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.
Quoting the Alt piece –
“”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.””
While I also want the progressives to recognize the socio-economic advantages that are available through the proper use of the monetary system – Sorry, but this is all false.
The government never spends currency into the monetary / economic system.
Currency is printed BY the Treasury, FOR the private bankers, who collateralize it into their vaults for use by the public. It is a debt upon entering circulation and remains a debt.
Only the coins of our entire money supply are issued without debt.
The other false notion contained in the quote is that FIRST the government must spend the money – not currency – that the people use to pay taxes. This is false. The private banks issue all the money, including that used to pay taxes.
Trying to convince progressives that command of the monetary system is a paramount objective in order to achieve the social justice that we all crave cannot be done by the system of beliefs based upon reserve accounting of the banking system.
Banks create the money.
They then leverage their own creations.
The solution to garnering the control of the money system is laid out in progressive Congressman Dennis Kucinich’s Bill to nationalize the Federal Reserve and the money system powers back to the Congress and the people
Click to access BILLS-112hr2990ih.pdf
That used to be the goal of all progressives.
Thanks for the comment. I’m only generally aware of this bill (not its particulars), but I can say that I’m pretty comfortable with “nationaliz[ing] the Federal Reserve and the money system powers back to the Congress and the people.”
And though I’m not an MMT expert, my sense is that an MMT perspective is not inconsistent with this approach. In fact, my sense is that this is part of the message of a NEP post by Dan Kervick that I discussed awhile back. If you check it out, please share your thoughts on how it relates to your perspective and the policies that would be implemented by the Kucinich bill.
I am sorry but I cannot agree with any of these positions. A debt based fiat currency (which is not money) is immoral on the grounds of slavery. At what point is a bank or government allowed to issue notes of currency (in an ever-inflationary manner) backed with the servitude of its citizens? Born into debt and issued as a security on the market with no control of the “money” which is printed off by a power which enslaves all man?
To me the MMT theory is a Phoenix rising from the flames which have burned the erroneous and flawed Keynesian economics of yesterday (and sadly still here today). I do not understand the progressives, who seek social freedom and equality, yet wish to economically enslave the population. All fiat currencies inflate, and it is the poor which are the most dramatically affected in this social engineering scheme. As prices increase, it is the poor who have the inability to compensate for price adjustments because of their close-to-subsistence levels. Hard money is the guard against inflationary tendencies and the people should be allowed to decide what they wish to use as money, not imprisoned yet again by the monetary system of a monolithic all knowing social engineer known as the government.
Hold-on to your fiat pieces of paper and I will hold-on to my silver and gold.
We will see what the world wishes to call “money” as history has been in my favor.
Thanks for the comment Alan. It’s clear that we have very different economic perspectives that are unlikely to be resolved in a series of blog comments. That being said, I’ll respond to you on a few points.
I don’t understand, nor see any strong empirical or logical basis for your assertion that fiat money is a form of slavery, especially relative to other forms of money, including systems based on scarce commodities like gold, which historically have often been mined in severely exploitive ways (often with slave labor) in countries around the world. I see no basis to claim that commodity-based money frees human beings and fiat-based money enslaves them. If a government that issues sovereign non-convertible currency and whose “debt” is always in that currency, can always pay off its “debt” by creating more of that currency (if it chooses to, without raising taxes), then how are it’s citizens “born into debt” and condemned to servitude?
You assert that fiat money inflates and that this particularly hurts the poor. But I’d point out that, in the wake of the 2008 financial crisis, when federal budget deficits and Fed-funded money creation have both increased dramatically, the economy has been experiencing virtually no inflation. Empirically, I don’t see a strong case for your argument, or the economic model it implies.
I do think that reliance on monetary expansion (per recent Fed action) can tend to inflate asset prices (e.g., stocks, commodities) and is not a very good strategy for stimulating economic growth during the kind of “balance sheet” recession we’re now experiencing. I’m more in favor of fiscal spending approaches such as the Job Guarantee program advocated by leading MMT thinkers. It seems pretty clear to me that providing employment to those involuntarily unemployed is a productive use of money. As to it’s impacts on inflation, I’d refer you to Bill Mitchell’s blog, perhaps starting with this relatively recent post.
I suspect you believe that governments are incapable of being “productive” in a meaningful way. But, again, I don’t see empirical basis for this belief. Yes, government spending and operations can be (and often are) inefficient, but they are not inherently and overwhelmingly so. And it’s also true that private entities can be (and often are) inefficient and unproductive. And, while I’d concede that the latter have, in many cases, more impetus toward efficiency due to market forces, I don’t see this as a basis for a black & white statement claiming that private market-based entities/spending is “good” and public/government entities/spending is “bad.” To me, they both have their place in the world, and the appropriateness of each should be based on careful analysis of the specific reality, not an ideology, regardless of where that ideology falls on the political spectrum, or how emotionally satisfying it may be to believe we are “right” and “good” and others are “wrong” and/or “bad” (and I believe that this applies to ALL ideologies, whether left or right and whether political, economic, religious or whatever).
Markets are an effective mechanism to direct a lot of human activities, but I don’t believe they are always the best one, particularly if they are characterized by significant distortions from optimal conditions related to market entry, pricing transparency, externalities, etc. And I’d argue that, in today’s economy, these deviations tend to be widespread and substantial.
And speaking of efficiency, I think Bill Mitchell makes compelling arguments that the macroeconomic inefficiencies associated with unemployment are much greater than the aggregation of microeconomic inefficiencies that might be associated with government-funded employment or other microeconomic inefficiencies claimed by those who believe that “unfettered” private market activity is the solution to our economic and social problems. To get a sense of this, I recommend this video, where Mitchell explains his Job Guarantee ideas at a European conference. His discussion of the relative size and significance of macro inefficiencies vs. micro inefficiencies starts at around 7:30. Mitchell also addresses this issue in this blog post.
And, in case you’re interested, Mitchell addresses the gold standard here.