Modern Monetary Theory Goes Mainstream

I thought at first with a heavy sigh that this was going to be another in a long line of articles that dont understand how Federal Debt works. I was wrong. In fact, this is the first article I have read in a mainstream publication (and I consider Politico mainstream in that it isn’t an economics focused publication) that really lays out the MMT points very clearly and why republican complaining about debt at this points shows a real misunderstanding of the situation. I can’t tell you how pleasantly surprised I was at the point of view this article takes and how prominently it was placed. They didn’t even mention MMT until the very end when they quoted Professor Stephanie Kelton and mentioned MMT.

1 Like

Republicans know full well there is a huge amount of wiggle room in deficit financing. As Bill Kristol wrote in the WSJ in 1980:

The neoconservative is willing to leave those problems to be coped with by liberal interregnums. He wants to shape the future and will leave it to his opponents to tidy up afterwards.

But allowing a notional debt to carry forward, like a secured mortgage, is not MMT. It’s simply good budgeting. With basement-level interest rates there is no need to stir controversy and scare people with talk of arbitrarily expanding the money supply absent bond sales. Promising to “start the printing press” as one lefty headline put it, would probably induce inflation by causing a loss of confidence. As long as that risk is completely unnecessary, it would be unwise to invite it,

Congress will use normal accounting, which pleases me as it protects my meager pension.

1 Like

Thing is we are not even close to any inflation. As the debt has grown, interest rates have remained steady or fallen. One more point. When Reagan blew up the debt in the 80’s, bonds were paying up to 9% and it didn’t break anything. We only break things when we try to subdue the debt by means other than growth of the economy.

1 Like

This is not in dispute. I noted low interest rates. Dick Cheney said “Deficits don’t matter; Reagan proved that”. We agree that deficit worries since 1980 are unfounded.

That is not the same as saying the debt can be ignored. In practice, yes, sort of, because we can keep re-financing. You can ignore a million-dollar mortgage, too. But it stays on the books and has meaning. Its income is on the asset side of the bank ledger. In the same way, the income from US Treasuries is an asset.

Overt discounting of the meaning of debt, by increasing money supply without anchoring it to issued debt, would cause a loss of confidence, and would bid up the yields on bonds of all types, including corporate and municipal.

Republicans are simply liars on the debt and deficits.

2 Likes

How about we try to remember that inflation happens when the fisc injects more money into the economy than real productive capacity can use, and that “loss of confidence” is about as real as the specter of communism haunting the continent.

1 Like

So long as the dollar remain’s the world’s reserve currency, we will be able to refinance.

The difference is that in 2009 the MSM was virtually unanimous in pushing Simpson-Bowles-ism as the only way forward, entirely abandoning their supposed position as functional stenographers, but only on this one issue.

That is not the case here.

The Republicans since 1980 have always been merely corrupt in managing the nations finances.

1 Like

Not that it will change anytime soon, but as long as all US debts are in US Dollars, it doesnt even matter if it is the reserve currency, but really, what currency is stable and transparent enough to challenge it? I cant think of one. Yen, Yuan, Euro? None of those could do it. Japans debt to GDP is twice ours, the Euro is hardly what I would call stable and the Yuan is just about as UN transparent as any major currency.

People always seem to want to make it so much more complicated than it really is. We are not refinancing. Unless printing money is refinancing, but I think that strains the definition somewhat.

1 Like

Sovereign currency issuers by definition never go bankrupt involuntarily.

1 Like

Sure… under the reasoning that as long as their wheelbarrows are large enough, people will still be able to transport enough money to buy a loaf of bread.

1 Like

Nobody said there were not limits to printing money. You have to stop when you hit your inflation target, which also indicates the economy is heating up. This is not that time. It isnt even close to that time….

1 Like

Not sure what this has to do with MMT as textbook theory…people have long had largely arbitrary constraints about how much debt is “okay”…and for a decade more folks have been able to look at Japan and see that their tolerance is much larger as a society / government than the folks running things here.

While i know changing these arbitrary limits is often the goal of MMT folks…it really has very little to do with the actual theory of economics which they created in order to push those arbitrary limits higher.

Folks like Krugan and Deese and others had already shifted their priors on Debt to GDP to be much higher than they currently are before Kelton ever got her moment in the sun.

So I’m not really sure how MMT can claim this as a “win” for their theory of economics?

Not to mention, the Deese’s and Furman’s and Krugman’s of the world are unshackled from the Larry Summers’ of the world and now back in the White House running things…not Kelton or anyone else.

Though, the fact that so many folks seem willing to claim a victory of sorts for MMT in this moment (which is a good moment, don’t get me wrong…people arbitrary conceptions of what was “too much” debt were obviously too low based on real world examples, like Japan) reinforces what the “real” purpose of MMT as a economic theory was:

That it was created wholesale to provide a framework to shift those arbitrary debt to GDP priors and help supplant the folks still holding onto them in popular economics (or better yet, as White House economic advisors) with folks like Kelton.

