What we need to know about deficits

 I submitted this to the Albuquerque Journal on Sept 23. It was fun to write. I hope they publish it.
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 Martin Crutsinger (AP) recently informed us in the Journal that the US Government deficit has increased to over a trillion dollars in the first 11 months of this fiscal year. He also reported the $379 billion of interest payments. And, he concluded with a quote from Michael Peterson, head of the Peterson Foundation, ”Absent more responsible budgets, the deficit and interest costs will continue to grow rapidly, diminishing America’s future.”

His numbers are correct, not his conclusion. I’ll attempt to explain why in straightforward  terms. Deficit hawks cling to the myth that “government must treat its spending like a household.”

The federal government creates all US dollars through the Fed (Federal Reserve Bank). Where else can dollars come from? Neither China nor billionaires can create dollars. Households and businesses use the US dollars that government creates. That's the crucial difference, user vis-a-vis creator.

The prevailing myth is that government, like a household, must borrow from the private sector to get money to spend. Also, the myth claims that taxes confiscate dollars from households and businesses. Nowhere does the myth explain the origin of dollars.

This is the real story. Upon authorization from Congress the federal government creates dollars to buy goods and services from the private sector. Then, government takes back some of those dollars through taxation. And, the Treasury sells securities to soak up the dollars remaining in the private sector after taxation. Those treasuries remain in the private sector as savings, and the interest on them is income for the private sector.

As a point of simple logic, dollars must exist in the private sector before tax collection or treasury sales (borrowing) is possible. That is, government must spend before it can tax or borrow. Like tickets collected at the ballpark dollars must exist in the economy before collection is possible.

Government deficits become private savings. So, future generations benefit from federal investment in infrastructure, research, and education. Also, they get to keep the savings in the economy. The national debt resulting from deficits is never paid off. We outgrow it. 

Data show that government deficits result in private surpluses (savings).

Naysayers raise the specter of hyperinflation - Weimar! Zimbabwe! - when they consider government creating money. They miss the point. Government uses the money created to buy real goods and services not pour money into the street. Inflation occurs not from too much money but a lack of productivity or natural resources. Government can always buy what is for sale in US dollars including labor.

While the deficit hawks implore the government to live within its means, deficit owls know better. They implore government to live up to its means. The productive capabilities of the USA are legendary. Still, we fail to employ all who want a job and fall into the neoliberal trap that anything worth doing is worth doing for profit. So, we denigrate public service and let people suffer and die from lack of housing and health care.

Understanding how our fiscal system works allows us to realize much greater production and more equitable distribution of our nation’s vast wealth.

Don’t worry about the national deficit coming home to roost

 I submitted this to the Raleigh N&O on August 28. Not my best effort, but is was timely.
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In response to Professor Campbell’s commentary in The N&O on August 18, I would like to set the record straight on the growing national deficit coming home to roost. It won’t.

The national deficit is the annual amount of money spent by the federal government that is not taxed back from the private sector. Thus, it remains in the private sector. By law the US Treasury must sell securities to soak up those dollars not taxed. Treasuries not sold at auction will be bought, by law, by designated private Primary banks. Treasury auctions never fail.

China gets into the act, because it has a lot of US Dollars from our purchases of Chinese stuff. It can choose to hold those dollars in its account at the US Federal Reserve (Fed) or invest them in the US economy. Often, China chooses to buy interest bearing treasuries, so it holds some $1.2 trillion in US securities.

If China decides to dump those securities, it can sell them to anyone. To accommodate China the Fed might buy the securities back. When the Fed started Quantitative Easing in 2008, it showed that it can buy US treasuries from anyone without upsetting the economy. It expanded its balance sheet to $4 trillion in treasury and private assets and the same amount in reserves without causing inflation predicted at that time.

According to the Daily Treasury Statement, as of August 28, the Treasury had redeemed $7.9 trillion and issued $8.3 trillion in treasuries in the month. China’s operations would hardly rattle the system.

If the Fed buys the securities back, China is in the same position as before it bought the securities, $1.2 trillion on deposit at the Fed. Then China has the problem of finding buyers of the currency to invest in other countries.

