AntiCapitalist MeetUp: government deficit is a myth in the eyes of Modern Monetary Theory
Modern Monetary Theory (MMT) can (but not will) save the US economy. What with the White House Council of Economic Advisors now reduced to one economist, it’s worth noting that one of their econometric models (Hassett) influenced the prediction that COVID-19 infections in the US would go to zero by June.
That is after all, the deconstructive goal for a democratic socialism, to ensure a heterodox economic revolution that inverts the liberal/neoliberal orthodoxy. This notes that a progressive Council of Economic Advisors could actually guide a more regulatory US economy.
For example, Modern Monetary Theory is not a panacea, but is one of many fluid communities of scholars. This community has evolved methodological stops on a path that moves the US economy away from “antiquated notions of macro modeling (Krugman), inflation (Summers), and debt financing (Rogoff).” One strict version of academic monetary theory was influenced by “Uncle Miltie” Milton Friedman, but a more anti-capitalist MMT has developed with a modest academic niche and an entry point into the Bernie Sanders campaign.
I have yet to finish the new Stephanie Kelton book which attempts to bring MMT to a wider business audience in this election year, but this diary reminds us how heterodox political economics (post-Keynesian mainly) is essential to effect global and national economic change as another recession is here with Trumpism poised to crash the US economy. The sink that collects carbon is not identical to the one that collects the money supply, because of the problem of value.
Capital and labor are reconstructed in MMT because in terms of stock and flow, capital’s difference from money resembles water and hence it can sublimate (much like finance capital) and freeze (much like comparative statics), as well as embody liquidity of transformation in the water cycle (evaporation, transpiration, condensation, precipitation, and runoff).
Capital’s temporality distinguishes itself from money’s short-term tangibility, but as a commodity form, it represents a “reflection of an antagonism which lay deeper, at the level of the economic conditions of existence”. We only see it in those major crises that mark the path of the capitalist mode of production.
Nouriel Roubini was the only mainstream economist to accurately predict the 2007-8 great recession but will “History be repeated until history is defeated” in the coming years. Here he hedges his prediction for the post-Trump economy:
Unfortunately, even if the Greater Recession leads to a lackluster U-shaped recovery this year, an L-shaped “Greater Depression” will follow later in this decade, owing to ten ominous and risky trends.
- The first trend concerns deficits and their corollary risks: debts and defaults. The policy response to the COVID-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.
- A second factor is the demographic time bomb in advanced economies. The COVID-19 crisis shows that much more public spending must be allocated to health systems, and that universal health care and other relevant public goods are necessities, not luxuries.
- A third issue is the growing risk of deflation.
- A fourth (related) factor will be currency debasement.
- A fifth issue is the broader digital disruption of the economy.
- This points to the sixth major factor: de-globalization. The pandemic is accelerating trends toward balkanization and fragmentation that were already well underway.
- The backlash against democracy will reinforce this trend.
- This points to an eighth factor: the geostrategic standoff between the US and China.
- Worse, this diplomatic breakup will set the stage for a new cold war between the US and its rivals – not just China, but also Russia, Iran, and North Korea.
- A final risk that cannot be ignored is environmental disruption, which, as the COVID-19 crisis has shown, can wreak far more economic havoc than a financial crisis.
I recently attended a webinar that addressed the public finance implications of MMT whose video is included below.
Monetary Finance in the Age of Corona Virus: MMT and the Green New Deal
Treasuries and central banks are scrambling to find ways to pay, not just for climate change policies, but also for social insurance to compensate the millions of workers who have been asked to sacrifice their livelihoods for the social good.
Line Up: Warren Mosler, Narayana Kocherlakota, Ann Pettifor, Vítor Constâncio, L. Randall Wray, Stephanie Kelton, Laurence Kotlikoff, Megan Greene, Roger E. A. Farmer
The world is going through a remarkable transformation in the aftermath of an unprecedented shut down of economies all over the globe. Before the crisis there was already significant debate about how to pay for the costs associated with the transition to a low carbon environment. That debate has intensified as treasuries and central banks are scrambling to find ways to pay, not just for climate change policies, but also for social insurance to compensate the millions of workers who have been asked to sacrifice their livelihoods for the social good.
complete Zoom VIDEOs: www.rebuildingmacroeconomics.ac.uk/…
For more content on MMT: Christian Reilly Patricia Pino do a whole podcast series about MMT, including interviews with Warren Mosler, Phil Armstrong (mentioned by Roger at the beginning), Bill Mitchell, Pavlina Tcherneva and many more http://www.pileusmmt.libsyn.com
Further link from Zachary Kopelman: There is also Money on the Left which is a bit more transdisciplinary than MMT Podcast but still quite good mronline.org/…Inflation: ftalphaville.ft.com/…
A recent article by John Weeks points the way to identifying some of the problems for MMT analysis, even as it’s largely a critique of UK Treasury policy.
