The famous joke about Modern Monetary Theory is that it is not modern, not monetary, and not a theory. Which is quite funny. And yet it’s gone from being an esoteric position held by an assortment of oddballs to becoming a fairly established rationale for fiscal dominance and increasingly prevalent.
I am open to the idea that there is an important insight contained within MMT that hasn’t been fully captured by the mainstream of the economics profession. This is in part based on the fact that I don’t fully understand John Cochrane’s fiscal theory of the price level but suspect that it is helpful, and in part because I am a heterodox economist myself and don’t ignore ideas just because they’re badly espoused.
Indeed, I’ve recently engaged with several MMT advocates on X/Twitter and now feel as though I have a good understanding of the appeal and the sources of confusion.
MMT rests on elaborate wordplay.
For example,
“Taxes don’t fund a state with its own central bank and fiat currency. They allow the state to buy goods and services without causing inflationary pressures in the wider economy by depriving the non govt sector spending power.”
In other words,
“Unless you want inflation, government spending requires taxation.”
“Taxes do not pay for government spending.”
Sure, but,
“Taxes are required to offset the inflation that would otherwise be caused by the central bank money creation used to fund that spending.”
Sometimes, MMT provides a concise and appealing simplification. Others, a lengthy and seemingly sophisticated exposition. But a laser focus on the economic concepts reveals that it’s word play. Jonathan Bartlett has called this "technically true but practically useless" (see here for more).
MMT says “we won’t run out of money”. But “we might have massive inflation”. Which is pretty much the same thing, if we think in terms of purchasing power.
After all, inflation is a tax. It’s a tax on money balances. And our cash holdings are wealth. So inflation is a wealth tax. As “Mr Red Eagle Trader” has pointed out,
