By Howard Schneider
WASHINGTON (Reuters) – Twitter may not be the best place to decide the future of the U.S. economy.
But square off a Nobel laureate and a former U.S. Treasury chief against a firebrand professor from a state university in New York, and an otherwise obscure debate over “modern monetary theory,” or MMT, becomes a center ring battle over how the Democratic Party should shape economic policy ahead of the 2020 presidential election.
Over the past three weeks, New York Times columnist and Nobel economics prize winner Paul Krugman, along with former Treasury Secretary Lawrence Summers, have used social media, television appearances and news columns to rebut the ideas of Stephanie Kelton, an economics professor at the State University of New York at Stony Brook.
Kelton, who advised democratic socialist U.S. Senator Bernie Sanders in his 2016 run for the Democratic presidential nomination, is a staunch advocate of MMT, which promotes the idea that government spending, and deficits as needed, should be used to meet the full employment and inflation mandates currently tasked to the U.S. Federal Reserve.
The intense back-and-forth exchanges have ranged from wonky money and savings demand charts to flat-out insults, with Krugman calling Shelton’s thinking “a mess” and Summers panning MMT as “the voodoo economics of our time” in a Washington Post column.
Kelton responded to Summers’ jibe with a Twitter video clip from the U.S. TV sitcom “Happy Days” famous “jumping the shark” episode in 1977, which has come to connote the moment when an established phenomenon crosses into absurdity or irrelevance.
“This isn’t a fight I intend to lose,” she said on Twitter on Tuesday, shortly before Summers appeared on CNBC to say, in reference to Kelton’s theories, that “one thing that every American ought to support are the laws of arithmetic.”
GRAPHIC: MMT debate explodes on Twitter – https://tmsnrt.rs/2VFAktL
The war of words could be dismissed as social media fun and games, except it represents a fundamental debate, gaining intensity ahead of the Democratic presidential nominating contests, over how to finance a “Medicare for All” healthcare restructuring, a “Green New Deal” environmental program, and other initiatives.
Those sweeping ideas are now at the center of several of the emergent 2020 campaigns. They have already become a talking point for Republican President Donald Trump, who has said it shows the Democratic Party has embraced “socialism.”
With $22 trillion in outstanding U.S. government debt and chronic annual deficits driven by entitlement and other legal commitments like interest payments, economists across the political spectrum and at the Fed argue the country is already on an unsustainable fiscal path and needs to tread carefully.
To support those and other ideas being debated by the Democratic presidential contenders, Kelton’s approach would involve a full-on reengineering of how the United States uses debt and deficits, and how its central bank works.
That would likely be a non-starter in more normal times.
But a decade after the 2007-2009 financial crisis and recession, even the most mainstream of thinkers, including Summers and influential figures like the International Monetary Fund’s former chief economist, Olivier Blanchard, are rethinking how governments should manage their fiscal affairs.
The general notion: In an era when trillions of dollars of central bank purchases of bonds, also known as quantitative easing, and massive cuts in U.S. taxes have failed to spark either inflation or significantly higher interest rates, it is probably safe to borrow much more, and invest it toward productive public projects.
GRAPHIC – Kelton versus the economic establishment:
Jason Furman, who was chairman of the White House’s Council of Economic Advisers for most of former President Barack Obama’s second term, said on Tuesday the Obama administration, even as it crafted ambitious programs, was sensitive to how extra spending affected the ratio of total government debt to gross domestic product, and assumed it was good to keep that ratio stable or declining.
Today, “I have a lot of people pushing me, why? Why does it need to be 80 (percent) as opposed to 120, or 40? What’s the evidence?” Furman, now a professor at Harvard’s Kennedy School of Government, said at the Peterson Institute for International Economics in Washington.
“I have just lost my ability to have any economic conviction around that as an anchor. Definitely it should not go to infinity.”
Short of that, Furman, Blanchard and others say the United States should not shy away from spending on projects that offer benefits for the cost involved. Blanchard, in particular, said running higher deficits to save the planet was a “good idea.”
They still see a limit out there somewhere, but as long as the U.S. economy grows faster than the interest rate paid on government debt, it’s likely safe to keep borrowing. The current ratio of U.S. publicly held debt to GDP is around 76 percent.
Kelton takes a more expansive view of what the government can and should do, even in the face of possible blowback from bond and currency traders. “‘Bond markets and foreign exchange markets won’t let us’ is a pretty terrible way to build a case against a political and economic program to save the planet,” she tweeted.
She has not yet aligned herself with a 2020 presidential candidate publicly, but some of her ideas, such as a guaranteed government-funded job for anyone who wants to work, have found a home among Democratic contenders like U.S. Senator Kamala Harris of California.
GRAPHIC – Summers versus Kelton: https://tmsnrt.rs/2UiyZIV
GRAPHIC – Kelton thinks Summers has ‘jumped the shark’ : https://tmsnrt.rs/2UsyZXf
And Kelton has been intent in her response to the recent attention, matching Krugman and others tweet by tweet in maintaining that the U.S. government’s monopoly over dollar issuance – the printing press – could be used to set whatever level of demand is needed to maintain full employment and finance climate change and other programs.
It’s an idea Fed Chairman Jerome Powell dismissed in a congressional hearing last week, and which Summers and others say has backfired in other countries through higher inflation or a currency crash.
But it’s gained enough traction that opponents have felt compelled to respond.
“There is no left and right here. There is only magical thinking with regular folks paying the price when the spell breaks,” Betsey Stevenson, who was on the staff of the CEA during the Obama administration, said of MMT on Twitter.
“MMT didn’t deregulate the banks. MMT didn’t bail out Wall St and let millions lose their homes. MMT didn’t push a too-small stimulus over price tag fears,” Kelton responded.
(This story corrects spelling of Lawrence Summers’ name in third paragraph)
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
