MMT: What’s wrong with printing money?

For myriad reasons, it is hard to say that the Central Bank policy per se is governed by MMT 

“We need a mechanism where money flows out to the economy directly and permanently” – Kikuo Iwata 

By Sumanasiri Liyanage

Two prominent economists in Sri Lanka, Dr. W.A. Wijewardene, a former deputy governor of the Central Bank of Sri Lanka and Prof. Sirimevan Colombage, Professor of Economics, Open University of Sri Lanka, published two articles in Daily FT last week criticising the extant monetary policy paradigm of the Central Bank of Sri Lanka (CBSL) alleging that the CBSL while distancing itself from inflation oriented policies has begun to follow closely the policy framework that derived from the main tenets of Modern Monetary Theory (MMT). 

MMT as new discourse on the monetary-fiscal policy mix gained credence among left leaning Democrats especially during the presidential campaign in the US. Why is the issue of MMT raised in the Sri Lankan discourse? According to Prof. Colombage, Central Bank Governor Prof. W.D. Lakshman’s recent statement at an economic forum that domestic currency debt in a country with sovereign powers of money printing is not a huge problem is in close affinity with the MMT argument.

The two economists were unanimous over the issue that the continuation of present policy paradigm of the CBSL will necessarily lead to a disaster. Dr. Wijewardene in the form of a conversation between two popular teledrama characters, Ashini and Sarath Mahattaya, gave a clear and lucid narrative on the MMT tracing its historical roots. This is very useful to economic students. At the end of the conversation with his granddaughter, Sarath Mahattaya, Dr. Wijewardene’s narrator had concluded: “So, the present Government’s reliance on MMT is like getting a demon to work for it. If it does not play the game within limits, the demon will turn back and swallow it. This should be properly understood by the present Government’s top policymakers who advocate printing of money to pay for Government spending.” Of course, Dr. Wijewardene has admitted that the Government may borrow moderately. “What I mean by moderately is that money printing should not cause unwarranted unaffordable inflation.” 

Prof. Colombage seems to be more reserved giving the impression that MMT may be okay for advanced countries like the USA and Japan with reserved currency, but not for a small country like Sri Lanka. I am sure he may be thinking of the proposal by the former deputy governor at the Bank of Japan Kikuo Iwata. Moreover, he seems to think that MMT like policies are unavoidable at present conjuncture. He writes: “The recent monetary expansion points to imminent dangers in adopting MMT-style monetary policy in a country like Sri Lanka, though such policy stance might be unavoidable amidst the unprecedented economic setback caused by the COVID-19 pandemic.” 

This article intends neither to defend the extant monetary policy of the CBSL nor to posit that the main arguments of the MMT are correct. For myriad reasons, it is hard to say that the CBSL policy per se is governed by MMT. Nonetheless, the interpretation of the MMT given by Dr. Wijewardene and Prof. Colombage appears to have missed some of the complexities of the MMT argument as their contestation of the MMT seems to be based on the neo-classical and monetarist premise that money supply is exogeneous. On the contrary, post-Keynesians and MMT theorists posit that money supply is endogenous and linked with the effective demand. Hence, deficit financing does not necessarily lead to inflation.

Modern Monetary Theory

MMT proposes to bring the government to the fore. According to Randall Wray, the main weakness of macroeconomics texts and teaching today is that they start with unanswered question. Where does money come from? Modern macroeconomics skips this question leaving it to circular reasoning. As a result, in present day macroeconomics textbooks the government is brought in not in Chapter 1 as it should be, but in Chapter 8 or 10.

Secondly, the MMT may not be reduced to a notion that upholds deficit financing through printing money. It posits referring to historical evidence a nexus between printing money and redemption of tax. Hence, Dr. Wijewardene’s following statement is a result of simplistic reading of the MMT. Critiquing Stephanie Kelton, he writes: “One of the bold statements of Kelton is that taxes are charged for paying for government expenditure is mere fantasy. That is because there are many other ways of paying for such expenditure such as printing money. Governments can pay for expenditure by borrowing. When it comes to repaying, they can print money and repay the debt. So, there is no problem.”

Thirdly, MMT does not totally neglect as critics say the possibility of inflationary pressure as a result of deficit financing. It has its own explanation of the phenomena of inflationary pressure before achieving full employment and hyper-inflationary situations.   

A simple MMT macro model is adequate enough to demonstrate the complexities of its basic postulates. Scott Fullwiler’s MMT macro model that was derived from the famous Keynes, Kalecki Post-Keynesian identity (National Income equals National Expenditure), the key equations of the MMT read as follows:

Investment = Private Savings + (Tax – Government expenditure) + (Imports-Exports)

If Private Sector Surplus (PSS) equals Private Savings – Investment 

PSS = Government Deficit + Current Account Balance

So, PSS – Current Account Balance = Government Deficit

Suppose that the Current Account Balance remains unchanged, an increase in Government Deficit leads to increase in PSS that equals Wages Saved + (Profit – Investment). Assuming that all wages are consumed we may write the fundamental equation of MMT as follows:

Net Profit = (Profit – Investment) = Government Deficit     

The above equation shows that Government Deficit increases net Profit. 

MMT posits that an increase in government deficit leads to expand the economy that in turn leads to increase the tax base. 

Deficit finance and inflation

Can deficit finance lead to inflation? MMT has two answers to this question. Agreeing with the post-Keynesians, MMT posits that a continuous increase in money printing through deficit finance after achieving full employment would generate an inflationary pressure. If the resources are not fully employed, deficit financing would not necessarily lead to inflation. Besides, this full employment inflation, Randall shows that inflationary pressure may occur if increased government expenditure focuses on elite projects and highly skilled employment. Such an expenditure may create more what David Graeber called ‘bullshit jobs’.

MMT has multiple weaknesses. However, those weaknesses have nothing to with the critique of MMT by mainstream economists. If a country like Sri Lanka adopts deficit financing and printing money in a crisis situation, it is imperative such policies should be accompanied by import restrictions, proper direction of Government expenditure and increase of direct taxation. Nonetheless, the Government decision to dispossess Eastern Container Terminal (ECT) shows that its directionality is fundamentally wrong.

In lieu of conclusion, it is imperative to note without giving room for a misunderstanding that MMT as well as all the varieties of Keynesianism suffer from basic flaw. They seem to inverse the nexus between human labour, value and money. Michael Roberts has highlighted this in the following words: “They ignore that all the things that we need or use in society are the product of human labour power and under a capitalist economy where production is for profit (i.e., for money over the costs of production), not need, then money represents the socially necessary labour time expended. We see only money, not value, but money is only the representation of value in its universal form, namely abstract labour as measured in socially necessary labour time. It is a fetish to think that money is something that is outside and separate from value.” Anyway, this would be a subject for another article.

(The writer is a retired teacher in political economy and can be reached via e-mail: [email protected].)