By J.A. Myerson
“These guys are in the dark. Owls can see in the dark.” – Stephanie Kelton, September 25, 2012
1. Stop Worrying And Love Fiat Money
“Oh man, you have to look them up online,” Tim Fong told me on our tour of Oakland’s gentrification. “If I lived in New York, I would go to every one of those things.” He sounded as though he were talking about some massive First Friday blowout, rather than a lecture series on monetary, fiscal, and economic policy at Columbia Law School. Fong, a Bay Area real estate lawyer and former member of the finance committee at Occupy Oakland (motto: “Timothy Y. Fong, Attorney At Law, Sues Banks”) is a convert to Modern Monetary Theory, or MMT, which is the most boring name for a thing people actually get excited about. He told me I needed to get excited about it, too.
What had hooked Fong was MMT’s explanation for why the dollar has value, which he encountered on the heterodox economics blog Naked Capitalism. Stephanie Kelton, professor in the economics department at University of Missouri–Kansas City and a leading MMT-er, describes the dollar as “a tax credit.” If the only thing the government will accept in tax payments is the U.S. dollar, anyone living or doing business in this country has to try to earn dollars, and dollars are therefore valuable. “When I started reading about MMT, it was like a lightning bolt,” Fong said, “Like, ‘Oh, that’s why.’”
The lecture series he recommended to me is organized by the Modern Money Network , a group of students from various fields who, like Fong, have been struck by the MMT lightning and want to transmit it as widely as possible. Wouldn’t you know it: I watched the videos and got totally sucked down a hole.
MMT basically says that our understanding of money needs to catch up to the conditions we’ve had in place since August 15, 1971, when President Nixon severed the dollar’s final connection to gold , making ours a fiat currency, which we are incapable of exhausting. As a result of this turn of events, the federal government’s taxation does not in any way finance its spending. All of our political rhetoric—talk of “spending tax payer money” or the question “How are we going to pay for it?”—still reflects pre-fiat thinking, the MMT-ers say, and this conceptual mis-orientation is the primary impediment to full employment and equity.
The federal government’s relationship to money is the mirror image of mine or yours or that of a city or a corporation or any other entity that uses dollars. For us, the users of dollars, our spending comes either from income or loans. Without first getting or borrowing dollars, we don’t have any dollars to spend on stuff. The federal government’s relationship to money is exactly the opposite, because it doesn’t use the currency like we do. It issues the currency. Dollars only come into existence because the federal government spends them into existence. It has to spend them before it can tax or borrow them, since there are no dollars to tax nor none to borrow except for the ones the federal government has already created.
Professor Kelton and other MMT-ers differentiate themselves from deficit hawks (“Austerity Now!”) and deficit doves (“Austerity Later!”) by describing themselves as “deficit owls.” The only reason for Austerity Ever would be to drain the economy of excess spending power, lest there be runaway inflation. With as much capital and labor unemployed as we have, we don’t need to worry about inflation, and we never need to worry about the deficit, except that it may get too small, such as now.
The implications of this topsy-turvy approach are extremely seductive to people who, like me, believe in the social provision of goods and services. If, unlike households and firms and states, the federal government is not constrained by revenue in its spending, then it can and will always be able to afford any expenditure that a “public purpose,” a useful MMT catchphrase, should require. As long as the expenditure is in US dollars, on whose creation the federal government has a monopoly, we can afford it. The bullet trains and solar panels and comfortable public housing and health care and education and pensions and all the rest of it. If we can marshal the real resources to meet everyone’s needs, we have enough dollars to afford them.
Fiat currency is like magic socialism dust.
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“That’s not tax money. . . we simply use the computer to mark up the size of the account.”- Ben Bernanke, 60 Minutes, March 15, 2009
2. That One Rad Zillionaire Finance Guy
The theory was developed in what L. Randall Wray, Kelton’s colleague at UMKC, recalls was “the first internet discussion group I ever heard of,” one devoted to Post Keynesian Thought (PKT). Along with Wray, one of MMT’s main authors was “this strange profane guy,” Bill Mitchell at Australia’s University of Newcastle, “who swore like a drunken sailor.” Wray and Mitchell found they agreed “on Kalecki, on Marx, on fiscal policy, and especially against the Austrians that were slowly but surely killing PKT.” Opposing an advancing hegemonic view is the perfect occupation for leftist economists.
