MODERN MONETARY THEORY:
RIGHT A LITTLE & WRONG A LOT
September 26, 2020
Modern monetary theory (aka MMT) is a theory about the relationship between a government, the money it "prints,"* and taxes. You can read about this theory online here.
Where MMT Is (Partially) Right
The jist of the theory, and the reason that some people love it, is that it says--rightly!--that a government such as the United States can "print"* as much money as it likes without any need to increase taxes. The government can, therefore, according to MMT, print as much money as required to pay for things people would like it to pay for, such as health care for all and good schools for all, etc. without any need to raise taxes. I call this the "happy conclusion" from MMT; it is why people love MMT. But the "happy conclusion" of MMT is true only to a certain extent.
To understand the limit to MMT's "happy conclusion," one needs to consider that money and wealth are not the same thing. By wealth I mean material goods (either existing naturally such as land and minerals under the ground or created by the labor of people) and services performed by people. At any given time the level of technology and the number of people able to do work currently and in the past sets an upper limit on the total amount of wealth there can be. Whereas an infinite amount of money can be "printed," an infinite amount of wealth cannot be created. Inevitably, therefore, decisions will have to be made about what wealth to produce and what wealth not to produce. Clearly in the United States a decision was made (by the ruling billionaire plutocracy that actually calls the shots) to produce more military wealth and less medical wealth than ordinary people would prefer.
How are such decisions about what wealth to produce and not to produce actually made?
These decisions are made by the government creating money and putting it into the hands of certain people and not other people. Putting money in the hands of the generals at the Pentagon, for example, means deciding to create military wealth such as weapons and the services of soldiers and civilians hired by the military. During the Covid-19 pandemic, Congress--fearing a dangerous uprising if it didn't**--created several trillion dollars of money and put it into the hands of ordinary people to buy consumer goods and services; this implemented a decision to keep producing such goods and services despite the fact that the stay-at-home policy reduced people's incomes and would otherwise have reduced the demand for, and hence the production of, such goods and services. (Read this footnote to see why there was no appreciable inflation.***) Controlling who gets the money is a way of controlling not only what wealth is produced, but also who gets the wealth it buys.
The point is that money is not wealth; it is an instrument for controlling what wealth is or is not created and who ends up enjoying that wealth. This has always been the case with money. As the late David Graeber discusses in his wonderful book, Debt: The First Five Thousand Years, the origin of money was as an instrument for kings to make peasants produce food for the use of soldiers. The king would create a "coin of the realm" and then levy a tax on peasants that could only be paid with the "coin of the realm." The king would then pay his soldiers with the "coin of the realm," and the peasants would have only one way to get the "coin of the realm" they needed to pay their tax--by selling the food they produced to the soldiers. This method, for various cultural reasons, worked better than requiring the soldiers to violently seize food from the peasants.
Where MMT Goes Wrong
MMT proponents argue that if the legislators in Congress understood MMT, then they would know that they could "print" all the money that it would take to pay for what the general public wants the government to pay for, such as medicare for all and good schools and education for all and wonderful healthy and safe environments for all, etc. So, according to MMT proponents, all we need to do is educate our legislators to understand MMT, and then we'll have the wonderful society we want. Here's what's wrong with this notion.
First, our legislators are not stupid. They understand MMT as well as anybody. The reason they don't print money to make life wonderful for ordinary people is because they are beholden to the billionaire ruling plutocracy, and that plutocracy does not want to make life wonderful for ordinary people. The plutocracy wants to maintain the enormous class inequality that is the basis of its extreme wealth and privilege and power. And the plutocracy knows that in order to do this it absolutely must treat ordinary people like dirt, to make lower class people "know their place," to make lower class people internalize the notion that they are an inferior lot that does not deserve to enjoy life the way upper class people do, and to accept their position at the bottom of an unequal society where they must unquestioningly do what they are told to do by their "betters"--the upper class folks. (Read in detail here how the plutocracy treats us like dirt routinely, in many ways that are well-known.)
Second, the only way to make our society one in which we produce the wealth that ordinary people need or desire and ensure that this wealth is enjoyed by ordinary people without it being hogged by an upper class, is by removing the rich from power to have real, not fake, democracy with no rich and no poor, as discussed here.
The people who love to talk about MMT don't understand the way the world really works, even if they happen to understand one little fact about it.
* By "print" I mean create new money by any means, including just creating electronic versions of money such as increasing the value in a bank account by using just a computer, and doing this possibly via a semi-independent central bank such as the U.S. Federal Reserve banking system.
** The government (i.e., ruling class=plutocracy=billionaires) knew that if it were perceived as not responding to the epidemic in a morally just and wise practical manner, then it would lose whatever is left of its legitimacy, and hasten the day of revolution. So, the government was under heightened pressure due to the viral epidemic to help people who lost income due to the stay-at-home policies still have money to buy the essentials of life.
*** Why, it may be asked, did the printing of trillions of dollars this way not cause any appreciable inflation. After all, the theory is that inflation is caused when there are, for some reason, more dollars than usual chasing a given amount of commodities. Here's the explanation for the absence of inflation.
Due to the stay-at-home policy, many businesses--prior to the printing of all those trillions of dollars--had to furlough (or fire) employees. Such a business, consequently, did not need the money for wages it otherwise would have needed. This meant that the business did not need to take out a loan to pay its wages (businesses operate by borrowing money from banks.) If the business had borrowed that money to pay those wages, it would have meant that a bank would have created that money "out of thin air" (which is how money is created--read about this if you're not familiar with the process.) So had there not been the pandemic, all of that wage money would have been created this way; because of the pandemic stay-at-home policy, however, that money was not created in the normal way.
Instead, that wages-money (actually only some of it, which is why unemployed workers are still hurting!) was created ("printed") by Congress. Thus the trillions of dollars "printed" by Congress did not actually increase the usual amount of dollars in circulation, but only kept that number from dropping as much as it would have without Congress "printing" those trillions of dollars. Due to the increase in the number of workers unemployed, fewer commodities were produced, and as we see above there were fewer--not more--dollars chasing them. This is not an inflationary situation. This is why there was no appreciable inflation.