March 20, 2021

MMT: The Gift That Keeps on Giving.

by Hal Gershowitz

Comments Below

Modern Monetary Theory. It’s all the rage on the far left. Maybe they’re on to something.

The premise is really quite simple. When a government pays all of its bills (including debt) with sovereign money that it controls and prints, then printing whatever is needed to pay the piper(s) is not a problem. There is no need to worry about inflation because printing money will not cause inflation, the proponents say, until the demand for goods and services outstrips supply. There’s no need to worry about the concern creditors, merchants, landlords, or workers might have regarding the currency’s integrity. Government deficits are nothing about which to be concerned because deficits on the government side of the ledger are, of course, simply surpluses on the private sector side of the ledger. When the government incurs a deficit to build F-35 bombers, Lockheed Martin experiences a surplus to produce the monster flying-weapons system. What’s the big deal?

Sooner or later, the theory goes, when (and if) the economy reaches full employment, demand might outstrip production (or supply), and then, and only then, the beast of inflation might raise its head. Then, the government merely has to step in and pull money from the economy to tame the beast. How? By spending less (often easier said than done) or by raising taxes.

It’s a really tempting idea. As the sole issuer of America’s sovereign currency, the government can print whatever money it needs. We can expand the economy to its full potential, enrich business, eliminate unemployment, and finance whatever we need—free healthcare, free college, a relatively carbon-free environment, and even a robust infrastructure, with new highways, bridges, airports, rapid rail, and high-speed internet for everyone. We just have to keep the government’s printing presses in good working order. The idea that we have to raise taxes to pay for all of this deficit spending is nonsense, the MMT crowd says. Maybe they’re not so crazy.

MMT is the premise of Stony Brook University Economics Professor Stefanie Kelton’s mind-bender, “The Deficit Myth.” Everyone who has an opinion about deficit spending and public debt should put their long-standing, preconceived notions aside and read Kelton’s book. You may, or may not, change your mind, but you will come away with serious views to consider.

I was a skeptic before I read Kelton’s book, and I still am…somewhat. After reading Kelton’s treatise, the thought occurred to me— if she’s right, why stop with the government’s printing presses? Why not have the government authorize citizens to buy approved small, family-size printing presses along with blank, government-encrypted paper stock, and let the people print their own currency. Of course, there would have to be some strict rules. For instance, one rule might be that a family or single adult submit a list of what they would buy with the money they would print. Once the appropriate bureau within the Treasury Department gave its approval, the family (individual) would then be authorized to print the currency needed to buy the approved goods or services (no approval for gambling, sex, snacks, or tax-deductible pet charities).  Receipts, of course, would be required to demonstrate proper use of printed funds with stiff penalties for misuse. After that, the money could circulate freely, thus potentially increasing its velocity throughout the marketplace. I jest, of course…or maybe not.

Modern Monetary Theory argues that we need to stop thinking of government spending the way we think of household spending. They’re entirely different animals, Kelton argues rather convincingly. A household must possess or borrow money before it can buy anything. The United States buys (spends) whatever it needs and creates a deficit account for the difference between the cost of what it has purchased and the cash it has to pay for the goods or services it has procured. MMT theorizes that the deficit’s size is really irrelevant and meaningless until it has caused full employment and stimulated more demand than producers can satisfy. Then and only then, MMT posits, do you have to take steps to rein in inflation by reducing spending or raising taxes to draw money out of the hands of consumers. In other words, we don’t need taxes to cover the cost of government spending. The primary reason to tax the people is to pull money from the economy to dampen demand. Taxation is, then, primarily a device to keep demand balanced with the supply of available resources.

Traditional “old-school” economists recoil at the notion of rampant deficit spending. Kelton, however, argues that deficit spending is of no great consequence and that the enormous benefits far outweigh the possible need, from time to time, to rein in spending or to increases taxes to cool occasional imbalances between demand and supply.

Whether Kelton is making a valid point in embracing robust deficit spending is undoubtedly debatable. Still, I suggest that anyone recoiling at the notion read her book before condemning her point of view.

I recognize that printing-press economics is not new and that other countries have waltzed to that siren song, and it never seemed to turn out well. But that’s because those nations kept printing instead of taking steps to mitigate the money supply once demand began outstripping supply.

