With the Congressional Budget Office projecting annual deficits greater than $1 trillion for years to come, many experts are calling for a renewed focus on the country’s fiscal path. But one contrarian economist says that the federal government could be running much larger deficits without running into trouble.
Stephanie Kelton, an economist at Stony Brook University who has advised Sen. Bernie Sanders and who is one of the leading proponents of Modern Monetary Theory, told Bloomberg TV’s Erik Schatzker Thursday that in her view the U.S. could increase its current deficit by about 50% without causing any immediate problems.
“We could safely increase the deficit, let’s say by another $500 billion or so, before we begin to see inflation accelerating to something that we would consider problematic,” Kelton said, citing research by analyst Philip Pilkington at the investment firm GMO.
The main thing to worry about is inflation, Kelton said, but the data show no problems in that area despite years of substantial budget deficits. Although standard economic theory says that increased federal borrowing should push inflation and interest rates higher, the opposite has happened over the last decade, signaling that there’s still plenty of fiscal space that could be exploited by policymakers to make public investments in education or infrastructure — or even for more tax cuts — before inflation becomes a problem.