Debating Modern Monetary Theory

Costas Lapavitsas, Robert Rowthorn, Costas Lapavitsas, Robert Rowthorn

• Publisher: Routledge
• Year: 2022
• eBook ISBN: 9781000581225
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This book considers the theoretical and empirical claims of Modern Monetary Theory (MMT) in developed and developing countries. It is structured as a debate between leading MMT theorists and MMT critics.

MMT threw down a challenge to mainstream economics and forced it to respond, above all in the USA. This is a rare occurrence, almost unknown, for heterodox economics during the last few decades. It is not surprising, therefore, that MMT has attracted strong attention from a broad swathe of researchers. It is even less surprising that it has become the theoretical vehicle of choice for political activists opposing austerity. Its influence is remarkable and has gradually spread to other social disciplines, including even cultural theory. Furthermore, the policy responses to coronavirus by several governments, particularly the extraordinary expansion of central bank balance sheets in 2020, appears to support MMT in practice.

This volume takes into account the rising popularity of MMT and considers its theoretical claims in depth, since popularity does not necessarily equate to being right in theory. It also considers MMT claims regarding fiscal and monetary policy in view of the implications of the pandemic crisis for public spending and public debt. It is not accidental that the strongest support for MMT, in both theory and policy, is to be found in the USA, since MMT conclusions rely heavily on close institutional analysis of US government financing mechanisms.

The chapters in this book were originally published as a special issue of The Japanese Political Economy.

Is government debt net wealth?

Robert Rowthorn

ABSTRACT

MMT claims that government borrowing makes the private sector wealthier, thereby stimulating expenditure. Robert Barro famously denied this on the grounds that government borrowing leads eventually to higher tax rates. Rational agents will put funds aside to pay these future taxes and will not perceive themselves as wealthier. They will restrain their expenditure following a fiscal stimulus. Using a model inspired by Wynne Godley and Marc Lavoie, this article examines the conditions under which MMT is correct. The decisive factor is the amount of slack in the economy. The greater the amount of slack, the closer MMT is to reality.

A central tenet of MMT is that government debt is net financial wealth for the nongovernment sector (Kelton 2020; Wray Larry 2015). At one time, this was an orthodox view in the theory of public finance. The orthodoxy was challenged in a celebrated article by Robert Barro (1974). He accepted that, in a conventional accounting sense, government debt is net financial wealth. Indeed, this equality is an identity. It follows arithmetically from the fact that the government sector and the nongovernment sector constitute the whole economy. Hence, the net financial liabilities of one sector, taken as a whole, must be equal to the net financial assets of the other sector, taken as a whole. Barro did not deny this. His point was different. He was concerned not with accounting but with behavior. What matters for behavior is the extent to which government debt is perceived to be net financial wealth. Agents will react differently to their holdings of government debt depending on whether or not they regard them as net wealth.

To understand Barro’s point, consider an economy that has no financial links with the rest of the world. Government expenditure is constant. Suppose the government implements a temporary tax cut that is matched by the sale of new bonds to the nongovernment sector, which in this case is the domestic private sector. The immediate...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Citation Information
• Notes on Contributors
• Introduction: Debating modern monetary theory
• 1 Is government debt net wealth?
• 2 The Job Guarantee and the Phillips Curve
• 3 Does the national debt matter?
• 4 External debt matters: What are the limits to monetary sovereignty?
• 5 Modern monetary theory on money, sovereignty, and policy: A marxist critique with reference to the Eurozone and Greece
• Index