Left-wing Dems in minority with new approach to spending

President Trump’s 2020 spending proposal has drawn criticism from deficit hawks worried that it fails to balance the budget within a decade, but some Democrats are promoting a new economic theory that says deficits don’t really matter.

The rationale, known as Modern Monetary Theory (MMT), argues that debt poses much less of a threat than previously thought.

{mosads}And while it remains far from the economic mainstream, the idea is gaining traction among left-wing Democrats proposing expensive policies like Medicare for All and the Green New Deal. Freshman Rep. Alexandria Ocasio-Cortez (D-N.Y.) has said MMT should “absolutely” be part of a conversation on paying for new government programs.

The theory’s main proponent is Stephanie Kelton, who previously served as chief economist of the Senate Budget Committee under ranking member Sen. Bernie Sanders (I-Vt.).

She says the conventional wisdom that deficits crowd out private investment, lead to higher interest rates and easily spur inflation is largely wrong.

“What’s wrong with it is the very simple point that budget deficits augment private savings,” says Kelton, now an economics professor at Stony-Brook University.

Whereas economists traditionally argue that a growing debt will weigh down an economy, Kelton says deficits put more money in people’s pockets, which in turn spurs growth.

{mossecondads}“When the government runs a budget deficit, it means they’re putting more money into the economy than they’re taking out,” she said.

Most congressional Democrats, including Speaker Nancy Pelosi (Calif.) and Appropriations Committee Chairwoman Nita Lowey (N.Y.), adhere to conventional wisdom, arguing that fiscal responsibility is important.

Pelosi angered some progressives earlier this year by insisting on including pay-as-you-go rules for the new Congress, while Lowey slammed Trump’s 2020 budget request as “irresponsible and dangerous.”

MMT veers outside the mainstream by arguing that instead of issuing debt to pay for deficits, the government should print more money — terminology Kelton chafes at, saying it conjures images of Weimar Germany after World War I and the hyperinflation that it caused.

The theory also contends that Congress and the executive branch should take charge of monetary policy and put in place mechanisms, like a federally funded jobs guarantee, to automatically adjust deficits based on the economic cycle. Congress should also determine how best to offset new spending based on the inflationary effects of the policies, as opposed to waiting for the Federal Reserve to react, the theory says.

But that approach would violate the commonly agreed-upon tenet that a functional financial system depends on an independent central bank to set monetary policy free of political influence, which is one reason why economists have been aghast at President Trump for publicly demanding that the Fed lower interest rates.

Critics of MMT are many, and they have not been shy about speaking out.

“To think that if there’s massive inflation that Congress and the president will be able to act is completely whacko,” says Marc Goldwein, policy director at the Committee for a Responsible Federal Budget, which advocates for lowering the national debt.

Congress seldom manages to even pass spending bills on time, and even let funding lapse for five weeks earlier this year, he noted.

Former Treasury Secretary Larry Summers argued in The Washington Post this month that the ideas behind MTT were “oversimplified and exaggerated by fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone.”

And Nobel Prize winning economist Paul Krugman wrote in The New York Times last month that the theory’s supporters were “messianic in their claims.”

Proponents say there is more nuance, and that mainstream economists have missed the boat on some of its more-accepted premises. Budget hawks, they say, have warned about the detrimental effects of high deficits for years.

“Rewind the clock 10 years, same argument. Rewind another 10 years, same argument. This goes all the way back to Reagan,” says Kelton.

Both inflation rates and interest rates were higher in the 1990s, when the debt was a fraction of what it is today and the budget was balanced.

Kelton also emphasizes that MMT doesn’t argue there should be no checks on the deficit whatsoever, but that the main concerns about debt should focus on inflation, not crowding out investment or high interest rates.

“It’s all about the economy’s capacity to absorb the new spending,” she said. “Look at what the Republicans just did. If all those things that they say were true, we would have had to raise taxes all the extremely large deficits run under [former President] Obama.”

“Look at what the Republicans just did,” she added, referencing the 2017 GOP tax-cut law that is projected to add $1.9 trillion to the deficit. “If all those things that they say were true, we would have had to raise taxes all the extremely large deficits run under [former President] Obama.”

Goldwein says the evidence that debt leads to higher interest rates is clear, but acknowledges that the economy may have more room for debt spending than once thought.

“Frankly, I am surprised, even from 10 years ago, that interest rates are so low, but it doesn’t follow that debt doesn’t have an effect,” he said.

The global trend toward lower interest rates is not set in stone, and having a large pile of debt will be more dangerous when rates spike, he argued.

But even as critics pile on, the conversation around MMT and the role of debt is likely to get louder in the run-up to the 2020 presidential election.

Kelton said she has advised four declared presidential candidates on her views, and two more that are potential White House hopefuls.