The Left plans an experiment to pay for the Green New Deal

Summary: The Left plans to pay for the Green New Deal with an untried economic theory (as usual, we are their lab rats). That is, one never successfully tried (e.g., the Assignats of the French revolutionary regime failed badly). Here economist Ed Dolan discusses modern monetary theory (MMT). How does it differ from mainstream economics? Is it a cornucopia of money? Originally posted in 2012. But fringe theories never go away (MMT has century-old roots in Chartalism). Part one of two.

“Everything Old Is New Again.”
— Song by Peter Allen and Carole Bayer Sager (1974).

Ed Dolan explains modern monetary theory (MMT)

This is a follow-up to a post about the Federal debt
by William K. Black (Associate Professor of Economics and Law at the University of Missouri – Kansas City).

I have been reading this lively thread with great interest. I do not think of myself as an MMT advocate, and I gather that most of the commenters agree, yet I keep seeing them passionately claim as uniquely “MMT” views that are completely commonplace and that I, as a “mainstream” economist, have always taught as obvious truths. For example, Ikonoclast wrote …

“A key MMT view is that taxes do not pay for expenditure. In one sense this is right. In another sense it is wrong but more of that later. MMT takes the view that the national budget creates all the dollars of expenditure for that year at the time the budget is brought down. MMT further states that taxes, when collected, extinguish the dollars thus collected”

Well, it happens that I am in the middle of teaching a monetary economics course right now, and tomorrow’s lecture addresses just this subject. One slide in my lecture (a slide that has been there for years) contains a set of T-accounts that demonstrates precisely this point: Collection of taxes extinguishes money, spending by the Treasury creates money, and when you consolidate the two T-accounts, the two transactions net out to no change in money. In exactly that sense, as Ikonoclast points out, the “MMT” proposition is both right and wrong.

Surprise, surprise! I’ve been teaching MMT for years and didn’t even know it.

Ikonoclast is right on the mark in saying that we have to distinguish between mainstream economics – here I mean truisms like “assets = liabilities + net worth” – and “man on the street” (MoS) economics. The trouble is exactly that MoS does not understand the economics of any kind very well, including the truisms.

Here is a perfect example: Sometimes I take my students to a “money museum” set up by the central bank of the country where I am teaching. Among other displays, there is a cube, about 18″ on a side, that contains paper bills in the local currency amounting to 1 million currency units. When I get back to the classroom, I ask my students the following question: where do the banknotes in that stack in the museum appear on the central bank’s balance sheet?

Now, these are undergraduate students, still teenagers, and most of their preexisting knowledge is of the MoS school. 90% of them answer that the banknotes in the museum should be entered on the Central Bank’s balance sheet as a 1 million unit asset. The other 10% – the ones who know a little bit about how central banks work – answer that the banknotes should be entered as a 1 million unit liability. Of course, both are wrong! The correct answer is the banknotes in the museum are just a stack of paper and do not appear on the CB balance sheet at all until they are issued to the public in some way, for example, through an open market operation, or transferred to the Treasury which subsequently spends them on goods and services.

I can see from the “taxes extinguish money” thread here that members of the “serious” subset of MMTers agree with me that banknotes stored by the Treasury or CB are neither assets nor liabilities of the government, they are “nonmoney”, just paper. What many contributors to this discussion thread fail to realize that us “mainstream” economists know that and have always known it, along with many other “uniquely MMT” propositions.

At the same time, I would be willing to bet a large stack of colorfully printed paper that many participants in this discussion would have given the wrong answer right to my trick question about the banknotes in the museum. Clearly, there is an MoS version of MMT as well as the serious version.

The same goes for the view of whether sovereign governments can “go broke.” I think all mainstream economists recognize that there is a sense in which the answer is yes and a sense in which it is no. In the sense that they can always create new money to settle any financial obligation that has a fixed nominal value in their own currency, the answer is, almost trivially, that no, they cannot go broke. On the other hand, they face the inflation constraint, and under conditions of hyperinflation, governments can “go broke” in the sense that they cease to be able to buy real goods and services with any finite nominal amount of currency.

