There are many schools of thought on economics. For convenience, this blog has always focused on The Big Three. First, there is the Austrian or "Tough Love" school that says budgets should be balanced at all times. Second, there is the Keynesian school that says deficits are good during bad times as long as the budget has a surplus during good times. Third, there is the relatively recent Supply-side school that argues debt is easier to handle if the economy is growing faster, which results from a cut in the highest marginal tax rate.
Europe has been using the Austrian approach to recover from its financial crisis and has been applying "tough love" or austerity to their budgets and their people. However, the time for this approach to work is running out. Already, there are anti-austerity demonstrations and riots. In addition, the ongoing scandal over the research methodology of This Time Is Different by Reinhart and Rogoff has dis-credited the intellectual basis of the Austrian approach, at least temporarily.
So, it should not be surprising that a relatively obscure school of economic thought is now getting much more attention, and that is Modern Monetary Theory (MMT), which has been around since 1895. It argues that nations with their own free-floating (not linked to gold) currency have an obligation to run budget deficits in order to finance GDP growth. They believe deficits increase money supply. (There is little disagreement that economic growth must have some increase in the money supply, but how much is too much? Plus, should that increase in money supply come from the central government or the central bank?) When a government runs a deficit, it gives the private sector a piece of paper called a bond and then re-deposits the cash into the private sector. It is a win-win, no?
When former Vice President Dick Cheney famously said "deficits don't matter," he unknowingly re-energized Modern Monetary Theory. Liberal Nobel-Prize-winning economist Paul Krugman said that MMT is "just not right" because it places too much emphasis on the freedom of the central government to run deficits in both bad economic times and good economic times, as long as they have their own free-floating currency. MMT may have more friends on the right than the left.
Certainly, MMT is not one of The Big Three of economic theories, but it is now growing as a logical result of austerity-fatigue. The intellectual tide is shifting . . .
NOTE: Modern Monetary Theory (MMT) should not be confused with Modern Portfolio Theory (MPT), which deals with improving investment performance while managing risk, not budgets and money supply.
Europe has been using the Austrian approach to recover from its financial crisis and has been applying "tough love" or austerity to their budgets and their people. However, the time for this approach to work is running out. Already, there are anti-austerity demonstrations and riots. In addition, the ongoing scandal over the research methodology of This Time Is Different by Reinhart and Rogoff has dis-credited the intellectual basis of the Austrian approach, at least temporarily.
So, it should not be surprising that a relatively obscure school of economic thought is now getting much more attention, and that is Modern Monetary Theory (MMT), which has been around since 1895. It argues that nations with their own free-floating (not linked to gold) currency have an obligation to run budget deficits in order to finance GDP growth. They believe deficits increase money supply. (There is little disagreement that economic growth must have some increase in the money supply, but how much is too much? Plus, should that increase in money supply come from the central government or the central bank?) When a government runs a deficit, it gives the private sector a piece of paper called a bond and then re-deposits the cash into the private sector. It is a win-win, no?
When former Vice President Dick Cheney famously said "deficits don't matter," he unknowingly re-energized Modern Monetary Theory. Liberal Nobel-Prize-winning economist Paul Krugman said that MMT is "just not right" because it places too much emphasis on the freedom of the central government to run deficits in both bad economic times and good economic times, as long as they have their own free-floating currency. MMT may have more friends on the right than the left.
Certainly, MMT is not one of The Big Three of economic theories, but it is now growing as a logical result of austerity-fatigue. The intellectual tide is shifting . . .
NOTE: Modern Monetary Theory (MMT) should not be confused with Modern Portfolio Theory (MPT), which deals with improving investment performance while managing risk, not budgets and money supply.