The problem is China’s not ours. Our national deficit is nothing more than a harmless tally of the amount of money not taxed back after federal government spending. We need to beware of inflation not the size of the deficit. As for the interest on the national debt, it is set by the Fed and is income mostly to the domestic private sector.
Dan Metzger, is a retired physicist and writes about money matters. He lives in Cary, NC.

Money and Gold: A Primer

 Duane and I have been working on this for a while. We are attempting a common sense approach to understanding our monetary system. Hopefully, we will stimulate readers to delve more deeply into the working of a sovereign fiat monetary system.

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The US currency is no longer based on a gold standard. That has huge implications for all financial policy decisions made by the US government. That change in our monetary system completely changes the way we should think about all monetary and fiscal operations.  There is no longer any equivalence in financial management between households and the federal government. Unfortunately, the wrong belief that our monetary system is constrained as if our currency were still on the gold standard continues to cripple our nation’s sustainable economic growth in the name of “fiscal responsibility.”

Nixon Did It

In 1933 President Roosevelt took us off the gold standard domestically to implement his successful New Deal program. But, the value of our money was still tied to the value of gold through foreign trade. Gold was the means of payment for all imports.

In 1971, President Nixon officially defaulted on international gold payments. That action had the effect by 1973 of changing our money to a nonconvertible, fiat currency with a floating foreign exchange rate.

Federal officials in Washington struggled for years to come to grips with the relationship between gold and currency. In the mid-70s they gave up any pretense of a dollar to gold monetary relationship. It is little wonder that to this day our currency is not widely understood. This lack of understanding has had a devastating impact on our fiscal and monetary operations.

Federal policy decisions based on gold standard beliefs are largely responsible for the massive wealth inequality in America today.

The Monetary Base and Inflation

Under a gold standard, a nation’s monetary base (Currency in circulation + Bank vault cash  + Bank deposits) depends on the amount of its gold supply and the value assigned to it. The only ways to expand the monetary base to promote economic growth are to arbitrarily inflate the value of gold or obtain more gold through mining or exports.

Simply stated, a nation must create money to buy gold from either gold miners in the private sector or foreign trade surpluses. Then the gold rests in government vaults and the private sector holds the money.

Having spent its money to buy gold, government must tax or borrow it back for its own expenditures. This familiar way of thinking about our currency persists to this day despite Nixon’s decision in 1971.

Under our current nonconvertible fiat system all that gold-centric thinking is wrong. We must rethink everything about how we manage our monetary base, where our money comes from and where it goes, how we manage inflation, and what we gain or lose in foreign trade. Our correct understanding of these issues impacts our ability to recognize whether policies help or hurt the economic and social issues that concern us every day.

The Federal Reserve Bank (Fed), or private banks acting as Fed agents, issue all US dollars.  There is no other source. The detailed double-entry bookkeeping that records fiscal transactions is beyond the scope of this note. But, the entries reveal that:

• The federal government creates money when it spends and destroys money when it taxes.

• Banks, accredited by the Fed, create money upon issuing loans and loan repayments destroy money.

So, the monetary base is flexible and varies according to the needs of government and the private sector to buy goods and services.

There is no limit to the amount of money the federal government can create. But, there is a limit to the nation’s productive capability, which includes labor, natural resources, and equipment. Interestingly, the New Deal initiated in 1935 demonstrated that we can manage our productive capacity to employ all who want to work.

Inflation will rear its ugly head if the federal government tries to buy more than the country can produce. When the country turned its productive capacity to win World War II, measures were taken through price controls and rationing to contain inflation.

For decades since WWII, the productive potential of the nation has been underutilized. That is, federal government spending has been below that necessary to use all the nation’s available resources including labor.  In fact, government practice has been to enforce involuntary unemployment on the labor force to maintain a buffer stock of unemployed labor.

Think about it. The Fed, through its management of the federal funds rate (the interest rate at which banks borrow in the federal funds market) tries to control inflation by assuring that 3% to 5% of the labor force remains unemployed. This buffer stock of unused labor keeps wages low to prevent dollar devaluation, which is inflation.

Buffer stocks are nothing new; they have been used to control the price of grain with the government guaranteeing the price of a commodity. To assure a minimum price farmers would receive for their crops, government would buy excess grain and store it in times of plenty. Then it would sell grain at the same price in bad growing seasons.

