The Madness of Modern Monetary Theory
Australians who are concerned with their economic welfare and standard of living must quickly come to terms with Modern Monetary Theory (MMT).
In recent years, a select group of Australian and international academics have advanced MMT as a radical heterodox economic thesis of how an economy can achieve full employment.
For these economists, involuntary unemployment is considered the greatest economic evil that can exist and that this evil can be rectified through a series of economic policies including a ‘Job Guarantee’ program mandated by a ‘currency-issuing’ sovereign government (such as Australia’s Federal Government).
Such a ‘Job Guarantee’ program would require a government to employ all workers who have not been employed by the private sector and to give them work through a public sector job which would pay a ‘living (minimum) wage’.
This stock of jobs offered by such a government through the ‘Job Guarantee’ program (otherwise referred to as the ‘buffer stock of jobs’) would fluctuate given the amount of jobs created by the private sector and consequently, the quantum of ‘involuntary unemployment’ created as a consequence.
On this basis, MMT proponents argue that the government ultimately ‘chooses’ the unemployment rate within the economy. This view differs from the conventional view that the level of unemployment arises from a series of macro and micro economic factors including:
overall economic conditions, including economic and regulatory certainty as well as business and consumer confidence;
economic policies and laws relating to elements such as taxation, employment, energy, transport, infrastructure and intellectual property;
worker skills, expertise and attitudes; and
costs imposed by government regulation and administration.
According to MMT proponents, funding for a ‘Job Guarantee’ program on top of existing expenditure commitments of a ‘currency-issuing’ government could be met irrespective of the required quantum of public expenditure. These governments have no fiscal budget constraints and can therefore sustain continual budget deficits through the printing of ever increasing amounts of national fiat currency (whether in physical or digital form).
MMT asserts that continual budget deficits and money printing will not lead to inflation if the growth in government spending does not grow faster than the growth in economic productive capacity.
Moreover, MMT proponents claim that the value of a functional currency does not come from any underlying intrinsic tangible value (whether it be gold, silver or another tangible commodity), but rather it comes from the Government demanding taxes be paid in that currency which is enforceable through lethal state-sanctioned force.
At the core of MMT is the assumption that government budgets are not equivalent to household budgets as households are constrained by the level of generated income whereas a currency issuing government can never run out of money.
Consequently, MMT proponents claim that a currency-issuing government can never face insolvency or bankruptcy and therefore economic and political emphasis for governments to maintain sustainable public finances is both misguided and redundant.
Traditional economic theories spanning multiple schools of economic thought as well as economic history finds such propositions to be highly problematic, because ever-increasing currency and credit creation leads to significant structural economic imbalances, the loss of monetary purchasing power, runaway inflation, hyperinflation and ultimately currency failure.
Leading proponents of MMT such as Australia’s Professor Bill Mitchell from the University of Newcastle, dismiss existing macroeconomic and monetary economic theories, frameworks and models as ‘fake knowledge’ and content with ‘virtually zero’ value.
Moreover, these proponents reject any comparisons between the potential consequences of MMT and famous 20th and 21st Century episodes of hyperinflation such as Weimar Germany, Zimbabwe or Venezuela as they offer an alternative rationale.
Rather than accepting the proposition that hyperinflation was caused because of reckless money and credit creation resulting in a loss of confidence in the country’s currency, Mitchell argues that in both of these cases, each country experienced a sharp and significant fall in economic output and productive capacity which therefore caused the nominal value of goods and services to skyrocket relative to the existing supply of locally denominated money.
Mitchell, for example, cites that agricultural productive capacity in Zimbabwe fell by approximately 60 per cent under the land redistribution policies of President Mugabe and that industrial productive capacity fell in the German Ruhr region post the first world war resulting from the conditions imposed by the Treaty of Versailles.
However, these arguments regarding declining productive capacity, in and of themselves, cannot empirically justify an annualised inflation rate in Zimbabwe skyrocketing to 231 million per cent or a monthly rate of inflation in Germany of 322 per cent.
Moreover, MMT economists who seek to achieve full employment levels within an economy conveniently ignore potential adjustments to labour market laws and other employment related policies that can simultaneously reduce the cost of hiring workers and thereby increase overall employment levels.
Singapore, for example, is a case study in point, where full employment with an unemployment rate of 2 per cent was achieved under the Prime Ministership of Lee Kuan Yew which did not require publicly funded Job Guarantee programs, continual budget deficits and associated money and credit creation.
These deficiencies coupled with the lack of conceptual robustness or empirical evidence justifying MMT bring into question its validity as an economic theoretical proposition which can enhance practical policy decisions and public policy outcomes.
However, the significance of MMT as an economic theory and potential policy prescription in the Australian context cannot be understated as particular actors from across the Australian political spectrum (including members of Federal Parliament) have come to adopt MMT as an acceptable economic framework.
This may have a material impact as to how policy makers approach the inevitable economic crisis which will engulf the Australian economy when Australia’s existing structural financial and debt imbalances, including record household debt and foreign debt levels, come to a head via a likely international economic shock.
Such approaches may include a greater quantum of monetary and fiscal stimulus involving a dramatic increase in the domestic supply of money in order to fund more Federal Government expenditures.
Such fiscal expenditures may encompass:
small to medium size business incentives;
increased public sector employment opportunities;
further private sector employment programs;
education and training programs; and
increased provision of social welfare measures.
Such measures may provide initial, but short-lived, relief from the impact of the inevitable economic crisis, especially if debt defaults, deflation and unemployment were to ensue.
However, the policy prescriptions offered by MMT will, despite what MMT proponents claim:
reduce the purchasing power of the domestic currency;
create new or further exacerbate existing structural economic imbalances; and
ultimately cause runaway inflation thereby consequentially collapsing the Australian dollar on foreign exchange markets.
For those Australians who wish to avoid these adverse outcomes, it is critical that they take personal economic precautions by ensuring they maintain sustainable household finances and hold sound money such as gold and silver bullion.
They should also actively engage in the national policy debate by scrutinising the monetary perspectives of federal parliamentarians and politically advocate for sound money policies and prudent government finances.
John Adams is the Chief Economist for As Good As Gold Australia