By Tom Rees
Stephanie Kelton does not see economics the way most economists do. US dollars are like points in an American football game or frequent flier miles for an airline, she argues.
The Stony Brook University professor believes the US “can’t run out of dollars” just as a “carpenter can’t run out of inches”.
Kelton is the top economic adviser of Democratic challenger Bernie Sanders and a leading advocate of the highly controversial Modern Monetary Theory (MMT) – a set of ideas causing a stir in economics.
The government, MMT-ers say, can just print more money to fund spending as long as the economy has not reached full capacity.
Such ideas rail against economic orthodoxy and have faced a backlash from economists. Critics warn MMT could spiral into hyperinflation or worse a complete loss of credibility and confidence in a central bank.
Kelton’s ideas may soon take the leap from the blackboard of the lecture theatre to the Oval Office.
Sanders, the firebrand Democratic candidate, has all the momentum in the race to become Donald Trump’s challenger. After his surge in polling, Sanders is closing the gap with front-runner Joe Biden and widening it with fellow leftist Elizabeth Warren.
Tonight the Vermont senator is expected to win the first state in the Democratic primaries, Iowa, and also predicted to sweep up two other early states. The world’s largest economy could soon become the guinea pig for Kelton’s highly contentious ideas.
If Wall Street were to dream up their nightmare Democratic candidate, it would look like something like Bernie Sanders. “Biden is more of an establishment type but Bernie is going to rock the boat a lot more. The economy would become a lot more challenged,” says Nikolaj Schmidt, chief international economist at T Rowe Price.
Sanders’ Leftist populism has garnered the senator a devout following known as “Bernie Bros” and has the potential of luring working class votes away from Trump.
The 78-year-old has ambitious spending plans that promise to ramp up debt. He wants to provide free healthcare and university education for all Americans, cancel student debt, expand welfare payments, build 10m houses and create a “green new deal” that would tackle climate change and inequality simultaneously.
That is partly paid for with a wealth tax and higher income taxes on the richest while banks will be broken up and Trump’s protectionism on trade would likely linger under Sanders.
It is a sweeping overhaul of the US economy and estimates for the plans run up into the tens of trillions of dollars. Sanders himself admitted last week that he does not know the full cost of his healthcare plans.
The president is already pushing debt to what mainstream economists view as potentially dangerous levels. The Congressional Budget Office warned last week that the US is running an “unsustainable” $1 trillion deficit that will push debt up to just under 100 per cent of GDP by 2030 and 180 per cent by 2050, levels seen in Greece. The deficit will average $US1.3 trillion ($1.94 trillion) over the next decade.
One economist sanguine about these shocking deficit predictions is Kelton. She claimed on Thursday that another $US500 billion could be “safely” added to the deficit. Kelton argued that the textbook economic risks of trillion dollar deficits – such as inflation, higher interest rates and the crowding out of private investment – have not materialised.
It is true that economists have become more relaxed about higher deficits in the world of ultra-low interest rates. But the only barrier for Kelton and Modern Monetary Theorists to higher spending is inflation.
MMT – which has many different guises – is the idea that a country with its own currency faces no constraints on spending as the government can just print money to pay for it.
The only thing that would limit the spending is inflation if it causes too much demand for an economy to cope with when it is at full capacity.
Economist Richard Murphy, a MMT supporter and the co-author of a report proposing the “green new deal” in the UK, says “economics is out of ideas” and that Kelton has become the leading theorist by some way.
Murphy says that Kelton is highly influential with Sanders and Democratic congresswoman Alexandria Ocasio-Cortez. The 30-year former bartender has taken the Democratic party by storm and has thrown her now-considerable weight behind the Sanders campaign.
MMT’s rise in prominence in recent years has sparked a backlash among mainstream economists. A survey of top economists by the University of Chicago Booth School of Business showed unanimous rejection of the underlying principles of MMT.
Many feared that MMT would put a rocket under prices, citing examples of hyperinflation in Weimar Germany in the Twenties, and Venezuela. “The grain of truth in MMT is we can add a little more debt probably safely but the problem is we don’t know where that trip point is. That’s what leaves me nervous,” warns Nathan Sheets, chief economist at PGIM Fixed Income and a top official in the US Treasury under Barack Obama.
Sheets sees the move towards Sanders and extreme policies like MMT as an “aftershock” of Trump after almost four years of a turbulent and divisive presidency.
The main appeal of Kelton and her ideas for Sanders is that they help the senator’s dubious spending calculations add up.