Modern monetary theory (MMT) has come a long way. From its inception in the 1970s as a heterodox theory taken seriously only by a handful of economists, to becoming the weapon of choice for political candidates with expansive expenditure plans such as Alexandria Ocasio-Cortez, MMT is drifting into the mainstream, and the Covid-19 pandemic is accelerating its progress.
Its proponents argue that given that countries issue their own currency, they could pay for their expenses by issuing more of that currency. This increase in the money supply – popularly known as “printing” money – would continue until inflation is high and problematic, or is expected to be. At that point, it should be controlled by raising taxes.
Many, including the Federal Reserve’s chairman and BlackRock’s chief executive, fear that this could lead to uncontrolled inflation. But with quantitative easing (QE) programmes growing across the OECD nations due to the pandemic, the main implications of MMT would probably be not so dissimilar to those that this new wave of QE will cause.
Critics also point at the experiences of Argentina, Zimbabwe and Venezuela, where the monetisation of deficits caused severe hyperinflation. What they miss is that in these cases, corruption, political instability and an inability to borrow in their own currency played an equal, if not larger, role.
As a historic new QE programme is deployed in Britain, only time will tell if inflation takes off after the crisis. If that is not the case, MMT will deserve at least serious consideration by mainstream economists.