Zimbabwe is a perfect case in point. It had a sovereign currency and did not blush to print octillion dollar banknotes, but eventually the people they tried to buy goods and services from just said “no thanks, I’d rather keep this loaf of bread than sell it to you for 1 octillion dollars.” Instead, they just turned their back on the government and used substitute currencies, mostly euros and rand, for day to day transactions.

The government ranted “no, you can’t do that! This is our sovereign fiat currency! You have to use it!” No one paid any attention. The government ranted “you have to pay your taxes and you have to pay them in Zimbabwe dollars!” People just said, “why should we pay taxes to you bunch of clowns?” and turned their back again. So the Zimbabwe government went broke despite its mighty printing presses. Seriously, I’d be very interested to read a good MMT analysis of the Zimbabwe hyperinflation. Know of any?

Ikonoclast is again right on the mark when he writes “It leads one to wonder why MMT advocates are so keen to make odd-seeming claims to emphasize their difference from Keynesianism in general. Perhaps one can put it down to what Freud called the “narcissism of minor differences” {see Wikipedia}.

MMTers seem to share this narcissism of minor differences with some other small schools of economics. For example, I have hung out a lot with members of the Austrian school, and even edited a book once called The Foundations of Modern Austrian Economics (see it here and here). I like these Austrian guys, they are smart and have good ideas, but wow, are they ever heavy into the narcissism of minor differences. The sad thing is, although it gives them some kind of boost to their self-esteem, it hurts their ability to convince the world at large of the validity of that subset of their ideas that are both sound and original.

In the above-mentioned book, I cited Milton Friedman as saying “There is no such thing as Austrian Economics – only good economics and bad economics.” (Friedman did recognize that Austrians – for example, his Chicago colleague Hayek – had many good ideas.) I would say very much the same thing about MMT.

See part two: Can we happily borrow our way to a Green New Deal?

About the author

Edwin G. Dolan is a Senior Fellow at Niskanen Center (Ph.D. from Yale). He was an Asst. Prof. of Economics at Dartmouth, and later on the faculties of U of Chicago, and George Mason U. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. He has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment.

During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington’s San Juan Islands.

His publications include TANSTAAFL, the economic strategy for environmental crisis (1971) and Introduction to Microeconomics (2016). Also, see his posts at Roubini’s Economonitor.

About Modern Monetary Theory (MMT)

MMT is best known for stating that governments can print far great amounts of currency without ill consequences than conventional theory suggests. It is in one sense the mirror image of the “austerian” (not Austrian) obsession with gold and inflation. They are bookends, in a sense.

Many well-respected economists advocate this theory. Such as my fellow author in the old days at Roubini’s Economonitor L. Randall Wray (Prof Economics at U of Missouri-Kansas City); see his articles here. See these boosters’ articles about MMT and the limits of monetizing the debt.

• “Deficits Do Matter, But Not the Way You Think“ by L Randall Wray, 20 July 2010.
• “Deficit Doves Meet the Deficit Owls“ by Stephanie Kelton at New Economic Perspectives, 21 July 2010.
• “Soft Currency Economics” (2008) — ebook by Warren Mosler (hedge fund manager), 32 pages.
• Seven Deadly Frauds of Economic Policy (2010) — ebook by Warren Mosler, 63 pages.
• “MMT and Why Historians Need to Reclaim Studying Money” by Rebecca L. Spang (Prof of History at Indiana U). Also, see a response by Maxximilian Seijo.

Here are two clear explanations of MMT by Paul Krugman (not a fan of MMT).

1. Deficits and the Printing Press (Somewhat Wonkish)
2. MMT, Again

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1. What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!
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3. Harsh truths about the Federal debt, showing how Left & Right lie to us.
4. Today’s mythbusting: the Fed is not suppressing interest rates.

See the great economic challenge facing America

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