Summary: The Left plans to pay the fantastic cost of the Green New Deal using an untried economic theory (we will be their lab rats, again). That is, 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, I rerun it now for the presidential campaign. But fringe theories never go away (MMT has century-old roots in Chartalism).
“There is no such thing as Austrian Economics. Only good economics and bad economics.”
— Nobel Laureate Milton Friedman at a June 1974 conference at South Royalton VT. Ed Dolan was one of the organizers. It was a pivotal moment in the resurection of Austrian economics. His insight applies to all economic theories.
Ed Dolan explains modern monetary theory (MMT)
The first and simplest question.
Can governments go broke? 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 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 example. It had a sovereign currency and did not blush to print octillion dollar banknotes, but eventually the people said “no thanks, I’d rather keep this loaf of bread than sell it to you for 1 octillion dollars.” Instead they used substitute currencies, mostly euros and rand, for day to day transactions.
The government said “no, you can’t do that! This is our sovereign fiat currency! You have to use it!” The government ranted “you have to pay your taxes and you have to pay them in Zimbabwe dollars!” People said, “why should we pay taxes to you bunch of clowns?” The Zimbabwe government went broke despite its mighty printing presses. See more about this episode.
The key to a good government budget.
One thing nearly everyone agrees on is that U.S. fiscal policy should be sustainable. But economists disagree about the meaning of sustainability. This post explores three meanings of fiscal policy sustainability and explores their significance for budget debates.
Sustainability as solvency.
The first, and simplest, meaning of sustainability makes it a synonym for solvency. The proposition that we do not have to worry about debts and deficits because the government can never “run out of money” has become a mantra among followers of Modern Monetary Theory (MMT). As L. Randall Wray puts it in his book Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems
“When we say that [perpetual government sector deficits] are ‘sustainable’ we merely mean in the sense that sovereign government can continue to make all payments as they come due – including interest payments – no matter how big those payments become.”
Strictly speaking, we should refer to the ability to meet financial obligations in full and on time as equitable solvency to distinguish it from balance-sheet solvency, which means negative net worth. No one ever seems to worry about governments’ net worth. Discussions of fiscal solvency always center on whether a government will be able to meet its financial obligations on a cash-flow basis, or will, instead, run short of cash and be forced to default.
Is MMT correct in its claim that a government can never become equitably insolvent? Yes, as long as the proposition is limited to governments that issue their own sovereign currencies and maintain floating exchange rates.
A country like Greece could literally run out of euros because it is a user rather than a sovereign issuer of the euro. Any fiscal policy for Greece that does not include a mechanism for obtaining enough euros from some external source to meet its financial obligations would be unsustainable in the sense of being inconsistent with equitable solvency.
A country, like the United States, that has a fully sovereign currency and a floating exchange rate is in a fundamentally different position. The U.S. government can always issue as many dollars as it wants, provided it does not bind itself with self-imposed restraints like the federal debt limit. Under some circumstances, fiscal deficits might become large enough to have undesired consequences (more on that later) but if it wanted to ignore those consequences, it could always get the dollars it needed to meet its financial obligations.
Some countries are in an intermediate position between Greece and the United States. Like Latvia. Although Latvia issues its own currency, the lats, its solvency is constrained in two ways. First, the Latvian government has borrowed large sums in foreign currency. To the extent it has done so, it is in the same position as Greece; its solvency depends on having a way to obtain the foreign currency it needs to meet those obligations. Furthermore, Latvia maintains a fixed exchange rate. That constrains its ability to meet obligations like salaries and pensions even when they are denominated in its own currency. Issuing too many new lats could put unsustainable pressure on the exchange rate, causing the government to choose between defaulting on its debts and defaulting on its commitment to maintain its peg to the euro. {Update: Latvia gave up its currency and adopted the Euro on 1-1-2014.}
Can we say that because a country with a sovereign currency and a floating exchange rate can never become equitably insolvent, its fiscal policy can never become unsustainable? In my view, we cannot. Solvency is only the starting point for a discussion of sustainability, not the whole story.
Mathematical sustainability.
A second meaning is that a fiscal policy is unsustainable if it causes the ratio of debt to GDP to grow without limit. The concern here is that a debt that grew without limit would eventually become unmanageable, leading to some unpleasant consequences like default, excessive inflation, or forced austerity. I will refer to this second meaning as mathematical sustainability.
