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I think too many people in power have learned from MMT how money, banking, and government finance actually works, so it would probably take a few generations for people to forget those again for debt-hysteria to strongly return. In addition to the plain logic, all the evidence is that strong fiscal policy is the answer to extreme economic crises, rather than a target for blame.
Even the eurozone seems to have learned that their anti-fiscal-policy stances were a mistake and caused the first big crisis to flatline growth for the last 15 years. So the Maastricht 3% deficit limit is finally being scrutinized and softened to allow for better counter-cyclical fiscal policy. And in the US we've gone from Obama being confused and thinking he needed to fly to China to make sure they'll still 'lend' us money, to now the massive covid stimulus packages without a peep about becoming Greece or bankrupting our grandchildren.
Now the conversation is more correctly about inflation instead of solvency. And while regular people do hate inflation, even way more than is warranted, I'd guess that's too nuanced and subjective for much support of a constitutional amendment around debt/deficit.
This seems like a fringe opinion. Countries that have "figured out how money works" and lean into debt-financed government spending tend to end up like Argentina or Turkey.
We've just experienced an episode of high inflation due to government stimulus. If anything, we've learned just how dangerous MMT can be.
Why would returning to historical levels of deficit/GDP be considered hysteria?
I'm not sure the government stimulus is the best single explanation for the high inflation of the last few years. If you want to blame the government, then I think overreaction to COVID would be a better angle of attack, since a recent Indicator episode looked at why there is a disconnect between ordinary Americans, who claim to be miserable, and economists who say that despite what Americans say in polls they're spending more like they're happy (high spending on travel, etc.), and it concluded that a lot of indicators of Americans being happy with the economy are actually due to pent up COVID spending. Basically, people didn't get to go on vacations for a year or two and now that things have opened up they have a bunch of money saved up that they're still spending, in spite of inflation.
If this explanation is correct, it might mean the government stimulus is part of the saved up money that Americans are now spending, but I somehow doubt that one time payments of $600 per person in December of 2020, and $1000-$3000 in 2021 are the best explanation for a sustained increase of prices across the economy. That just doesn't seem like a parsimonious explanation of what we're observing.
This spending was financed by government debt. Debt that that wasn't paid off. In a standard Keynesian model a sustained increase in the level of government debt leads to a sustained increase in the price level all things equal. Monetary factors also matter a lot, but the Fed was also being expansionary and allowed inflation to increase rapidly and didn't want to tighten policy and cause deflation, since that would lead to a recession in the standard Keynesian model.
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The Eurozone situation would have presented an extreme moral hazard if the PIGS had been more generously bailed out with no drama. That's not to say the ECB was particularly intelligent about it or that the Germans and Dutch weren't largely responding to domestic populist demands to cut off those profligate mediterranneans, but if you look at the kind of fiscal climate you had in Italy or Spain during the early-2000s construction booms where like penniless teacher couples were being handed €3m loans to open their own hotel or whatever you can see that change was necessary. Monetary integration without fiscal integration is unustainable, people were rightfully angry that every Greek doctor was reporting an income of €12,000 a year and taking the rest tax-free in cash while Austrian and French doctors had to pay 40%+ tax rates on every penny they made above a low amount, there was a lot of built-up rage about it.
Agreed on all counts I think. But despite the rage and desire to punish, they did have to accept the economic reality and Draghi finally set it right in 2012 with the "whatever it takes" admission, which was correcting the first main issue. Then I think since covid and looking at the 15 years of poor growth, they've been coming around on the problems with deficit limits, which is the second big economic problem. These things reflect what necessary compromises had to be made 30 years ago to get buy-in, and what were the dominant narratives at the time (where central bankers and monetary policy were seen as sufficient wizardry to manage an economy).
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I don't know about becoming Greece, but inflation was elevated largely due to fiscal policy and the price of servicing government debt is real and increasing. MMTers will say that you can just inflate the currency further into nothingness or confiscate everyone's wealth to pay the bills, but I don't see how becoming Argentina is much better than becoming Greece.
