Feb 19, 2012 at 11:12 am
I know some visitors here will be happy to see this piece on “modern monetary theory” in today’s WaPo today, as was I. It’s particularly gratifying to see my friend Jamie Galbraith featured, a rare economist whose ability to see outside the box has enabled him to be consistently right about a lot of things that others have missed.
For me, I’m down with MMTs up to a point. I very much agree that deficit reduction has been deeply miscast as pure virtue, with little regard for its economic impact. As I’ve written many times here, the first question re fiscal policy, at least until we’re reliably headed toward full employment is not “how quickly does your deficit come down?” It’s: “is your deficit large enough to replace lost private sector demand?”
This emphasis on using the tools of government, including the ability to print money and run large budget deficits in times of market failure, is MMT’s most important contribution to the current debate. On specifics, I thought the piece intimated that MMT’ers’ fiscal policy operates largely through tax cuts and increases. I don’t think that’s correct—I know for a fact that Jamie G, for example, favors investment in public infrastructure.
That’s important, because while tax cuts are a breeze politically, they’re less effective relative to most other types of stimulus, and they’re awfully hard to unwind (this is a political flaw to MMT, btw…they seem to believe they can reverse the potential inflationary impacts of printing money by raising taxes on a dime).
Also, a fundamental MMT pillar—countries with their own fiat currencies can’t default—is correct, though the piece cited some economists suggesting that default would be preferable to the hyperinflation they fear that MMT could generate.
Along with the above political point re tax increases, I’ve got two other critiques. First, however you get there, when the economy is improving in earnest, we need our debt to grow more slowly than our GDP, as Richard K describes here. That doesn’t imply zero budget deficits, but it does imply that deficits must respond dynamically to growth, growing in busts, coming down as a share of the economy in booms. IE, we need fiscal policy that avoids structural budget deficits (ones that grow when the economy is improving). I can see MMT working effectively in deficit-increasing mode; less so in deficit-reduction mode.
Second, there is no path to a sustainable long-term fiscal outlook that doesn’t reduce health spending, a problem not restricted to the public sector, btw—if anything, it’s worse in the private sector, where costs are rising even faster. Printing money doesn’t help you here—you need to reform the delivery system to take advantage of pooling and to emphasize cost effectiveness, i.e., the quality of treatment over the quantity.
That said, MMT is part of the solution and I’m glad it’s getting some attention.
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