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The MMT Myth

In today's environment of ultra-low interest rates and massive monetized fiscal deficits, the dangerously naive policy prescriptions offered by Modern Monetary Theory are being realized more or less by default. Whether central banks will be able to regain control after the current crisis is an open question.

FRANKFURT – Many people are now proclaiming that the COVID-19 pandemic has provided proof positive that Modern Monetary Theory (MMT) is the only way forward for governments. To the uninitiated, MMT probably sounds extremely sophisticated – even scientific. Its representatives speak as though they have developed a new economic paradigm comparable to the Copernican Revolution in astronomy. Yet behind the sleek title and confident policy pronouncements lies a message that is as simple as it is dangerous, particularly now that governments around the world are spending freely to keep their economies afloat during the pandemic.

According to MMT, governments can spend what they want on whatever they want until full employment is achieved, and without ever having to worry about the financing, because the central bank will provide the money by simply operating the printing press at no cost to the government. Whether this contribution to economic thought even deserves to be called a new “theory” is debatable, considering the unoriginality (and banality) of its central concept. Indeed, the ideas about government spending date back to the economist Abba P. Lerner’s concept of “functional finance” in the 1940s. MMT has merely tacked on a federal job guarantee.

The first publications on MMT – such as Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, by the economist L. Randall Wray – appeared several years ago, and were met with near-unanimous criticism from economists across the political spectrum. Nonetheless, the debate about MMT continues, primarily because it has been picked up by politicians like the former UK Labour Party leader Jeremy Corbyn and US Senator Bernie Sanders.