Forget the mantra, “how are you going to pay for it?”
On page 182 of The Deficit Myth, author Stephanie Kelton quotes Alan Greenspan expressing the key idea that underpins Modern Monetary Theory (MMT)—that’s the theory that shows we can dispense with pointless agonizing over federal budget deficits. Deficit spending is the bugaboo that looms menacingly over every proposal to spend big on some government program—the bugaboo that elicits the refrain, “How are you going to pay for it?”
The bugaboo can be easily slain, and conservative Alan Greenspan was just the man for the job.
The Greenspan quote at the end of this paragraph is an answer he gave to famous deficit hawk Congressman Paul Ryan in a hearing about entitlement reform. Ryan was hoping to elicit Greenspan’s endorsement of privatizing social security—Ryan’s premise being that government-supported Social Security was insecure due to impending deficits, and that “personal retirement accounts” were the remedy. Greenspan, however, disappointed him. His answer was, “I wouldn’t say pay-as-you-go benefits are insecure. There’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”
Whoa! Was Greenspan—chairman of the Federal Reserve at the time, and self-described “lifelong libertarian Republican”—really pulling the rug from under Paul Ryan’s cherished agenda to wrest safety-net programs away from the federal government and hand them over to his big-money donors? Was he really saying that the federal government could pluck money out of thin air to fund an entitlement?
Yes, he was saying that, although Greenspan was not a fan of MMT. He was simply stating a fact. The fact is that the U.S.—like Japan, Australia, the UK, and China, to name a few—is an issuer of a sovereign currency. Meaning it can pay for whatever it wants by creating dollars (these days, usually electronically, even though minting physical American coins and printing greenbacks continues to this day.) Fortunately for us Americans, the U.S. is not in the position of a country like Greece, whose dumping of the drachma and embrace of the Euro tipped it into financial disaster in 2010.
Uh oh! This sounds really irresponsible. Isn’t the responsible way to pay for federal programs to tax enough money away from people and companies to balance the federal budget? Otherwise, deficits will pile up year after year to create a mountain of federal debt that will crush the ability of future generations to pay it off, and create a nation of paupers?
No. This is the story we tell ourselves, and both Democrats and Republicans reinforce it time after time when discussing the budget, especially when such ambitious proposals as Biden’s $1.9 trillion Covid-19 relief package land in Congress. Republicans say, “How are you going to pay for it? Tax future generations into the next century?” Democrats answer, “We can pay for it right away by raising taxes on the rich.” Both sides work from the default assumption that government expenditures have to be matched by taxes and fees.
Dead wrong, say Stephanie Kelton and other proponents of Modern Monetary Theory (see Kelton’s video a few paragraphs down), and it acts as a giant drag on the economy. The American federal government is not like a household that has to balance the books or face creditors who can take away your car, your TV, your phone, your cable service, your house. The federal government doesn’t have to close shop because of big national debt. The federal government, says Kelton, is the issuer of money, and the rest of us—including states and municipalities—are users who have to balance their budgets. The federal government has drawn dollars out of thin air to pay for such breathtaking programs as the Interstate Highway System, the Apollo Moon Program, the Internet, the most expensive military in the world by an order of magnitude, and subsidies to the fossil fuel industry that rewards us by giving the planet a fever. And that’s OK, as long as there’s enough productive capacity in the real economy to absorb those dollars. (See next section, “There’s a problem . . .”)
When politicians perceive a need—bail-outs for Wall Street and the auto industry to end the Great Recession, trillion-dollar tax cuts to the rich that never pay for themselves—the government finds a way to pay for them, and the source is the government itself. It has done so for decades, with the deficit ballooning to eye-popping proportions, but somehow the economy plods forever forward, surviving the ups and downs of the business cycle, with the hardest blows coming not from government overspending. The hardest blows come from greedy shenanigans in the private sector, such as hedge funds’ Byzantine financial instruments that are too complicated for even their inventors to understand —not that it matters to them as long as they’re making profits. It’s not deficits that matter, it’s political priorities. When it comes to federal budgets, political priorities are driven by the plutocracy.
The government can pay for Biden’s $1.9 trillion Covid-19 stimulus, but it has to tread carefully when spending big. Rather than the mythical budget deficit chimera, there are real-world hazards to consider, and MMT has a strategy to avoid them.
