The Fiscal Deficit, Modern Monetary Theory and Progressive Economic Policy

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A Socialist Project e-bulletin ... No. 2145 ... July 14, 2020
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The Fiscal Deficit, Modern Monetary Theory and Progressive Economic Policy

Andrew Jackson

Modern Monetary Theory or MMT has crept in from the academic margins to become an influential doctrine in progressive policy circles in the United States. Both Elizabeth Warren and Bernie Sanders drew on the ideas of MMT to shape their ambitious public spending platforms. MMT has been cited as one way to fund a Green New Deal, in combination with progressive tax reform.

It is safe to say that most Canadian progressives are not debating the finer points of monetary and fiscal policy. However it is useful to critically consider some of the most important pros and cons of MMT, based on the new book by a leading US advocate, Stephanie Kelton. (The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. New York: Public Affairs, 2020.) In a nutshell, MMT puts forward a powerful critique of mainstream macro-economic policy but discounts the need for truly radical change if the economy is to be regulated and managed for the... public good.

MMT is something of a misnomer. Far from being "modern," it draws heavily on monetary theories developed in the 1930s by John Maynard Keynes, and since that time, by left Keynesian economists rejecting orthodox finance and the view that government budgets should (almost) always be balanced, that deficits crowd out private investment which should be driving the economy, that monetary policy (changes in interest rates) as opposed to fiscal policies (changes in public spending) should be the key policy tool for managing fluctuations in the economy, and that private investment is much more productive than government spending.

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