A buffer stock of some sort is always needed to preserve the value of a sovereign currency. In the past we used gold. Now we use the price of unemployed labor. Wouldn’t it be much better if we used the price of employed labor by implementing a federal jobs guarantee (JG)? The JG would establish the minimum wage and other conditions of employment. Business firms would then have to meet or beat these minimum terms when hiring.

We must control inflation. We can do that by abolishing involuntary unemployment and implementing the JG. That will ensure that everyone who wants a job can have one at a livable wage and provide useful public service.

Deficits Matter; We Need Them

If government taxes less than it spends, those dollars, pejoratively called a deficit, remain in the private sector to grow the economy. When government decides to spend more than it taxes, it borrows by selling US Treasury securities that soak up the dollars not destroyed by taxes. Then, the “deficits,” as US Treasuries, remain as assets in the private sector.
So, the total sum of US Treasuries outstanding is a record of the dollars not taxed out of existence since the beginning of the republic. That sum, trumpeted with alarm, is called the national debt, an economically meaningless historical record that causes much political consternation and misunderstanding.

Under a gold standard, as stated above, government must tax or borrow from the private sector to obtain funds to spend.

Under our fiat system, a system that people have used for most of human financial history, it is obvious that taxation and borrowing can not take place unless there is already money in private hands. So, like the gold standard, the federal government must first spend funds into private hands before it can collect taxes or sell treasuries.           

Think about it.  When one earns a dollar, one can only consume, pay tax, or save. Nothing else is possible. When one uses money to consume, the recipient of that money has the same three options. Any money saved is money not taxed away. We see that savings are possible only when the government spends more than it taxes. That is, the federal government must run a “deficit” and increase the national “debt” to make private savings possible.

Many politicians advocate reducing the national debt. Some promote a balanced budget amendment to the Constitution. Doing that would prevent any possibility of creating private savings. Economic stagnation, recessions, or depressions would become more common.  The chart below illustrates the situation. Federal deficits correspond to private savings.

To retire the national debt would mean retiring all US Treasuries, which would eliminate all private savings. The chart clearly shows that the reduced deficits during the decade leading up to 2008 resulted in reduced private savings that lead to the Great Recession. Let’s hope that future presidents understand what deficits mean, learn from the consequences of Bill Clinton’s deficits, and don’t repeat his mistake.

Taxes Matter; We Need Them

We have seen that federal spending is a separate federal government financial operation and must precede taxation. Still, taxes are necessary for the following reasons.
Taxes

• legitimize our currency. They create demand to acquire the tax credits (dollars) that government accepts in payment of taxes.

• are a means of averting inflation by reducing demand for consumption.

• inspire commerce to earn tax credits.

• can penalize lawbreakers.

• can reduce wealth inequality.

Borrowing; We Don’t Need to do It

Under the gold standard, government sold interest-bearing assets, US Treasuries, to preserve its gold supply. Treasuries were an attractive alternative to potential buyers of gold, and they served as convenient collateral in financial transactions.

Under a fiat system, government has no need to borrow, because government can create as much money as needed to achieve its objectives within the constraints of its available resources.  But there remains a market demand for US Treasuries in private sector financial transactions and for risk-free income. So, the selling of Treasuries to match deficit spending has continued as a financial practice as a matter of superfluous law.

Also, the Fed buys and sells treasuries to adjust the quantity of reserves in the banking system  to defend its funds rate target. However, the Fed could defend its rate target as well without Treasuries by simply paying interest on bank reserves just as it has done since 2008.

Banks Are Important

Bank lending creates most of our money. As private loans must be repaid with interest they add no net financial assets to the private sector. However, in the absence of federal deficits, the monetary base will grow as long as lending outpaces repayments and will decrease whenever payments outpace lending.

Indeed, acting for the government, the Fed issues money on a monopoly basis as needed by the economy. The Fed sets the price, the federal funds rate, at which banks can borrow money. Then the Fed supplies all that is needed in the overnight federal funds market at that price.

Many otherwise knowledgeable people still wrongly think that the money supply is limited as if it were based on gold and that any increase in the monetary base causes inflation. Further, common thought holds that competition between private and federal borrowing will “crowd out” private borrowing by driving up interest rates. The common belief that there is a fixed money supply, as with a gold standard currency, causes government and private companies to compete for money. Thus, if the government uses too much money, the interest rates go up and crowds out borrowing for private businesses.

