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In the last few years, the so-called Modern Monetary Theory (MMT) has been gaining prominence in the media and the public. This article presents the MMT approach to money and monetary policy, and discusses its recommendations regarding fiscal policy and aggregate demand management, the structural policies it advocates as well as the international aspects of MMT. Overall, it appears that MMT is based on an outdated state of economic science and that its claims regarding economic policies are much exaggerated: The meaning of MMT is more that of a political manifesto than of a genuine economic theory.

Georg Friedrich Knapp’s (1905) The State Theory of Money (STM) provides the main theoretical underpinning of the Modern Monetary Theory’s (MMT) approach to money. We briefly expose STM’s link with MMT and then analyse the recommendations of MMT related to money, monetary policy and the role of the central bank. We also consider historical precedents and a possible implementation of MMT in the USA.

While MMT proponents are technically correct that a government with its own currency can print money to pay its bills, that isn’t the end of the story. In our recent Mercatus policy brief, Scott Sumner and I criticize the stronger claims of MMT and identify five major weaknesses with the idea.

1. MMT has a flawed model of inflation that overestimates the importance of economic slack.

MMT is at its weakest when addressing inflation, how it gets determined and how policies can control it. Its most common argument reduces to: inflation control is not a problem until it is. Problems arise when resource utilization reaches some limit, at which point higher taxes can keep inflation in check. But resource utilization is not the only factor that affects inflation. In late 2021, consumer price inflation hit a 40-year high of over 6%, yet compared to their pre-COVID levels, employment, capacity utilization, and industrial production are lower, while the unemployment rate is higher. Inflation is not rising because the overall economy has hit its resource limit. To be sure, supply-chain issues have driven up some prices relative to others, but these issues are not what anyone means by economy-wide resource limits. MMT’s weak theory of inflation is stunning because the potential of the MMT agenda to trigger inflation is the most frequently voiced criticism of the theory [Summers (2019), Cochrane (2020), Hartley (2020), Mankiw (2020)].

The guaranteed jobs program points to a more general theme of MMT: the federal government can solve big problems once policy makers grasp the key tenets of MMT. Kelton (2021) identifies seven “deficits,” defined in terms of both quantity and quality, that MMT can help to close: good jobs, saving, health care, education, infrastructure, climate, and democracy. MMT promises to address each of these deficiencies by first altering policy makers’ understandings of fiscal financing matters.

In a recent book review on money mechanics, I briefly critiqued Modern Monetary Theory (MMT). The central problem with it, I argued, is its failure to recognise resource scarcity: “While there are several problems with the theory, the most fundamental is that it confuses money with resources. When the government spends, even with money “printed out of thin air,” it transfers real resources in the economy. For example, when the government builds a new factory, the cost is not in terms of dollars, but in terms of the scarce resources it soaks up – the machinery, raw materials, labor, and capital. The relevant question therefore is not how much it costs or whether we can “afford it,” but what those resources would have done had they not been commandeered by the government. Put simply, supporters of MMT tend to either neglect or deny the fundamental problem of resource constraints.” In an email to me, economist and MMT proponent Warren Mosler pointed out that the theory does in fact take into account resource trade-offs and provided a link to a paper of his which states: “The essence of the political process is coming to terms with the inherent trade-offs we face in a world of limited resources and unlimited wants. The idea that people can improve their lives by depriving themselves of surplus goods and services contradicts both common sense and any respectable economic theory. When there are widespread unemployed resources as there are today in the United States, the trade-off costs are often minimal, yet mistakenly deemed unaffordable.” In short, resource scarcity applies when workers are widely employed, but not when a significant number of workers are unemployed. In the former case government spending tends to merely shift resources from one use to another, whereas in the latter case government spending tends to put idle resources to work. This distinction is important to properly understand the thinking behind MMT, so I thank Dr Mosler for taking the time to read my piece and point this out. However, even with the distinction in mind, I believe the critique in my original piece stands. For one thing, all government spending, even in a depressed economy, involves at least some resource trade-offs. Why? Because it is nearly impossible to target only “idle” resources without inevitably consuming some productive ones in the process. For example, say the government “prints” money to hire unemployed workers to build a bridge. Even so, such a project requires resources like concrete, gasoline, rubber, machinery, and skilled workers like engineers and project managers, some of which (or whom) will be drawn away from productive areas of the economy. But there is a deeper reason why government spending runs into resource constraints. Consider that after an economic slump, it takes time for the imbalances between supply and demand in the economy to match one another. For example, after entrepreneurs and businesses realise that the projects they have undertaken are unprofitable, when their products are not wanted by consumers and therefore go unpurchased, firms discontinue their plans, which throws workers out of their jobs. This period of “inactivity” constitutes a recession. It is during this time that businesses rely on the crucial information provided by pricing signals to determine how to reallocate capital productively going forward, so that they can hire, expand, and rebuild. But if the government decides to “print” money to employ unutilised resources, it distorts the very pricing mechanisms these firms and entrepreneurs depend on to deploy the resources at their command, meaning that the economy ends up with a disfigured resource structure. In other words, “idle” resources provide a vital price signalling function that government spending confuses. Because of this confusion, resources get shuffled into areas of the economy they otherwise would not have, had they been left to the private economy. That is why MMT is predicated on a distinction that fails to yield a meaningful difference. On the one hand, and where it is right, it recognises the reality of resource constraints when the economy is booming; on the other, and where it is wrong, it argues that resource constraints do not apply when the economy is slumping. But the truth is they do. And that is something that no sound economic theory can ignore.

