Larry Summers Slams MMT as ‘Fallacious’

(Bloomberg) -- Larry Summers heated up a brewing row among economists over Modern Monetary Theory, calling the deficit-friendly doctrine “fallacious at multiple levels” and accusing its supporters of holding out the promise of a “free lunch.”

The former Treasury secretary under Bill Clinton and White House adviser to Barack Obama is the latest big-name economist to turn his fire on MMT, a school of thought that's been gaining ground especially on the left wing of the Democratic Party. It argues that governments with their own currencies don't need to tax, or even borrow, to finance spending -- and that when inflation is low, as it is now, there's room for bigger government deficits.

The debate is happening against a backdrop of surging American deficits and public debt -- and bond markets that show little sign of being spooked.

President Donald Trump, who inherited a widening budget shortfall, has expanded it some more by subtracting revenue through tax cuts, while outlays on defense, health care and interest payments are growing. The gap reached $310 billion in the first four months of the current fiscal year, a jump of almost 80 percent from a year earlier, the Treasury said Tuesday. Yet yields on 10-year Treasuries are below 3 percent, a historically low level.

Read more on Wall Street's view of MMT

MMT arguments are rooted in a “valid idea” that fiscal policy needs to be re-thought in an era of low interest rates, Summers, a Harvard University economics professor, wrote in a Washington Post op-ed published late Monday. But they've been “stretched by fringe economists into ludicrous claims,” he wrote, citing the idea that the U.S. government can offer employment to anyone who wants it, and finance the plan through its central bank “without any burden on the economy.”

The jobs guarantee, an idea backed by MMT economists, has made it onto the platform of several contenders for the Democratic presidential nomination in 2020. There's also growing support for a Green New Deal, which advocates say could be partly financed by deficit spending. That idea got some backing from another economics heavyweight on Tuesday.

Olivier Blanchard, the former International Monetary Fund chief economist, said the current U.S. budget gap isn't justified on “purely fiscal grounds,” according to the slideshow of a talk delivered at the Peterson Institute for International Economics in Washington. But he said that rather than trying to eliminate the deficits, the U.S. could spend them on useful tasks including combating climate change -- “leaving a livable planet with higher debt: A good deal.”

Read more about some key ideas behind MMT

Summers said the MMT approach can lead to hyper-inflation “past a certain point” and would risk a currency collapse because it ignores external constraints on the U.S. economy.

Similar charges were leveled at cheap-money policies adopted by the Federal Reserve and other central banks after the 2008 crisis, although those critiques receded as Fed's purchase of trillions of dollars of debt didn't trigger inflation or undermine the dollar.

In the economists' war over MMT, Summers is siding with Paul Krugman. The Nobel laureate has been engaged for weeks in a sometimes testy debate with Stephanie Kelton -- a Bloomberg Opinion columnist and leading MMT economist, who advised Senator Bernie Sanders during his 2016 presidential campaign.

Kelton fired back at Summers on Tuesday in a Twitter post that highlighted the way some Democrats are starting to become more critical of economic policies carried out by their party's past administrations. “MMT didn't deregulate the banks,” she wrote. “MMT didn't bail out Wall St and let millions lose their homes. MMT didn't push a too-small stimulus over price tag fears.”

Another prominent economist linked to the Democrats also weighed in this week on the party's future course. Brad DeLong, a professor at the University of California at Berkeley who worked at the Treasury with Summers, argued that it's time for centrist or “neoliberal” Democrats to cede leadership to the party's left -- then work to make their ideas better.

Summers, Krugman and DeLong have been identified in the past with support for government spending to accelerate growth.

In a January article in Foreign Affairs co-authored with Obama administration aide Jason Furman, Summers argued that concern about the national debt is overdone and “the deficit-dismissers have a point.” In a 2014 op-ed in the Financial Times, he wrote that when interest rates are low enough, public investment projects “can pay for themselves.”

To contact the reporter on this story: Ben Holland in Washington at bholland1@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Scott Lanman

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