Modern Monetary Inevitabilities

ALEXANDRIA, VIRGINIA – In a recent Project Syndicate commentary, James K. Galbraith of the University of Texas at Austin Modern Monetary Theory and corrects some misunderstandings about the relationships among MMT, federal deficits, and central-bank independence. But Galbraith does not explore what is perhaps the most important issue of all: the political conditions needed to implement MMT effectively.

MMT owes its newfound relevance to the fact that deflation, rather than inflation, is becoming central banks’ main concern. For a high-debt, high-deficit economy like the United States, deflation is an especially serious threat, because it delays consumption and increases debtor anxiety. Consumers forego major purchases on the assumption that future prices will be lower. Homeowners with mortgages cut back their spending when they see home prices falling and the equity in their homes declining. These cutbacks worry the Federal Reserve, because they add to deflationary pressures and could trigger deeper spending cuts, stock-market declines, and widespread deleveraging.

The Fed’s inability so far to reach its 2% target for annual inflation suggests that it lacks the means to overcome persistent disinflationary forces in the economy. These forces include increased US , which diminishes aggregate demand by weakening employee bargaining power and increasing income inequality; population aging; inadequate investment in infrastructure and climate-change abatement; and technology-driven labor displacement. Making matters worse, US political gridlock assures continued commitment to economically exhausted strategies such as tax cuts for the rich, at the expense of investment in education and other sources of long-term growth. These conditions cry out for significant changes in US government spending and tax policies.

MMT is seen as a way to accomplish the needed changes. It holds that a government can spend as much as it wants if it borrows in its own currency and its central bank can buy as much of the government’s debt as necessary – as long as doing so doesn’t generate unacceptably high inflation. Both tax-cut advocates and supporters of public investment find little not to like.

MMT has been roundly criticized by economists across the political spectrum, from Kenneth Rogoff and Lawrence H. Summers of Harvard University to Paul Krugman of the City University of New York. All contend that it is a political argument masquerading as economic theory. But Galbraith and Ray Dalio of Bridgewater Associates see MMT differently. Dalio argues that MMT is real and, more to the point, it is an inevitable policy step in historically recurring debt-cycle downturns.

In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is

  1. to cut overnight official rates to stimulate credit and investment expansion. The second (MP2)
  2. is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and
  3. proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.

Achieving political agreement on what to finance and how is essential for implementing MP3 effectively. In a financial meltdown or other national emergency, political unity and prompt action are essential. Unity requires a strong consensus on what should be financed. Speed requires the existence of a trusted institution to direct the spending.

In the early 1940s, when the US entered World War II and winning the war became the government’s top priority, the Fed entered full MP3 mode. It not only set short- and long-term rates for Treasury bonds, but also bought as much government debt as necessary to finance the war effort. MP3 was possible because the war united the country politically and gave the Roosevelt administration near-authoritarian rule over the economy.

The core weakness of MP3/MMT advocacy is the absence of an explanation of how to achieve political unity on what to finance and how. This absence is inexcusable. Total US debt (as a share of GDP) is approaching levels associated with past financial meltdowns, and that doesn’t even account for the  associated with infrastructure maintenance, rising sea levels, and unfunded pensions. For the reasons Dalio lays out, a US debt crisis requiring some form of MP3 is all but inevitable.

The crucial question that any effort to achieve political unity must answer is what constitutes justifiable spending. Alexander Hamilton, America’s first Secretary of the Treasury, offered an answer in 1781: “A national debt,” he wrote, “if it is not excessive will be to us a national blessing.” A government’s debt is “excessive” if it cannot be repaid because its proceeds were spent in ways that did not increase national wealth enough to do so. Debt resulting from tax cuts that are spent on mega-yachts would almost certainly be excessive; debt incurred to improve educational outcomes, maintain essential infrastructure, or address climate change would probably not be. Accordingly, it will be easier to achieve political unity if MP3 proceeds are spent on priorities such as education, infrastructure, or climate.

