Can the US print its way out of a deficit?

Emily Lambert | Mar 20, 2019

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When governments collect less money through taxes than they spend, they run deficits. But the US government borrows in the same currency it issues, so can’t it use its printing power to help balance its budget and avoid a deficit?

This is the general idea behind modern monetary theory (MMT), which maintains that a country that controls its currency and issues debt in that currency can sidestep deficits. US Representative Alexandria Ocasio-Cortez (Democrat of New York) advocates that the theory should be a “larger part of our conversation,” suggesting that the government could use MMT, as well as other tools, to fund ambitious and potentially expensive policies such as the Green New Deal reforms she supports. 

But Federal Reserve Chair Jerome Powell has described MMT as “just wrong.” And when Chicago Booth’s Initiative on Global Markets polled its Economic Experts Panel, it found no unabashed MMT fans.  

None of the prominent economists polled agreed that countries that borrow in their own currency need not worry about deficits because they can print money to finance debt. More than half disagreed strongly with this suggestion—and the share rose to almost three-quarters when weighted by respondents’ confidence in their answers. 

“The present value of debt issuances is equal to the present value of debt payments,” responded Stanford’s Darrell Duffie. “So borrowing more now means paying more later.” 

However, several respondents who strongly disagreed acknowledged there could be room for nuance. “Obviously, they should worry,” remarked Yale’s William Nordhaus, recent recipient of the Nobel Prize in Economic Sciences for his work on climate-change economics. But he added that some issues may be less pressing, “particularly with flexible exchange rates.”


Ray Fair, Yale
“Surely inflation might be a problem.”
Response: Strongly disagree

Oliver Hart, Harvard
“This kind of behavior can quickly lead to inflation or even hyperinflation once the economy is close to full capacity.”
Response: Strongly disagree

Steve Kaplan, Chicago Booth
“At some point, it becomes untenable, and the country becomes Venezuela or Zimbabwe.”
Response: Strongly disagree

 


Darrell Duffie, Stanford
“If this were true, each such country could finance the purchase of all of the world’s output, which is obviously impossible.”
Response: Strongly disagree

Anil K Kashyap, Chicago Booth
“Lots of countries have proved this to be impossible.”
Response: Strongly disagree

Larry Samuelson, Yale
“Creating money can finance a great deal of spending, but incidents of hyperinflation and collapse as well as other crises indicate there are limits.”
Response: Disagree