Modern Monetary Theory (MMT)

Modern Monetary Theory (MMT) is a relatively new money theory in the field of monetary economics. The theory states that governments that have control of the money supply are not constrained by tax revenues for their spending. In particular, such countries have the power to increase spending because they can print additional money and have a monopoly in doing so.

On this page, we provide a short Modern Monetary Theory primer. We discuss the primary mechanism and how MMT can be used to solve some pending issues.

What is modern monetary theory?

Modern Monetary Theory (MMT) is discussed in the context of policy debates of whether governments should focus on limiting budget deficits. Modern Monetary Theorists argue that budget deficits are not as harmful as many traditional economists argue.

In fact, MMT argues that government debt is money created by the government that has not been taken back using taxes. Thus, the government could increase the money supply by issuing additional debt or just printing money as the  two are equivalent. The money collected with issuing debt (or printed) can then be used to pay for government programs such as health care or to fight climate change. The increase in government debt, MMT argues is not a big problem. Many developed countries have government debt levels far higher than what they currently are, without adverse effects.

The only limit a government has, is the resources in a country. But if growth is too high and too many projects require the same inputs, inflation can go up. At that point, MMT argues that the government can take the excess money back out of the economy. To do this, the government can increase taxes. This is a very unconventional way at looking at taxes. Rather than collecting taxes to pay for projects (infrastructure, national defence,…), taxes would be used as a monetary policy instrument.

With the basics of Modern Monetary Theory explained, we now to turn to some of the criticisms.

Criticisms to MMT

The main problem with Modern Monetary Theory (MMT) is that politicians are in charge of the money supply. The problem with that is that, when it becomes necessary to increase taxes, politicians may be unwilling to do so. The consequence can be too much inflation or even hyperinflation. This can actually destroy the currency. Also, inflation may harm the economy. Increasing taxes at the same time would increase the downturn.

Summary

We explained MMT, a heterodox monetary theory first proposed by Warren Mosler in the 1990s. The theory has been gaining traction but many implications of such an approach are still unclear.