Modern Monetary Theory (MMT) has become a hot issue, especially after U.S. Rep. Alexandria Ocasio-Cortez stressed its importance in boosting public spending for education and medical services. The global economic slowdown, rising inequality and limited opportunity for additional monetary easing support a fiscal expansionary policy.
MMT claims that governments never default on their own currency-denominated debt because they have a monopoly on supplying the currency. Thus they should increase public spending to achieve full employment and price stability. Neither taxes nor bond issuance are necessary to finance public spending. Expansionary fiscal policy can be sustained until substantial inflationary risk emerges, which in turn can be controlled through a tax hike.
MMT claims that fiscal policy is powerful with the ability to directly increase employment through various projects and the ability to adjust inflation through taxes. In contrast, monetary policy is ineffective for several reasons. Interest rate cuts do not generate sufficient credit demand when the outlook on firm profitability and household income is weak. Reduced interest income also discourages private sector spending.