As discussed in an earlier post, a country’s structural primary budget balance is a useful indicator of mathematical sustainability. The structural primary balance is the government’s surplus or deficit, excluding interest on the debt and adjusted to take into account the state of the business cycle {see Wikipedia}. In any given case, the conditions for mathematical sustainability depend on the starting debt-to-GDP ratio, the rate of interest on the debt, and the rate of growth of GDP. (For details of debt dynamics under various scenarios, see this slideshow.)
Typically, the rate of interest tends to be higher than the rate of growth. In that case, a country that starts with any debt at all must hold its structural primary balance at a small surplus in order to achieve mathematical sustainability. For example, since 1980, the interest rate on U.S. government bonds has averaged about 1.3 percentage points higher than the rate of GDP growth.
If that differential were to persist in the future, the federal budget would have to maintain a primary surplus of about 0.9% of GDP to stabilize the debt at its current level of approximately 70% of GDP. If the average inflation rate were to stay at the Fed’s target of 2%, interest payments would consume about 2.3% of GDP, so the overall balance, including interest payments, would show an average deficit of about 1.4% of GDP.
If, given those starting conditions, the primary surplus were less than its steady-state value of 0.9%, the debt-to-GDP ratio would, over time, increase without limit. For example, if the primary budget were held exactly in balance, the debt-to-GDP ratio would double every 50 years. In reality, as of 2011, the U.S. structural primary balance was in deficit by 5.8% of GDP, according to OECD data. With a structural primary deficit of that size and given the assumed values of other parameters, the debt ratio would grow much more rapidly, doubling about every 10 years.
From the IMF’s April 2019 “Fiscal Monitor.”
The structural primary deficit of the US is ~3% now – in the 9th year of the expansion. It is getting worse. Awful.
On the other hand, if the primary surplus were greater than the assumed steady-state value, the debt would shrink steadily as a percentage of GDP. For example, if the U.S. primary surplus were held at 2% of GDP, the debt would disappear in 50 years, after which the government would accumulate net assets in a steadily growing sovereign wealth fund.
Are such extrapolations of the debt-to-GDP ratio something we should really care about, or are they just a parlor game? Opinions differ as to whether it is a matter of pressing national importance to bring the U.S. structural primary balance into consistency with the conditions for mathematical sustainability.
Federal debt as a percent of GDP (updated).
For example, followers of MMT like to point out that the debt dynamics become much friendlier if the rate of interest is held permanently below the rate of growth. If that can be done, then regardless of the initial values of the debt and the structural primary balance, the debt-to-GDP ratio always converges to some finite value. It should be mentioned that many non-MMT economists worry that attempting to hold the interest rate below the growth rate over a long period would carry a risk of serious inflation, but exploration of that issue will have to wait for another time.
A further, and to my mind more realistic, argument made by some MMT followers is that the debt will never “explode” because something will happen to change the parameters of the model before an explosion takes place. Wray compares the discussion of unstable debt dynamics to speculation about what would happen to a person who constantly consumes more calories than he burns. Mathematically, such a person would eventually “explode,” yet we have never seen an exploding person. Something else always happens first.
Editor’s note: the “something else” for the obese is often death, from accident or illness resulting from obesity. See the list of the heaviest people. The “something else” for governments is often some form of collapse or crash.
The way I see it, mathematical sustainability is a useful benchmark for discussion of fiscal policy precisely because it causes us to focus on the changes that must take place if the current set of budget parameters implies an impossible outcome. Will they be changes for the better or the worse? Will they be changes that come about in an orderly way or changes that are forced and unpleasant?
To pick up on Wray’s analogy, suppose you step on the scales and find you are seriously overweight. You are not yet morbidly obese, but you are gaining steadily. Do the numbers on the scale mean you are at risk of literally exploding? Of course not, but they do indicate that you will have to face up to some hard choices. Will you start exercising and change the way you eat? Or will you wait until you have developed diabetes or suffered a heart attack, and then sign up for emergency gastric bypass surgery?
Editor’s note: Or will you die, as about 800 thousand Americans do each year from their cardiovascular disease?
Functional sustainability.
That brings us to the third meaning of sustainability: If a country has a set of rules and decision-making procedures that adjust fiscal parameters over time to serve some rational public purpose, we can say that its fiscal policy is functionally sustainable.
There is no one set of rules that is consistent with functional sustainability. For example, many MMT followers favor focusing fiscal policy on the goal of full employment and adjusting tax rates to moderate aggregate demand when and if a threat of inflation develops. (Such a scheme is a descendant of Abba Lerner’s writings on functional finance in the 1940s.)
