The Problem With Modern Monetary Theory


Much of Modern Monetary Theory is, as its proponents insist, simply true. Governments can create more of their own fiat currency at will. How much tax there is at the Treasury isn’t, unless in extremis, a limitation on how much government can spend. There are parts that aren’t quite and wholly true. It isn’t so that fiat money only gains its value from the willingness of a government to accept it as tax payments. Bitcoin has value, however absurdly, it’s a fiat currency and you can’t pay tax in it. Sure, the willingness to accept for tax purposes will aid in creating a value, it’s the only which is at issue.

What gives a currency value is that people will accept that it has value. That the government will accept it aids in that but consider it this way. How much value will a fiat currency have if the government will accept it for taxes but no other bugger will for beer, bread or barns? And then reconsider, what if everyone will accept the pieces of paper for beer, bread and barns, but government won’t? The US dollar has private value in Russia and no official value when dealing with government.

But here’s what the truly large problem with MMT is:

Sixth, the fact that the government spends first, and taxes second, means that the answer to the question ‘how are you going to pay for it?’ is always available to anybody who understands this process. A government decision can always be paid for, presuming the actual resources required to deliver it exist within the economy, simply by commanding the central bank to pay for it and then arranging, if necessary, for the additional tax due on the income that has been generated (because all government expenditure is, by definition, somebody else’s income) to be collected.

That’s just casuistry. OK, so, accept the MMT thesis. Tax doesn’t actually pay for stuff, tax only limits the inflation arising from having paid for stuff. OK, so, how different are these two questions:

1) Who are you going to tax to pay for this?

2) Who are you going to tax to stop the inflation from having paid for this?

The interesting difference between these two questions is what? Nowt that anyone can see now, is it? We’re going to increase the government abstraction of real resources from the economy – that’s what government direction of resource use means, that the private sector or private individual doesn’t get to do so – and someone, somewhere, has to lose control over those resources so that government gains it. This is tax again.

Another way to put this is that sure, MMT means that we can have a high spending government, one that consumes more of GDP. Great. To balance this we need higher taxation to limit the resultant inflation. Great. The difference between this high spend high tax economy and the traditional Old Labour high tax, high spend, economy is what? We’re still in an economy where government controls more of said economy. And someone ends up paying more tax as a result.

And that’s the problem with MMT. If government gains a larger proportion of the economy then everyone not government must have a smaller portion of it. How money is created doesn’t change that in the slightest. Our end result isn’t any different from the traditional tax the hell out of everyone to allow the establishment to spend all the cash. We did also try that, we call the experiment the 1970s and who wants that decade back?

And now a prediction. Anywhere that really did follow the MMT prescription would find itself with stagflation. Lots of government spending, yes, with all its inefficiencies. And high taxation, with all its inefficiencies, to limit the resultant inflation. Quite, welcome back to the 1970s. An inflationary and inefficient economy. Super, eh?