MMT and Two Paths to Big Deficits
In recent months, the international policy-making elite has tried to distance itself from Modern Money Theory (MMT), often going to hysterical extremes to dismiss the approach as crazy–including Japanese officials who reject any intimation that they are following MMT policy. Yet, as MMT gathered momentum over the past year, its developers began to receive a flood of calls from reporters around the world enquiring whether Japan serves as the premier MMT example. After all, MMT supposedly promotes budget deficits and for a generation Japan has run the biggest deficits among the rich, developed, capitalist nations. And MMT is purported to claim government debt doesn’t matter, so why not point to the nation with the biggest government debt ratio as the prototype for MMT policy? My answer is always the same: No, Japan is not following MMT policy. Instead, Japan is the perfect case to demonstrate that all of the mainstream theory concerning sovereign budgeting is wrong. And that Japan is the best example of a country that consistently chooses the antiMMT policy response. Let’s quickly run through the evidence. First, mainstream economics predicts that big deficits cause inflation. Yet in the country with the