Modern Monetary Theory ‘blinks’ in PEC text and stresses fiscal debate; understand

Full of technical details and controversial even for insiders. This is Modern Monetary Theory, usually identified by the acronym in the English version MMT. Given its complexity, the debate about its concepts is usually restricted to the academic world.

In a very simplistic way, it maintains that the State can have a deficit, debt and issue national currency as much as it wants — in short, spend without going bankrupt. A statement that is opposed to conventional economic thinking, called orthodox, which holds exactly the opposite, the need to control debt and public spending, to maintain the financial health of the State and the country.

Last week, the MMT became news after being quoted precisely in one of the most awaited and observed texts: the opinion of Senator Alexandre Silveira (PSDB-MG) to support the approval of the Transition PEC (proposed amendment to the Constitution) —a measure which frees the elected government to raise spending for 2023.

Intellectual stress set in among economists when they came across the acronym in the text of Congress.

In the elected government’s economy transition group, economist Persio Arida warned that the mention could create noise in the assessment of the PEC.

Fernando Haddad, who had not yet been appointed as the future Minister of Finance in the Lula 3 government, made contact with Senator Alexandre Silveira, pondering whether it would really be necessary to keep the quote, in a sign that it would be better to suppress it. The snippet has been extracted. But the controversy was already installed.

Comments, publications on social networks and reports popped up advocating that the PT had found an accurate economic dogma to explode the spending ceiling once and for all, despite the fact that the text was being presented by a PSDB parliamentarian.

According to the senator’s advisory, the section was written by the Budget Consultancy, one of the organizations that provides technical support to parliamentarians in the legislative process.

The coordination of the area informed the Sheet not be authorized to disclose the names of technicians who work in this type of service, as authorship is attributed to the parliamentarian who commissions the text.

There is a new generation of MMT scholars, and some circulate in Congress. A reference is the economist David Deccache, economic advisor at the Chamber and author of the book “Modern Monetary Theory: The key to an economy at the service of the people.” The PT economist Guilherme Mello, another one who is in the transition group and is quoted for the government, teaches MMT at Unicamp (State University of Campinas).

The greatest exponent of the theory in Brazil is economist André Lara Resende. A member of the economy’s transition group and also quoted to occupy a position in the elected government, he told Sheet who saw no sense in the quote.

“I considered the mention primary and unnecessary. A surprising political naivety”, he said. “MMT is the source of a lot of confusion. Its detractors as well as most of its supporters don’t understand it.”

André Lara is a scholar of the phenomena associated with money. Along with Arida, he was the creator of the principles that led to the creation of the URV, the scriptural and parallel currency of the Real Plan. For decades, he was feted as a liberal economist. After poring over the assembled authors at MMT, he published articles arguing that the “mainstream” economy had become dysfunctional.

The book “Consensus and Contrasensus: For a Non-Dogmatic Economy” brings together several of these texts.

“The MMT is just an accurate description of the fiat money system. Its critics maintain that it is a license to spend, without any criteria, financed by monetary expansion,” he says. “It’s absolutely not the case, but you’re going to explain that ‘my name isn’t Manuel’! So I never mentioned it again. It just causes confusion.”

The fact is that the new acronym has once and for all entered into the old debate that puts contractionists (who, in general terms, in favor of controlling inflation by curbing consumption) and expansionists (who, broadly speaking, in favor of stimulating consumption to bring growth) in the fiscal policy debate, but it is neither a modern nor a monetary theory.

To understand its principles it is necessary to go through the history of the coin.

In the past, currency was something physical, usually a precious metal. As money evolved into coins of less noble metals and banknotes, it started to have backing (each physical unit corresponded to a quantity of concrete wealth). In the 19th century, the gold standard was adopted, that is, the amount of currency in circulation represented a volume of gold stored.

Countries bought, stocked, managed and sold bars all the time. The exchange rate was fixed. Money, investments, exports and imports depended on, and affected, gold stocks.

That began to change in 1914, when England switched from the gold standard to the gold dollar. The pound was pegged to the US currency, which in turn held the reserve in gold. Other countries have made this migration. In the 1970s, when the United States began to spend like there was no tomorrow, it became clear that there wasn’t enough gold. In 1973, the United States decoupled metal money.

Currency began to be identified as an accounting record. But what matters in MMT is that the State was free to issue. The State creates sovereign currency when it turns on the money printing machine and also when it issues public debt securities, not only for the financial market but also for the Central Bank.

That is, the MMT states that the State can issue and go into debt to spend in the national currency unlimitedly. It will never go broke—unlike a company, whose debt limit is its ability to grow to pay its debts, or a family, whose debt limit is its income.

Then questions arose. Can the State create currency to generate growth and employment? Until when? Can it stop recessions? But if creating a lot of currency won’t it generate inflation?

Questions like these were asked by generations of economists dedicated to studying currency, its genesis, its use, both by states and private companies, and the effects on growth, collection, income and employment.

