Saturday, March 16, 2019

Short Take: Creating welfare with MMT reduces welfare

Currently, there is no real danger of U.S. deficit spiraling out of control. Despite this, deficits absolutely do matter. One possibility of higher deficits is that it can lead to higher taxes in the future, though this depends on how real interest rates evolve over time. Olivier Blanchard recently did work on this topic. Blanchard's conclusion was that this likely won't happen since(arguably) real interest rates in debt will remain below GDP growth rates. This is the baseline of an MMT argument, however, I never said that bad things couldn't happen.

MMT advocates do recognize the counter-cyclical view that deficit spending could lead to higher inflation once the economy overheats and expands beyond "maximum capacity". If inflation were to rise, MMT advocates say you should raise taxes to hold down inflation (although they don't think of inflation as a problem right now). This, once again, is a true statement. However, the MMT view of constantly spending and monetizing debt would not only lead to high deficits and inflation but as they said, higher taxes. It could even lead to hyperinflation. Because of this risk, the Fed will likely continue targeting it's mandates and refuse to monetize the debt. If this is true, then the burden of deficit spending will fall on future taxpayers, because fiscal policy would be the last resort in the absence of a monetary one. The increase of taxes would lead to slower economic growth and the decrease in overall income would lead to less welfare for people even though the intent of MMT would be to fund welfare programs. If this isn't bad enough, higher interest rates would crowd out private investments and capital accumulation which would also hurt the economy.

Keynes said that in the long run, we're all dead. MMT says, "Well what are we waiting for?"

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