Modern Monetary Theory (MMT) is a macroeconomic framework that argues that countries that issue their own currencies can never “run out of money” in the same way a business or household can. It challenges conventional views about fiscal policy, public debt, and monetary policy. Here are some key points:
- Government Spending and Currency Issuance: MMT posits that a government that issues its own fiat currency can create money to finance government spending. It doesn’t need to rely solely on taxes or borrowing to fund itself. Taxes serve to control inflation and redistribute wealth, rather than to fund spending per se.
- Inflation Concerns: According to MMT, the primary risk of this type of spending is inflation, rather than defaulting on debts. Therefore, it suggests that government spending should be limited by the economy’s capacity to absorb that spending without causing inflation.
- Role of Taxes: Taxes are used to control inflation, regulate economic activity, and ensure that the currency is in demand (since people need it to pay taxes).
- Public Debt: MMT views public debt differently from the mainstream. Since the government issues its own currency, it can always meet its debt obligations by creating more money. However, this doesn’t mean unlimited spending is advisable due to the risk of inflation.
- Unemployment: MMT advocates for policies like the Job Guarantee (JG) program, which would provide a job to anyone who wants one at a fixed wage. This would act as an automatic stabilizer for the economy, controlling inflation and maintaining full employment.
- Monetary Policy: Traditional roles of monetary policy, such as controlling inflation through interest rate adjustments, are viewed differently under MMT. It argues for a more subdued role for central banks and a more prominent role for fiscal policy in managing economic stability.
Critics of MMT argue that it underestimates the risks of inflation and could lead to irresponsible fiscal policies. They also question the efficacy of using taxes to control inflation and the practical challenges of implementing policies like the Job Guarantee.
Supporters, on the other hand, argue that MMT provides a more accurate description of how fiat money systems actually work and offers valuable insights into how to achieve full employment and more stable economies.
