Modern money perspective on Biden’s $1.9-trillion big spend

Lars Syll

Excerpt from Stephanie Kelton’s book The Deficit Myth:

“ MMT is about identifying the untapped potential in our economy, what we call our fiscal space. Our choice to utilize that fiscal space is a political matter …

“ The point is that we run our economy like a six-foot-tall guy who wanders around perpetually hunched over in a house with eight-foot ceilings because someone convinced him that if he tries to stand up tall he’ll suffer a massive head trauma. For too many years, we’ve been crouching down when we could have been standing strong.

“ Irrational fears about government debt and fiscal deficits caused policy makers in the US, Japan, the UK, and elsewhere to pivot away from fiscal stimulus toward austerity in the years following the global financial crisis. This forced immeasurable pain on tens, if not hundreds, of millions worldwide.

“ The U.S. has a deficit. That’s true. But the problem is not the budget deficit. The real deficits are in the climate, healthcare and infrastructure. How do we tackle those deficits? By spending! “

MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Rather than having a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment, deficit spending will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfil our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMT advocate denies that too much government spending can be inflationary. What is questioned is the proposition that all government deficits are necessarily inflationary.

Source: ERAR blogs, 4 March 2021 https://rwer.wordpress.com/2021/03/04/mmt-perspective-on-bidens-1-9-trillion-big-spend/