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MMT will guide you into a new world.
Your cherished intuitions about economics and some of the knowledge that you have of the subject will get challenged.
You may get angry and frustrated at times, but you will come back and enjoy a completely new view of economics.
However, the pain of severing yourself from strong believes will be offset by the relief of seeing gaps closed in your understanding of economics, realising that you were right in having reservations about some economic theorems, discovering errors and having them replaced by sounder explanations.
While conventional economics can be an opaque and overly complicated maze, MMT is straightforward and simple. If it is hard to understand at times, this is mostly because it often runs counter to the economic explanations we have grown accustomed to. In studying MMT you are in for an adventure that stands a good chance to leave you a changed person.
What follows is a foretaste of MMT's topsy-turvy world of economics. Get used to a new perspective. Like a pilot flying acrobatic manoeuvres, adjust your brain to new perspectives.
Here are a number of propositions that describe MMT's take on the economy.
- A government that issues its own currency does not need to ever issue debt to acquire the means required to accomplish its tasks. Nor does it need to tax citizens to pay for whatever goods and services it wishes to command.
- Government can always produce whatever amount of money it intends to spend. Put differently, government can never go broke.
- Using its unique power to spend, government can ensure that the economy fully employs all available resources, including, of course, human labour.
- The government needs to balance the economy, not the budget. For it is able to increase or decrease spending to keep the economy buzzing without either overheating or going into recession.
- Full employment, maximal productivity and stable prices are the criteria by which economic policy ought to be judged. The state of the budget (balanced, surplus or deficit) and the level of government debt may be whatever they are as long as the key function of economic policy — maintaining full employment, productivity and stable prices — is being adhered to.
To conclude this first encounter with some of the thoughts defining MMT, let us take a look at six common misconceptions of conventional economics:
- (1) Government spending is limited by its ability to tax or borrow.
Wrong. We have seen already why this is not true. We shall go into this issue more deeply later on in the book.
- (2) Government deficits today are a burden for our children tomorrow.
Future generations are not being burdened by today's government deficit. This follows from (1). Government has the ability to produce of its own accord the money it needs. It does not have to ask taxpayers or investors or banks to give it the requisite funds. This implies that to be able to spend tomorrow, government has no need to withhold money today and keep it until the future.
The wealth and welfare of future generations hinges on their own ability to produce desirable output. Future affluence also depends on what earlier generations have been able to create in terms of productive results (infrastructure, knowledge etc.). If by incurring deficits today government ensures the economy is fully employed (creating desirable output at full capacity), the economic inheritance of future generations will be the greater for it. Or the poorer if stunted by insufficient government spending.
- (3) Government budget deficits take away savings.
The opposite is the case. Every penny of deficit incurred by government shows up as a surplus for the non-government sector. What else would be logically possible? If government spends more into the non-government sector than it derives from it, the latter must be in surplus, the former in deficit — by definition.
- (4) Government debt may become too high to sustain social security.
There is no need for this to happen. Again, owing to (1).
- (5) Savings are needed to provide the funds for investment.
It is the other way around. Government and the banks create money which is used for investments that end up in the pockets of providers of goods and services. Some of these funds may end up as additional savings. You may also ask yourself, if savings are money that is shifted from savers to borrowers, how do additional savings ever spring into existence? Well, they are not created by setting aside existing money, but require the creation of new money.
- (6) Increasing budget deficits make for higher taxes in the future.
If the budget deficit is used to keep the economy in full swing, but the economy is accelerating still further, higher taxes can be used to to pull it back to lower, more reasonable levels, keeping it from overheating.
Also, the claim that increasing levels of government debt inevitably force interest rates up to attract creditors and to crowd out non-government seekers of credit is not true.
First, as we will see later, government can determine the level of interest rates at will.
Second, as it can always produce the money needed to service debt, there is no need to price in the risk of solvency. There is a reason why the market refers to government debt as the risk-less asset.
Third, to begin with, government does not have to borrow money to cover its spending.
Also, the claim that increasing levels of government debt inevitably force interest rates up to attract creditors and to crowd out non-government seekers of credit is not true.
First, as we will see later, government can determine the level of interest rates at will.
Second, as it can always produce the money needed to service debt, there is no need to price in the risk of solvency. There is a reason why the market refers to government debt as the risk-less asset.
Third, to begin with, government does not have to borrow money to cover its spending.
This concludes our first glimpse into the "awkward" world of Modern Monetary Theory (MMT).
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