The Core Problems with MMT
The core POLITICAL notion behind modern monetary theory (“MMT”) is to use budget deficits to achieve needed and proper government spending levels, when raising taxes on income and wealth are blocked politically, realizing that higher public debt, unlike budget restrained private debt, is not an economic problem in most circumstances for a nation with its own sovereign fiat currency for the many reasons MMT explains. However, there are limitations on MMT.
These principally include the following:
First, the accounting system of the US government and its institutions are mistakenly set up and assume there is an income or budget restraint applicable to the federal government, just as there is one for households. Many mistaken arguments against MMT are based on this mistaken convention and a misunderstanding of MMT. Except by this convention, government expenditures are not tied to tax and bond sale receipts, but too many do not understand this argue against MMT from within the confines and law governing the convention.
Second, there is the prospect of imminent of inflation, the true, real and natural constraint on expenditures by the federal government under MMT. One political thought favoring MMT is to use public debt — when raising taxes on income and wealth are blocked politically — to mobilize idle resources and promote economic development and growth, but this increases the public debt which is problematic for many bond holders who are subject to an income or budget constraint. Strong use of MMT is problematic if inflation looms, e.g. China and India. Inflation in China is over 4.7 % unofficially and about 6% in India or when there is seriously collapsing GDP.
Third, a key aspect of MMT is the realization tax revenues and bond sales or deficits need not be used to finance government expenditures in excess of receipts. The credit of the US government is sufficient to do that alone, again subject to the limitation of inflation. But this is a quantum leap too far for the economic illiterate who think within the inapplicable accounting convention that requires expenditures to equal receipts. This hurdle of economic ignorance blocks not only understanding but change and broad implementation of MMT.Fourth, how well a country’s public debt is managed and its credit rating, along with how it is held — by the government itself in what percentage? and by who else? are factors WITH THE ACCOUNTING CONVENTION that have a bearing because those the government must deal with are bounded by an income or budgetary restraint and view these factors as important in decided to hold US bonds. China’s public debt has a double A minus rating and is managed better than many, but less well than US public debt. How the economy is fairing matters, too, for similar reasons.
Fifth how politically stable or instability or poorly run a government has a bearing, for the above reason, in both an MMT and a conventional world. When Ted Cruz tried to induce default on the public debt, a key rating agency lowered the government’s credit rating on the public debt of the US, citing poor government and political instability. But this is willful sabotage of the process in both worlds.
Sixth, a misunderstanding of or disbelief in MMT coupled with a desire to create trouble for the idea so as to block its use or implementation is also a key problem with, or more correctly, for MMT. It is a limitation on it as well. Ignorance can be debilitating here. Fortunately, the US government departments use credit to make many of purchases they do all ready and often they go over budget guidelines thereby applying MMT notions sub rosa. The overages can be financed from the government’s accounts at the fed in the form of new money, yet still staying with the accounting convention. But we are coming closer.
MMT has the problems I point out here, but there it is pressure to adopt it in part and compromise the income must equal expenditure rule or convention because higher taxes on income and wealth are unreasonably blocked by republicans in congress who are largely clueless about all this.