Abstract
The essential claim of Modern Money Theory (MMT) is sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained. This paper analyses the macroeconomic arguments behind that claim and shows they are suspect. MMT underestimates the economic costs and exaggerates the capabilities of deficit-financed fiscal policy. Those analytic shortcomings render it poor economics. However, MMT's claim that sovereign governments are financially unconstrained is proving a popular political polemic. That is because current distressed economic conditions have generated political resistance to fiscal austerity, and MMT fits the moment by countering the neoliberal polemic that government lacks fiscal space because it is akin to a household.
Highlights
A BRIEF OVERVIEW OF MMTRecently, there has been a burst of interest in Modern Money Theory (MMT).1 MMT is associated with a small overlapping group of economists at the University of Missouri, Kansas City, and the Levy Economics Institute, NY, USA
This paper has examined the theoretical foundations of MMT
Crocker (2020), who is a proponent of MMT, advocates a universal basic income (UBI) rather than a job guarantee program (JGP)
Summary
There has been a burst of interest in Modern Money Theory (MMT). MMT is associated with a small overlapping group of economists at the University of Missouri, Kansas City, and the Levy Economics Institute, NY, USA. The ‘meat and potatoes’ component is the macroeconomics of money- and bondfinanced budget deficits It describes MMT’s view of how government finance works, why taxes are not needed to finance spending, and why government is financially unconstrained. MMT’s proponents have always maintained that government spending is limited only by available economic capacity.’ Nersisyan and Wray (2010) debate the issue of limits to government debt and conclude ‘sovereign government is not constrained financially, which means it can never face a solvency issue’ 474 Review of Keynesian Economics, Vol 8 No 4 capacity to issue money, which seemingly renders government financially unconstrained. MMT neglects those costly ramifications, leading it to underestimate the economic costs and exaggerate the capabilities of deficit-financed fiscal policy. Its printing press approach to government spending is proving a popular political polemic, countering neoliberal polemic which justifies fiscal austerity by describing government as akin to a household
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