At the other end of the political spectrum, many U.S. conservatives favor an annually balanced budget, preferably enshrined as a constitutional amendment. True, such a policy would be strongly procyclical. It would require austerity during recessions and would provide little restraint on spending during booms. (See here for a detailed critique.) However, procyclical or not, a balanced budget rule would be “functional” in the sense of providing a rule that is consistent with mathematical sustainability.
In between, a variety of fiscal policy rules have been proposed. One such rule would constrain each year’s structural primary deficit to a level consistent with mathematical sustainability. Unlike proposals for an annual balancing of the current budget, a policy of structural balance would allow the free operation of automatic stabilizers like income taxes and unemployment benefits. Alternatively, we could allow more room for discretionary countercyclical policy by requiring the structural primary deficit to remain on target on average over the business cycle rather than on a year-by-year basis. Countries like Chile, Sweden, Germany, and Switzerland provide examples of such rules.
Note that none of these fiscal rules say anything about the size of government or the content of spending. Any of them could be adapted to a big government with a generous social safety net; a big government with a strong defense establishment; or a small government limited to protecting property and enforcing the rule of law.
The trouble is that we don’t have any workable fiscal policy rules at all. As Herbert Stein observed almost 30 years ago …
“The basic fact is that we have no long-run budget policy – no policy for the size of deficits and for the rate of growth of the public debt over a period of years. Annually we make decisions about the size of the deficit that are entirely inconsistent with our professed long-run goals, with the explanation and hope that something will happen or be done before the long-run arises, but not yet.” {AEI Economist, December 1984.}
It would be hard to find a better characterization of a fiscal policy that is functionally unsustainable.
What can we agree on?
In light of all of the above, where can followers of MMT and non-MMT economists find common ground? I see three potential areas of agreement.
First, we should be able to agree that there is no point in arguing over the solvency vs the mathematical version of sustainability. Both are valid. They are complementary statements about different aspects of fiscal policy. Furthermore, neither approach amounts to more than a formal truism until we add the concept of functional sustainability.
Second, everyone should be able to agree that fiscal policy does not have to be procyclical to be “sound.” Whatever theoretical framework we start with, fiscal austerity during a slump is not a good idea. That should put MMT and non-MMT economists largely on the same side during budget negotiations.
Third, it should be possible to agree that just because the government can, in a solvency sense, always “afford” to spend, that does not mean more spending or lower taxes are always better. Even when the economy is operating below potential, as it is now, we need budget procedures that set sensible national priorities and winnow out spending and tax breaks that serve only to reward favored interest groups at the expense of the broader public.
Furthermore, we need to recognize that an economy in boom conditions needs to restrain aggregate demand. Rules can shape policies so that fiscal prudence operates when needed than simply to “hope that something will be done before the long-run arises, but not yet.”
——————————————-
See Dolan’s slideshows about Fiscal Policy and Taxes
- Is the US Government Debt Really Out of Control? – This explains the simple arithmetic of debt dynamics. Currently, the US federal debt is not on an unsustainable path.
- Who Really Pays Taxes? The Question of Tax Incidence – Uses concepts of supply, demand, and elasticity to present the basic theory of tax incidence
- How do we Know if the Federal Debt is Sustainable? – Covers structural primary balance and debt dynamics. This slideshow can be used in conjunction with How Can We Tell if Fiscal Policy is Sustainable? Three Views.
- The Truth about Taxes: What are our Choices? – They focus on the issue of changes in tax rates vs. broader tax reform that broadens the tax base.
A clearer answer to the question
“The Uses and Abuses of Modern Monetary Theory” by Karl Smith (also a senior fellow at the Niskanen Center) at National Review – “Its advocates overlook its flaws.” Short version: no, MMT does not justify regarding the government as a cornucopia of money. He lists a few of many historical examples proving that should-be obvious truth.
About Modern Monetary Theory (MMT)
MMT is best known for stating that governments can print far greater amounts of currency without ill consequences than conventional theory suggests. It is in one sense the mirror image of the austerian (as in austerity, not Austrian) obsession with gold and inflation. They are bookends, in a sense. Many well-respected economists advocate this theory.
Other posts about MMT.
- The Left plans an experiment to pay for the Green New Deal.
- Can we happily borrow our way to a Green New Deal?
See these about MMT and the limits of monetizing the debt
- “Deficits Do Matter, But Not the Way You Think“ by L. Randall Wray, prof economics at Bard (2010). See his articles here.
- “Deficit Doves Meet the Deficit Owls“ by Stephanie Kelton at New Economic Perspectives, 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.
- MMT White Paper: Modern Monetary Theory (MMT) – “The purpose of this white paper is to publicly present the fundamentals of MMT.”
