Larry Summers heated up a brewing row among economists over Modern Monetary Theory, calling the deficit-friendly doctrine “fallacious at multiple levels” and accusing its supporters of holding out the promise of a “free lunch.”
The former Treasury secretary under Bill Clinton and White House adviser to Barack Obama is the latest big-name economist to turn his fire on MMT, a school of thought that’s been gaining ground especially on the left wing of the Democratic Party. It argues that governments with their own currencies don’t need to tax, or even borrow, to finance spending -- and that when inflation is low, as it is now, there’s room for bigger government deficits.
The debate is happening against a backdrop of surging American deficits and public debt -- and bond markets that show little sign of being spooked. President Donald Trump, who inherited a widening budget shortfall, has expanded it some more by subtracting revenue through tax cuts, while outlays on defense, health care and interest payments are growing. Yet 10-year Treasury yields remain below 3 percent, a historically low level.
MMT arguments are rooted in a “valid idea” that fiscal policy needs to be re-thought in an era of low interest rates, Summers, a Harvard University economics professor, wrote in a Washington Post op-ed published late Monday. But they’ve been “stretched by fringe economists into ludicrous claims,” he wrote, citing the idea that the U.S. government can offer employment to anyone who wants it, and finance the plan through its central bank “without any burden on the economy.”
The jobs guarantee, an idea backed by MMT economists, has made it onto the platform of several contenders for the Democratic presidential nomination in 2020. There’s also growing support for a Green New Deal, which some of its supporters say could be partly financed by deficit spending.
Summers said the MMT approach can lead to hyper-inflation “past a certain point” and would risk a currency collapse because it ignores external constraints on the U.S. economy.
Similar charges were leveled at cheap-money policies adopted by the Federal Reserve after the 2008 crisis, although those critiques receded as Fed’s purchase of trillions of dollars of debt didn’t trigger inflation or undermine the dollar.
In the economists’ war over MMT, Summers is siding with Paul Krugman. The Nobel laureate has been engaged for weeks in a sometimes testy debate with Stephanie Kelton -- a leading MMT economist, and also an adviser to Senator Bernie Sanders during his 2016 presidential campaign.
Kelton fired back at Summers on Tuesday in a Twitter post that highlighted the way some Democrats are starting to become more critical of economic policies carried out by their party’s past administrations. “MMT didn’t deregulate the banks,” she wrote. “MMT didn’t bail out Wall St and let millions lose their homes. MMT didn’t push a too-small stimulus over price tag fears.”
Another prominent economist linked to the Democrats also weighed in this week on the party’s future course. Brad DeLong, a professor at the University of California at Berkeley who worked at the Treasury with Summers, argued that it’s time for centrist or “neoliberal” Democrats to cede leadership to the party’s left -- then work to make their ideas better.