The Challenge to Status Quo Economics Everybody is Talking About

By Lynn Parramore

February 22 — Over the last week, an important approach to economics that has spent years on the sidelines went mainstream: Modern Monetary Theory. This is good news for anyone who wants to see the neoliberal paradigm challenged, and a positive sign to heterodox economists who have difficulty getting a hearing in a field still gripped by outmoded models.

The theory, which provides unusual perspectives on issues including currency, debt, and government spending, kicked off in the mid-90s and has since grown into a movement. Its roster of proponents includes James K. Galbraith; Australian economist Bill Mitchel; Randall Wray and Stephanie Kelton of the University of Missouri-Kansas City; Rob Parenteau; Scott Fullwilier; Warren Mosler; and blogger Marshall Auerback. Their insights have been particularly valuable in countering the deficit hysteria which reached a fever pitch in the U.S. during the summer of 2011, and still darkens policy debates worldwide.

I worked with several MMTers after the financial crisis, especially Auerback, and met with plenty of scoffs, despite the fact that the renowned Galbraith was a key adherent. When I published a piece on the deficit in the Huffington Post which featured the insights of several MMTers, I received more mail than I’ve ever gotten on a single article — most of it hostile (See: The Deficit: Nine Myths We Can’t Afford). The majority of the liberals and ‘progressives’ I spoke to about MMT could not begin to consider an approach than upturned so much of what they knew to be "true" about the economy — despite the fact that much of that "truth" had been handed to them by neoliberals.

Establishment types told me the theory was "too out there" and "too controversial." But to me, "out there" and "controversial" was just what we needed to shake up a field that was mired in dangerous mythology and flawed thinking. Gradually, MMTers became part of a vibrant economic conversation on the websites bold enough to publish their work (New Deal 2.0, a blog I founded in 2009, was at one time such a venue). Recently, I’ve been proud to introduce Auerback to a new and receptive audience at AlterNet. Coming soon: economist Stephanie Kelton of UMKC will be explaining the theory in a feature article for AlterNet.

In the mean time, here’s a look at what people are saying.

From the Washington Post:

In contrast to “deficit hawks” who want spending cuts and revenue increases now in order to temper the deficit, and “deficit doves” who want to hold off on austerity measures until the economy has recovered, Galbraith is a deficit owl. Owls certainly don’t think we need to balance the budget soon. Indeed, they don’t concede we need to balance it at all. Owls see government spending that leads to deficits as integral to economic growth, even in good times.

The term isn’t Galbraith’s. It was coined by Stephanie Kelton, a professor at the University of Missouri at Kansas City, who with Galbraith is part of a small group of economists who have concluded that everyone — members of Congress, think tank denizens, the entire mainstream of the economics profession — has misunderstood how the government interacts with the economy. If their theory — dubbed “Modern Monetary Theory” or MMT — is right, then everything we thought we knew about the budget, taxes and the Federal Reserve is wrong.

From the Financial Times‘ Alphaville blog:

We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.

But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever.

And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade.

From CNBC’s John Carney:

It was obvious to me way back before I had ever heard of MMT that government’s should probably never run a budget surplus—or should do so only in dire emergencies. When the government runs a surplus, that means it is taking more money out of the economy than it is spending back into the economy. It is making us poorer.

Anyone who worries about wasteful government spending should be all the more concerned about government surpluses. When corporations accumulate too much cash, investors rightly worry that management will lose discipline and engage in wasteful acquisitions or expansions. Better to pay it out in a dividend.