MMT is in the Spotlight with Recession from Tax Increase!?
Infinite Fiscal Deficit is Impossible
Photo: HIROYUKI OZAWA/Aflo
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MMT Gains Attention After Tax Increase
After the consumption tax increase in Japan, there have been continuous indicators of an economic recession, including a 5.1% decrease in consumption expenditure. In light of this, the Modern Monetary Theory (MMT) is receiving increased attention.
Details
Allowing for an Infinite Fiscal Deficit
MMT, in its simplest terms, is a theory that allows for an infinite fiscal deficit.
Its primary points are as follows:
- If nations are using their own currencies as units of debt, they will not go bankrupt (default on a debt).
- This is because they can print more money in order to pay off their debt.
- Creating massive amounts of currency won’t cause its value to lessen. This is because the currency is backed by the fact that it is the only way to pay taxes (*1).
Based on this theory, political parties such as Reiwa Shinsengumi, headed by Mr. Taro Yamamoto, are coming up with drastic policies including “the abolishment of consumption taxes,” “a minimum wage of 1500 yen guaranteed by the government,” and “the distribution of money.”
Perspective 1
Historically Infeasible
However, MMT can easily be disproved by looking at history.
In the past, there have been many countries who have mass-printed their currency in order to pay off their debt, causing its value to crash tremendously (hyperinflation). In Germany, too, there have been instances where a trunk full of bills was required to buy a coffee. Even though their debt was technically paid off, they were also technically bankrupt (*2).
Perspective 2
Economic Growth Is What Causes Fiscal Reconstruction
We also note that Japan is in debt with its own currency it they shouldn’t raise taxes worrying about fiscal reconstruction. Where is the line between secure and dangerous fiscal policy?
The most important aspect is the balance between debt and gross domestic product (GDP).
Two companies that both have a debt of 10 million yen will each have a different sense of security if one has revenue of 100 million yen annually while the other has revenue of 2 million yen. Government, too, would have increased tax revenue and be able to continually pay off its debt if the nation’s economy prospered.
However, the Ministry of Finance in Japan has cooled off the economy with a hasty tax increase which has stopped the nation’s economic growth. With this, the ratio of national debt to the scale of the economy has increased, putting their finances in danger.
When thinking about financial safety, the question of whether the government is using its money in order to increase GDP in the future also needs to be asked.
In corporate terms, this question is equivalent to asking whether a company is using part of their profit for new investments and research and development, or whether they are using it for unnecessary receptions and social benefits.
Looking from this perspective, opposition parties with policies based on MMT are dangerous.
Far-fetched distribution policies may benefit the economy in the short term, but it will be transient. The increase in debt will surpass the increase in GDP, causing the nation to head towards bankruptcy.
The basic principles of economic reconstruction are growth first and growth second. What we need right now is to cut off unnecessary expenses while decreasing consumption taxes that are stifling the economy. Then, investment should be made in areas that will create future wealth, such as traffic infrastructure, and the industries of the future, instead of using the money to distribute of social security widely.
There will be a time lag before these policies lead to increased tax revenue. However, the Japanese government is in fact in debt with its own currency; although debt is not unlimited, this signifies that there is time to wait for the growth to occur.
