Photo/IllutrationStephanie Kelton, an economics professor at Stony Brook University, responds to questions in an interview with The Asahi Shimbun. (Takashi Ebuchi)

  • Photo/Illustraion

NEW YORK--Modern monetary theory (MMT) is gaining much attention for its somewhat unorthodox view that governments do not have to worry about fiscal deficits.

One of the main advocates of MMT is Stephanie Kelton, an economics professor at Stony Brook University in New York.

She feels that Japan, with its huge fiscal deficit, provides a number of lessons for the United States because the Japanese economy is not suffering from inflation triggered by a financial collapse.

Kelton was asked about her views of MMT and its effect on government policy.

Excerpts of the interview follow:

Question: Do you believe there is no need to pay for government expenditures through taxes?

Kelton: In MMT, we don’t think about taxation as providing the government with revenue. A government that issues its own currency clearly does not need to tax. Taxes allow the government to regulate how much net spending happens in the economy.

MMT differs from conventional economics on everything from how banking works to how interest rates are determined to how we think about the role of the government deficit in the economy to the risks of debt.

Q: What should governments be doing while generating large fiscal deficits?

A: If the government could bring those extra resources off the sidelines out of unemployment, and put them to work, then there’s more economic activity, more production.

You will often hear people say deficits are evidence of a country that’s living beyond its means. I think that we are living far below our means in the United States. I think the same is true for Japan.

The government is afraid to try to run the economy at full employment because it’s afraid of inflation. Why aren’t we afraid of the costs of all of that unemployment as well because those impose economic and social costs?

Q: Did you support the tax cuts implemented by the Trump administration?

A: No, but I’m not opposed to tax cuts, per se. Rather than concentrate the benefits of the cuts at the very top, which is what this administration did, it would have been much better to be investing in infrastructure, education, research and development. That’s a better way to use that fiscal space as opposed to tax cuts, which are always indirect stimulus. You could have achieved 4 percent growth easily.

Government spending is direct, and directing spending into things that boost productivity and long-term growth are better than tax cuts.

If we were back in the year 2008 when the U.S. economy was in the grips of the Great Recession and millions and millions of people were losing their jobs, Congress could have passed legislation and said we’re going to commit to spending a trillion dollars over the next three years, upgrading, modernizing America’s infrastructure, and we’re not going to raise a single tax as we do that.

The U.S. economy, I believe, would have been able to absorb all of that new spending without any inflation problem.

The question then becomes: Suppose we wanted to do it today. My strong preference is that Congress considers inflation risk when it decides to engage in ambitious new spending programs. It should be mindful of the inflation risk right now.

If a trillion (dollars) will cause inflation to increase to levels that the American people won’t tolerate, they will tax half a trillion back out, because there’s only enough capacity to take half a trillion of spending without inflation pressure.

Q: Considering how long the legislative process takes, can the government respond quickly to inflation?

A: Before a vote, look at the bill and ask does it increase the likelihood of inflation. Look at defense spending. The Senate passes it and no one thinks about inflation risk at all, they just pass it.

Q: Isn’t expanding the economy without a revenue base like a free lunch?

A: No, it’s not a free lunch theory. Look at the U.S., look at Japan, Most of the time, with very few exceptions, in my lifetime, the U.S. government budget has been in deficit. That doesn’t mean that there’s a free lunch.

If government can come in and make up the difference and close the gap to keep the economy at full employment, then I don’t like the phrase “free lunch.” But you can say it’s freely available labor that could be hired and put to work.

Q: But wouldn’t the huge fiscal deficit push up interest rates?

A: If there is only so much money and if the government wants to run a bigger deficit, it has to compete with private borrowers. That competition drives up the interest rate.

But that’s clearly wrong. When the government runs a deficit, spends $100 billion into the economy, it only taxes $90 billion back out. The deficit put $10 billion in the economy. It’s adding dollar assets to balance sheets outside the government sector.

When some people say the government debt is a burden on future generations, I would say that is wrong. The next generation will be made up of bondholders and taxpayers, just like the current generation. It is true that bonds are not distributed equally. The bondholders in the future will benefit from the interest payments on those bonds. Bondholders are also taxpayers.

But some taxpayers aren’t bondholders. So you can’t burden an entire generation. But there are distributional consequences.

Q: The focus on MMT is a recent development, but do you think the birth of the Trump administration had an effect?

A: I think that passing the tax cut and jobs act (by the Trump administration in late 2017) helped in the sense that many economists, including people like Larry Summers and Paul Krugman, were warning that this was the wrong time for the government to do fiscal stimulus. They said if you do fiscal stimulus now, interest rates will go up and inflation, all the bad stuff will happen.

What happened? Growth ticked up, unemployment went down, we still can’t get to 2 percent inflation, interest rates are right where the central bank puts them. In other words, none of the warnings were correct. The conventional narrative is wrong.

Q: Why did you focus on the Japanese experience?

A: I think the U.S. is a model for MMT. The example that Japan provides, which is instructive, is that you’ve got a publicly held debt to GDP ratio that is three times ours. Bond rating agencies downgraded Japan. Your interest rates didn’t spike like Greece. No inflation problem.

Everything falls apart in terms of the conventional wisdom.

Market participants understand they’re not going to default on obligations denominated in a currency that you and only you can create.

Q: But can you say that just because no problems occurred in the past, there will be no problems in the future?

A: It’s extremely difficult to imagine how you get a hyperinflationary episode. One study found 56 examples of hyperinflation occurring anywhere at any time in the world. In not one single case has hyperinflation ever occurred in a country with a democratic government trying to run a full employment policy. What happens is you have wars, coups, food shortages, those sorts of things.

Whether you’re talking about Zimbabwe, Weimar Germany or Argentina, wherever you look in the world and you see hyperinflationary episodes, it’s always the case that something happens on the supply side of the economy, usually giving rise to shortages in output.

Milton Friedman famously said inflation is always and everywhere a monetary phenomena. When you get hyperinflation, it’s always been the case that you have too few goods, it’s not too much money.

It is clearly the case that deficits in Japan have not reached the levels that give rise to bottlenecks or wage inflation. Japan’s deficits have not gotten too big.

Q: After the collapse of the asset-inflated bubble economy, Japan implemented a series of government spending plans and continued with monetary-easing policy. Isn’t the fact that the economy is still stagnant evidence that there are errors in MMT?

A: People have to have sufficient confidence to part with their money. I think there are just a lot of uncertainties, you know, why would I part with money today if I'm anxious and nervous about what future policy is going to look like? You need spending. Spending is the engine of growth in a capitalist economy.

Q: Why is MMT still considered unorthodox by many economists and fiscal and financial authorities around the world?

A: We thought that the sun goes around the Earth, and it took a long time for us to change that thinking and to see that the Earth goes around the sun. Right now, we think that taxes are at the center of everything, and the economy revolves around taxes. Without more taxes, you can’t build a good economy.

I think that the Copernican moment is coming, where we start thinking of taxes as a way to affect distribution and to guard against inflation risk. It requires as big a leap in our thinking, maybe as big as the Earth and the sun.