Why Modern Monetary Theory is suddenly the cool kid (and why you should care)

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Why Modern Monetary Theory is suddenly the cool kid (and why you should care)

I started writing this piece for inclusion in Gaining CHOICE, our weekly email. But as I read more and more the piece became longer and longer until it was clear the idea of Jobs Guarantees and Modern Monetary Theory warranted a post all of their own.
Modern Monetary Theory (MMT) sounds dry, I know, and in truth, and it is. But it’s likely you’re going to hear a whole lot more about it, and the idea of jobs guarantees, in the coming months and perhaps years.
Because MMT proposes an interesting solution to unemployment. And battling unemployment will be the number 1 agenda item around the country.

The common view of money is a slight extension from the Gold Standard. Money is a scarce resource, and its value derives from its scarcity. Wheelbarrows full of notes as seen during hyperinflation in Germany after World War 1 are etched in people’s memories as what happens when governments break the scarcity ideal, and simply print money with abandon.
Modern Monetary Theory however, proposes an alternate view.
Governments issue money to citizens through government spending. Citizens then have an obligation to pay that money back to the government at some point in the future via taxation. Money has value because without it, citizens can’t pay their taxes. The idea of austerity and living within your means, becomes redundant – governments can create as much money as they like with repayment coming via future tax payments. Inflation (and therefore hyperinflation) are not a problem under this theory, because governments reduce spending and increase taxes when the supply of labour is tight – ie, everyone has a job. MMT argues that inflation isn’t caused so much by money printing as there being insufficient supply of goods to buy. So the wheelbarrow of cash to buy a loaf of bread isn’t so much a lesson on the dangers of printing money, as it is an illustration of what happens when there aren’t enough loaves of bread.
MMT therefore says governments should print as much money as is necessary to achieve full employment, and then claw that money back through taxes once everyone is in work.
It’s a very different approach. It goes against pretty well everything I was taught at university – and I did an economics degree!
But it has application today because at its heart is the concept of full employment – governments should spend money until everyone has a job.
That’s where the idea of a jobs guarantee comes in, and that’s why MMT is getting considerable focus right now.
The idea is that governments will guarantee everyone a job who needs it. Rather than simply get unemployment benefits, you get a job that earns you a wage. It would be up to local councils and community groups to provide those jobs – roles like teachers aides, maintenance of community assets like sporting facilities, and recycling and environmental projects.
Pay would be at the minimum wage – currently $740 per week, almost exactly what the Job Keeper payment is now.
Job Guarantee would help to reduce poverty, and people who receive the income, spend it, so more economic activity occurs, making the whole idea viable according to advocates.
Those on Job Keeper now are effectively receiving a Job Guarantee. There just isn’t any work they can do right now due to COIVID. So whilst this idea seems radical, it’s not a big leap from our current situation.
MMT economists position governments as currency monopolists – a jarring term yet certainly accurate. We know monopolists have near unfettered power in the domain in which they reign. In an environment where we could be looking at significant and persistent unemployment leading to family breakdowns, home loan defaults, and the inevitable economic tailspin that follows, monopolist power, if used for good, might be just what we need.
What about foreign exchange? If governments print money more freely, won’t our exchange rate drop, making imports more expensive? Yes, the MMT advocates would say, but that is a good thing. It will mean more of what we need will be produced locally, creating more jobs. They contend that cheap imports have been given priority over jobs for local citizens.
Bringing jobs back to local economies is not just the banner cry of MMT theorist. Donald Trump’s last election win had this objective as a central policy approach. But it pushes against well accepted economic theory. Australia for instance is really good at producing wheat. Standard economic theory says we should grow as much wheat as we can, and then sell the surplus we don’t need to other countries producing goods they’re really good at – say China for TV’s. Australia producing its own TV’s, and China producing its own wheat sees less goods produced overall – both countries, and their citizens, are the loser. MMT’s potential to reduce trade is tough to reconcile at the national level, though perhaps it means less wealth at the top, but better conditions for those at the bottom of the economic ladder.
Here’s some more key concepts in the MMT world view:

  • Cutting interest rates to stimulate employment is flawed – business won’t borrow if they believe the outlook is poor, no matter how low interest rates are. Plus, once rates are at zero, what do you do? They in fact believe cutting interest rates has the opposite effect as less interest is paid on bonds and other investments to investors, reducing potential spending – something many retirees can relate to in recent years.
  • Governments can pull people out of unemployment through creating money and providing a job guarantee. To not do so is immoral.
  • The private sector’s aim is to maximise profits. Employees are a cost and therefore it is rational for the private sector to always want to minimise this cost. It is therefore up to government to take action to create full employment.
  • The purpose of taxation is primarily to drive demand for the currency which ensures it has value. Secondary purposes include managing inflation, addressing income inequality, defending the nation, and providing essential services.

It is fair to say MMT is not loved by many traditional economists. They quite rightly point to examples like Zimbabwe, Argentina, and Venezuela, countries where governments printed money largely unconstrained, and economic disaster ensued.
MMT advocates would argue problems in these nations were due to flawed government bureaucracy and administration, which is probably fair, but it does highlight the practical challenges of Modern Monetary Theory. Some MMT advocates also suggest the approach is only open to countries whose currencies are considered reserve currencies – the United States, Europe, and perhaps China. The examples cited above occurred, in their world view, because these countries’ currencies did not hold reserve status. If that’s true, then MMT can’t be implemented in many countries, and certainly not Australia.
Another practical concern is that it’s all very well to say that when full employment is achieved, governments will reduce spending and increase taxes. But that’s easier said than done, especially in a democracy where the next election is never too far away.
The coronavirus pandemic has put us in genuinely unprecedented times. Governments are being looked upon to do more and more by their citizens. And interest rates around the world are at or about zero. Fresh approaches will be needed in the coming years and decades. I’m not convinced that Job Guarantees and Modern Monetary Theory, but it’s great to explore some fresh ideas and reconsider existing norms.
Don’t be surprised if you hear more on Job Guarantees and Modern Monetary Theory in the coming months.

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