The German economist Georg Friedrich Knapp (1842-1926) stated that the credibility of the currency is also associated with the political-institutional stability of the State. An unstable country suffers from inflation even if it is strict with debt control and currency issuance.

The Polish neo-Marxist Michal Kalecki (1899-1970) argued that public deficits do not matter, as they are inherent to an economic policy that acts to maintain full employment. Many of his principles are similar to those presented in the General Theory of Employment, Interest and Money, by the Englishman John Maynard Keynes, before he published them himself, which earned him the nickname of Keynes of the left.

Abba P. Lerner (1903-1982) made extensive studies on public spending, coining the term functional finance. Among his conclusions are that State investment is the only one that can be planned for the benefit of the growth of nations, as private investment only occurs when there is a guarantee of profit for some.

Hyman Minsk (1919-1996) stated that the volume of credit offered by the banking system follows the perception of risk and return, reflecting the moods of entrepreneurs, and it is the oscillation of this state of mind that causes recurrent crises in capitalism.

In 1990, American economist Larry Randall Wray packaged the theories of these and other scholars in the book “Understanding Modern Money”. It was an ironic title, of course. He knew he reorganized old concepts, but the name stuck. MMT was born.

A typically American context created the environment for the combo to attract attention.

Wray’s works had financial support from fellow countryman Warren Mosler, businessman, fund manager and independent politician, which increased the publicity of the theme. One of his students, Stephanie Kelton, echoed the debate even more clearly in another book, “The Deficit Myth.”

Kelton became an adviser to Democratic Senator Bernie Sanders, bridging the gap between MMT and US public policy — with exaggerations, recognized even by MMT advocates, which helped to support the criticism that the theory underlies disorderly spending.

Although identified with the left, even heterodox people have reservations about MMT. Economist Nelson Marconi, who calls himself a developmentalist, says that some of his instruments inspire care.

“It is necessary, for example, to know when to use the issuance of public bonds, because, depending on the level of activity, you lose control of the interest rate, consequently, of the exchange rate, and generates inflation.”

Its advocates argue that MMT findings, applied well, yield benefits.

“The dominant idea is that the State needs to control its accounts”, says Simone Deos, senior researcher at Cebri (Brazilian Center for International Relations). “But the contributions of empirical research, gathered in the MMT, show that the State’s investment generates growth, income and collection, and that contracting expenses reduces GDP and collection.”

One argument is that in the pandemic, even without the label, MMT was applied.

“The MMT describes a fact: that there is no budget restriction for the State to spend, but that does not mean that there is a mandate to spend”, says Leonardo Burlamaqui, professor at the Department of Economic Evolution at the State University of Rio de Janeiro, another scholar on the subject. . “Exactly because I have this power, I need to have a huge responsibility to spend. Fiscal responsibility.”

COMPARE THE THEORY MAINSTREAM X MMT IN 5 POINTS

Mainstream

1. The government has limitations on issuing currency and making debt
2. Taxation finances government spending
3. The Budget is limited and its equilibrium avoids an increase in interest rates and a retraction of private sector investment
4. National savings guarantee financing for investment and the public deficit reduces national savings.
5. governments break

MMT

1. Governments are free to issue currency and debt
2. Taxation is an incentive to use sovereign currency
3. The Budget has no limit, and the State must invest to encourage the private sector and maintain full employment
4. The public deficit caused by spending is transformed into private investment and increases national savings
5. Governments don’t break

WHAT THE OPINION OF THE TOucan SENATOR SAID

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In addition to not compromising debt sustainability, the additional expenditures provided by this PEC may, in fact, increase the government’s payment capacity. The expansion of the Auxílio Brasil Program (or whatever comes to replace it) is projected at R$ 69.3 billion.

Traditional Keynesian theory, as well as so-called Modern Monetary Theory (or MMT) emphasize the central role of fiscal policy (as opposed to monetary policy) to recover a country’s economy. More specifically, they recommend expanding public spending without due compensation in the form of higher taxes.

In this way, the multiplier effect of such expenses is enhanced. As is often taught in economics courses, the transfer of income to the poorest strata of the population stimulates consumption, which, in a context of high unemployment, allows for the expansion of production without significant pressure on labor costs.

It is worth remembering that, despite the recent improvement in the labor market, with the unemployment rate showing a consistent downward trend, reaching 8.3% in November of this year, its level is far above what can be considered a situation of full employment. Although there is no consensus on what the unemployment rate would be when the economy is at full employment, even more conservative estimates point to values ​​below 5%.

There is, therefore, a lot to recover in the labor market so that we can consider that our economy is at full employment.

It should also be emphasized, as some MMT supporters point out, that the increase in public spending cannot provoke a crisis of distrust in countries that issue debt in their own currency. That is, if the financing of expenses were made in foreign currency, a concern with the country’s solvency would be justifiable. But as the bonds issued by the National Treasury are in reais, there is no possibility that the government will not pay.

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