Lamentably, with the occasional exception, leftist economists and their heterodox departments don’t typically hold the greatest sway over professors, bloggers, and especially investors and policy-makers. But a banking whiz kid-turned-hedge fund manager with a penchant for sports metaphors—this is harder for the mainstream to ignore. In this respect, the professors are in luck; they have Warren Mosler.
A veteran of the PKT discussion group, Mosler lives in St. Croix, largely for purposes of taxation, and has basically retired from finance (and political campaigning and car manufacturing, neither of which was among his core competencies ), to pursue a full-time career as an MMT evangelist. One suspects this entails contributing a Jackson or two to MMT’s two main bastions: UMKC’s Center for Full Employment and Price Stability (CFEPS: already, in its name, fending off inevitable questions about inflation) and Newcastle’s Centre of Full Employment and Equity (rendered and pronounced as “CofFEE”).
But over and above his deft public speaking and considerable wealth, Mosler contributes something just as valuable: his credibility on monetary operations. His longtime ground-level proximity to money creation makes it extremely difficult to refute him when he explains that the government does almost all its spending by merely crediting bank accounts. Congress, via the Treasury Department, instructs the Federal Reserve to increase the size of a balance, by a keystroke. An alteration is made to a spreadsheet, and the government has spent. Taxation happens by the same wizardry. To levy a tax, the government simply debits bank accounts; i.e., it decreases the sizes of balances. It doesn’t collect a mound of dollars and store them in a vault, to be spent later. It sucks them right out of existence. The balance drops, and the money is gone.
So says Warren Mosler. To hear him tell it, even the most important figures in economics can’t convincingly deny it. His illuminating, free e-book, “Seven Deadly Innocent Frauds of Economic Policy” could justly be subtitled “arguments I have won with famous geniuses.”
Like this one with Lawrence Summers:
I opened with a question: “Larry, what’s wrong with the budget deficit?” He replied: “It takes away savings that could be used for investment.” I then objected: “No it doesn’t, all Treasury securities do is offset operating factors at the Fed. It has nothing to do with savings and investment.” To which he retorted: “Well, I really don’t understand reserve accounting, so I can’t discuss it at that level.”
I, for one, can’t summon enough regard for “Larry” to doubt the story. Team Warren.
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“And here’s the truth—there are no gimmicks that create jobs. There are no simple tricks to grow the economy.” – Barack Obama, Amazon Chattanooga Fulfillment Center, July 30, 2013
3. The Political Project
MMT proper consists of positive statements on how money behaves and why. But for most MMT proponents, the conceptual reorientation corresponds to similar normative proclivities. Specifically, the Holy Grail is full employment.
The way the owls propose to achieve this is by hiring the unemployed. The government should guarantee a job for everyone who wants it, doing one of the useful things that people want done. Mitchell, the foul-mouthed Australian professor, is credited with articulating a job guarantee as a buffer stock: just as you might keep a store of a commodity to insulate its price from fluctuations in supply and demand, the government should keep its workforce ready to re-enter the private labor market, when the cycle comes around again. This is where the “price stability” piece comes in, and what the owls offer as a bulwark against inflation.
As someone who wishes everyone could work a lot less, not a lot more, and as someone who permanently prefers public sector employment to private, some of this vision makes me uncomfortable, not least its reproduction of neoliberalism’s treatment of human labor as a commodity. The idea of keeping the national worker-asset base liquid—or whatever—does too much to accommodate the private sector’s wildly destructive apprehension about hiring the unemployed.
More enticing is Bard College professor Pavlina Tcherneva’s articulation of “the job guarantee through social entrepreneurship,” a model wherein the employer isn’t the government, but the nonprofit sector.
It is centered on community-based and community-proposed programs that can be implemented at all phases of the business cycle and that can address different levels of unemployment and community need. This is a bottom-up approach in the trust sense of the phrase—powered by communities, localities, and individuals themselves.
If you can identify a community’s need and propose a credible way of addressing it, you can obtain funding.
Fong thinks the idea shakes the foundations of capitalism. “If you set a job guarantee wage significantly above today’s minimum wage,” he says, “that would severely disrupt the low-wage service economy that exists now.” When competing with a living-wage-paying public employment option, McDonald’s and WalMart would have to change their entire business models in order not to lose employees, says Fong. “Who would subject themselves to that treatment?”
