For Overspending Governments, an Alternative View on Borrowing Versus Raising Taxes
(Bloomberg) -- Under conventional economic theory, a government that spends more than it collects has two unpleasant choices: borrow, or raise taxes. An alternative view provided by what’s known as Modern Monetary Theory is taking hold among progressive U.S. politicians. The idea is that there’s lots more room for deficit spending on wish-list items like guaranteeing everyone a job, fixing infrastructure, making higher education loan-free and ensuring everyone has access to health care. With President Donald Trump and congressional Republicans having gone all-in on cutting taxes, these Democrats want to offer voters something bolder than rehashed stories about the perils of budget deficits.
1. What are the tenets of Modern Monetary Theory?
Its main argument is that countries that have their own central banks and borrow in their own currencies -- the U.S., U.K., and Japan, for example -- can’t go broke. This isn’t such a departure from mainstream political thought. The U.S. has run surpluses in only 12 of the last 77 years, and congressional Republicans -- members of a party once known for challenging too much government spending -- cut taxes and raised military spending in the past year, both of which will add to the deficit. America’s creditors show no signs of worry about the government’s ability to pay its bills.
2. So a government can just print as much money as it wants?
MMT does recognize the possibility of overdoing things but says when there’s little inflation in the economy, as now in the U.S., there’s much more room to spend than economists typically allow.
3. Where did the idea come from?
It developed over the past quarter-century among a small group of economists, rooted in an older theory called chartalism and advancing the ideas of earlier post-Keynesian thinkers. There was a bump in interest following the global recession of 2007-2009, as governments pushed the envelope in trying to stimulate economies. Warren Mosler, widely credited as a pioneer of MMT, started out promoting his ideas in early internet chat rooms alongside economist Bill Mitchell and others.
4. Who’s leading the charge now?
One prominent MMT enthusiast is Stephanie Kelton, a professor of public policy and economics at Stony Brook University in New York who advised Senator Bernie Sanders during his 2016 presidential campaign. "Deficits, per se, are not disturbing," Kelton wrote in a September column for Bloomberg Opinion. "Is there a limit to how big the deficit can safely climb? Absolutely! Deficits matter. They can be too big -- risking accelerating inflation. But they can also be too small, robbing the economy of a critical source of income, sales and profits."
5. Why does this theory matter?
Because at least some Democrats in government, and others seeking election, are subscribing to a component of MMT -- the idea of a government as employer of last resort, hiring anyone who wants to work. (Many such discussions envision an hourly salary of $15.) Proponents include Sanders, the Vermont independent who ran for president in 2016 and is expected to run again in 2020; Democratic senators Cory Booker of New Jersey, Kirsten Gillibrand of New York and Elizabeth Warren of Massachusetts; and Alexandria Ocasio-Cortez, the former Sanders organizer who upset a veteran congressman to seize the Democratic nomination in a House district in New York.
6. What do others think?
Critics say Modern Monetary Theory is a recipe for reckless spending, runaway prices and, in the extreme, economic collapse as in Venezuela. If the government borrows on the scale advocated by MMTers, “the outcome, I believe, will be inflation. And they don’t believe that," says Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington. Brian Riedl of the conservative Manhattan Institute dismisses a jobs guarantee as “fantasy-land economics” that would require higher taxes and devastate industries like retail and fast food that would be paying less than government-provided jobs.
The Reference Shelf
- A QuickTake explainer on the U.S. budget deficit.
- The MMT pioneer who hopes to be governor of the U.S. Virgin Islands.
- More on the idea of a U.S. government-guaranteed job.
- A Bloomberg Opinion column explored when it’s time to start worrying about budget deficits.
- Ronald Reagan’s first inaugural address in 1981, decrying deficits.
©2018 Bloomberg L.P.