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Modern Monetary Theory, the Deficit Myth and New Economic Paradigm

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Global Risk Institute

KEY HIGHLIGHTS FROM OUR FEBRUARY 5, 2021 DISCUSSION ON MODERN MONETARY THEORY

GRI is presenting a series of five macroeconomic policy webinars in 2021.

  • Modern Monetary Theory, the Deficit Myth and New Economic Paradigm with Stephanie Kelton, American economist and leading authority on MMT — Friday February 5
  • Strategic Challenges and Structural Risks with Ultra-Low Interest Rates and Quantitative Easing with Bill White, former Deputy Governor, Bank of Canada — Thursday February 18
  • Tactical Lessons from Quantitative Easing in Canada with Warren Lovely, Managing Director, National Bank and Christopher Ragan, Associate Professor, McGill University — Tuesday March 2
  • Fiscal Anchors and Approaches with Don Drummond, Adjunct Professor and Stauffer-Dunning Fellow, Queen’s University and Jack Mintz, President’s Fellow, School of Public Policy, University of Calgary — Tuesday April 8
  • Economic Repercussions for Women: During and Beyond the Pandemic — Date and speaker to be confirmed
Headshot of Sonia Baxendale, President and Chief Executive Officer, GRI

In the first of these macroeconomic webinars, GRI President & CEO Sonia Baxendale hosted a discussion with Stephanie Kelton about Modern Monetary Theory, the Deficit Myth and New Economic Paradigm. Dr. Kelton is a leading authority on Modern Monetary Theory (MMT) and Professor at Stony Brook University. Her New York Times best-selling book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, was published in June 2020.

Headshot of Doctor Stephanie Kelton, GRI

For an audience of nearly 200 participants, Dr. Kelton provided an in-depth overview of MMT and its approach to fiscal and monetary policy. She set out in depth why it is important to think differently about fiscal policy’s importance and role, and why too much of the burden has been on monetary policy and central banks for several decades prior to the pandemic.

Dr. Kelton began her prepared remarks with a review and summary of mainstream economics assumptions about macroeconomy policy, including that traditional economic theory and practice views:

  • government spending as limited by budgetary constraints;
  • to cover fiscal shortfalls, governments must borrow funds, raise money through taxation or reduce spending; and
  • other than for temporary purposes during a recession, deficits and public debt accumulation reduce economic growth, risk sovereign default, and burden future generations.
  • Dr. Kelton then explained how MMT offers an alternative framework or “lens” through which to assess the macroeconomy and challenges mainstream ideas as follows:
  • Countries with independent control over their own currencies, or “monetary sovereigns,” do not actually face limits on public spending as conventionally defined. Examples include the United States, United Kingdom and Canada, among others;
  • Inflation, not deficits or the scale of public debt, is the main constraint on fiscal policy;
  • Rather than finance government spending, taxation primarily serves to reduce aggregate incomes and thus spending by consumers and business; and
  • Fiscal policymakers should not prioritize balanced budgets over the goal of healthy economy – the fiscal policy goal should be full employment with ongoing low inflation.

Dr. Kelton concluded her prepared remarks by suggesting the creation of an automatic fiscal stabilizer to guarantee full employment across the business cycle.

In the Q&A, Dr. Kelton rejected the claim that MMT is just an economic and political argument for big government spending. She noted that MMT redefines the fiscal policy space available to governments and that fiscal room should be used to achieve the goal of full employment while adjusting the fiscal policy stance if inflation increases. With respect to sub-national governments, Dr. Kelton stated that provinces/states are not monetary sovereigns, and so face budgetary constraints more akin to households than national governments. And in response to questions about MMT’s wider reception, Kelton described how MMT has gained new support among policymakers and financial professionals alike.