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Tag Archives: Fiscal Policy

Hummel on Modern Monetary Theory

If we focus solely on MMT’s [Modern Monetary Theory’s] essential claims about money, distinct from any associated policy proposals, it is neither new nor modern. It simply justifies funding government expenditures by issuing fiat money, which, of course, all economists have long been aware is possible. MMT then attempts to downplay the potential inflationary impact of such financing with manipulations of the government and central-bank balance sheets. But it merely...

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Spending must be paid for—but when?

There’s been a lot of recent discussion about the budget deficit, which is growing rapidly. Some argue that this is not a problem, while others see a crisis coming. I believe that both sides are wrong. I don’t believe the deficit will lead to high inflation, nor do I expect default. There may be some increase in interest rates, but probably not very large.  Nonetheless, it is a problem. All government spending must be paid for with taxes (if one treats inflation as a...

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Why is the public debt situation in Italy worse than in Japan?

Japan’s public debt is much higher than in Italy, as a share of GDP (roughly 240% vs. 130%, though sources differ). The difference in net debt is not nearly as large, but still significant. And yet Italy must pay a substantial risk premium on its public debt (third largest in the world), whereas Japan (with the second largest public debt) pays roughly zero interest rates on borrowed funds. In previous posts I’ve discussed one difference; Japan borrows in its own...

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Who’s Afraid of Budget Deficits?

In a provocative article in Foreign Affairs titled “Who’s Afraid of Budget Deficits?” Jason Furman and Lawrence H. Summers argue that we should not worry much about the federal government’s large and growing budget deficits.  While they admit that politicians and policymakers “shouldn’t ignore fiscal constraints entirely,” they say that they “should focus on urgent social problems, not deficits.” And throughout the piece, they assume, for every single problem they...

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MMT is wrong

I have a new piece in The Hill, discussing the increasingly popular “Modern Monetary Theory”: The basic problem is that MMT proponents mix up the roles of fiscal and monetary policy. They argue that monetary policy should play a supporting role, holding down interest rates to reduce the cost of public borrowing. Meanwhile, the thinking goes, fiscal austerity should be the tool used to hold down inflation when aggregate spending begins to exceed the productive capacity...

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Should governments invest more when rates are low?

Many economists believe the answer is yes.  For years, I’ve been trying to convince my fellow economists to first think about the reason for low rates. Four years ago, I argued that low interest rates did not call for more government investment if the low rates were caused by a leftward shift in the investment schedule: A few weeks ago I criticized a Robert Shiller claim that economic theory tells us that low interest rates should lead to more investment. That’s an...

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Banfield on the Hyperbole of Urban Bankruptcy

As I never stop telling you, politics is nothing but an ocean of hyperbole!  But seriously, folks, I just came across a fine debunking of political hyperbole while reading Edward Banfield‘s 1974 classic, The Unheavenly City Revisited. A great part of the wealth of our country is in the cities.  When a mayor says that his city is on the verge of bankruptcy, he means that when the time comes to run for reelection he wants to be able to claim credit for straightening out...

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The politics of budget deficits

I have a new piece at The Hill, discussing the problem of unsustainable budget deficits: Governments have little incentive to run budget surpluses and today seem to be ignoring even the more modest goal of keeping the deficit at sustainable levels. The economics profession shoulders some of the blame for this situation. Many economists relied on dubious macroeconomic theories to advocate deficit spending during the past recession. This provided a cloak of...

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Markets are inhuman (and that’s a good thing)

Here's the Financial Times: The leaders of Italy's two leading populist parties took aim at global financial markets on Wednesday, accusing investors of trying to "blackmail" them by unloading Italian assets as they tried to form a new government. A sharp sell-off that saw yields the Italian government's benchmark 10-year bond suffer their biggest move in two years was triggered by the parties calling for a...

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Henderson on Lars Larsen Show

Last week, I was interviewed on the Lars Larsen radio show. He spent the whole week at Hoover interviewing various colleagues. My segment starts at about the 1 hour and 20 minute point and ends at about the 1 hour and 29 minute point. For some reason, he cut out about a minute at the end where I was discussing the bad budget deal. Lars argued that even a veto by Trump would not have led to a better budget...

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