PREVIEW： Brokenomics ｜ MMT Basics
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Summary
MT is a modern monetary theory that argues that a sovereign government can never run out of money and can create magic money out of thin air to fund public spending and infrastructure projects. The problem is that it doesn't work at any scale, which is why it is not a good fit for the man on the desert island.
Transcript
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Hello and welcome to Brokernomics. Now in this episode I have been pestered repeatedly by the
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audience to cover MMT. Not something I was wildly enthusiastic about because I tend to like to talk
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about things that I like and MMT is not on that list but nevertheless people wanted to hear about
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it so fine we will dig into that. Because I'm not a proponent of it I did struggle for a while to
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think okay how am I going to cover this one and I have reached out to an individual who has given
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me a bit of back and forth on this one which we'll get into later in this episode so there'll be some
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pushback on my views which will hopefully be helpful. Now let's start off with a little summary
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of what MMT is in a nutshell. So it's basically MMT is modern monetary theory and it's essential
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argument is that a sovereign government that issues its own fiat currency such as the US or
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the UK can never run out of money and it doesn't need taxes, doesn't need borrowing to fund spending
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instead it can just create the magic money out of thin air to fund you know public programs with
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inflation being the main constraint as to where you would hold back. So I think in that little summary
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kind of gives why I'm not attracted to this line of thinking you see I like the schools of economic
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thinking that are logically consistent to any scale you know for the man on the desert island or space
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age economy. Now my thinking is based around increasing the levels of productivity and innovation
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which holds true if you're on that desert island or if you're colonizing Jupiter or whatever it is.
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With MMT the argument is well you know you can just get yourself out of any bother just by
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printing money out of thin air. It doesn't scale logically in consistency consistently at every
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level. It doesn't work for the man on the desert island. If printing money was the solution to your
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problems well you know in that case why not simply make available the PDFs of the 20 pound notes or the
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20 dollar note and then everyone can just print them off at home and you know we can all be rich.
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Obviously that wouldn't work because nobody would be working in the shops or the nobody would be
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producing anything because what's the point you can just print the money off at home so there's no
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point turning up to work. And the MMT is will say no no no you've taken it too far. So why doesn't
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your theory work logically and consistently at any scale? But okay fine. So well let's let's dig into
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their thinking. Now first thing to do I should I should clarify the types of thinkers who look at
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this. So the mainstream economists who are not MMTers who are very much a dying breed at this point
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because basically MMT has seduced the mainstream economists. But the mainstream economists would
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accuse it of under-esclamating the risk of inflation and promoting you know irresponsible fiscal policy
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and they argue that inflation can occur well before you get to full in full employment and that central
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banks not treasury should control demand via interest rates. Like I say they were dying the mainstream
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economist who is not also an MMT is waning at this point. There's the Austrian sort of free market view
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which which which I would describe to and and we just see MMT is repackaged justification for central
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control money printing state expansion. I think it's rife with moral hazards malinvestments
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crippling innovation misunderstanding human nature reality. So so there is that. But I should also add
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there is the MMT purist. Now we have to I think we have to start with those guys in a minute because
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the MMT purist will tell you well no MMT is just a thought exercise it's a logical exercise you're not
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actually necessarily supposed to apply it in the real world and anytime somebody does apply it in the
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real world and it goes wrong and it leads to bad results well they can just say well you know the
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theory is sound but you applied it wrong you didn't do you you you know you you you didn't dismantle
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the old legacy of the fiat based system before you did it. So they could always argue that any time
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that it is attempted and quite provably goes wrong they can just say well you know that that wasn't real
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MMT it was it wasn't pure enough you you you know real MMT has never been tried which is not a line of
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thinking that I would say that I'm amenable to because well we we've heard that before from
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central planners haven't we. So a quick note on some you know notable proponents of of MMT
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Stephanie Kelton she is a former Bernie Sanders advisor and now writes the the deficit myth
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or author of the deficit myth she's a big proponent of it. There's Bill Mitchell
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um an Australian economist um you might have seen him crop up on various well if you're into
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this sort of thing you might see him crop up on various podcasts and kind of stuff you know he
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strongly supports MMT for you know the job guarantee model that it gives. There's a version of him in
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the UK Richard J. Murphy um he um he's done lots of videos in support of MMT. Interestingly enough he's
