Rep. Alexandria Ocasio-Cortez says the notion that the government needn't worry about balancing its books should be “a larger part of our conversation.” | Saul Loeb/AFP/Getty Images FINANCE & TAX Ocasio-Cortez boosts progressive theory that deficits aren’t so scary

The Democratic Party's base is rallying around calls for massive social welfare programs like Medicare for All, a federal jobs guarantee and a Green New Deal — all of which would cost trillions of dollars and potentially bust the budget.

Yet a small but growing chorus of progressives say that policy makers are thinking about deficits all wrong: The red ink, they say, is not that big of a deal.


Rep. Alexandria Ocasio-Cortez, (D-N.Y.), told Business Insider last month the notion that the government needn't worry about balancing its books should be “a larger part of our conversation.”

Sen. Elizabeth Warren (D-Mass.) said Congress’s current system of finding savings to offset spending increases “doesn’t make any sense.” It is “clear that we need to rethink our financial accounting for the United States,” she said.

“There’s no question in my mind but that [the idea is] gaining traction, just based on my inbox, my voicemail,” said Stephanie Kelton, a leading proponent of a new theory behind deficit spending who served as an adviser on Sen. Bernie Sanders’s presidential campaign. She pointed to an uptick in inquiries from Hill staff, members of Congress and journalists.

To be sure, the debate is still a wonky sideshow for Democrats compared to flashier discussions about taxing the rich, as Ocasio-Cortez and Warren have advocated, and even many progressives are skeptical. But liberal politicians may come to embrace the idea that budget deficits are overstated as they increasingly face pointed questions about how they will pay for their costly proposals.

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Deficits have long been considered a drag on the economy, diverting private investment into government bonds instead of jobs and technology, and swallowing tax dollars into a mounting pile of interest payments. To avoid these effects, government spending is often framed like business spending: Costs should be offset by revenue.

But the philosophy that Kelton and others are pushing — dubbed “modern monetary theory” — views it differently. Governments, it says, create money, so they don’t even need to borrow any — they can spend as much as they like. The only limitation should be the threat of inflation, not insufficient revenue.

Under this theory, if the government did spend enough to stoke inflation, it would be counteracted not by the Federal Reserve hiking interest rates, as it does today, but by the president and Congress agreeing to raise taxes to pull money out of the system — assuming they would be willing to take that politically unpopular step. Interest rates would be pegged at a low level.

“We should be backing into the offset question, instead of approaching everything” as needing to be paid back, dollar for dollar, said Kelton, an economics professor at Stony Brook University in New York.

Kelton, who also served as chief economist to Sanders (I-Vt.) on the Senate Budget Committee, says lawmakers should simply ask how much government spending the economy can absorb without sparking inflation.

“If this was 2008, we could do a trillion dollars of infrastructure investment with no offset and everything would be fine,” she added. “As you get closer to full employment, the need for offsets increases.” Still, that “offset” would be based on supply and demand, rather than the cost of the program.

Warren, a presidential candidate who has proposed a “wealth tax” on the very rich, didn’t offer a specific opinion about modern monetary theory. But she called for a reconsideration of how spending and deficits are viewed.

“There are investments that produce real value over time, and our government accounting should take account of that,” she told reporters in a Senate hallway last week. “Investments in education, in infrastructure, pay off for our people and pay off for domestic businesses.”

She criticized Congress's “pay-as-you-go” rule, which requires spending to be balanced with an increase in revenue, suggesting an openness to increasing the deficit. But in the wake of expansive Republican tax cuts, most experts warn that now isn’t the time to further balloon spending.

“There’s a mentality on the left that since we just passed $2 trillion of tax cuts that they should get theirs as well,” Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget. “Two wrongs don’t make a right.”

“It’s dangerous when we’re in a situation where debt is already so high to talk about making it even higher,” he added. “I understand that folks don’t want to make deficit reduction a top priority right now, but to take an unsustainable situation … and build off of it seems like a massive mistake to me.”

Modern monetary theory, Goldwein said, doesn’t reflect reality. While the theory’s supporters say there’s currently no danger of runaway inflation, he said that’s largely because the Federal Reserve has established its credibility in being willing to stave off that threat.

“I don’t think we can use the example of the world we’re in today to understand the inflation constraints of tomorrow,” he said.

Jason Furman, who served as chief economist for President Barack Obama, also suggested that expecting Congress and the president to raise taxes to fight inflation was impractical.

Fighting inflation should be left to the Fed since that is the central bank’s mandate, Furman said, and for all its faults, it usually makes logical choices.

Fiscal policy — Congress’s job — “very often is completely insane,” he said.

Furman and former Treasury Secretary Larry Summers argued in a joint article last week that deficits don’t matter as much at the moment, since interest rates are low, making borrowing cheap, and because investors still have considerable appetite for U.S. debt.

“But [budgeters] should ensure that, except during downturns, when fiscal stimulus is required, new spending and tax cuts do not add to the debt,” they wrote. “This middle course would tolerate large and growing deficits without making a major effort to reduce them — at least for the foreseeable future.”

Under MMT, Democrats would still need to set priorities for many of the projects they want to pursue, like new infrastructure, particularly when the economy is faring well, Kelton said. But something like Medicare for All, which some analysts say could save the American people as much as $2 trillion, might actually call for more government spending to prevent job losses, she said.

“Think of this as GDP ripped out of the economy,” Kelton said. “So if you’re saying I’m going to do Medicare for All — we’re going to spend less — and we’re going to pay for it by raising taxes, what you’ve just laid out is a program of austerity.”