The political test for justifying MP3-financed government spending, is clear: Will future generations judge that the borrowing was not “excessive”? Most Americans born well after WWII would say that the debt incurred to win that war was justified, as was the debt that financed the construction of the Interstate Highway System, which literally paved the way for stronger growth.

As the 1930s and 1940s show, MP3 is a natural component of government responses to major debt downturns and the political crises they trigger. We know much more about what contributes to economic growth and sustainability than we did in the first half of the twentieth century. To speed recovery from the next downturn, we need to identify now the types of spending that will contribute most to sustainable recovery and that in hindsight will be viewed as most justified by future Americans. We need also to design the institutions that will direct the spending. These are the keys to building the political unity that MMT requires. To know what to finance and how, future Americans can show us the way; we need only put ourselves in their shoes.

Worry About Debt? Not So Fast, Some Economists Say

U.S. deficits may not matter so much after all—and it might not hurt to expand them for the right reasons

Now, some prominent economists say U.S. deficits don’t matter so much after all, and it might not hurt to expand them in return for beneficial programs such as an infrastructure project.

“The levels of debt we have in the U.S. are not catastrophic,” said Olivier Blanchard, an economist at the Peterson Institute for International Economics. “We clearly can afford more debt if there is a good reason to do it. There’s no reason to panic.”

Mr. Blanchard, also a former IMF chief economist, delivered a lecture at last month’s meeting of the American Economic Association where he called on economists and policymakers to reconsider their views on debt.

The crux of Mr. Blanchard’s argument is that when the interest rate on government borrowing is below the growth rate of the economy, financing the debt should be sustainable.

.. Interest rates will likely remain low in the coming years as the population ages. An aging population borrows and spends less and limits how much firms invest, holding down borrowing costs. That suggests the government will not be faced with an urgent need to shrink the debt.

Mr. Blanchard stops short of arguing that the government should run up its debt indiscriminately. The need to finance higher government debt loads could soak up capital from investors that might otherwise be invested in promising private ventures.

Mr. Rogoff himself is sympathetic. “The U.S. position is very strong at the moment,” he said. “There’s room.”

.. Some left-wing economists go even further by arguing for a new way of thinking about fiscal policy, known as Modern Monetary Theory.

MMT argues that fiscal policy makers are not constrained by their ability to find investors to buy bonds that finance deficits—because the U.S. government can, if necessary, print its own currency to finance deficits or repay bondholders—but by the economy’s ability to support all the additional spending and jobs without shortages and inflation cropping up.

Rather than looking at whether a new policy will add to the deficit, lawmakers should instead consider whether new spending could lead to higher inflation or create dislocation in the economy, said economist Stephanie Kelton, a Stony Brook University professor and former chief economist for Democrats on the Senate Budget Committee.

If the economy has the ability to absorb that spending without boosting price pressures, there’s no need for policy makers to “offset” that spending elsewhere, she said. If price pressures do crop up, policy makers can raise taxes or the Federal Reserve can raise interest rates.

“All we’re saying, the MMT approach, is just to point out that there’s more space,” she said. “We could be richer as a nation if we weren’t so timid in the use of fiscal policy.”

 .. By continuing to run large deficits, says Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, the U.S. is slowing wage growth by crowding out private investment, increasing the amount of the budget dedicated to financing the past and putting the country at a small but increased risk of a future fiscal crisis.

Market interest rate signals can be misleading and dangerous. By blessing the U.S. with such low rates now, he says, financial markets just might be “giving us the rope with which to hang ourselves.”

Seven Fixes for American Capitalism

Ideas from the Right, the Left, and across the Atlantic to mend what’s broken in our economy.

Antitrust Pivot

Many of the U.S.’s biggest economic ills—rising inequality, stagnant wages, low productivity growth—stem in large measure from corporate consolidation and monopoly power run amok. That’s the message from a new breed of policy wonk urging a return to the trustbusting days of the early 20th century.

