COVID-19 debt crisis: Is Modern Monetary Theory a solution?

With permission of Alan Moir,

Modern Monetary Theory (MMT) has garnered increasing attention in recent years as a means to solve economic problems such as government debt and unemployment. Interest has grown still further since the outbreak of the COVID-19 virus as government debt around the world has exploded almost overnight on the back of huge spending packages.

The idea of MMT has been around for a number of years, championed by pioneers such as Australian economist Bill Mitchell of the University of Newcastle and the Centre for Full Employment and Equity.

It has been particularly popular among economists who could be described, or identify, as left or post-Keynesian.

The United States is where it has probably had the strongest influence, especially since prominent MMT advocate Stephanie Kelton became economic adviser to Bernie Sanders' progressive presidential campaign.

So what is MMT? Basically, it is a theory of how the monetary system and the economy in general work, but it generally also encompasses certain related policy prescriptions, such as a jobs guarantee.

One of the central issues it addresses is government budget deficits and debt.

For anyone trying to put forward a progressive agenda advocating increased spending on health, education and unemployment payments, the “how are we going to pay for that?” refrain is all too familiar.

It is widely accepted, at least among politicians and economists, that we have to balance the government budget. For any spending, we have to pay for it, somehow, by cutting other spending somewhere else or by raising taxes.

If we don’t do that, we are going to build up a debt which future generations will have to pay off.

The comparison is frequently made between the government budget and the household budget. Every household has to balance its budget or, at least, if it goes into debt it has to, eventually, pay that debt off.

Deficit spending

But for MMT, the comparison is false. Unlike households, governments can print money. If a government wants to spend money it doesn’t have, it can just print some more.

The actuality of “printing money” is a little more convoluted than the term suggests.

In most countries, like Australia, the government doesn’t have the authority to print money per se. That authority belongs to central banks, which usually have some degree of autonomy in relation to the government.

Governments generally fund their deficit spending by selling interest-bearing bonds and owing their debts to bondholders. But if, instead of leaving these bonds in the hands of private bondholders, the central bank buys up these bonds with money that it has the power to create, then it becomes the central bank to whom the government owes money. (Though when the central bank has autonomy like in Australia and the US, it is up to the central bank as to whether it collaborates in this operation.)

In this situation, the government ends up owing a debt to itself, more or less.

No central bank has any need to insist on a government ever paying off a debt created with money it simply printed. There is no reason why it can’t just accumulate indefinitely. Whatever the government debt to the central bank becomes, it is of no real significance.

It should also be noted that no actual printing need be involved in “printing money”. Rather, it involves an expansion of the figures in the electronically-recorded central bank balance sheet, and a corresponding growth in the bank account balances of the sellers of bonds.

Following the 2008 Global Financial Crisis, the major rescue package for the US economy was the Federal Reserve’s quantitative easing program. This involved making a short-term loan via the process described above. Indeed, economists have often used the term “money printing” to describe it.

The Reserve Bank of Australia didn’t follow the US’s quantitative easing program in its response to the GFC.

But when the COVID-19 crisis hit and the government, made emergency spending announcements of more than $200 billion in March, the Reserve Bank of Australia (RBA) began hoovering up government bonds. By April 21 RBA Governor Philip Lowe announced that it had, so far, purchased $47 billion worth and remained willing to “buy bonds in whatever quantity is required”.

Jobs guarantee

MMT advocates could argue that these governments and central banks are unwitting and unwilling converts to MMT.

But they would also argue that this mechanism should not only be used to bail the economy out of a crisis. If all this money can be suddenly created out of nothing now, why do governments always cry poor when asked to raise funding for schools or the unemployed? Why can’t this be done all the time?

One policy generally conjoined with MMT is the “jobs guarantee”. Since governments posses this unique ability to create money, why should there be unemployment? Governments could guarantee a government-paid job to everyone who needs it, and have the money to pay for it.

There are various possible permutations of what a jobs guarantee scheme would look like. Usually, it is suggested that the unemployed could be offered work at the minimum wage so that better-paid private sector work is still attractive if it becomes available.

Work could be done fulfilling various social needs that are currently not being met. In the US, it has often been pointed out that many thousands of roads and bridges are dilapidated and dangerous, so this has been suggested as an area that job guarantee workers could be employed in.

MMT has also been put forward in conjunction with plans for a Green New Deal. This idea, championed in the US by Bernie Sanders and Senator Alexandria Ocasio-Cortez, supports a large government-funded campaign to create jobs as part of transforming the economy towards environmental sustainability.

To the predictable cries of “Where’s the money going to come from to pay for all this?”, an army of jobs-guarantee workers funded by MMT-style government funding has been put forward as a plausible answer.

While conventional economists tend to insist that governments have to “balance the books”, when pushed, most will admit that that isn’t necessarily true and expenditure can be, and indeed is, funded by money printing.

But this will usually be followed by the warning that money printing will create inflation. The spectre of Weimar Germany and the hyperinflation that resulted from money printing there will almost inevitably be raised.

If there is an increase in the amount of money circulating in an economy, but no corresponding increase in the goods and services being traded, then it stands to reason that those goods and services are going to start costing more.

