Washington establishment freaks out as Modern Monetary Theory gains currency

Modern Monetary Theory (previously) is an economic philosophy based on the idea that all state spending is "deficit" spending, since money comes into existence when the government spends it, and when the government raises taxes, it does so in order to take that money out of existence, both in order to control inflation and to limit the concentration of power in the hands of the wealthy.

The corollaries of this are many, but the two standout ones are:

1. The government can create money to buy any good or service that the private sector isn't using without driving inflation (that is, if there's someone unemployed and the government gives them a job, that won't drive up wages because the private sector had already passed on using their labor, so the supply/demand ratio of labor to private jobs remains constant), offering full employment to everyone who wants to work; and

2. The government can create money to buy goods and services that the private sector is currently using without creating inflation, provided it can convince people not to spend that money -- for example, by creating "war bonds" that sequester the vast sums that get pumped into the economy during wartime, to prevent the workers who receive those sums from bidding against the materials that are being used in munitions factories.

These two facts are central to the Green New Deal, which proposes using a combination of a federal jobs guarantee and federal procurements of the materials needed for a sustainable energy conversion and climate change remediation to avert the climate crisis.

As Modern Monetary Theory gains ground in DC -- thanks in large part to the likes Stephanie Kelton, a leading MMT advocate who is Bernie Sanders' economic advisor, the deficit/austerity hawks are starting to freak out at the thought that we might reverse 40 years of treating currency-issuing sovereign nations like they were households balancing their checkbooks.

Some centrists are trying to diffuse the energy for MMT by proposing "stimulus" as a means of making the economy less unequal and dysfunctional, but the right aren't even willing to make that concession -- instead, they're having a full-bore freakout.

The decline of the deficit fear-factor is palpable in Washington, said Coronado, a former Federal Reserve economist. “You can see it politically, it’s already happening,” she said. “The progressive camp is frustrated, they have had it, and are saying ‘You guys are wrong, you have been wrong about everything and now it’s going to be our turn.’”

Slowing global growth and trade disputes have helped push interest rates lower, and were cited by the Fed when it cut its target rate twice this year. Investors project a third cut Oct. 30, and other central banks are also easing policy.

Economists Worry That MMT Is Winning the Argument in Washington [Steve Matthews/Bloomberg]

(via Naked Capitalism)

(Thumbnail: Senate Democrats, CC BY)