Yves here. MMT, or Modern Monetary Theory, is in the process of becoming vastly more visible by virtue of leading MMT advocate, Stephanie Kelton, becoming Chief Economist on the Senate Budget Committee on behalf of ranking member Bernie Sanders. And that means, as this post demonstrates, that MMT has gone through the “first they ignore you, then they ridicule you” stages and is now in the “then they fight you” phase. And one of the chief strategies of MMT opponents is to misrepresent it. Tim Worstall has a post decrying the dangers of MMT ever being used in the real world—even as he recognizes or at least suggests that it might be the correct description of how the monetary system works—and is particularly concerned about Stephanie Kelton’s new appointment as Chief Economist on the Senate Budget Committee. (Note: Randy Wray also posted a critique of Mr. Worstall’s post today.) Mr. Worstall’s main issue is one we’ve heard hundreds of times before—because MMT explains that currency-issuing governments operating under flexible exchange rates and without debt in a foreign currency do not actually have budget constraints, this opens the door to all sorts of problems if put into practice. We can’t trust our government with this information, in other words—it must be required to match spending with revenues over some period (whether each year, over the business cycle, etc.) or at least plan over some period of time to not allow the debt ratio to rise beyond a modest level.** **The latter is actually what neoclassical economics argues—contrary to popular understanding, there are no economic theories that require the government to ever balance its budget. What they argue is that the government must eventually keep its debt ratio at a modest level, which does allow modest deficits on average forever. What this does require is primary surpluses (i.e., budget position before accounting for debt service) to offset primary deficits if the interest on the national debt is above the economy’s growth rate. In fact, though, this condition hasn’t been met on average in the post WWII period; only the 1979-2000 period saw average interest on the national debt rise above the economy’s growth rate. nakedcapitalism/2015/01/mmt-versus-cbo-replacing-budget-constraint-inflation-constraint.html
Posted on: Wed, 14 Jan 2015 01:52:08 +0000
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