Modern Monetary Theory and Local Alternative Economies
In two articles I wrote recently, here and here, I explore Modern Monetary Theory, an emerging discipline of economics which “.. describes the way that money works in a way that an 8-year-old can grasp more readily than a PhD, which in itself is unnerving. ‘The contribution of MMT is not the discovery of new facts,’ (James) Galbraith says. ‘It’s a teaching core of things which are factually uncontroversial.’ But its implications can be radically humane. What’s threatening to the establishment, Galbraith adds, ‘is that the narrative is very compelling.” https://www.thenation.com/article/the-rock-star-appeal-of-modern-monetary-theory/
In brief, MMT reveals to the public facts about how our monetary system works that politicians, if they are aware themselves, prefer we do not know. First, the US is a monetarily sovereign nation. That means it established its currency by law and has complete control over it. Only the federal government can create our sovereign currency, private banks create credit. The US cannot become insolvent in its own currency, unless it chose to. Second and related, the US government creates all money through the process of spending or paying bills. Tax revenue is not required for the government to spend. In fact, it must spend for the private sector to have dollars with which to pay taxes, since all dollars originate with the Feds. Government spending necessarily precedes the payment of taxes.
Third, since the government has the ability to create money by spending, it has no need to borrow money, for example, by selling Treasury notes. Consequently, it actually has no debt. What traditional economists and politicians refer to as the huge US debt has been shown to be public savings deposited with the Federal Reserve. Functionally equivalent to a CD you or I might hold from a bank.
And forth, these facts destroy the pejorative charge of out of control “deficit spending”. Since the Feds can create money at will, it can never spend more than it has. The danger of putting too much money into the private economy is inflation, by watering down the value of the dollar. Allegations of the dangers of deficit spending have never materialized. Inflation has been no issue for many years. Further, the Feds use taxes to control inflation by drawing off the excess supply. A deficit in one sector of the economy is directly balanced by a surplus in another sector. So, if the federal government is in deficit, the sector comprised of all of us and businesses are in surplus. MMT theorists believe a favorable situation exists when the non-federal sector has a surplus. It means there is more money out there to spend, which in turn strengthens the economy. Government surpluses, on the other hand, represent a deficit condition in the non-governmental sector. Less money available to spend in the broader economy is a negative condition.
Our government continues to manage the money supply as it did before we went off the gold standard, even though that act changed the whole ball game. The former constraints are gone. Yet the Federal Reserve, the Treasury Department and the Congress behave as though the deficit and debt are real fiscal issues to be contended with. Policies designed to cope with these mythical barriers unnecessarily afflict the population with shortages of the services and resources required to maintain a decent quality of life. It need not be that way. In reality, the government can create all the money it needs to correct all of the grievous conditions we Americans face, from unemployment, to poverty, to lack of access to health care, to environmental destruction, to the crumbling infrastructure. It is a lack of political will that perpetuates these conditions, not a lack of dollars!
As the frankly liberating arguments of Modern Monetary Theory become more widely known, its positive potential to transform our nation (and other monetarily sovereign nations) draws closer on the horizon. MMT operates at the macroeconomic level, but its impact would be felt at the micro level of local economies, especially if deliberately directed that way. This article will address two promising avenues that can and should be pursued — the arena of public banking, and the MMT-style Jobs Guarantee (JG). I will use excerpts from the article from think COLUMBUS first, MMT Economics Offers Key to Funding New Economy and Green, Progressive Agenda by Chuck Lynd, to cover the topics. (http://dev.thinkcolumbusfirst.org/2016/08/mmt-economics-offers-key-to-funding-new-economy-and-green-progressive-agenda/).
Currently, the only existing public bank in the US is the Bank of North Dakota. A public bank is a financial institution in which a state or other public entity are the owners. It is a company under government control. From the BND web site:
In 1836, the U.S. Congress did not renew the charter for the Second Bank of the United States, opening the door for states to start their own banks. Alabama, Kentucky, Illinois, Vermont, Georgia, Tennessee and South Carolina all created banks that were completely owned by the state government. Missouri, Indiana and Virginia had banks with the State holding a majority interest and a number of other states created banks with the State owning a minority interest. By 1900, only Virginia and Kentucky survived. Today, these two banks are no longer functioning.
