How to Get the Economy Back on Track: Austrian Economics vs. Modern Monetary Theory
What’s wrong with economic policy?
When orthodox economic ideas failed to get the United States economy back on track, less conventional monetary policy measures like quantitative easing quickly became mainstream. But despite the Fed’s efforts, the economy is still stalled and unemployment remains high. Is it time to look beyond the old economic thinking that has failed to do the job?
Warren Mosler and Robert Murphy offer two radically different approaches to getting the economy going again. As Murphy puts it, “We’re both saying the government should change what it’s doing, and we have a difference in what we think that should be.”
But what should government do?
Mosler, one of the founders of Modern Monetary Theory (MMT), has a number of suggestions centered on getting aggregate demand going again. He suggests a full payroll tax holiday and a yearly $5,000 government healthcare stipend offered to everyone in the U.S. He also suggests creating a program to offer federally funded transition jobs to the unemployed as a means to prevent long-term unemployment. Mosler’s reasoning is that the private sector has shown that it won’t hire the long-term unemployed. So to prevent the loss of productive resources – and to boost demand – the government should step in and provide transitional employment aimed at keeping workers attractive to potential employers so that they can quickly transition back to the private sector.
Mosler’s suggestions are based on the insights of MMT, as he notes the basic balance-sheet problem of public sector saving: If the public sector is running a surplus, then the private sector will have to take on debt. At a time when both the private sector and public sector are focused on deleveraging, the result is economic stagnation. In this situation, “only the government can be the counter-cyclical to the private sector,” Mosler says.
Murphy’s response to the same problem has been simple: Government interference isn’t letting prices do their job. His goal, as he later notes, is to “get the government out of business.” He blames the Federal Reserve for the housing bubble and suggests that Fed policy had set artificially low interest rates, causing “an unsustainable boom.”
Mosler counters that interest rates mean different things for a fixed exchange rate policy (for example, the gold standard) and a floating exchange-rate system, which we have today. Given that the U.S. no longer operates under fixed exchange rates, Mosler believes that Murphy’s criticisms don’t apply. Instead, Mosler points to the financial sector as a part of the problem.
“The financial sector is entirely parasitic and we let it get way out of hand,” he says, adding that, “you can’t allow banks to do anything you can’t regulate.” Despite claims from the industry to the contrary, “you don’t necessarily have to let the banks lend anything,” Mosler says. “You have to make sure it serves a public purpose.”
The status quo clearly is failing. But what should government do? It could step in and take more radical counter-cyclical steps to get the economy going, as Mosler suggests. Or it could get out of the way and let prices work, as Murray says.
Who do you agree with?
Check back tomorrow for a “New Economic Thinking” interview with Mosler on Modern Monetary Theory and his suggestions for getting the economy back on track.