As mentioned in a prior post, Modern Monetary Theory (MMT) “provides an alternative to the dominant neoclassical framework for understanding the federal deficit and modern monetary systems.” As that post noted, this enables the federal government to, among other things, directly (and dramatically) address unemployment via a “job guarantee” (sometimes referred to “employer of last resort”) program.
This post will elaborate a bit on this brief reference, in preparation for a subsequent post that will link MMT to New Growth Theory—another relatively new economic theory—and apply them in concert to U.S. Internet and communication policy.
As described at the MMT Wiki site (hat tip to commenter Hugo Heden):
There is nothing inherently wrong with government deficits. They do not necessarily “crowd out” private activity, they do not “burden” future generations, they can not lead to “financial ruin” of the government. Persistent government deficits are in fact the expected norm in a growing economy. They add to the net financial assets (currency and bonds) of the non-government sector and this accommodates for its desired net saving.
The government must not “over-fund” the desire to net save, i.e deficit spend so that effective demand exceeds the potential for the economy to expand to meet it. This happens at some point when the economy approaches full capacity utilization and full employment, if the government continues deficit spending. Should that happen, demand side inflationary pressure will arise – a general continuous economy wide price level increase.
But if the budget deficit is calibrated correctly – which means that it matches the saving intentions of the foreign and private domestic sectors taken together – then it can be 10 per cent of GDP or 1 per cent of GDP forever without adding inflationary pressure. It is only when the budget deficit accelerates and pushes total spending in the economy beyond the real capacity limits that they become problematic. So continuous budget deficits forever are fine if that is what is needed to offset non-government savings intentions.
For the cartoon-lovers among you, this 12 minute animated video does a pretty decent job of laying out the basic argument that a sovereign issuer of currency like the U.S. does not face the same kind of “budget constraint” faced by households and businesses (and, in today’s world, the European countries that use the Euro and have abandoned their own sovereign currency). The video was created by Joe Hykan, an economics student and Lewis & Clark College.
For those interested in developing a deeper understanding of MMT, there’s plenty of information at the MMT Wiki and the New Economic Perspectives web site, both of which also have links to other MMT-oriented sites.
In this blog I won’t be attempting to dig deep into MMT theory in ways comparable to what you can find on these and other sites. Instead, I’m going to focus mainly on the policy implications of MMT’s claim that federal budget spending only becomes problematic “when the budget deficit accelerates and pushes total spending in the economy beyond the real capacity limits.”
If true (and I’m convinced that is), this claim has very important policy implications, and poses a direct challenge to the deficit hawks that control (or at least heavily influence) federal policy. All the more so today, when both the cyclical and structural components of U.S. unemployment are problematic, and where we face serious long-term challenges related to providing our citizens with high-quality education, healthcare and employment opportunities, and to addressing climate change and necessary changes in how we generate, distribute and use energy.
As I see it, the ubiquitous availability of high-capacity, symmetrical, non-discriminatory Internet connectivity is a key component of the infrastructure necessary to successfully meet these challenges (and also to improve the functioning of our painfully dysfunctional political system). Unfortunately, the evolution of Internet access and related public policies has fallen far short of what I and many others consider ideal.
As I’ll discuss in a future post, MMT appears to have significant implications for addressing these shortfalls in Internet availability and policy, which, in turn, can help address these broader societal challenges. To me that’s a big deal.