MMT = Keynes 2.0

20 Jul, 2020 at 13:09 | Posted in Economics | 9 Comments

As time goes on, and 2020 turns into 2021, the long-held idea that governments are like households and businesses that have to repay their debts, or even that government deficits must be financed by debt at all, will increasingly be exposed as a mistake.

20It will be more or less a return to Keynes, except with the twist that the Keynesian aim of balancing the budget over the course of the cycle – deficits in bad times, surpluses in good times – doesn’t matter, not that anybody has actually achieved that lately anyway.

In future 2020 will be seen as the year when Keynes 2.0 got underway – when monetary and fiscal policy merged and a more sophisticated theory of government took hold, in which spending has no limit apart from the capacity of the economy.

As debt continues to be monetised, it will become obvious that without economic bottlenecks, spending and deficits can increase with no negative inflationary and welfare impacts.

Alan Kohler / The Australian


  1. “except with the twist that the Keynesian aim of balancing the budget over the course of the cycle”

    When did Keynes ever say that?

  2. It is difficult to imagine that the editors of the “Australian” (masthead Murdoch publication in Australia) waved Kohler’s article through.
    It seems we are all MMTers now.

    • Although most MMT people seem to be leftish in their politics, there is a lot about MMT that the wealthy might actually like. MMT does not necessarily call for higher taxes on higher incomes in order to ‘pay for’ government spending on social programs for example. Nor does it really challenge capitalism fundamentally. There is not the typical lefty feeling that the main reason we have poor people is that the wealthy have too much money and that the only way to rectify that is to take from the rich so as to give to the poor.

      I’m actually a little surprised that more of the wealthy have not recognized this. Maybe it is because MMT so emphasizes the role of the government as currency issuer? What do you think? Why would the rich not like MMT once they really understood the implications of the theory?

    • Jerry,
      Firstly, the Murdoch press and its fellow travelers, have, for decades, preached that deficits and debt matter, knowing it was bullshit.
      Have they shifted because they can see it does not necessarily, per se, threaten the hegemony of the one percenters? Maybe.
      Perhaps they also believe MMTers when they say inflation suppression is critical to MMT policy.
      So, while there is no financial constraint on government budgets, as we all know, there is the inflation constraint (I would also argue there is an exchange rate constraint but MMT refutes that).
      The inflation constraint hobbles MMT policy to the point that it is not much different in effect than saying debt and deficits do matter, in a practical sense. The inflation constraint, cannot by and large, allow deficits to get out of hand – not much different than what the neoliberal prescriptions say.
      MMT seen in this way is not that much different than the status quo.
      The only difference is the JGS which MMT will rely upon as a stabilizer. How effective this might be in practice remains to be seen.
      And I would argue that the only way Bill Mitchell and Noel Pearson got to publish their JGS manifestos in the Murdoch press was to have a JGS with a hard edge – no unemployment benefits at all for the unemployed not willing to participate in a JGS.

      • Good points. Thanks. ‘Why’ questions about the reasons people act are always difficult, maybe impossible to truly know. I do think that MMT, in showing that it is only an inflation constraint on government spending, does allow for a considerable difference in policy prescriptions from what the typical non MMT economist would have said 15 years ago. And it is far different than what the politicians in power today believe- or say they believe. Even more liberal Democrats act as though any proposed budget change needs to have a ‘pay for’ included in the bill. It hobbles progressive policy.

        • Reagan must have been an MMTer, because he implicitly blamed Carter’s paltry deficits for high 1970s inflation. Except Reagan cut taxes as inflation fell, and ran deficits four times higher than Carter. A real MMTer would have raised taxes in the 1970s? I bet they would have been voted out faster than Carter.
          Far better is to realize inflation is not a constraint at all, since it can easily be hedged and adjusted to. Reagan understood that projecting US power in the Middle East would bring down inflation …

          • Robert, MMT doesn’t necessarily just prescribe an increase in taxation to deal with inflation. In some cases a cut back in specified programs might be appropriate. In addition, MMT doesn’t rule out an incomes policy in certain sectors where an inflationary spiral is beginning to crop up. By the way how would you suggest Australia could hedge inflation?

            • Pay inflation via inflation-indexed bonds and inflation swaps, and print money as needed.
              Inflation swaps currently match private inflation sellers with inflation buyers. Retailers who benefit from rising prices pay inflation to savers who buy a bond. Sovereigns also theoretically benefit from inflation because nominal tax receipts should increase, all things being equal. If breakeven private inflation swap rates get too far away from target, the central bank should buy or sell inflation swaps to pin the breakeven rate.
              Savers are buying insurance against inflation rising above an implied, or breakeven, rate from the price of the inflation-linked financial product. The central bank can hedge inflation in private markets but instead of relying on tax money, it just prints it.

  3. I do not think MMT gives a hard refute of exchange rate effects, just that it depends on many factors – primarily in the political economy rather than the operational economy – where between developed economies the passthrough effect is close enough to negligible or minimal

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