When Rep. Alexandria Ocasio-Cortez rolled out her “Green New Deal,” calling for clean energy and guaranteed jobs, one of the first questions she got was: How do you plan to pay for it?
The New York Democrat argued that ambitious programs can easily be financed through deficit spending.
“I think the first thing that we need to do is kind of break the mistaken idea that taxes pay for 100% of government expenditure,” Ocasio-Cortez told NPR’s Morning Edition in February.
In doing so, she shined a spotlight on a once-obscure brand of economics known as “Modern Monetary Theory,” or MMT.
“There was something of an Oprah effect when she did that,” said economist Stephanie Kelton of Stony Brook University. “People immediately probably started Googling ‘Modern Monetary Theory’ to find out what she was referring to.”
Run that Google search and you’ll quickly find Kelton herself. The economist, who advised Bernie Sanders’ 2016 campaign, is one of the best-known evangelists for the theory. Kelton says paying for big government programs is the easy part. If Congress has the will, the Federal Reserve can effectively print the money.
“If Congress authorizes a few billion dollars of additional spending, or a few hundred billion dollars, then the Fed’s job is to make sure that those checks don’t bounce,” Kelton told NPR.
A central element of MMT is that governments that control their own currency — like the United States — don’t have to worry about spending more than they collect in taxes. They can always create more money. But despite the caricature sometimes offered by both the theory’s critics and supporters, Kelton insists that’s not a blank check for unlimited government spending.
“Too often, people get a whiff of MMT, they don’t read the literature, and they somehow arrive at the takeaway that MMT is about printing prosperity,” Kelton said. “And of course when people hear printing money, they go straight to Zimbabwe or Weimar Germany.”
Those are notorious cases of hyperinflation. But Kelton argues that runaway prices are only a danger when demand outstrips the real resources in an economy — the people, machines and raw materials. If there’s idle capacity, MMT maintains that additional government spending does not trigger inflation.
Last week, under questioning from Ocasio-Cortez, Federal Reserve Chairman Jerome Powell acknowledged the U.S. job market has shown more capacity to grow without sparking inflation than he and his colleagues had expected. Still, Powell is no fan of MMT.
“The idea that deficits don’t matter for countries that can borrow in their own currency, I think, is just wrong,” he told a Senate hearing in February. “We’re going to have to either spend less or raise more revenue.”
Tax historian Bruce Bartlett also blasts MMT as little more than a fig leaf, giving license for big spending in the same way Art Laffer gave Republicans cover to cut taxes with the dubious claim they’d pay for themselves.
“MMT is sort of the Laffer Curve for the left,” Bartlett said.
Some of MMT’s biggest supporters, however, are not liberal politicians but bond traders at firms like Pimco and Goldman Sachs. James Montier, who’s with the investment firm GMO, says he turned to the theory after more conventional economics led him astray.
In the 1990s, Montier and many others were convinced that Japan’s rising government debt would drive up borrowing costs. It didn’t.
“It cost both me and my clients or anyone who was stupid enough to follow me money,” Montier recalled. “It was one of the worst trade positions I have ever suggested in my entire life.”
He says MMT offers better financial forecasts, and helped him understand why interest rates in the U.S. have stayed low, despite growing government deficits.
Persistently low interest rates have also prompted some mainstream economists like Larry Summers and Jason Furman to rethink their attitudes and be less concerned about deficits. But they haven’t embraced MMT.
Furman, who advised former President Obama, says there are always a lot of ambitious ideas floating around Washington. He argues those that are really worth doing are also worth paying for.