By strategically using government spending and taxation, it is possible to achieve full employment, price stability, and economic growth without causing inflation.
Modern Monetary Theory (MMT) is a macroeconomic framework that suggests that countries with their own fiat currency—meaning a currency that is not backed by commodities like gold—have more financial freedom than is traditionally assumed. This theory posits that such countries are not operationally constrained by revenues when it comes to federal government spending. In other words, a government that controls its own currency can always fund its own operations and obligations, whether or not it has enough tax revenue.
MMT originated from the ideas of economist Warren Mosler in the early 1990s. Mosler, a Wall Street trader, noticed that the conventional understanding of government finance seemed to be flawed. He proposed that governments with the ability to issue their own currency could never run out of money in the same way a business or household could. This idea was initially met with skepticism, but it gradually gained traction among some economists and policy thinkers.
The theory further developed through the work of economists like Bill Mitchell, L. Randall Wray, Stephanie Kelton, and others. They expanded on Mosler's ideas, arguing that the primary risk of government spending was not default or bankruptcy, but inflation. According to MMT, if a government spends too much, it could cause the economy to overheat, leading to inflation. However, they argue that this can be controlled through policy measures, including taxation, which they view not as a source of revenue, but as a tool to manage inflation and control aggregate demand.
MMT has been associated with progressive policy proposals, such as the Green New Deal and job guarantee programs, as it provides a theoretical framework that allows for significant government spending without the need for balanced budgets or fear of insurmountable debt. However, it remains a controversial and debated theory within the field of economics. Critics argue that it downplays the risks of inflation and overspending, and could lead to fiscal irresponsibility. Despite these debates, MMT has significantly influenced discussions about economic policy and the role of government in the economy.
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