For Wray, the job guarantee as the central economic strategy is simply the original purpose of the monetary system: “to mobilize resources for the public purpose.” Why would a democratic government spend money into existence and make it valuable by demanding some of it back in taxation, if not so that the money could support the general enterprise.
It sounds good to me. After all, someone’s got to install the smart energy grid and bullet train infrastructure and fiber-optic telecommunications network and. . .
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“The process by which banks create money is so simple that the mind is repelled.” -John Kenneth Galbraith
4. The Problem
Mass theoretical reorientations are not cheap and easy. The owls face a huge foe: the repellence of the mind. The full MMT program is digestible for the type of people who are excited to hear from friends which economics lectures they should spend hours watching on YouTube. But for people with lives, “Your tax money is irrelevant to financing the government’s spending” is a bitter pill to swallow. This claim, which as far as I can tell is irrefutable, just sounds like it is not in keeping with reality. It challenges not just a statistic, but an entire conceptual framework that has been consistently cultivated by politicians for longer than most people have been alive.
On the Right, the myth of a revenue-constrained federal budget is an indispensable rhetorical device in the ongoing effort to cut social services and privatize governmental functions. This is apparently out of an ideological obligation to legislate as though there were still a gold standard because they wish there were still a gold standard, like a pedestrian pretending to be swimming out of a desire to swim.
But the Right has not been alone in reinforcing the idea. Franklin Delano Roosevelt himself acknowledged that the reason to devote payroll taxes to a social security trust fund was political, not economic. “With those taxes in there, no damn politician can ever scrap my social security program,” he said. “Those taxes aren’t a matter of economics, they’re straight politics.” In the modern era, the government doesn’t need your FICA taxes in order to credit the accounts of social security recipients. Even if the social security trust fund’s balance were negative, every recipient’s bank would accept a check from the federal government. As long as there are adequate real goods and services for retirees to subsist on, the federal government will be able to afford to purchase them, and there will be no pension crisis.
Roosevelt’s political maneuver has been judo-ed over the past few decades by the Austrian free marketeers, who have elevated above all other social goals the mobilization of resources to the private sector. Now, lo and behold, the distended, cocaine-addled Finance, Insurance, and Real Estate sector is greedily licking its chops and giddily stroking its flanks at the prospect of eating up the retirement money we’ve socially been “saving up.” If we’re lucky, progressives will try all manner of rearguard actions to insure that the savings stay in the public sector. But the owls hoot: we don’t have to “save” dollars at all. We will always to be able to afford the amenities that constitute a dignified retirement.
In fact, we should “suspend FICA taxes.” As Mosler points out,
All agree that FICA is a highly regressive punishing tax on people working for a living, ideologically unacceptable to the “left”, and, of course, the “right” is against any tax.
I’d locate the greatest hope for widespread political conversion in this point. What better way to “simplify the tax code” than to stop unnecessarily withholding a significant cut of everyone’s wages?
Internal coherence and easily articulable benefits for working people furnish MMT’s political program with a lot stronger gut-punch than the doves’ incoherent position: we need to deficit spend now, but not too much, because we still have to keep the deficit in check, if not now then definitely later. We have to be for deficits before we’re against them—the political appeal of this is self-evidently dead on arrival.
Fong finds hope in what he observes as a “great hunger for an alternative.” Five years into the post-Lehman economy—with none of the debts canceled, none of the wealth restored, none of the quality-wage job creation resurgent, and none of the political will to reverse any of it—it isn’t hard to see why. “I think what MMT offers people is a reason why it doesn’t have to be this way,” Fong says.
Thanks in part to the energetic diligence of the internet’s large and expanding community of owls and owlets, more public economists are coming to wrestle with, and appropriate concepts from, MMT. Even Paul Krugman, who has consistently been dismissive for years, admitted recently that the owls might be right, but we won’t know “until we get out of the slump, because standard IS-LM and MMT are indistinguishable when you’re in a liquidity trap.”
Intriguingly, Americans displayed an eagerness to use fiat currency as a devious workaround to the ludicrous debt ceiling debates: the trillion dollar coin, first articulated in by a commenter on Mosler’s blog, was actually a thing people were discussing on the subway! I found the trillion dollar coin moment a really exciting episode in American politics. If you did too, I’ve got a lecture series to tell you about.