Since the dawn of capitalism, market economies have placed a high emphasis on labour productivity. Continuous improvements in technology geared towards productivity increases lead to more output being produced for a given amount of labour. But crucially these advances also mean that fewer people are needed to produce the same amount of goods and services each year. As long as the economy expands fast enough to offset increases in labour productivity there is no problem. But if the economy does not grow, people lose their jobs.

Economic growth has been necessary within this system just to prevent mass unemployment. Communities and the politicians that represent them celebrate the construction of a new factory not so much for the increase in supply of some needed product, but because of the jobs it creates. In advanced economies, the shortage of employment has become more pressing than the shortage of products. Basically, we produce goods and services mostly to keep people employed rather than to cater for their needs.

#3: It could crowd out tens of millions of private sector jobs. There are currently 54 million people who earn $15 an hour or less. When they find out the federal government is offering $15 an hour plus benefits and permanent job security, many of those workers would quit their current job and join the federal workforce.3 Companies that could afford to would raise wages to keep some of these workers; other companies would simply go out of business. The labor markets would be controlled by the government in ways never seen before in America. And even if just half of low-wage private sector workers quit, the number of federal employees would rise by between 35 and 40 million.4 Costs to the government would then rise to anywhere from $1.6 trillion to $2.24 trillion per year, and the private sector would see massive repercussions.

In reality, the fiscal costs are likely to be much, much higher, and the economic welfare losses even more significant, because in the labor market and broader economy, a public jobs guarantee program would significantly crowd out productive private sector activity. This type of policy will radically alter behavior of both workers and businesses, and so the supply and demand for labor.

The Census shows that, among those who worked in 2016, 70+ million Americans earned under $32,500 (the full‐​time job guarantee salary would be $31,200). Yes, not all of these would seek out positions on the jobs guarantee program. But a large proportion would, especially those employed in uncertain roles with low levels of job security.

RTTNews) - Private sector employment in the U.S. jumped by much more than expected in the month of May, according to a report released by payroll processor ADP on Thursday.

The report said private sector employment shot up by 278,000 jobs in May after surging by a revised 291,000 jobs in April.

Several recent works on China and Sino–US relations have made substantial contributions to the current understanding of how and under what circumstances a combination of nuclear deterrence and economic interdependence may reduce the risk of war between major powers. At least four conclusions can be drawn from the review above: first, those who say that interdependence may both inhibit and drive conflict are right. Interdependence raises the cost of conflict for all sides but asymmetrical or unbalanced dependencies and negative trade expectations may generate tensions leading to trade wars among inter-dependent states that in turn increase the risk of military conflict (Copeland, 2015: 1, 14, 437; Roach, 2014). The risk may increase if one of the interdependent countries is governed by an inward-looking socio-economic coalition (Solingen, 2015); second, the risk of war between China and the US should not just be analysed bilaterally but include their allies and partners. Third party countries could drag China or the US into confrontation; third, in this context it is of some comfort that the three main economic powers in Northeast Asia (China, Japan and South Korea) are all deeply integrated economically through production networks within a global system of trade and finance (Ravenhill, 2014; Yoshimatsu, 2014: 576); and fourth, decisions for war and peace are taken by very few people, who act on the basis of their future expectations. International relations theory must be supplemented by foreign policy analysis in order to assess the value attributed by national decision-makers to economic development and their assessments of risks and opportunities. If leaders on either side of the Atlantic begin to seriously fear or anticipate their own nation’s decline then they may blame this on external dependence, appeal to anti-foreign sentiments, contemplate the use of force to gain respect or credibility, adopt protectionist policies, and ultimately refuse to be deterred by either nuclear arms or prospects of socioeconomic calamities. Such a dangerous shift could happen abruptly, i.e. under the instigation of actions by a third party – or against a third party. Yet as long as there is both nuclear deterrence and interdependence, the tensions in East Asia are unlikely to escalate to war. As Chan (2013) says, all states in the region are aware that they cannot count on support from either China or the US if they make provocative moves. The greatest risk is not that a territorial dispute leads to war under present circumstances but that changes in the world economy alter those circumstances in ways that render inter-state peace more precarious. If China and the US fail to rebalance their financial and trading relations (Roach, 2014) then a trade war could result, interrupting transnational production networks, provoking social distress, and exacerbating nationalist emotions. This could have unforeseen consequences in the field of security, with nuclear deterrence remaining the only factor to protect the world from Armageddon, and unreliably so. Deterrence could lose its credibility: one of the two great powers might gamble that the other yield in a cyber-war or conventional limited war, or third party countries might engage in conflict with each other, with a view to obliging Washington or Beijing to intervene.

