No one would describe the past decade as a triumph for economic policy makers.
Years of ultralow interest rates resulted in only a slow and stuttering recovery in North America, Europe and Japan. Debt ballooned, inequality widened – and that was before the novel coronavirus clobbered the global economy from a new direction.
Isn’t there a better way to run things? Stephanie Kelton thinks so. In her recent book, The Deficit Myth, she eloquently argues the case for Modern Monetary Theory, or MMT, which holds that countries that borrow in their own currency can never run out of money.
Governments of developed countries such as the United States, Canada and Britain are nothing like households or private businesses, Ms. Kelton writes. As she quite rightly points out, these countries create their own currencies and therefore have far more flexibility than private enterprises in ordering their affairs.
Exactly how far you want to push this insight, though, is open to debate. To Ms. Kelton, it amounts to an open chequebook for ambitious social initiatives. She urges legislators in advanced economies – especially those in Washington – to spend big on programs to create well-paid jobs for anyone who wants to work.
“Uncle Sam doesn’t need to come up with dollars before he can spend,” writes Ms. Kelton, a professor at Stony Brook University in Stony Brook, N.Y. “The rest of us do. Uncle Sam can’t face mounting bills that he can’t afford to pay. The rest of us can. Uncle Sam will never go broke. The rest of us could.”
Ms. Kelton is a two-fisted writer and there is a lot to like in her rousing call to action. Unfortunately, there is also a lot to be skeptical about.
The positive stuff first: Ms. Kelton is excellent at expressing the frustration many of us feel when we look at how little of the vast wealth created by technology and trade in recent decades has filtered down to the population as a whole.
She notes the increasing share of wealth that goes to the top 1 per cent of the population and the growing sense of financial insecurity that afflicts many middle-class wage earners.
“What people really long for are the days when a single breadwinner could support a family, buy a home, put two cars in the garage, send the kids to college, take the family on vacation once a year and retire with a decent pension,” she writes.
Exactly. Whether you live in Ontario’s rust belt, a decaying factory town in Ohio or England’s blighted north, the story of the past generation has been one of declining job prospects, falling economic security and increasingly fragile pensions.
Governments that attempt to confront these problems are hobbled by the widespread belief that debt and deficits are evil. Conventional wisdom insists that budget makers should strive to avoid deficits and lower debt whenever possible.
To Ms. Kelton, and MMT enthusiasts in general, this deficit obsession is perverse. They argue that a government that borrows only in its own currency can never run out of money. It always has the ability to print more.
To be sure, there are limits. But MMT proponents argue the real ceiling on money creation has nothing to do with any artificial need to balance the budget. Instead, it depends on how much in goods and services the economy can actually produce.
So long as the economy remains within its productive potential, the government can and should spend freely. Only when demand surges past potential output, and inflation surges, should policy makers take away the punch bowl and calm down the party.
How should they do that? As things now stand, central bankers would hike interest rates to bring high spirits back to earth. They might even risk plunging the economy into recession to cool off the inflationary fervour.
That is a clumsy, painful strategy, Ms. Kelton asserts. To her way of thinking, the government should instead use fiscal policy – that is, taxes and public spending – as its primary economic tool.
Policy makers would adjust government spending to ensure the economy is always operating at full capacity. If inflation flares up, they would boost taxes to cool off the excess activity. Otherwise, they would spend as much as necessary to ensure all the economy’s productive resources are fully employed.
Ms. Kelton has a ready response to anyone who worries that government programs would be too slow to deploy in a crisis. She urges a job guarantee that would assure anyone regular employment at a decent wage. This guarantee would always be in place and would act as an automatic stabilizer. In effect, the government would become the employer of last resort throughout the economic cycle, deploying workers in ways that would help build a greener, kinder society.
As you might imagine, this happy vision appeals to many people, especially those on the left of the political spectrum. But how realistic is it?
Not very, according to most experts. A 2019 survey of 42 politically diverse economists by the Booth School of Business at the University of Chicago turned up nobody who agreed with the core tenets of MMT.
MMT has failed to convince even prominent liberal economists who are sympathetic to many of MMT’s ultimate goals. Larry Summers, a former U.S. Treasury secretary, dismisses it as dangerous nonsense. Paul Krugman, a Nobel laureate, scoffs at its airy promises. He says MMT advocates like Ms. Kelton make up the rules of the game as they go along by shifting their claims whenever they’re challenged on a point.
One issue is that while many governments can print their own currency, they can’t ensure that people will always want to hold unlimited amounts of the stuff. Past a certain point, lenders back off and savers look for alternatives. Controlling your own currency doesn’t grant a nation a free pass from consequences, as Britain discovered in the 1970s when it had to arrange a loan from the International Monetary Fund.
To function in the real world, MMT would have to deftly manage inflation. Its claims in that area seem particularly dubious.
For one thing, it assumes elected officials would raise taxes to tamp down any surge in prices. Maybe such high-minded politicians exist in some world, but in this one they are often in short supply, especially if an election looms.
Even if politicians do co-operate, it’s not clear they can easily toggle the financial-policy switch to align actual and potential output and bring inflation under control. High inflation can coexist with lots of economic slack, as it did in the 1970s, when prices and unemployment both soared. On the other hand, inflation can remain stubbornly low despite sizable budget deficits and low unemployment, as it has in recent years. This is a real challenge for MMT policy makers – and, to be fair, to policy makers of all stripes.
All of this argues for a healthy dose of skepticism about many of Ms. Kelton’s bolder claims. But that may be missing the point. The best way to read her book is an expression of the deep frustration many people feel about today’s underwhelming economic orthodoxy. Dismiss her economics if you will. But don’t underestimate the anger she represents.
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