Economists Worry That MMT Is Winning the Argument in Washington

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U.S. budget deficits and the national debt are on track to keep growing because both President Donald Trump and his Democratic rivals want to use low interest rates to finance more spending -- in effect embracing some form of Modern Monetary Theory, business economists said at a debate on the topic Monday.

Conservatives and centrist Democrats argued in support of fiscal discipline for years by saying it would crowd out private spending, “and they used the threat of higher interest rates as the scary boogeyman,” Julia Coronado, president of MacroPolicy Perspectives LLC, said at a meeting organized by the National Association for Business Economics in Denver.

But interest rates have fallen this year even as the U.S. deficit surpassed $1 trillion in the 11 months through August, after tax cuts passed by Trump and a Republican Congress. The 10-year Treasury yield has fallen to around 1.5%, from more than 3% in November.

And among the Democrats, MMT -- which argues that governments with their own currency can’t go broke, and can keep spending until inflation becomes a problem -- has been embraced by some progressives to push back against fiscal hawks who argue the U.S. can’t afford big spending programs like Medicare For All and a Green New Deal. One of the highest-profile MMT economists, Stephanie Kelton, is an adviser to the Bernie Sanders campaign.

‘Wrong About Everything’

The decline of the deficit fear-factor is palpable in Washington, said Coronado, a former Federal Reserve economist. “You can see it politically, it’s already happening,” she said. “The progressive camp is frustrated, they have had it, and are saying ‘You guys are wrong, you have been wrong about everything and now it’s going to be our turn.’”

Slowing global growth and trade disputes have helped push interest rates lower, and were cited by the Fed when it cut its target rate twice this year. Investors project a third cut Oct. 30, and other central banks are also easing policy.

That’s one reason for the turn toward more budget stimulus, Catherine Mann, global chief economist with Citigroup Inc., told the panel.

“Monetary policy creates fiscal space by reducing the interest rate that sovereigns have to pay on their borrowing relative to what it was in 2007,” Mann said. That creates the option to retire the debt, “which is what the bond vigilante people would have said you should do” -- or to increase outlays, as the U.S. government is in fact doing.

Whether that spending is productive will depend on whether it enhances the economy’s ability to grow, she said.

‘Let’s Have a Party’

Most mainstream economists have been critical of MMT, though there’s growing support for the idea that fiscal policy may have to take over from monetary policy as the driver of growth in the economy.

That doesn’t justify current U.S. budget deficits, which are “not a recipe for being a strong, healthy superpower economy,” Cristina Romer, who was chair of the Council of Economic Advisers under the Obama administration, told the Denver meeting.

“The idea that ‘let’s have a party now’ and not even be thinking about how much the fiscal situation is predicted to deteriorate because of demographics and health care and long-run trends, is just really deeply irresponsible,” she said.

Former Fed governor Laurence Meyer noted during the discussion that economics heavyweights including former Treasury Secretary Larry Summers have come out in support of fiscal stimulus.

Still, even with structural forces keeping rates low, “there is a limit,” Meyer said. “You can’t have $5 trillion deficits for the next 20 years and say everything is going to be fine.”

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Jeff Kearns, Ben Holland

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