by Reexamining the economic costs of debt In recent months a new approach to national government budgets, deficits, and debts—Modern Money Theory (MMT)—has been the subject of discussion and controversy. A great deal of misunderstanding of its main tenets has led to declarations by many policymakers (including Federal Reserve Chairman Jerome Powell and Japan’s Prime Minister Shinzō Abe) that it is crazy and even dangerous. Supposedly, it calls on central banks to just print money to pay for ramped-up spending. It is purported to claim that deficits don’t matter. It is said to ignore the inflationary consequences of spending without limit, and even to invite hyperinflation. None of these claims is true. MMT is based on sound economic theory. Most of it is
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Reexamining the economic costs of debt
In recent months a new approach to national government budgets, deficits, and debts—Modern Money Theory (MMT)—has been the subject of discussion and controversy. A great deal of misunderstanding of its main tenets has led to declarations by many policymakers (including Federal Reserve Chairman Jerome Powell and Japan’s Prime Minister Shinzō Abe) that it is crazy and even dangerous. Supposedly, it calls on central banks to just print money to pay for ramped-up spending. It is purported to claim that deficits don’t matter. It is said to ignore the inflationary consequences of spending without limit, and even to invite hyperinflation.
None of these claims is true. MMT is based on sound economic theory. Most of it is not even new. Rather it represents an integration of a number of long-standing traditions that heretofore had not been linked. It does reach some surprising conclusions, but these conclusions are more consistent with real world outcomes that mainstream theory has trouble explaining. Further, a growing number of prominent economists and financial market participants have recognized that it is worth examining MMT. Its conclusions—especially those regarding the fiscal policy space available to sovereign governments—are being embraced by some policymakers.
In this testimony I do not want to rehash the theoretical foundations of MMT. Instead I will highlight empirical facts with the goal of explaining the causes and consequences of the intransigent federal budget deficits and the growing national government debt. I hope that developing an understanding of the dynamics involved will make the topic of deficits and debt less daunting. I will conclude by summarizing the MMT views on this topic, hoping to set the record straight.