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somebody I'd like to have a conversation with because we will disagree on absolutely everything
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um but it would be fun to see if we could find any areas of agreement and if we if we do disagree
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if we can dig down into into some of it so if anybody knows Richard you know put put the word out
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I think a chat would be um interesting if not even even if we don't reach full accord uh on all matters
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um and the main person that I should mention is Warren Mosler so he was he's a hedge fund an
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American hedge fund manager uh wealthy successful guy and maybe 30 odd years ago he wrote a he wrote
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a paper on MMT he didn't call it MMT we'll come to that uh he wrote a paper on this thought exercise
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and within its own framework it is it is logically consistent so we you know we're you know we have to
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talk about that um yeah so this paper written 30 odd years ago and he called it I believe soft
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currency economics now let's just sort of take you through the point the key points that he makes
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in that paper so we're at least starting with a a fair reflection of what the MMT purists would say
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the theory sells effectively on this so they start off with MMT alone recognizes the US government
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uh or the UK government and its agents are sole suppliers um of demand for the payment of taxes
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that currency itself is a public monopoly and that US government levies taxes in US dollars
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and US dollars to pay those taxes uh could only originate from the government so the government has
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to sell goods or services or assets so that so the economy has to sell um good services and assets
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to the US government uh or it will not be able to pay its taxes so so the key the key here is
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with MMT you create the tax liability and you said to people well you must pay because because we've got
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monopoly on force we've got the guns so here's a liability you have to pay it then people need to
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go out and find a way to get that currency okay how are they going to do that well the government is
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going to inject this money into the economy by buying things therefore putting money into this economy
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and then at the end of it you collect the taxes so this is fundamentally different from the way that
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the mainstream economists would think about it which is the the government raises the taxes and then it
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spends it on things that it likes whereas MMT is no no no you've got to put the tax liability right at
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the beginning and the tax collection right at the end and then you'll get your functional economy in
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that bit in the middle where people are like oh no I've got a tax liability how am I going to pay it
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all the way over here I know I'll do stuff and then what stuff can I do oh I'll do the stuff that
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government has just printed some money for and I'll do that and then I get the money and then I can pay
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the taxes yay pretty much the gist of it so according to the white paper the ramifications of this is that
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the government and its agents you would say from inception they spend first and only then can the
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taxes be paid so this is and this is the direct contrast with the old mainstream economic models that
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states that the government must go out and get taxes uh and then spend it um and then issue
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liabilities for the next year and collect them and spend them and it also recognizes the US government
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needs to get dollars to spend uh but rather instead it is a driving force that makes the US government's
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dollars uh viable uh by creating that liability and demanding that you must pay them because otherwise
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you will well go to jail lose your house you know whatever whatever method that you want to use for
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um backing up your tax liability demand that you you put out there so I'll read a little bit from
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the introduction of the white paper to give you a flavor of the kind of things that these people are
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thinking about in order to um why they felt they need to construct this worldview so uh
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I quote here um in in the midst of great abundance our leaders promote privation we're told that
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national health care is unaffordable while hospital beds are empty we are told that we cannot afford to
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hire more teachers while many teachers are unemployed and we are told that we cannot afford to give away
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school lunches while surplus food goes to waste for example thousands of young men and women are
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constricted constricted into the armed forces when were women constricted into the armed forces I don't
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know but that's what he wrote um the country oh as he uh the country would receive the benefit of a
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stronger military force however if those new soldiers had have been home builders the nation may then
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suffer a shortage of new homes the trade-off is basically a reduction in the welfare of the nation
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uh if the U.S. decides that it puts more value on building homes than it does bombing wherever it is
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it wants to bomb this week um however if the new military manpower comes not from people who are
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building houses but from individuals who are unemployed well there's no trade-off now you've
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just received uh you know net benefits the cost of conscripting home builders for military service is high
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the real cost of employing the unemployed is negligible so you can see the focus here it's all about okay
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well look we've got these unemployed people no economic system that I'm aware of has ever achieved
