A possible answer to Covid-19: is it time for Modern Monetary Theory?

As the corona crisis continues and States spend huge amounts to support the economy, many are worried that public debts may become too burdensome. In a new book, Stephanie Kelton – a prominent advocate of Modern Monetary Theory (MMT) – challenges orthodox economy and explains that governments do not need to worry excessively about spending.

As there is no limit to the amount of money that can be created by central banks, MMT proponents such as Stephanie Kelton argue that governments can spend as necessary on all desirable causes – ranging from fighting off economic collapse to green energy. Kelton explains that governments do not have to worry about paying for it with higher taxes or increased borrowing.

Kelton strongly disagrees with the statement by Margaret Thatcher that “The State has no source of money other than the money people earn themselves. If the State wishes to spend more, it can do so only by borrowing [the people’s saving] or tax [them] more”. This, however, Kelton sees as a fundamental misunderstanding. Since States issue currencies and can create unlimited amounts of money, the state’s budget is fundamentally different from that of a household or company, who do not have the power of money creation. The State, as the issuer of the currency, cannot go broke. Thus, the story is told backwards: the government does not need citizens’ money, but citizens need the government’s money.

One of Kelton’s key points is to invest now to prevent future inflation. As long as the money that is newly created is used productively, there is little risk of inflation. These investments should be aimed at what benefits citizens. “Imagine what opportunities would be available", Kelton asks, "if we let go of the ‘How will you pay for it?’ question and focused on how to use our resources to serve the public good”. Thus, in her recent book The Deficit Myth, Kelton explains that “Deficits can be used for good or evil. They can enrich a small segment of the population, driving income and wealth inequality to new heights, while leaving millions behind … Or they can be used to sustain life and build a more just economy that works for the many and not just the few”.

MMT clearly represents a political ideology which favours greater government involvement in fighting economic inequality and climate change, with Kelton having acted as a senior economic adviser to Bernie Sanders’ 2016 and 2020 presidential campaigns. Critical reviews of The Deficit Myth therefore come from the opposite political spectrum. As one reviewer writes regarding what he sees as the book’s fundamental problem: “Regardless of what happens to the ‘price level,’ monetary inflation transfers real resources away from the private sector and into the hands of political officials. If a government project is deemed unaffordable according to conventional accounting, then it should also be denied funding via the printing press”.

Be this as it may, The Deficit Myth is a timely publication that serves as an inspiration today and for a post-corona world.