Analysts and, begrudgingly, mainstream economists, seem to be coming around to the notion that fiscal-monetary “partnerships” (wherein central banks enable and explicitly accommodate government spending) are likely to define the macro narrative in the years ahead.
In a sense, this is a circular, semantic debate.
A common refrain (which I’ve used in these pages, mostly for the sake of avoiding confusion at a time when the general public is just now beginning to realize what deficits and debt actually represent in advanced economies), is that the pandemic “brought forward” the expected long-term shift towards Modern Monetary Theory.
As one reader was keen to point out recently, that isn’t an accurate characterization if one believes MMT is simply a description of reality. After all, one doesn’t “implement” reality or bring it “forward”. Rather, one simply lives it.
This is where the debate becomes circular and semantic. At its core, MMT is indisputable. It’s fact. Indeed, it’s tautological. Which is one reason I often struggle with i) celebrating it as some sort of epiphany, and ii) understanding how it’s possible for it to have “detractors”. For example, the contention that “water is wet” is not an epiphany and it cannot have detractors because water is nothing if it’s not wet, and wetness has no meaning outside of water.
When it comes to MMT, you can divine its tautological nature with inductive reasoning. Congress doesn’t wait on April 15 to go to war, for instance. And the Pentagon doesn’t make decisions about whether to update fighter jets based on bidding metrics for the last 30-year Treasury auction.
But abstracting further, it’s as simple as this: There were no dollars before there were dollars. Taxing and borrowing in dollars on the part of the government cannot possibly precede government spending, because absent the government, there is no such thing as “dollars”.
Of course, if you’re a politician, you know how this works because you live it, but obscuring the fundamental reality from the public serves a variety of purposes, many of them critical.
It’s not a “conspiracy”, per se. For one thing, it’s pretty clear that many politicians don’t believe their own eyes — that both common sense and their own hands-on experience are somehow not to be trusted because the phrase “there’s no such thing as a free lunch” just sounds so damn convincing.
Beyond that, a situation where the general public is fully apprised of how government spending works could lead to unrealistic demands from voters, who aren’t likely to go much further when it comes to analysis once they grasp the basics.
Voters won’t, for example, care much about the myriad ways taxes are necessary and useful (e.g, they can be used to create incentive structures), once they come to terms with the fundamental concept that the government most assuredly does not “need” their tax money in the same way that they need a paycheck. Similarly, voters won’t care about why inflation serves as a limit on otherwise unlimited spending power.
Rather, once the public has an “Aha!” moment regarding deficits and debt in advanced, currency-issuing economies, any and all nuance will be, at best, of secondary importance. At worst, it will be totally ignored.
It is the public’s unwillingness (or inability) to engage analytically with nuance that arguably makes it dangerous for voters to be educated about how spending actually works in America (or in the UK, or in Japan, or in Australia, etc.).
This is ironic: We can’t educate the public because if we do, there’s no guarantee voters will further that education and attain the kind of mastery necessary to safely wield what, to many, will seem like a revelation after spending their entire lives stuck in the false equivalence between the federal government’s finances and the family checkbook.
But now, there’s no turning back. While the pandemic can’t properly be described as the event that “brought forward the implementation” of MMT (again, because MMT’s basic tenets are just a description of reality), it can be said that the stimulus programs unleashed across economies served as a wake up call for the public when it comes to understanding how government finance actually works. (I’d be remiss not to mention the fortuitous timing of Stephanie Kelton’s “The Deficit Myth”, which became a New York Times best-seller right in the middle of the pandemic.)
Every day we spend arguing over comparatively petty issues and persisting in the notion that advanced, currency-issuing governments are constrained in their capacity to spend by anything other than inflation, is a day wasted — and tragically wasted at that.
Deficit hawks claim to care about our “children” and our “grandchildren” who will purportedly be called upon to pay off the money we’re “borrowing from the future”. That is absurd. We cannot “owe” an amount denominated in a currency we print. That is a philosophical impossibility.
I don’t have any children. As such, it seems profoundly unlikely that I’ll have any grandchildren. But if I did, I wouldn’t be worried about their imaginary obligation to pony up tax dollars so that Washington can pay its bills.
What I would be worried about, though, is the distinct possibility that within 200 years, the planet will be uninhabitable. Or that, within 50 years, America’s infrastructure will be totally unsafe. Or that already spiraling inequality will lead to a complete societal meltdown that leaves future generations to exist in some kind of Mad Max-ish free-for-all.
Consider that while Republicans and Democrats have spent the last three months bickering over the difference between keystroking $1.5 trillion into existence or conjuring $2.4 trillion out of thin air, scientists have discovered what looks like life on Venus. Apparently, we could go over there (to Venus) and check it out in a matter of months (of course, months turns into years once the logistics and planning come into play, but you get the point).
In a sad testament to just how deeply-ingrained false notions about debt and deficits really are, the second linked article in the preceding paragraph finds the MIT Technology Review suggesting that “it’s not easy to justify spending hundreds of millions or even billions of dollars on a mission that could be over in a matter of hours and not give us what we need”.