There’s a problem with excessive government spending, but it ain’t the deficit
“How are you going to pay for it?” is not the right question to ask when it comes to government fiscal policy, according to Stephanie Shelton and other proponents of MMT. The right question is, when you pour dollars into the economy, is there productive capacity to absorb those dollars? If not, you risk inflation, and inflation is the enemy of an economy that works for everyone.
For example, imagine an infrastructure project that calls for the building and restoration of thousands of bridges, dams, levees, and highways. Such a project will create a massive surge in demand for a lot of concrete—tens of millions of tons of it. (This is at a time when, believe it or not, there is an incipient global shortage of sand—the particular kind of sand that is one of the three essential constituents of concrete; the others being cement and gravel.)
If the capacity of concrete makers cannot meet the surge in demand for their product, the price of concrete will go up. Some contractor engaged to rebuild bridges as part of the infrastructure project will have to pay more, but so will everyone else: homebuilders, office builders, builders of power stations, airports, industrial parks, recreation facilities, etc. The rise in concrete prices will ripple throughout the economy. The makers of concrete will amp up their capacity, in the process increasing demand for material, tools, and energy, which will in turn push prices up still further.
Of course there’s a lot more than concrete that goes into making bridges—steel, heavy equipment, delivery vehicles and other tools— and wherever demand outstrips the capacity to supply, prices rise and ripple effects multiply. Supply also consists of capable employees—and when demand is high, wages go up.
The government can’t spend willy-nilly just because it’s easy to create money. There is no limit to creating dollars, but there is a limit to the quantity of dollars that can safely be spent without triggering inflation.
Stephanie Kelton encapsulates the key concepts of Modern Monetary Theory in a five-minute BBC presentation.
When Larry Summers came out against the Biden Covid-19 relief bill a few weeks ago, he was not particularly worried about the national debt—rather, he called out the risk of overheating the economy and causing inflation. Summers is neither a champion of MMT nor a deficit hawk, but he is an inflation hawk. He knows the main question to be asked of a stimulus package is not where the money is coming from, but where it’s going to. (See video of Summers grousing about MMT at the end of this post.)
This is not to say that the new Covid-19 Relief Bill is too big. Stephanie Kelton would likely say it’s too small. It is to say that inflation risk must be a key factor influencing the size of any bill and where the money is to be spent. (Another factor, unfortunately for stimulus bills being hauled through Congress, is human psychology, where pricing resembles the tactic of retailers marking widgets at $1.99 rather than $2.00. It is, amazingly, a tactic proven to work in retail, and it’s a major factor in trimming the relief bill down from $2+ trillion to $1.9 trillion.)
As for taxation, MMT creates a framework for viewing taxes in a discretionary mode, as a tool instead of a must-have antidote to the imaginary perils of budget-busting. Taxes are useful for four things: curbing inflation, redistributing wealth, incentivizing good behavior (e.g. a carbon tax to fight global heating) and reinforcing the dollar’s role as the standard currency.
Injecting sovereign currency into the
“Birth of the People’s Economy”
Stephanie Kelton insists that MMT is not a prescription for how to spend money, it’s a description of how the monetary and fiscal systems work. It’s a description that could have evolved naturally from President Nixon taking the U.S. off the gold standard in 1971, and could have put a stop to continual rows in the Congress about deficit spending. But the old balance-the-federal-budget paradigm has stuck with us like a vestigial organ, perhaps because it dovetails so well with our experience of personal household budgeting. It may also dovetail with intuitions about wealth stemming from scarcity throughout most of human history: getting Something for Almost Nothing was unthinkable before the era of productivity that has been our lot in the West beginning with the 19th Century’s Industrial Revolution.
Despite Stephanie Kelton’s characterization of MMT as just a description, she does have an agenda implicit in the subtitle of the deficit-myth book, the Birth of the People’s Economy. The last two chapters of her book—”The Deficits That Matter” and “Building an Economy for the People”—point the way.
There’s far too much material in Kelton’s last two chapters to go deeply into here, but two main points bear elaboration.
First, Kelton’s “Deficits that Matter” are a humanitarian twist on the deficit trope. They are the “Good Jobs Deficit,” the “Savings Deficit,” the “Health Care Deficit,” the “Education Deficit,” the “Infrastructure Deficit,” the “Climate Deficit,” and the “Democracy Deficit.” As a staffer for Bernie Sanders in 2015, Kelton persuaded her boss to make a statement about Deficits that Matter in a Senate Budget Committee meeting, which earned a headline in The Hill: “Bernie Sanders flips the script with ‘deficits’ plan.”
