Modern Monetary Theory on the Rise
by David Atkins
Don't look now, but it appears that the abject failure of the Austrian economists and austerity mavens to produce political or economic successes is starting to have an effect. The once radical school of Modern Monetary Theory advanced by Galbraith and others is starting to gain a lot of traction (h/t to Dave Dayen:
“I said economists used to understand that the running of a surplus was fiscal (economic) drag,” he said, “and with 250 economists, they giggled.”
Galbraith says the 2001 recession — which followed a few years of surpluses — proves he was right.
A decade later, as the soaring federal budget deficit has sharpened political and economic differences in Washington, Galbraith is mostly concerned about the dangers of keeping it too small. He’s a key figure in a core debate among economists about whether deficits are important and in what way. The issue has divided the nation’s best-known economists and inspired pockets of passion in academic circles. Any embrace by policymakers of one view or the other could affect everything from employment to the price of goods to the tax code.
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.
The term isn’t Galbraith’s. It was coined by Stephanie Kelton, a professor at the University of Missouri at Kansas City, who with Galbraith is part of a small group of economists who have concluded that everyone — members of Congress, think tank denizens, the entire mainstream of the economics profession — has misunderstood how the government interacts with the economy. If their theory — dubbed “Modern Monetary Theory” or MMT — is right, then everything we thought we knew about the budget, taxes and the Federal Reserve is wrong.
Gee, you think? Decades of Reaganomics, Celtic Tigers, tax cuts, deregulation and austerity later, and some economists are just now beginning to figure this out.
Kevin Drum and Jared Bernstein have some fascinating comments as well.
I'm no economist, but I would add a couple of brief thoughts here:
1) It is possible for entire academic disciplines to change their accepted theories in a matter of a decade or two. It wasn't more than a half-century ago that the Austrian economists so dominant now, were themselves the much mocked outcasts of the academic world. It was the failure of Keynesian models to deal adequately with oil inflation shocks and increasing globalization that partly caused the Milton Friedman ascendancy. And it may well be the obvious failure of the Austrian school to deal with multinational corporate exploitation and the obvious crippling disasters of deregulation that may swing the pendulum back again, moneyed interests notwithstanding. I remember back in 2005 when almost everyone was still saying that real estate was the best investment ever and it would never come down. At the time, I felt that either I or the world must be crazy. But it's amazing how fast conventional wisdom can change.
2) Given the challenges of global population growth, climate change and resource shortages, the world had better hope that the Modern Monetary Theorists are correct. The nations of the world will either band together to put the Bond Lords in their place, controlling their own currencies and accounts for the benefit of their own people and those of other nations, or the world will go down in literal and figurative flames.
Because if the Austrians are right after all, we're headed for a grim Malthusian future of famine, mass migrations, and probable nuclear conflict. That's why Republicans implicitly must reject climate science and the notion of resource shortage; if they don't, their economic policies are consigning all of us to a horrific future.
Modern Monetary Theory is an idea whose time is long past due.
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