Acceptance of the neoliberal hypothesis and its implied framework of an otherwise stable economic system led to the reduction, trivialization, of monetary policy to interest rate management. The pre–neoliberal emphasis on central banks buying and selling public bonds faded to obscurity. This earlier approach derived from an analysis that considered interest rates an ineffective tool for short term economic management. In place of interest rate adjustment central bank bond transactions sought directly to increase (bond purchases) and decrease (bonds sales) bank liquidity.
The bond transactions could be used to reinforce the effects of fiscal policy, making macroeconomic policy more effective. As I explain in detail in my new book Debt Delusion, governments “live within their means” by use of taxation and borrowing to fund expenditure. In a democratic society social necessity determines public expenditure. Rational governments use taxation and borrowing to fund those expenditures in a manner that maintains economic stability and fullest possible utilization of resources.
In times of extreme economic and social need such as wars, recessions and the current covid-19 crisis, public borrowing serves as a major instrument to maintain stability and protect health and livelihoods. The role of borrowing involves more than funding, though that is its immediate purpose. The interaction of spending — fiscal policy — and borrowing — allows monetary policy to play a central role in economic stabilisation.
Recalling my undergraduate macro-course and the introductory unit on Stock-Flow analysis, the importance on accurate accounting frameworks is at the basis of MMT which necessitates a more ecological approach to a materialist analysis. MMT is like the Buddhist river raft parable, it claims that it is a theoretical position rather than a policy prescription and it does, in the face of yet another neoliberal economic failure, a entry point to paradigm shift on integrated resource analysis of the stocks and flows of an economy. As a research program it will need much more applied research and modeling in an interdisciplinary context.
A number of conceptual approaches are potential beneficiaries from MMT approaches, where in the short-run re-regulation should return to the economy.
Stock-Flow Consistent (SFC) models are a family of macroeconomic models based on a rigorous accounting framework, which guarantees a correct and comprehensive integration of all the flows and the stocks of an economy. These models were first developed in the mid-20th century but have recently become popular, particularly within the post-Keynesian school of thought.
While ecological aspects were not considered by post-Keynesian authors like Godley or Lavoie, SFC models are now widely used within Ecological Macroeconomics. In addition to cash flows, resource or energy flows and stocks or an ecosystem with renewable resources are modeled. References are made in particular to the flow-fund models of Nicholas Georgescu-Roegen. Other approaches integrate concepts of SFC models into agent-based modeling (ABM) or input–output models.
“Kalecki: Economics is the science of confusing stocks with flows”
The regulatory problem is always more than simply (disincentivising greed / capital accumulation) in terms of the social structure of accumulation, but is also a class problem that ultimately must redress economic inequality. It is not simply about taxing or even eating the rich, as much as we have been angered about the nearly one trillion dollar bump the ruling class will gain from the current crisis. Would that we could get greater gains in such class consciousness prior to the US November election.
The big question is how to cut the income (and separately the wealth) of the richest people on the planet. Taxing the rich, appealing as it is, is not the most effective way to reduce their incomes. Reducing the incomes of the rich can best be accomplished by cutting the workweek, with no cut in pay for the workers. What now is distributed to the owners as profit and to CEOs as income, will become pay for the workers. This places the fight for environmental and economic justice at the workplace.
Reciprocity and trust remain the key problems in the wider problem of societal debts related to key historical facts in the US economy related to inequality and capital formation, such as slavery reparations.
In this new book, Max Haiven argues that capitalism's economic vengeance explains the culture and politics of revenge we see in society more broadly. Moving from the history of colonialism and its continuing effects today, he examines the opioid crisis in the US, the growth of 'surplus populations' worldwide and unpacks the central paradigm of unpayable debts – both as reparations owed, and as a methodology of oppression.