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full employment maybe slavery did um no economic system has achieved un uh full employment uh we want
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full employment because that's what we consider to be the key metric here not like me who thinks
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productivity and innovation are the key metrics but they think full employment is the key metrics
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um well why don't you just go out and employ the unemployed seems simple really doesn't it the
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idea that people can improve their lives by depriving them of surplus goods and services contradicts both
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common sense and any respectable economic theory so I guess I'm doing an unrespectable economic
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theory then um when there were white when there is widespread unemployment resources as there are today
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in the United States trade-off costs are often minimal yet these are mistakenly thought of as
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unaffordable the deficit doves and deficit hawks who debate the consequences of fiscal policy both accept
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traditional perspectives of federal borrowing both sides argue that to accept the premise of the federal
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government borrows money to fund expenditure they only differ in their analysis of the deficit's effect
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it is believed that federal deficits undermine the financial integrity of the nation
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policy makers have been grossly uh misled by an obsolete monetary understanding consequently we face
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economic underperformance now at this point I should probably get into the um the buckaroo
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experiment so um you know the theory sales would say okay yes yes you know you know don't don't
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blame us when MMT goes wrong in real life because um you know it is a thought experiment it is a
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logical exercise but nevertheless they did come up with a real world application that fitted the
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function of what MMT was trying to achieve quite neatly and quite efficiently and they often hold this
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up as their prime example of look MMT can work so the example is um some you know I forget which
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university some university they're convinced to do this MMT based experiment and they've been running
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it for uh maybe 25 years at this point something like that I mean the original paper is a good 30
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years old um so this this buckaroo experiment so so what's the buckaroo experiment so basically what
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you do is you is you go to a university and you um remember how they say you've got to create the
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liability first and the tax collection at the end and then the stuff that happens in the middle
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that's when you inject the money and the whole thing works so what's the buckaroo experiment well
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it's you go to these students and you say you have a liability um at the at the end of this semester
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or a term or whatever end of this year at the end of this academic year you have to turn in a hundred
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buckaroos and if you do not hand in a hundred buckaroos well you won't get your um you won't get
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your grades so the university has real taxing power here it has it has a taxing monopoly because
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you know it's a credible threat you know you want your grades I mean otherwise you wouldn't be there
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and you know if you don't pay in your hundred buckaroos well what are you going to do so you
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so it creates a a genuine and viable need to go out and get these buckaroos how do you earn a
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buckaroo well you earn a buckaroo by spending an hour of work in a nominated institution so you know
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they list a whole bunch of non-profits um and the local hospital and things like that so you do an
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hour of work down the local hospital and you are issued a buckaroo do that a hundred times and you
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know there you go you've got your was it was it 10 times something like that you it might have been
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10 times so you you you collect your 10 buckaroos you pay them in uh before the end of the academic
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year and therefore you become eligible for your grades so um in order to you know so they created
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the liability collection comes at the end and in the meantime they are going to inject these buckaroos by
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buying uh the government in this case the university by buying services off the unemployed
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unemployed scroungy students uh in exchange for turning them from unemployed people to people
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who are doing something which they would say is useful in one of these hospitals now um already we're
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starting to to deviate somewhat from from my world view on this because you know they would say well
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look um a hospital is a useful place okay uh i don't argue with that if you are um if you have some
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malady or you know you're giving birth or you know whatever it is um hospitals are genuinely useful
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um places for that sort of thing and i can well imagine that if you're running a hospital
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and one student comes and knocks on the door and says and and and the setup with this is that they'd
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never turn anyone away so people turned up to do an hour of work they would always accept them
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so let's say one student turns up at this hospital and says i'm here to do uh whatever four hours of
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of work in exchange for four buckaroos i don't doubt that it's quite straightforward to find something
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for that able-bodied youngster to do um when there's one of them you know you you can find somebody who's
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doing something who's shifting boxes around or mopping something or whatever it is and you can
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say look just go and help that person now even if even if it's nothing more than going changing the
