For Overspending Governments, an Alternative View on Borrowing Versus Raising Taxes

(Bloomberg) -- Under conventional economic thinking, a government that spends more than it collects has two unpleasant choices: borrow or raise taxes. An alternative view, Modern Monetary Theory, is more accommodating of deficit spending. MMT is taking hold among U.S. politicians whose wish lists include guaranteeing everyone a job, fixing infrastructure, making higher education loan-free and ensuring everyone has access to health care. The invigorated progressive wing of the U.S. Democratic Party is using MMT to push back against decades of fiscal hawks saying the nation can’t afford large-scale social projects such as the recently proposed Green New Deal.

1. What are the basics 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 and don’t need to be so worried about overspending. 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 Republicans -- members of a party once known for challenging too much government spending -- cut taxes and raised military spending under President Donald Trump, adding more than $1 trillion to the deficit. America’s creditors show no signs of worry about the government’s ability to pay its bills, as judged by the yields on the nation’s benchmark notes.

2. So a government can just print as much money as it wants?

Not quite. Deficits do matter under MMT, which recognizes the possibility of overdoing things and stoking inflation. But when there’s little inflation in the economy, as now in the U.S., MMT says there’s much more room to spend than economists typically allow.

3. Who subscribes to MMT?

Representative Alexandria Ocasio-Cortez, who has become the face of the progressive push in Congress, backs MMT and has floated increased deficit spending to pay for the proposed national mobilization to address climate change that’s being promoted as the Green New Deal. (Its myriad initiatives would cost upwards of $93 trillion, according to one estimate.) Some other big-name Democrats are backing not just the Green New Deal but also the related MMT-inspired idea that the government should be an employer of last resort, hiring anyone who wants to work. Four U.S. senators seeking the Democratic Party’s 2020 presidential nomination -- Cory Booker of New Jersey, Kirsten Gillibrand of New York, Elizabeth Warren of Massachusetts and Bernie Sanders, the Vermont independent who in the past has called himself "a democratic socialist" -- have signed on to both initiatives.

4. Where did the MMT 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.

5. 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 Sanders during his 2016 presidential campaign. Deficits "can be too big" when they risk accelerating inflation, she wrote in a September column for Bloomberg Opinion, but they "can also be too small, robbing the economy of a critical source of income, sales and profits." Pavlina Tcherneva, chair of the economics department at Bard College in New York, is another key voice, particularly in advocating MMT as the foundation for the government guaranteeing everyone a job. There’s also a younger generation of supporters including Rohan Grey, founding president of the Modern Money Network, and Raul Carrillo, staff attorney at the New Economy Project in New York.

6. What do others think?

Critics say MMT is a recipe for reckless spending, runaway prices and, in the extreme, economic collapse on the scale of Venezuela, particularly as the U.S. deficit nears $1 trillion. BlackRock Chief Executive Officer Larry Fink called MMT "garbage"; former New York Fed president Bill Dudley said its proponents want a “free lunch." Other economists are more nuanced. Former Pimco chief economist Paul McCulley said super-low inflation in the U.S. over the past decade is one factor in favor of an MMT approach. Former Janus Capital fund manager Bill Gross said the U.S. could safely double the size of the budget deficit. Olivier Blanchard, former chief economist at the International Monetary Fund, said debt is manageable so long as economies grow at a faster pace than a government’s borrowing costs. Even former Treasury Secretary Larry Summers, who called MMT “fallacious at multiple levels,” co-wrote an article urging Washington to "end its debt obsession."

The Reference Shelf

• A QuickTake explainer on the U.S. budget deficit.
• The MMT pioneer who lives in a tax haven.
• More on the idea of a U.S. government-guaranteed job.
• One group’s plan to fund a Green New Deal.
• A Bloomberg Opinion column that criticizes MMT, and another that answers the critics.
• A deeper dive on inflation by MMT proponents in an op-ed.
• A podcast that explores MMT with monthly episodes.
• Ronald Reagan’s first inaugural address in 1981, decrying deficits.

To contact the reporter on this story: Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Laurence Arnold, Ben Holland

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