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Debts and Deficits | Munk Debates

EPISODE #36

Debts and Deficits

Be it resolved, debt and deficit fears are overblown as advanced economies address the COVID-19 pandemic.

Guests
Stephanie Kelton
Jacob Funk Kirkegaard

About this episode

The economic fallout from COVID-19 has compelled governments around the world to launch the largest fiscal and monetary aid programs in living memory. This is happening at the same time as a radical, new approach to economic policy making is gaining momentum: Modern Monetary Theory. Its proponents believe that governments, as issuers of their own currencies, are not limited by revenues they collect when it comes to spend. They argue governments should instead create and spend money on programs that are in the public good. Not to do so is a political, not an economic decision. Critics of “MMT” think it is based on a deeply flawed theory of money and how it works in the real economy. Rather than ushering in a new era of prosperity and economic opportunity MMT risks dooming advanced economies to soaring inflation, declining productivity, and currency debasement. In sum, there is no free lunch in economics.

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Guests

Stephanie Kelton

"Virtually everything that we have been taught to think and fear about federal budget deficits and government debt is either misleading, incomplete, or just flat-out wrong."

Stephanie Kelton

"Virtually everything that we have been taught to think and fear about federal budget deficits and government debt is either misleading, incomplete, or just flat-out wrong."

Stephanie Kelton, former chief economist on the U.S. Senate Budget Committee, is professor of economics and public policy at Stony Brook University. Politico recognized her as one of the fifty people across the country most influencing the political debate, and Bloomberg named her one of the fifty people who defined 2019. Dr. Kelton was a contributing writer for Bloomberg, and her op-eds appear in the New York Times, Washington Post, and Los Angeles Times.

Jacob Funk Kirkegaard

"Making it possible for politicians to spend whatever they want, funded by the central bank, is going down a dangerous road."

Jacob Funk Kirkegaard

"Making it possible for politicians to spend whatever they want, funded by the central bank, is going down a dangerous road."

Jacob Funk Kirkegaard is Senior Fellow at the Peterson Institute of International Economics. Before joining the Institute, he worked with the Danish Ministry of Defense, the United Nations in Iraq, and in the private financial sector. He is a graduate of the Danish Army's Special School of Intelligence and Linguistics with the rank of first lieutenant; the University of Aarhus in Aarhus, Denmark; Columbia University in New York; and received his PhD from Johns Hopkins University, School of Advanced International Studies. He is coeditor of Transatlantic  Economic Challenges in an Era of Growing.

Show Notes

Stephanie Kelton has recently published  The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. For a quick 101 on Modern Monetary Theory you can read her New York  Times op-ed Learn to Love Trillion Dollar Deficits: Our country’s myth about federal debt, explained.
 
Jacob Funk Kirkegaard is the co-editor of Transatlantic Economic Challenges in an Era of Growing Multipolarity and author of The Accelerating Decline in America's High-Skilled Workforce: Implications for Immigration Policy,
 
Deficits and debt did not start with coronavirus stimulus packages. You can get a sense of the wide range of government debt as a percentage of GDP accumulated by countries around the world by looking at this OECD graph. Japan has the highest ratio of debt to GDP in the world. You can learn more about how Japan might illustrate that MMT works here.
 
During the debate Jacob referred to European countries that do not run deficits. In 2009 Germany amended its constitution to include a “debt brake”. The requirement to balance fiscal spending with tax receipts is known in Germany as “Schwarze Null” (black zero). You can learn more about Schwarze Null here and how Germany has relaxed this rule to respond to the pandemic here.
 
Throughout the debate Stephanie and Jacob argued about the role of the central bank and the importance of central bank independence. You can learn more about how this debate has been surfacing more frequently in a Financial Times article that looks at the history of central bank independence. The article cites a 2013 research paper that shows that central bank independence is a fairly recent construct and occurs in “secular cycles”.

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