Modern Monetary Theory Isn’t a Panacea

5 mins read

Modern monetary theory, which holds that the government can massively increase spending without worrying much about the deficit, has recently been thrust into policy debates by progressive members of Congress. Some members have advocated for MMT to shape how Congress thinks about making a budget for the federal government. Rep. Alexandria Ocasio-Cortez (D-NY) has said the idea that the government doesn’t need to offset spending with raising revenue should be “a larger part of our conversation.” Advocates for MMT aren’t limited to freshman representatives; one of the theory’s leading advocates, Stephanie Kelton, has served as an economic advisor to Sen. Bernie Sanders (I-VT). As appealing as we find dramatically expanding the scope of government with few consequences, modern monetary theory is not supported by economics. Even if it was, implementing it according to experts’ recommendations isn’t politically feasible.

Adherents to MMT posit that a government that issues its own currency can’t go bankrupt because it can always print more money, so policymakers shouldn’t be hugely concerned about a government deficit. Mainstream economists generally agree with modern monetary theorists that deficits can be healthy under certain economic conditions. Modern monetary theorists, however, take this perfectly reasonable position and leap to conclusions that are unsubstantiated by economic research. For example, advocates of MMT argue that the government can undertake large spending increases, such as single-payer healthcare, without increasing tax rates because they believe that MMT provides so much fiscal flexibility. Going even further, MMT advocates for as big a budget as necessary to reach full employment, without giving much thought to the effects on the deficit.

The only consequence of massively increasing government spending, MMT adherents claim, is that inflation might increase because the government would be funding itself by printing money. In this case, modern monetary theorists believe that taxation is the appropriate instrument for reducing inflation.

Even though a massive expansion of government spending is an attractive idea, MMT doesn’t align with economics. Large deficits can negatively impact the economy. Analysis by economists at the Brookings Institution has shown that deficits have a negative effect on long-term economic growth because investors may lose confidence in the government to control inflation. Temporary deficits can be perfectly healthy in recessions, when the economy needs fiscal stimulus to get to full employment, but these economists argue that permanent deficits lead to concern about inflation and discourage investment.

Modern monetary theory is also completely impractical to implement from a political standpoint. Adherents to MMT recommend that taxation be the instrument to control inflation, so we’d have to trust Congress to raise taxes when prices are increasing rapidly. Since tax hikes during periods of inflation would be extremely unpopular because people would have to contend with rising prices and less disposable income, it doesn’t seem likely that Congress would follow through. Currently, one part of the Federal Reserve’s mandate is to control inflation. Since the Federal Reserve is an independent agency, it doesn’t face the political hurdles Congress would face when it comes to controlling inflation. If the government were to adopt MMT, the Federal Reserve would give up its control of inflation because it would have to print money to finance fiscal policy. We shouldn’t hand over control of inflation to a political body lightly because Congress shouldn’t be trusted to make politically unpopular decisions to address inflation.

Modern monetary theorists largely agree with mainstream economists about the role of government, such as that the government should do more social spending and that government deficits aren’t necessarily cause for concern. MMT, however, takes these well-reasoned positions to an extreme that is politically and economically infeasible.

Laura Wilcox

Laura Wilcox '20 is from Alexandria, VA studying economics and math. She is passionate about central banks and monetary policy.


  1. Having supported MMT for about ten years, i.e. since long before the recent surge in interest in it, my verdict on the above article is “not too bad”, though I have a couple of quibbles, as follows.

    “Analysis by economists at the Brookings Institution has shown that deficits have a negative effect on long-term economic growth because investors may lose confidence in the government to control inflation.” Bit like saying “Fire-fighters should err on the side of squirting INSUFFICIENT water on a fire rather too much else everyone might “lose confidence” in fire-fighters ability to squirt the right amount on the fire.”

    Keynes said “Look after unemployment and the budget will look after itself”, which pretty much ties up with what MMT claims: i.e. the amount of extra government spending in a recession should be whatever deals with the recession without exacerbating inflation too much.

    As for “have a negative effect on long-term economic growth”, well enduring a level of unemployment which is PERMANENTLY higher than it need be won’t do much for “economic growth” either will it?

    “…these economists argue that permanent deficits lead to concern about inflation and discourage investment.” Well now Laura Wilcox may not have noticed, but there’s been a deficit nine years out of ten since WWII. In fact there is a simple quasi-mathematical reason for that which is this. Assuming the stock of base money and government debt is to remain constant relative to GDP in the long run (which it actually does, more or less), then the base and debt will need to be CONSTANTLY topped up, and there’s only one way of doing that: a deficit. That’s for two reasons. First inflation is constantly eating away at the real value of the debt. Second, economic growth (in real terms) requires the debt and base to expand pari passu.

  2. “Modern monetary theory is also completely impractical to implement from a political standpoint.”
    That is so funny because MMT is a description of how government finances work at the present and also describes how comercial banks work. MMT is the only description of how money is created, destroyed and distributed. I have started to read about MMT when i read from Australian economists Steve Keen how mainstream economists are not allowed to discus money, banks and debt. That was so crazy to read since you would think that economists study money but when i thought about my micro and macro classes that was so true.
    MMT is the only school of economics that study money, then there came Positive Money which is just desire to change how money presently works.
    MMT does not need implementing because it is how money works for last 100 years since most of the world came off of Gold STandard. But still it describes only sovereign currency country finances which is only 6-7 countries n the world. USA, UK, Canada, Australia, Japan and Switzerland. Those are only sovereign currency countries in the world. EuroZone is also but not individual states in EZ.
    So, only those 6 countries practice MMT. I say practice for last 100 years. there is no need to implement nothing new, just to use it properly. MMT major political agenda is to break population from the mythology about money so that population can not be scared into believing lies of insolvency of social Security, Welfare programs waste and how US can not afford any program that Congress wants. US can afford as many wars as it wants but no welfare or GND from AOC is official mantra that politicians and media are presenting and scaring people into silence.
    Political problems are different from ability to fund or affordability or usefulness of such programs. Mythology about money is part of the problem where politicians can lie as much as they want.
    Again, economists are not allowed to discus money, only MMT describes how money works. No need to implement it.

  3. Has anyone suggested it is a panacea?

    I might argue however that an electorate and governing body literate in MMT would soon stop asking questions like “How are we going to pay for it?” and instead start saying “Why should we have this?” A discussion about healthcare would no longer be interested in the budgetary affects but simply what is the best way to deliver health care to all people. Without the budgetary argument, conservatives have no leg to stand on regarding health care. They can’t argue that using private insurance is cheaper, its clearly not. They can’t argue that a threat of bankruptcy for working class families simply because somebody acquires a life threatening and expensive illness increases their freedom. They can’t argue that insurance companies add value to our healthcare, they are pure extractors.

    The only thing they have that keeps their base scared of single payer is budgetary. “Its too expensive!!”, “It’ll bust our budget!”, “Our grandkids will be burdened with the debt!”. The fact is most Americans hate health insurance companies more than the govt, believe basic health care IS a right and and a humane thing to provide for everyone. The only question is how to get there. Unveiling the ruse around our monetary system and economics discussions in general would be very bad for our rulers and that is why the daily vehement attacks on MMT. It simply presents what money is, what sovereignty means, what a trade deficit is, what a foreigner holding a treasury bond means. It lays bare all the lies and hysteria surrounding the supply siders and Chicago school acolytes…… and that is terrifying to them…… and it should be…. the end of their monopoly on the conversation is coming.

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