- Every Friday, 20 Minutes offers a personality to comment on a social phenomenon, in his meeting “20 Minutes with…”.
- The deficit myth, by the American economist Stephanie Kelton, ambassador for Modern Monetary Theory (TMM), is available this week in France.
- While the coronavirus crisis has shed light on the issue of state debt, many economists reject the TMM, which argues for defenses funded by the creation of money. But it is gaining ground among elected officials like Alexandria Ocasio-Cortez in the United States.
No, debt and deficits are not necessarily bad for a country. No, a state’s budget cannot be compared to that of a family. No, creating money to finance ambitious reforms does not inevitably lead to hyperinflation. This is what the American economist Stephanie Kelton argues in The deficit myth, available since Wednesday in France (ed. Les Liens qui libéré).
The one who advised the American Democrats in the Senate in 2014 and 2015, then Bernie Sanders during her 2016 campaign, is one of the ambassadors of Modern Monetary Theory (MMT), which defends spending financed by of the creation of money. And if many economists – including on the left – are screaming, the TMM is starting to gain ground among progressive American elected officials like Alexandria Ocasio-Cortez, in particular to tackle the climate challenge.
What are the basic principles of “Modern Monetary Theory”?
The TMM explains how a sovereign currency works. A state that issues its own currency, collects a tax, borrows in its currency and does not convert it into something limited, like gold, or into a foreign currency, like the United States, Canada, or Japan , can never be short of money. You can never have bills you can’t pay or be bankrupt.
Because a sovereign state can always create more money?
Exactly. When I was a student at Cambridge, the reference book by Olivier Blanchard (IMF chief economist from 2008 to 2015) explained that states can pay their bills in three ways: raise taxes, borrow or turn the printing press. But this option was quickly put aside, as it was seen as inflationary or even hyper-inflationary. That gives you two options: tax or borrowing. The TMM says: “This is all wrong”. There is only one way: all government spending is funded with created money.
The idea that a sovereign state can finance itself by “spinning the printing press” is old. What is “modern” about TMM?
It would have been a good thing that the economists who assure today that there is nothing new in the TMM made this speech during the crisis of 2008. It would have saved us a lot of suffering, because the political leaders listened to deficits and austerity. What is modern is understanding the mechanisms of state finances and the monetary system.
When I was teaching international finance, the textbook by Paul Krugman (Nobel Prize in economics in 2008) and Maurice Obstfeld made no distinction between countries with a sovereign currency and others. Suddenly, Krugman was puzzled. He said, “Japan has a huge debt compared to its GDP, and interest rates are close to zero. Italy has smaller debt but astronomical interest rates ”. For him, it was a paradox. The TMM has always understood what was happening: Japan’s debt is in yen, Italy’s in euros, because it has abandoned the lira.
The approach has changed on the Covid-19, with in particular an American stimulus plan of 1.900 billion dollars. Is Emmanuel Macron’s “whatever the cost” justified?
Of course. Faced with such a crisis, we do not worry about budget deficits at the end of the year. What worries is a massive pandemic, the loss of lives and the means of subsistence. The priority is to protect as much as possible from economic spinoffs, to ensure the survival of industries and communities.
France does not issue its own currency, it is the European Central Bank. The ECB can allow governments to manage their budgets with more flexibility, as they are now. The question is what comes next. Do we say “phew, everyone is immune to Covid-19, let’s go back to the Maastricht criteria stability pact with a debt of less than 60% of GDP”? In my opinion, that should not be the priority.
With interest rates low, as is currently the case, a majority of economists are not very worried about soaring debt. Is there no critical threshold, according to the TMM, for example if rates go up and creditors’ confidence collapses?
We panic when we hear “deficits” and “debt”, thinking that it is a national threat, that it endangers the future of our children, when these concepts are benign. Debt exists because a state chooses to offset its budget deficit by selling treasury bills. Debt is what you see in the rearview mirror, it’s a historical record of all the times the state spent more than it collected in taxes. She doesn’t have to be scary. It should simply be seen as part of the monetary system. It’s another way to pay the bills.
Can it get too big? Of course. If you pay huge interest and creditors spend those gains in an overheating economy, you can create inflation problems.
An overwhelming majority of economists reject MMT because issuing a significant amount of currency has often been associated with runaway inflation. What do you answer them?
I am not minimizing the risk of inflation. But we must be humble: it is arrogance to say that we understand all these mechanisms, that we have a single model and the only tool we will need to fight it is a rise in central bank rates.
I am not ruling out the possibility of higher inflation in a period of transition, or because of supply chain disruptions. But for demographic and technological reasons, with productivity gains, the risks are more limited than in the past. With globalization, we are in a global market, inflation rates around the world tend to move in the same direction.
To fight inflation, you advocate raising taxes when necessary. Isn’t it dangerous to trust elected officials to take such unpopular measures?
The message of the TMM and my book is not “Spend until you create inflation and then tax it”. We must first do prevention, in particular by determining which expenses must be offset by income. And for tax hikes, bills can have automatic trigger points. For example: an increase if inflation increases by more than 0.5% in six months.
You also suggest creating public jobs guaranteed by the state. Isn’t there a risk that these people will never go back into the private sector?
With TMM, you can pay for whatever is available in your currency, including non-working labor. This means that unemployment is a political choice that can always be eliminated. There are many advantages to having a guaranteed employment program to avoid the socio-economic costs associated with unemployment.
According to our model, on average, we would have 15 million people in the United States (about 10% of the workforce) in this program. When the Covid-19 arrived, we would have had the ability to use them immediately. For example for contact-tracing, delivery of meals to people with reduced mobility… Jobs would be temporarily funded by the government but administered by cities and states.
You advised Bernie Sanders. The TMM seems to seduce certain elected officials, like Alexandria Ocasio-Cortez, who speaks about it to finance the “Green New Deal”. Was that your goal?
I want people to realize that the state budget does not work like a family’s. That elected officials have the power to vote to finance health, education and fight against climate change. It is a message of optimism. This is not Margaret Thatcher’s vision, in which there would be no alternative.
The future does not have to be hard and full of hardships because we have lived beyond our means, and the time to pay has come. It’s a miserable world. It is not just a health or economic crisis. We have been facing the climate crisis for generations and we are only beginning to take it seriously. Let’s focus on the real issues: the carbon budget and the temperature rise to be limited to 1.5 or 2 ° C. It is this budget that is important. Everything else is incidental.