During the early 1900s, North Dakota’s economy was based on agriculture, specifically wheat. Frequent drought and harsh winters didn’t make it easy to earn a living. The arduous growing season was further complicated by grain dealers outside the state who suppressed grain prices, farm suppliers who increased their prices, and banks in Minneapolis and Chicago which raised the interest rates on farm loans, sometimes up to 12%.
North Dakotans were frustrated and attempts to legislate fairer business practices failed. A.C. Townley, a politician who was fired from the Socialist Party, organized the Non-Partisan League with the intent of creating a farm organization that protected the social and economic position of the farmer.
The Non-Partisan League gained control of the Governor’s office, majority control of the House of Representatives and one-third of the seats in the Senate in 1918. Their platform included state ownership and control of marketing and credit agencies. In 1919, the state legislature established Bank of North Dakota (BND) and the North Dakota Mill and Elevator Association. BND opened July 28, 1919 with $2 million of capital.
From Chuck Lynd: The state bank of North Dakota offers a model, since 1916 (sic), of how banks can serve the public interest through times of economic boom and bust. Their well-documented success is now being studied for potential replication in a number of cities and states, including California.
Here in New Mexico the idea is being considered by the City of Santa Fe.
Lynd: If a state bank can work alongside private sector banks, imagine how much greater the impact might be if the Federal government, the sovereign issuer of currency, could begin to increase public investments in developing renewable energy, infrastructure improvements, and employment programs? These investments would be similar to recent stimulus packages proposed under President Obama during the Great Recession, but they could be implemented on a much larger scale and could be publicly financed without creating funds from debt to be paid back with interest. Franklin Roosevelt’s New Deal offers a somewhat similar model, in that the Federal Reserve was used to create low interest loans for small farmers and business owners during the Great Depression.
Not all MMT economists support local economic development or focus on sustainable development policies. However, their approach to public finance and advocacy of alternatives to debt-based money creation could be the mechanism that unlocks needed capital investments that could be directed to local economic development and green infrastructure projects. The time has come for the Localists and the multiple threads being woven together in the New Economics Coalition to join forces with a new fiscal engine capable of driving their progressive, sustainable agenda.
Some of that investment money could be directed toward alternate economy businesses, such as co-ops, workers interested in buying out their owners, co-op housing, community land trusts and mutual associations. In regions where community development banks do not exist, a public bank could play a similar role.
For more information on public banking see Ellen Brown’s Public Banking Institute — http://www.publicbankinginstitute.org/
Most MMT theorists favor a Jobs Guarantee over the Universal Basic Income. Without going into detail about their reasons, one principle concern is avoiding the conflicts generated between low wage workers and those who get their money “for free”.
Lynd: Many MMT economists offer what they call a Jobs Guarantee (JG) program designed to address the problem of poverty directly and, indirectly, the extremes of income inequality that we are now experiencing in the US and around the world. The JG program offered by MMT economists differs from most Federal programs that are provided by government agencies and usually focus on job training.
MMT style JG proposals are funded Federally but offered locally through the nonprofit sector. The economy is divided into the private sector, public or government agency sector, and the nonprofit sector. By design, the JG proposals kick in only when the private and public sectors are not able to provide jobs for those who are willing and able to work. Nonprofit organizations are focused on community based needs and have the capacity to hire but lack the funds to do so. When the unemployment rate (including those who are underemployed and have given up their job search) rises above a certain level (4% is typical) then Federal funds are made available to nonprofits on an application basis. When private sector employment expands businesses can hire from the public and nonprofit labor markets.
Roughly 1.6 million nonprofits account for 11.4 million jobs, 10.3 percent of all private sector employment, and contribute about $880 billion dollars to the economy, or about 5.5% of G.D.P. Building the capacity of these organizations to innovate, develop social enterprises, and increase services where needs are critical is a strategy that is attractive across the political and ideological spectrum.
James Galbraith is correct when he labels the MMT narrative “very compelling”. However, today it is compelling to a relatively small number of Americans who know about it. Before any of the ideas on these pages can become real the lies about our monetary system must be exposed to a far larger group of citizens. My main purpose in writing about MMT is to ask each of you to spread the word, so that we may reach that critical mass of knowledge sooner rather than later. MMT economists have had minimal impact on Federal authorities, despite valiant efforts. Only when an aroused public, speaking with a strong unified voice, demands that the government change its monetary policies are we likely to see results.