How To Turn Old-School Economic Theories Into Forward-Thinking Economic Strategies

11 mins

How To Turn Old-School Economic Theories Into Forward-Thinking Economic Strategies

Modern Monetary Theory

Why Bernie Sanders loves MMT

3 mins

A favorite of politicians like Bernie Sanders and Alexandria Ocasio-Cortez, Modern Monetary Theory (a.k.a. MMT) is a pretty radical departure from other economic theories. It takes Keynesian theory to the next level, arguing that a government can borrow as much as it likes to pay for its spending.

Unlike Friedman, MMT doesn’t care much about monetary policy or interest rates. In fact, it thinks the natural interest rate should be zero and anything above that is just a nice bonus for investors. Instead, MMT is concerned with government spending: whenever something needs to be paid for (like the series of green energy projects proposed in Ocasio-Cortez’s “Green New Deal”), the central bank should just print more money, use it to pay for the projects, et voilà: unlimited money 💸

Really?Well, not quite. When people hear about MMT they often freak out about spiraling, Venezuela-style price rises. Borrowing more money only leads to more economic activity if it’s put to productive use. Otherwise, extra cash chasing the same goods and services could spark inflation.

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But MMT fans have a potential solution: a guaranteed job program. Anyone that needs a job would have one, which should mean enough workers are in the labor force to deal with the increased demand created by more money in the economy. Plus MMT can reduce most taxes because government spending will now be funded by borrowing, not taxation. This would allow the government to use the taxes that are left to stop inflation from ever getting too carried away – a simple tax hike should slow price rises by reducing people’s take-home pay🤞

MMT is a brave new frontier for economics – it’s never really been put into practice. The closest example would probably be Japan, where national debt is 250% of the economy. Japan’s got problems with slow growth, but inflation is the least of its worries – in fact deflation (decreasing prices) is common there.

Anything as tradition-smashing as MMT will attract detractors, and there are some pretty vocal ones against this radical economic theory. Critics say governments can’t be trusted to go through the politically unpopular process of raising taxes to control inflation, and worry that reckless spending might become a new normal. But with people increasingly sick of the economic status quo, MMT offers a new alternative.

The history of economics has been one of constant change – theories come into vogue, something goes wrong, and then we move on to the next one. Who knows: maybe MMT is just another in a long line of these theories… or maybe we’ll finally find the one that works?

In this Pack you learned:

🔹There’s more than one way of interpreting economics, and debates about which way is “right” have raged for centuries

🔹Classical economics argues for the power of the invisible hand, advocating for free markets

🔹Keynesian economics is more keen on government intervention, wanting them to spend their way out of recessions

🔹Monetarism thinks we’ve got to use interest rates to control the money supply and inflation

🔹Modern Monetary Theory is a new way of thinking that suggests we can fund government spending by printing more cash

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