Modern Monetary Theory

Modern Monetary Theory

By Dylan Matthews | Washing Post | via Arnold Kling.

About 11 years ago, James K. “Jamie” Galbraith recalls, hundreds of his fellow economists laughed at him. To his face. In the White House.It was April 2000, and Galbraith had been invited by President Bill Clinton to speak on a panel about the budget surplus. Galbraith was a logical choice. A public policy professor at the University of Texas and former head economist for the Joint Economic Committee, he wrote frequently for the press and testified before Congress.

What’s more, his father, John Kenneth Galbraith, was the most famous economist of his generation: a Harvard professor, best-selling author and confidante of the Kennedy family. Jamie has embraced a role as protector and promoter of the elder’s legacy.

But if Galbraith stood out on the panel, it was because of his offbeat message. Most viewed the budget surplus as opportune: a chance to pay down the national debt, cut taxes, shore up entitlements or pursue new spending programs.

He viewed it as a danger: If the government is running a surplus, money is accruing in government coffers rather than in the hands of ordinary people and companies, where it might be spent and help the economy.

“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.

Continue reading here.

Update I

What is Modern Money Theory?

Why MMT is like an autostereogram.

… modern governments able to issue fiat money can’t go bankrupt, never mind whether investors are willing to buy their bonds. And it sounds right if you look at it from a certain angle. But it isn’t.

Born and raised in Mwanza, Bihemo spent most of his childhood in rural Tanzania before going to Arusha and Kibaha for his secondary education. He is currently in his final year pursuing a BSc. in Electrical Engineering and Computer Science at Jacobs University Bremen in Germany. Bihemo will blog with Vijana FM about solar energy for sustainable economic development in rural areas, education for a modern society, and computer science. He believes an idea in mind is unreal. To make it real, we must communicate it and argue for it convincingly. If we can achieve this, Bihemo believes, our idea becomes real. Let’s give life to our ideas. Let’s blog and encourage discussions on issues relevant to us.

3 Comments

  1. bihemo 3 years ago

    Consider the following:

    You are government and are broke. You can make yourself money (new notes and coins…). Why would you let yourself go broke?

    I mean, it tempts to say, let me print more money and use it to, among other things, pay my debts. People will have the money, possibly, a lot of it, if uncontrolled. And you notice that price of things will go up — inflation or even hyperinflation — and eventually people will prefer to exchange things over things because they will lose trust in your currency. But then you lower taxes of goods & services in order to bring the prices down…You have things under control. Hopefully.

    But it sounds like a very very terrible idea…see following paragraph

    http://en.wikipedia.org/wiki/Deutsche_Mark#Economics_of_1948_currency_reform

  2. Vincent Cate 3 years ago

    MMT does not fit the experimental evidence. They claim that you can monetize debt and it will not cause inflation. Historically this experiment has been done many times and it does cause inflation. In fact, if the central bank is the main buyer of government debt then you usually get hyperinflation.

    http://pair.offshore.ai/38yearcycle/#chartalism

  3. Stanley Mulaik 2 years ago

    The idea that monetizing debt will automatically lead to serious inflation is not born out by experience. Japan, which has a fiat money system, has a debt to GDP ratio near 2, but it does not have inflation. The Japanese people are obsessive savers, and they take money out of the economy and put it into savings for retirement at a rate faster than the government can create the money. So, inflation is a much more complex phenomenon.
    You can have inflation if you have high exports, which bring new money into circulation in the country. And you can have much deficit spending without inflation if you are buying lots of imports which take money out of the economy to foreign producers. So, it depends on whether your economy is in a recession or depression or has full employment whether you will have inflation. During a recession or depression with high unemployment, deficit spending (which monetizes debt) you will not have inflation until you near full employment, and even then it may not be serious. Hyperinflation usually occurs when governments have to pay debts in currencies they do not issue. They may issue money to cheapen its value in order to pay off high debts, like Germany after World War I which had war reparations to the Allies near double the value of every piece of property in Germany.

Leave a reply

Your email address will not be published. Required fields are marked *

*

Human verification:

Please type the characters of this captcha image in the input box

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>