Squawking About MMT
Good Saturday morning! (It was morning when I started writing.)
A couple of days ago, I wrote about how some leading economic commentators were reacting to so-called “Trussonomics”—i.e. the economic program offered up by the new Prime Minister, Liz Truss, and her chancellor, Kwasi Kwarteng.
Writing for The Guardian, Larry Elliott described it as an “assault on economic orthodoxy.” Elsewhere, Martin Sandbau of The Financial Times wrote that it demonstrates a “radical shift” toward a more “carefree attitude” about public debt.
Sandbau’s piece focused on this more “carefree attitude” about public debt, a disposition he has come to share, even as he considers the gamble on trickle-down economics to be “rather reckless.” To carry out its economic program, the UK government is expected to borrow an additional £70B this year.
Truss and Kwarteng and preparing to throw a lot of money around…the UK will subsidise energy prices more than any other European country…and make good on promised tax cuts…
…the carefree attitude displayed by the new stewards of the UK economy has something going for it, which is their lack of worry about the level of public debt…which rather sounds like not letting concerns about the debt get in the way of the deficits they want to run…
…what if Truss and Kwarteng are right…what if there is no good reason to think that any particular debt level is too high—and whatever it is, it should be treated with benign neglect?
Heretical as that view may sound, there are some powerful arguments in its favour. In 2015, an IMF discussion note, explicitly concluded that in countries not facing prohibitive interest rates, ‘policies to deliberately pay down debt are normatively undesirable.’ …
And three years ago Olivier Blanchard gave a prestigious lecture to the American Economic Association in which he argued that the financial and welfare cost of public debt was likely to be small if not negative….
Given the insights of the IMF and of Blanchard…it seems to me that…what these arguments point to, then, is what in technical terms is called to ‘be chill about public debt levels.’
While people like me—i.e. economists using the MMT framework—can claim to have had some success in shifting the popular debate over fiscal and monetary policy, no one deserves more credit for helping policymakers learn to be more “chill about public debt” than Oliver Blanchard.
His presidential address reverberated through the academy. It led to a palpable shift in the way people like Larry Summers and Jason Furman talked about debt sustainability. With the high-profile academics taking a softer stance on public debt, much of the financial press followed, helping to spread the new fiscal gospel into the halls of power.
The briefly fashionable—and highly destructive—argument that governments should set fiscal policy to keep debt-to-GDP ratios from “tipping” above 90% was jettisoned in favor of Blanchard’s more nuanced argument about debt service ratios and some comforting observations about the historic tendency for growth rates to exceed interest rates (g>r).
As COVID hit, a more "chill” attitude toward public borrowing was embraced the world over. Even Brian Riedl of the conservative Manhattan Institute was suddenly cool with the prospect of the US debt ratio stabilizing at 150% of GDP.
On a global scale, the fiscal response to the pandemic dwarfed the fiscal response to the Great Financial Crisis (GFC). Central banks mostly repeated what they had done before—large scale asset purchases (QE) and zero interest rate policy (ZIRP). In terms of the economic recovery, the more robust fiscal response made all the difference.
The US experienced the shortest recession in its history, clawing back all 22 million jobs that were lost in the pandemic in two-and-a-half years time. (Compare that to the post-GFC era, when it took nearly seven years to recover fewer than 9 million lost jobs.)
Instead of anemic growth, persistently high unemployment, and negligible inflation, we got a booming economy, record job growth, sky-high corporate profits, and a blazing hot stock market. At least that’s what we had before the Federal Reserve decided unwind it all.
For the better part of two years, the mood over at CNBC’s Squwak Box was pretty upbeat. The hosts chatted with SPAC kings waiving blank checks , NFTs became an exciting new asset category, Dogecoin was headed for orbit to set the foundation for interplanetary commerce, and a never-ending parade of CEOs dropped by to report on record margins and soaring corporate profits.
Now that cryptocurrencies, housing, corporate earnings, and broader financial markets are either markedly slowing or totally rolling over, one of the show’s hosts wants us to look back on the policy response to the pandemic—which she likens to MMT—with derision.
I happened to be watching the show yesterday when this segment aired. If you click the tweet below, you’ll hear the host, Becky Quick, ask whether yesterday’s drop in the pound and the sharp move up in interest rates on gilt-edged bonds is “the death knell for modern monetary theory.” Each of the guests went on to agree that it is or at least should be, because, as Rick Santelli put it, “you can’t print forever and get away with it.”
Ah, yes, journalism at its finest.
It’s one thing when a bombastic TV personality goes on a mini-rant about “printing money” but it’s another when fellow scholars and academics go along with the misrepresentation of MMT. Pointing to some basket case economy—the Weimar Republic, Zimbabwe, Argentina, Venezuela, Sri Lanka, Turkey, or even the UK—and squawking about MMT might make for entertaining television, but you’re telling on yourself when you demonstrate such willful ignorance.