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Do deficits matter? Show more Show less
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For decades, politicians and economists have condemned deficits as evil. Today, there is a lively debate about whether deficits matter and whether there are advantages to running them. Most notably Modern Monetary Theory encourages the government to run deficits in order to achieve its objectives of full employment and investment.

Deficits are not bad as governments that issue their currency can't go bust Show more Show less

The government should use fiscal policy to achieve full employment, creating new money to fund government purchase. Deficits are not a problem, only inflation is. If inflation becomes a problem, the government can raise taxes and issue bonds to withdraw cash from the economy.
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Governments that issue their own currency are not constrained by borrowing

As long as central banks can buy government bonds with newly created money, a government cannot default. Therefore deficits and debt are not important. Inflation might be a problem, but not deficits, and inflation can be countered with higher taxes.

The Argument

“When the government wants to spend, the Fed hits the ‘print’ key, but when it collects taxes it hits the ‘delete’ key. When the government taxes its citizens, it does not ‘get’ something it simply subtracts something from the economy,” according to Stephanie Kelton, the leading proponent of Modern Monetary Theory (MMT). “Congress does not have to borrow—that’s completely optional. Instead the government can let people hold cash. That way there would not be fights over the debt and debt ceiling.” Critics of MMT often argue that such policies could lead to hyperinflation. But Kelton does not see that as a threat in the U.S. “Capacity utilization is at 75%, while the broader unemployment number is still pretty high and workers have no bargaining power. Inflation will not rise if wages continue to stagnate,” said Kelton. “Once inflation does begin to rise, the government can use its taxing power and the central bank can use its policy tool to control it while keeping unemployment at low levels.”

Counter arguments

Proponents

Premises

Central banks can print money to buy government bonds. If inflation rises, the government can tax people and the central bank can sell bonds to soak up any extra money causing inflation. The government will be able to act judiciously to avoid hyperinflation by using taxation.

Rejecting the premises

References

This page was last edited on Thursday, 27 Feb 2020 at 11:45 UTC