by Patricia Cohen NYTimes edited by O Society April 9, 2019
The package of eccentric ideas known as modern monetary theory — for example, that annual deficits are too small, and that the United States can essentially print money to pay off its debt — has been on the receiving end of a remarkable level of vitriol.
In policy circles, heavyweight economists have churned out scathing attacks. In the business arena, titans like Laurence D. Fink and Bill Gates have labeled it “garbage” and “crazy talk.” And in academia, when the University of Chicago’s Booth School of Business asked top scholars about a couple of its claims, they split between the 28 percent who disagreed and the 72 percent who strongly disagreed.
But M.M.T., as it’s known, is attracting a conspicuous number of fans in an unexpected place: Wall Street. Money managers, chief executives and business analysts maintain that the approach offers several important and overlooked insights, and far from finding it fanciful or deranged, they are using M.M.T. to build economic forecasts and even trading strategies.
“I don’t look at labels in terms of what’s on the left and the right,” said Jan Hatzius, the chief economist at Goldman Sachs. “I try to look at what makes me have a better chance of getting the forecast right, and I do find some of the ideas useful.”
So does Paul A. McCulley, a former chief economist at the behemoth asset firm Pimco. Ideas like M.M.T. that rub against the grain of conventional economics, he said, have “for all of my career been a very useful framework for analysis.”
That framework helped produce billion-dollar gains for the company after the 2008 financial crisis. Dismissing alarms about outsize government debt and white-knuckle interest rates, Pimco instead bet successfully that rates would remain low. When it came to decision-making during this period, Mr. McCulley said, M.M.T. and other unorthodox approaches helped him “get it right.”
Richard C. Koo, chief economist at the Nomura Research Institute in Tokyo, said he had been telling his clients for years that “even with huge budget deficits in the U.S., interest rates would actually come down, not go up.”
Wall Street is not immune to the herd mentality, but Mr. Koo and several other analysts argued that academic economists had a vested interest in certain theories and were, therefore, more likely to suffer from groupthink.
In an article posted on Wednesday on the website of Grantham, Mayo, Van Otterloo & Company, known as GMO, the strategist James Montier wrote: “For me an economic approach must help me understand the world, and provide me with some useful insights (preferably about my day job — investing). On those measures, let me assure you that M.M.T. thrashes neoclassical economics, hands down.”
And Daniel Alpert, a managing partner of the investment bank Westwood Capital, credited the theory with preventing him from panicking that rates would soar when the Federal Reserve set off a brief “taper tantrum” in 2013 and announced it was easing its stimulus program.
Over the past couple of years, he said, the Fed tried everything — “it did a belly dance to get long-term interest rates up” — and it didn’t work.
M.M.T., Mr. Alpert said, “successfully debunks 40 years of misassumptions of how markets and public credit work.”
Explaining M.M.T.’s Appeal
Progressive politicians like Senator Bernie Sanders of Vermont andRepresentative Alexandria Ocasio-Cortez of New York are among the most vocal supporters of M.M.T., but the theory’s appeal crosses political lines in part because it offers a narrative for a series of events that the established wisdom failed to anticipate or explain.
Big government deficits, for instance, were supposed to mop up available pools of capital and drive up interest rates, which would, in turn, elbow out private investors, damage growth and feed inflation.
But the last decade was different. When deficits soared after the recession, interest rates fell and savings rates climbed. Investors are awash in capital. The economy has been expanding, slowly, for 10 years, with unemployment and inflation rates ensconced at record-low levels.
One reason for the misjudgments may be that the economic models that confidently strode down the mainstream were hammered out in the decades after World War II, when American companies had an enormous appetite for capital investment. “We don’t live in that world anymore,” said Mr. Koo of Nomura. Today, vast fortunes shift across oceans in an instant, currencies are untethered from gold, and your local coffee shop may no longer accept cash.
