The promise and pitfalls of Modern Monetary Theory

Invoking a Keatingism, last weekend Alan Kohler observed that every pet shop galah is now talking about Modern Monetary Theory, essentially governments printing money to pay for their spending, rather than funding themselves by taxation and borrowing. In our pages across a fortnight, we’ve published a range of commentators and policy advocates on the promise and pitfalls of MMT. It’s an idea, not that new, frankly, that has been behind the progressive push for a universal basic income and the Green New Deal in the US. Now this arcane idea is in the spotlight. On Saturday, wealth editor James Kirby even teased out what MMT might mean for your portfolio. “You need to be in front of the curve whatever you might think of the theory,” Kirby advised. That’s why we’ve encouraged debate: to look at an issue in the round, so readers can engage with ideas and be prepared for a world being reshaped by COVID-19.

Kohler is a fan of MMT. He argues JobKeeper and JobSeeker should be turned into a permanent federal job guarantee. Economics editor Adam Creighton, while not denouncing the theory as “bollocks”, reminded readers there was no free lunch. Even “money creation” is another form of borrowing. Drawing on the history of Weimar hyperinflation and examining rising public indebtedness in the time of corona, on Friday Henry Ergas argued the present situation was one in which governments’ ability to spread the cost of shocks between the present and the future has quite properly come into its own. Still, those costs can’t be ignored. “The mere fact governments in the advanced economies are covering a growing share of their deficits by borrowing from central banks — that is, by printing money — hardly makes them disappear,” Ergas noted.

Seizing the MMT moment, Cape York indigenous leader Noel Pearson last weekend made the case for a jobs guarantee, based on the work of local economist William Mitchell, whom we also published. Pearson argued governments should fund real jobs at the minimum wage to all unemployed Australians. Policymakers had used the unemployed as “buffer stock” for 50 years to keep inflation in check. “My people, consigned to welfare and structural exclusion from the real economy in the post-60s era of growing unemployment, have been victims of a public policy choice for which there existed a better and more humane alternative,” he wrote. Like Pearson, we have railed against the scourge of passive handouts and the strife that comes from intergenerational welfare. He is right in celebrating, and pursuing, the majesty of Martin Luther King’s claim in “solving the problem of racial injustice with the solution of universal, colourblind, economic justice”.

Yet Pearson’s is a mammoth, brave proposal, one that would redefine the role of the state. In the midst of the greatest social and economic calamity in 90 years, there has to be more scope for imagination and ambition in our policy approach. Unemployment will be high for years and its misery will fall most on the vulnerable, young people, and those living in remote areas. Make-work schemes such as Community Development Employment Projects have had their day. But there are other hurdles to a full employment scheme as envisaged by Pearson and Mitchell. The cost and administration, regardless of which level of government was in control, would be vast. Work incentives would be skewed in all sorts of ways. What happens to people who don’t want to work or train? Welfare, even with its manifest faults, helps those who fall through the cracks. While the policy edifice is failing indigenous people, a neat solution is a chimera.

MMT certainly has theoretical appeal, even for rational, hard-nosed economists. It’s axiomatic there is no budget constraint in such a model. But we live in a complex, even messy world. Imagine telling a populist National, a clueless Green or a Labor class warrior there is no spending limit. How can you hope to manage the economy? At least it could lead to more candour on budget night: “The four deficits I announce tonight” or even “Australia is back from the dead and still in the red!” The value of MMT, as Kohler noted, is it lifts the curtain on our financial system, if not on policymakers. As an analytical tool the theory has merit. But with printing money in the real world, there is a day of reckoning or just a long stagnation. Our income can never be guaranteed, so we need to earn and pay our way.