Of the “Democracy Deficit,” Kelton says, “There’s one more gap in American life that, while not necessarily greater in scope, cuts even deeper because this deficit is the reason for all our other deficits.” Expanding on that, she says “It’s the deficit between the few and the many; between the powerful and the powerless; between those with voice and those without.”
Secondly, in her final chapter, Kelton lays the cornerstone of the Building-Economy-for-the-People edifice: full employment supported by government-funded jobs. The latter do not need to entail making or selling Stuff. They can be mainly public service jobs, based on community needs; or employment in a jobs bank that “should include a wide variety of available work, ranging from fire prevention to flood control and sustainable agriculture.”
Tying a liberal political agenda to MMT has generated headwinds for MMT among conservative and centrist economists like Larry Summers. They suspect that MMT is a monetary Trojan Horse whose hidden political purpose is to promote a giveaway to the unemployed for doing easy, useless work—one step away from a Universal Basic Income. (Kelton, incidentally, is cautious about UBI—it is not part of her version of MMT.)
The giveaway-to-the-unemployed-for-doing-easy-useless-work objection is addressed by Modern Monetary Theorist Bill Mitchell in the following video (pick it up at 14:00 where he discusses government price stabilization for wool in Australia):
Government-guaranteed employment buffers the inevitable ups and downs of the business cycle. When the economy cools, the government employs people to do public service work. When it heats up, they can go back to work in the private sector. They might even decide to stay in the public sector if it gives them a greater sense of purpose, even if it pays less in dollars and cents.
Another benefit of government-guaranteed work is to help prepare for coming drops in demand for human labor due to automation. No one seems to have a good answer for that, other than to argue we have to have enough people earning money to pay for the things the robots make and do, or the economy grinds to a halt. Creating the kind of jobs for the future that humans are good at and machines are bad at may require the kind of government initiative such as the Interstate Highway System and the Internet, creations on such a scale that private enterprise won’t take a gamble on, but is happy to exploit once the government brings them into being.
Even as it stands now, most of the benefit from gains in productivity are accruing to the top wage
earners, as pay has stagnated on the lower rungs of the economic ladder for forty years. The graph at right tracks wage growth in adjusted dollars. (You may have to zoom it 150% to read it, but in brief the left end is 1979, the right end is 2019, the blue line is wage growth for the top 0.1%, the green line is the top 1%, and the orange and red lines are the rest of us—the red being the bottom 90%.)
An economic upheaval is on its way—some say it’s already here, and the rise in “diseases of despair” (alcoholism, drug addiction, and suicide) attests to it. We are ill-prepared for it. Modern Monetary Theory and government-guaranteed employment can be part of a strategy to cope. It’s a much wiser strategy than allowing populists to ride a wave of economic resentment into power.
Other Sources
Besides Stephanie Kelton and Bill Mitchell, the most prominent names in MMT are Warren Mosler (the so-called “father of MMT”) and L. Randall Wray. For starters, you can get a lot of hits on YouTube for either one of them. It’s hard to keep up with Mosler whose speech is laced with monetary and fiscal jargon. Wray is clearer but still wonky. This is why Kelton is getting most of the publicity.
There’s a helpful explication of MMT key points pro and con by Dylan Matthews in Vox
A 59-minute presentation by Stephanie Kelton with extensive Q&A fills out key concepts touched on in the short video above. I’m just pasting in the URL rather than a hyperlink to save space here:
https://www.youtube.com/watch?v=a9pAPIUYXxQ
Find Wray answering the critics, rejecting the Fed’s Quantitative Easing, and dismissing the charge that MMT favors “helicopter money”: https://www.youtube.com/watch?v=9yf8uJ9na48
Finally, to give the wet blankets their due, let cranky old Larry Summers pontificate, accusing MMT of being voodoo economics while grossly mischaracterizing it (ignoring MMT’s presciptions for curbing inflation), and claiming that 4% unemployment is no reason for fiscal stimulus (in March 2019). Summers also touts the Clinton administration’s policies without explaining why there was a recession beginning shortly after Clinton left office—not the fault of the incoming Bush administration.