- “A Skeptic’s Guide to Modern Monetary Theory” by N. Gregory Mankiw (prof economics, Harvard).
- Stephanie Kelton’s The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy
(2020).
Here are two clear explanations of MMT by Paul Krugman (not a fan of MMT).
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. He is a Senior Fellow at The Niskanen Center.
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 Introduction to Economics
For More Information
Ideas! For shopping ideas see my recommended books and films at Amazon. Also, see Chapter One of a story about our future: “Ultra Violence: Tales from Venus.”
If you liked this post, like us on Facebook and follow us on Twitter. For more information, see these posts about monetary policy, about fiscal policy, and especially these …
- What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!
- Are conservatives right about the Fed? Is it a malign force in America? – Spoiler: no. Written during one of the Right’s bouts of hysteria about the Fed destroying America!
- Harsh truths about the Federal debt, showing how Left & Right lie to us.
- Today’s mythbusting: the Fed is not suppressing interest rates.
See the case for MMT
The Deficit Myth:
Modern Monetary Theory and the Birth of the People’s Economy.
By Stephanie Kelton (2020).
From the publisher …
“The leading thinker and most visible public advocate of modern monetary theory – the freshest and most important idea about economics in decades – delivers a radically different, bold, new understanding for how to build a just and prosperous society.
“Any ambitious proposal – ranging from fixing crumbling infrastructure to Medicare for all or preventing the coming climate apocalypse – inevitably sparks questions: how can we afford it? How can we pay for it? Stephanie Kelton points out how misguided those questions really are by using the bold ideas of modern monetary theory (MMT), a fundamentally different approach to using our resources to maximize our potential as a society.
“We’ve been thinking about government spending in the wrong ways, Kelton argues, on both sides of the political aisle. Everything that both liberal/progressives and conservatives believe about deficits and the role of money and government spending in the economy is wrong, especially the fear that deficits will endanger long-term prosperity.
“Through illuminating insights about government debt, deficits, inflation, taxes, the financial system, and financial constraints on the federal budget, Kelton dramatically changes our understanding of how to best deal with important issues ranging from poverty and inequality to creating jobs and building infrastructure. Rather than asking the self-defeating question of how to pay for the crucial improvements our society needs, Kelton guides us to ask: which deficits actually matter? What is the best way to balance the risk of inflation against the benefits of a society that is more broadly prosperous, safer, cleaner, and secure?
“With its important new ways of understanding money, taxes, and the critical role of deficit spending, MMT busts myths that prevent us from taking action because we can’t get beyond the question of how to pay for it.”
The Deficit Myth:
Modern Monetary Theory and the Birth of the People’s Economy.
By Stephanie Kelton (2020).
From the publisher …
“The leading thinker and most visible public advocate of modern monetary theory – the freshest and most important idea about economics in decades – delivers a radically different, bold, new understanding for how to build a just and prosperous society.
“Any ambitious proposal – ranging from fixing crumbling infrastructure to Medicare for all or preventing the coming climate apocalypse – inevitably sparks questions: how can we afford it? How can we pay for it? Stephanie Kelton points out how misguided those questions really are by using the bold ideas of modern monetary theory (MMT), a fundamentally different approach to using our resources to maximize our potential as a society.
“We’ve been thinking about government spending in the wrong ways, Kelton argues, on both sides of the political aisle. Everything that both liberal/progressives and conservatives believe about deficits and the role of money and government spending in the economy is wrong, especially the fear that deficits will endanger long-term prosperity.
“Through illuminating insights about government debt, deficits, inflation, taxes, the financial system, and financial constraints on the federal budget, Kelton dramatically changes our understanding of how to best deal with important issues ranging from poverty and inequality to creating jobs and building infrastructure. Rather than asking the self-defeating question of how to pay for the crucial improvements our society needs, Kelton guides us to ask: which deficits actually matter? What is the best way to balance the risk of inflation against the benefits of a society that is more broadly prosperous, safer, cleaner, and secure?
“With its important new ways of understanding money, taxes, and the critical role of deficit spending, MMT busts myths that prevent us from taking action because we can’t get beyond the question of how to pay for it.”
Pingback: Can MMT pay for the Democrats’ Green New Deal? – Fabius Maximus website – ThePlanet1st
IIRC, Bush Jr gave a tax break to the rich and businesses when the general consensus was that factories were underutilized and the gov’t needed to increase spending. If true, I wonder if the sound policy would be to slightly increase taxes as the economy was good, and decrease taxes for the segment that needed stimulus when the economy was bad.