In fact, contrary to common thought, federal government deficit spending increases the monetary base and will “crowd in” private investing if government spending is appropriately targeted into the domestic economy.

Because the Fed manages it, the federal funds rate is a policy variable not controlled by market influences. Bond vigilantes are artifacts of the gold system and do not exist in a fiat monetary system. Let us be glad the gold system is gone.

Trust Funds Are Misunderstood

Unlike a gold based monetary system, federal government saving has no meaning in a fiat system where needed money is always available.

So, there is no need for Medicare and Social Security Trust Funds, which are government savings accounts. Therefore, projected budget shortfalls are no real threat to Medicare and Social Security. The threat is embodied only in current laws that need to be changed.

Congress can always make the necessary funds available. But, with funds alone it can not make the necessary personnel and facilities readily available. That takes proper federal government management, foresight, planning, and funding necessary to ensure that care facilities and care givers are available as needed.

Foreign Trade Is Misunderstood

Under a gold system, imports would draw down a nation’s gold bullion reserves. So, countries would try to balance trade to maintain their monetary base. US trade was well balanced until the early 1970’s when the gold standard no longer applied. President Trump’s trade policies, which make use of tariffs to decrease imports, models the Gold standard. In that case exporters are winners of gold and importers are losers.

Under the fiat system, a nation trades its own plentiful currency for imports of products or services from foreign workers using foreign resources. Thus, exports are costs to us, as the products of American workers result in benefits for another nation. In what is called the “real terms of trade” the importer is the winner as its residents enjoy an improved standard of living.

It is true that imports tend to increase involuntary unemployment in the US. However, as stated above, under a fiat system the nation can eliminate involuntary unemployment and stabilize the value of the currency with a JG.

Conclusion

In the early 1990’s a heterodox school of economics rediscovered these insights into a fiat monetary system. Since then the school has codified its work in many publications, lectures, symposia, and college text books under the moniker of Modern Monetary Theory. Its work establishes that the fiat monetary system reveals fiscal policy space not available under gold standard constraints.

The school encourages any country with a sovereign, nonconvertible, fiat currency with a floating foreign exchange rate to maximize its productive capabilities to the benefit of all its residents.

Programs like universal healthcare for all, free college education at public institutions of higher learning, superior public education system, modernization of our transportation, water & sanitation infrastructure, and addressing the climate crisis with the urgency it demands are not radical.  They are achievable within the constraints of our available resources.

Unemployment indicates that federal deficits are too small and fiscal stimulus should be implemented. Inflation indicates that the limits of productivity are being tested. Then remedies such as taxes, spending cuts, or regulations are in order.

Republican Senators Denounce MMT

This is a short version of the previous post. I submitted it to the Washington Post on May 11. It was not published.
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Five US Senators propose a Resolution to condemn Modern Monetary Theory. They are as misguided as those condemning the Copernican view of planetary motion. MMT takes an enlightened look at economic practices staring us in the face.

Current economic policy depends upon maintaining a consistent level of unemployment to manage inflation. Consider that! Government enforces involuntary unemployment to prevent inflation.

MMT proposes to prevent inflation by assuring full employment with a federal job guarantee. Resource availability demands that deficit spending be limited to that required for full employment. That’s a lot more than currently allowed.

 MMT shows that government spending is not limited by available dollars. It is limited by available real resources that include manpower, raw materials and productive capacity. Households must live within their means; sovereign nations must live up to their means.

Government fiscal austerity has backfired around the world giving rise to tremendous wealth inequality and the consequent rise of populism. The economic insights provided by MMT show that there is room for much more federal fiscal stimulation of the economy.

MMT is backed by decades of study and scholarly publications. The policies proposed by MMT would result in more equitable distribution of wealth, full employment, and maximum use of our nation’s productive capacity. Why would anyone condemn that?

