# Does Modern Monetary Theory (MMT) provide a useful insight into how to manage the economy?

According to advocates of [Modern Monetary Theory][MMT] (MMT), the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector. Deflation is not seen as a risk because the Government of any country with sovereign control of its own internationally accepted currency can print money to create as much inflation as it wants at will (depending on who receives that money).

It appears to me that this must be true to some extent, but my concern is that the feedback mechanism where the extra money generates inflation might not be smooth and free flowing for various reasons and a vast excess of money might accumulate in an unstable way in certain areas of the economy. After a period of time some trigger event might cause a sudden uncontrollable cascade flood of that money that could destroy public confidence and the currency itself. Is this an unfounded fear?

• I am in the MMT camp, but I fear this question would only generate opinion-based answers. Ideally, it should be re-phrased to be a technical question about MMT. Another issue is that your characterisation about money printing is absolutely counter to MMT views on inflation. Embedding that within the question makes it harder to get a good answer. Feb 20 at 22:36
• @Brian Romanchuk, I'm certainly not an expert so I probably haven't phrased it very well. If you could elaborate I will see if I can improve the question. I'm slightly confused as I was under the impression that money printing causes or can cause inflation no? and taxation should reduced it? All other things being equal etc etc. Feb 20 at 23:37
• I gave you an answer, which discusses the body of your text. The title is too grandiose and open ended, and invites opinion-based answers. Your question is really about how MMT relates money supply to inflation (which it doesn’t). I would cut down the question to be something like “How does MMT view the relationship between mobey and inflation.” Feb 21 at 2:28
• No doubt I have worded the question badly; however, I meant that excess wealth could build up in savings of those already better off, gold bullion, bit coins and other liquid or relatively liquid but non-circulating assets that given the right circumstances might be released back into the consumer side of the economy suddenly causing a wave of inflation. Presumably economist think they know in general terms where all of the "printed" money actual is or has ended up so this is not an issue (bank reserves?). So perhaps such “areas of the economy” are not a concern as they are not large enough. Feb 21 at 14:21

Does Modern Monetary Theory (MMT) provide a useful insight into how to manage the economy?

That depends on your definition of MMT, because it is not generally agreed on what it even is. You will find some arguing it is just a macro/monetary theory (such as the Wikipedia page) but then I seen MMT proponents on this site arguing it is a whole new paradigm that encompasses all macroeconomics and microeconomics. In addition, the MMT is not a theory in a way that is commonly understood in science, that is as far as I know there is no rigorous agreed upon MMT model that is testable. This makes it difficult to address it, because it is hard to criticize something that has no agreed upon framework as one can always simply respond to any criticism that it is not about the right interpretation of MMT.

However, this being said, the main tenets of MMT, as laid out by advocates such as Stephanie Kelton seem to include assertions that:

• debt and deficit for countries issuing their own currency does not matter.
• government can fund virtually arbitrary amount of real spending through monetary financing.

This is rejected by conventional economists. In fact, an IGM poll among more than 40 top mostly Ivy league US policy economists shows that literally none of them agrees with the MMT propositions

Modern Monetary Theory

You can also have a look at critiques of MMT by other top economists such as Krugman, Rogoff, Summers or Mankiw (2019).

Consequently, at least when it comes to the above mentioned tenets, conventional economists reject the modern monetary theory and do not consider it useful. This is not to say that some policy recommendations might not be valid. For example, as far as I know many MMTers advocate for more government spending and higher deficits - that is not necessary bad idea especially in recession, and it is recommended policy by conventional macro models (e.g. see Mankiw Macroeconomics 8ed or Blanchard et al Macroeconomics: a European Perspective) but most conventional economists would still worry about deficits getting too out of hand and would caution against too much monetary financing (outside perhaps liquidity traps). Or most conventional economists and conventional macro models would argue it is not possible to simultaneously control inflation through taxes while simultaneously stimulating economy with monetary financed spending, in most macro models to avoid inflation you would have to raise taxes by amount exactly offsetting the effect of government spending (see Romer Advanced Macroeconomics), and to the extend government uses distortionary taxes (e.g. non-lump-sum taxes) it would leave economy worse off.

