I have been carefully avoiding writing about Modern Monetary Theory (MMT) in the expectation that the nostrum would soon fall from fashion. However, its popularity has been steadily growing, especially among the US Democratic Party.

A common criticism of socialists is that they never tire of finding ways to spend other people’s money. The beauty of MMT is that money is magically created by as much debt issuance as necessary, with no negative consequences. The appeal is understandable.

Fake Remedy To Economic Problems
Like those offering perpetual motion machines, the elixir of eternal life, or the secret of turning base metal into gold, we must be naturally suspicious of gurus promising endless prosperity. It is not as if plenty of smart people have failed to give the issue lots of thought over the past couple of hundred years.

Part of the problem in analysing MMT is that it means different things to different people and the theory seems to be permanently shifting. In its most benign form, MMT argues that because interest rates are very low, the government can freely borrow money to restore the economy to equilibrium. Rising inflation would be a signal to pull back on spending. This is really just Keynesian economics in a liquidity trap and not wildly controversial, although implementing suitable policies proved politically very difficult in the years following the Global Financial Crisis.

In a more aggressive form, MMT argues that the government has access to an endless pot of money, due to unlimited debt issuance which can be financed by the central bank. The funds can be used to guarantee a job for all. Then add to that universal Medicare, better infrastructure, free university tuition and higher pensions, and it is easy to see the attraction.

The idea that there is no limit on government borrowing has an unhappy history, with recent examples in Zimbabwe and Venezuela showing how it can lead to spiralling inflation. There are also plenty of cases of developed economies where excessive budget deficits led the currency to fall and produced a surge of inflation. It is broadly correct to argue that a government has unlimited ability to borrow in its own currency, but it is badly incorrect to argue that excessive debt creation has no adverse consequences.

A more practical problem for America is that MMT implicitly believes that politicians can pass budgets based on an objective assessment of the state of the economic cycle. That seems hard to believe in the US – remember that purely for political gains, the Republican Party blocked fiscal expansion under President Obama when it was completely justified by the weak economy.

Wrong Answer To The Wrong Question
Who would you trust to adopt responsible economic policies? Technocratic central bankers with a clear legal mandate, or self-interested politicians with an unlimited budget?

MMT is the wrong answer to the wrong question. The wrong answer, because it is a false remedy. The wrong question, because the challenge facing the US economy is no longer how to boost demand.

The MMT debate relates to a problem that no longer exists. As a target, MMT aims at full utilisation of resources in an economy. However, this is already the case across most of the developed world. The US unemployment rate of 3.8% is close to a 50-year low and labour markets are nearly as tight in Europe and Japan.

At the moment, some US Democrats are advocating MMT, but what they really seem to want is more public spending on services and less inequality. This could be addressed by changes to the tax system and welfare spending, without relying on MMT’s voodoo economics. The US government’s revenues are a far-smaller share of the economy than in Europe (31% of GDP compared to 46%) and with the budget deficit already at alarming levels after the tax cuts of 2018, there is a good case for higher taxes.

As the title puns, ultimately the theory is empty (eMMpTy). However, this evidently does not mean that it will soon disappear. If we move towards 2020 with a realistic chance of the Democrats sweeping the presidency and Congress, then we could expect USD and the bond market to come under pressure if MMT is still in the spotlight.