Ten questions on Modern Monetary Theory

Modern Monetary Theory (MMT) is one of the most headline-grabbing topics in economic circles lately, but it isn’t an easy concept to grasp. Below, we ask and answer the 10 critical questions that everyday economists might want to know about this hotly debated economic theory.

What is Modern Monetary Theory?

In the simplest terms, Modern Monetary Theory is an economic school of thought that begins with this idea: governments that print their own currency can’t, by definition, run out of money. Proponents of MMT argue that rather than attempting to balance the budget each year (by matching spending with taxation and other revenues), governments should instead aim for an economy that has full employment. A government could do that by spending and thus, creating jobs, even if that means running persistent budget deficits since those budget deficits could be funded by creating more money.

Doesn't money printing cause inflation?

Yes and no. The creation of money in and of itself doesn't cause inflation; after all, governments do it all the time. But when an excess of money combines with a lack of goods, labour, or capacity in the system, then inflation can result. Basically, it's a supply and demand story: too much money in the system and not enough slack in the labour market to absorb it, and/or not enough goods available to be purchased with all that money, will lead to inflation, or even its ugly cousin, hyperinflation.

But a country can't keep on spending forever … right?

No! MMT doesn't argue that governments can spend limitlessly. The key is that governments need to stop spending when full employment has been reached. Once that point has been reached, excess spending could tip the economy to a point at which inflation will start to rise.

How is MMT related to the concept of universal basic income?

Universal basic income argues for a program that would give each citizen a certain amount, whether they’re working or not. MMT, however, advocates for a job guarantee instead. That is, under MMT, anyone who can’t find a job in the private market would be provided one by the government. MMT proponents consider policies such as universal basic income to be undesirable and an inferior solution compared to a job guarantee.

Would there be no unemployment at all under MMT?

MMT argues that the responsibility of fiscal policy is to make sure that spending in the economy is sufficient to maintain production at levels at which there would be a job for everybody who wants one. In other words, governments should use their fiscal capacity to fill the gaps left by the private sector. Certainly, there would always be people who aren’t working for frictional reasons — for example, the time lag between leaving a job and finding a new one, or between entering the workforce and finding a job — but MMT-based policies would make sure that no one who wants to job is unemployed in the long-term.

If the government can spend as much as it wants under MMT, would the government tax us at all?

Governments levy taxes for two basic reasons: to finance government spending programs and as a fiscal policy tool to drain money out of the economy. Under MMT, governments would tax only for the latter reason, the goal being to manage aggregate demand and keep it in line with available supply of resources so inflation doesn’t get out of line. Put another way, as unemployment nears zero and inflation risked increasing, the government would increase taxes to pull some money out of the financial system and keep everything in balance.

Doesn’t MMT contradict hundreds of years of economic theory?

No, but it does contradict neoliberal economic theory. Neoliberalism advocates for a much smaller government role in the economy (for example, minimal taxes, trade barriers, and regulation), with the emphasis being placed on the free market. While it has been the dominant paradigm for the past four decades or so (Margaret Thatcher and Ronald Reagan introduced neoliberal policies during their terms), we believe that the sentiment is beginning to shift.

Why is it so popular all of a sudden?

MMT isn’t a modern concept, but there’s a renewed awakening to it as populations become more and more frustrated with the current state of affairs. Inequality (for example, as measured by the Gini index1) has been steadily increasing across the world, particularly in some of the world’s largest economies like the United States and China, leading some to argue that our economic system isn’t sustainable. Beyond the social aspect, interest in it has gained traction as low rates and massive spending programs during the global financial crisis (GFC) of 2007‒2008 and the COVID-19 pandemic haven’t caused the rise in inflation that traditional economics would predict. Some important politicians in the U.S. have even floated the idea of using it, bringing the idea of MMT into the headlines.

Line chart showing the Gini index of inequality from 1986 to 2016 for the U.S., Canada, the U.K., Germany, Italy and China. Inequality has risen steadily for all of the countries, particularly for China.

Is it actually in use anywhere?

No government has adopted MMT as a formal policy, but we’d argue that some elements of it are already embedded in our economy. During the GFC, for example, in an interview with CBS’s 60 Minutes, former Federal Reserve Chairman Ben Bernanke said that the Fed had printed money to pay for government spending:

Bernanke: “So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."
60 Minutes: "You've been printing money?"
Bernanke: "Well, effectively. And we need to do that because our economy is very weak and inflation is very low."

The fact is that the United States has been running deficits for years — specifically, 46 of the last 50 fiscal years — without any runaway inflation (with the exception of the mid-to-late 1970s, though it's widely accepted that that bout of inflation was caused by other external factors). It’s therefore getting harder and harder to claim that responsible deficits are dangerous. That said, while the U.S. has been monetizing its debt, since it’s not explicitly in the name of eliminating labour underutilisation, we wouldn’t consider it MMT.

Combination line and bar chart showing U.S. inflation and U.S. budget balances since 1954. Despite increasing budget deficits, inflation has never exceeded 14%.

So, if it’s so great, why don’t governments adopt MMT as policy?

Critically, not all economies have the capability to engage in MMT, as it requires certain criteria — namely, the country must issue its own currency and allow it to float freely, and the country must not borrow funds in other currencies. Even for countries that fit the bill, MMT requires highly reliable and credible institutions that have the policy discipline to turn off the fiscal taps if inflation is too high (though that’s equally true under the current economic regime anyway). But perhaps the biggest obstacle is politics — there’s massive political resistance to the idea of full employment, as it would involve the elimination of low pay, low investment in training and skills, and overall, would likely result in a transfer of wealth and power. In short, it’s an economic philosophy that will have to play the political game before becoming official policy.

1 “Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution.” (https://data.worldbank.org/indicator/SI.POV.GINI)

1 From the World Bank: “Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution.” (https://data.worldbank.org/indicator/SI.POV.GINI)

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Sue Trinh

Sue Trinh, 

Head of Macro Strategy, Asia, Multi-Asset Solutions Team

Manulife Investment Management

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