To answer the second question first, MMT matters because it’s starting to trickle down from academia into serious politics. The theory is finding supporters on the ascendant Left-wing of the US Democratic Party. Indeed, some see it as the means by which a progressive administration might fund the Green New Deal (which carries a ten trillion dollar price tag).

Suggested reading

Just how mad is the Green New Deal?

By Peter Franklin

As for the first question, it might be helpful to draw a parallel between economics and physics. The theories of the two disciplines can be expressed in the form of complicated equations. Physics theory has a much firmer foundation in reality than economic theory, but in both cases one can rearrange the maths and re-chop the logic to arrive at bold new interpretations. MMT is to economics what general relativity, quantum mechanics and string theory are to physics – a fundamental reordering of the theoretical framework.

In conventional economic policy, governments raise money through taxation and borrowing (or by turning on the real and metaphorical printing presses). They then spend that money. However, Modern Monetary Theorists say that’s the wrong way of looking at it. Because a sovereign nation ultimately creates its own currency, it need never default on any debt denominated in that currency. It can, therefore, create all the money it needs – the only limit is the risk of inflation (caused by too much money chasing the finite productive capacity of the real world economy). The purpose of taxation in MMT is not to raise revenue, but to control inflation – i.e. by taking away the ability of individuals and organisations to place demands on the economy’s productive capacity.

This is how Matt Breunig sums it up in a piece for the People’s Policy Project:

“What MMT advocates do is assert that actually all government spending is funded by money creation. Taxes and borrowing may look like ways the government gets cash to spend, but in fact all they do is delete money.”

Though MMT supporters tend to be on the Left, so are the theory’s most vociferous opponents – of which Breunig is one:

“…it has become clear to me that the bulk of MMT discourse is not really about what the best policy instruments are for maintaining price stability and debt stability, but rather about using word games to make people believe that the US can have Northern European levels of government spending without Northern European levels of taxation…

“The real point of MMT seems to be to deploy misleading rhetoric with the goal of deceiving people about the necessity of taxes in a social democratic system.”

Of course, there’s always a distinction to be drawn between ideas in their pure form and the grubbier uses that they’re put to. In this respect, conventional Left-wing economics (or Right-wing economics, for that matter) is no less unsullied than MMT. For instance the most prominent calls for higher taxation to fund higher spending have focused on squeezing the super-wealthy. This conveniently distracts from the fact that Scandinavian-style welfare states depend on a heavily-taxed middle class.

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The irrelevant debate over the top rate of tax

By Peter Franklin

So let’s leave the politics aside, and ask whether MMT has any merit as a way of looking at economic policy. I believe that it might just do, since we live in a world where some goods and services are becoming ‘post-scarce‘. As an example of what this means, consider the case of software: once an app has been developed, the cost of producing more copies of it is negligible – it is demand that is constrained, not supply. Technologies like artificial intelligence and robotics have the potential to shift more and more of the economy into a state of effectively inexhaustible productive capacity.

As I’ve noted previously, a decade of extremely loose monetary policy has notably failed to unleash inflation, suggesting an increasingly flexible supply-side response to the demand we throw at it. Indeed, given demographic trends, it’s the demand-side we should be more worried about. In the most aged societies, like Japan, the struggle is to stop deflation, not inflation.

If this is the direction in which we’re headed, the rise of MMT, if nothing else, prompts us to reconsider some basic assumptions.

For instance, in all advanced economies there is a fiscal authority (typically a finance ministry) that controls the level of public debt through fiscal policy like taxation, borrowing and expenditure; then there is a monetary authority (typically a central bank) that controls the price level (i.e. inflation) through monetary policies like interest rates, quantitative easing and money creation in general.

The revolutionary implication of MMT is that this should be the other way round – the central bank providing the government with money it needs (simply by creating it), while the finance ministry manages inflation through its powers over taxation and expenditure.

Unlike the generalised impact of interest rates, tax and investment based interventions can be targeted at particular sources of inflationary pressure. For instance, if land prices are shooting up then an appropriate response might be the imposition of land value taxation to dissuade speculators (plus more funding for the regeneration of derelict sites).

In an economy where some forms of supply are becoming superabundant, but others remain constrained (and thus become opportunities for speculators and monopolists), using a scalpel, not a cosh, to tackle inflation makes evermore sense.

One doesn’t have to agree with where MMT came from, or its use and abuse in contemporary politics, to see its relevance to a changing future.

Suggested reading

Why 'enough' is the most dangerous word in economics

By Peter Franklin

“The wealth of the top 1 percent increased by an average of $4.9 million over the past decade, while the average holdings of the bottom 99 percent declined by about $4,500. Wealth inequality is now the highest it has been since the Federal Reserve began collecting this kind of data in 1983.”

Breunig, however, has a solution – a sort of sovereign wealth fund that he calls a “social wealth fund”:

“Here’s how it could work. The federal government would create and run a new investment fund, and issue every adult citizen one share of ownership. The fund would gradually come to own a substantial and diverse portfolio of stocks, bonds and real estate. The investment return that the fund generates would be paid out to each citizen in the form of a universal basic dividend, and the shares would be nontransferable to preserve the institution’s egalitarian purpose.”

I’m sure we’d all like a piece of that, but how much would it be worth?