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mop water every now and again or or just being an extra pair of hands moving some boxes of surgical
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gloves around or whatever uh what what what happens if if if half the university were to turn up at the
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same hour what if what if 2 000 students were to turn up at 9 a.m on saturday morning at this at this
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hospital can you have you got useful work for them to be doing well the the mnt um purists don't
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consider that the the idea of the work being useful or productive or in it in any way is is is outside
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the scope of this the the sheer fact that people um are unemployed and they could be employed on
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something assumes that that adds value now let's say that this this hospital employees to say let's say
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it's a small hospital and it employs 200 people if 2 000 extra students turn up one morning
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does that make the hospital 10 times more productive you know is is somebody who was going to be in a
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coma for 10 days now going to be in their coma for one day um is a pregnant woman going to deliver in
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0.9 months instead of nine months you know i don't think so the the assumption is that is that you can just
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add a unit of labor to a thing um and then that thing becomes more productive but anyway okay so
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anyway this this buckaroo experiment um like i say it's run for 25 years um the other interesting thing
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you find is that the buckaroos themselves become tradable as you as you'd expect actually so when
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they started the experiment people would work extra hours and earn extra buckaroos more than they
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needed and then they would trade them and they started off trading them for five dollars per buckaroo
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so some people were happy to work and earn and other people were like yeah no i'm not doing that i'll
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just i'll just buy the buckaroos off a fellow student um and so what that did is it and they ended up
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with a with a tax liability of whatever it was let's say it was a thousand buckaroos across
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10 students or you know 100 students they actually issued um something like 1200 buckaroos
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so effectively they had a deficit of 200 buckaroos so the mmt is look at that and say well look we
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generated money out of nothing we ran a deficit of 200 buckaroos um what's not to like i mean
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everything worked you know the taxes were paid uh work was done unemployment was pushed down
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you know in the purest mmt world well the whole experiment has just worked wonderfully um and then
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as time rolls on um i think like i said this has been going for 25 years at this point a buckaroo is
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now trading at 25 dollars per buckaroo and they would say well look you see there's been no inflation
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because one buckaroo is the reward for one hour of work and that has remained consistent for 25 years
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there has been no inflation well yes there might have been inflation of the dollar during that period
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uh because you know one buckaroo used to be worth five and now it's worth 25 but um you know that's um
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you know that that's not within the buckaroo system that that's just the dollar inflating over there
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so uh hopefully that gives us an idea of what the uh the purists are are arguing in their point and
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the purists will often get uh upset with the with the applied mmt is who is basically everybody else
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apart from the original theory sellers and a few other sort of theory sellers on this they
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are not abstractists they generally the the the real world the other people that i talk about
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the real world mnt is what they like to do is well turn it the other way around they don't like there
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being limits on government spending and deficits because they believe ultimately that that government
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is the solution to problems whereas somebody like myself of course would say that government
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is the cause of um many many if not most problems that we have today and therefore more government
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is a bad thing whereas the an mmt proponent uh you know will tell you that mmt is a good thing
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right so with that out of the way let's turn our attention to uh the applied mmt is which is becoming
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um the uh i would i would say it's it's well on its way to becoming the majority of the mainstream
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view at this moment and look at each of their arguments so what's the what's the first key
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tenant of mmt uh monetary sovereignty a country that issues its own currency us dollar uk pound
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it can't go bankrupt in its own currency it could always create more money to pay domestic debts
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now my response to that is okay yes but in doing so that you're debasing the money itself
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add to that the cantillion effect which basically says that the closer you are to the money creation
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the better you off are as a result of it which is why wherever you inject this money
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so in the current system money is created basically the nexus between government and the financial
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services and that's why government and financial services continue to grow but wages are a long way
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down the list of who gets new money when it flows into the system therefore wages always lag the
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growth in government and financial services which as a result means that um well i mean it used to be
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that your granddad could buy a you know a four-bed home and support a family and a stay-at-home wife
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whereas you cannot even afford yourself let alone let alone children if you would like to see the full
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