The Flaws of Modern Monetary Theory

The Flaws of Modern Monetary Theory

The simple version of MMT says that governments can spend without regard to income and can ‘print’ money to cover spending. This is like saying ‘You know that long history of countries who had economy trouble because they printed money to cover spending and debt… let’s do that again but this time it will work.’

But really what MMT is saying if you take out the extremist point of view is that debt is not a bad thing. They believe in spending then taxing and this works because governments can easily raise debt and if the money is spent well, it is an investment that will increase taxes. IE build new roads, houses, and businesses will be built there, build tourist attractions, and tourists will come and spend money. Increase spending on education, and the economy will have a skilled workforce.

This is in contrast to neo-liberalism where you tax then spend believing that spending has no relationship to revenue. The problem is that you can just cut taxes and then refuse to spend money. Every time a government does this, their economy struggles.

An Economic Mirage: The Flaws of MMT

That so-called “modern monetary theory” (MMT) does not describe or accurately model observed economic reality. Insofar as any model, economic or otherwise, does not accurately both reflect and predict reality, it is wrong. While it is true that “all models are wrong but some are useful”, there are limits to model utility in direct proportion to accuracy of conformance to observed reality.

The MMT model is entirely built to serve a political aspiration: near unlimited spending by a national government on anything and everything that collectivists want, despite vehement denials to the contrary by MMT advocates.

Unfortunately for that aspiration, there’s no such thing as a free lunch. Horrific demonstrations and object lessons of what happens when governments debase or devalue their currencies by ‘monetizing deficits/debts’ or ‘spending money into existence’ abound in economic history, and we would all do well to avoid repeating the mistakes of those governments thereby avoiding those particular paths to national economic ruin and societal impoverishment. The experiments have been run, and the disastrous results are known.

The Price of Ignoring Economic Realities

“It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong.” — Richard P. Feynman

It is crucial to understand that every economic theory, no matter how well-intentioned or seemingly sophisticated, must conform to observed reality to be useful. MMT fails this test, as it does not accurately model the economic realities faced by nations today.

The historical evidence is clear: when governments print money without the corresponding economic growth to back it, inflation, currency devaluation, and economic collapse often follow. The currencies of such nations lose value, and their economies suffer a significant strain.

Alternatives to MMT: Fiscally Responsible Policies

Instead of relying on MMT, a more fiscally responsible policy approach should be adopted. This involves balancing budgets, ensuring that government spending matches or is supported by adequate tax revenue, and investing in long-term economic growth through sensible investments in infrastructure, education, and research and development.

A focus on fiscal discipline and economic prudence is not merely a return to traditional economic thinking but a pragmatic approach to sustainable economic management. By following tried-and-true economic principles, governments can ensure a stable and growing economy, rather than risking the unpredictable and often disastrous outcomes that have accompanied the application of MMT in the past.

Conclusion

In conclusion, while the intentions behind MMT might be noble, the practical applications in real-world economies have proven detrimental. The evidence from economic history shows that relying on MMT can lead to economic instability and societal impoverishment. It is essential for policymakers to focus on sound, proven economic theories and policies that adhere to observed reality.