You may have never heard of Modern Monetary Theory (heretoafter referred to as MMT), but if you're my age (b. 1983) or younger then you've lived in a world generally ruled by what would be called "MMT." You're probably familiar with The National Debt, The Bank Bailout, and Trickle Down Economics; three things that have vague descriptions but real impacts on life and society. In this post we seek to examine how MMT is already an integral part of our daily lives, and how politics affects its implementation in America.
Before we go any further, let's define what MMT actually is, here's how Wikipedia defines MMT:
Modern Monetary Theory or Modern Money Theory (MMT) or Modern Monetary Theory and Practice (MMTP) is a macroeconomic theory and practice that describes the practical uses of fiat currency in a public monopoly from the issuing authority, normally the government's central bank.
In so many words, the government uses its central authority/trust to mint currency to motivate the outcomes it desires– I suppose the real caveat to this statement lies in "outcomes it desires," right? Generally since the 1940's successful "capitalist" societies have had diverse economies with a thriving middle class– the American Dream– there's a reason why this is the case. If the sole will of the government is to benefit the ultra-wealthy political/financier class then to be sure the whole political system will be undermined by resentful working/under class. For example unions go on strike when they feel their workers' interests aren't being fairly addressed; people protest in the street and disrupt business, or boycott entire industries, vote out incumbents– none of which are outcomes a government desires, no matter how distant or tone-deaf to its citizenry it may be.
Ultimately a government that has implemented MMT may also implement policies that are socialistic– but MMT itself is not socialism. Let's define socialism while we're at it:
a political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.
Clearly MMT does not advocate for regulating means of production, distribution or how exchange is conducted.
Implementation of MMT involves creating money, which ultimately must be spent by someone somehow, in order to make it's way into the normal exchange-for-goods economy we're all familiar with. Whether that money is issued in the form of loans to business, spending on public projects, or direct investment in citizens (tax breaks, welfare, stimulus checks, etc), The Government (acting through a Central Bank) issues the currency originally. MMT proper constitutes the control of the supply of a sovereign currency, and who receives it– and it postulates that any desired socioeconomic outcome can be successfully obtained through its (successful) implementation.
When Barack Obama famously gave his You Didn't Build That speech he ticked off a firestorm of (mostly) right-wing hullabaloo. "Capitalists" in the traditional sense would like to sell you the idea that business and The Free Market created all the wealth in society, and that if The Government would just get out of their way, The Free Market could do even better.This view completely ignores the role of the central government and Federal Reserve system in the success of these so-called "free-market" businesses. The gist of Obama's speech is correct, and in this example the monetary infrastructure put in place to make possible the success of free-market business, was put there by The Government.
Trickle Down (aka "Voodoo") Economics is a political theory that if MMT is used to create wealth in the corporate sector, that the wealth will be commensurately distributed through wage increases, increased spending and generally all the benefits of added liquidity. However as we've seen frequently businesses actively can work to undermine the benefits of employees to the benefit of shareholders. It would seem that corporate accountability to things like justice and fairness run counter to the demands of publicly traded companies and that's fine, it frankly seems like what a business can and should do. What if you reversed the pyramid in this case, and distributed the bulk of this created wealth to the base instead of the capstone?
Trickle Down economics is the one end of the political spectrum of how MMT is implemented in America– the other end of the political spectrum is Universal Basic Income (heretoafter UBI).
Here's how wikipedia defines Universal Basic Income:
Basic income, also called universal basic income (UBI), citizen's income, citizen's basic income, basic income guarantee, basic living stipend, guaranteed annual income, or universal demogrant, is a governmental public program for a periodic payment delivered to all on an individual basis without a means test or work requirement.
UBI could be called "trickle up economics" in that it's giving the discretionary spending power to the base of the economic pyramid (the citizen)– instead of in traditional "trickle down" models where spending power is distributed to the top of the pyramid (employer). I highlighted the word "political" earlier on because no matter how these funds get disbursed, the net result from a political perspective is the same in terms of cost. The difference is in which end of the pyramid gets more or less of the monetary pie.
