Hi. This is Carl Tannenbaum, Chief Economist for Northern Trust. They say that economists are people who see things in practice and wonder whether they'll work in theory. We do love a good theory in our profession.
And there's a new one floating around that's getting a lot of attention. Modern monetary theory, or MMT, offers a new way to add pep to sluggish economies. Economic growth has been a little bit more modest during the current expansion, partly as a result of aging populations, lower labor force growth, and lagging productivity. To provide a boost, MMT suggests that the government do a lot of spending, and then the debt that they incur be purchased, essentially, by the central bank who prints money to pay for it. Sounds simple, right?
Well, not so fast-- printing money for spending has traditionally led to much higher inflation. And it took years to get that out of the system in the United States. And central banks are typically not supposed to be used as the government's piggy bank. They're set up independently to guard against exactly that possibility.
There's no guarantee, as well, that the government's spending will be done judiciously, as legislators have a tendency to all pursue their pet projects. So when viewed carefully, there really is very little modern about modern monetary theory. It, perhaps, is merely a new name for an old idea and a bad idea at that. And that's the view from here.