February 23, 2017


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If I told you that there are no constraints on federal government spending, you’d probably think I’m a radical deficit hawk and thus fiscally irresponsible beyond conventional liberal economics. Even Paul Krugman, the personification of liberal economics, doesn’t take it that far and assumes that adequate revenue is necessary for a proper budget (i.e. since borrowing costs are low, the government should run an affordable deficit and spend to offset the lack of private investment).

Moreover, the spectrum of the national dialogue on public spending is limited between those who believe that deficit spending and the resulting higher quantity of money in the money supply would cause dangerous levels of inflation, and others (as evidenced by Krugman’s position) who believe that deficit spending can be responsible as long as borrowing is cheap and eventually financed by proper levels of taxation.

Yet, Modern Monetary Theory (“MMT”) insists that the fiscal policy positions within that spectrum are all assuming an unnecessary constraint in public spending. In a soon-to-be published paper, Cornell Law School professors Robert Hockett and Saule Omarova undermine the notion of capital being mostly private, hard to come by, and flight-prone, and advance the fact that capital is mostly publicly supplied and “indefinitely extensible[.]”[1] One implication regards the relationship of banks with the economy and the central reserve (a discussion we will bookmark for my next post), but another is that the US can continuously borrow and never go bankrupt. More specifically, because the US owns the printing press (machines that pump out the money) and because all debts are denominated in US dollars, the US can meet all of its debt obligations. Thus, capital is not scarce and is in fact indefinitely extensible for government use. Moreover, the US will always have the ability to pay back its debts and its shopping list can be made much longer.

But I know what you’re thinking: what about inflation?

It is true – public spending may lead to inflation. However, Professor Hockett believes that soaking up money in the money supply can check inflation. There are several ways to do this, but one way is to have the central bank issue more securities. Another is to institute a higher tax. No matter which policy is ultimately implemented, inflation can be mitigated.

If MMT is correct, our federal government has the ability to pay for robust social programs, infrastructure renewal, investments into R&D for green energy and other industries, university grants for research on risky, yet potentially innovative and revolutionary technology, etc.

We should provide a space for this position in our national dialogue because it deserves serious attention, not only because of the nascent body of work backing MMT, but also because of its significant ramifications on fiscal policy.


[1] Hockett, Robert C. and Omarova, Saule T., The Finance Franchise (August 8, 2016). Cornell Law Review, Vol. 102, (2017 Forthcoming); Cornell Legal Studies Research Paper No. 16-29. Available at SSRN: https://ssrn.com/abstract=2820176 or http://dx.doi.org/10.2139/ssrn.2820176, page 4 with reference to footnote 13 on page 5.