Aug 31, 2019
Have you seen Eric Tymoigne’s recent tweet destroying the top myths about Modern Monetary Theory? If not, listen to this episode and hear the myths evaporate.
Tymoigne begins by giving an elegant explanation of MMT as a theoretical framework explaining how governments issuing their own currency, or monetarily sovereign, operate in the economy. Understand that and you understand the importance of government policies in promoting full employment and price stability. And now, the myths:
#1 MMT ignores Minskian financial instability.
Listen to Eric’s explanation of Minsky's Financial Instability Hypothesis. He describes why, in the last financial crisis, people took on mortgages they were unable to afford, giving them no choice but to borrow more, default or attempt to sell their assets.
#2 MMT ignores capital controls.
Capital controls regulate the flow of money into and out of a country. Ideally, you only allow money that is productive and limit speculative activity through taxes or other barriers.
#3 MMT only applies to the US.
Wrong. MMT applies to any country with monetary sovereignty. What does that mean? When a country issues its own currency it is monetarily sovereign. Similarly when it issues debt only denominated in own currency, imposes taxes only in own currency, and makes payments using its own currency, it satisfies the definition of monetary sovereignty. Plenty of nations do that.
Eric explains what’s special about the US is having foreign demand for the US dollar. When the foreign sector wants to save in US dollars, the federal deficit must increase. But even the US has constraints making it appear not to have sovereignty. The public debt ceiling, which has been used for political gain, has created disruptions and self-inflicted constraints.
#4 MMT says nothing about developing economies.
(Editor’s note: anyone who has listened to Fadhel Kaboub knows that this is patently false.)
Development involves complex decisions regarding how to develop production and provide for the needs of the people in housing, education and healthcare. Monetary sovereignty gives you some freedom to work through these issues.
#5 MMT doesn’t recognize there can be tradeoffs.
MMT economists are constantly confronted with examples of hyperinflation in Zimbabwe and the Weimar Republic. They understand these were unique circumstances; when spending runs close to a nation’s productive capacity, there are potential inflationary pressures. In the US and other developed, monetarily sovereign countries, we are far from full productive capacity today.
#6 MMT is for monetary financing of government spending.
Eric explains the complex relationship between the central bank and the Treasury. This is a complicated issue, coordinated in an extremely refined manner.
#7 MMT says deficits don’t matter.
Eric explains that deficits matter quite a bit because deficits inject income into the private sector. The government can always afford to deficit spend. MMT is concerned with the availability of real resources.
Eric Tymoigne is an Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College. His areas of teaching and research include macroeconomics, money and banking, and monetary economics.