Modern Monetary Theory: A License for Deficit Spending?

Every once in a long while, you come across something that provides you with a totally different perspective on an issue that you long thought was well-understood.  Katia Dmitrieva provided such an epiphany in an article in Bloomberg Businessweek with the intriguing title A Hedge Fund Guy Lefties Can Love.  There are several “hedge fund guys” who are beloved of lefties because they contribute funds to liberal causes.  However, in this case, the beloved, Warren Mosler, has been promoting an economic theory that could provide a solution to the greatest problem liberals face: how to pay for all the things they feel a need to do.

For many years Mosler has been espousing an economic theory referred to as Modern Monetary Theory (MTM).  Consider this summary of the implications of MTM.

“Its main argument is that governments with their own currencies can’t go broke. They have more room to spend than is usually supposed and don’t need to collect taxes (or even borrow) to pay for it. One thing they can, and should, spend money on is a jobs guarantee—offering work to anyone who wants it.”

How revolutionary is that!

A more detailed explanation of MTM and why it has finally begun to receive some respect from the economics community is provided by Atossa Aroxia Abrahamian in The Nation: The Rock-Star Appeal of Modern Monetary Theory.

The US dollar is a fiat currency.  That means it has the value assigned to it based only on the credible word of the government producing and providing it.  There is no specified amount of gold or some other commodity backing it up.  This means the amount of dollars in circulation has no physical limitation.  There may be economic or social constraints that enter into the equation, but MTM proponents claim that false economic constraints that have produced great social harm have been applied for decades. 

Abrahamian provides this perspective.

“Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.”

“The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.”

Mosler has acquired some credible allies in promoting MTM.  One of the leading proponents is Stephanie Kelton.

“Stephanie Kelton recalls initially disagreeing with some of Mosler’s theories about taxes; then her colleague L. Randall Wray told her to do her own work and show how he was mistaken. ‘I wrote it up in the Cambridge Journal of Economics and set out to prove he was wrong,’ Kelton recalls, ‘but I arrived at the same place he did’.”

“From then on, Mosler became something like the movement’s sugar daddy, funding graduate research, making donations to the Center for Full Employment and Price Stability at the University of Missouri, even opening a research center in Switzerland.”

Some economists continue to dismiss MTM as nonsense, but a greater number of them are now willing to at least debate its main points.  The biggest area of contention involves how likely injecting significant amounts of money into the economy is likely to create an unacceptable level of inflation.  The MTM people claim that inflation is not an issue unless the economy is utilizing labor and other resources at full capacity, and that we are far from such a state at present.  They claim that they predicted effects that befuddled traditional economic thinkers.

“’We built credibility,’ Kelton says, ‘and that helped us get established as a school of thought. The [New Economic Perspectives] blog helped us get a voice. It also gave us a historical record about being right about things like how the US downgrade wouldn’t make interest rates go up; that quantitative easing wasn’t inflationary; and that the eurozone would run into trouble. We were saying that in 1998’!”

And suddenly, economics is boring no longer.