There's Nothing Modern About MMT

Modern Monetary Theory (MMT) tells us that governments should finance public spending by creating money.

- By Alexander William Salter

To prevent inflation, MMT advocates say, the government should use taxes to siphon off excess purchasing power, which supposedly would enable the public sector to greatly expand its activities, eliminating the scourge of underemployment.

At a time of skyrocketing national debt and mild inflation, what was once a fringe school of thought with few adherents has captured the public imagination. Rebutting MMT’s claims requires a little history, which shows there is nothing “modern” about its prescriptions.

MMT promoters, who are mostly journalists and public intellectuals rather than professional economists, start with a couple of obvious truths: Governments can’t default if their debts are denominated in their own currency, and they can create a demand for their currency by imposing tax obligations. From those premises, the theory’s supporters leap to some extraordinary conclusions: They argue that there are too many idle resources even in healthy economies and that fiat-money finance is the key to mobilizing those resources. It sounds like clickbait: “Learn this one weird trick to jumpstart the economy!”

Similar measures have been tried before, right here in America, and they have worked. But that isn’t good news for MMT fans, because understanding why currency finance worked then means seeing why it won’t work now.