Since the federal deficit was a central (and, in my view, misguided) focus of both of the two recent political conventions, it seems like a good time to revisit the Modern Monetary Theory (MMT) perspective on the deficit (in what will be my first post since finishing up a two-month project that left me with no time for blogging).
The timing is also good (and my job a lot easier) because I can refer to several very good blog posts that have addressed this issue in the past few days.
In a post at New Economic Perspectives (NEP), J.D. Alt critiques a key premise underlying today’s economic conventional wisdom, the acceptance of which he claims is “the principal dilemma of the progressive cause.”
In Alt’s view, progressives have seriously weakened the power and public embrace of their arguments by “allow[ing] a bedrock conservative premise to go so long unchallenged.” In fact, he says, “progressives themselves have either overtly or implicitly agreed with the premise, making it virtually impossible for them to effectively advocate their goals.”
The faulty premise, says Alt (and other MMT advocates) is that “The money for federal government spending must come from the Private Sector, either through the collection of taxes and fees, or government borrowing.”
Alt points out that this premise, a foundation of today’s dominant “economic Common Sense,” ignores a key piece of economic reality:
Where does the money come from that the people earn in the first place? If we add that to the equation, the picture changes in a surprising way: The money that people earn, it turns out, is created by the sovereign government itself. In the modern U.S. economy, this is paper fiat money that is issued by the Federal Reserve as the legal exchange currency of the Private Sector. And what is central to the progressive’s cause is the little understood and seldom discussed fact that to get this fiat currency into the Private Sector—where the banking industry can leverage it with loans, and businesses can use it to make payrolls, and households can earn it for their daily transactions—the sovereign government first has to spend it.
A related point is made by Matthew Yglesias, in a post entitled “We’re Not Out of Money.” Referring to federal deficits and their implications, Yglesias reminds us that:
[I]t’s simply not true that we’re out of money. Many states and municipalities are up against hard budget constraints, but the US government has the ability to create US currency in unlimited quantities. It hasn’t run out of money and won’t ever run out of money. It would be nice for people to understand this point separately from controversies over whether public sector programs are wise or just.
In another NEP post, MMT economist Stephanie Kelton praises Yglesias for taking on the powerful economic myth that “the U.S. Government is Out of Money.” She also notes that a recent post by Business Insider’s Joe Weisenthal takes on a related and also-powerful myth, “that a government surplus is a sign of fiscal responsibility.”
In his graph-filled post (and yes, there’s also an equation), Weisenthal argues that the budget surplus during the Clinton years “destroyed the American economy.” As he explains:
If the government is in surplus, it means that the government is taking in more cash than it’s spending, which is the opposite of stimulus. It’s also well known that the US trade deficit exploded during the late 90s, which means that [it] was also a huge drag on GDP during [the Clinton] years. So the trade deficit was subtracting from GDP, and the government was sucking up more money from the private sector than it was pushing out.
There was only one “sector” of the economy left to compensate: Private consumption. And private consumption compensated for the drags from government and trade in two ways. First, the household savings rate collapsed during the Clinton years. And even more ominously, household debt began to surge.
Weisenthal quotes from an email exchange with Kelton, who points out that:
The private sector cannot survive in negative territory. It cannot go on, year after year, spending more than its income. It is not like the US government. It cannot support rising indebtedness in perpetuity. It is not a currency issuer. Eventually, something will give. And when it does, the private sector will retrench, the economy will contract, and the government’s budget will move back into deficit.”
Within the myth-busting efforts of Yglesias, Weisenthal and the growing ranks of MMT advocates, Kelton sees an “empowering message.”
As word spreads, elected officials in both parties will lose their primary excuse for inaction on a whole range of neglected and underfunded programs. “I’d love to help, but I’m all tapped out,” simply won’t sell. Nor will the desperate calls for “shared sacrifice” and “entitlement reform” in the name of fiscal responsibility.
Picking up on this point in his post, Alt envisions a policy debate very different from the one going on today between the two major political parties. As he points out, when they operate within today’s myth-based economic paradigm, which draws faulty analogies between federal government deficits and debts incurred by private households and businesses, progressive arguments face a fundamental and unnecessarily uphill battle. In an MMT-based economic paradigm, things would be different, he says:
Instead of arguing about which national program we can no longer afford, we’d be debating which national program should be expanded, why it should be expanded, how it should be expanded; we’d be debating about what we want to become, rather than about who’s to blame for what we cannot be.
Alt closes his post with a call for a new MMT-informed “common sense” among progressives, one that abandons artificial notions of monetary scarcity and wrongheaded notions of austerity-based “solutions” (which actually aggravate recessionary cycles), and instead focuses on mobilizing real human, natural and technology resources in the service of human needs and aspirations.
So what are the progressives waiting for? Why not summon a trumpeting fanfare: Common Sense has a NEW sense, and it tells us we actually do have the dollars necessary to make the world we live in a whole lot better for everyone.