Modern Monetary Theory & Its Discontents

07.16.21

In the final days of 1980, dozens of US congressmen received a strange holiday greeting: “Happy New Year,” read the card. “Your share of the national debt is $35,000.” When his private rebukes produced no visible effect, Seymour Durst, an outraged citizen, started decorating the front page of the New York Times with his thoughts on fiscal responsibility. “Federal debt soaring, national economy shrinking, soon the twain shall meet.”

Poetry was beyond his readers. Desperate for a broader captive audience, Durst hung a 1,500-pound, bedazzled debt clock above the heads of thousands of New Yorkers. “It’ll be up as long as the debt or the city lasts,” he said, adding, “If it bothers people, then it’s working.” Thankfully, Durst died long before the national debt hit $28 trillion, or reached 102% of GDP, as it stands woefully today.

Yet his righteous spirit lives on. Today, many view the national debt as evidence of the government’s wanton spending habits and inability to comprehend basic accounting principles. Soon the creditors will appear, handing off our bridges and tunnels to the hungry Repo Man. One day our children, yoked by the sin of their fathers, will become debt peons to China, incapable of enjoying daily life because their parents wanted too many iPhones. At the very least, Social Security will have to go. It’s unsustainable: we could barely afford payments back when people still believed in reproduction!

One of the loudest voices to cut through this doomsday echo chamber is Modern Monetary Theory (MMT), an accounting-based economic theory that refutes any notion that the government will somehow run out of money. Stephanie Kelton, an accomplished public speaker and author of The Deficit Myth, frequently serves as the public face of MMT, though its foot soldiers now walk among the White House (AOC), Bloomberg (Joe Weisenthal), and, increasingly, Wall Street (Warren Mosler).

To her, the problem isn’t finding the money — that can be solved with a simple keystroke — it’s finding the votes. “Once [Congress] has the votes, it can authorize the spending,” says Kelton. “The rest is just accounting.”

This week, as the debt ceiling bears down upon us once more (Congress must raise or suspend the debt ceiling by July 31st), we ask, how much is accounting, and how much is genuine fear? Can we actually sustain the largest national debt in history without crushing taxes, a bare bones future, runaway inflation, or default?

Accounting, Monopoly Style

MMT’s genius is that it describes the economy as it already operates: sovereign, currency-issuing countries (such as the US, UK, Japan, Canada, Germany, etc.) self-finance their deficits. Each central bank acts as a monopoly currency supplier, allowing the government to spend money regardless of taxing levels or revenues.

Contrary to popular perception and standard political rhetoric, the federal budget has few parallels to a household. When Obama told citizens that the government was relying on “a credit card from the Bank of China,” or when Margaret Thatcher insisted that “there is no such thing as public money… there is only taxpayer money,” both were ignoring the fact that the government issues its own money. Since the US dollar is a “simple public monopoly,” as Kelton calls it, traditional financial limits, such as running out of money or facing bankruptcy, do not exist. (This does not apply to state or local governments, which are currency users rather than issuers).

The only real limit is inflation, which occurs when the government keeps spending even after maxing out its real resources (capital and labor).

So why does the government insist on taxing us? MMT offers four non-revenue related reasons for taxation: 1) to redistribute wealth, 2) to discourage vices, 3) to fight inflation, and 4) to get the population working. “The government doesn’t want dollars,” says William Mosler, a former hedge fund manager turned academic. “It wants to provision itself. The tax isn’t there to raise money. It’s there to get people working and producing things for the government.”

For example, if the government wants to purchase F-35 fighters, the US Treasury simply instructs the Federal Reserve, its bank, to send over the payment. “The Fed does this by marking up the numbers in Lockheed’s bank account,” writes Kelton. There is no handwringing or balancing of budgets. It’s a simple keystroke.

One advantage enjoyed solely by the United States is that it issues the world’s reserve currency. The rest of the world can’t purchase basic imports (oil, gas, grain) or buid their own reserves without accumulating dollars. As Jacobin, a prominent socialist magazine, noted, the US enjoys enormous privilege thanks to the captive global market for Treasury bonds. “The United States, exceptionally, can run giant deficits and borrow on a vast scale with little constraint (so far).”