Technological advances, demographic shifts and persistently lower interest rates have further altered the global economy. Mohamed A. El-Erian, chief economic adviser at the financial firm Allianz, wrote in an email that “modern monetary theory has merit in stimulating debate” on whether those changes provide “for governments to run larger economically sustainable deficits than was previously thought possible.”
Besides the risk of government deficits, M.M.T. throws out a drawerful of other venerable assumptions with Marie Kondo-esque ruthlessness. To start, it instructs you to erase that textbook drawing of a white-haired Uncle Sam collecting tax dollars from the public and then using them to pay for military weapons, highway repairs, federal workers’ wages and more.
Tax revenues are not what finance the government’s expenditures, argues Stephanie Kelton, an economist at Stony Brook University and one of the most influential modern monetary theorists. What actually happens in a country that controls its own currency, she says, is that the government first decides what it’s going to spend. In the United States, Congress agrees on a budget. Then government agencies start handing out dollars to the public to pay for those tanks, earth movers and salaries. Afterward, it takes a portion back in the form of taxes. If the government takes back less than it gave out, there will be a deficit.
“The national debt is nothing more than a historical record of all of the dollars that were spent into the economy and not taxed back, and are currently being saved in the form of Treasury securities,” Ms. Kelton said.
Ms. Kelton, a frequent speaker at business and financial conferences and the chief economic adviser to Mr. Sanders during his 2016 presidential campaign, points out that every dollar the government spends translates into a dollar of income for someone else. So a deficit in the public sector simultaneously produces a surplus outside the government.
The reverse is also true, Ms. Kelton maintains, and that can lead to trouble. The seven biggest American depressions or downturns going back 200 years, she said, were all preceded by government surpluses.
Ms. Kelton complains that modern monetary theorists are often incorrectly described as contending that “deficits don’t matter.” Of course they matter, she said.
What she disagrees with is the reason given. In her view, deficits are not a sign of excessive spending or necessarily a forerunner of inflation. They can be too big, especially if they are not used to increase the nation’s productive capacity, or if there is a shortage of labor, raw materials and factories.
“If Congress authorizes too much spending and businesses are not nimble enough” to absorb it, there can be bottlenecks and price pressure, she acknowledged.
But she argues that it is much more likely that deficits are too small, depriving the economy of critical investments. The best way to stabilize the economy and ensure full employment and a humming economy, she said, is to have the federal government guarantee every American a job.
The notion that surpluses could cause economic downturns flips conventional thinking. Yet the idea of sectoral balances — that government or nongovernment deficits are offset by surpluses on the other side — is what some financial economists find so illuminating, even if they stop short of endorsing all of the theory’s tenets.
“It is a great way of summarizing whether households and firms are living beyond their means,” said Mr. Hatzius of Goldman Sachs. “It is a great indicator of potential financial crises.”
In his view, giant private-sector deficits are much more alarming than public-sector ones because households and companies are at much greater risk of losing access to credit in a downturn. Unlike the Treasury, they can’t print money — or issue bonds — when they run out.
Mr. McCulley, now retired from Pimco, used the same kind of analysis to guide his investing decisions after the financial crisis. He figured the only way that private borrowers could shrink their vast storehouse of debt was to have the government buy up those assets. He was unconcerned that the federal deficit would balloon as a result.
Pimco’s view during the crisis, he said, was “shake hands with the government,” because it had the largest checkbook. That is why the firm invested heavily, for example, in the federally guaranteed mortgage-backed securities that most other firms were shedding.
Mr. Koo of Nomura has further developed the idea of sectoral balances to explain the most recent wave of recessions and argue for larger government deficits. The problem that major economies in Japan, Europe and the United States have today, he said, is that despite low interest rates, investment opportunities in domestic markets don’t offer sufficient returns to lure borrowers to go into debt, using the vast pools of available savings.
That means “the government has to spend money to keep the economy going,” he said. And as long as the government invests in projects that produce an economic return greater than the yield on 10-year Treasury notes — currently about 2.5 percent — “this will never be a burden on taxpayers.”