The movement—labeled the New Brandeis School by its proponents and derided as Hipster Antitrust by its critics—is looking to ditch the Chicago School approach that’s dominated antitrust enforcement since the late 1970s. The Chicago School hews to what’s known as the consumer-welfare standard, which finds mergers anticompetitive only if they raise prices.

The new model takes its inspiration from Supreme Court Justice Louis Brandeis, who emphasized the need to restrain big companies and the concentration of economic power. Lina Khan helped galvanize the movement with a 2017 paper she wrote as a law student at Yale that made the case that Inc. is a threat to competition, even though it’s lowered some prices for consumers.

Any ambitious government-led project to reshape the U.S. economy usually runs into the same objection: We can’t afford it. One school of economic thought says that’s all wrong.

Modern Monetary Theory, a once-fringe set of ideas now getting some mainstream attention, says governments borrowing in their own currency have more room to spend than they think. The U.S., for example, can run deficits without having to worry about going bust, because it creates the dollars in the first place. The real constraint only kicks in when there’s too much spending relative to a limited supply of goods and services—in other words, when inflation spikes. And there’s been little sign of that in America for decades.

MMTers argue that their system isn’t so radical; it’s the way things already work, at least some of the time. Presidents, including the current one, haven’t balked at measures to boost the military or cut taxes, even when the resulting deficits run into the hundreds of billions. And emergencies, such as the 2008 financial meltdown, typically push concerns about balanced budgets deep into the background.

Now there’s a different sort of emergency on the horizon: climate change. Since the threat is arguably greater than economic depression or even war, it requires action on a suitably vast scale, argue Democrats who’ve picked up on the issue.

And MMT offers a key to unlock the financing. That’s why freshman Representative Alexandria Ocasio-Cortez, one of the first U.S. politicians to talk publicly about MMT, is also at the forefront of the drive for a Green New Deal. The maximal version of that program includes shifting the U.S. to 100 percent renewable energy within 10 years. If that wasn’t ambitious enough, the plan also calls for the government to guarantee a job for everyone who wants one—an MMT favorite that’s also a throwback to Franklin D. Roosevelt’s New Deal.

“Clearly, the environment matters more than entries on balance sheets,” says Randall Wray, a senior scholar at the Levy Economics Institute of Bard College and one of MMT’s most prominent proponents. “The environmental thing is real. It’s not financial.”

MMT’s detractors say government spending on that scale could trigger the kind of inflation that would wreck the whole economy. America’s national debt has already ballooned since the Great Recession, they warn, and adding more will erode the country’s creditworthiness and undermine the dollar’s role in global finance.

While those warnings are still frequently heard, there are signs that they’re losing their impact as the debate leans left. Several renowned economists who aren’t MMTers have recently tried to downplay the risks attached to deficits and debt. They include Olivier Blanchard, former chief economist at the International Monetary Fund, and Obama administration heavyweights Larry Summers and Jason Furman. Bank of England chief Mark Carney has made the case that action on climate change represents an economic opportunity, not a burden.

Ocasio-Cortez didn’t manage to garner enough Democratic support for her first attempt at actual legislation, a proposal to set up a Green New Deal committee. But there’s broad sympathy for the idea in principle, including among several of the party’s presidential candidates, and many of them have also endorsed a jobs guarantee. —Katia Dmitrieva

Tech to the Rescue Inc. Chairman and Chief Executive Officer Jeff Bezos wishes there were a trillion human beings in the solar system. With room for that many people, there would be “a thousand Einsteins and a thousand Mozarts,” he told the Economic Club of Washington, D.C., in September. The world’s richest man is funneling $1 billion or more a year into a company, Blue Origin, that he hopes will help make extraterrestrial settlement a reality, creating places to live for all those Einsteins and Mozarts.

