Gordon Boronow on What You Should Know About the Modern Monetary Theory Favored by U.S. Socialist Democrats

Modern Monetary Theory, or MMT as it is known, is in the news a lot these days. Socialist Democrat politicians such as Bernie Sanders and Alexandria Ocasio-Cortez have embraced MMT. They use the theory as reason why they don’t need to bother with troublesome questions about how to pay for all the “free stuff” they are promising. However, leading mainstream economists on both the left and the right are concerned about the bias to inflation that is built into MMT. In testimony to Congress last week (and sure to come up again this week in Senate testimony) Fed Chair Jay Powell said the theory “I think is just wrong”.

Once Socialist Democrats discovered MMT could be useful, MMT started to gain the attention that has eluded it for over 100 years. The MMT concept, called Chartalism at the time, was originated by Georg Friedrich Knapp in 1905. Abba Lerner developed ideas further in a 1947 paper “Money as a Creature of the State”. The ideas of Chartalism were developed to free the state from the constraints of gold-backed money, the world standard at that time.

MMT has been slowly gaining academic attention since the last vestiges of the gold standard were eliminated by President Nixon in 1971. The breakthrough for MMT came when Bernie Sanders’ populist ideas took the Democrats by storm in 2016. A rising tide of support for socialism is putting MMT firmly in the spotlight. MMT is the academic argument that seemingly allows Socialist ideas to spring free from the discipline of traditional monetary theory. But what is MMT, and should we be concerned about it?

As a monetary theory, MMT is straightforward. It starts with the fact that the dollar is a fiat currency; i.e., the dollar has no value in itself such as a gold-backed dollar would have. MMT claims the value of the dollar is that it can be used to pay taxes, which if unpaid would cause the state to punish you. Dollars, unlike gold, can be created by the government. Since the United States controls its own currency, it cannot default on its debts. It can simply create more dollars as needed. This is certainly true in a fiat currency world.

The obvious problem is the temptation to print so many dollars that inflation spirals out of control. Not to worry, say the MMT proponents. The government will control inflation pressures by simply spending less or taxing more. (I’m certainly comforted by this assurance, aren’t you?)

Much of what has been written about MMT is “inside baseball” stuff. Economists arguing the merits of an MMT perspective or the traditional monetary theory (or even old school gold standard theory). From my economic point of view, for what it’s worth, MMT would quickly face the same “Laffer curve” limit on taxes that politicians face today. Then it becomes a question of Congressional self-control or an inflation spiral.

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SOURCE: Christian Post, Gordon Boronow