In particular, the cost of government borrowing does not depend solely on the risk of default. It also depends on factors such as expectations for inflation, as well as the opportunity cost of diverting resources from the private sector.
This is where the second plank of MMT is important, but frequently glossed over. Many of its more fanatical supporters have looked at the recent surge in borrowing and concluded that there never has been – and never can be – a lack of money to pay for better healthcare, education, welfare, or green infrastructure. Sadly, this is baloney.
Money itself may not be a “scarce resource”, but the same cannot be said of the goods and services that it is expected to buy. Otherwise, any country with its own currency could use its “magic money tree” to pay for world-leading healthcare, education, and so on.
Most people, including the more sensible proponents of MMT, recognise that unlimited monetary financing of public spending could simply lead to higher inflation, or crowd out private spending in other ways.
The third point about the benefits of running a deficit is often the most confused. It is simply not true that deficits are necessary for economies to grow, or to pay for good public services. Many countries, notably in Scandinavia, have run budget surpluses for long periods and still enjoyed sustained increases in living standards.
In addition, deficits are usually financed by conventional borrowing, not money printing. This is true even now during the pandemic. Bond purchases by central banks have helped to keep long-term interest rates low, but direct monetary financing of deficits is mostly still taboo.
Indeed, if all that MMTers are saying is that governments should be willing to borrow more to stimulate demand during recessions, and especially when interest rates are already close to zero, that’s hardly new or controversial either.