Bezos and others argue that innovation is the essential ingredient in human betterment. They have a point. Life would be pretty awful without the advances made by past generations, such as indoor plumbing, vaccines, refrigeration, and telephones. Bezos even asserts that freedom itself, not just material well-being, depends on technological progress: “I don’t even think stasis is compatible with liberty,” he told the Washington audience.

In the view of the tech-to-the-rescue crowd, innovation can solve just about every problem humanity faces. Global warming can be fixed with better electric cars, solar cells, wind turbines, and batteries. Income inequality can be solved by educating or retraining workers for the high-tech jobs of the future.

The Information Technology & Innovation Foundation, a Washington think tank founded in 2006 to propagate this philosophy, argues that using antitrust law to break up or discipline the big technology companies can backfire, discouraging innovation and harming consumers. Robert Atkinson, president and founder of the ITIF, co-wrote a 2018 book with Michael Lind called Big Is Beautiful: Debunking the Myth of Small Business.

The techies welcome a prominent role for government in paying for education and conducting or supporting research and development. But the movement is split on trade. The nationalists want to keep the U.S. in the tech vanguard and are willing to resort to tariffs and subsidies to preserve its dominance. The globalists, including some heads of multinational companies that earn lots of their profits abroad, are happy to see other countries advance technologically, figuring that the benefits of breakthroughs—say, a cure for cancer—will be shared by all of humanity regardless of their origin.

The common theme is that prosperity depends on a robust tech sector. “We’re in a 10-year productivity depression” that’s hurting living standards, says Atkinson. “Tech is really the only way we’re going to raise productivity growth.” —Peter Coy

Tariff Truthers

If there’s one thing most economists around the world today can agree on, it’s that tariffs are bad. Protect one domestic industry with an import tax, and you hurt a swath of others. Tariffs reduce choices for consumers and push up prices for goods. They stifle competition and deter innovation. And they invite other countries to retaliate, leading to the sort of tit-for-tat behavior that’s left U.S. soybean farmers watching crops once destined for China rot in their fields.


Devotees of small government were stirred by candidate Trump’s vow to “drain the swamp” and pull U.S. troops out of foreign quagmires. But President Trump, with his tariffs and deficits, has proved to be “the opposite of a libertarian,” the Libertarian Party declared in March.

Still, the free-market purists aren’t giving up the fight. One of their bugbears is the Federal Reserve and its cheap money—a distortion of the market’s natural efficiency, according to Austrian economist and libertarian idol Friedrich Hayek. When Ron Paul, America’s highest-profile libertarian, ran for president in 2012, he pushed for the Fed’s abolition and a return to the gold standard. “If you want to restrain government, you restrain the power to create money,” he said. “That’s what gold does.”

The Fed can probably rest easy. Americans aren’t exactly clamoring for a return to gold, while hyperinflation and other disasters predicted by libertarians in the easy-money decade since 2008 haven’t come to pass.

Some libertarian ideas are finding a larger audience. Among them are the call for stripping back zoning rules, because they limit the construction of affordable housing, and their criticism of patents that lock in profits for Big Tech or Pharma and licensing requirements that insulate professionals like doctors from competition. A common theme of such critiques—that the economy is rigged in favor of big and established actors—commands growing support among mainstream economists.

And beyond the realms of U.S. policy, the world is evolving in ways that give libertarians hope. Those who deplore the “tyranny” of central banks are rejoicing at the explosion of cryptocurrencies. (The Libertarian Party accepts donations in Bitcoin.) Recreational marijuana use is already legal in 10 states and backed by more than 6 in 10 Americans, according to a poll by the Pew Research Center.

Paul, who outperformed most expectations during his own tilt at the presidency, says a popular Libertarian candidate could well emerge in 2020. It’s a stretch to say he’s cheerful about the wider outlook, though. “It’s a bubble economy in many, many different ways, and it’s going to come unglued,” he told the Washington Examiner. —Andrew Mayeda