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Sovereign Debt

 

Williams College economist, Kenneth Kuttner, has co-authored a timely article at Econofact. It decimates the proponents of Modern Monetary Theory (MMT) including Representative Alexandria Ocasio Cortez (D-NY) and Senator Bernie Sanders (I-VT).

MMT is popular among socialists because it asserts that a country cannot default on its debts as long as it is controlling its own currency and limits its borrowing to its own currency. It implies we can safely reduce unemployment by printing more money. This approach is obviously appealing to socialists because it means they can ignore other tools for reducing unemployment like cutting the size of the government, reducing regulations, reducing the minimum wage or implementing tariffs which benefit U.S. workers. Kuttner and his co-author, Michael Klein, summarize their findings:

However, contrary to MMT doctrine, there are very real constraints on the government’s use of deficit spending. First, using sustained monetization (“printing money”) to finance deficits, a core principle of MMT, invariably creates inflation. Second, the reliance on tax hikes or spending cuts to quell inflation is highly unrealistic, given politicians’ extreme aversion to fiscal austerity, not to mention the lags inherent in the budgeting process. And third, MMT ignores the fact, that above a certain level, deficit spending will contribute to an ever-rising ratio of debt to GDP, whose costs will eventually be borne by future generations.

In the scatterplot above, they demonstrate the positive relationship between the inflation rate and the difference between the growth rate of the monetary base and the rate of growth of GDP for the U.S.

Kenneth Kuttner is a Professor of Economics at Williams College. His areas of expertise include macroeconomics, monetary policy, macroprudential policy, and the Japanese economy. Michael Klein is as Professor of International Economic Affairs at Tufts University. His research interests include world capital markets, exchange rate management, and foreign direct investment.

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