- MMT supporters are right to call for more spending, but they can still be more progressive, Paul Krugman said.
- Where MMT sees taxes as the best way to slow inflation, Krugman argued the Fed can do the same.
- You can lean on the Fed to slow inflation and also allow the government to spend more and keep taxes low, he said.
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Modern Monetary Theory economists are the trailblazing left-wingers in the field. Nobel laureate Paul Krugman says he’s farther left than them.
Both schools are inspired by the great 2oth-century English economist John Maynard Keynes, whose theory of fiscal stimulus influenced not only FDR’s response to the Great Depression of the 1930s, but $5 trillion of federal spending amid the coronavirus recession.
Krugman was one of the “neo-Keynesians” who worked to integrate his theories with neoclassical economics of the 1950s and onward. But in recent years, MMT has taken that legacy forward, arguing that, since the US is the only power that can print US dollars, the government can spend first without raising cash through taxes.
Where the prevailing policy strategy sees budget deficits as the primary obstacle to spending, MMT asserts that inflation is the biggest risk. Taxes can then be used to slow inflation by reining in the money supply, according to the theory.
Krugman says policymakers can also rely on the Fed to handle inflation, and that’s actually a more progressive economic policy.
“MMTers, at least if they’re consistent with their own doctrine, are substantially to the right of people like me,” Krugman told Insider earlier this month. “The MMTers don’t seem to believe that monetary policy can ever be used for anything useful.”
The MMT framework existed on the fringes of economic policy before the COVID-19 crisis, but Treasury Secretary Janet Yellen has said that, so long as interest rates stay at historic lows, the government should spend what’s necessary to power the economic recovery. That’s a sharp reversal from the Obama administration’s approach, which was hindered by fears of deficit spending and the growing national debt pile.
If deficit worries took center stage in 2009, inflation is the biggest risk looming over the pandemic-era recovery. One camp, led by conservatives and moderate Democrats, is concerned that unprecedented spending and the Federal Reserve’s low rates can spark the worst inflation crisis since the 1970s.
The other, which Krugman resides in, sees inflation cooling once reopening ends and the country settles into a new normal. But while MMT supporters view taxes as the key weapon for curbing inflation, Krugman believes policymakers can rely on the Fed to keep price growth in check.
Followers of MMT, then, can be “more cautious and less willing to go wholeheartedly into progressive policies” than those who appreciate the Fed’s power, he added.
While the economy hasn’t fully rebounded yet, Krugman sees a repeat of Obama-era concerns potentially being the biggest mistake policymakers make during the recovery.
President Joe Biden has teed up another $4.1 trillion in spending on infrastructure and care programs in recent weeks, as well as several tax increases set to pay for most of the plans. Such pay-fors are appealing for those who worry about the budget deficit, but in practice, they could keep the recovery from reaching its full potential, Krugman said.
Passing more spending packages while leaving taxes untouched could keep the US from entering a demand-starved recovery like that seen after the Great Recession, he added.
“What the doctor ordered is some sustained moderate deficit spending,” he said. “That’s what worries me a little bit. That we’re still too worried about fiscal responsibility and not sufficiently worried about persistent weakness of demand.”