This world is a world of ideas, some rational and some not. As it gets harder to tell which is which, it is necessary to study every aspect carefully before making a decision to believe and act upon any one idea. This article will endeavor to do the same concerning Modern Monetary Theory (MMT), an idea which is being debated and acted upon today.
First of all, what is MMT? The theory states that large governments (like the U.S.) that issue their own currency don’t have to follow budget constraints on spending because they can always print more money to service the interest on their debt and pay down the principal. And to avoid the devastation of inflation, once the money supply reaches a certain point, it will be taxed off the market and “burned”. There are two requirements for MMT to work, according to its proponents. The government must have monetary sovereignty, which is the ability to print money and borrow in its own currency. Also, taxes should be used and seen as a way to take money out of the market and stop inflation. (Moller)
If a government creates money, MMT says there is no reason why it can’t simply print or issue more money whenever it chooses. The Modern Monetary Theory would justify any government spending on vastly large government programs, such as Medicare and welfare programs, because the debt can just be paid off with the printing of more money.
However, the theory that governments can just print all the money they need poses some problems that may or may not be solvable. Inflation, for one. Looking around the world, there are examples of other countries that have tried something similar to what MMT suggests, and they didn’t turn out well.
For example, the Weimar Republic. Germany had a healthy, flourishing economy from 1890 to 1914, dominating all the major Continental markets except for France. By 1914, 63% of German exports were finished goods (to compare, in 1873, only a third of them were). (Britannica). But somehow by 1923, the once-healthy economy had collapsed. What happened? Of course, as in every situation, there were many factors, but some of them include the following.
After World War One and the Treaty of Versailles, Germany was largely in debt: $400 billion in today’s money (de Pommereau). After being unable to pay a reparations payment, France and Belgium sent troops to confiscate industrial goods as reparation payments. The German workers in these industries were ordered to show a “passive resistance”, which meant to go on strike. However, the Weimar government still had to pay these workers, and their only response was to print more money. As the flood of money hit the market, hyperinflation led to extreme prices, and the more the money was printed, the higher the prices became. In January of 1923, a loaf of bread cost 250 marks, and in November of the same year, hyperinflation had made the price 200,000 million marks. (BBC Bitesize)
There are two main things that seem to have led a healthy economy to a fallen one. The first is large amounts of debt, which MMT approves and even encourages a government to accumulate. The second is printing money, and a lot of it. These two main things (among other factors, of course) led to the fall of the Weimar economy.
Could MMT in the U.S. have a similar reaction? To compare, the U.S. is more than $27 trillion in debt (much greater than Germany’s $400 billion), with the interest building every second (U.S. National Debt Clock). To print more money to pay off that debt and to justify any government spending would create inflation, to be sure. Whether that inflation could be controlled is a different question.
Opponents of MMT also cite the hyperinflation of Venezuela as another example why the theory doesn’t work. Venezuela’s economy was highly dependent on its oil exports, which made up 90% of the country’s export earnings. The money from this had enabled the government to spend a lot on different social programs, including health services and welfare. But when the global price for oil dropped in 2014 (Monaldi), foreign demand for the Venezuelan bolívar (the country’s currency) went down with it. As the value of the bolívar decreased, the solution of Nicolas Maduro, Venezuela’s president, was to simply print more money to pay the government’s bills. However, doing so made the value of the bolívar even less, and this cycle drove Venezuela into the devastating spiral of hyperinflation. (Carmody)
It’s necessary to consider the differences between Modern Monetary Theory and the actions of the Weimar Republic and Venezuela. Those in favor of MMT refute these examples as extremely different scenarios. According to proponents, MMT cannot cause inflation in a developed country like Japan or the United States. For developing countries (like Venezuela), the problem does not begin with MMT, but instead begins with trade deficits (importing more than they export) and resulting debt owed in foreign currencies. These countries do not have monetary sovereignty because they owe much debt in foreign currencies. A country like the U.S. would be able to pull it off, they say, because the risk of inflation remains under control as long as government spending doesn’t outpace the economic productivity of available resources, labor, and equipment. In short, the economy under MMT must be able to export more than it imports in order to avoid trade deficits. (Kaboub). However, the U.S. actually has the largest trade deficit in the world. It imports much more than it exports, with a deficit of 922.78 billion dollars as of 2019. (Statista) Wouldn’t this actually be a similar scenario?
