NOEL KING, HOST:
New York Congresswoman Alexandria Ocasio-Cortez wants a Green New Deal - clean energy, guaranteed jobs. When she announced this, everyone asked, how are you going to pay for it? Here's what she told Morning Edition earlier this year.
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ALEXANDRIA OCASIO-CORTEZ: I think the first thing that we need to do is kind of break the mistaken idea that taxes pay for 100% of government expenditure.
KING: She says ambitious government programs can be financed through deficit spending. And in saying that, she has spotlighted an obscure brand of economics known as Modern Monetary Theory. NPR's Scott Horsley has a beginner's guide.
SCOTT HORSLEY, BYLINE: Modern Monetary Theory's been around for years, but it's only recently stepped out of the shadows. Economist Stephanie Kelton of Stony Brook University says that's partly thanks to Ocasio-Cortez. The social media darling embraced the theory while making an unapologetic case for costly new government programs.
STEPHANIE KELTON: There was something of an Oprah effect when she did that. People immediately probably started googling Modern Monetary Theory to find out what she was referring to.
HORSLEY: Run that Google search, and you'll quickly find Kelton herself. The economist, who advised Bernie Sanders' 2016 campaign, is one of the best-known evangelists for MMT. Kelton says paying for big government programs is the easy part. If Congress has the will, she argues, the Federal Reserve can effectively print the money.
KELTON: If Congress authorizes a few billion dollars of additional spending or a few hundred billion dollars, then the Fed's job is to make sure that those checks don't bounce.
HORSLEY: A central element of MMT is that governments that control their own currency, like the United States, don't have to worry about spending more than they collect in taxes. They can always create more money. But Kelton says that's not a blank check for unlimited government spending.
KELTON: Too often, people get a whiff of MMT. They don't read the literature. And they somehow arrive at the takeaway that MMT is about printing prosperity. And of course, when people hear printing money, they go straight to Zimbabwe or Weimar Germany.
HORSLEY: Those are notorious cases of runaway price hikes. But Kelton says inflation is only a danger when demand outstrips the real capacity of the economy - the people, machines and raw materials. Last week, under questioning from Ocasio-Cortez, Federal Reserve chairman Jerome Powell acknowledged the U.S. job market has shown more capacity to grow without triggering inflation than he and his colleagues had expected. Still, Powell's no fan of MMT, as he told a Senate hearing back in February.
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JEROME POWELL: The idea that deficits don't matter for countries that can borrow in their own currency, I think, is just wrong. We're going to have to either spend less or raise more revenue.
HORSLEY: Tax historian Bruce Bartlett also blasts MMT as little more than a fig leaf giving license for big spending, in the same way Art Laffer gave Republicans cover to cut taxes with the dubious claim they'd pay for themselves.
BRUCE BARTLETT: MMT is sort of the Laffer Curve for the left.
HORSLEY: Some of MMT's biggest supporters, however, are not liberal politicians but bond traders at firms like PIMCO and Goldman Sachs. James Montier, who's with the investment firm GMO, says he turned to MMT after more conventional economics led him astray. In the 1990s, Montier and many others were convinced Japan's rising government debt would drive up borrowing costs. It didn't.
JAMES MONTIER: That cost both me and my clients or anyone who was stupid enough to follow me money. It was one of the worst trade positions I have ever suggested in my entire life.
HORSLEY: Montier says MMT offers better financial forecasts and helped him understand why interest rates in the U.S. have stayed low despite growing government deficits. Persistently low interest rates have also prompted some mainstream economists like Larry Summers and Jason Furman to rethink their attitudes and be less concerned about federal deficits. But they haven't gone so far as to embrace MMT. Furman, who advised former President Obama, says there are always a lot of ambitious ideas floating around Washington. He argues those that are really worth doing are also worth paying for. Scott Horsley, NPR News, Washington.
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