Monetary Policy and the Green New Deal

On February 7, House Representative Alexandria Ocasio-Cortez and Senator Ed Markey jointly introduced the Green New Deal resolution. Cosponsored by nine senators and over 60 House Democrats, the document was a roadmap for addressing climate change, spurring economic growth, and improving social welfare. With unabashed references to the New Deal of 1933, the Green New Deal similarly aspires to achieve monumental levels of economic and social reform. Using climate change as the impetus, Ocasio-Cortez’s ambitious resolution seeks to address the issue with proposals that enact structural reforms she sees as obstacles to the welfare of historically disadvantaged groups.

One of the chief economic theories enabling this resolution is modern monetary theory (MMT). Considered a radical departure from conventional economic theory, MMT asserts there is nothing inherently wrong with increasing government debt to enable government spending. For advocates of MMT, the only concern is inflation. So long as inflation is kept in check, which advocates argue is likely, provided there is excess labor or production capacity, the government should be free to issue new currency to finance spending.

Conventional monetary theory and politics find at least two problems with this requirement. First, economists have generally agreed that printing money to fund spending is a bad idea. A recent survey by University of Chicago Booth School of Business of 42 top economists found none of them believed a government with control of their currency should disregard concerns for the deficit or print unlimited money for spending. The concern is, of course, inflation. The second problem is America’s traditional reluctance towards government deficits. As the graph below shows, the vast majority of Americans care about the budget deficit at least somewhat. Although attitudes toward debt have moved from disdain to a reluctant acceptance in the last decade, massively increasing government spending and the deficit is still politically unpalatable.

          Gallup

           *Asked of a half sample

Yet Ocasio-Cortez, like many prominent progressives, is a strong supporter of modern monetary theory. In a recent interview with Business Insider, she stressed the need for MMT to be "a larger part of our conversation." Given the ambition and cost of her plan, this comes as no surprise. While controversy exists over the exact cost of the New Green Deal, mainly due to the vagueness of the current resolution, estimates generally run into the trillions. Though parts of the deal could be funded within current initiatives, it is highly likely the government will have to significantly increase its budget to accommodate the amount of spending required.

It is here that modern monetary theory comes in. If Ocasio-Cortez and her allies are successful in convincing America to adopt this economic theory, she will have won half the battle towards realizing her New Green Deal. Given America’s current reluctance towards significant increases in the government deficit, evidenced by some of the controversy around last year’s tax reforms, adoption of modern monetary theory is the only way to get America behind the necessary spending.

Second, MMT enables Ocasio-Cortez to achieve initiatives such as full employment, large-scale zero-emission infrastructure, and agricultural reform by disassociating the money the government must borrow from inflation. Now, this is not to say MMT ignores inflation, but that its implementation is predicated on an assumption of excess production and labor capacity in the economy. With additional supply available to meet the increase in demand, MMT argues prices and therefore inflation will remain stable. In cases where demand does outstrip supply, taxes can be raised to reduce growth and stabilize inflation.

Advocates of modern monetary theory, like Ocasio-Cortez and Stony Brook University professor Stephanie Kelton, place guardianship of the economy entirely in the hands of fiscal policy and ipso facto, lawmakers. Monetary policy in the form of central banks would be unnecessary because legislators can enact policy to expand and contract the economy as necessary.

But is this true? Is there really no need for monetary policy to exist if modern monetary theory is implemented? The practical answer is no. Although MMT in theory eliminates the need for monetary policy, its inherently political nature will limit its effectiveness. Consider for example the time inconsistency problem. Although proponents of MMT present taxation as an effective form of contractionary fiscal policy when runaway growth and inflation occur, it is hard to imagine politicians carrying through when the time comes.

