Some observations on MMT: what’s right, not right, and what’s too simplistic

Abstract

Three observations on modern monetary theory (MMT): (1) What’s right is not new—Consolidating public finance, whether it’s held on a balance sheet of the Fed or held on the balance sheet of the fiscal authority, is the appropriate strategy to understand debt burdens and debt sustainability even as the independence of the Fed relative to its role in the fiscal space is a legitimate topic of discussion. The monetary authority has a monopoly over the issuance of its own currency, and in addition the currency issuer gets seigniorage. (2) What’s new is not right—The notion that somehow deficits need to precede tax payments is not necessary. It is not right to argue that public debt is not a future burden, or that the zero lower bound is a natural state. Moreover, sovereigns can default, in numbers of ways, including inflating away obligations or depreciating the currency. (3) What’s left is too simplistic—there is complacency with regard to the exorbitant privilege; there is evidence in auctions of some digestion problems of large fiscal deficits. Importantly, MMT lacks a financial sector, yet financial intermediation and markets are central to the how much monetary accommodation boosts the real economy or asset prices. Boosting the latter could worsen inequality. Finally, MMT does not address choices or quality of fiscal policy, which would affect the real economy, inequality, and asset markets.