Brawl Breaks Out Over Modern Monetary Theory
Posted by Michael A. Kamperman on March 29, 2011
A debate has erupted between Paul Krugman and James Galbraith over whether or not deficits matter in the long run. The debate centers on the utility of Modern Monetary Theory, which in a nutshell is the usefulness of the federal government printing money to stimulate demand. While I agree with Galbraith, the specifics and nuances of the debate are not important (they can be found on Paul Krugman’s blog). What is important is that the debate is taking place. On the national level no one is talking about the federal governments ability to print money and end the current depression. All of the talk is about the debt and the deficit and the existential threat they make to the United States. Of course such thinking is hogwash since we can pay all of our debt by pushing a button on a computer, and we control the computer printing press. We still think and operate as though we are on the gold standard and bound by the physical laws of nature. We are no different than ancient people who would sacrfice a community member to apease the gods and try to make it rain during a drought. Basically, we are economically sacrificing so many people; students and teachers, construction workers, the disabled, the poor, and so many more. The reason for the sacrifice is because we are afraid our currency and economy will collapse into bankruptcy and hyperinflation when we reach the point where we are unable to pay back the debt caused by large deficits. It matters not whether the number entered into the computer to print is $1, or $10, or $10 million, or $10 trillion all that is required for the U.S. to pay back its debt is to enter any number and hit print. It’s not like gold, we cannot run out of the stuff. Yet we are willing to close nursing homes and school libraries and let college graduates move back home with Mom and Dad with nothing to do all day but play video games because we are afraid to use something that we have an unlimited supply of, which is dollars. If we would use those unlimited dollars, then whole country could go back to work in weeks.
Hopefully this debate will be joined by others giving it a chance to make it up the chain to the policy maker level, because no one at that level is talking about it. They need to start talking about something besides austerity. Imagine you are a young man with 5 minutes to get to your Valentine’s Day date at a fancy restaurant with a girl you’ve been dying to go out with. You realize you forgot your wallet and you ask me for help. I offer you a choice of my wedding ring made up of $500 worth of gold, or a $500 bill. If you want the date you have to grab the paper, because the ring can’t buy you dinner at the restaurant and the paper can. So why in the world are we worshipping the ring and obeying its rules rather than using the paper and following its different set of rules?
This country desperately needs this debate. For starters, we need QE3 and a big new stimulus plan. Home prices are still going down because it is too difficult to get a mortgage. I know of a young couple who applied for an FHA mortgage and were turned down on their own and needed a co-signor. They both graduated from college and had no debt. They both had full-time jobs in their field of study and they both had a good credit score. But because they had no debt they had very little credit history. Under the new rules you cannot get an FHA mortgage without two years history on three different credit lines. Your rent cannot be used as evidience you will pay your mortgage. What you really need are three credit cards. It is unfathomable that the federal government, which already back-stops 90% of the mortgages in America, would have policies keeping qualified borrowers out of the market over a fear of the taxpayer losing one more dime. Even though the federal government can mint the dimes. We need sanity to return and this debate may return it. As an aside Bob Herbert has left his position as a New York Time columnist. He got the problem. His last words were about how we need new leadership and new ideas. Ditto!