This is where it can get murky when fiscal policy remains tethered to prior orthodoxy. It goes beyond the digital printing of money to reconceptualizing public debt. Chartalism is one way of rethinking that problem, coincidentally during a vital period when there were many competing theories for the fiscal role of the state.
For central banks that already print money to buy assets, so-called helicopter drops could follow — directly funding state spending with newly created money that’s not offset by government IOUs, or even by feeding cash direct to households.
Such options remain taboo to some extent but policymakers have come mighty close to them during the latest shock. The idea isn’t new; it was coined back in the 1960s by Milton Friedman as an option to battle deflation, and sounds like a plausible option given stubbornly low inflation.
Then there’s the middle ground of modern monetary theory which some say we are already unofficially experiencing. Proponents posit governments should just spend on healthcare, education or infrastructure without worrying about debt levels, as long as low inflation allows central banks to keep borrowing costs low.“Currently the linkage between the fiscal and monetary side is not explicit,” said Guy Miller, chief market strategist at Zurich Insurance Group. “(But) this is the direction we are moving in.”
It is certainly clear that we cannot fetishize any one set of theories, only appreciate that there are multiple modalities available to assess the problem of managing modern economies. Money is a (more) flexible instrument, but the underlying implication is that state discipline is essential to its monetary policy. For example, the institution of junk bonds needs even greater regulation. Capital and ideology as Piketty indicates, in historical wealth formation remains the problem.
In a new book The Deficit Myth, Stephanie Kelton explains what is the most important conclusion to draw from MMT – namely, it is a myth that if the government runs large budget deficits (ie spending more than it gets in tax revenues) and borrows the difference, eventually public sector debt will become unsustainable (ie debt repayments and interest will become too much for the government to deal with), leading to sharp increases in taxation or cuts in public spending and possibly a run on the national currency by foreign creditors.
Kelton says that this argument of the ‘Austerians’ is a myth. In her book, she brings forward the main arguments of MMT: first, that “governments in nations that maintain control of their own currencies — like Japan, Britain and the United States, and unlike Greece, Spain and Italy — can increase spending without needing to raise taxes or borrow currency from other countries or investors.” The state (national government) controls the unit of currency accepted and used by the public, so it can create any amount of that currency to spend. So the state need not issue bonds to borrow from the private sector, it can just digitally ‘print’ the money. Indeed, that is what is happening right now during the COVID-19 pandemic, the argument goes. The US administration and others are spending trillions on paying workers to stay at home and businesses to go into hibernation. Yes, it is financing some of this by issuing bonds, but it is the Federal Reserve or the Bank of England that is the main purchaser of these bonds, so in effect ‘printing’ money to spend.
The argument of MMT and Kelton is that this is a new way of looking at public finances and monetary policy. You see, what nobody has realised until the MMT guys were listened to is that, historically, “It’s the state’s ability to make and enforce its tax laws that sustains a demand for them, which in turn makes those dollars valuable.” This is the theory of chartalism, developed by a German economist of the 1920s, George Knapp and others, that money has emerged in modern economies as the result of the state needing to spend and so needing to invent a unit of currency that it can tax people in.
So the demand for money by people has been created by the state in order to pay taxes. Money is created by the state and then taken back (destroyed) by taxation. So, you see, the state controls money and therefore can control the modern economy. It can spend without the constraint of rising debt.
Kelton says that “In 2020, Congress has been showing us — in practice if not in its rhetoric — exactly how M.M.T. works: It committed trillions of dollars this spring that in the conventional economic sense it did not “have.” If that is right, it is not good news for MMT. For will all these trillions deliver more output and more resources to meet social need? Much of this largesse from the ‘digital printing’ of money into bank reserves will not end up as more output, employment and investment. Most of the trillions are either being hoarded by the big companies, while raising more debt at zero rates; or being invested in the stock and bond markets for capital gains. It will not go into increasing capacity in productive sectors, because the profitability of capital is very low – as I have shown in other posts. MMT has nothing to say about this, instead resting on its faith in increasing the quantity of a state currency unit. Marxist theory does: hoarding money tells you that money has become a fetish, the objective in itself, rather than to be used as capital to extract more surplus value from the exploitation of labour in production.
