Abstract
The objective of this paper is to examine the foundations of Modern Monetary Theory (MMT) by building upon the individual papers in this issue of the Atlantic Economic Journal by Mark Skousen and Patrick Newman. The foundations of MMT include five cornerstones. First, sovereign governments that are the sole supplier of a national currency (e.g., United States) can issue as much currency as they want, have unlimited ability to fulfill promised future payments, and cannot go bankrupt. Second, legislation enables spending while taxes neither place a limit nor specify government spending (earmarked taxes would be an exception). Third, a sovereign government can borrow as much as it likes in pursuit of laudable public sector projects or fiscal policy programs to manage the economic cycle. Fourth, a huge and growing national debt is beneficial to the economy as long as inflation remains contained. A fifth feature, the blogosphere, shaped the emergence of MMT largely in the absence of technical vetting and critical empirical examination. The popularization derived for MMT through the blogosphere will have a profound effect on U.S. politics and economic policy in the 2020s and 2030s. The foundations of MMT are refuted by the work of public finance theorists David Ricardo, James Buchanan, Robert Barro, and Alberto Alesina.
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Notes
For the composition of federal debt and its ownership, see Committee on Responsible Federal Debt (2017).
See the general discussion in section 8 of Fisher (1930).
The American Action Forum (2019) estimates that if the Green New Deal (GND) is enacted, every American household would pay $65,000 per year to foot the bill and the total price tag could reach $93 trillion in the first ten years alone.
The U.S. PAYGO budget rule requires that new legislation that affects revenues and spending on entitlement programs, taken as a whole, does not increase projected budget deficits. Operationally, it requires that discretionary spending must be funded with revenues that are currently available rather than borrowed. It does not apply to discretionary spending (not controlled through the appropriations process).
Alesina has produced a constant stream of supply-side analyses of fiscal consolidation (e.g., Alesina et al. 2014).
Leland B. Yeager:(1924–2018) is known for his contributions to the monetary-disequilibrium theory, monetary constitutions, and sound money. Yeager (1956, p. 438) contends that depressions often arise from “an excess demand for money, in the sense that people want to hold more money than exists.” According to the American Institute for Economic Research (2018) announcement at Yeager’s passing, Yeager argues the only way for people to increase their real money balances to their desired level is to either (a) sell non-monetary assets in exchange for money or (b) curtail their spending (Burns 2018). Yeager concludes the adjustment to disequilibrium is characterized by a long and excruciating “crying down” of prices.” Yeager argues, “an economy-wide excess demand for money shows up not as specific frustration in buying money but as dispersed, generalized frustration in selling things and earning income.” His work was critical of the Keynesian diversion into fiscal policy solutions and the dismissal of monetary explanations for depressions. Yeager advocated free market monetary alternatives and a strict separation of the state and money. Yeager advocated replacement of government-issued fiat monies with a monetary unit that would be defined by an unchanging bundle of commodities selected to ensure the stable purchasing power of money over time. See also Yeager (1962).
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Brady, G.L. Modern Monetary Theory: Some Additional Dimensions. Atl Econ J 48, 1–9 (2020). https://doi.org/10.1007/s11293-020-09654-6
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DOI: https://doi.org/10.1007/s11293-020-09654-6