A money theory risen from the grave sows terror

The “modern monetary theory” MMT is again on everyone’s lips, thanks to an over-interpreted tweet by the Prime Minister. What does the episode say about the sorry state of the Finnish monetary policy debate?

I thought the so-called modern monetary theory (MMT) was long dead and buried. But now it has come back to haunt us. Its ghost is lurking in every corner, from the editorial page of Helsingin Sanomat to Yle’s current affairs programme A-studio.

The basic idea of MMT is that if a country can incur debt in its own currency, it can always pay its debts by switching on the money machines. In this way, it can never be forced to default.

In fact, this is true at best in a rather unintriguing sense. Owning a banknote printing press does not actually protect a country from bankruptcy, nor does it relieve it of the constraints of economic management. Both economic theory and history tell us this quite straightforwardly.

MMT is, therefore, more interesting as part of a movement critical of capitalism than an economic theory school.

Nevertheless, MMT was still an occasionally amusing subject to discuss a few years ago. Many of its proponents are sharp, and conversations were rewarding.

However, that was still the post-inflationary era, and the discussion was at a comfortable theoretical level. Now that we have entered the post-inflationary era, the entertainment value of MMT has disappeared.

The Prime Minister ruffles feathers

Why, then, has MMT, which I thought had fizzled out, returned to the domestic debate?

The immediate reason is the Prime Minister’s infallible ability to unnerve critics. On Twitter, she quoted a column by political scientist Antti Ronkainen:

“There is something seriously wrong with the prevailing ideas of monetary policy when central banks protect their credibility by driving economies into recession.” (translated) https://t.co/QHRVqvXXnc

— Sanna Marin (@MarinSanna) October 2, 2022

The Prime Minister could have been more direct. She could have laid down criticisms of monetary policies directly on the table instead of hiding behind quotation marks.

Because of its indirectness, the Prime Minister’s tweet left a regrettable amount of room for interpretation. But it could well be interpreted without any reference to MMT. Perhaps she just wanted to signal that she does not think an overly tight monetary policy is a good idea in the current economic situation.

Whether the Prime Minister is right – which is entirely possible – or not, there is nothing strange about her opinion as interpreted in this way. Prime ministers have never liked tight monetary policy. This is precisely why they were isolated from monetary policy-making, and central banks were made independent.

Instead of pointing this out, for example, Aki Kangasharju, Managing Director of the ETLA Economic Research, declared that the Prime Minister had fallen under MMT’s spell.

The editor-in-chief of Helsingin Sanomat also interpreted, or I think overinterpreted, that the Prime Minister had sided with MMT based on the tweet. Kai Mykkänen, chairman of the Coalition Party’s parliamentary group, did the same in A-studio.

The level of the Finnish debate is modest

The immediate reason for MMT’s return to the public eye was, therefore, the Prime Minister’s ability to rattle the public. But I sense a deeper problem.

Perhaps people in Finland are no longer very good at having a political debate about inflation and interest rates.

Instead of simply saying that she is in favour of lower interest rates, the Prime Minister is criticising “the prevailing ideas of monetary policy”. Similarly, those in favour of higher interest rates have no other way of expressing their views than stirring up MMT panic.

The loss of debating skills is probably partly due to the long era of zero interest rates without inflation and the distancing of decision-making to Frankfurt. These took interest rates and inflation away from the heart of politics for a long time.

The lack of academic voices is also a problem. In university economics departments in Finland, monetary policy experts are few and far between.
The economists who are most familiar with scientific research in the fieldwork at the Bank of Finland. Naturally, working at the central bank almost completely prevents them from participating in public debate.

Elsewhere in the world, politicians and academics engage in a heated but MMT-free debate on interest rate policy. We need to be able to do the same.

There are real passions, choices and disagreements involved. For example, it is unclear what the effects of raising interest rates will be. How to deal with the consequences and risks of interest rate policy is a question of values.

This is not just some stuffy issue of interest only to economists. Central banks’ decisions directly affect employment, purchasing power and income distribution – in other words, the well-being of all of us.

We must be able to disagree on these important issues without being suspected of joining strange schools of thought.

All of us, politicians, economists and citizens alike, must therefore learn to engage in the heated political debate about inflation and monetary policy. But let us let the poor modern monetary theory rest in peace in the graveyard of tiresome thoughts.