Ignored for years, a radical economic theory is gaining converts

Bloomberg

In an American election season that’s turned into a bonfire of the orthodoxies, one taboo survives pretty much intact: Deficits are dangerous.
A school of dissident economists wants to toss that one onto the flames, too. It’s a propitious time to make the case, and not just in the U.S. Whether it’s negative interest rates, or helicopter money that delivers freshly minted cash direct to consumers, central banks are peering into their toolboxes to see what’s left. Despite all their innovations, economic recovery remains below par across the industrial world.
Calls for governments to take over the relief effort are growing louder. Plenty of economists have joined in, and so have top money managers.
“There’s an acknowledgment, even in the investor community, that monetary policy is kind of running out of ammo,” said Thomas Costerg, economist. “The focus is now shifting to fiscal policy.”
Currency Monopoly
That’s where it should have been all along, according to Modern Money Theory. The 20-something-year-old doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on government spending in nations with their own currency.
Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars or yen — but they’re also the monopoly creators of dollars or yen, so can always meet their obligations. For the same reason, they don’t need to finance spending by collecting taxes, or even selling bonds.
The long-run implication of that approach has many economists worried.
“I have no problem with deficit spending,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York. “But this idea of the government printing money — unlimited amounts of money — and running unlimited, infinite deficits, that could become unhinged pretty quickly.”
To which MMT replies: No one’s saying there are no limits. Real resources can be a constraint — how much labor is available to build that road? Taxes are an essential tool, to ensure demand for the currency and cool the economy if it overheats. But the MMTers argue there’s plenty of room to spend without triggering inflation.
The U.S. did dramatically loosen the purse strings after the 2008 crisis, posting a deficit of more than 10 percent of gross domestic product the next year. That’s since been trimmed to 2.6 percent of GDP, or $439 billion, last year.
The Congressional Budget Office expects the gap to widen in the coming decade, as retiring baby-boomers saddle the government with higher social security and health-care costs. That’s the risk often cited by fiscal hawks.
Mainstream doves accept the long-term caveat. But they point to record-low bond yields and say investors aren’t worried about deficits right now, so why not spend?
MMT takes that argument even further. The question is: Who’s listening?
“They’re shut out of the central banks, the finance ministries, the Treasuries of the world,” said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and former Federal Reserve Board economist. Gagnon doesn’t subscribe to all MMT arguments, but thinks there’s enough slack in the global economy that “it’d be a good time for them to have influence.”
If MMT seems marginal now, Randy Wray, an economics professor at the University of Missouri-Kansas City and one of the doctrine’s founders, recalls a time when it barely registered at all.
Wray, who wrote “Understanding Modern Money” in 1998, says he used to meet with like-minded colleagues and count how many people understood the theory. “After 10 years, we had to go a little beyond two hands — we had to use a few toes,” he said.
Now, thanks to the blogosphere, he says there are thousands around the world, especially in struggling euro-area countries like Italy and Spain. MMT was among the early doomsayers on the single currency, arguing the lack of monetary sovereignty would render governments helpless in a crisis.
In the U.S., one presidential candidate is at least listening to MMT economists. Advisers to Bernie Sanders include some of the school’s leading advocates: Stephanie Kelton, a Sanders hire to the Senate Budget Committee, and James K. Galbraith, whose father helped shape President Lyndon Johnson’s “Great Society” programs.