Employment As an Economic Right

One area where MMTers break from mainstream economic orthodoxy is in their call for a federal Job Guarantee (JG). Most mainstream economists operate under the assumption that some level of unemployment is necessary to prevent high inflation. The Federal Reserve tolerates a certain level of unemployment known as NAIRU (the Non-Accelerating Inflation Rate of Unemployment), typically guesstimated at 5–6%, to prevent inflation from rising above a target figure (currently 2%). In other words, joblessness, as Kelton puts it, is “an official policy of the United States.”

MMT rejects this as a barbaric form of human sacrifice that “relies on human suffering to fight inflation.” Instead of tossing 9.8 million people to the wind, so to speak, MMTers argue that since the government is responsible for unemployment (by taxing citizens, which, in turn, forces them to obtain government currency), it should also be the one to remediate it. Kelton imagines a seamless transition: the instant a worker receives the pink slip, they will be whisked away by the federal government fairy, who “takes workers as they are, and where they are, and … fits the job to their individual capabilities and the needs of the community.”

Full employment, rather than cyclical unemployment, will serve as a “powerful new shock absorber” by expanding the pool of potential workers. For, as Kelton points out, nobody wants to hire the chronically unemployed. Some job history — even for a government care program — essentially derisks them for future employment. This also takes the pressure off of the Fed: no longer are they tasked with balancing the economy through delicate tweaks of the interest rate.

“The truth is,” writes Kelton, “we have placed far too much responsibility on central banks… They cannot alter taxes or spend money directly into the economy, so the best they can do to promote employment is to try to establish financial conditions that will give rise to more borrowing and spending.” Instead, Kelton passes the baton to our watchful congressmen, who she expects to fine-tune the economy through real-time adjustments to fiscal policy (taxes and spending).

Would You Rather? Federal Reserve or Congress

While some rejoice at the idea of reducing the Federal Reserve’s influence, others fear its replacement — Congress — would invite still more incompetence, corruption, and abuse of power. Without central bank independence, critics argue, the Fed will become a pawn of the US Treasury, forced to step aside while inflation races out of control.

Stephen King, senior economic advisor at HSBC, believes tasking Congress with more fiscal power would immediately cause an obvious conflict of interest. “Giving elected representatives the keys to the printing press is the equivalent of giving a gambling addict the keys to the casino,” wrote King in the Financial Times. “For many politicians, the primary objective is to remain in power. As such, they will too often be incentivized to pursue instant gratification at the expense of longer-term stability.”

Another problem is logistics. It’s no secret that Congress is plagued by a chronic inability to execute. MMTers assume that taxes can be abruptly lowered and raised, when in reality it takes years, if not decades, for any serious tax reform to take root.

Spending isn’t much better. Since 1977, Congress has only managed to pass four spending bills on time. According to the Brookings Institute, the likelihood of legislative gridlock doubled from 1947 to 2012. “Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision,” observed Jacobin.

Congress Flirts with Default

MMT is unlikely to become a global economic policy simply because many of its prescriptions are so US-centric. If nothing else, MMT might help refine Congressional debates by reframing the federal deficit as a matter of inflation and investment rather than debt. Instead of fixating on whether or not new spending might cripple future generations, leaders might ask more telling questions like, “Will this cause inflation?” or “Is this spending policy generating any positive returns?” But until the US is ousted from its throne of World’s Reserve Currency, the rest of the world is stuck with the US dollar.

The more immediate threat is default, not because the Fed can’t afford its bills, but because Congress won’t approve them. Thanks to the debt-ceiling limit — a useless appendage which fails to restrain borrowing — Congress could cause a default simply through political grandstanding, as it nearly did in the debt-ceiling crisis of 2011.

“There have been serious costs associated with prior debt limit episodes,” said Shai Akabas, the Bipartisan Policy Center’s director of economic policy. “Investors doubted the creditworthiness of the United States, taxpayers were saddled with higher interest rates on our debt, and Americans continued to lose faith in the government’s ability to do its job.”

Akabas urged Congress to avoid another “flirtation with default” back in February, but we’re two weeks out now with no clear plan. Let the nail biting begin.

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