to create domestic green energy. Is that intentional?
More government spending, if it’s done the right way, actually reduces inflation, it doesn’t cause it. If you spend money on training doctors and nurses and building solar renewable energy, that will reduce inflation. What drives inflation in the U.S. today is four major areas: Housing, college education, energy, and healthcare. The MMT policy framework that deals with inflation says: let’s target those four areas and kill inflation at the source. So, when we talk about a Green New Deal, a job guarantee, Medicare For All, it’s really about reducing cost in those areas.
With the GND, we’re talking about building alternative sources of energy away from fossil fuels because, most of the energy, transportation, and electricity generation that we have in the U.S. is driven by fossil fuels, which is priced internationally. The best way to insulate the U.S. economy from that source of inflation is to produce it domestically at a much lower cost. The only way to do it is to scale up production of renewables, which creates thousands of jobs, and will protect the US economy from any fluctuation in oil prices or energy prices because of global conflict. That’s the MMT lens. It allow you to go to the root causes of inflation.
Parents worry a lot about the national debt. It’s skyrocketing, and a lot of parents worry that we’re leaving our children with a debt that they will never be able to pay for, that they’ll drown under. How does MMT respond to the threat of a growing deficit?
Deficit hawks, economists, and politicians say the national debt is immoral and irresponsible, because it’s us, adults, spending irresponsibly, and then passing on the debt to our children and grandchildren, which then, in their generation, they have to tax themselves more to pay for. During the elections, we’ll get postcards of pictures of babies crying that say “The national debt is irresponsible and is a burden on future generations.”
The more deficit-dove perspective, the Paul Krugman, middle of the road, liberal type, they say, “The debt is not immoral or irresponsible, because responsible parents also borrow money to buy a house, buy a car, and they pay it off on time.” There’s nothing wrong with debt, per se. It doesn’t need to be paid off completely. But it does have to be managed within reason. For them, the reasonable time to borrow and spend is when interest rates are really low, when there’s a deep, severe recession and we need to jumpstart the economy. As soon as things go back to normal and it becomes expensive to borrow, the government should balance the budget and not massively spend.
What we call the national debt is not the same thing as a personal debt. From an MMT perspective, we don’t believe that taxes fund government spending, so when those payments come due, principal and interest, the government pays for it the same way it pays for anything else. Congress approves the payment to bondholders. If that puts too much money in the system, MMT says: we will do the same thing we always do, which is either tax more to take money out of circulation to combat inflation or sell more bonds to take money out of circulation, or whatever the source of inflation is, go after it at the source. There is zero risk of default from an MMT perspective as long as you have monetary sovereignty.
Elizabeth Warren, who is uber progressive, plans on paying for the Universal Child Care Plan she proposed by levying a wealth tax. Is that a disingenuous argument, based on MMT?
Taxing the rich, which is a hot topic these days, is not because we need their money to fund education or public health. Taxing the super rich should be because inequality has negative effects on society. It should be to protect the democratic process. We say democracy is one person and one vote. But in practice, it’s the billionaires who have huge influence politically, via lobbying and political campaign contributions, so taxing excessive wealth is a way of protecting democracy from oligarchy. Not because we need their money for education.
So we won’t actually be taxing the wealthy to pay for the program. We’ll be doing it to combat inflation if we were to put this huge infrastructure package in our budget.
Exactly. It’s completely misleading for a congress or anybody running for office to say, “I’m going to tax this in order to pay for that.” That’s not how that works.
We’re not going to transition into an MMT world. MMT is the way the world is. It’s just that Congress has this silly rule of tying their hands behind their back and saying, “Sorry, we can’t do this unless we do the other thing.”
MMT is not new. World War II came right after the Great Depression. The country was broke, there was no money, there was nobody to tax and borrow from, and then this massive challenge of saving the world was on the table. We spent money into existence and built a massive military industrial complex to win the war. The taxing happened during and after the war. The borrowing — the freedom bonds and war bonds the treasury issued — happened during the war, not before. It was after the money was spent, and people had cash to spend, that’s when war bonds were sold, to capitalize on the patriotic mood of the population, and primarily to convince the population to abstain from consumption until after the war. The government said, “Give me your cash, I’ll give you this government bond, I’ll pay you back in ten years, plus interest.” And that’s exactly what people did. Because there were no new cars and no new homes to buy or build. Everybody was working for the war effort. Had it not been for the war bonds, and the taxation that happened during and after the war, and price controls, there would have been hyperinflation.
So there’s a reason the Green New Deal is styled so purposely after the New Deal effort. It’s an infrastructure plan, to build a capacity of workers, to create national energy programs, to combat inflation and save the planet.
There’s one element that everyone in the media so far is missing, or at least criticizing with the Green New Deal. People ask, “Why are you including everything and the kitchen sink? Medicare for all, energy, inequality, why is it everything at once? Why not just do the green stuff?” This is precisely where they fail to recognize the MMT approach on inflation. The main sources of inflation are health care, energy, college education and housing. Medicare for all will be deflationary, not inflationary. At the same time, we will have components of the Green New Deal that will put pressure on prices. Raising wages and services. These things will offset each other. The fact that we are spending massively on renewable energy? Yes, of course at first there will be upward pressure. We don’t have the productive capacity built in yet. But we will be building it. And eventually, things will taper off. The biggest burden on any employer today is the cost of health are. Reducing the cost of health care will reduce the cost of education and the cost of doing business across the country. That’s deflationary, not inflationary. So, having everything in the kitchen sink is by design.