Keynesian and Classic economics vs MMT in a political environment
Current economic policy dominating the two major political parties can best be summed up as Keynesian (Democratic) vs. Classic (Republican).
-In a nutshell, Keynesian view (generally held by Democrats) is that government should spend money (deficit/debt) during economic downturns to stimulate the economy. But during good economic times, the government should raise taxes to create a surplus and to keep the economy from heating up and creating inflation. This has been mostly true for almost seventy years and proven by facts on the ground. The downside of Keynesian approach is that politicians of all stripes are loath to raise taxes. So under this paradigm the only approach feasible is to severely cut government spending to bring a surplus about, yet those usually come from programs which benefit the least among us- social security, Medicare and Medicaid, Food Stamps.
Republicans typically hold to Classic Economics with a sprinkle of Say’s Law. Classic economics holds that deficits are always bad, government must always balance the budget. Republicans since Reagan have sprinkled Say’s Law on to of this. Say’s Law is an old hypothesis easily summed up as modern Trickle Down. Republicans will never raise taxes, but they are more than willing to cut taxes. So it should come as no surprise that the biggest deficits (outside an economic calamity that we experienced in 2009–2010) were created under Republican Presidents Reagan, GWBush and Trump. Ultimately Republicans fail on economics of the nation for two varying levels. First, they usually insist on balanced budgets and no debt yet have presided over the worst! And yet, ironically, when they have deficit spent, it stimulated the economy Keynesian-style. It echoes Nixon, after the gold standard abandonment (a false comment by the way) that “we’ere all Keynesians now.” Republican stimulating tax cuts were short term, poorly targetted and while they did give the economy a jolt- it was the jolt of a sugar high only to be followed by a depressive aspect.
Further, Republican’s melding Say’s “trickle down” “rising tide lifts all boats” has been proven false repeatedly as wages for all but the wealthy remain static since 1980. The only thing that rose during their tides were yachts.
I have for a long time considered myself to be a Keynesian. But I also have, for years, held the view that federal govt budget is NOT the same as household budget.
But for a moment, let’s accept this bad analogy. If your car broke down and it was the ONLY means for you to get to work and you had no savings, would not putting a repair on the credit card be a wise “investment” to keep your job and income flowing? You can pay off the card later, right? I took on a bit of debt with student loans to get my Bachelor’s degree. I knew I would have debt but considered it an investment in my future which would pay off in better jobs with higher income and that ultimately proved to be true. So not all debt is the same under household accounts and even more so under federal budgets!
The ultimate problem with both classic economic approach and Keynesian is that they were developed under a hard money (gold standard) paradigm which is no longer a viable approach. Both systems posit that if you run deficits in good times, government spending crowds out private investment as well as creates massive (sometimes hyper) inflation. Yet we have had deficits now for the last ten years — or more- and inflation remains in the +/-2% range and has not really budged.
So I had these disparate ideas about the economy based on what I saw but at odds with Keynesian approach and could not put my thumb on the difference.
My views on trade were also a bit at odds not only with (of course) Trump’s zero-sum approach, but those of my fellow progressives. The progressive side argued against various trade agreements because of what it does to American workers. But aren’t American consumers to be considered also?
A few decades ago US textiles moved operations from the Carolinas to the Dominican Republic displacing hundreds or thousands of jobs. Yet millions of Americans were now able to get less expensive clothing from the move.
What is at issue here is not trade or off-shoring of production which could benefit Americans from the cost of the goods. The issue is US response to the lost jobs. The USA has been in the thrall of “free trade” and lassaiz-faire for 200+ years and the lost jobs were a factor in that world view. No wonder workers are angry and looking for who to blame!
Then I read “The Deficit Myth” by Stephanie Kelton which outlines Modern Monetary Theory.
MMT holds that the BUDGET is not the metric to be measuring government approach to the economy, but rather full employment and other factors! In 2016, running for Congress, I stated we need a new CCC for the 21st century. A new Civilian Conservation Corp to hire people unemployed and keep them working. Kelton’s book calls for a jobs guarantee at a livable wage- essentially a new CCC! Kelton’s book also derides the false “household budget” metaphor as well.
The key point of MMT is that the government is not a currency user as are you and I, and as are state governments. The Federal Govt is a currency ISSUER and as such, under the non-hard money approach, can never run out of funds. The focus should be on other outcomes than just a budget deficit or surplus.
After reading her book I realize I’ve been an MMT adherent for years without realizing it.