Just think about that for a moment, I implore you. Some scientists now believe there’s “something alive” in the atmosphere one planet over, and not only does it barely make the news cycle, serious people are actually debating whether or not it’s “worth” spending a currency we print to go and check it out for ourselves.
I suppose I shouldn’t be surprised. This is a country where politicians on both sides of the aisle continue to pretend that wholly imaginary budget constraints are holding the government back when it comes to, for example, preventing ~30 million people from experiencing food insecurity during a pandemic (that’s how many answered “sometimes not enough to eat” or “often not enough to eat” in late July in response to a Census Bureau survey).
The absurdity of this has long been criminal. In 2020 it turned deadly. If we persist, it will be existential.
But hey, look at the bright side: When your grandchildren’s grandchildren can’t breathe the air anymore, at least the national debt won’t be out of control.
More abstraction for a populace addicted to illusion……(not your article)…..taking us headlong into an unknown…..will reality ever bite back?
It might get a bit more real very soon as millions are starting to get their utilities turn off as the moratorium ends.
The general population won’t learn MMT because politicians won’t allow themselves to be shown the shills that they are.
I not use MMT to put Americans back to work doing something useful; pay a decent wage to work outside fixing, clearing or building stuff.
That should say “Why not use”
Already did that 2006 to 2008 when most of the scrap metal went from the US to China for their Olympic Birds nest and the huge dams.
Whats really needed is a huge push for a remedial education system and a age/skills tiered minimum wage.
China was willing to pay for that scrap and the US was not. The market dictated the home of the metal not politics.
Ironically, some inflation via MMT, or other government spending, would help reduce personal debt, as increased demand from people that rely on a paycheck, would feed through to increased hiring and wages, which would slowly eat into student loan, mortgage, credit card, auto debt… etc. personal debt is a tax on future spending and matters a lot more than government debt.
I’m having trouble understanding a world where MMT is the norm. Is the utopian MMT world a place where everyone eventually lives in a mansion and eats steak and lobster. It sounds great, but why would a rancher or fisherman go to all the trouble of supplying steak and lobster when the government will just hand out money?? But then it seems to center around the USA printing the reserve currency. Does this also mean that everyone in Zimbabwe and Ecuador and Thailand will also enjoy the miracle?? If not, i don’t think this would end well. And how do you measure wealth when you can just print what you think you need?? What actually is an MMT dollar worth?? Why bother having an income tax?? That just seems to be a repressive way to extract money from the poor and another quandary for the rich to avoid paying. As MMT is supposedly now in effect, I guess we’ll all just have to sit back and wait for this to sink in. It’s like no longer having a defined value to tie the worth of your money to. I hope it won’t be like being on the Edmund Fitzgerald without a rudder or a compass.
Man O’ Lourdes – the small bit of reading I’ve done suggests that there is a bit of constraint, in theory. When inflation rises too much, legislators will hike taxes to cool things down.
Two interesting points there.
One is that taxes are now a monetary policy lever rather than a source of revenue. Ponder that one for a moment.
The second is related — why would any politician on a two year term ever vote to raise taxes soley to cool down inflation?
But those are in a pure MMT system. The closest real world example we have is Japan. What a disaster, right? Really?
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Should do more reading… Start here https://docs.google.com/document/d/1gvDcMU_ko1h5TeVjQL8UMJW9gmKY1x0zcqKIRTZQDAQ/edit
MMT is being embraced by more and more because we can’t possibly believe in a “balanced budget” in these conditions. The pandemic crisis is proving the basic tenets of MMT (hey, it has persuaded the Fed) as we are increasing the monetary supply without limits and are still worried about deflation. The real test–and the need for a steady and intelligent hand–is keeping the “unlimited” spending confined to creations of recognized value such that inflation does not destroy the process. We have no experience with openly embracing MMT and using its premises to advance greater equality of economic benefits, health care and other obvious benefits. If we spend it on unnecessary defense, walls and other unproductive b.s., inflation will bite us in the ***. But when was the last time you saw a steady and intelligent hand in a position of overall responsibility? Good luck to us all.
Agree use MMT money as a investment in America’s future. Eventually inflation will rise and we will have to raise taxes and interest rates but that could be many years from now.
Well stated!!!
Why thank you, kind sir.
was going to send to you…
This post is emblematic of why you are one of the very best reads in finance/econ… a fair treatment of our exchange where many with a platform such as yours would have likely just run over me. Warren Mosler (MMT “founder”) is my mentor, and being that I learned much of what I know from him first hand, I am sensitive to what are often semantic differences in wording that can lead to erroneous characterizations and conclusions. And, since your site is one of the few places that give “MMT” fair treatment, I did think it appropriate to highlight the potential pitfall of describing MMT as something that’s “implemented”. Apologies if my tone implied that I believed you harbored such a misunderstanding. I can’t speak for many of the prominent MMT academics, but I can tell you that Warren Mosler never represent his personal epiphany as if he’d discovered something novel. Quite contrary actually, when he determined (as a bond trader) that buying bonds from the Tsy or the Fed were functionally the same thing and therefore bond sales by Tsy was actually a monetary policy operation and not about funding govt spending. The 1st thing he did was try to find others who saw it the same way to verify his thinking. He was actually surprised by how few people he was able to find that realized that govt spending was not revenue constrained, per se. It simply was not a part of the dominant neo liberal paradigm. And being that MMT is a description of monetary and fiscal operations, the language used matters. For example, many MMT proponents say things like “taxes don’t fund govt spending”, which causes confusion because while govt spending isn’t dependent upon tax revenues, tax liabilities are necessary to create demand for the govt’s otherwise worthless currency.