I have often heard and read that the politicians fear a tax increase will cause a recession tipping point. I can see this as real for a huge reduction in money supply caused by the taxes, but small incremental taxes? LK do you have any real examples of small incremental taxes causing a recession except in an overage good economy?
John,
(1) “gave a tax break to the rich and businesses”
Both theory and history show that tax breaks to the rich have small economic impact due to their high propensity to save (unlike the poor and middle class – esp the unemployed – who spend extra income).
(2) The 2003 Bush Jr tax cut was during an economic expansion. All it did was zoom the deficit.
(3) “if the sound policy would be to slightly increase taxes as the economy was good, and decrease taxes for the segment that needed stimulus when the economy was bad.”
That’s called Keynesian economics. Keynes fully explained that in his 1936 magnum opus. Conservatives ignore it. Conservatives would ignore the law of gravity if it would put more money in the pockets of the rich.
(4) “I have often heard and read that the politicians fear a tax increase will cause a recession tipping point.”
Only if done when the economy is weak, which nobody is stupid enough to do. I doubt the average politican knows any economics beyond that – fact or fiction – required to help their partisan interests.
(5) “do you have any real examples of small incremental taxes causing a recession except in an overage good economy?”
Small changes have little impact (ie, they’re small). FDR raised taxes in 1937 – during the recovery phase of the Great Depression. The US economy immediately stalled, pulled back into growth eventually by WWII spending (war is the mother of fiscal stimulus).
If the green deal is going to save the planet why are the rest of the world giving us money to support it?
Sven,
I’ve asked that question about the US acting as a global police force. If all these nations depend on us to keep the dragons away, why don’t they pay us? Even the poorer ones could pay something, and some are as rich as the US.
Great article, Larry! Every time I’d think of a major question the article would address it in the next paragraph.
My view of fiscal sustainability is that it is a matter of faith. The article brilliantly summed up my thought (not enough detail to call it a theory) with this comment about the government of Zimbabwe:
“People said, “why should we pay taxes to you bunch of clowns?” The Zimbabwe government went broke despite its mighty printing presses.”
Any given government will survive as long as its people and its creditors of that government believe that either:
a) it is behaving in a way that will give them a return on their personal investment (loyalty to the government or an actual monetary investment) or
b) It will soon return to sanity (see above)
No government will survive long if it does not have the support of the people and creditors (it can briefly survive losing the support of the people but losing the support of the creditors is more serious, in part because the creditors lack of faith will cause enough problems for the government that the people will lose their faith soon after).
The other classic historical example of the point you are making is the Wiemar Republic. Trying to pay your bills using hyperinflation does nothing but lose the support of both the people and the creditors more quickly.
The US has a huge advantage in faith because it is the world’s reserve currency. It would take several (probably many more) major failures in judgement on the part of the US for the creditors to lose faith in the US government’s ability to provide a return on the loyalty investment.
Successfully losing that faith would be absolutely catastrophic for the citizens of the US (who deal almost exclusively in US dollars) and would be almost as catastrophic for the rest of the world’s major currencies (who measure their success using the US dollar).
Even with Trump in office, I do not foresee any reasonable combination of circumstances that could cause the rest of the world to lose faith in the US government over the next 30 years. A series of Presidents that make Trump look like a genius might do it but even that would likely only put a dent in the confidence rather than break it.
Pluto,
“The other classic historical example of the point you are making is the Wiemar Republic. …support of both the people and the creditors more quickly.”
That is not correct, although it is the standard Right-wing faux history version. The strength of the Wiemar Republic’s legitimacy (that’s what you’re describing) is that it went through massive stress in its first 5 years. Economic collapse, being bled by the Allies, internal insurgencies (the Freikorps, communists) – culminating in the 1923 hyperinflation. Yet it worked through all of those, into the stability and prosperity of 1924-1929.
Weimar was wrecked by the Great Depression – and their decision to respond to it with austerity (like turning off the oxygen to a patient in intensive care). In contrast, Hoover responded with mild stimulus. This bought time FDR to greatly expanded Hoover’s programs.
Thanks for the correction, Larry. I should have done more research rather than relying on my increasingly creaky memory.
As you noted, the Wiemar Republic survived the hyper-inflation period because the people and creditors stood by it. Also, as you noted, the stress on the Republic during that time was incredible but the Republic DID survive and delivered peace and prosperity in the mid and late 20’s.
Pluto,
“Thanks for the correction,”
66 thousand plus comments posted here. A microscopic fraction acknowledges mistakes. Among all things, imo that marks the best. Learning is everything, our only path to prosperity – perhaps survival – in the 21st century.
