1.1 Introduction
Modern Money Theory (MMT) has recently gained a significant amount of attention. From occupying a marginal corner of the marginalized âPost-Keynesianâ economics five years ago or less, MMT has now drawn attention, support, and disdain from Wall Street speculators, Harvard economists Kenneth Rogoff and Lawrence Summers and even Jerome Powell, the Chair of the Federal Reserve. Glossy profiles of some of MMTâs most outspoken advocates, especially Ph.D. Economist Stephanie Kelton, have hit the internet (see for example Zach Carterâs slightly over the top âStephanie Kelton Has the Biggest Idea In Washington; Once an outsider, her radical economic thinking won over Wall Street. Now sheâs changing the Democratic Party.â). Much of this new-found fame (and infamy) have stemmed from the positive views of MMT expressed by prominent progressive politicians, including Senator Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez (AOC).1
The recent appeal of MMT is understandable. For almost forty years, neo-liberal economic theory and policy has dominated macroeconomic policy with its focus on balanced budgets, austerity and the elevation of âindependent central banksâ to focus on inflation to the virtual exclusion of all other goals, including full employmentâ(e.g., Epstein and Yeldan 2009; Pollin 2003). In this world, mainstream (neo-liberal) economics was used as a justification for macroeconomic policies that tolerated high unemployment, and government budgets that starved important public investments and social programs for the poor and working class. Mainstream Democrats in the US and similar politicians in Europe and elsewhere also adopted this approach, with devastating results on our economies and the livelihoods of many people (Blyth 2013). Austerity for the working class and riches for the rich also helped to fuel the rise of the populist right and authoritarianism in the US, Europe, and elsewhere.
The apex, and partial denouement of this neo-liberal austerity approach came with the onset of the Great Financial Crisis of 2007â2008 and the restoration of austerity budgets in Europe and to some extent in the US, following a brief post-meltdown âKeynesianâ moment. Many people in the US and elsewhere could see the hypocrisy and venality of bail-outs for the bankers and austerity for everyone else. The pushback gained force with the devastating revelations of the problematic econometric analysis of Reinhart and Rogoff (2010) published by Herndon, Ash, and Pollin which greatly undermined the pseudo âscientificâ underpinnings of the austerity ideology (Herndon et al. 2014). Yet, most Democratic politicians, including Barack Obama, Hillary Clinton, and Joe Biden, and their mainstream economists like Larry Summers, Tim Geithner, and Kenneth Rogoff continued to emphasize the dangers of government deficits and government debt at all times other than deep recessions.
MMT advocates questioned this austerity focus forcefully and developed an economic perspective to challenge it that was very attractive to those who saw the wrong-headedness and destructive nature of this mainstream economics and Democratic party embrace of austerity in the face of worsening income distribution, slow economic growth, and high unemployment.
In fact, the Republican Party had long ago abandoned the economics and practice of austerity economicsâexcept for when Democrats were in power. Arthur Laffer, author of âsupply-side economics,â showed the Republicans that they could cut taxes for the rich and continue to feed the military-industrial complex and favored industries like Wall Street and big oil without tears or fears of deficits. Despite whole libraries of economic analysis discrediting the theory, Trump recently gave Laffer the Presidential Medal of Freedom for his service (to the Republican Party, that is):
âArthur B. Laffer, the âFather of Supply-Side Economics,â is one of the most influential economists in American history. He is renowned for his economic theory, the âLaffer Curve,â which establishes the strong incentive effects of lower tax rates that spur investment, production, jobs, wages, economic growth, and tax compliance.â Donald J. Trump, June 19, 20192 (see Waldman 2019).
This award comes on the heels of the massive Republican tax cuts of January 2019 for which Republican advocates variously claimed that supply-side impacts would mean there would be no increase in deficits and âno one cares about deficits anymore.â MMT fits quite naturally into this space. Steve Englander refers to âa conservative version of modern monetary theory.â âThe conservative version sounds like the Fed-accommodated tax cut regime the Trump Administration seems to be supportingâ (Englander 2019). Along these lines, in the summer of 2019 the Washington Post reports that Trump Chief Economist âLarry Kudlow dismisses deficit concerns as GOP abandons fiscal toughnessâ (Newmeyer 2019, Washington Post, June 14).
Meanwhile, after the initial counter crisis spending, Democrats and their mainstream economists continued to focus on limiting the budget deficits and the government debt accumulation despite relatively high unemployment, unmet social and economic needs, and a slowly growing economy.
In the face of this Democratic and their mainstream economicsâ focus on austerity and the dangers of deficits (except for during major recessions), MMT theorists were saying to anyone who would listen that government deficits were irrelevant, that austerity was costly and unnecessary and that the hapless Democrats and their economists were deathly wrong.
Yet, MMT theorists were not the first or only economists to criticize neo-liberal austerity economics. Orthodox Keynesian and heterodox economists more generally have been pushing back against this cynical and destructive policy and ideology for decades (see the articles, for example in Dymski et al. 1993; Palley 2015a, b; Blyth 2013; Galbraith 2012).3
For decades, most of my heterodox colleagues and I wrote and taught our students about the need for socially productive investments by the government; how we not only leave debts to future generations but also real assets from public investments. These public investments and full employment driven by sensible macroeconomic policy was the best policy for social good.
Other heterodox economists demonstrated empirically the folly of austerity economics. And while the Herndon, Ash, and Pollin critique of empirical claims by Rogoff and Reinhart âfiscal cliffâ warnings received a great deal of attention and probably helped to break the global march toward more austerity, it is MMT, not other schools of post-Keynesian thought, that has recently received so much attention.4
A key reason that MMT has gained many adherents is that it puts this anti-austerity argument on a whole new plane. MMT claims that, in principle, government spending never has to be paid for and is typically implemented by a mere stroke of the monetary pen. For them, we donât need to ask of progressive advocates for a âGreen New Dealâ or âMedicare for Allâ: how are you going to pay for it? For MMTers, this question is not only unnecessary, but is also nonsensical (see, for example, Kelton, February 2, 2019). This way, MMT has recently been able to capture a large amount of attention in the progressive debate.
Roughly speaking, as developed by Randall Wray, Stephanie Kelton, and others, MMTâs macroeconomic approach amounts to Abba Lernerâs âfunctional financeâ approach with a twist of âsovereign moneyâ and âdebt monetizationâ (Lerner 1943), based on the financial accounting of Wynne G...