<aside> 🗣 This is my attempt at explaining the core tenants of Modern Monetary Theory, it's divergence from the macroeconomic orthodoxy, and the implications for the current economic crisis.
It is necessarily simplified (and so nuance will be lost) so that people without economic education can understand it easily.
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Should the government budget be run like a household? Must we ensure that governments only spend money that they earn, so that we always end up 'balanced'?
The economic orthodoxy says yes. If we fail to heed this rule then our standard of living will degrade. If a government spends more than it earns, it will fall deeper and deeper into debt until all its income will be spent paying down interest. It will have no money left to provide for its citizens.
For the past 40 years, this idea has underpinned economic policy making. The International Monetary Fund, the lender of last resort to countries suffering from economic malaise, has imposed this rule upon countries such as Libera, Iceland and Mexico. Large swathes of southern Europe - including Spain, Greece and Portugal - suffered because of this rule during the 2011 European Debt Crisis.
It's an axiom, but a vocal and increasingly prominent section of economists reject it outright. Modern Monetary Theorists (or MMTers) believe that imposing this rule is not only useless but often actively harmful.
MMT argues that governments should not be run like households because most governments have the ability to create their own money. Specifically this applies to "monetary sovereigns", governments which satisfy three conditions:
If these three conditions are satisfied, then the government has no default risk. It's impossible for them to go broke because they can issue money to pay debts!
It shifts the focus of economic management away from monetary supply and towards resource utilisation. An economy will become richer if all of its people are actively employed, and if the government has to spend money in order to ensure this then so be it. The quantity of money, and the speed of its increase, is immaterial.
The implications for economic policy, if MMT holds true, are enormous. Governments should be persistently running deficits in order to create private sector surpluses and stimulate growth. In doing so, governments would become far more active in the economy. Programmes of nationalisation or jobs guarantees, previously only the domain of far-left political parties, would quickly become conventional!
These questions are especially important now, as policymakers grapple with how to restart their economies after the Great Lockdown. If governments are free to spend as much as they like so they can get people back to work, this may be the solution to a looming economic depression.
It all hinges on this central question. Does the government budget work like a household? If so, then Modern Monetary Theorists are unequivocally wrong. If not, we may be at the precipice of a new economic movement as important as the removal of the gold standard.