Policy report
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Description

Modern Monetary Theory (MMT) is a supposedly new macroeconomic paradigm, but it is essentially a reprise of 1930s Keynesian economics. Its central premise — that countries which can borrow in their own currencies should not worry about government deficits and can finance as much government spending as they want — is deeply flawed, yet it has political appeal and has found favour in the mainstream media.

This paper argues that the macroeconomic consequences of MMT would be disastrous. According to MMT, large budget deficits due to increased government spending and the monetisation of debt that arises as a result are not a problem. Yet, as the authors point out, both the size of government and public debt have long-term consequences in terms of bigger interest bills, higher taxes and lower future economic growth.

MMT also assumes governments can use fiscal policy to ‘fine tune’ the economy to stimulate demand and boost employment in times of macroeconomic distress like the COVID-19 crisis. But the historical record shows that such fiscal policy activism risks leading to runaway inflation.

The authors conclude that MMT is essentially a political doctrine: it recommends increased government spending to stimulate economies, rather than tax cuts, and recommends tax hikes to pull money out of the economy and control inflation during booms. The political economy of MMT thus suggests it is conducive to ever-expanding government.

Publication Details
ISBN:

978-1-925744-83-5

License type:
All Rights Reserved
Access Rights Type:
open
Issue:
CIS Policy Paper 41