How do deficits matter?
By Scott Sumner
Tyler Cowen directed me to a Ross Douthat post on people with intellectual influence:
Scott Sumner/Stephanie Kelton: Because market monetarism and modern monetary theory arguably stand in the same relation to our “no, really, deficits don’t matter” policymaking era as Milton Friedman did to Reagan-Thatcher neoliberalism.
I’m flattered that Douthat believes that I’ve been influential, but I worry that people might misunderstand this claim. As far as I know, my views on the deficit are almost the opposite of the MMT view:
1. I’ve been strongly opposed to the big budget deficits during the Trump/Biden era because they will require future tax increases, which slows economic growth. In contrast, many MMTers don’t seem to believe that deficits impose a burden of future taxpayers.
2. When inflation becomes a problem, MMTers favor tax increases as a way to restrain inflation. I don’t believe that tax increases are an effective means of reducing inflation (as we saw in 1968) and instead favor tight money as an anti-inflation tool. Thus when inflation does become a problem, MMTers basically assume that the budget deficit is too big, whereas I assume that money is too expansionary.
My views on the budget deficit are very much out of step with the times. I opposed fiscal stimulus last year, while (AFAIK) most economists favored it. I don’t believe that excessive fiscal stimulus in the US causes high inflation, most economists believe it does.