Politicians overwhelmingly prefer to preside over eras of growth. This is why political ads tout job creation and booming stock markets as evidence of a job-well-done. Citizens would never forgive a politician who made life harder in the short-run, even if long-term stability was the result. Furthermore, if inflation reduces the buying power of households, tax hikes would be political suicide. Raising taxes to restrain growth is a sound theoretical idea, but the political reality is citizens would be unlikely to reelect a politician who raised taxes and ended the economic party as a result. The infeasibility of tax hikes is the reason conventional monetary policy still has a place in the world of modern monetary theory.

The magic of conventional monetary policy lies in its apolitical nature. The Federal Reserve and its Board of Governors are designed in a way that limits political considerations. That is why the Federal Reserve is tasked with “taking away the punch bowl just as the party gets going.” Free from the influences of election cycles, the Fed can concentrate on its dual mandate of price stability and maximum employment. Conventional monetary policy will step in to temper inflation in an economic boom even as lawmakers hesitate over the optics of doing the same through fiscal policy.

But controlling inflation goes beyond interest rates, government spending, or even taxation. Instilling trust throughout financial markets, firms, and households goes a long way towards achieving price stability. After all, inflation expectations is a self-fulfilling prophecy. If expectations of inflation are stable, then workers don’t demand higher wages and firms don’t set higher prices. Central banks are uniquely able to do this because citizens have no reason to doubt either their capability or willingness to intervene. The same level of trust is not placed in our lawmakers.

Although demographic trends in the United States might bring modern monetary theory into the mainstream one day, the theory’s disregard for conventional monetary policy is misplaced. It places far too much faith in the political willpower accessible to politicians and neglects the benefits of apolitical decision making.

When inflationary pressures arise in the MMT world, it won’t be Congress that comes to the rescue of the American people. It will be the Federal Reserve.

Works Cited

Edwards, Jim. “Alexandria Ocasio-Cortez Is a Fan of a Geeky Economic Theory Called MMT: Here's a Plain-English Guide to What It Is and Why It's Interesting.” Business Insider, Business Insider, 30 Mar. 2019, www.businessinsider.com/modern-monetary-theory-mmt-explained-aoc-2019-3.

“Federal Budget Deficit.” Gallup.com, Gallup, Inc., 2019, news.gallup.com/poll/147626/federal-budget-deficit.aspx.

Mackintosh, James. “What Modern Monetary Theory Gets Right and Wrong.” The Wall Street Journal, Dow Jones & Company, 2 Apr. 2019, www.wsj.com/articles/what-modern-monetary-theory-gets-right-and-wrong-11554177661.

“Modern Monetary Theory Survey.” Igmchicago.org, 13 Mar. 2019, www.igmchicago.org/surveys/modern-monetary-theory.

Natter, Ari. Bloomberg.com, Bloomberg, 25 Feb. 2019, www.bloomberg.com/news/articles/2019-02-25/group-sees-ocasio-cortez-s-green-new-deal-costing-93-trillion.

Relman, Eliza. “Alexandria Ocasio-Cortez Says the Theory That Deficit Spending Is Good for the Economy Should 'Absolutely' Be Part of the Conversation.” Business Insider, Business Insider, 7 Jan. 2019, www.businessinsider.com/alexandria-ocasio-cortez-ommt-modern-monetary-theory-how-pay-for-policies-2019-1?r=US&IR=T.

Relman, Eliza. “Alexandria Ocasio-Cortez's Staff Says a Document That Supported Paying Americans 'Unwilling to Work' Was Accidentally Released. Here's What It Means.” Business Insider, Business Insider, 9 Feb. 2019, www.businessinsider.com/right-wing-media-attacking-alexandria-ocasio-cortezs-green-new-deal-2019-2?r=US&IR=T.

Roberts, David. “The Green New Deal, Explained.” Vox, Vox, 30 Mar. 2019, www.vox.com/energy-and-environment/2018/12/21/18144138/green-new-deal-alexandria-ocasio-cortez.

Roberts, David. “The Green New Deal, Explained.” Vox, Vox, 30 Mar. 2019, www.vox.com/energy-and-environment/2018/12/21/18144138/green-new-deal-alexandria-ocasio-cortez.