Modern Monetary Theory Resurfaces in Politics
Why Modern Monetary Theory is Regaining Attention
Zack Polanski, the leader of the Green Party, has brought a fresh energy and left-populist appeal to the organization. Under his leadership, the party has experienced a remarkable rise in the polls, positioning itself just a few points behind both Labour and the Conservatives. His discussions on economics and fiscal limitations echo concepts that resonate strongly with followers of the Modern Monetary Theory (MMT) debate.
During an interview last month with The New Statesman, Polanski explained that the essential fiscal rule should ensure inflation does not exceed the economy’s available skills and resources. In a television appearance with Laura Kuenssberg, he asserted that his extensive public spending initiatives would not require higher taxes on the wealthy. He emphasized that this approach focuses on public investment, which can be pursued independently of taxing affluent individuals.
Polanski also contended that loans from the Bank of England represent money owed to ourselves, lacking the characteristics of true borrowing or debt. These statements align closely with core principles of MMT.
MMT encompasses a range of ideas championed by various economists and supporters, rather than serving as a rigid policy framework. It gained significant traction in the 2010s, particularly through Stephanie Kelton’s influential book, The Deficit Myth. The theory posits that for governments issuing their own currency, like the UK, debt poses minimal constraints compared to inflation. It advocates managing macroeconomic policy primarily through fiscal measures rather than relying solely on monetary policy, even if the boundaries between them become indistinct.
In traditional economic thinking, the notion of printing money to address national challenges is broadly regarded as a dangerous strategy. MMT, however, suggests that countries with sovereign fiat currencies can generate and spend money at will without necessarily causing currency devaluation, runaway inflation, or economic collapse.
Key Principles of Modern Monetary Theory
Governments should leverage their fiscal budgets to regulate demand and achieve full employment—roles currently handled by monetary policy from central banks. MMT maintains that the primary limitation on spending is not bond market pressures but the presence of idle resources, such as unemployed labor. Increasing expenditure when the economy operates at full capacity risks sparking rapid inflation, making taxes a tool to control price pressures. In this framework, spending acts as the accelerator while taxation serves as the brakes. Fiscal deficits become inconsequential provided unemployment remains low and prices stable.
MMT fundamentally challenges the conventional view that elevated public debt hampers economic growth and burdens future generations. Advocates counter that private individuals and businesses often thrive in nations with substantial government debt. At its most extreme, MMT justifies high spending without corresponding taxes or borrowing—a provocative concept often mocked as the Magic Money Tree.
Reasons for Modern Monetary Theory’s Credibility
The appeal of utopian visions proves irresistible and spreads easily. Despite sharp criticism from mainstream economists, including prominent left-leaning figures like Paul Krugman, MMT’s promise of financing expansive political agendas holds clear allure, particularly amid persistent low growth following the global financial crisis.
Numerous economists, beyond just progressives, argue that overly cautious austerity measures have resulted in unnecessarily restrictive policies, notably during UK recessions in the early 2010s. MMT at least provides a valuable counterpoint to oversimplified comparisons between government and household budgets that pervade public discussions.
Supporters highlight real-world examples that challenge orthodox macroeconomics, such as Japan’s decades-long tolerance of massive public debt without inflation surges or bond market upheavals.
Critiques of Modern Monetary Theory
Fundamentally flawed, MMT revives a simplistic query often posed by children: if poverty persists, why not print money to distribute to the needy? The response is straightforward—governments can indeed create unlimited funds, as former Federal Reserve Chair Alan Greenspan noted. However, this does not expand the supply of goods and services; it merely inflates their prices.
Andy Haldane, former chief economist at the Bank of England, critiqued MMT as neither novel (rooted in early 20th-century discredited notions), nor truly monetary (more a political agenda), nor a robust theory (closer to wishful thinking).
Investment Implications
For the time being, investors need not panic excessively. Many experts believed the post-Covid inflation surge had discredited MMT permanently on the left, while the 2022 Truss-Kwarteng mini-Budget—intended as pro-growth—served as a stark warning on the right about the perils of unchecked borrowing for nations lacking reserve currency status.
Nevertheless, vigilance is advised regarding MMT-like rhetoric from political leaders. British politics remains highly volatile, potentially fostering unexpected alliances. In 2017, Jeremy Corbyn’s Labour secured 40% of the vote with People’s QE, an MMT-adjacent proposal to print money for public investments. As a populist doctrine, MMT carries substantial popular appeal.
