You may have heard of Modern Monetary Theory, an approach to economics that is increasingly popular on the left, and which is sometimes mischaracterized (by advocates and especially detractors) as holding that budget deficits are either unimportant or inherently good for the economy.
This week, freshman representative Alexandria Ocasio-Cortez told Business Insider that MMT needs to be “a larger part of our conversation.” You will often hear MMT cited in response to questions about how significant expansions of federal government spending, such as single-payer health care, would be financed. The idea is that MMT renders those financing questions much less important, because it counsels worrying less about the deficit.
MMT — or at least, the part of MMT that is most directly relevant to current debates about government spending — is neither crackpottery nor a revelation. It’s a way of stating an idea that can be stated equally well within an orthodox economics framework: that the desirability of budget deficits depends on the economic situation in question. MMT does not relieve policy-makers of “pay-for” questions — it just describes differently how policy-makers should evaluate whether they’re collecting enough taxes for a given level of government spending.
JW Mason, a leftist economist at the City University of New York who isn’t an adherent to MMT but describes himself as sympathetic to the approach, co-authored a paper last year with Arjun Jayadev of the University of Massachusetts Boston that helpfully seeks to map MMT onto a neo-Keynesian approach. That’s the approach typically associated with economic policy-makers in the Democratic party and further to the left, and it holds that when the economy goes into recession, the government should engage in deficit spending to make up for lost economic activity in the private sector, reduce unemployment, and engage otherwise idle resources.
The way Mason and Jayadev describe it is that MMT takes the traditional framework and reassigns the primary purposes of fiscal and monetary policy. Usually we would say that the government uses fiscal policy to keep public debt at an appropriate level and uses monetary policy to control inflation. MMT flips this on its head, espousing the use of fiscal policy to control inflation and of monetary policy to keep the public debt sustainable.
So while a conventional economic thinker might say you establish a new government program and levy taxes (now or in the future) to pay for it, an MMT thinker would say you establish a new government program and the government prints the money to pay for it. But that does not mean the MMT thinker thinks the new program is free! The government is not constrained by its ability to obtain dollars, but the economy is constrained by real limits on productive capacity. If the government prints and spends money when the economy is at or near full employment, MMT counsels (correctly) that this will lead to inflation, and prescribes deficit-reducing tax increases to reduce aggregate demand and thereby control inflation.
See how we have ended up back where we started? Whether you take a Keynesian view or an MMT view, if the government spends more, it’s likely going to need to tax more, sooner or later.
Of course, it matters how you describe things. And MMT economists will tell you there has been a strong bias in policy-making toward seeing the downsides of deficits instead of the upsides, in part because of the way we have become used to talking about deficits.
“One of the things that MMT has tried to do is say yes, of course, the deficit can be too big. Evidence of that would be an acceleration in inflation,” says the economist Stephanie Kelton, a professor at the State University of New York at Stony Brook, former adviser to Senate Budget Committee Democrats, and probably the most prominent MMT advocate in the economics profession. “But the deficit can also be too small. That’s something we’ve said for a long time that not a lot of other economists have pointed out.”
“Not a lot” is an overstatement — automatic and discretionary policies to expand budget deficits are policy tools both liberal and conservative governments reach for in recessions, whether they emphasize it in their rhetoric or not, and some economists must have been advising those policy-makers to use those tools — but I believe Kelton is correct that both economists and economic policymakers have been too focused on the risks of high deficits relative to low ones, and too focused on the risk of inflation versus the risk of unemployment. That is, while policymakers know we should run deficits in recessions, when the recession is really big they don’t run them large enough for long enough.
Mason argues that the key usefulness of MMT is for political economy — to restructure the choices facing policymakers so they’re more likely to achieve the goals of full employment and stable inflation, and less likely to err as they have: on the side of low deficits, high unemployment, and missed inflation targets in the down parts of economic cycles.
