Your tax bill arrives. In your simple-minded way, you think your tax is your share of what the government needs to pay for its programs. And if it needs more, you can always lend them some money by buying a government bond or two.

Sheesh – how ignorant can you be?

Nah – your tax is how the government controls inflation, obviously. You thought that was the Reserve Bank’s job? Dear oh dear, how passé.

Tax is simply a tool to make you use dollars. You have to use dollars to pay the tax, don’t you, otherwise you’d be using cowrie shells at the supermarket and the government wouldn’t have its monopoly on what works as money.

But the thing is, you don’t need to bother paying your tax. The government doesn’t really need your money, or your bonds. It can pay for everything simply by creating more money.

In fact, you have everything bass-ackwards. The government doesn’t need to raise money to be able to spend, as you foolishly think. It’s the other way around. It makes the money through its spending.

The reasons for Modern Monetary Theory

Modern Monetary Theory (MMT), from which you have just gained these new insights into your tax payment and bond holdings is, to put it mildly, a strange thing. But it’s gained some decent ground. While it’s still a long way from mainstream economics, there are professors who teach it. You can buy an MMT textbook. There are US presidential hopefuls who’ve run on it (not a high bar for credibility, I appreciate).

Why? It’s partly intellectual. Some economists genuinely believe the incumbent economic theories are wrong, outmoded, or both, and that’s not entirely silly. Our central banks, for example, despite following the economic orthodoxies, haven’t been able to get inflation up to where they said they would.

It’s also partly the economy. We’ve had some nasty business cycles – the global financial crisis (GFC), COVID – and people are looking for more or better tools to fight them with. While it’s not essential to the core of MMT, the theory tends to come bundled with a government money-financed job guarantee for all, which has its attractions in difficult times like today’s.

And it’s partly political, as adoption of any economic theory can be. Ironically, Mrs Thatcher hijacked a previous incarnation of monetarism in the 1980s, whereas this latest strain leans more leftwards, with a star role for expansive government spending.

If your taste runs to doctrinal monetary policy disputes, by all means go on the web and research whether it’s bank deposits that create bank loans or it’s loans that create deposits. Economists have been wrangling over these monetary arcana for yonks. My finals exam in 1973 featured the question ‘What is money?’ and, despite the nerdiness of such arguments, they’re important. Whether it’s combatting cholera or the GFC, the world advances on the back of better theories, and you don’t want to bet the economy on fundamental misdiagnosis.

The case against MMT

For mine, I haven’t been shifted from the mainstream. But even if I’m wrong and MMT is indeed an intellectual breakthrough, I’m still sceptical. Here are my two big doubts.

If buying whatever level of government spending you fancy and sending the bill to the central bank is indeed feasible, why haven’t governments been doing it forever? Why have we ever had a day with an unemployment rate above zero, when MMT can wave its wand and magic it all away?

“Why have we ever had a day with an unemployment rate above zero, when MMT can wave its wand and magic it all away?”

MMT people would likely respond that governments never realised they could, being under the false impression that they needed to avoid too much debt. But it’s straining belief that if this was indeed feasible, someone wouldn’t have given it a go by now.

Another question is an eventual threat to public trust in money. People base the acceptability of using modern ‘fiat’ money on its reliability as a store of purchasing power. News that an MMT government has the printing presses running hot in the central bank basement isn’t exactly comforting about the ultimate status of the dollar in your pocket.

MMT advocates say that’s a cheap shot, that MMT wouldn’t lead to the hyperinflation of 1920s Weimar Germany or present-day Zimbabwe. If inflation threatened to rise, because MMT spending had pushed the economy beyond full capacity, an MMT government would raise taxes, taking purchasing power out of the economy and reducing the scope for too much money to chase too few goods.

But we’ve heard “trust us on inflation” before. That’s why so many countries, including Australia and New Zealand, ended up taking the central bank away from the pollies and giving the job to technocrats. For now at least, I don’t recommend giving it back.

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