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The Value in Understanding MMT

…instead of saying they want to reduce government deficits and debt, supporters of “fiscal consolidation” and other such policies should say that they want to lower growth and lower private sector net saving, since that’s what the impact of their policies is likely to be. At the very least, supporters of austerity should indicate which of the other two balances will be reduced along with the government’s budget deficit, and how they will do this. The budget deficit cannot be reduced without reducing the private sector surplus and/or the current account deficit.

When we reframe the issue of deficits and debt and look at it from the perspective of how government actions affect the private sector, we get a completely different perspective on the economy. This is what MMT economists try to do—to evaluate government (fiscal and monetary) policy actions based on their impact on the private sector, rather than on some vague metric of what is an acceptable level of deficits and debt.

As I argued, high deficits can be correlated with high growth, but also with slow growth. Similarly, there is a good way and a bad way to reduce deficits. We can try to reduce deficits through austerity measures, in which case the response of the economy may end up increasing the deficit, as it slows growth. Or we may choose to boost growth through proactive fiscal policies which could then increase tax revenues and reduce transfer spending, thus lowering the deficit. Because the deficit or the debt ratio is not a good indication of economic performance, it should not be the focus of policymaking in any case.

An extract from the congressional testimony: Reexamining the Economic Costs of Debt Hearing before the House Budget Committee, November 20, 2019

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