Disclaimer: Not an economist. Just an interested observer wishing to learn more. Apologies if I mangle the theory here.
One fairly consistent response to the COVID pandemic by national governments has been the injection of staggering amounts of capital into the economy, which is funded by government borrowing. The US stimulus package, for example, has been valued at $2.2 trillion. In Australia, where I'm from, stimulus so far equates to around 10% of GDP.
To the extent that experts are commenting on this debt-financed response, they seem to be divided into highly divergent camps. Some say that this debt is creating a burden that future generations will need to repay - i.e. that we are borrowing from the future to pay for today's problem .
Others, including proponents of MMT, seem to take the view that government debt needn't be thought of as something that requires paying down. The only question relevant to this camp is whether the injection of money is the right thing to do in terms of managing the dynamics of the economy (consensus seems to be yes).
MMT is an idea I'd been reading a little bit about prior to this crisis (further info below), but given that most governments seem to now be following its dictates - i.e. borrowing and spending because that's the right thing to do in the present, rather than worrying about how those debts will be repaid - are we now entering a phase where we might learn whether MMT holds? Are we entering an experiment in monetary theory that might teach us more about which camp of economists is correct?
Relevance to EA:
Given the compounding nature of sustained economic growth, getting the settings right on monetary policy seems like it has the potential to significantly impact general welfare in both the near and long term.
Further, there is already an inherently longtermist angle to this debate - with many commentators appealing to the impact on future generations of excessive spending in the present.
On the other hand, if MMT holds, this should be promoted by EAs as a guide to how governments may respond to other and more severe x-risks than COVID-19. MMT has also held out as a basis for a 'Green New Deal', which is an interesting prospect.
Previous posts on MMT:
There have been some previous debate on this forum around MMT. See this post.
In that post, someone pointed to an IGM Chicago Survey to suggest that serious economists universally discount the ideas of MMT however, as I point out in the following section, that survey seemed to seriously strawman MMT's argumants.
What is MMT?
As I understand it, the central claim of MMT is that there is no need to balance a national budget in the way that one might want to balance their household or business budget. Instead, the role of the reserve bank is to 'balance the economy'.
The three core ideas  seem to be:
1) Monetary sovereign governments face no purely financial budget constraints.
- NB: We are talking here about governments that issue their own currency, have a floating exchange rate and no significant foreign currency debt, such as the US, UK, Japan and Australia.
2) However, all economies, and all governments, face real and ecological limits relating to what can be produced and consumed.
- The idea here is that if too much money is injected into an economy, then the spending power will eventually exceed the productive capacity of that economy - e.g. will outstrip labour supply or natural resources. MMT says that this is what causes inflation, not merely the injection of money into an economy.
- As I mentioned earlier, there was an IGM Chicago Survey where economists appeared to quite universally dismiss the ideas of MMT on the basis that they would lead to rampant inflation - see link. However, when you look at the set up for that survey, it's clear that they've strawmanned MMT by suggesting that it posits no limits on borrowing and government expenditure. This second premise of MMT dispels that myth. Under MMT there is still said to be a limit on government spending/borrowing, but it is defined by reference to the productive capacity of the relevant economy, rather than by reference to any balanced budgets or the like.
3) The government’s financial deficit is everybody else’s financial surplus.
- The idea here seems to be that there is an inverse relationship between private saving and government spending.
What are the alternatives?
The opposite view to MMT seems to be 'monetarism'. Advocates of monetarism say, among other things, that markets are best at determining the optimal allocation of resources, so the role of government should be minimised and indeed fiscal spending is not only ineffective but irresponsible. This focus on letting markets run free seems to have become the norm across most of the developed world.
A related idea to MMT is Keynsianism. However, as I understand it, Keynes was in favour of running a budget deficit only during periods of high unemployment. MMT takes this interpretation of Keynesianism further.
It seems troubling to me that there is so much disagreement about the fundamentals of questions around monetary theory. In fact, the more that I read, the more I feel that there is not even an agreed conception amongst different economists of what is meant by key concepts such as 'money', 'sovereign debt' or the 'economy'. And each of the viewpoints seems to be quite ideologically influenced. Is this right? How can it be that, as a society, we have such a poor grasp on concepts about money, and yet our whole society is organised around money?
Does anyone know of good resources (books, podcasts, articles, videos) where I could learn more about these ideas? Preferably resources that aren't promoting a single idea or ideology, but are fairly exploring all reasonable viewpoints.
Thanks! This response makes a lot more sense to me than many of the other materials I've been able to find online (including the various Krugman pieces I'd found, and the debate between Summers and Kelton on Bloomberg). Appreciate the time you've taken to write it.
It's still astonishing to me that we seem to have such an imperfect understanding of how monetary systems, which humans created, work. I guess it's just a product of these being very complex systems, somewhat akin to a weather system. I'd be interested to see though ... (read more)
I’m happy to hear that what I wrote was helpful!
I actually don’t think it’s that surprising that we have so much difficulty modeling the macroeconomy with high fidelity. In part, this is because of large degrees of endogeneity and general equilibrium effects (the shocks you are trying to model may alter key parameters of the models themselves), and in part, it is because contemporary macroeconomic models (i.e. DSGE/New Keynesian models) must necessarily make assumptions about human psychology in establishing their “microfoundations.” For a long time, for the sake of simplicity, there was little focus among macroeconomists on ensuring that those assumptions about human psychology were accurate. More recently, significant focus has been dedicated to that question, and more sophisticated, hopefully more accurate New Keynesian models have emerged. That said, even if these models better reflect the expert consensus in psychology and behavioral economics, they are still reliant on empirical findings in those fields for their accuracy, and given the replication crisis in psychology, that reliance may be compromising. It seems that there is no easy way ar... (read more)