But there is a reason to believe an MMT approach would not lead to better management of the economy in the long run: The fact that it calls for raising taxes to control inflation when the economy is strong. It is hard enough to sell voters on the idea of raising taxes in order to provide them valuable services. Now we are supposed to tell voters that taxes aren’t for financing the government, but we need to raise them anyway so we don’t overshoot an inflation target?
“The strong argument against MMT is precisely the one you made, that tax increases will be potentially difficult to carry out,” Mason told me when I asked him about this issue. “The contractionary piece of that might not be followed in practice because it would be very unpopular.”
And Mason thinks this issue could come up a lot, because — contrary to the views of some MMT scholars and most MMT enthusiasts in the political sphere — he believes that consistently implemented MMT would call for smaller budget deficits in the long run than a traditional Keynesian approach.
Remember, the primary way the government controls inflation now is through monetary policy: the Fed raises interest rates when it believes (correctly or otherwise) that inflation threatens a rise. But MMT thinkers tend to believe interest rates should be kept low and stable, regardless of inflation conditions — Warren Mosler, one of the founders of the movement, says they should be set permanently at zero. Without the interest-rate lever, once MMT policymakers achieved their goal of an economy at full employment, the tool they’d have to use to control inflation is a very unappealing fiscal one: tax-financed budget surpluses.
Whatever the Federal Reserve’s demerits, the idea of depending on Congress to pass surplus-generating tax increases in order to keep the economy stable and prevent runaway inflation gives me hives.
The key question about MMT is whether expecting Congress to implement a novel model of economic management in a way that could go haywire is really the best way to address biases in economic policymaking when those biases could be addressed more directly.
The economics profession is already working on this: Olivier Blanchard, outgoing president of the American Economic Association and former chief economist at the International Monetary Fund, used his speech at the AEA’s annual meeting last week to urge a rethinking of the merits of public debt, arguing that its fiscal and social costs are lower than economists have often thought. Essentially, this is the core of the Kelton critique — that we have been too quick to assume deficits are bad and too reluctant to see when they are good — but expressed without departing from the Keynesian model of spending and deficits.
“I think there are a lot of reasons to rethink fiscal policy, and almost all of them are because the parameters in our models have changed,” says Jason Furman, an economics professor at Harvard’s Kennedy School of Government, who served as chairman of the Council of Economic Advisers under Barack Obama.
What parameters? Furman notes, as Blanchard did in his speech, that it’s become clear that risk-free interest rates are persistently below the rate of economic growth, which makes it easier for governments to be confident that their economies will grow faster than their debts. And he notes that the link between deficits and interest rates appears to be weaker, so there’s less reason to worry that high borrowing levels will lead to out-of-control borrowing costs.
“I have a certain sympathy for MMT; I think they are more correct than the people who are trying to revive Bowles-Simpson,” says Furman, referring to a proposal from early this decade to sharply reduce federal budget deficits. “Those people may have the right model and the wrong parameters. MMT may have the wrong model, but it may get you the same thing as the right model if you have the right parameters.”
Furman, like Mason, says he has significant reservations about MMT prescriptions like keeping interest rates permanently low and seeking to control inflation through tax increases.
That Ocasio-Cortez and some commentators on the left turn to MMT to argue for the feasibility of significant increases in government spending is odd given another talking point they use: that other countries have found ways to finance larger and more generous governments than the US does, providing benefits like free education and single-payer health care to their populations.
This is true and a valid rejoinder to anyone who thinks such programs are impossible — as for how difficult they might be to implement here, it is important to note that the US starts off a higher per-capita cost base than any other country that has ever previously sought to move nearly all health-care expenditure onto the public ledger — but it also undermines the case for MMT.
None of those countries that have single-payer health care needed MMT to make it work. They did it the conventional way, by taxing the public. Maybe that’s a sign that that’s the best way to implement such programs. Or maybe it just reflects the fact that you’d still need to tax the citizenry to implement single-payer health care, even with an MMT worldview.