I also challenge the premise that the public would push policy towards inflationary overspending if it understood that the federal govt wasn’t revenue constrained. I think most empirical evidence actually points to a public and politicians that are more tolerant of unemployment than inflation.
” I think most empirical evidence actually points to a public and politicians that are more tolerant of unemployment than inflation.” Thank you for simplifying reality.
Gentlemen, I appreciate your comments. I read them and re-read them. I am no closer to knowing what an MMT dollar is worth or how you peg it’s value. it sounds like taxes and inflation are used as controlling instruments to try to keep the dollar within whatever range the government and the fed deem necessary and that the government is being relied on to keep the printing presses from overheating. Fat chance.
The USD is a simple public monopoly… USD can only come from the govt and it’s agents (TSY, Fed, chartered commercial banks, etc.), or it’s counterfeit. Consider that bank created money denominated in USD nets to zero (bank deposits are the acct holders asset and the bank’s liability, and are off set by loans which are the bank’s asset and the borrower’s liability). Monopolist are necessarily the price setter. Therefore, the price level is necessarily a function of prices paid by the government’s agents when it spends, or collateral demanded when it lends. Said in another way, the USD is worth whatever one must offer to attain it. 6 min of labor at $10/hr, for example. And since, in the first instance the govt is the ultimate source of USD, it’s the price setter whether it (or we) realizes it or not. Market forces continuously discover all other prices as expressions of relative value to the prices set by govt. This is always the case whether you believe MMT to be an accurate description or not.
Again…I thank you for your reply. But again it seems to revolve around the reserve currency, The US dollar. If MMT is universally accepted by the populous, what happens in countries and their people if they don’t deal with the US dollar in everyday life. There have been several articles written about the cracks appearing under the dollar from the antics of the Trump administration and it’s ham-handedness in dealing with other nations. it may be the reserve currency now, but… if you have two or even three reserve currencies does it still work? Or do they compete with each other until one is declared the winner? Maybe I’m too old to worry about this.
While a paradigm may be universal, descriptions are necessarily specific. The description of one system does not preclude one from having understanding of another.
Also, I reject your premise that anything I said is dependent upon being the “reserve currency”. My description applies to CAD, JPY, GBP, AUD, etc. What is it that you think relative value means?
And consider that “reserve currencies” are just an artifact of trade policy and other institutional structures. For example, in order for CNY supplant USD as “reserve currency” Chin would have to accept running large and persistent trade deficits and potentially higher unemployment.
MoL brings up a basic point. The US can pull off MMT given its reserve currency role. Japan can do it because it does not rely on foreign buying of their government bonds. Australia relies on foreign capital, so any major move into MMT is out. Canada? Not sure but probably not.
This isn’t really true. Australia doesn’t have to issue any bonds at all if they don’t want to. Alternatively, they can buy them from themselves, like they’re doing right now under YCC. An AGB is just an interest-bearing Aussie. In order to grasp this, you really have to stop persisting in mistaken beliefs about what debt, taxes, and deficits are. This essentially applies to any currency-issuing, advanced economy. Obviously, when you start talking about real EMs (Australia is sometimes loosely classified as such, but it’s a DM) it gets considerably more indeterminate, but arguing this point when it comes to GBP, AUD, CAD, JPY, etc. is fruitless. It’s not that you’re “wrong”, it’s that the concept of “right” and “wrong” has no meaning here. MMT is just a description of how it works in currency-issuing, advanced economies. No advanced economy really “needs” to borrow or tax first before spending. It’s just not true and it’s also not how it works in real life.
“Relying on foreign capital” is something different from borrowing in other currencies. Borrowing in USDs (or EUR or JPY or etc.) if you’re an EM can be disastrous because you can’t print the currency that you borrowed in. That’s not the same thing as foreign investment in local currency bonds, which can always be paid off by definition because they are denominated in the home currency, When that home currency is issued by a reliable, stable, advanced economy, there really isn’t a problem.
Good point there. Singapore could do it. But that runaway inflation risk a la Zimbabwe usually lurks for EM countries which get shut out of USD denominated markets.
An interesting case is India. “Hot money” flows in & out of the country pretty regularly wreck havoc on domestic money markets and interest rates. Perhaps that has to do with the convoluted structure of their capital markets and banking system. Dunno.
In any case, it has been gratifying to see “austerity” as the go-to response to a downturn lose almost all credibility post 2008 and now watching the Calvinist doctrines embedded in conventional economic and political theory being called into question.