Modern Monetary Theory Makes Sense, Up to a Point

Yet, by implying that inflation needs to be watched, she also implied that the government should not borrow and overspend, which I fully agree with.

Moreover, she was right to say that, in some cases, Americans overreact to government deficits. In fact, there is a long history of disputes among accountants over how to define deficits. For example, it has been proposed that the federal government adopt separate capital and operating budgets, separating long-term investments from operating costs.

But he is not easy how to do this, and the change was not made. These accounting issues are technical and do not provide useful slogans for influencing public opinion, as modern monetary theory does.

Representative Alexandria Ocasio-Cortez of New York is perhaps the most visible proponent of the theory. In her defense of the Green New Deal program she introduced with fellow Democrat Senator Edward J. Markey of Massachusetts, she used the theory to dismiss criticism that increased spending would require higher taxes.

Yet the Green New Deal – that the Republican-controlled Senate rejected Tuesday in a procedural vote – seems awfully expensive. When pointed out to him the cost of his plan in a National Public Radio interview with Steve Inskeep Last month, Ms Ocasio-Cortez said: ‘I think the first thing we need to do is kind of break down the misconception that taxes pay one hundred percent of government spending.

When pressed, however, she said, “When we decide to enter the realm of deficit spending, we have to do so responsibly.” Given that there are currently great opportunities for government investment and interest rates are low, these programs should go ahead with deficit spending. Again, it’s a classic argument: it makes sense to spend when the return on public investment exceeds the borrowing rate.

These are reasonable ideas. However, they are not always expressed in a way that appeals to mainstream economists, so it is not surprising that two Harvard economists recently wrote articles harshly criticizing modern monetary theory. Kenneth Rogoff did it in “Modern monetary nonsense“, while Lawrence Summers wrote:”The Left’s Embrace of Modern Monetary Theory Is a Recipe for Disaster.”