MMT does work, no really - in Argentina

Modern Monetary Theory does come under a certain amount of attack from time to time. Largely, we think, because of the intellectual heft of those who promote it so assiduously over here. But it is necessary to point out that the base precepts do in fact work. Even if, as here, the example is from Argentina:

The 54-year-old has managed to lower stubbornly high inflation and produce a budget surplus by making large budget cuts, including on spending for services for people with disabilities.

MMT tells us that government can - does - just print money to spend. The limitation upon this is when there are no spare resources to motivate into use by doing so, that being the point at which inflation arises. The answer to the inflation is to reduce that money supply created by that extra spending - all is thus copacetic. Now there are those who insist that the money supply reduction should be done by extra taxation but that’s a policy choice not an innate part of the theory. The theory simply says that the budget surplus is required - that’s what retires that extra money back into the central bank computer, the surplus - and that’s what kills the inflation.

In the Argentine example the previous administration very definitely did turn on that printing press. In the months running up to the election there was the usual orgy of pre-election spending then boosted by the decision that income tax no longer applied. We assume that was because the polls were looking bad for the incumbent administration so let’s crank up the money printer go brrr in order to regain power. For, obviously, that the incumbent administration retain power is a very, very, important part of economic management. No. Really.

So, what does MMT tell us about how to deal with said inflation? It’s very clear on this, the money printer needs to be set to rrrrb and that extra money sucked back out by running a budget surplus. Whether that surplus is gained by more tax or less spending the theory is agnostic about - it’s the surplus that matters. The insistence upon MOAR TAX is a policy choice by our local intellectual hefties, not a part of the base theory.

So, what has Sr Milei done? He’s produced a budget surplus by reducing spending, money supply decreases and the inflation goes away. Modern Monetary Theory works.

Now, in this country we've inflation double target, we’re running a budget deficit of 4 and 5% of GDP, so what does MMT say we should be doing? We should be running a budget surplus, set that money printer to rrrrb. MMT is agnostic on whether that’s from tax increases or spending reductions. We have our preference of course, indeed we’ve a little - and getting longer - list of spending cuts. We also tend to think that 45% of GDP is not an amount that can be squeezed out of the British people. But that’s all policy and preference. MMT really does say that right around now is when we should be running a budget surplus.

We look forward to all the Modern Monetary Theory experts agreeing with us. For they will, right? It is actually a theory, not just an excuse for more government, right?

Tim Worstall