The S&P 500 Index, on the other hand, has produced a 15% annualized total return since the recession. It’s setting record after record — something President Donald Trump likes to trumpet. The Russell 2000 Index has gained an average of 13.5% a year, while high-yield corporate bonds have produced a 9.1% annualized return in the past 10 years. Basically, holders of financial assets have had a great decade while those who rely on salary bumps have fallen behind.
An MMT-inspired fiscal policy, in theory, would hope to change that. None other than Ray Dalio, founder of Bridgewater Associates, has said he sees MMT as “inevitable.” Policy makers, he says, have to figure out “how to get the economic machine to produce economic well-being for most people” when typical central-bank tools fail. He sees a coordination of fiscal and monetary policy as the only answer.
The big question, Dalio says, is whether elected officials can responsibly push and pull on the economy. Wray thinks they can. “Give the policy makers the truth, and if you believe in democracy, you’ve got to trust them to do the right thing,” he said. “I don’t think there’s any danger that just because they realize the government can’t run out of money, let’s spend until the cows come home. I’ve never met any politician who wants inflation.”
Of course, there are still any number of lawmakers — mostly, but not exclusively, Republicans — whose views are rigid as ever about the budget. “I certainly don’t want my grandkids to see the crisis scenario in which the interest rate on the debt will skyrocket abruptly because investors will no longer have confidence in our government’s ability to pay its bills,” lamented Steve Womack, an Arkansas Republican, at the House hearing. Ralph Norman, a Republican from South Carolina, peppered Wray with questions, including if he had ever run a business or knew the inflation rates in Chile, Peru and Venezuela. “Hyperinflation hurts the little man,” he warned.
And for every big-name investor like Dalio who’s sanguine about MMT, there’s at least one who dismisses it outright. Jeffrey Gundlach, chief investment officer at DoubleLine Capital, has blasted it as a “crackpot idea.”
By now, MMT economists are no strangers to ad hominem attacks. “The most important thing is just the weight of the evidence,” says Stephanie Kelton, a professor of economics and public policy at Stony Brook University who is also an adviser to the Bernie Sanders campaign and has written occasionally for Bloomberg Opinion. “At some point, people become increasingly willing to rethink the theories, the models, the conventional wisdom because all of the things that were supposed to happen kept not happening.”
Kelton points to Japan, which is running a debt-to-GDP ratio of about 238% with low inflation and interest rates locked near zero, as an example of failing conventional wisdom. “Increasingly you’re hearing central bankers talking openly and candidly about a need for a fiscal partner,” she said in a phone interview. “There’s growing but reluctant acceptance of the idea that fiscal policy is going to have to take on a bigger supporting role — and maybe even a starring role.”
This is where Representative Alexandria Ocasio-Cortez’s Green New Deal, or something like it, comes into the picture. Wray co-wrote a paper titled “How to Pay for the Green New Deal,” in a nod to John Maynard Keynes’s 1940 book “How to Pay for the War.” To consider how far MMT still has to go, just consider Wray’s view of taxes: “It is possible that we will need to constrain domestic consumption in order to release resources for the GND effort in a noninflationary manner. The problem is not that we cannot financially afford the GND — government can always bid resources away from private use by paying higher prices — but spending on the GND will generate private income that can support higher bids in competition with the government for scarce resources. This is the real reason that tax hikes might be desirable: to reduce private income and thereby remove competition for resources.”
To condense the argument: Taxes are not about raising revenue for the government. They’re to reduce spending power to avoid price inflation.
For many people who have just a cursory understanding of the U.S. monetary system, this can be difficult to grasp. After all, it has been a long time since fiscal policy has played a “starring role,” as Kelton says. It’s why Wray has to go back to World War II for any sort of comparable government initiative.
It’s still far too soon to say whether MMT will catch on in the 2020s. But in some ways, the Trump administration has washed away what remained of the Tea Party’s resolve. In a bipartisan move, the House this month passed two spending bills that provide $1.4 trillion to fund the U.S. government. The U.S. will almost certainly run at least a $1 trillion annual deficit in the coming years.