This is an esoteric discussion of sustainability that does not answer the question about the GND. My answer is that MMT gives us the insight to find the fiscal space to “pay for” or accomplish the GND and other progressive initiatives.
Clearly, the Fed, which controls interest rates can always set them below the real growth rate, so sustainability need not be an important consideration. There is no known limit to debt to GDP ratios other than one’s tolerance for big numbers.
We might better focus on inflation and employment. MMT insists that a full employment policy is possible through a federal job guarantee program. That would maximize the nation’s productive capacity. Further, that capacity can be targeted to projects that address the GND objectives and others.
As long as federal expenditures do not ask for more than the nation can produce, inflation will not rear its ugly head. We have a large and complex economy. How will we know when we ask for too much from one sector, say automobile manufacturing, and too little from another, say construction? That’s what we have a CBO for. It would be tasked with looking for pockets of inflation that would inform national budgeting rather than simply looking at deficits to “grade” legislation.
For the GND and other initiatives such as health care and education, the question is not about having the money; it’s about having the capability and resources. It would make no sense to throw money at health care without having the facilities and trained personnel. Those would have to be developed first.
Ed Dolan’s erudite discussion has little to do with the guts of MMT. After MMT looks at all the operational details of our monetary system it comes down to management of a buffer stock of labor.
Currently the Fed maintains a buffer stock of unemployed laborers by assuring, through interest rate manipulations, that some fraction of the labor force must endure involuntary unemployment. MMT would assure full employment through a federal jobs guarantee at a livable minimum wage and benefits that would set the industrial minimum conditions for employment.
Both systems would stabilize the value of the dollar (inflation). One by stabilizing the value of unemployed labor, the better one by stabilizing the minimum value of employed labor.
Dan,
(1) “This is an esoteric discussion of sustainability ….”
Cardiac surgeons’ discussion before operating on you is also esoteric. What is your point with that characterization?
(2) “that does not answer the question about the GND”
There is no “the question” about GND. It’s a vast proposal, about which we could list many big vital questions.
(2) “My answer is that MMT gives us the insight to find the fiscal space to “pay for” or accomplish the GND and other progressive initiatives.”
You have an answer! Are you an economist? How much do you know about macroeconomics, esp monetary theory?
(3) “which controls interest rates can always set them below the real growth rate”
So you know little about monetary theory. That’s quite false. The Fed can control the riskless short-term rate – so long as it is willing to infinitely expand its asset base (as it did during the Quantitative Easing programs). But the US bond market is gigantic beyond imagining – and the Fed can’t begin to control it. If its balance sheet balloons so that investors (including foreign investors) fear inflation and currency collapse – long rates will rise as the Fed continues to keep rates below the natural rate.
Then bad things happen, as they have happened so often in other nations.
(4) “There is no known limit to debt to GDP ratios other than one’s tolerance for big numbers.”
That’s bizarrely false. Apparently you know little even about MMT. Even economists in the MMT school say nothing remotely like that: they acknowledge reality (inflation and currency stability are the boundaries to the money supply). MMT isn’t a magic cornucopia of money.
Larry,
An esoteric discussion about cardiac surgery does not accomplish the surgery. The title of your piece was a question that was not answered in the discussion.
Of course the GND is not yet defined. But, we expect it will be a bold program that will continue to raise questions about funding.
You raised a question. Apparently you did not expect or want an answer. I’m not an economist fortunately. I’m merely a retired scientist who has studied Mosler, Wray, Mitchell, Kelton, Fullwiler and others for some 10 years. From earlier times there are Eccles and Ruml, who understood MMT before it was a thing.
Of course the Fed controls the short term rate. It is the monopoly supplier of money and sets its price. Longer term rates are based on expectations of what the Fed will do in the future. The New York Fed uses open market operations to establish the level of reserves in the banking system in order to maintain its target rate. After expansion of its balance sheet through QE, the Fed resorted to paying interest on reserves to set a floor on the funds rate.
https://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
https://www.newyorkfed.org/markets/ior_faq.html
Inflation from the expansion of reserve balances did not occur. The fear of inflation appears to come from those who believe that banks lend out reserves (the loanable funds myth). It is still a mystery to some that banks actually create money when they extend credit.
Apparently, you still think in terms of a natural rate (NAIRU?) That would explain your ignoring the last part of my post. MMT disregards the notion of a NAIRU.
I’ll admit that my remark about debt to GDP ratios was flippant. MMT cares little about that ratio and points to Japan where the ratio exceeds 200%. People worry too much about federal debt, which does not need to be paid off and too little about private debt, which must be paid off. Currently, public debt is about $10 trillion greater than federal debt.