“If, over time, the social wealth fund came to own one-third of the country’s wealth, that would allow it to distribute an annual dividend equivalent to about a third of the total returns on invested capital each year, which represents about a tenth of net national income. In 2016, based on the latest available census population figures, that would have meant around $6,400 paid to all adults or $8,000 paid to every person between the ages of 18 and 64.”

That’s not nearly enough to live on (and why exclude children?), but nevertheless a substantial sum – one that might provide people with greater confidence to come off welfare, switch jobs or start their own business.

It might also give governments a new way of managing the economy – by upping the “universal basic dividend” at times of low consumer confidence, and dialling it down when the economy shows signs of overheating.

Breunig notes that the “key challenge in building a social wealth fund is not how to run it once it has been created, but how to bring assets into the fund in the first place.” Well, yes.

His ideas for capitalising the fund include the following:

“…the transfer of existing federal assets like land, buildings and portions of the wireless spectrum into the new fund… increases in taxes on capital that affect mostly the wealthy such as estate, dividend and financial transaction taxes and the creation of a new type of corporate tax that requires companies to directly issue new shares to the social wealth fund on an annual basis and during certain corporate moves such as initial public offerings, mergers and acquisitions.”

In other words, he wants to tax the wealth of the individuals and corporations that have already got a lot of it. If we are to introduce or increase wealth taxes, then a social wealth fund might be the best way to deploy the revenues.

There’s always something a bit iffy about liquidating assets to pay for current expenditure (retirement being an obvious exception, though one that applies to individuals not nations). There may be a case for greater redistribution of wealth, but it ought stay as wealth.

One could argue that using the proceeds of wealth taxation to reduce national debt would be a better and simpler option. After all, getting rid of a liability is equivalent to acquiring an asset – and a lot less fiddly.

Unfortunately, the hard work of debt reduction is easily undone. A government that pays the political price of spending restraint may be replaced by one that pushes debt back up again to pay for bribes to the electorate.

A social wealth fund, based on an equal share for every citizen, would be much harder for governments to raid – both politically and, if properly established, legally.

UnHerd's Charlotte Pickles is currently preparing an audio doc on taxing wealth. Here's her piece from last week on the topic...

Is it possible to design a tax that targets the really wealthy?

By Charlotte Pickles

However, his analysis does beg a rather big question: if easy money is so damaging then how have those responsible — first and foremost, the central bankers — got away with it for so long?

Actually, this is two questions:

• how have they got away with it politically; and
• how have they got away with it economically.

Firstly, the politics. Douglas Carswell is against independent central banks on principle. Monetary policy decisions should be a matter for democratically elected politicians, not appointed technocrats that can’t be voted out. Fair enough. However, in respect to easy money let’s not kid ourselves that this is something our politicians would have done any differently. Indeed, they’ve actively done their bit to pump cheap debt into the economy – for instance, by loosening the regulatory framework (until the resulting financial crisis). And I’m afraid that we, the people, haven’t exactly been out on the streets demanding a return to monetary and fiscal discipline. We like cheap debt, we like low taxes, we like high spending.

Of course, you can’t have low taxes and high spending without lots of borrowing. The deeper that a  nation goes into debt, the greater the pressure to keep interest low enough to keep the cost of servicing and refinancing that debt within affordable bounds. With enough pressure, monetary policy (i.e. the setting of interest rates) becomes subservient to fiscal policy (i.e. financing budget deficits). This state of affairs is known as fiscal dominance and it is generally reckoned to be a bad thing. Writing for City Journal, the economist Bill Watkins explains why:

“For years, fiscal dominance existed on the fringes of economics, important mostly to economists thinking about fiscally irresponsible countries such as Argentina and Brazil. Italy, too, has a long record of monetary accommodation of deficit spending. There’s a reason none of these countries has achieved its economic potential—fiscal dominance has led to bad outcomes, including ever-increasing inflation, reduced trade, declining consumption, and, eventually, political instability.”

Keeping a lid on inflation (and everything that stems from it) is, in normal circumstances, the top priority of monetary policy and thus the setting of interest rates. Fiscal dominance typically distorts the order of priorities, dragging interest rates below the level needed to contain the inflationary beast. Because voters like low prices even more than low taxes and high spending, they tend to punish governments that let inflation rip.

In previous decades, ultra-low interest rates would have resulted in ultra-high inflation; but in recent years, they haven’t. Which brings us to our second question. The main reason why the central bankers have gotten away with things economically is that they’ve been operating in a disinflationary environment. Indeed, in some countries – such as Japan – the primary threat is outright deflation (i.e. negative inflation).

If inflation isn’t a threat (or at least a much smaller one than it used to be) then some might ask whether fiscal dominance matters any more. Needless to say, it does matter, because, as Douglas Carswell explains in his article, rock bottom interest rate policy (and its scuzzy mate, quantitative easing) can wreak havoc in many other ways.

Perhaps the most fundamental question is why the money markets put up with such low interest rates. After all, the rates set by central bankers act as a floor on market rates, not a ceiling. Commercial lenders have every incentive to loan money at the highest rate that borrowers are willing to pay. Like all prices in a free market this is subject to supply and demand. Therefore if interest rates are so low it is because there is too much money on offer to borrowers who have too little use for it (other than overheating the housing market).

If western economies were bursting with exciting opportunities in productivity-boosting enterprises, then the competition for investment capital would be more intense and interest rates would be higher. The fact that rates have been so low for so long is a sign not just of bad policy, but also of a failing economic system.