Washington Insider -- Tuesday

Modern Monetary Theory

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Trump FY 2020 Budget Again Proposes Farm Program Cuts

Reducing the premium subsidy for crop insurance, tightening down income qualifications, tightening farm program payment limits, altering U.S. conservation programs, eliminating a forage disaster program and changes to nutrition programs are all included in the Fiscal Year (FY) 2020 budget proposal for USDA, provisions that were rejected by lawmakers that were part of the FY 2019 budget plan. The plan would seek a 15% cut in USDA's budget while seeking a broader cut of 5% across the government to nondefense discretionary spending.

Farm program changes include ones similar to those rejected in the just-completed 2018 Farm Bill, including lowering the adjusted gross income (AGI) level to qualify for commodity and conservation program payments. The budget proposes lowering the AGI to $500,000 from the current $900,000 level. Lawmakers rejected efforts to lower the AGI cap to $700,000 during the 2018 Farm Bill process. The budget plan says the lower AGI cap would save $63 million in FY 2020 and save $1.3 billion over 10 years.

For conservation programs, the budget plan would target Conservation Reserve Program (CRP) to environmentally sensitive areas, limit the enrollment of whole farm fields (except for grasslands) and eliminate funding for signing and practice incentive payments (SIPs and PIPs), with the exception of the Conservation Reserve Enhancement Program (CREP). Those provisions would save $58 million in FY 2020 and generate savings of $706 million over 10 years. The plan would also limit CRP payments to 80 percent of the National Ag Statistics Service (NASS) county rental rates, generating $584 million in savings over 10 years.

The budget plan contains provisions that were rejected in FY 2019 spending plans eventually approved for USDA and expectations are that will be the case again this year, particularly with Democrats now in charge of the House.

USMCA Notification Coming From Trump Administration to Congress

President Donald Trump on Friday said he plans to send the new U.S.-Mexico-Canada Agreement (USMCA) to Congress very soon, which would start a 90-day clock for lawmakers to approve or reject the plan without any changes.

"Mexico, Canada is done. We will be submitting to Congress very shortly. And that is a great deal for the United States, so we are very happy about that," Trump told reporters.

Congressional sources believe it will be the second half of this year before both chambers of Congress vote on USMCA.

Washington Insider: Modern Monetary Theory

There is a kind of new idea circulating these days—although many of its elements have been around for a while, the New York Times is reporting this week. It says that in the past, “modern monetary theory” advocates have been a merry band of contrarians. If they taught a course, it might be called Everything You Know About Macroeconomics Is Wrong.

They hold that governments able to borrow in their own currency need not be constrained by budget deficits and debt — and can act more boldly than economists have assumed without negative consequences, the Times says.

Furthermore, NYT thinks that “something has changed recently. The modern monetary theory crowd is being taken a lot more seriously.” However, the Times cautions that reinventing the system in the world’s largest economy on the fly seems risky.”

The Times says ideas rooted in this approach show up in the Green New Deal and other initiatives of the left wing of the Democratic Party. And these ideas are increasingly being wrestled with — though skeptically — by leading center-left economic policy thinkers.

These include Nobel laureate and Times columnist Paul Krugman and the former Treasury secretary Larry Summers who have written disdainfully about modern monetary theory even as they accept some of its arguments and in practical terms have similar preferences for economic policy in the near term.

NYT also cites Stephanie Kelton, a leading advocate of the theory, who is challenging Krugman and Summers.

This debate so far has featured plenty of abstract macroeconomic theory as well as dueling rhetorical styles and no small amount of insider vs. outsider dynamics. The modernists are “insurgents” who view their antagonists as a calcified elite — who see modern monetary theory people as “gooey idealists.” NYT also considers Kelton and other adherents of the theory as “seemingly on a journey from outsider to insider.”

But for all the digital ink spilled on this topic on the pure economics of the theory, The Times says there has been surprisingly little discussion of the practical implications for how such policies would work.

For example, a core idea behind the theory is that Congress should spend money as it sees fit, constrained only by available real-world resources of labor and materials. In this model, inflation is the sign that spending needs to be reined in or taxes raised.

However, the Times thinks it might be too much to expect Congress to move with “foresight and wisdom” in applying the brakes at the right time—because it hasn’t in the past when elected officials displayed “exactly the opposite instincts of MMT advocates.” For example, in 2011, Congress demanded deficit reduction at a time of deflation risks and weak growth. And, in 1981, the Reagan administration and Congress enacted tax cuts and military spending increases at a time of double-digit inflation.

The Times says “anyone who has watched the sometimes off-the-wall questions at congressional oversight hearings of the Fed over the last decade would be unlikely to conclude that the lawmakers have a better understanding of economic policy.”

In addition, it says the ability of a country to borrow money in its own currency isn’t a permanent state of affairs. It’s a “credibility” that a country can gain and lose, as countless nations have over the centuries. The conventional view is that you attain that ability over time through low inflation, an independent central bank, a strong legal system and good governance.

A country that prints its own money has no need to default on its debt. But history offers many examples of the result of using money printing as a solution for a lack of private buyers for debt: a vicious cycle of rising inflation.

The MMT crowd will surely be prepared to explain why its approach wouldn’t end in catastrophe, the Times says, but focuses on a broader point. What’s being proposed is a fundamental reordering of how economic institutions and priorities work. “It would be nice to have some proof of concept before it is put in place in the largest economy in the world — also home to the world’s reserve currency.”

So, in a weird leap, the Times asks for a smaller country — with its own currency — to govern itself according to the theory’s principles in a “test.” It mentions possibly New Zealand, Norway, Switzerland, Sweden, Israel, and Singapore.

If those countries can design systems of economic governance in an MMT world — and achieve a higher standard of living then maybe the U.S. should scale it up to a larger country. Indeed, an intellectual shift on how much to worry about budget deficits is already well underway.

But the livelihoods of billions of people worldwide depend on the idea that the United States — with its centrality to the global economy and financial system — won’t botch things.

But, selling the U.S. public — and the world — on the capacity of the Congress to identify precise economic pressure points in time to “fix” problems seems to be reaching very far indeed, as the Times says. And, asking for an ideal “guinea pig” country to identify future “pot holes” for the U.S. seems like an even longer economic shot.

Most likely, we will be mostly on our own and will succeed or fail through our capacity to move into new theoretical territory in controlled, well managed ways that have served in the past, ignoring the radical and seductive alternatives and skeptical of the easy fixes, Washington Insider believes.

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