A deficit theory's backers and smackers

InvestmentNews.com recently interviewed Stephanie Kelton, head of the economics department at the University of Missouri-Kansas City, and an outspoken proponent of what's known as modern monetary theory. Followers of MMT believe many economic policy mistakes arise out of a basic ignorance of how fiat money works. MMT theory flies in the face of the common wisdom that the federal government should balance its budget. A key tenet of MMT is that government deficits are not only necessary, but critical, in financing private-sector growth. Loony? Perhaps. But it's not out of the mainstream. Goldman Sachs & Co. Inc. chief economist Jan Hatzius, for one, is a big believer in the sector-flow analysis that supports this theory. Still, even liberal economists such as Paul Krugman have their doubts about MMT and its apparent disregard for inflationary risks arising from deficit spending. MMT proponents bristle at that criticism, saying the theory is being misinterpreted and that deficits can do cause inflation — but only with full employment, which the U.S. rarely sees, and only if productivity lags at the same time. Here , economist Dean Baker attempts to bridge the divide somewhat. Finally, Dylan Matthews of the Washington Post had a well-done story from a year ago about the development of MMT and what its theorists believe.