Senator Thom Tillis is Wrong to Condemn Modern Monetary Theory-MMT

This was submitted to the Raleigh New & Observer on May 4. It was not published.
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Of all the economic practices that have been or might be implemented by our federal government five US Senators propose a Senate Resolution to condemn the one practice that promises to do the most good. They apparently admire those practices that continue to enrich the top 10% at the expense of the less fortunate. They cling to the old rationale that the federal government must balance its budget like a household or burden future generations with debt. MMT shows them to be wrong.

Senator Tillis and two of his Senate Banking Committee colleagues along with two other Senators demonstrate with this ridiculous resolution that they favor their rich donors over the rest of us. They take issue with federal deficits proposed by “radical Socialist policies” that will “explode our national debt” and burden future generations. It’s a familiar refrain used to restrict government spending that would benefit us all.

MMT is a study of the fundamental fiscal and monetary operations at work in our economy. On the basis of simple accounting arithmetic MMT recognizes that in our economy a federal deficit provides a surplus in the private sector. Because the government issues our money, it is not constrained like a household budget. Deficits don’t burden future generations; they enrich them.

Current economic policies depend upon maintaining a consistent level of unemployment to manage inflation. That means government enforces involuntary unemployment to prevent inflation. MMT proposes to prevent inflation by assuring full employment with a federal job guarantee. Deficit spending must be limited to that required for full employment.

Government enforces involuntary unemployment on millions of potential workers.

MMT shows that government spending is not limited by available dollars. It is limited by available real resources that include manpower, raw materials and productive capacity. Households must live within their means; sovereign governments must live up to their means.

Fiscal ignorance is not limited to Republican conservatives. Too many Democrats also worry about deficits and think that government deficits “crowd out” private investment, because there is a limited money supply. This ignorance also leads to the notion that deficits cause interest rates to increase. MMT understands that interest rates are set and controlled by the Federal Reserve Bank.

MMT understands that money is created by both government spending and bank loans. And, money is removed by federal taxes and loan repayments. So, when the private sector is overburdened with debt, government spending can keep the economy humming. Obviously, Senator Tillis and his Banking Committee cohorts don’t understand banking and government fiscal operations.

Current economic practices put money in the pockets of the rich in the hope that money will “trickle down” to the rest of the population. That has never worked anywhere in the world. MMT understands that our economy runs on sales. So, putting more money into the population will result in more sales creating demand that will encourage investment.

Government fiscal austerity has backfired around the world giving rise to tremendous wealth inequality and the consequent rise of populism. The economic insights provided by MMT show that there is room for much more federal fiscal stimulation of the economy.

MMT is backed by decades of study and scholarly publications. The policies proposed by MMT would result in more equitable distribution of wealth, full employment, and maximum use of our nation’s productive capacity. Why would anyone condemn that?

Modern Monetary Theory Makes Sense

 I submitted this to the Raleigh News & Observer on April 7. It didn't sell.
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On March 31 The N&O published a New York Times OpEd by Robert Shiller titled “Modern Monetary Theory Makes Sense, Up to a Point.” Shiller like many of his mainstream colleagues, which include Krugman, Summers, Rogoff and others, doesn’t quite get the essence of MMT. They all agree that it is OK for government to run fiscal deficits sometimes, but maybe not too much. How much would appear to be anyone’s guess.

MMT is to mainstream economics what Copernican planetary theory was to the prior Ptolemaic view. It’s no wonder MMT is attacked without being understood. MMT gives us an entirely new perspective on our economy.
MMT focuses on achieving full employment, while the mainstream focuses on reducing federal deficits, which are government spending in excess of taxes.

MMT explains that deficits are normal and necessary for a rich country like ours. Moreover, it tells us how large the deficits should be. Deficits need to be large enough to achieve full employment for anyone willing and able to work. Mainstream economists obsess about achieving balanced federal budgets at least in the long term.

National Debt is equivalent to Private Sector savings. Your family share is what you own.

Mainstream economists preach that taxes and borrowing fund government expenditure. MMT teaches that the government must spend before there is money to be taxed and borrowed.

Mainstream compares government finances to those of a household or business. It also insists that when government competes for a limited supply of money private investment will be “crowded out.” MMT shows us that the federal government can purchase goods and services limited only by available resources. Government competes with business for those productive resources not for money.

