What’s Wrong with Modern Money Theory (MMT): Macro and Political Economic Restraints on Deficit Financed Fiscal Policy

by: Thomas Palley

October 26, 2020 |
Working Paper,
Journal Article

>> Read Journal article in Review of Keynesian Economics
>> Read pre-print working paper

Abstract

The essential claim of MMT is sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained. This paper analyzes the macroeconomic arguments behind that claim and shows they are suspect. MMT underestimates the economic costs and exaggerate the capabilities of deficit financed fiscal policy. Those analytic shortcomings render it poor economics. However, MMT’s claim that sovereign governments are financially unconstrained is proving a popular political polemic. That is because current distressed economic conditions have generated political resistance to fiscal austerity, and MMT fits the moment by countering the neoliberal polemic that government lacks fiscal space because it is akin to a household.

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