Tyler Cowen directed me to a Ross Douthat post on people with intellectual influence:
Scott Sumner/Stephanie Kelton: Because market monetarism and modern monetary theory arguably stand in the same relation to our “no, really, deficits don’t matter” policymaking era as Milton Friedman did to Reagan-Thatcher neoliberalism.
I’m flattered that Douthat believes that I’ve been influential, but I worry that people might misunderstand this claim. As far as I know, my views on the deficit are almost the opposite of the MMT view:
1. I’ve been strongly opposed to the big budget deficits during the Trump/Biden era because they will require future tax increases, which slows economic growth. In contrast, many MMTers don’t seem to believe that deficits impose a burden of future taxpayers.
2. When inflation becomes a problem, MMTers favor tax increases as a way to restrain inflation. I don’t believe that tax increases are an effective means of reducing inflation (as we saw in 1968) and instead favor tight money as an anti-inflation tool. Thus when inflation does become a problem, MMTers basically assume that the budget deficit is too big, whereas I assume that money is too expansionary.
My views on the budget deficit are very much out of step with the times. I opposed fiscal stimulus last year, while (AFAIK) most economists favored it. I don’t believe that excessive fiscal stimulus in the US causes high inflation, most economists believe it does.
READER COMMENTS
marcus nunes
May 31 2021 at 4:13pm
I never mention fiscal stimulus/deficits. Monetary policy is “sufficient” to describe the economy at present. Hope all the stimulus/relief doesn´t damage the dynamics going forward.
https://marcusnunes.substack.com/p/commodity-prices-the-feds-worst-enemy
Mark Z
May 31 2021 at 6:42pm
Douthat’s remark was indeed confusing, I thought you and Kelton had nearly opposite views of the business cycle. Oversimplified, she thinks fiscal policy determines things, but it’s optimal to run massive deficits because even in normal times there’s lots of slack, which big deficits solve, without costing us much in the long run, and monetary policy is ineffective, while you think fiscal policy is ineffective, monetary policy determines things, running big deficits is costly in the long run, and so not worth doing even in recessions. Opposites, basically.
I suspect Douthat may not fully get the enormous difference between why you and her both haven’t feared inflation much recently, but believing monetary policy doesn’t work and believing interest rates don’t necessarily reflect its looseness or tightness are qualitatively different positions.
Scott Sumner
May 31 2021 at 6:58pm
Yes, our views are almost 180 degrees apart.
Daniel
Jun 1 2021 at 9:18am
+1 to both of you. In that paragraph Douthat seems surprisingly vacuous.
Just because the theme of policymaking *seems to be* “deficits don’t matter” does not necessarily mean Scott (sorry?) or Kelton were influential in it. Bizarre.
Market Fiscalist
May 31 2021 at 6:53pm
Scott says ‘big budget deficits […] will require future tax increases’. I assume this is because otherwise we would get inflation ? Scott then says ‘When inflation becomes a problem, MMTers favor tax increases as a way to restrain inflation. I don’t believe that tax increases are an effective means of reducing inflation (as we saw in 1968) and instead favor tight money as an anti-inflation tool’
If inflation can be avoided by tight money, then doesn’t this mean that its not always the case that ‘big budget deficits […] will require future tax increases’ ?
(Perhaps the tax increases will be needed for something other than preventing inflation?)
Scott Sumner
May 31 2021 at 6:58pm
You asked:
“I assume this is because otherwise we would get inflation ?”
Inflation is a tax, so it’s not an either/or situation.
Market Fiscalist
May 31 2021 at 7:36pm
OK, but you say later ‘ I don’t believe that tax increases are an effective means of reducing inflation (as we saw in 1968) and instead favor tight money as an anti-inflation tool’
This seems to imply that both inflation and tax can be avoided by tight money.
Scott Sumner
May 31 2021 at 11:00pm
No, I meant that tax increases alone won’t prevent the inflation, you need tight money.
As far as the burden of the debt, the taxes may be paid at some future date. Thus you don’t need tax increases right now, but you will at some point in the future.
Max More
Jun 1 2021 at 11:27am
Why say you will need future tax raises? Why not also spending cuts? (The preferred option, typically, as far as I’m concerned.)
Scott Sumner
Jun 1 2021 at 11:49am
Yes, that’s also an option. As a practical matter, you are likely to get some of each.
Jerry Brown
May 31 2021 at 9:11pm
“In contrast, many MMTers don’t seem to believe that deficits impose a burden [on] future taxpayers.”
