Stephanie Kelton, professor of public policy and economics at Stony Brook University and economic advisor to Bernie Sanders, is a leading figure in the rising economic movement called Modern Monetary Theory (MMT).
In challenging conventional economic schools of thought, MMT revolves around the idea that because the U.S. government issues its own currency, it can sustain large spending for policy programs, like the Green New Deal, without having to worry about taxing and borrowing. The theory shifts the focus to a money-financed fiscal policy, in which government spending does not need to depend on hefty taxes when it can just create the money it needs.
“It asks us to focus on the monetary system as it is today and to recognize it affords us the opportunity to do more in terms of economic policy and to improve economic and social outcomes,” Kelton said.
MMT academics study the transition of a gold standard system, in which paper money’s value is fixed by the amount of gold, to the current monetary system — modern fiat currency — where floating exchange rates are determined by the open market. Politicians, Kelton argued, are trapped in a gold standard framework because the question of where the money will be coming from is a recurring concern.
By using MMT as a lens to make sense of the monetary shift, she proposed that the pressing question about the American economy should be — how much could be spent without creating inflation? The MMT approach focuses on the capacity of the economy by looking at the nation’s real resources: raw materials, technology and the skills of people.
“So how much can we do with the real resources we have, recognizing that the money can always be there to push those resources where we think we want them used in the economy?” Kelton said. “It’s about replacing artificial complaints with real complaints.”
MMT teaches that the federal government does not have a revenue restraint, so it can safely spend more money in a balanced economy when it efficiently makes use of its resource capacity. In brief, the capacity of a sovereign government to reach full employment is determined by the real resources available in the nation.
William Black, an Associate Professor of Law and Economics at the University of Missouri-Kansas City and the editor-in-chief of Kelton’s blog, “New Economic Perspectives”, aims to showcase economic projects through an MMT framework while sparking debates.
Black explained that MMT guides economists and politicians on the kinds of policies that need to be followed to reach a sovereign currency, as well as their understandings of important macroeconomic issues like the recession in Europe’s southern economies.
“One of the areas [MMT] had such predictive success, is Stephanie Kelton’s analysis of why the euro was an exceptionally dangerous form of currency that would in particular expose the southern cone,” Black said. “[Kelton] proved to be completely correct of things and that there should be a stimulus program that would in fact lead to a much improved growth rate.”
Other economists, including Thomas Palley, former Chief Economist for the U.S.-China Economic and Security Review Commission, are critical of MMT for undervaluing the economic costs of money-financed fiscal policy.
“I don’t think they pay very much attention to class conflict and income distribution issues that are behind the failings of capitalism,” Palley said. “They see money-financed fiscal policy as entirely benign in its consequences, and having no adverse impacts on the economy or even more than that, as being unfinancially constrained.”
Palley added that MMT scholars backtracked over the last several years as they spoke more about the dangers of inflation, the need for capital controls and adjustable interest rates. In doing so, their work has fallen back into a form of old Keynesian economics, which looks at how government spending does not need to be financed without taxes.
“Its appeal is not theoretical. Its appeal is political. It offers policies that are very enticing: free college and university for all, Green New Deal for all, expanded social security — all of this essentially at no cost,” he said. “We’re living in an era of relative stagnation. People are very fed up with 30 years of neoliberal austerity, and in that environment, the Modern Money Movement’s proposals are politically attractive.”
As Bernie Sanders’ chief economic advisor, Kelton said that planning an ambitious political agenda centered on the economic bill of rights needs a macroeconomic framework that is compatible with financing it.
Aside from driving MMT into the political sphere, Kelton spoke about how she uses her teachings at Stony Brook to expose her students to both sides of debates and getting them to focus on the right questions, especially when the information is limiting.
“You don’t know that policy options are available because everyone has told you we can’t have those things because of the deficit,” Kelton said. “You don’t know that it’s okay to dream about public colleges and universities being tuition-free. You think it is all out of bounds because someone has told you it’s because of the debt.”
If she can “clear away misunderstandings about some of the perceived barriers” to government spending through her classes at Stony Brook, then maybe students will be able to see the possibilities “for themselves.”