The mainstream does not tell us how the money supply comes into being. It just exists in limited quantity as a veil behind which things happen. MMT explains that money is created by both federal deficits and bank loans and that the money supply expands and contracts depending on demand.

Further, MMT correctly regards the Federal Reserve Bank (Fed) as the monopoly issuer of US dollars. It sets the price of money, the Federal Funds Rate, and supplies all that the economy demands at that rate.

Under current monetary principles the Fed manages inflation by the morally indefensible practice of limiting employment opportunities for workers as it raises interest rates based on unemployment statistics. It tries to force 3% to 5% unemployment or some 4,500,000 to 7,500,000 people to maintain a pool of unemployed workers. That keeps wages low.

MMT employs taxes and borrowing as tools to manage inflation. Also, MMT seeks to achieve full employment through a Job Guarantee that maintains a pool of federal workers (managed at local levels) employed at a livable minimum wage. Businesses can draw upon this pool, if they meet the minimum standards set by the Job Guarantee. This practice would enforce a minimum wage and eliminate parasitic employers (those relying on food stamps to supplement wages).

We need only look at history to recognize the value of federal deficits. Our nation has been running deficits for over 200 years. In that history government has run a significant surplus seven times. And each time the surplus was followed by a terrible depression or recession. Most recently were the surpluses run by president Jackson (1835), who was widely acclaimed for paying off the national debt. Then came the surpluses before the Great Depression, followed by those run by president Clinton, who is also widely praised. During the decade leading to 2008 federal surpluses and low deficits, drained financial resources from the private domestic sector, which led to the Great Financial Crisis.

MMT urges the country to expand its productive output to the maximum and provide all residents with a decent living standard. Ambitious programs like the Green New Deal, universal health care, investment in education and infrastructure are well within our capabilities. It’s not about our nation living within its means, but up to its means. That is making America great.

In Defense of MMT

This is a response to a George-Will article published in the Albuquerque Journal. For the fun of it I submitted it to the Journal last week. It is an update and revision of the letter I previously submitted to the Raleigh News & Observer. Gotta keep trying.
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George Will, a great wordsmith, sells newspapers. But, his column in the Journal on March 14, which dismisses MMT (Modern Monetary Theory) as a late-night commercial hoax, exposes his economic naiveté. Will and the economists he quotes, Summers and Furman, are members of an old-boys club, which includes Paul Krugman. That self aggrandizing club has been slow to grasp the essence of MMT.

MMT represents an economic model to replace the so-called Neoliberal model that over the past half century has resulted in massive shifts in wealth to the rich at the expense of the poor and not-so-rich. Indeed, the disappearing middle class has been well documented.

The Neoliberal model obsesses about national deficits and debts, which it misunderstands. And, through its adherents’ inexorable influence on our Congress, it extracts tax benefits for the rich. The model promises investments by the rich will cause trickle-down wealth for everyone. That has not worked out well anywhere!

Results of neoliberal policies

MMT recognizes the power of a state issued, sovereign, fiat currency. Federal spending creates money in the economy while taxes, in effect, destroy money. We call the difference between spending and taxes a deficit, and deficits accumulated over time we call the national debt.

The Neoliberal model by design or ignorance fails to recognize that US Treasury securities, which are private assets, make up the national debt to the penny. Imagine that! The infamous National Debt Clock is also the National Savings Clock. We don’t pay off the national debt. It remains as the record of net private assets created by government deficit spending since our republic began.

Government can not run out of money as long as it does not promise to convert it into something it can run out of, like gold. Of course, the world rejected the gold standard when President Nixon took us off the international gold standard in 1971.

So, unlike households and businesses, there is no financial limit to government spending. But, MMT recognizes that there is a real constraint on spending, because there is a real limit to productive resources; labor, equipment, infrastructure, and natural resources.

Therein lies a caution. The purchase of more goods and services than the nation can produce will cause inflation.

Implied in the above is the counterintuitive fact that government, again unlike households and businesses, does not need to tax or borrow to spend. Taxes and borrowing, the sale of treasuries, are useful to avert inflation.

Actually MMT is not so modern. Marriner Eccles, who was FDR’s Fed Chairman, helped steer the nation out of the Great Depression in the 1930s. Eccles understood that our great nation had the productive capacity to afford everyone a decent standard of living. Beardslee Ruml, 1946, Chairman of the Fed Reserve Bank of New York, published Taxes for Revenue are Obsolete. Abba Lerner, 1943, advocated full employment in Functional Finance and might be the father of MMT. He would balance the economy not the budget.