Part of the idea of Modern Monetary Theory involves taxing all the surplus money off the market and getting rid of it, which action Germany and Venezuela did not fully do. But would taxing more money really have helped the situation of hyperinflation? Zach Moller, in his article What is MMT, and Why Isn’t It Practical?, writes: “Under an MMT regime, policymakers would need to respond to inflation by doing two of the most unpopular things ever: raising taxes and cutting spending.” (Moller). MMT proponents assume that these necessary policies would be put in place quickly and easily to control inflation. However, meaningful tax increases receive a lot of opposition and are hard to put in place — think of the recent tax referendum in Utah. After a new tax increase was passed, citizens all over the state rose in protest and gathered enough signatures that the bill was repealed. (Wood). With so many people opposed to increased taxation, to think that policy-makers would approve a tax increase quickly, if at all, would be fallacious, especially while people’s earnings are being cut down by inflation. To suddenly have $20 only be worth $16 because of inflation, and then to have 5 more dollars taxed away (to fix the inflation) would definitely be a source of irritation and protest.
One argument that may be raised after reading the research is this: “The examples given are not exactly the same as MMT. Venezuela and the Weimar Republic didn’t do it quite right. Given a chance, the U.S. could follow the theory all the way and prosper more than it’s ever dreamed of.”
Yes, of course. Just like Soviet Russia and other communist countries didn’t get all the way to true communism, and if it’s tried again, it will be done in the correct way. Certainly, the examples provided are not exactly like what MMT suggests (what ever is?), but they are similar enough that, in trying the theory, the risks may greatly outweigh the benefits, if any. The aspect of taxing surplus money off the market would be difficult and unwelcome, and the idea that the government can spend as much as it wants because it can always issue more money just sounds too good to be true. Like most scenarios when this is the case, it probably is.
BBC Bitesize. “The Weimar Republic 1918-1929.” BBC Bitesize, https://www.bbc.co.uk/bitesize/guides/z9y64j6/revision/5#:~:text=Germany%20was%20already%20suffering%20from,and%20the%20increasing%20government%20debt.&text=In%20order%20to%20pay%20the,printed%2C%20the%20more%20prices%20rose. Accessed 12 November 2020.
Britannica. “Germany – Foreign policy, 1890—1914.” Britannica, https://www.britannica.com/place/Germany/Leaders-of-Germany. Accessed 12 November 2020.
Carmody, Michelle. “What caused hyperinflation in Venezuela.” The Conversation, 5 February 2019, https://theconversation.com/what-caused-hyperinflation-in-venezuela-a-rare-blend-of-public-ineptitude-and-private-enterprise-102483#:~:text=In%20these%20conditions%2C%20printing%20more,cycle%20is%20what%20causes%20hyperinflation. Accessed 13 November 2020.
de Pommereau, Isabelle. “Germany finishes paying WWI reparations, ending century of ‘guilt.’” The Christian Science Monitor, 4 October 2010, https://www.csmonitor.com/World/Europe/2010/1004/Germany-finishes-paying-WWI-reparations-ending-century-of-guilt. Accessed 12 November 2020.
Kaboub, Fadhel. “Why Government Spending Can’t Turn the U.S. Into Venezuela.” In These Times, 7 January 2019, https://inthesetimes.com/article/united-states-venezuela-modern-monetary-theory-trade-deficits-sovereignty. Accessed 13 November 2020.
Moller, Zach. “What is MMT, and Why Isn’t It Practical?” Third Way, 18 July 2019, https://www.thirdway.org/memo/what-is-mmt-and-why-isnt-it-practical. Accessed 12 November 2020.
Monaldi, Francisco. “The Impact of the Decline In Oil Prices on the Economics, Politics and Oil Industry of Venezuela.” Columbia SIPA, September 2015, https://energypolicy.columbia.edu/sites/default/files/Impact%20of%20the%20Decline%20in%20Oil%20Prices%20on%20Venezuela_September%202015.pdf. Accessed 16 November 2020.
Statista. “The 20 countries with the highest trade balance deficit in 2019.” Statista, https://www.statista.com/statistics/256666/the-20-countries-with-the-highest-trade-balance-deficit/. Accessed 13 November 2020.
U.S. National Debt Clock. “U.S. National Debt Clock.” https://www.usdebtclock.org/. Accessed 12 November 2020.
Wood, Benjamin. “Utah Legislature repeals tax reform in pair of overwhelming votes.” The Salt Lake Tribune, 28 January 2020, https://www.sltrib.com/news/politics/2020/01/28/tax-referendum-hits/. Accessed 12 November 2020.