In the climax of the Real Housewives of New York’s sixth season, Aviva declares “… the only thing artificial or fake about me is this!” Proceeding to throw her prosthetic leg across the table. In addition to being iconic, this also provides context to the debate between the economic mainstream and the advocates of the fringe-left Modern Monetary Theory (MMT). With the publishing of their textbook Macroeconomics in February, the prosthetic leg of theoretical debate was well and truly thrown across the table.

First off, who are our limb lobbing theorists? MMTers claim to merely be the true adherents of Keynesian compared to the ‘bastardised’ version that proliferates today. The big names in the field are Stephanie Kelton, Bernie Sander’s economic advisor for his 2016 campaign, and William Mitchell, an Australia economist who co-authored Macroeconomics. However, papers on the theory date all the way back to the 40s.

They argue that countries that use and issue their own currency can issue as much debt as they like. The central bank just generates the cash necessary to ensure the government meets its requirements. But wait, you might say, inflation is a thing. MMTers believe that inflation, not debt and deficits, is the only constraint on government spending. Once inflation becomes problematic, the government can contract the money supply through reduced spending and higher taxation. In this respect, an MMT government can be regarded as being responsible for pseudo-monetary policy with taxation taking on the role of interest rates while the central bank is relegated to the role of a big money printer.

The theory, of course, is much more complicated than this but its advocates do layout some interesting thoughts. They justify the removal of an interest rate mechanism by arguing that the true natural interest rate is zero. Monetary policy tinkering, they argue, has no real effect on the economy as investment decisions are based on growth potential rather than the cost of money. They argue monetary policy only benefits the investor class. (Do you see what I mean what I say left wing?). They also raise the fascinating point that inflation is not just a result of the money supply, but also the overabundance of price-setting power of big firms. The breakup of large companies, they argue, would enable inflation to be partly competed out of the economy. One of the theory’s more accepted ideas is the notion that, contrary to popular belief, banks do not create money from loans, but rather, offer loans as they are demanded. Deposits are just the proceeds from these loans. This firms the basis of the argument that lending restrictions would be able to further combat inflation.

Its detractors, however, regard MMTers as a bunch of left-wingers trying to justify an inability to budget – Magic Money Tree is a popular nickname on Wall St. They argue that currency markets might have something to say about governments deciding they have limitless money. A loss of investor confidence could see devastating devaluation. The rebuttal to this is that MMT is merely the natural progression to the gold standard. Without the requirement for cash to be convertible to gold, governments should use money to control the economy, rather than kowtowing to it.

Its detractors, however, regard MMTers as a bunch of left-wingers trying to justify an inability to budget – Magic Money Tree is a popular nickname on Wall St. They argue that currency markets might have something to say about governments deciding they have limitless money. A loss of investor confidence could see devastating devaluation. The rebuttal to this is that MMT is merely the natural progression to the gold standard. Without the requirement for cash to be convertible to gold, governments should use money to control the economy, rather than kowtowing to it.

The other prominent counterargument to MMT is that the government cannot be trusted to manage the economy in a timely and apolitical manner – after all, there is a reason why monetary policy is kept strictly separate. The answer to this is the use of the automatic stabilisers such as a national jobs guarantee, an idea that has gained traction in America. Such a program serves to stabilise the economy by absorbing unemployment and ensuring some demand. Importantly, it does not need legislation beyond its foundation, automatically acting when the economy enters a downturn.

Unfortunately, in economics, much like a fight between New York socialites, it is near impossible to tell who is ultimately right. Without an effective way to compare economic theories in practice, policy will be determined by who is powerful, not who is right. In this way Aviva maybe was on to something. Maybe sometimes you just have to throw your leg and see where it lands.


-Liam Falconer

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