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The left should resist the siren song of ‘modern monetary theory’

The public is open to standard progressive arguments about taxes and spending. 

Stacks of $1 dollar notes  move through a machine at the U.S. Bureau of Engraving and Printing in Washington, D.C., in Nov. 2017. (Andrew Harrer/Bloomberg)
Stacks of $1 dollar notes move through a machine at the U.S. Bureau of Engraving and Printing in Washington, D.C., in Nov. 2017. (Andrew Harrer/Bloomberg)

Over the past year, a new economic concept has moved to the center of the political debate, as economists, pundits and policymakers hold it up as the answer to our economic problems. Modern monetary theory, or MMT, supposedly explains how “We Can Pay for a Green New Deal,” as one of its leading advocates recently argued in HuffPost. “Here’s the good news,” wrote Stephanie Kelton, a professor of economics at Stony Brook University, along with two co-authors. “Anything that is technically feasible is financially affordable.”

 While Democrats and Republicans ask the “same tired questions” about the affordability of projects, Kelton and her co-authors argue that we can just open the spigot of the money supply by “printing” new currency (done with computer keystrokes these days, not a mechanical press), and so we can abandon the “obsession with trying to ‘pay for’ everything with new revenue or spending cuts.” This is the kind of answer advocates and policymakers across Washington are eager to hear: If it’s too hard to persuade politicians to increase taxes, that’s okay. There’s a technical fix.

 This is a huge departure from the assumptions that govern our budget. The United States, MMT advocates say, should decouple spending decisions from taxing decisions. And while there is merit to certain MMT proposals, it’s a distraction from tackling our biggest economic challenge: inequality.

 It would not be an overstatement to say that MMT hasn’t been well-received among many economists — and not just conservatives. Former treasury secretary Larry Summers called it “voodoo economics” in The Washington Post, suggesting that it offered the false promise of a “free lunch.” In a recent poll of about 50 elite economists by the University of Chicago Booth School of Business, not a single one agreed with a central MMT claim: “Countries that borrow in their own currency can finance as much real government spending as they want by creating money.” MMT proponents have responded that their views are misunderstood by mainstream economists.

 The debate between MMT advocates and other economists gets arcane very quickly; it’s a technical subject, and the two sides often speak past one another. MMT theorists have tended not to publish in mainstream journals, which increases the skepticism with which mainstream academics view their arguments. But that also means mainstream scholars are not likely to have closely engaged with the academic arguments for MMT. 

 MMT starts from the premise that the goal of economic policy should be full employment — an economic condition in which every worker who wants a job can find one — and that the chief tools to achieve that goal are projects financed with government-created money, rather than monetary policy (for example, the setting of interest rates by the Fed), which economists usually focus on. 

 Mainstream Keynesian economists are quite willing to run deficits during recessions. MMTers push further. Economists generally think pumping money into the system when the economy is already at full employment can lead to higher interest rates, inflation and the “crowding out” of private investment by public spending. These outcomes stem from the fact that when the economy is at full capacity, additional government spending competes for resources, driving up prices. Say you’re a small manufacturer looking to renovate your factory; if the government is pouring money into infrastructure in an already hot economy, it’s going to be mighty difficult to find a contractor — and the price is likely to be higher than you’d like to pay. 

Economists are rethinking monetary and fiscal policy. That’s a potentially positive development.

In general, MMT advocates think that policymakers are too conservative in their estimates of “full employment” — they want to see an unemployment rate lower than the 4 percent or so that many economists define as the “non-accelerating inflation rate of unemployment” (NAIRU). And they think concerns about inflation and higher interest rates are overstated, leading them to argue that policymakers should take on as much debt as necessary to keep the economy humming at true full capacity.

 On one level, MMT’s champions are providing a service in trying to push the public away from the obsession with federal budget deficits, which, in many contexts, are either nothing to worry about or a positive good. There’s a long history in the economics profession, and among D.C. think tank denizens, of crying wolf about inflation. Many, for instance, cautioned that the “quantitative easing” the Fed undertook beginning in 2008 — an effort to speed up job creation during the slow recovery from the recession by purchasing commercial assets or riskier assets, thereby raising their prices — would lead to inflation. It did not. 

 Even as deficits and federal debt have risen over the past decade, the nightmare scenarios sketched by deficit hawks have not been realized — interest rates and inflation both remain relatively low. (The federal funds rate is hovering between 2.25 and 2.5 percent, and inflation is below the Fed’s target of 2 percent.) While the unemployment rate has come back down, we don’t appear to yet have an economy that’s being pushed beyond its capacity. 

