It’s becoming hard to avoid. Everyone from Nobel laureate Paul Krugman to Federal Reserve Chairman Jerome Powell has been compelled recently to weigh in on Modern Monetary Theory, an alternative approach to economics at odds with the principles that have guided most Western policy makers for decades.
Interest in the theory is exploding in tandem with the U.S. budget deficit, after President Donald Trump’s tax cuts for top earners and businesses. Instead of promising to repair America’s public finances, many 2020 challengers on the Democratic side are running on big programs like the Green New Deal and Medicare For All that could further widen the gap between government spending and revenues.
MMT’s ideas about government finance and the space for fiscal spending offer a route to achieve those goals, and politicians such as Alexandria Ocasio-Cortez and Bernie Sanders are catching on. Economists including Krugman and Lawrence Summers as well as policy makers like Powell are pushing back.
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The debate in the U.S. right now centers on the question of whether there’s room for more public spending, with the MMTers arguing that governments — misled by conventional economic thinking — have become too fiscally conservative. The work of leading MMT scholars, published in academic journals since the 1990s, shows some of the roots of that argument. It also reveals the school’s vision of a dramatic departure from the way economic policy works now, especially in key areas like managing employment and inflation.
Here are some of the most important papers that offer insight into what MMT is all about:
Modern Money (Wray, 1998)
MMT’s policy prescriptions largely stem from the idea that money’s value is derived from the fact that it’s needed in order to pay taxes. If a government can tax citizens, it creates demand for whatever currency the obligation is paid in. That allows a government to print its own money and purchase goods and services from households and companies — knowing the sellers will have a reason to accept it. In other words, the government spends money into the economy first and then taxes some of it back later, instead of the other way around.
L. Randall Wray’s paper draws on the writings of 20th-century economists Friedrich Knapp and John Maynard Keynes to illustrate the historical roots of the theory. He connects it to the work of Abba Lerner, a Russian-born U.K. economist of the mid-20th century. Lerner’s doctrine of “functional finance” argued that governments should pursue their real-economy goals and treat the resulting budget balance as a residual outcome — instead of subordinating those goals to the quest for a balanced budget. (Many MMTers argue that President Donald Trump is currently doing something very similar.)
The Natural Rate of Interest Is Zero (Forstater and Mosler, 2005)
Central bankers around the world are obsessed with estimating the so-called natural rate of interest, which in mainstream economic theory serves to bring the desired levels of savings and investment into balance. The rate is now held by mainstream economists to be largely a function of demographics and productivity, and Fed officials believe that for the U.S. it’s currently somewhere between 2.5 percent and 3.5 percent.
Mathew Forstater and Warren Mosler use MMT’s idea about the source of money’s value to argue that the concept of a natural rate hasn’t been relevant in major economies since they moved to a floating exchange-rate system in the 1970s. The “natural” or “normal” rate is now zero, in the sense that central bankers have to take specific actions to prevent it from settling there, and keeping it above zero is “necessarily a political decision” on their part.
Public Service Employment: A Path to Full Employment (Wray, Dantas, Fullwiler, Tcherneva and Kelton, 2018)
MMT economists have long supported a jobs guarantee. They draw inspiration from American economist Hyman Minsky, who said the government can serve as the employer of last resort, and from the public works programs of the New Deal.
The MMT argument is that the jobs guarantee isn’t just a welfare measure: It’s also a key stabilizer of the economy, which will set a floor on wages and shore up demand during recessions. They argue that it’s better to use employment as a buffer than unemployment — their description of the current approach, in which the Fed sets interest rates based on the idea that if the jobless rate gets too low then the result will be high inflation.
Even if the government paid 15 million people to participate in such a work program, “the impact on inflation would be macroeconomically insignificant,” the economists estimated in this 2018 study.
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