MMT does not imply a cornucopia of money. However, it does allow us to see more federal fiscal policy space than say, the Peter P Peterson Institute would allow.
Your apparent intolerance of my perceived ignorance makes me think I poked my nose under the wrong tent.
Dan,
“The title of your piece was a question that was not answered in the discussion.”
This isn’t grade school. Dolan gives people information about the subject so that they can make up their own mind.
As for the rest of your comment, you stated the answer: “I’m not an economist.” You have little understanding of the subject. Since you ignored my response to your statements, there is no point in saying more. I suggest that you publish your theories, since few or no economists agree with you. The next Nobel Prize awaits!
Dan,
“my perceived ignorance”
I suggest that you provide more useful information. Such as focusing on specific statements by Dolan and citing rebuttals by other economists. There is ample disagreement among these matters (which is why there is no “answer” to the headline question).
While it’s nice that you consider yourself an expert, it’s not realistic for others to share your belief. Every post by experts here – climate science, economics, biology – gets self-styled experts proclaiming certainties as if given Stone Tablets by God. After 16 years at this gig, I’ve found that that’s just fun self-expression – not useful information for others.
Questions concerning MMT:
Is MMT correct when they say that sovereign states that issue their own fiat currency need not borrow or raise taxes to fund spending, instead they may, if they chose, simply create money and spend, and that borrowing or raising taxes can sometimes occurs later to counter demand impacts?
Could the U.S State institutional structure ( with its powerful Central Bank and Treasury Department) and that kind of money creating power potentially become a type of para-democratic organ with its own agenda with no practical set of checks and balances as envisioned by our Constitution?
Is it conceivable that other powerful organizational structures within the U.S. State (like the intelligence/military apparatus) have also benefited from that kind of money creating power,especially since 1971, when the U.S. went off the gold standard and balance of payment constraints largely dissolved?
James,
(1) “Could the U.S State institutional structure ( with its powerful Central Bank and Treasury Department) and that kind of money creating power potentially become a type of para-democratic organ with its own agenda with no practical set of checks and balances as envisioned by our Constitution?”
No. The Treasury is a federal agency, fully subject to the President, Congress and the Courts. Ditto about our central bank (the Fed) – although conservatives often lie about this. A military coup would be much easier – and that is almost impossible under current circumstances.
(2) “Is it conceivable that other powerful organizational structures within the U.S. State (like the intelligence/military apparatus) have also benefited from that kind of money creating power, especially since 1971”
No. The US money supply has quite properly increased along with GDP since inflation was broken in the 1980-83 recession. A good measure of that is the dollar’s value vs. currencies of our trading partners. It is unchanged since 1988. It is down 11% since 1973 – good, since it was wildly overvalued then.
(3) “Is MMT correct when they say that sovereign states that issue their own fiat currency need not borrow or raise taxes to fund spending,”
Yes. But these are somewhat equivalent processes, all subject to the monetary limits set by inflation and currency stability. They differ in their mechanics and political effects – both of which are essential factors in a political system. Dolan explains this in another post.
One slide in my lecture 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. …
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 – teenagers – and most of their preexisting knowledge is of the MoS {man-on-the-street} 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.
Isn’t MMT being used to create “trillionnaires?”
Is that sustainable?
LT,
“Isn’t MMT being used to create “trillionnaires?”
No, MMT is not being used. The Fed ended its Quantitative Easing on 29 October 2014. Fed assets have increased slightly (8%) since August, a preemptive move in response to the slowing of the economy (as opposed to the Fed’s usual policy of “too little, too late”).
One of the great mysteries of modern America is how the Left and Right lie to their followers. Both sides clearly see this in the “other” tribe, but remain blind to it in their own tribe. Right wing media overflow with false fact and faux economics. The repeated failure of their predictions doesn’t both their tribe.
This makes us easy to rule. Perhaps we have become pleasant peasants.
Quick question: what are Austrian economics?
Also this bizarre post from Daniel Larison at TAC: “The case for impeachment is overwhelming.” I think Trump broke his brain.
Isaac,
“Quick question: what are Austrian economics?”
You know how to find such answers. The Britannica and Wikipedia provide excellent introductory answers.
“Also this bizarre post from Daniel Larison.”
Each tribe in America correctly mocks the madness of the “others”, but remains blind to the madness of their tribe. It’s the fun path to decline. When we can see ourselves clearly, then political reform will become possible.
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Very nice piece. Thanks.
