My Brain Hurts

My Brain Hurts

You'll think me mad, but I've allowed myself once more to be drawn into an economic discussion with a "Modern Monetary Theory" enthusiast, because I was so startled to read that a solid bunch of progressives out there believe that the government deficit is not only a good but an essential thing for the welfare and happiness of Americans.

First of all, I've got to link to last year's Onion video on "The Money Hole" (h/t to today's Daily Caller for reposting it), which perfectly captures the lunacy of most political/economic discussions I've ever tried to listen to:

Now back to MMT: I take it the idea is that all private-sector financial transactions balance out to zero, which is Bad Thing, so the Government/Treasury/Central Bank injects new net financial transactions into the economy by spending more than the government taxes, which is a Good Thing. I asked why, in that case, the government shouldn't make the deficit even more fabulously beneficent by spending with greater abandon and collecting no taxes at all. The answer came back that that would cause inflation, a Bad Thing. What's more, without taxes, there would be no demand for the U.S. currency, because no one would believe it had value, just as my personal I.O.U. has no value if I have no visible means of future support. So why is a deficit a Good Thing, again?

And why is it not a Good Thing that all private-sector financial transactions net out to zero? Isn't that another way of saying that part of the private sector (say, older people who've amassed assets for retirement) is always lending to another part of the private sector (say, younger people who are starting businesses)? Why shouldn't it balance? And what, in the name of all that's comprehensible, would any of this have to do with the dream of full employment provided to us by a benevolent government?

I've never been schooled properly in economics. It was one of those things I never even considered studying in college. Now I'm completely at sea, trying to read up on this stuff. Can someone tell me whether MMT is complete lunacy, or is it worth trying to read more about it until I can make sense of some of the concepts? Because reading some of the links I've been sent to really makes me feel like I'm trying to understand the works of Joseph Smith, but without bringing sufficient faith to the task.

My husband recommended Thomas Sowell's excellent text, Basic Economics, to make up for my inadequate formal education, and I'm enjoying it thoroughly, because it's written in something I recognize as English. In the meantime, I see S&P has "revised its outlook" on the U.S. sovereign credit rating, perhaps preparatory to downgrading its AAA status:

Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.