Let's talk about inflation, as I'm sure a lot of people are probably asking the question "if we make more money doesn't that make the money already in my pocket worth less?" The simple answer is no, not directly. The US Dollar is "worth" what it is based on essentially what somebody wants to charge for their goods. It's not different than the traditional understanding of inflation; scarcity of goods means that competitive buyers with more money can offer progressively higher sums leading suppliers to increase prices. But what if scarcity wasn't an issue (within reason)? If the money we create is used to hire another baker/banker/baby-sitter, then technically the capacity for production has increased with it (supply) thus demand is relatively unaffected– it's a zero-sum game essentially if the money is issued in a way that simultaneously creates more supply.
What the government has done through bailouts and Quantitative Easing is expand the money supply; by directly purchasing "bad assets" and buying securities to prop up prices on Wall Street and making huge loans to keep some of the largest American Corporations solvent throughout the myriad economic challenges of the past 20 years. You could argue either for or against these bailouts and other measures but frankly, I don't have a strong opinion and I think the point is pretty moot from a MMT perspective. The thing that draws my ire is the naysayers when it comes to giving bailouts and fiscal stimulus to people directly; a lot of people are too proud to call it what it really is, but "stimulus check" is just another nice word for white-collar welfare.
Some critics of MMT would point to a place like Venezuela as an example of how MMT can destroy an economy beyond repair. The facts are that Venezuela has a lot more problems than simply how they print money. In addition to political corruption, they are also a banana republic relying almost solely on oil as an export to sustain their economy. The value behind the Venezuelan Bolívar is mainly supported by capital brought into the country by exporting oil, almost every other real good a Venezuelan citizen might need is imported– which means they have to export wealth in order to meet their demand for goods. With declining oil prices and demand, Venezuela has had little to support the value of its currency and the Bolívar has consequently imploded under immense inflationary pressures. Venezuela's problem was one of "no supply, all demand" that no amount of monetary policy would ever be able to correct.
Most robust economies have a fairly even trade balance and in which domestic production can be increased to meet demand– and thus curb inflation regardless of how many dollars the central bank makes. This is one of the fundamental premises of MMT: inflation isn't the direct cause of an increase in monetary supply, but the ability of production (supply) to meet the supply of money (demand). Frequently MMT policies attempt to increase monetary supply through a job guarantee program, which has the dual function of preemptively adding more productive capacity while injecting economic stimulus directly into the economy in the form of wages.
One of the interesting byproducts of the last 30 years is the rise in common knowledge about a few economic principles. For example: most people know of and have a vague understanding of the stock market (buy low, sell high, etc). We have a vague enough understanding to know about things like The Dow Average, Inflation, and The National Debt– and we've been told that these things are indicators of our economic health, and accepted that we're expected to make sacrifices in order to keep those indicators green. It's how we've been sold things like bailouts, tax cuts for the ultra-rich, tax cuts for big thriving businesses– we're told all these are the required sacrifices at the altar of the Capital Gods.
However, we seem to have grown extremely negative in our opinion of welfare for citizens– even spending on public programs like education is now seen as frivolity that must be sacrificed in order to keep the Dow Jones high. It simply is not true that these things must be sacrificed in order to have a strong economy– in fact in most cases it seems totally antithetical to maintaining a healthy economy (and society) to ask these things of people. It certainly is not a case of our government "not having the money" to pay for things like education, Social Security, and unemployment benefits– and it should be fairly obvious to the average person when the government is able to approve a 2 Trillion dollar stimulus bill in a couple of weeks.
The most interesting thing to me about the times we live in is the fact that we're seeing proto-UBI right now in the United States vis-a-vis the stimulus checks. If there are multiple rounds of checks, it would literally be a nationwide trial-run of Universal Basic Income. When all the smoke of the pandemic clears it will be interesting to see what the economic effects of those stimulus payments were– a good many economists have argued that stimulating the base of the economic pyramid tends to create a lot more economic activity than stimulating the very top. If the numbers show that giving away that $260 billion (as of writing this) actually had a very positive overall impact on the economy, will the naysayers to UBI change their tune then?