Nowadays, everyone is doing it, but very few people are discussing it—with the exception of American economist Stephanie Kelton, who is pushing a movie about the topic.
What exactly are they doing? By their actions, governments are demonstrating that debt and deficits are irrelevant.
With the end of the pandemic, the world's government debt has reached a record high of $US82 trillion, more than double its pre-GFC level, and shows little signs of abating.
It has been 20 years since the governments of the globe as a whole managed a surplus, and even then, it was modest and short-lived.
Although MMT is not specifically acknowledged, its main fallacy—that deficits are irrelevant—has gained widespread acceptance.
Although the government's long-term projections indicate a return to deficits lasting at least ten years, Australian Treasurer Jim Chalmers is set to report his second surplus shortly. They would not if they believed it was important, either politically or economically.
The Congressional Budget Office in the US is similarly forecasting perpetual deficits and escalating public debt.
Since there has not been a widespread public shift to MMT, what has changed if there is not any significant opposition to this?
The arguments against
Three items: First, the pandemic demonstrated (again) the effectiveness of fiscal policy and the fact that, at the very least, those specific deficits were not only necessary but also irrelevant; second, Japan demonstrated that deficits and mounting debt could continue for decades; and third, governments are being forced to face the reality that balanced budgets are unachievable due to the baby boomer retirement bulge, so they have given up on trying.
The most crucial of those is the last one. "It is not simply that more individuals are retiring … it is that their retirements are rising in length," stated BlackRock CEO Larry Fink in his annual letter to shareholders last week. Nowadays, there is a 50/50 probability that at least one of you will receive a social security check until you are 90 if you are married and both you and your spouse are over 65.
Furthermore, governments are aware that attempting to prevent climate change and addressing its repercussions will come at a huge expense.
Additionally, Australia's National Disability Insurance Scheme, which is based on diagnosis rather than need, has created an additional layer of complexity. Although there is already an effort to correct that error, it might be too late because disability is being adequately supported.
In these situations, the kind of tax increases needed to balance the budget would be rather incompatible with maintaining power.
A government can only hope to win reelection by kicking the can down the road and avoiding the topic. This is because balanced budgets are now politically impossible due to rising health care and retirement assistance costs, as well as a declining working-age population that pays taxes.
Conservative opponents in particular would love to discuss it, but they have to back off when asked for real answers.
Naturally, the political elites are giving up on it since it is too difficult to maintain a balanced budget throughout the economic cycle, which has long been the Australian mantra. Really, it is not even feasible.
The answer? Simply stop talking and predict shortfalls. No one is protesting, no one is being voted out as a result, and even conservatives are only partially complaining because they do not want to be asked to decide who should pay taxes and what should be reduced.
"It is simply untrue."
However, what about the mounting debt from interest payments that is displacing other expenses?
Stephanie Kelton exonerates everyone in her book The Deficit Myth, claiming that viewing curiosity as a burden is a misunderstanding.
"Making interest payments on government bonds is just as easy as making any other payment."
She stated that "there is no fixed pot of money" and that it is "simply not true" that growing interest payments reduce the amount of money available for other objectives.
However, Kelton continued by saying that inflation is the limit. The economy can only support increased spending so much. That is the limitation.
Interest rate increases are a type of fiscal stimulus; the more of them there is, the more stimulus there is.
Inflation in 2022 was caused by the pandemic's enormous fiscal stimulus, but it was short-lived and easily managed.
Debt interest only contributes to inflation when it is paid to residents. Interest payments on the large portion of the government's debt that is kept offshore do not contribute to inflation at home.
Modern Monetary Theory is merely a description of how government finances operate, which is that government spending occurs prior to tax revenue being collected (from that spending initially), and the only constraint on the spending is inflation. It does not, as many people believe, constitute approval to print money to fund government spending.
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