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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.
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| 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.