The US Bureau of Economic Analysis provides interesting data on the contribution of 93 different industries (and groups of industries) to the GDP. In a previous post I analyzed the contribution of the oil industry to US GDP growth. Now I present the big picture: the contribution of every industry to the GDP and GDP growth. In other words, who is responsible for the sound growth of the US economy since the crisis of 2009?

The following is a summary of the main statistics and some conclusions (of my own) though the reader may draw his/her own conclusions.

In 1944, Franklin D. Roosevelt proposed a second bill of rights enshrining the right to a job and a decent income. More than 70 years later, many on the left say it is time to deliver.

Vermont Sen. Bernie Sanders, a Democratic presidential candidate in 2016 and likely again in 2020, is drafting legislation that would guarantee a job to anyone who wants one, at $15 an hour plus benefits. New Jersey Democratic Sen. Cory Booker has proposed a somewhat less ambitious version.

Hiring by U.S. companies increased more than expected in May, pointing to a labor market that remains tight even in the face of higher interest rates, according to the ADP National Employment Report released Thursday morning.

Companies added 278,000 jobs last month, easily beating the 170,000 gain that economists surveyed by Refinitiv predicted. It is slightly below the revised 291,000 figure recorded last month.

War College, Maxwell AFB, “The Coming Collapse Of The Dollar, And A Time For War”, 12/26/2014, https://tinyurl.com/y32yc6o8

In my opinion we are witnessing an Empire end-time struggle of the U.S. dollar hegemony over the world – the result of which may become the end of the dollar as we know it and grave financial pain for the American citizen, or even worse, World War 3.

Geopolitics is dead. Long live geoeconomics. Since the turn of the millennium, the geoeconomics of sanctions and sweeteners has slowly been replacing the geopolitics of diplomacy and war. With U.S. forces actively engaged across a wide swath of Africa and the Middle East, the transition from geopolitics to geoeconomics may not seem all that obvious. But on closer inspection, it becomes clear that military intervention these days is limited to places that lack functioning economies that can be effectively sanctioned. Most of the world, and all of the economically productive world, lies in the sphere of geoeconomics.

That economically productive section of the world, spanning the Atlantic and Pacific basins with North America at its center, incorporates more than 80 percent of global GDP into an interwoven fabric of transnational production networks. In this zone of integration, outright war is obsolete as a tool of foreign policy. Those who suggest that the “great powers” of today might repeat the mistakes of 1914 and stumble into war fail to understand that 21st century economic integration is much deeper than the international trade of the early 20th century. It’s hard to imagine China invading Taiwan when Taiwanese firms employ more than 15 million people in China itself.

There is a growing consensus in the discipline of IR that we are currently witnessing the end of an era (Flockhart 2016; Acharya 2017; Duncombe & Dunne 2018; Peterson 2018).1 The LIO built by the United States at the end of the Second World War, which was later (practically) universalized at the end of the Cold War, is on its last legs, and we are on the cusp of a new, more chaotic orderless era. Of course, the end of the American-led LIO has been hypothesized for some time. The putative decline of the United States coupled with the rise of China and other emerging powers (such as India, a resurgent Russia under Putin, or even the EU’s potential for deeper integration post-Brexit) has led to terms such as post-American world, G-Zero world, and multipolarity (or multi-order) gaining widespread usage in the mainstream coverage of international affairs in recent years (see Bremmer and Roubini 2011; Layne 2012; Zakaria 2008). Such prognostications have accelerated since the election of Donald Trump as President of the United States in late 2016, as his foreign policy – at least rhetorically – no longer seems to care about liberalism or the United States’ position as arbiter of the LIO, rather prioritizing an “America-first” aim (Peterson 2018; Posen 2018).

The problem with these prognostications about the imminent collapse of the liberal international order is that they assume that the defining characteristic of the LIO is liberalism. This article prescribes to the school of thought that the liberal aspect of the United States’ post-WWII international order was more of a superficial framing device rather than anything substantial and that, in reality, the real substance of engineering the order was the promotion, and then maintenance, of the United States’ international primacy (Barnett 2019; Lind & Wohlforth 2019; Patrick 2019).2 This is not to say that the order did not have any liberal characteristics – as Lind and Wohlforth (2019) contend, the order is not ideologically bound and can reflect the prominent ideologies of a given time – nor that the order has not been, on the whole, good for international politics. But, any consideration of the state of the LIO needs to focus on the substantive, not superficial areas. As Stokes (2018, 134) argues, proclaiming the order finished is naïve because it is “highly unlikely that the agency of Trump will overcome the deep structures and path dependencies that incline towards systemic maintenance” and that even if there is some deviation away from the order, “American elites will seek to ‘snap back’ to the status quo ante, given the goods the United States still derives from its hegemony.”

