Modern Monetary Muddle
The debate over the much-touted and much-criticized modern monetary theory (MMT) is the murkiest I have ever been involved with, short of secondary school debates about the existence of God. But I finally see it clearly. Incredible as it may sound to nearly all observers – once they learn what MMT says – its basic economic tenets are agreed to by most knowledgeable economists. The dispute is not really over its core economic model; it is over fears of its perceived political implications.
Neither MMT’s critics, however, nor its advocates have the temerity to dwell on the ultimate source of those fears.
What does MMT say?
Stephanie Kelton is the author of the book, The Deficit Myth, which was published June 9. Her book has generated a great deal of interest and controversy, and has recently been a New York Times bestseller.
Dr. Kelton is a professor of economics and public policy at the State University of New York at Stony Brook and was chief economist on the U.S. Senate Budget Committee (serving the Democrats) from 2015 to early 2016. She was an advisor to the Bernie Sanders 2016 and 2020 presidential campaigns. (I interviewed Professor Kelton in an Advisor Perspectives podcast that you can listen to here.) In her book, she explains the MMT basics. I will now give a brief synopsis of them.
To put it in a very small nutshell, MMT rejects the (TAB)S model of the federal budget in favor of the S(TAB) model.
So what are the (TAB)S and S(TAB) models?
The (TAB)S model says that Taxes And Borrowing precede Spending. That is, for the federal government to spend money, it must first collect taxes or borrow to cover the spending. Most people can relate to this model because it is similar to what enables a household, a business, or a state or city government to spend. You can’t spend the money if you don’t have it. First you have to borrow it – or earn it – or if you’re a state or city government, collect it in taxes.
But the federal government’s budget doesn’t work like a household budget. Dr. Kelton, when she was chief economist for the Democrats on the U.S. Senate Budget Committee, discovered that none of the senators who sit on this powerful committee seemed to realize that. The difference is that the federal government, unlike a household, or a business, or a state or city government, is the issuer of the currency, not just a user of it.