We’ve tested Modern Monetary Theory and it doesn’t work
As with all theories the big test is when we run the idea against reality. It’s always reality that is right. Doesn’t matter how glorious the theory it’s the theory that fails, not the universe.
So, Modern Monetary Theory says that we can just print to spend. That, in fact, we do just print to spend. The limitation is not money, nor tax revenues, but real resources in the economy. From that we derive the point that when we’ve printed enough money to be using all the resources then more money printing will turn up merely as inflation. This works both ways - more inflation means we’ve printed too much money.
The solution here is known too. Simply tax more in order to remove that excess money from the economy.
That is the theory, we’ve not misrepresented it. Well, does it work?
Quantitative Easing was printing lots of money to spend. We got inflation. Therefore we should do Quantitative Tightening in order to remove that excess money and so stop the inflation. You can see there’s a strong correlation between these two ideas. In fact, at one level, they’re the same idea.
So, we can test MMT by how well QE/QT is working. And the thing is the political system is insisting, nay shrieking, that the QT must not be done. For that limits the amount of joy that politics can gain from spending all the loot.
We can thus divine that MMT would run into the same problem. They never would tax back - which would mean runnning a budget surplus - the excess money printed. Thus the inevitable result will increasing, even accelerating, inflation.
There’s a longer discussion of this on Substack. If British politics will not support QT to curb money creation and inflation then British politics is never going to support taxation and budget surpluses to curb money creation and inflation. Therefore MMT turns out to be a non-viable theory. True, for political reasons but as MMT would indeed be run by politics that’s sufficient to prove failure. You know, fun idea but isn’t reality a right cow?
Tim Worstall