MMT just gives the descriptive reality & logic of how things work now and throughout history, including how the base interest rate is simply a policy tool to subsidize savings (which can be set at 0% any time we desire to not pay that subsidy). Argentina is currently serving as a good example of why giving savers free money, in proportion to how much money they already have (increasing the interest rate), is probably not the tool you're looking for if you want to combat inflation (shocked pikachu there). As for the USD inflation, it appears that most currencies around the world experienced about the same cost-push inflation coming out of covid, while having fairly disparate levels of counter-cyclical fiscal injections and unemployment levels, so it's not as obvious as it may seem.
The Greece point is that the conversation was simply incoherent just 10-15 years ago, but has moved significantly toward productive correct debates about the preferred size of government and inflation constraints, rather than a fear of large numbers and negative-sounding words debt & deficit. So that's my prediction that the world is moving farther away from arbitrary limit rules on those, rather than looking to embrace the wisdom of Germany in 2009 or 1992.
To be fair, I think when you're talking about crisis situations in places like Greece you're dealing as much with a question of solving politics as solving economics. In a normal country fiscal stimulus is probably better, but in a country with endemic political clientelism, implementing austerity can be a brake on the kind of corruption that's been dragging the economy down in the first place.
Yeah there's nothing stopping anyone from doing a bad job running a government, but I'm skeptical that austerity is going to significantly hamper the corrupt actors anyway. That often seemed more like a 'just-world' convenient justification in each of the sovereign debt sagas. Greece would have been fine (at least in this sovereign debt regard) if they hadn't given up the drachma, and they ended up fine once the ECB finally realized it was their job to simply fully back all member states.
Any government will need to have various checks against spending getting out of control, such as having a proper budgeting and auditing process. But once you land on the size of government desired, the taxes and especially the debt & deficit are just dynamically emergent results based on the private sector's savings desire and the level of exporting. Net exporters acting like their lower deficits are evidence of good sense & morality is more of that just-world confusion. Trying to force a country to shoot themselves in the foot economically based on those debt/deficit outcomes being too large for someone's aesthetic preference (or bad faith justification) is a destructive angle that it seems people are not falling for as much anymore.
I mean it'll stop the specific problem they had with corruption, which was taking on debt and spending it all on politically connected patrons rather than investing it into more productive uses. If you assume they will spend funds on more productive uses there's a stronger argument for stimulus than if you can count on corruption being so bad that it'll get squandered.
I don't think you can chalk it up to aesthetic preferences - for Greece specifically we have the comparison of the modern day vs the post war era up till the oil crisis, during which they kept the budget controlled and growth was steady and reliable.
To take a more extreme example of the political circumstances mattering more than pen and paper economics, austerity in the US might mean one thing we're familiar with, but austerity in Argentina means they stop printing money, which is probably necessary to tame inflation regardless of whether or not austerity is actually a good idea in abstract.
This might be beyond me. What do you mean?
It just doesn't really sound like reality here to me, talking about huge complex government budgets like this. Is the premise something like, they'll do all the necessary & proper spending first, and then at the end of that, if they are still allowed to issue some more bonds before hitting some limit (with some kind of timing, like the last day of each period?), then they'll max that out and give the money out to the cronies? So the hall-monitors from other countries try to perfectly set a limit on them in order to just allow enough for the proper spending which should be prioritized? If the leadership is simply corrupt and untrustworthy, why wouldn't all that 'favored' spending be mixed in with all the 'proper' spending, and the distinction being possibly subjective anyway?
Good governance is hard and I don't know all the ways that other countries and US states for example try to deal with these. The euro monetary union countries definitely have a tricky setup to deal with, without a 'united states of europe' fiscal authority. I can imagine the psychology of being in other countries and feeling a lack of trust of others' behavior. It just seems like everyone is moving away from thinking that arbitrary limits on the fiscal outcomes are workable solutions.
That chart of sectoral balances is the fastest way to really intuitively understand that financial assets are zero-sum. So when we talk about the government deficit, we're simultaneously talking about the non-government's surplus. You can slice everything into any number of different sectors, but a common useful separation is 'government' vs 'domestic private sector' vs 'external / rest of world' sectors.
