Alan Kohler: Modern Monetary Theory has become modern fiscal practice

A few years ago everybody was talking about Modern Monetary Theory, both ardently for and scornfully against, but nobody was doing it.

Now everybody is doing it but hardly anybody is talking about it, apart from American economist Stephanie Kelton, promoting a film on the subject.

Doing what, exactly? Governments are showing by their deeds that deficits and debt don’t matter.


Global government debt has hit a record high of $US82 trillion, more than double what it was before the GFC, and no sign of slowing since the end of the pandemic. 

The world’s governments, in aggregate, haven’t managed a surplus for 20 years, and even then, it was small and brief.

MMT is not mentioned by name, but its prime heresy – that deficits don’t matter – has become gospel.

Australian Treasurer Jim Chalmers will soon announce his second surplus, but the government’s long-term forecasts show a return to deficits that last at least 10 years. If they thought it mattered, politically or economically, they wouldn’t.

In the United States the Congressional Budget Office is also projecting deficits forever, with endlessly rising government debt. 

There is no serious objection to this, but there hasn’t been a mass public conversion to MMT, so what’s changed?

The reasons against

Three things: First, the pandemic revealed (again) the power of fiscal policy along with the fact that those particular deficits, at least, not only didn’t matter they were essential; second, Japan has shown that you can go for decades, and counting, with deficits and rising debt, and third, the baby boomer retirement bulge is forcing governments to confront the idea that balanced budgets are impossible, so they have given up trying.

The last of those is the most important. As BlackRock CEO Larry Fink wrote in his annual letter to shareholders last week: “It’s not just that more people are retiring … it’s also that their retirements are increasing in length. Today, if you’re married and both you and your spouse are over the age of 65, there’s a 50-50 chance at least one of you will be receiving a social security cheque until you’re 90.”

On top of that the cost of climate change – trying to prevent it and dealing with its effects – will be enormous and governments know it.

And Australia has added its own extra degree of difficulty with a National Disability Insurance Scheme based on diagnosis rather than need. There’s an attempt now to recover that mistake but it may be too late – disability is being properly supported.

The sort of tax increases required to balance the budget in these circumstances would be somewhat inconsistent with staying in power.

The combination of increased retirement support and health care spending with a shrinking working age population paying taxes means that balanced budgets are now politically too hard – the only way a government can hope to get re-elected is to kick the can down the road and just not talk about it.

Oppositions, especially conservative ones, would love to talk about it, but as soon as they are pressed for actual solutions, they must clam up.

So understandably, the political classes are giving up on it – a balanced budget over the course of the economic cycle, which has long been the Australian refrain, is too hard. It’s not even possible, really.

The solution? Just shut up and forecast deficits. Nobody’s complaining, nobody’s getting voted out because of it, and even the conservatives are only half-hearted in their complaints, because they don’t want to be challenged to nominate which spending to cut, and who to tax. 

‘Just not true’

But what about the growing burden of interest payments, crowding out other spending?

In her book, The Deficit Myth, Stephanie Kelton lets everyone off that hook; she says it’s a mistake to see interest as a burden.

“Paying interest on government bonds is no more difficult than processing any other payment.”

She wrote that it’s “just not true” that rising interest payments shrink the amount of money left over for other priorities – “there is no fixed pot of money”.

But as Kelton then went on to say, there is a limit – it’s inflation. “There is only so much room in the economy to absorb higher spending. That’s the constraint …”

Rising interest payments act as a form of fiscal stimulus – the more there is, the more stimulus.

The massive fiscal stimulus of the pandemic did produce inflation in 2022, but it was transitory and easily controlled.

Interest on debt is only inflationary to the extent that it’s paid to locals. A lot of the government debt is held offshore; the interest payments on that do not fuel domestic inflation.

Modern Monetary Theory does not represent permission to print money to fund government spending as a lot of people think, it’s just a description of the way government finances work, which is that government spending takes place before tax revenue is collected (from that spending to begin with, and the only constraint on the spending is inflation.

And that, it turns out, is the way things are working.

Alan Kohler writes twice a week for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor

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