The economic lessons of the 1930s and 40s fell under the sway of Milton Friedman, a major proponent of free-market capitalism, in the 1970s. He might be the father of the Neoliberal model. But, we credit Warren Mosler with rediscovering the MMT model in the early 1990s and stimulating solid academic research. That research is published and available to those willing to learn.

With insights provided by MMT we are going back to the future with the realization that this great country can afford a Green New Deal, including a federal job guarantee, and universal healthcare. MMT gives us the vision to look beyond misunderstood deficits and debt to focus on what our nation can do with its great productive capacity.

There is a stark difference between households that must live within their means and sovereign nations that should live up to their capabilities. Don’t be persuaded by the knee-jerk reactions from the old-boys club.

AOC is right about a Green New Deal

Today I submitted the following to the Raleigh News & Observer. It felt good to write something again.
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Alexandra Ocasio-Cortez is well known and both maligned and praised around the world as is her signature, audacious proposal for a GND. When asked recently on a TV program how she would “pay for” such an ambitious program, she answered with aplomb, “The same way we pay for our military.” To paraphrase, the government writes a check and government checks don’t bounce.

She has learned about Modern Monetary Theory (MMT), a description of the way our economy works that is gaining widespread traction with economists. MMT is also both maligned and praised around the world. It represents an economic model to replace the so-called Neoliberal model that over the past fifty years has resulted in massive shifts in wealth to the rich at the expense of the poor and not-so-rich. Indeed, the disappearing middle class has been well documented.

The Neoliberal model obsesses about national deficits and debts, which it misunderstands. And, through its unconscionable influence on our Congress extracts tax benefits for the rich. The model promises investments by the rich will cause trickle-down wealth for everyone. That has not worked out!

https://www.youtube.com/watch?v=_HKhP0nzaAM

MMT recognizes the power of a state issued, sovereign, fiat currency. That federal spending creates money in the economy and taxes in effect destroy money. We call the difference between spending and taxes a deficit, and deficits accumulated over time we call the national debt.

The Neoliberal model by design or ignorance fails to recognize that US Treasury securities, which are private assets, make up the national debt to the penny. Imagine that! The infamous National Debt Clock is also the National Savings Clock. We don’t pay off the national debt. It remains as the record of net private assets created by the government for public use since our republic began.

Government can not run out of money as long as it does not promise to convert it into something it can run out of, like gold. Of course, the world rejected the gold standard long ago.

So, unlike households and businesses, there is no financial limit to government spending. But, MMT recognizes that there is a real constraint on spending, because there is a real limit to productive resources; labor, equipment, infrastructure, and natural resources.

Therein lies a caution. Attempts to buy more goods and services than the nation can produce will cause inflation.

Implied in the above is the counter intuitive fact that government, again unlike households and businesses, does not need to tax or borrow in to spend. Taxes and borrowing, the sale of treasuries, have other purposes beyond the scope of this note.

Actually MMT is not so modern. Marriner Eccles, who was FDR’s Fed Chairman, helped steer the nation out of the Great Depression in the 1930s. Eccles understood that our great nation had the productive capacity to afford everyone a decent standard of living. Beardslee Ruml, 1946, Chairman of the Fed Reserve Bank of New York, gave a paper entitled, Taxes for Revenue are Obsolete. Abba Lerner, 1943, advocated full employment in Functional Finance and might be the father of MMT.

The economic lessons of the 1930s and 40s fell under the sway of Milton Friedman, a proponent of free-market capitalism, in the 1970s. He might be the father of the Neoliberal model. But, we credit Warren Mosler with rediscovering the MMT model in the early 1990s and stimulating solid academic research.

With insights provided by MMT we are going back to the future with the realization that this great country can afford a GND, including a federal job guarantee, and universal healthcare. MMT gives us the vision to look beyond misunderstood deficits and debt to focus on what our nation can do with its great productive capacity.

There is a stark difference between households that must live within their means and sovereign nations that should live up to their capabilities. AOC is on firm ground.