Stephanie Kelton: Biden Has Adopted MMT
President Biden’s proposed $6 trillion budget will not be fully paid for with tax increases or other spending cuts. It will increase the deficit, according to Stephanie Kelton, and that constitutes an implicit if not explicit adoption of the principles of modern monetary theory (MMT)
Kelton is a professor at Stony Brook University and was an economic advisor to Bernie Sanders for his two presidential campaigns. She spoke on June 3 at the FPA NorCal conference, which was held virtually.
Before I get to her comments about Biden’s policies, l will review what she said about the underlying assumptions and framework of MMT.
Kelton described MMT as a macroeconomic school of thought or paradigm that explains how a sovereign country that controls its currency behaves. It does not apply to countries that are part of a common currency, like the euro, or with non-fiat currencies that are convertible into, for example, gold.
MMT has come under intense scrutiny from prominent economists, but Kelton said that it has been mischaracterized. Paul Krugman wrote that deficits don’t matter, and Larry Summers said MMT means governments can spend forever. She called those statements, “deliberate attempts to mischaracterize MMT.”
Deficits matter, she said, but not the way we are taught. You cannot think of government budgets as a personal budget because governments get to issue their own currency, whereas ordinary citizens are users of it.
“We cannot assume that persistent deficits are unsustainable or that interest rates will eventually go up,” she said, “increasing the likelihood of a default.”
Kelton reviewed the last 15 years of economic policy. She said that the fiscal response to the 2008 crisis was insufficient. As a result, the Fed, led by Ben Bernanke, stepped in with quantitative easing. A debt crisis ensued for countries in southern Europe (the “PIIGS”), and that motivated President Obama to heed the warnings that the U.S. could face a similar fate. That led to the formation of the Simpson-Bowles commission, which recommended tax cuts to “pay” for the deficit. It lacked support, and the deficit continued to grow. There were increases in the debt ceiling with accompanying promises to “get our fiscal house in order,” she said. Sequestration began in 2013, which meant automatic budget cuts to constrain the deficit. Bernanke responded with QE3, the most aggressive iteration of quantitative easing. But QE is not very powerful, she said, and it didn’t stimulate the economy sufficiently. President Trump eliminated sequestration and implemented tax cuts. Summers and Krugman warned against those cuts, she said, as leading to a disaster, which did not happen. Under Trump, there was modest growth, low inflation, but no terrible consequences of the deficit.