It may be an ‘Austerian’ myth that governments cannot run deficits and need to ‘balance the books’. But it is an illusion to reckon that the crisis-prone nature of capitalist production can be ‘managed’ by means of ‘money artistry’, that is, by the manipulation of money, credit and government deficits. That’s because the structural causes of the crises and under-capacity lie not in the financial or monetary sector or the fiscal sector, but in the system of globalized capitalist production.
For those trained in more orthodox “mainstream” methods, Rodina’s paper is useful to see how very specific programs like GND could gain from its methodological viewpoint. His challenge is that the scholarly program has not yet reached the Kuhnian moment of scholarly incommensurability but as we know, heterodox political economy has labored for nearly two centuries against an orthodoxy largely sponsored by capitalism itself.
I, for one, have learned a lot. The MMT literature explores procedural, accounting, and institutional aspects of modern monetary institutions and their coordination with the fiscal authority.
An excellent bibliography of MMT can be found here
The analysis naturally leads to a powerful message which is at the core of MMT: a government with a sovereign currency can always afford to pay in the currency it prints and it is not subjected to the same financial constraints of a household.
In other (more poetic) words, the government deficit is a myth. #DeficitMyth
My reaction, as I suspect one also from any economist with mainstream training, has been: well, we knew that already. In fact, it is almost a trivial conclusion.
But as I kept thinking about it, I gradually began to realize how liberating that message is.
Just think about it. Do we want to save the planet from climate change with a #GreenNewDeal?
We should not worry about how to pay for it, the Government always can.
We just need to find the political will to do it.
In exposing the “affordability” argument as devoid of any accounting, procedural, and institutional underpinnings, #MMT casts itself as a seductive cry to political activism by calling for “the birth of the people’s economy.”
Energized by the call, I set out to investigate the economics of #MMT. In the #MMTBluePaper I argue that the economic theory in #MMT is still embryonic. The crux of the problem: the distinction between nominal and real magnitudes is often vague.
A quick refresher: “nominal” are things measured in the unit of account (e.g. dollars, euros, etc.); “real” are the same things measured in stuff – goods and services – that ultimately affect people’s well-being.
As a matter of financial accounting, #MMT’s propositions are correct, if not tautological, when applied to nominal magnitudes: the public sector’s deficit is always equal to the private sector surplus. “To the penny,” indeed.
L. Randall Wray puts in Copernican terms: “This reverses the orthodox causal sequence. […] The deficit spending by the government provides the income that allows the nongovernment sector to run a surplus.” Modern Monetary Theory, page 106, 2015.
In terms of nominal income, the statement is an accounting identity.
In terms of real income, it is a big deal.
The ultimate question is then when and how the public deficit/private surplus turns into higher real income, and thus higher people’s well-being.
In the paper, I design simple economic environments featuring the foundational elements of #MMT, and obtain explicit conditions on individual behavior, technologies, and markets for the government deficit spending to increase real income.
The upshot: the government must have exclusive access to a “technology” – broadly interpretable as a way to either directly produce, coordinate, regulate, etc. — that is superior to that available to the non-government sector. And the government must be credible.
A related insight is that, in the presence of a severe financial friction, typical of monetary production economies, the government’s deficit provides a financial instrument that allows resources to flow to their most productive uses.
Other environments may well indicate alternative, and possibly markedly different, conditions. The point here is that being explicit about assumptions facilitates the criticism of a theory and its progress (or dismissal).
A couple of concluding thoughts. I am grateful to #MMT because it has led me to question economic propositions that I took for granted and to put them to the test of an alternative approach.
I have also experienced the frustration of getting close to understanding the economics of #MMT, only to have the (unstated) assumptions changed under my feet. I fear the same frustration has kept many genuinely interested economists away from a fuller engagement.
I think a better way can be found. The #MMTBluePaper is my two cents to the cause.
At the same time, my reading of the MMT academic literature suggests that MMT has not yet provided a fully coherent theory of the macroeconomics of government intervention that can persuade genuinely interested mainstream academic economists and policymakers. To my knowledge, there are no scholarly works that offer clear assumptions and explicit results of when the deficit of the public sector (surplus of the private sector) can be welfare improving, taking into account the behavioral response of the economic actors involved, and specifying a transparent mechanism of price determination.
Here is the link again: drive.google.com/…
A shout out to @mileskimball who has encouraged me to work on this project.
There are more video and audio introductions to MMT that are available and one hope that there will be greater discourse on this within the Democratic party, given that there are a majority of corporatist/centrists in the DNC and the convention committees.