This is mostly accurate in my opinion. If all the caveats about the government (such as the USA) being the issuer of a non- convertible currency that borrows only in its own currency are considered. MMT holds that the burden of the spending is borne at the time of the government spending- not at some time in the future. Government spending diverts real resources to government uses whenever government spends. If those resources were not being used, well it’s not a big problem- and it is not a problem in the future for taxpayers. If most resources were already being used optimally, additional government spending is going to both divert from previous uses and risk causing inflation. Both of which could be a problem at the time the spending occurs- not at some point in the future because of a debt burden.
Christophe Biocca
Jun 1 2021 at 8:05am
That model assumes that all deficits are immediately monetized though? If not, the question of where real resources were diverted from is “the person who bought the treasury bond, foregoing their ability to use the money now in exchange for more money later”.
Jerry Brown
Jun 1 2021 at 2:06pm
Not really. I assume you mean by ‘immediately monetized’ that the Fed would buy the government debt and that would mean no individual would have to reduce their private spending because they tied their monetary resources up in a bond contract.
What I think MMT says is that when the government spends, say to build a highway, it uses materials and labor building it that are then unavailable to the private sector. So if you wanted me to build a house for you but the government hired me to work on their highway project there could be a problem if you can’t find another builder for your house. That would be the real resources aspect that MMT says is important. The ‘money’ itself is never a problem for a government that creates and issues its own money. Recent history of US Federal spending during the pandemic tends to support that view in my opinion.
James
May 31 2021 at 10:35pm
“I don’t believe that excessive fiscal stimulus in the US causes high inflation, most economists believe it does.”
Where do you think the economists who disagree with you are going wrong in this?
Here is what I was taught in school: If the government increases borrowing to fund the stimulus but saving by the private sector does not change, then the interest rate has to increase for the credit markets to clear. If the central bank is committed to an interest rate target, then the increase in government borrowing will raise the interest rate above that target and the central bank will have to increase the money supply to bring the interest rate back down to the target. That increase in the money supply is inflationary.
Can you point out which step you think is incorrect?
Scott Sumner
May 31 2021 at 11:03pm
James, That’s all correct if the Fed targets interest rates at a constant level. But it actually targets inflation. It adjusts interest rates to keep inflation at 2%.
Thomas Lee Hutcheson
Jun 1 2021 at 4:46am
I left a comment at NYT that Douthat apparently did not understand either Scott’s views or Keller’s views or both.
Of course, strictly speaking “deficits” do NOT matter; what matters is the aggregation of the taxing and spending decisions. If the deficit goes down because an investment with positive NPV is not made the + deficit is good. If the NPV is negative the -deficit is good. The “deficit is not/ought not to be an argument in the decision function of whether to carry out the investment or not. If as most pundits assume, an all pubic expenditure increase consumption and some part of the borrowing reduces investment that would otherwise have been made in positive NPV projects, then the “deficits are bad” (and therefore “matter”) rule of thumb (formerly preached by Republicans and occasionally practiced by Democrats) is correct and lies behind the idea that taxes should equal expenditures at full employment.
Thomas Lee Hutcheson
Jun 1 2021 at 4:58am
Whether deficits do or do not impose a “burden” on future taxpayers as future taxpayers are also futures consumers of government services and receivers of interest income and so is just not a useful way to decide about the combination of public expenditures and taxes. If taxes are reduced to partially increase consumption as with the “Tax Cuts for the Rich and Deficits Act of 2017” then future recipients of the income that would have been produced by the investments are “burdened,” but identifying those future non-receives of income as “taxpayers” adds nothing to the analysis.
ilverin
Jun 1 2021 at 12:43pm
There is a difference between facts and values.
Probable fact:deficits do not cause inflation.
Value:future tax increases are worse than current deficits are good.
So Scott has influenced many to accept the alleged fact but few to accept his value, so Scott’s influence on the discourse may have a similar effect to MMT’s influence on the discourse.
Brian Donohue
Jun 1 2021 at 1:44pm
Good post. Happy to see you get a deserved mention by Douthat, unhappy about you being penned with Kelton, concerned that Douthat (like almost everyone) is basically clueless about monetary policy.
Phil H
Jun 1 2021 at 11:27pm
These are really basic questions, I guess, but I don’t understand either of Scott’s core arguments.
“big budget deficit…require future tax increases, which slows economic growth”
(1) Why do budget deficits require tax increases? The experience over the 20th century seems to me to be fairly clear: that the state has an increasing capacity to carry debt. It’s one of the technologies developed in the 19th and 20th centuries, and I don’t see any obvious reason why it should break down.
(2) Why do taxes slow economic growth? Is this just the “private sector is inherently more growthy than public sector” argument, or is there another specific mechanism?
Scott Sumner
Jun 2 2021 at 12:34pm
Phil, Deficits require higher future taxes, ceteris paribus. I don’t deny that the debt carrying capacity has risen due to lower interest rates.
Taxes discourage wealth creation, as a portion of the gains go to the government. It’s the standard “incentives” argument.
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