(May 11): Modern Monetary Theory (MMT) has received unprecedented attention now that policymakers are pursuing extraordinary economic-policy measures to combat the Covid-19 pandemic. Discussing the US Federal Reserve’s “whatever it takes” approach, CNBC’s Joe Kernen recently concluded that “we are all MMTers now”. And in a recent commentary, Willem H Buiter of Columbia University claimed that “much of the US response [to the pandemic] will come in the form of ‘helicopter money’, an application of [MMT] in which the central bank finances fiscal stimulus by purchasing government debt issued to finance tax cuts or public spending increases”.

As these remarks show, many commentators seem to view MMT as merely a blueprint for turning on the printing press, whether to send cash to Americans through an appropriation by Congress, or to provide liquidity to financial markets through the Fed’s actions. With the recent adoption in the US of a US$2.1 trillion ($2.96 trillion) rescue package, we are supposedly now engaged in what Buiter calls “a massive experiment with hitherto unorthodox” MMT.

These commentators have it all wrong. MMT does not support quantitative easing (QE), nor does it prescribe “helicopter drops”, for the simple reason that there is no such thing as a “helicopter money” alternative to financing a fiscal-stimulus package. Instead, what MMT does is describe how a government that issues its own currency actually spends, taxes, and sells bonds as a matter of course. In doing so, the theory demonstrates that a government like that of the US does not, in fact, face financial constraints.

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