 What’s more, there remains a great need for federal investments to solve problems related to health care, child care, climate change and outdated infrastructure. There’s a huge opportunity cost in failing to spend on such priorities out of fear of phantom inflation. Both MMT advocates and many mainstream economists hold that view. We seem to be in an era of prolonged low interest rates, partly because of low investment and an aging population, so we shouldn’t stress about deficits, at least until we see clear signs of inflation.

 MMT advocates look at taxes in a way that most mainstream economists do not. They see taxes as important not as a source of revenue — since the government can create whatever money it needs — but as, among other things, a tool to combat inflation, should it rear its head. If inflation were to pick up under an MMT regime, Congress could raise taxes, pulling money out of the economy.

 But there are reasons to be wary of these concepts. MMT proponents offer what looks to many like a technical way around intractable political problems. But their solution is neither politically easy — could we rely on Congress to raise taxes to thwart inflation? — nor does it deal in a direct way with one of the central economic challenges of our time: The richest Americans are obstructing, subverting and distorting the way our economy works to their own benefit. 

 Between 1979 and 2015, after accounting for taxes and transfers, Americans in the middle 60 percent of the income spectrum saw their incomes rise by 46 percent, while those in the top 20 percent saw their incomes rise by nearly 103 percent. High inequality is associated with less upward mobility and with the capture of politics by elites. In the recent college admissions scandal, wealthy parents were literally buying opportunities for their children, but a legal version of that system exists, too, in which large donations to a college grease the path to admission. More generally, Martin Gilens, a Princeton politics professor, has found that policies favored by economic elites tend to be much more likely to implemented; “in contrast,” he writes, “the support or opposition of the poor or the middle class has no impact on a policy’s prospects of being adopted.” Economists have even documented that businesses focus on high-end consumers to such an extent that there are now fewer innovations for goods and services aimed at middle America. That means higher prices for the middle class, too.

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Taxes — a crucial tool downgraded in importance by MMT — are the best way to reverse these trends. The failure to tax those at the top contributes to higher inequality at a time when U.S. tax laws lowered federal revenue last year to only 16.2 percent of gross domestic product (after the enactment of the 2017 tax cuts), compared with 19.8 percent in 2000 before the tax cuts under George W. Bush and 17.8 percent in 2007, before the recession.

 The question of how much additional spending MMT would actually permit is unclear. Although it sometimes sounds as if MMT proponents are promising an endless supply of free money — that misconception gets picked up by critics and even some supporters — they often build in mechanisms to slow spending in the (unlikely, they think) event of inflation. Programs like unemployment insurance, supplemental nutrition assistance and government-provided jobs would ramp up during recessions and ramp down during upturns. 

 Note that such systems mean MMT offers no free lunch in terms of financing permanent programs. Spending on the Green New Deal and other policies would go down, and taxes up, in the event of inflation. Viewed that way, MMT might not be too different from Keynesianism after all. (The left-wing commentator Matt Bruenig has suggested that MMT basically amounts to Keynesianism rewritten in a “private language,” a suggestion MMTers reject.)  

 A complete adjudication of the MMT debate threatens to get hyper-technical; the details should perhaps be reserved for academic journals. But to me, as someone who shares some of the policy goals of MMT advocates, it seems crazy to give up on taxes as an important source of revenue for vital social programs — to define taxes as, in a sense, irrelevant to government spending — at a time when the public, finally, seems to have an appetite for universal health care, wealth taxes and similar ambitious policies. At such a moment, why embrace a theory that has never been tested on a significant scale? 

 To shift toward an economic theory that sees taxes as largely irrelevant to government spending is economically and politically unwise. Large swaths of the left are beginning to see the wisdom of addressing the imbalances created by policies like the Trump tax cuts. And we’re paying more attention to political scientists who tell us that releasing the wealthy from taxation is undermining our shared investment in our democracy and our society. 

 We face some clear political choices right now. Do we expand Medicaid or keep the Trump tax cuts? We can raise taxes on the wealthy to pay for renewable-energy technology — or decide that it’s more important to ensure that the wealthy have low taxes. 

 The left and the center-left are well positioned to win such fights. But not if they buy the misguided idea that a technical fix will solve our political problems.


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