At the core of Deluard's argument is the idea that domestic conditions in the US right now make MMT a bad fit — potentially creating a disastrous situation on a global basis. And that all stems from the US dollar's position as the world's foremost reserve currency.

According to Deluard, the massive amount the US government makes by issuing currency puts it in a unique position. It's allowed Americans the luxury of being able to import close to four times their annual income over the past 27 years without truly having to pay for it.

The drawback is that, in the years since the end of the gold standard, there’s been a significant and growing lack of discipline when it comes to government spending. Before 1971, there was a natural limit to how much money could be printed. New issuances were dependent on the amount of gold sitting in the nation’s coffers.

Today, with the dollar backed not by a hard asset but by the “full faith and credit” of the U.S. government, the federal debt is closing in on an astronomical $28 trillion, which is more than 130% of the size of the U.S. economy.

MMTers opine that governments should not be treated like households, which have to match revenues and expenses. MMTers maintain that governments control their own fiat currencies and therefore can pay their liabilities in their own currency, which they can print as they wish. Accordingly, governments do not need to budget as households or companies do, because they can meet all their obligations by simply printing money. And this, of course, is true. Problems, however, occur when government spending decisions lead printing presses to get out of control, as has happened in Weimar Germany, Argentina and many other Latin American countries, and the Zimbabwes of the world. So if the government simply instructs the central bank to print money whenever it needs it and in quantities beyond what the economy can absorb, one would expect inflation to rear its ugly head — often with catastrophic political and social consequences as in the Weimar Republic, which ushered in the Nazis.

The debasement of the currency also has ramifications on the foreign exchange market. If a country’s central bank prints too much money, it will lead to the devaluation of the currency on the foreign exchange markets. This, too, has many negative consequences, not the least of which is that if imports of goods and services cost more, prices will rise, causing inflation to accelerate. For the U.S., the devaluation of the U.S. dollar would have much more serious consequences. The U.S. dollar is the world’s major reserve currency, and U.S. Treasury obligations are held as reserves in central banks worldwide. A significant dollar devaluation would cause these banks, as well as other foreign institutions and corporations, to dump their U.S. Treasury holdings. The dollar dropped over 6% in 2020, and there is perhaps more to come. Currently, $7 trillion of U.S. government obligations are held by foreigners, and panic-selling to exchange these bonds for other currencies would cause enormous downward pressure on the dollar, debasing it even further. This would have potentially disastrous ramifications in the world’s capital markets.

One of Kelton’s main proposals is to take the task of balancing inflation against resource exploitation (i.e. employment) away from the Fed and give it to Congress. Congress would decide whether there is slack in the economy. It would decide whether to make use of that slack by spending more, without regard for whether that spending is “covered” by taxes. If there were no slack at all and the economy was tightly wound, then Congress would decide whether to mop up the excess dollars by raising taxes. It would do this, of course, by drawing on expert advice, for example from the Congressional Budget Office. But that advice would not be couched in terms of balancing the budget, but in terms of determining the extent to which national resources were fully utilized and inflation was emergent.

The critics are freaked out by two things.

Yet in their recent article in The New Republic, David Adler and Daniel Bessner argue the U.S. should abandon these advantages. In their view, the dollar’s role has encouraged American militarism and should be relinquished to curb such behavior. Dollar hegemony is not without cost, but to renounce it would be a profound mistake. Adler and Bessner’s view neglects the sizable economic benefits the dollar’s role confers on the U.S., as well as its possible use as an antidote to military adventurism. It ignores the enormous good that can be done with deficit spending, much of which has gone to the American military but could instead fund progressive programs. And it elides the inability of the U.S. and its global trading partners to shift away from dollar dominance without creating worldwide financial distress. Adler and Bessner are right that the U.S. has misused its privilege, but Washington should not abandon it; rather, American leaders should seek to transform it.

Generations of American policymakers have been right to protect the dollar’s key currency role for economic reasons. Most notably, dollar hegemony affords the U.S. the ability to run large and prolonged budget and balance-of-payments deficits. The dollar represents 62 percent of allocated foreign exchange reserves, is used to invoice and settle roughly half of world trade, and accounts for 42 percent of global payments. Because governments, banks, and businesses worldwide need lots of dollars, the world market always stands ready to absorb new U.S.-dollar-denominated debt without charging higher interest rates.