In another country across the Atlantic, quite soon (on Friday of this week in fact), we may see MMT start to be put into practice. The UK is holding a general election in which one of the two contending parties is Labour. Labour always has had a tendency to borrow, spend and print, not always in that order.
But the current Labour Party has been taken over by, as the current Prime Minister put it, “Hamas-backing, IRA-supporting, anti-Semitism condoning appeaser[s] of the Kremlin”. Their regime of choice is the former East Germany, whose passing some of them publicly lamented as being the end of the last true workers’ government, and their aim will be to recreate it in Britain.
They are also financially illiterate doctrinaire socialists and propose to start their term by taking some 4% of the economy into state ownership with unknown levels of compensation, appropriating 10% of the shares of all large companies (and will take more later), making the Boards of all large companies 30% workforce representatives, and embarking on a dual program of giveaways and investment. What the investment will consist of is not clear, but the sums talked about are huge in relation to the economy.
The giveaways are clearer: for instance, commuter rail fares are to be dropped by 30% (by what will be the state railway company). Everyone is to get free Internet over fibre right to the premises (from what will be the state monopoly ISP or broadband supplier, already christened ‘British Broadband’). There will be huge increased spending on state pensions. There will be a four day week nationally….
Questioned on this program, Britain’s leading Hamas-backing, IRA-supporting anti-Semite, one Jeremy Corbyn, the leader of the Labour Party, did not seem to understand, or at least would not admit, that all this would have to be funded or to have any idea that it might result in borrowing and debt.
The polls still favor a Conservative win, but the lead has narrowed recently, and some form of government headed by Corbyn is definitely on the cards.
Watch carefully. It could be a foretaste of what can happen to America. Its a more extreme form, because the US has a written constitution which would prevent most of this program from being implemented, and the UK once out of the EU has no limits on what Parliament may enact.
But there again, what is happening in the UK with the Labour Party shows how Weimar could fall, and its a question how strong a wall the US written constitution will turn out to be. In democracies, once people have lost faith and confidence, they can ignore the nature of who they are voting for. The evidence may be plain for all to see, there may be books, articles, speeches, even a manifesto making clear what they are going to do. But in a spirit of contempt and indifference and hostility, the electorate puts them into power. And only later, when this turns out to have been the last election, do they see what they have done.
Or worse still, it may be that they see and know what is coming, but are in such a state of anger and disillusionment that they do know, and they really do want it.
I should add, on the UK example, that there is in the investment proposals a UK GND to get to net zero emissions at vast expense and with almost certainly completely impractical measures.
But there is also a more important point of principle, which may come into play in the US also. At any election of this kind, you will still get many so called ‘moderates’ returned. Because the purge of the representatives at a local level has not yet been completed. The question is, whether they act as a brake on the deranged and wicked who have taken over the leadership of the party.
The UK example so far is that tribal loyalties will make them support a leadership they believe to be both deeply damaging to the country and morally indefensible. This is the lesson of the Labour Party ‘moderates’ who accept that Corbyn and associates have condoned and tolerated anti-Semitism, are fiscally irresponsible to the point of madness, and represent a real danger to the country’s security.
70% of Labour MPs voted in a motion of no confidence against Corbyn a year or two ago. Their views are well known. It had no effect. But they are campaigning to get Corbyn and his clique elected and into power, anyway. If he comes to power, they will probably dutifully vote for ethnic cleansing, nationalizations, and the abolition of civil liberties.
This is how democracies fall.
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MMT White Paper: Modern Monetary Theory – “The purpose of this white paper is to publicly present the fundamentals of MMT.”
Warren,
Thank you for posting that! I added the full description to your comment, and added it to readings list in the post (along with your 2008 e-book).
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I can’t tell if this is an article by Ed Dolan or Larry Kummer.
Check out this five part series on Fiscal Sustainability by Scott Fullwiler.
If Ed, it suggests he has not had much interaction with L. Randall Wray when they both wrote on Economonitor.
It’s pretty clear that the Government budget identity is not a before the fact constraint, its just an after the fact accounting identity so solvency issues can clearly be dismissed.
MMT is just the engine or the operating system. What you do with it is up to you.
Senexx,
Ed is stating the consensus opinion of economists. That you state a contrary view as fact is …interesting. But does not make it so.
“It’s pretty clear …”
Unless you are an economist, that’s quite a bold statement.
Seness,
“I can’t tell if this is an article by Ed Dolan or Larry Kummer.”
If you were uncertain from the title, the “About the Author” section should have made it clear.
I saw that but being unfamiliar with this site it could have been an overlooked part of copy and paste.
I maintain it is pretty clear by sheer logic.
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