However, as stated at the beginning it is not clear what MMT is. For example, as pointed in the comments your description of MMT is quite different from what many MMT proponents asserts. For example, you state:

Government of any country with sovereign control of its own internationally accepted currency can print money to create as much inflation as it wants at will (depending on who receives that money).

But as far as I know most MMTers reject the idea that inflation is caused by expansion of money supply and rather argue inflation is consequence of different factors (such as institutional factors, or lack of competition that allows firms to hike prices and so forth). For example, according to the recently published 'MMT textbook' by the most public proponents of MMT, Mitchell, Wray, and Watts:

“Conflict theory situates the problem of inflation as being intrinsic to the power relations between workers and capital (class conflict), which are mediated by government within a capitalist system.”

It appears to me that this must be true to some extent, but my concern is that the feedback mechanism where the extra money generates inflation might not be smooth and free flowing for various reasons and a vast excess of money might accumulate in an unstable way in certain areas of the economy. After a period of time some trigger event might cause a sudden uncontrollable cascade flood of that money that could destroy public confidence and the currency itself. Is this an unfounded fear?

This is difficult to address because it is not clear what you are trying to say here. For example, it is not clear how money could "accumulate in certain areas of the economy" (whatever that is even supposed to mean - people from selected sectors hoarding money under matrasses?) or what is meant by 'flood of money' - once money circulate they are already in the economy and affect the economy.

However, this being said there are many prominent economists who argue that following policies advocated by MMTers such as Kelton or Mitchell, Wray, and Watts it would eventually after some time lead to excessive inflation (see again the articles by the critics in previous part of the answer). There are also empirical examples of countries which attempted to excessively monetize their debt and fund spending via monetary expansion where this led to such high inflation that in the end it led to currency substitution (e.g. see Kamin & Ericsson 2003) about the Argentinian case), but I think it is more likely most developed countries would simply reverse course and change policy before going that far.

• @BrianRomanchuk 1. I would not call peer reviewed research published in AEA Papers and Proceedings as well as leading peer reviewed macroeconomic textbooks cited in the answer above an 'opinion' but to each according to their own. 2. I literary cited Mitchell, Wray, and Watts: Macroeconomics... who literally claim that their book is advocating MMT... if you don't consider that MMT literature then fine but then I wonder what counts as MMT literature to begin with
– 1muflon1
Feb 21 at 2:28
• I missed the textbook citation, sorry. However, the cited text had almost no MMT content to it. This was exactly the situation with the Mankiw article, which only had a fe out of context quotes from the text Feb 21 at 2:35
• MMT seems at best ill defined and contentious. If sufficient money was printed and circulated widely enough it would cause inflation. If everyone in the UK were given £1,000,000 to spend how could that fail to have an inflationary effect? But the more important question is whether the Governments deficit matters. Here I am less certain. When I hear people say there is no magic money tree, it seems to me that they are being simplistic. There is, the only danger being that nobody knows quite how hard you can shake it before it comes up by the roots destroying the currency in the process. Feb 21 at 14:33
• They are saying debt and deficit do not matter, but they aren't saying money supply doesn't matter, are they? And they are saying spending creates money supply. So, that's very different from being able to spend infinite quantities of money. It seems like the survey questions were loaded questions with respect to MMT May 4 at 20:27
• @user253751 those poll questions are literally based of the referenced article written by Kelton for the Bloomberg and that other MMTer - as far as I can see almost any proponent of MMT claims something different and not consistent with other MMT proposals but the questions were definitely not loaded
– 1muflon1
May 4 at 21:27

According to advocates of MMT, the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector.

This statement is in accord with MMT, and it can be traced back to the concept of Functional Finance. One could do a search for Abba Lerner’s articles on Functional Finance to see the roots of the idea. There are theoretical differences between Functional Finance. L. Randall Wray’s working paper #900 at the Levy Institute discusses this.

Deflation is not seen as a risk because the Government of any country with sovereign control of its own internationally accepted currency can print money to create as much inflation as it wants at will (depending on who receives that money).

MMT rejects the concept of “printing money” as is understood by mainstream economics, and certainly rejects Monetarist notions about a linkage between money supply and the price level. Instead, deflation is not a worry as fiscal policy can be loosened.