Frankly, i think it’s a bit …unnerving…that folks would make up / re-conceptualize this complex economic theory and spend years write books (and a few papers) on it saying that everyone has gotten economics wrong and only you have the REAL answer as a way of pushing moderates to be okay with more debt…which is why i’m uncomfortable with Kelton’s moderate success pushing these notions and gaining clout inside Progressive economics.

But frankly, she seems to have largely been outflanked by Moderate and Progressive economist learning rightfully from the Obama to Trump macro economic policies and the subsequent research that came out after the financial crisis that clearly their priors were set too low given the outcomes…and they adjusted just like people are supposed to do…

1 Like

The victory is not in adoption as it is that MSM is finally reporting from its perspective. If you read the piece originally linked…that never would have been written 4 years ago. It shows how the conversation has moved. Whether he cares to admit it or not, Krugman has moved quite a bit in the direction of MMT

2 Likes

I just think it’s a rather dubious claim to make…especially since it has literally zero to do with the whole theory Kelton and others have pushed. This is what Furman and Krugman and others have long been saying…“yeah, no shit” their priors on debt have shifted…that’s what happens when you have new evidence from over the last few decades on the subject…you adjust your priors. What they haven’t done is adjust their macroeconomic fundementals…and what Kelton’s been doing is shopping an entirely new set of macroeconomic fundementals (perhaps as a trojan horse just to adjust people’s priors?)…but the whole idea that you would make up an entire segment of macroeconomic theory just to shift someone’s priors is…bad…i mean, that’s REALLY bad…

1 Like

It isn’t dubious…I can go line by line of the article and point it out (later, I don’t have time to do it right now).
Kelton’s view isn’t all that earthshaking. It’s also played out fairly accurately over the last 10 years as far as interest rates remaining low when most people said they would not. Again, I’ll address this later when I have more time

1 Like

There is no need to go line by line through the article…ever since the last financial crisis everyone has been saying that recessions are always the time to utilize debt to finance recoveries. This was the critical mistake Europe made (that normal economic folks pointed out at the time Europe was making)…the only thing that’s changed has been the arbitrary prior on how much debt (relative to GDP) is “fine” for a nation. Krugman has said as of the last few years it’s “probably 150% of GDP” but honestly…it could be higher or lower than that. Folks have long noted that Japan, at over 200% of GDP continues to be fine. There really isn’t anything outside the realm of classic economics here to go line by line about. Economist priors on debt and inflation were always going to be iterative…no one ever said they were not.

None of this really engages with the actual Modern Monetary “Theory”…which puts forth ideas like utilizing tax increases to reign in any future runaway inflation, etc (good luck with that!)…which is my whole point…you can’t just claim the correlation and declare victory without engaging on the fundamentals of the actual mathematical models or how your macroeconomic policies have been implemented somewhere in the world…which Kelton and co never do…

Krugman and Furman as the most prominent folks to point this out, but the MMT folks like Kelton are very vague on the hypothetical questions that folks like Krugman and Furman deal with all the time (like about what the Fed is supposed to do under an MMT framework with interest rates, etc).

1 Like

How could MMT work with an independent Fed? First you have to get the President and Congress to engage in an extraordinary exercise in walking a tightrope between maximum spending and unacceptable inflation, raising taxes or cutting spending the moment the balance starts to shift, but then you also have to convince an independent Fed to go along with the plan?

Surely that’s where an Alan Greenspan would say, “It would be irresponsible to play politics.” And the next President Trump (or even a George H.W. Bush) wouldn’t worry more about juicing the economy than in whether decisions he forced upon the Federal Reserve were sensible in the longer term?

1 Like

Yes, so long as they borrow only in their own currency. But that doesn’t mean that they can’t lose the ability to refinance at favorable rates, particularly if they rely on foreign borrowers.

If you go back and reread the dueling op-eds Krugman and Kelton had, or listen to Furman’s debate with Kelton the Ezra Klein Show…she doesn’t really have an answer as to what the Fed’s role would be, or what the Fed would even do with interest rates in general…she just keeps dodging the question…

Furman kept trying to pin her down on whether a Fed, under MMT, would be expected to raise interest rates if the economy was getting “too hot”, and she just sort of demured and changed the subject…

A similar thing happened in the Krugman exchange…

They both kind of throw their hands up because they attempt to engage on good faith terms, but Kelton gets evasive…which is why i’ve come to see MMT has a trojan horse academic exercise in trying to shift priors on Debt (relative to GDP)…but it’s rattliing to me that in order to do that…they conceptualized an actual mathematical theory and mathematical model to make that sell seem more…academic?..legitimate? persuesive?

I mean, there is nothing wrong with adjusting priors…Yellen and Krugman and Furman have all been doing that without MMT…but it’s just…odd…to claim credit for changing people’s priors, especially when they have ignored your mathematical models completely and continually pointed out how little sense they make…

1 Like

A sovereign currency issuer never borrows in a foreign currency involuntarily.

Also now is a fine time to remember what happened to the Florentine usurer families when Edward III told them to go eff themselves.