Macro-Economic Acronym’s

Dylan Mathews, a student at Harvard and all-around smartypants, had a piece in the Washington Post yesterday that was well received about Modern Monetary Theory. Now I’m a very casual consumer of economic literature – I’ve no formal education and what I do know is entirely dictated by personal interest – but I’m still surprised that I hadn’t heard of this theory whose proponents Mathews describes as “deficit owls:”

In contrast to “deficit hawks” who want spending cuts and revenue increases now in order to temper the deficit, and “deficit doves” who want to hold off on austerity measures until the economy has recovered, Galbraith is a deficit owl. Owls certainly don’t think we need to balance the budget soon. Indeed, they don’t concede we need to balance it at all. Owls see government spending that leads to deficits as integral to economic growth, even in good times.

So what does this mean?

But if the theory is correct, there is no reason the amount of money the government takes in needs to match up with the amount it spends. Indeed, its followers call for massive tax cuts and deficit spending during recessions.

Another way to think of this, as far as I understand it, is that even good times the federal government should be deficit spending in ways that benefit the economy. Yet how does this differ from other, simliar, Keynesian thinking?

And while Modern Monetary Theory’s proponents take Keynes as their starting point and advocate aggressive deficit spending during recessions, they’re not that type of Keynesians. Even mainstream economists who argue for more deficit spending are reluctant to accept the central tenets of Modern Monetary Theory. Take Krugman, who regularly engages economists across the spectrum in spirited debate. He has argued that pursuing large budget deficits during boom times can lead to hyperinflation. Mankiw concedes the theory’s point that the government can never run out of money but doesn’t think this means what its proponents think it does.

Technically it’s true, he says, that the government could print streams of money and never default. The risk is that it could trigger a very high rate of inflation. This would “bankrupt much of the banking system,” he says. “Default, painful as it would be, might be a better option.”

The main difference seems to center around the fear of hyperinflation, or as Kevin Drum puts it:

In some sense, this all comes down to a question of how scared we should be of inflation.

Indeed and it seems that for all intents and purposes, because MMT would agree that budget deficits should be pursued in all cases except for the presence hyperinflation, this really does look like a difference of degree and not kind as a Keynesian based theory. Or, as Dean Baker states:

I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.

I don’t think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits then we would see if we also aggressively used channels two and three.

And yet I can’t help but think that MMT has only a niche impact on economic thought. In so much as their only notable departure from other, more widely accepted Keynesian systems, is only relevant to periods of the opposite type of economic reality than what we face today then their current public policy impact is nonexistent. Otherwise their ideological platform calls for many of the same things everyone calls for – an addition of numbers and not necessarily distinctive substance.


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