Before the pandemic, a set of ideas called Modern Monetary Theory (MMT) was coming into vogue among left-leaning economists and policy-makers. According to them, governments didn't need to collect taxes to pay for their spending. They could simply print the money and then use taxes and other regulatory controls to bring down inflation if the economy became overheated.
Some of these MMT champions argued that, at least in part, this is how the U.S. government already worked. With the Federal Reserve using quantitative easing to rebalance the economy after the Great Recession, the central bank had effectively monetized the debt. When billions of dollars pouring out of the Fed didn't lead to a spike in inflation, many saw this as even more evidence that the old ways of thinking about debt and spending were severely outdated.
Then something happened that forced MMT onto a wider stage.
A once-in-century pandemic spread across the world, and no less than President Donald Trump found himself signing off on the largest stimulus package in U.S. history, which included direct checks to individuals, business loans, and massive, continued support from the Federal Reserve.
Even more bizarrely, in political terms at least, this was not considered a sudden swing to the left for Trump. Indeed, Democrats accused the former president of not going far enough, and put forth their own proposals with sticker prices that might have been unimaginable even a decade ago. That's how much the pandemic changed the discourse around public spending.
But will this new budget-mindset survive a relative return to normalcy? The Biden administration is confronting this question head-on as it attempts to pass an ambitious legislative agenda to drive the economic recovery. With a $1.9 trillion stimulus package passed and a $2 trillion infrastructure bill on the docket, lawmakers are once again debating the scope and scale of federal spending, and to what extent it has to pay for this spending with new taxes.
MMTers — as proponents of the theory are sometimes called — would argue there is no need to raise taxes, but this idea can be hard to swallow for anyone who was already invested in the budget politics of the past, in which spending, debt, and taxation were supposed to align.
As MMT gets a taste of how it might fare in the post-pandemic world, here's a primer on its basic arguments, history, intellectual originators, and critics.
The History of MMT
The intellectual history of MMT is long and winding, with roots in older ideas such as functional finance (the idea that governments should direct spending to meet goals, such as taming the business cycle or achieving full employment) and chartalism (the idea that money itself originates with state activities such as taxation and spending, rather than emerging organically out of markets) — but it's more recent resurgence can be tracked back a few decades.
An ex-Wall Street trader named Warren Mosler helped popularize the basic ideas behind MMT in the early 1990s after linking up with a group of non-mainstream economists through an email list that included the likes of L. Randall Wray and Bill Mitchell, who would also become sort of the founding fathers of the theory. The group started to put their heads together and synthesize their respective viewpoints, coming up with what today we call MMT. Wray and Mitchell even wrote a textbook.
Mosler's 1993 essay "Soft Currency Economics" cuts right to the nub: "The validity of the current thinking about the federal budget deficit and the federal debt will be challenged in a way that supersedes both the hawks and the doves. Once we realize that the deficit can present no financial risk, it will be evident that spending programs should be evaluated on their real economic benefits, and weighed against their real economic costs."
In other words, nobody had it right, not tax-and-spend liberals or penny-pinching conservatives.
One reason why MMT began to gain purchase in the following decades is that these characterizations were simplistic to begin with. Republican presidents such as Ronald Reagan and George W. Bush were unapologetic deficit-spenders, while Democratic presidents such as Bill Clinton and Barack Obama had to fight tooth-and-nail over every spending package.
The apparent contradictions of this pattern reached a head with Donald Trump, who even prior to the pandemic was pushing the federal deficit and debt to new heights, hitting nearly $1 trillion in 2019. This is when a new generation of MMTers started to make their case.
Rep. Alexandria Ocasio-Cortez endorsed the idea back in 2019 as a way to pay for things like the Green New Deal and Medicare-for-all.
Stephanie Kelton, author of The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy, also began doing regular interviews on the topic, becoming the de facto face of the modern MMT movement. She served as an economic adviser to Sen. Bernie Sanders during his presidential campaign, and has since advised the Biden administration as well.
Earlier this month, Kelton penned an op-ed for the New York Times titled Biden Can Go Bigger and Not 'Pay for It' the Old Way on his infrastructure package.
The piece urged Biden to look beyond old ideas about fiscal responsibility (i.e. matching up spending and taxation evenly) and look to what exactly the economy needs in terms of support.
"The key to responsibly spending vast sums of money lies in carefully managing the economy's real productive limitations," she wrote. "Just as my son's Lego projects are limited by the amount of bricks we have bought for him, we can't squeeze more goods and services out of our economy once we've made use of all available resources."
In addition, she noted, don't worry about inflation until the economy is humming again.
MMT in Practice
So how does this all actually work?
First, it's worth noting that MMT is not a monolith. There are considerable disagreements over major points of the theory, but there's also quite a bit of overlap. We'll keep it simple here in the interest of clarity, but further reading will likely bring up a number of fascinating debates.
To start, one of the underlying ideas of MMT is that the economy should be managed by fiscal policy rather than monetary policy
Deficit-spending is currently funded by issuing bonds, which are bought by the private sector and in some cases by the Federal Reserve. Technically, the government could issue infinite bonds, as long as the central bank steps in to buy them when private demand is down.
In light of this reality, some have accused MMT of being no more than a reflection of what's already happening, but supporters say this misses the point. In their view, issuing bonds shouldn't be necessary. The government can just print the money.
Some MMTers argue that issuing government bonds serves the role of keeping interest rates down in the private economy. Either way, the end result of both approaches is that lawmakers— rather than the central bank — determines how much money should be put into the economy, based on their priorities, whether that's full employment or a transition to a green economy.
According to this view, the only limiting factor then is inflation, which the government regulates with taxation, capital controls, and other regulations on corporate profits and rents.
Naturally, these conclusions might be hard to swallow for mainstream economists who tend to believe that hyperinflation is always around the corner.
MMT has many critics, of course, and they come from both sides of the aisle.
Look no further than the current Federal Reserve Chair Jerome Powell.
"The idea that deficits don't matter for countries that can borrow in their own currency I think is just wrong," Powell said in testimony before the Senate in 2019.
As MMT would, in effect, take away power from the central bank, his skepticism makes sense, but the disagreement runs deeper than one institution defending its turf.
Right-wing critics from the Cato Institute and Mercatus Center fundamentally reject the idea of shifting monetary power from the central banks to lawmakers and the whims of party politics.
Left-wing critics, such as writer and economic analyst Doug Henwood, have accused the theory of being limited to rich countries that can easily print their own money without economic repercussions on the world stage. "But less privileged countries have to worry about foreign investors dumping their bonds and driving down the value of their currency, which would jack up interest rates and inflation," Henwood wrote in the socialist journal Jacobin.
However much MMT specifically is embraced or even name-checked, one of the basic ideas behind it, that governments should play a more active role in the economy, appears to be gaining widespread acceptance — although the success or failure of Biden's $2 trillion infrastructure could provide a window into the budget politics for at least the next four years.