What we find is that the private sector really wants to be running a surplus at almost all times, because people like to build up savings for security. So that's why in general the government almost always has to be running a deficit, injecting financial assets (money, bonds) into the economy. When the private sector is in deficit, that means people are collectively spending down savings and/or running up private debt, and we see it tends to end with a significant recession where the private sector forces itself back into surplus by cutting spending.
(The other source of financial assets would be the external sector, where a net exporting country runs a trade surplus. Then you could potentially have the domestic private sector and the government both in surplus potentially. On the flipside, if a country is running a trade deficit, then their government deficits need to be even larger in order for the private sector to be in surplus.)
So this is the dynamic 'savings desire' of the private sector. The behavior could be affected by various psychological, historical, cultural factors, and could be incentivized or disincentivized by stuff like tax-advantaged retirement saving, etc. We might find that the Japanese people lose trust in saving for the future by buying stocks, and instead they largely want to build up huge monetary savings for retirement, which could cause the japanese government to need to issue a massive amount of bonds & currency for people to sit on (without any inflationary effect, just having to solve the paradox of thrift and fight off deflation).
Going off some Greek sectoral balance charts here (which I would prefer to be flipped around 0 to look more useful) and from the paper they're quoting from. It looks like Greece had a moderate government deficit but their trade balance turned to deficit in the late 90s, which pushed their domestic private sector into significant deficit, probably running up a lot of private debt. Similar to the US at the time in the late clinton-era. Then Greece adopted the euro and was locked into effectively a currency peg with the likes of Germany, which essentially made the trade deficit structural from then on.
So then, during and after the financial crisis and great recession, the private sector was hammered and was trying to de-leverage and rebuild savings, which by necessity is going to force the government into massive deficit (as tax revenue falls and safety net spending rises, the normal automatic stabilizer reasons for this).
If the main moral failing (causing a larger headline government deficit number) turned out to be that they were running a trade deficit and had been suffering a private deficit for a decade, it doesn't really seem that damning. Hard to make corruption & profligacy actually work as a macro story (though I'm sure it's plentiful at the micro level).
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IMO non of this is conventional economics and is widely seems as false to experts.
It’s not just “descriptive/logic of how things work”. It had some truthiness in a few limited situations. An extremely well-diversified (like America dominant in all core industries) economy that can issue it’s own currency and if need be completely self-sufficient (commodity producer/tech dominant/manufacturing powerhouse). When the economy is operating significantly below capacity 2007-2020 and cam increase demand without causing higher inflation MMT appears truthy. One could argue simple monetarily policies would do the same.
There is zero evidence COVID did policies (which were MMT or traditional Keynesian) did not result in a long-term permenent change in the price level. By costs-push I assume you are referring to supply chain disruptions as causing inflation. Under a supply-chain ONLY model of COVID inflation we would have seen the price level increase by 10% with lower output levels followed by the price level returning to pre-COVID levels while output returned to pre-COVID levels. At this point the evidence is overwhelming that a large portion of COVID inflation was due to excessive stimulus.
I have no idea what your argentina remarks refer to. Printing less money and higher rates will 100% cause inflation to disappear. The issue is Argentina continues to print more base money to pay their bills. If Argentina quit printing money they would not have inflation.
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there is also potentially something weird with USD inflation. i've heard a large proportion of physical US currency (up to 50%) is held overseas. however, i'm not sure what % of the higher money supply is held by foreigners. its possible that foreigners could be helping to pay for a significant portion of seniorage which incentivises the US government and US voters to inflate the money supply.
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There is actually a good correlation.
To be honest, intuitively I would have expected more correlation. But as far as this chart goes, the x-axis doesn't really look like what I'd expect, with almost all countries clumped closely together between .01 and .05, whatever those refer to (I was under the impression covid stimulus varied a lot more, like these charts show). Tracking down this paper from your twitter screenshot, this is Robert Barro who is apparently still interested in his old bizarre idea of ricardian equivalence, where consumers are supposed to be rational agents and thus should respond to government deficits by saving money instead of spending it because they know they (or their descendants) will pay more taxes in the future at some point...So I imagine that explains the strange x-axis here, working in extra variables that are relevant to him wanting to test his specific ideas about rational consumers looking at debt ratios and duration.
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