Tuesday, February 12, 2019

Ryan Bourne — Let America's radical socialists be a warning to British politics

"Radical socialists" now. This person has no idea of what a radical socialist is based on history and policy, or else he is using the term as a smear. Oh wait, Cato Institute. There's a third possibility. Ideological bias.
Ocasio-Cortez and her cohorts are disciples of a new macroeconomic worldview called “Modern Monetary Theory” (MMT).
This postulates that governments with sovereign currencies face no financing constraints, and can spend as much as they like through new printed money. The only real constraint on spending levels is the capacity of the economy.
Even academic MMT-ers admit that if you pump in too much money when the economy is at full employment, inflation will rise, and will need to be choked off by higher taxes or spending cuts.
But political proponents of this kooky theory downplay this implication. In fact, they circumvent it, by claiming that, despite low unemployment, our economies are running significantly below their potential. This allows them to say that huge new spending could be financed by money printing without requiring higher taxes or resulting in rising inflation.
MMT recommends using functional finance to maintain full employment at optimal economic capacity with spending and offsets sufficient to meet nongovernment saving desire while maintaining price stability, instead of employing "sound finance" to achieve a fiscal target on the books.

The key constraint is availability of real resources and the key variable is nongovernment saving desire, which must be maintained at the level full employment to avoid the inefficiency of idling resources unnecessarily (though demand leakage), or sparking inflation by contributing to effective demand in excess of the capacity of the economy to meet it. The economic modeling involved is based on stock-flow consistent approach developed by British Treasury "wiseman" Wynne Godley and US economist James Tobin.

Ryan Bourne | R Evan Scharf Chair in the Public Understanding of Economics at the Cato Institute in Washington DC.

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