Bill Mitchell responds that, “All spending carries an inflation risk … government spending can have an inflation risk and so can private consumption and investment spending.”

But examples of hyperinflation are “not remotely like a situation of a government like the US or the Australian government picking up unused capacity in the economy.”

MMT advocates argue that their plan is not to simply pump more money into the economy arbitrarily, as would be the case if money were printed to fund a corporate tax cut, for instance.

It is targeted government spending. Central to this is to use the money to put unemployed people to work to produce more and to use up the idle economic capacity that unemployment represents, so economic activity increases along with the money supply.


While the general thrust of MMT is valid, often advocates overlook a number of problems and limitations.

One is that a jobs guarantee risks being turned into a “work for the dole” scheme.

In the US, it is usually suggested the jobs guarantee wage be set at the minimum wage. In the US especially the minimum wage is a criminally pitiful amount.

Those supporting the jobs guarantee are, possibly without exception, also supporters of an increase in the minimum wage. However, minimum wage work is still a less than ideal outcome.

Also, it can’t be assumed that a jobs guarantee would always be in the hands of progressive-minded people. Under a government hostile to the interests of workers, wages could be reduced or whittled away by inflation and it could be used as an instrument for creating a super-exploited workforce.

It doesn’t follow that a jobs guarantee should therefore be rejected, merely that it would remain a site of potential struggle and require ongoing vigilance against becoming an instrument of exploitation.

Another concern is that MMT can be put forward as means of funding government spending while leaving wealthy capitalists to their own devices, that is, without having to resort to making the wealthy pay more tax.

This would mean that it would only go a short distance in eliminating the vast economic inequalities that exist today.

Doug Henwood levelled this charge against MMT in Jacobin magazine titled “Modern monetary theory isn’t helping”.

Yet, although MMT provides a means of funding government expenditure without matching taxation, it doesn’t preclude conventional taxation-funded spending policies alongside it. Sanders did not shy away from promising to raise taxes on the rich in spite of Kelton being his economic adviser.

Some MMT theorists have also suggested conventional tax rises, though more in the context of them being used to subtract demand from the economy as a brake on inflation.

So while Henwood’s criticism could be true of some MMT theorists, it isn’t an inevitable part of MMT.

In a similar vein, the charge could be made that MMT, in and of itself, leaves the power of capital intact.

The problem of leaving capitalists to their own devices is not just a matter of equity. It also means that capitalists and capitalism can still exercise inordinate power over society, economy, media and government.

The capitalist class already uses these tools to prevent or overturn progressive reforms.

Such a charge could also be defended by responding that MMT need not be the solitary tool for implementing progressive changes, but could be used alongside other measures.

Maintaining profits

Nonetheless, this does lead to the matter of a certain naiveté that sometimes seems to come through from MMT enthusiasts.

While MMT proposes a solution to the problem of unemployment, it is often put forward without sufficient cognisance of the fact that, for capitalism, unemployment is not necessarily a problem to be solved, but rather a valuable tool to maintain profits.

Having a pool of workers who are poor and unemployed keeps up competition for jobs, which helps keep wages down. Economists even tend to define full employment as being when 4–5% of people are unemployed. Anything lower than that is viewed as undesirable, because it strengthens workers’ bargaining power.

This doesn’t mean that MMT should not be used to try to eliminate unemployment. But, as long as capitalism exists, measures to eliminate unemployment will be met with a war and not a thank you.

All the money and power of capital and its media and politicians will be brought to fight against measures that would have all workers benefiting from decent standards of living.

There are likewise problems if MMT were to be used as a solution to the environmental crisis, if the capitalist sector left to its own devices. If an army of job guarantee workers were enlisted to help save the planet while a capitalist sector is left to destroy it, the climate catastrophe would merely be postponed.

Also, on the environmental front, while MMT provides a means to solve unemployment by using the economy to capacity, the environmental crisis means that we may not want to use the economy to capacity.

If the unemployed are given jobs, it may be better for the planet if that gives a breather to other workers who should instead be able to enjoy more leisure time, rather than churning out more “stuff”.

Though MMT is not incompatible with a scenario of reduced working hours, capitalism will strongly resist it. More stuff means more profits and profits are the entire raison d’etre of capitalism.

The power of capital to exercise its inherent tendencies to produce more and more as cheaply as possible will also have to be brought to heel with means other than MMT itself.

A final limitation of MMT is that it works most readily with a country whose currency is also the global standard, like the US. For others, like Australia, with a well-recognised currency, it is a little more problematic. For poor, economically weak countries it is significantly more risky.

Printing money in countries with less favoured currencies risks those currencies being dumped in preference to what are seen as more reliable currencies. This can potentially put the local currency into a hyperinflationary spiral. There are also governments that don’t have their own currency, such as members of the Eurozone. For them, MMT simply isn’t an option.

None of these limitations of MMT mean that it should be rejected, but we should be aware it is not a panacea. When the COVID-19 crisis is over and we are told we can no longer afford the increased unemployment payments, and that someone now has to pay for the all debt that has accumulated, MMT provides valuable arguments to draw on.

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