Modern Monetary Theory vs Mainstream Macroeconomics

In my last blog, I introduced the basics of Modern Monetary Theory (MMT). While looking through my drafts folder tonight, I found this table I’d copied from this blog post by Bill Mitchell. It gives some commonly heard macroeconomic propositions, and gives an alternative MMT view on each proposition. It’s quite a succinct summary of how a lot of the things to do with the economy that are often stated as fact, are certainly arguable at best, and at worst, are total nonsense.

Mainstream macroeconomics Modern Monetary Theory
Budget deficits are bad Budget deficits are neither good nor bad and are required where the spending intentions of the non-government sector are insufficient to ensure full utilisation of available productive resources.
Budget surpluses are good Budget surpluses are neither good nor bad and may be harmful in some circumstances if they involve a drag on growth in situations where there are idle resources.
Budget surpluses contribute to national saving There is no sense to the concept that a currency-issuing government saves in its own currency. Saving is an act of foregoing current spending to enhance future spending possibilities and applies to a financially-constrained non-government entity. The government never needs prior funds in order to spend and thus never needs to “save”.
Budget should be balanced over the business cycle Budget should be allowed to adjust to the level of net spending required to achieve and sustain full employment given the spending decisions of the non-government sector, irrespective of the state of the business cycle.
Budget deficits drive up interest rates because they compete for scarce private saving Private saving is not finite and is related to income. Spending always brings forth its own saving because saving rises and falls with income movements, which are directly related to movements in spending.
Bond markets determine funding costs of government Central bank sets interest rate and can control any segment of the yield curve it chooses. The costs of government spending are the real resources that are utilised in any particular public program.
Budget deficits mean higher taxes in the future Budget deficits never need to be paid back. Every generation can freely choose the level of taxation it pays.
The government will run out of fiscal space (money) Fiscal space is more accurately defined as the available real goods and services available for sale in the currency of issue. The currency-issuing government can always purchase whatever is for sale in its own currency. Such a government can never run out of its own currency.
Budget deficits equals big government Budget deficits may reflect large or small government. Even small governments will need to run continuous deficits if there is a desire of the non-government sector to save overall and the policy aim is to maintain full employment levels of national income.
Government spending is inflationary All spending (private or public) carries an inflation risk. Government spending is not inflationary while real resources are idle (ie. There is unemployment). All spending is inflationary if it drives nominal aggregate demand faster than the real capacity of the economy to absorb it.
Issuing bonds to the private sector reduces the inflation risk of deficits There is no difference in the inflation risk attached to a particular level of net public spending when the government matches its deficit $-for-$ with bond issuance relative to a situation where it issues no debt. The inflation risk is embodied in the spending rather than the monetary arrangements that are associated with it (bond-issuance or not).
Intergenerational burdens are linked to inherited budget deficits in the form of debt that have to be paid back. Intergenerational burdens are linked to the availability of real resources. For example, a generation that exhausts a non-renewable resource imposes a burden on the next generation. A future generation cannot transfer real resources back in time.
Unemployment is used to control interest rate Employment is used to control interest rate
Sovereign issuer of currency is at risk of default Sovereign issuer of currency is never at risk of default. The issuer of a currency can always meet any liabilities it incurs in that currency.
Taxpayer money Public currency. The taxpayer does not fund anything. Taxes are a device to free up real resources so our agent, the government can instigate a socio-economy program for our collective benefit.
Humans make rational decisions based on self-interest Humans are complex and rarely predictable, reason and emotion are inseparable.

6 thoughts on “Modern Monetary Theory vs Mainstream Macroeconomics

  1. There are a few typos/editing errors, mostly innocuous (e.g. “while ever”) but also one that is substantively erroneous (“The issuer of a currency cannot (sic) always meet any liabilities it incurs in that currency “)

  2. I’m not happy with the response to “Budget deficits drive up interest rates…”.

    First, the response starts “Private saving is not finite..” What? So it’s infinite? I suggest a better response is thus (though the following needs shortening perhaps).

    Budget deficits DO DRIVE UP interest rates if the deficit is larger than needed to bring about full employment (as Warren Mosler implied in his “parents, children and business card” analogy). That is, given an excessive deficit, the private sector has to be induced via excessive interest rates, not to spend all its money. But the optimum size for the deficit is the size that brings full employment WITHOUT driving up interest rates.

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