The paradigm for time immemorial has always been for nations to budget like households. The focus has been to borrow, with the idea that new wealth will generate revenue (taxes) to cover the deficit incurred. Even today, when nations reduce taxes, they embrace the idea that the growth stimulated by reduced taxes will generate enough new wealth to pay off any deficit caused by the tax reduction. We engage ourselves in a perpetual political struggle to balance the books between deficit spending and income (revenue) to offset the incurred debt. Why do we do that?

Maybe, just maybe, as Albert Einstein once reminded us, “we cannot solve our problems with the same thinking we used when we created them.”

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10 responses to “MMT: The Gift That Keeps on Giving.”

  1. Susan Duman says:

    I never know exactly what to expect from you. That makes it fun to get up on Sunday morning.
    The concept of inflation is obvious but still above my pay grade.
    I enjoyed your tongue in cheek idea that we can just get printing presses.
    Susan Duman

  2. Robert borns says:

    The professors theory makes as much sense as the theory of a perpetual motion machine. Her. concept has taken down country after country as politicians and their supporters and dictators kick the can do own the road. Maybe Stoney brook really means stoned because all that baloney is as valid as all the pie in the sky that flim flam artists always pitch.

  3. TAck says:

    Having already forgotten everything I knew about Econ from my college days, the only thing I remember on this subject is that balancing budgets only takes away useful monetary tools. The gust being that Moderation in all things applies, and deficits are not inherently evil.

    I’m so impressed how you’ve jumped into yet another important and complex subject Hal. You humble the rest of us. Thanks foe the interesting read.

  4. TAck says:

    Having already forgotten everything I knew about Econ from my college days, the only thing I remember on this subject is that balancing budgets only takes away useful monetary tools. The gust being that Moderation in all things applies, and deficits are not inherently evil. So impressed how you’ve jumped into yet another important and complex subject Hal. You humble the rest of us. Thanks foe the interesting read.

  5. ronald B Sadoff says:

    massive government spending coupled with a dramatic drop in interest rates are the stimulii necessary to pull our economy out of a recession. That stimulii is still needed today with nearly 10 million unemployed. On the other side it would be prudent to reduce government spending as the pace of the economy quickens and inflationary pressures heighten. Thereafter government spending becomes costly as interest rates advance

  6. Perry says:

    Many a country which previously enjoyed a robust economy
    enjoyed the ride until there was no “Grease for the presses.

    I believe that Government spending is the cause of so much
    in wasteful programs and need for increasing taxes.

    Too many people are now homeless due to both drugs and the
    high costs of local taxes (Government) and Federal Taxes.
    IT’s time for the Government to become responsible to the
    savers and the true drivers of the economy.

  7. Mike says:

    Periodically, I interview economists for distribution to our customers and friends.

    Everyone of them has made the same observation: MMT is predicated on the premise that the US Dollar will be the Resereve Currency in perpetuity. As such, it provides a safe haven for investors who have limited options.

    Right now, and for at least the foreseeable future, that may be reasonable assumtion. But the laws of gravity have not been repealed and empires don’t last forever.

    There is a reason why China is making efforts to digitize their economy and use the Yuan and other tools to destabilize the dollar. And while the future of the Euro as a reserve currency is in doubt, there are issues which could lead to a signficant decline in the value of the dollar.

    And if you look at what is happening with the prices of base commodities such as steel, copper, resins, or the increase in oil or other essential commodities, there are economists that believe by the time the Fed acts to tame inflation, the genie will have be out of the bottle.

    So every time I hear someone talk about why MMT is good, I ask a simple question. Name one country in our lifetime that has “spent its way to prosperity.” I ams till waiting for the answer to that question. And if you listen to what the Chinese said in Alaska this week, one could surmise that they think the US is living on borrowed time.

  8. Paul says:

    Dangerous heterodoxy not supported by mainstream economists or even left leaners such as Larry Summers and Paul Krugman.

  9. Mike says:


    In case you missed it, Larry Summers recently said we were pursuing disastrous economic policies and identified the risks associated with the 1.9 Trillion bailout.

    And citing Paul Krugman doesn’t bolster your argument. I know that the NYT loves Paul, but go back to 2016 when he foerecast how bad Trump’s policies would be. Lost whatever remaining credibility he had.

  10. Paul says:

    My comments were pointing out that MMT is a dangerous idea. As I pointed out even leftist economists do not favor it

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