To add to the previous point: there is a difference between fiscal spending (e.g., handing households \$1 trillion) versus “quantitative easing” (the central bank buying \$1 trillion in existing bonds, which increases the money supply and reduces bonds held by the public). The difference should be obvious: handouts create an income flow, the second is just a secondary market financial transaction. MMT proponents argued that QE accomplishes almost nothing, saying that it is just a swap between two types of government liabilities. It should be noted that some neoclassical economists have made the same observation.

Since MMT proponents argue that QE accomplishes nothing, it is very hard to understand why some critics argue that MMT is just advocacy of “monetary financing.”

If we turn to page 343 of “Macroeconomics” by William Mitchell, L. Randall Wray, and Martin Watts (Wray & Mitchell are leading authorities on MMT, considered co-founders along with Warren Mosler) the authors state: “...when MMT says that government spends by keystrokes, this is a description, not a prescription. If critics were correct that government spending by printing money necessarily leads to high inflation or hyperinflation, then most developed nations would have at least high inflation, if not hyperinflation all the time because they all spend by keystrokes.”

It appears to me that this must be true to some extent, but my concern is that the feedback mechanism where the extra money generates inflation might not be smooth and free flowing for various reasons and a vast excess of money might accumulate in an unstable way in certain areas of the economy. After a period of time some trigger event might cause a sudden uncontrollable cascade flood of that money that could destroy public confidence and the currency itself. Is this an unfounded fear?

The issue is not money printing, rather too loose fiscal policy. The MMT argument is that you avoid this by structuring fiscal policy properly. For example, the key counter-cyclical policy proposed is a Job Guarantee. The Job Guarantee (JG) offers a job at a fixed wage. The JG wage acts as a de facto minimum wage, and so long as it is not increased, should not create upward pressure on wages. If the economy is seen to be overheating, workers will be bid away from the programme. This reduces the wages paid and increases income taxes - i.e., tightening fiscal policy automatically.

Arguably, bad policies - such as was pursued by mainstream Keynesian economists in the 1960-70s can create inflationary pressure. Fiscal policy needs to be tightened to avoid inflationary pressures if regulatory measures are not enough.

The fear of a “cascade” probably refers to fear of hyperinflation. The textbook “Macroeconomics” explains in Chapter 21 how mainstream theories about hyperinflation are incorrect in that they blame monetary financing. Instead, if we look at real world cases, hyperinflation is typically the result of the impairment of real productive resources. In the case of Weimar, there were gold reparations as well the occupation of the Ruhr.

However, these questions are really about a couple of topics that are misunderstood or misrepresented by other economists. The question title asks whether MMT offers insights into managing the economy. To answer that requires switching to topics not discussed within the question. For example, the Job Guarantee has nothing to do with “monetary financing.”

The previously mentioned textbook would be a good starting point to learn about MMT, or there are many resources online.

• I can't see how sufficient money could fail to be inflationary regardless of the productive resource in existence or lack of it. In the extreme, if the Government credited everyone's bank account with a million pounds surely there would be an increase in inflation? Does MMT assume that even in this circumstance that there would be no inflation? Or is there a tacit assumption about reasonable limits? Feb 21 at 14:42
• That’s fiscal policy, not just a change in money supply. As seen in QE, central banks can replace bonds with money, and there are very few visible effects. I.e., handing out one trillion dollars to households is different than the central bank buying one trillion in bonds. This is why MMT economists do not frame this as “printing money,” that is largely an invention of MMT critics. Feb 21 at 15:03
• Does MMT not still agree that price level = money supply / output, but disagree that printing money doesn't change the output? May 4 at 20:34
• The usual equation is MV=PQ, which means that you are missing velocity. The standard heterodox argument is that velocity is not stable, so the MV=PQ relationship gives no useful information. May 6 at 10:37
• @Slarty From what I understand the limits of spending are the real economic capacities. If demand increases beyond what can be "produced" in the mid-term as a result of the government spending too much there will be inflation. MMT doesn't claim there aren't limits of spending without risking inflation but that the limits are in actual real world capacities rather than an arbitrary budget. There are different indicators of when the capacity is close to being used fully, one of them is full employment. If there is no more "workforce reserve" you are likely at capacity soon. May 7 at 17:01