Why Modern Monetary Theory (MMT) is a poison pill?
In Economics, there is no school of thought that is absolute and fool proof. As a proponent of orthodox economic theory, I can comfortably admit that there are many flaws behind the assumption that an invisible hand helps in attaining the requisite market equilibrium and to attain full employment or achieve any other policy target.
Whenever a crisis knocks the door, marxists and other heterodox economists call for the ruling establishments to own it up, by placing immense pressure on bureaucrats and politicians who otherwise are never fully equipped to address a financial shock. The anti-orthodox economic theories war at once and put absolute power and responsibility on governments to address the perceived economic doomsday (every crisis is theorized to be worse than the previous one). One of the branches of heterodox theories, is a 3 decade-old (debatable) Modern monetary theory or simply put MMT.
For beginners, MMT as a school of thought gives the aggregate establishment (Central banks and Governments — if you are a realist, you will agree with the fact that both generally share a common bedroom), the de facto power to misuse the public monopoly to manage the supply of fiat currency in order to pull the country out of recession/slowdown or in many cases make it a going concern. Monetary system / money is the central theme of the theory that clearly differentiates between an individual/household to that of the establishment. It denies the government its otherwise orthodox status of being one large household by itself. While an individual has to create income out of the limited sources she/he has, the theory gives absolute monopoly to governments to create their income by borrowing (or let’s say printing). The theory dictates that governments / ruling establishments can never default (in the sovereign currency), as they are de facto producers of the same, essentially giving them the keys to keep the printers ON for as long as the civilization lasts. Governments around the world (especially democracies) may consider this as a god-sent gift, as they have the keys to address all /most of the populist promises and very well know how to circumvent any threshold set by the legislature over the amount of deficit the country can stomach. In order to attend to the oft-inefficient political paradox and one-upmanship, a government will be forced to lever the nation beyond what may be required to address a specific crisis. It also undermines Monetary policy as an effective tool and completely hands over the reins to the political class (which now controls the Central bank). Surely, no one including Abba Lerner would have imagined that his proposed functional finance approach of 20th century would have laid the foundation stone to this contentious thought.
While I appreciate very few ideas behind MMT (only during a Nuclear Armageddon), I also find many flaws in this thought as the theory asks you to rely wholly on an otherwise epitome of indiscipline called the political class. When governments have the license to utilize their absolute monopoly over the Sovereign currency, it’s no rocket science to understand that there is bound to be a steep rise in public borrowings (from an already over borrowed state) not just impacting the credibility of the nation trying to access foreign currency and its own purchasing power, but also increasing the prospects of hyper-inflation. Added to that, owing to the ability to access unlimited Sovereign currency, governments (especially emerging ones) will be discouraged to access foreign currency, as once accessed, the nation will only face investor humiliation in the Eurobond markets. Had it not been for the global acceptance of the big 3 CRA’s and an IMF, the world would have been staring at a global average of 400%+ Debt to GDP interpreted in multiple ways to camouflage the level of indebtedness by different establishments. The deficit-ridden economies of USA, EU and even emerging large economies like India with robust electoral systems, have seen a constant rise in the debt to address all of its populist promises and also to some extent halt the build-up of cronyism within the system. When a legislation-free license gets handed over to print and deliver, nations are bound to accelerate themselves towards hyper-welfarism/populism. This trap will again propel the need to grow revenue streams (via taxes) and impacts the very tenet of attaining a capitalist system. One of the arguments of few proponents of MMT is that MMT shields an increase in taxes, as printing money would mean unlimited revenue to the government. However, in order to address the surge in deficit YoY due to an increased interest outgo (high Sovereign yield), governments in order to save face and also rating, will be forced to increase taxes once again. The very intent of taxes are to regulate demand and control inflation, while MMT will end-up funding government’s coffers with more taxes on the rich and job creators (which is already rampant), bringing back the horrific memories of the failed ideology called Socialism. Worse, it creates a liquidity trap due to excessive pessimism and its resultant lack of private investment as predicted by John Maynard Keynes. To avoid any confusion, MMT has very little to do with what Mr. Keynes proposed. It’s a new breed that shrewdly collected ideas from multiple theories to camouflage the real intentions.
In the end, every system has to realize that the ultimate cure to any problem is that of the private investment and consumption with little government’s involvement. To achieve the dream of immediate stability, policy makers have to rely on conventional theories of an expansionary fiscal policy (till the crisis lasts) and monetary policy. Once the economy stabilizes, private sector has to take up the onus of recovery and growth. All said and done, political compulsions will affect any attempt to discredit MMT and world is bound to embrace it, as the pill initially sweetens things up for the ruling class. MMT can defeat the fundamental idea that an economic system is bound to hit the reset button every few years and destroy the natural eco-system of global economy. This new normal proposes an existential crisis to the entire fiat money as a concept which was painstakingly built over centuries.