Introduction to MMT (Modern Monetary Theory)

What is MMT?

Modern Monetary Theory (MMT) is a macroeconomic theory that focuses on the role of government spending and taxation in the economy. It is based on the idea that a government that issues its own currency, such as the United States government, has the ability to spend unlimited amounts of money without facing the same constraints as a government that uses a foreign currency.

According to MMT, a government's ability to spend is limited only by its ability to tax or borrow, rather than by the amount of money in its treasury. This means that the government can stimulate the economy by increasing spending and running a deficit, without necessarily having to worry about inflation or defaulting on its debt.

MMT also emphasizes the importance of full employment and the role of the government in achieving it. According to MMT, the government should use its spending power to create jobs and maintain full employment, rather than relying on the private sector to create jobs.

MMT has been a subject of debate among economists, and its ideas are not universally accepted. Some argue that MMT could lead to excessive inflation and unsustainable levels of government debt, while others argue that it provides a useful framework for understanding the role of government in the economy.

What are the MMT main disadvantages?

Some economics schools, such as the Austrian school and the Classic school, think that MMT is a dangerous theory that has many disadvantages. Accordingly to these schools, MMT's main disadvantages are:

Inflation: One of the main criticisms of MMT is that it could lead to high levels of inflation, as the government would be able to print money to fund its spending without being constrained by the need to raise taxes or borrow.
Unemployment: Another criticism of MMT is that it could lead to high levels of unemployment, as the government would be able to spend money without having to worry about the impact on the private sector.
MMT states that the best way to have a healthy economy, is to have a government that spends money to estimulate economic growth. However, spending more money to heat up the economy, might not always be the best solution. For example, if the economy is overheating, with high inflation and unemployment, the best solution might be to reduce government spending and raise interest rates to try to reduce inflation, and slowly bring the economy back to full employment.
MMT is a relatively new theory and hasn't been fully test in practice and some economists and politician still don't trust it. No country has ever fully implemented MMT in practice, some countries like USA and Japan, have some aspects of the MMT present in their economies, but not all of it.

What are the MMT main advantages?

It is not fair to say that MMT has only disadvantages, it also has many advantages. Keynesian and Marxist economists believe that MMT is a very useful theory that can be used to solve many problems of the world. According to these schools, MMT's main advantages are:

MMT states that the government should use its spending power to create jobs and maintain full employment, rather than relying on the private sector to create jobs. This is a very important point, because it means that the government can prioritize the population's needs and life quality, instead of prioritizing the needs of the private sector.
Reduce poverty: MMT also argues that government spending can be used to reduce poverty by providing social programs and other benefits to the population.
Correcting market failures: MMT argues that government spending can be used to help on the correction of market failures. For example, when the private sector fails to provide a good or service that is important for the population, the government can step in and provide it. Another example is when a big "crash" happens in the economy, the government can use its spending power to help the population and the economy to recover, it happened in 2008 with the subprime crisis.
Infrastructure: MMT also argues that government spending can be used to build infrastructure, such as roads, bridges, schools, hospitals, etc. This is very useful, because good infrastructure leads to more investments and economic growth. If the government doesn't invest in infrastructure, the private sector will not invest in it, because it is not profitable.

What do people often get wrong about MMT?

Many people do not understand MMT correctly, also, sometimes people use MMT to justify their own political views and biases. This leads to many misconceptions about MMT. Some of the most common misconceptions are:

MMT is a left-wing theory: MMT is not a left-wing or right-wing theory, it is a macroeconomic theory that can be used by anyone. Some people think that MMT is a left-wing theory, because it defends a bigger state and more government spending.
"With MMT the government can spend as much as it wants": This is a very common misconception about MMT. MMT states that the government should spend money to improve the population's life quality and to estimulate economic growth. However, it also states that this spending should be done in a sustainable, responsible and transparent way. This means that MMT isn't simply about spending as much as you want, it is about spending in a way that is good for the population and the economy.
MMT is anti-market: The "market" often doesn't like too much government spending, because it can lead do hyperinflation and high interest rates. However, if the government spendings are done in a responsible way, without causing inflation and high interest rates, the market will not be affected. MMT is also very important to correct market failures in extreme crisis situations.

Conclusion

MMT is a new and interesting theory, it has some disadvantages and some advantages. Besides that, if analyzed correctly, without political bias, it has the potential to solve many problems of the world. As everything in life, MMT is not perfect, has its flaws, but also has its use cases.