Ray Dalio, the founder of Bridgewater Associates, one of the world’s largest hedge funds, made a similar point in a paper he released recently about saving capitalism. Without any specific reference to M.M.T., he noted that “policymakers pay too much attention to budgets relative to returns on investments.”
The View From St. Croix
A couple of M.M.T.’s academic strongholds are the University of Missouri-Kansas City and the Levy Economics Institute at Bard College. And there, too, Wall Street’s attraction to the theory has played a role.
Warren Mosler, a hedge-fund mogul who resides in low-tax St. Croix, helped bankroll some of the work at those schools, donating money for student scholarships and conferences.
Mr. Mosler developed some of the ideas underlying M.M.T. from his own observations of financial operations, and has written a couple of short treatises.
He is used to doubters. “It’s astounding,” he said. How could the Fed chairman be wrong, he mused, and “somebody sitting in St. Croix in a pair of shorts be right?”
Ron Biscardi, chief executive of the investment firm Context Capital Partners, was one of those persuaded by the guy in shorts. When he read Mr. Mosler’s book, the ideas struck him as both revolution and revelation.
Mr. Biscardi’s company also runs conferences for the hedge-fund industry to which he has invited Ms. Kelton as a speaker. He had recently returned from one at the Fontainebleau Hotel in Miami Beach that featured tête-à-têtes between hundreds of investors and alternative asset managers and a keynote speech by Gary Cohn, the former director of the Trump administration’s National Economic Council.
Mr. Biscardi described himself as a libertarian and conservative. To him, modern monetary theory means not only more government spending on infrastructure, but also lower taxes on the wealthy. After all, if government deficits can grow larger, there’s no need to raise as much revenue.
To many mainstream economists, though, M.M.T. is a confused mishmash that proponents use to support their political objectives, whether big government programs like “Medicare for all” and the Green New Deal or smaller taxes. Think of the Mirror of Erised in the Harry Potter saga, which shows the heart’s desire — a tantalizing prospect that ultimately brings ruin.
From this perspective, M.M.T. is a version of free-lunchonomics, leaving the next generation to pay for this generation’s profligacy.
Although several prominent mainstream economists have recently revised their thinking about the risks of large government debt, they continue to reject other tenets of M.M.T.
At some point, they insist, if the government just creates money to pay the bills, hyperinflation will kick in.
“The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” the Federal Reserve chairman, Jerome H. Powell, testified before the Senate Banking Committee in February.
Reckoning With Keynes
Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, is aware of the conflicts between M.M.T. and the traditional framework developed by John Maynard Keynes, in which it is rooted.
But he is more struck by their similarities rather than their differences. Both recommend that government should spend when the private sector isn’t doing enough to employ the nation’s work force, raw materials and factories to prompt growth. Both deem inflation to be insidious.
The inflationary threat looms particularly large for economists of his generation, Mr. Kocherlakota, 55, said. For them, the seminal experience was the scarring inflation of the 1970s. “The big lesson was that resources are always scarce,” he said.
But over the past decade, he said, his thinking has evolved. Now Mr. Kocherlakota is more inclined to believe that scarcity is not the overriding problem and that the federal government could spend more without risk of excessive inflation.
If you put aside the theoretical disputations, Mr. Kocherlakota said, the important question is: How far is the United States from reaching the limits of its capacity?
Even with a jobless rate under 4 percent, he believes there is room to maneuver.
Mr. Kocherlakota said that compared to those within the Fed, chief executives, financiers and analysts who operate internationally tend to be more open to modern monetary theory in their analyses of government deficits and inflation.
“Folks who take a global perspective are much more likely to see a lot of unused capacity,” he said. They realize “inflation is not built at home anymore, it’s built through global pressures.”
Mr. McCulley, the Pimco alumnus, would put his money on that. Increasing the deficit so that the government could invest in infrastructure and the labor force “would not make me bearish on the stock market at all,” he said.
“At all,” he repeated. “If anything, it would make me bullish.”