“Modern Monetary Theory,” despite the arcane ring to the term, is a hot topic being bandied about in media these days.
Newcomers to the theory might assume that the whole idea is a contrived excuse to spend more federal dollars despite an already sizable deficit and debt load. Indeed, that may very well be the progressive Left’s motivation for embracing the theory as of late (see the video “How Marxism and Modern Monetary Theory Go Hand-in-Hand”), but the theory itself has been around for a while. Mostly, the theory’s adherents have been cloistered to economics departments (and only a small clique of economists, at that), so the academic theorists certainly have Bernie Sanders and Alexandria Ocasio-Cortez to thank for their moment in the sun.
Modern Monetary Theory starts with the observation that the US is the sole issuer of its currency. We are no longer constrained by a commodity currency (i.e. the gold standard). The primary insight of Modern Monetary Theorists is that federal deficits are not necessarily “bad” and surpluses “good” as is so often presumed. Fiscal deficits have no moral or qualitative value. They are simply accounting identities.
MMTers point out that, since the US is the sole issuer of its currency, it wields the power to print or destroy money. Through the printing press, it can create more money. Through taxes, it can effectively destroy money by taking it out of circulation. And since the Treasury Department has the capacity to print money ad infinitum, it technically can’t default on its debt.
When the government spends money, it simply credits one account and debits another. That is, when the government contracts with a private sector actor for some sort of work or service, it does not need to go check the vaults to make sure there’s enough money to pay. It can simply create the money and credit that to the private player’s checking account. At the same time, it debits the Treasury account by that much, which leads to either the issuance of new Treasury bonds or to new paper currency printed.
Deficits, they argue, actually have a positive effect on economic growth because when the government spends, it is simply putting more money into circulation in the private sector. Moreover, they assert that government spending is a form of investment which should result in an increase in productivity. This increase in productivity should help to absorb the fiscal deficits taken on to fund this investment over time.
Taxation, on the other hand, takes money out of circulation. Government spending stimulates the economy while taxation cools it down. Thus, the higher the deficit, the more the private sector is being stimulated. “Federal deficits are private sector surpluses,” says Stephanie Kelton, former economic advisor to Bernie Sanders.
And since government spending acts as an economic stimulus in this way, governments should do more of it until unemployment has been diminished to a very low level (or completely). “Unemployment is evidence that the deficit is too small,” Kelton says. Some MMTers advocate a jobs guarantee to provide temporary employment (almost like a form of unemployment insurance) as an additional lever to regulate the economy.
Once you reach full employment, then additional government spending would be inflationary. At that point, the supply of money in circulation would rise faster than demand for money. But until then, if the government wants to increase economic activity and output (and why wouldn’t it?), it should be a net spender rather than a net saver. In other words, it should run fiscal deficits until reaching full employment, at which time it should at least tighten the budget, if not balance it or even run a surplus.
Kelton uses WWII as an example of heavy government spending (and a huge run-up in federal debt) that didn’t have any negative effect on the economy. Just the opposite, she says. After WWII, America entered into a decades-long period of high productivity growth and prosperity.
She also uses Japan as an example of a country whose massive debt has not had any negative consequences. Japan has run fiscal deficits since the mid-1970s, pausing for a brief surplus in the late 1980s and early 1990s only to plunge back into deficits once its real estate market crashed.
The purpose of money, according to prolific MMT advocate L. Randall Wray, is as legal tender, also known as a “promise to redeem” or a record of debt. Money is an IOU to its issuer. Or, more accurately, it’s like a callable, zero-interest, perpetual government bond. This definition of money is predicated on the use of force and thus can only be an instrument of government. It requires the ability to issue credit in the form of money, and it also requires the ability to force other actors in society to accept the money and to pay taxes only in that currency. Fiat money has value not primarily because of trust in the issuer’s economy or because it is a medium of private exchange, but rather because it is the means by which private actors pay their obligations to the state.
In fact, says Wray, even back in the olden days of a gold standard, what gave gold coins their value was not the intrinsic value of the material. Rather it was the face of the ruler imprinted upon it, reminding its bearer that the coin came from the government and that the government had the right to reclaim it, that made the coin valuable. This is why coins with the face of the Queen of England or the Premier of China are mere novelties here in America. Who cares about the metal they’re made of? What makes them valuable is that they are backed by their issuing governments. Since the Queen of England and the Premier of China lack the authority to tax US citizens living in America, their currencies are essentially worthless here.
Governments must be the backer of the value of money / debt, say the MMTers. Otherwise, you are left with some form of barter system. Money has to be issued before it can be exchanged for goods or recollected by the government through taxation. Debt has to come before redemption. Sure, the private sector may produce the economy’s intrinsically valuable goods and services, but those are always priced in units of government debt.
Warren Mosler, a hedge fund manager and one of the few MMT thought leaders with a non-academic background, uses the illustration of a subway station with entry tickets. It has to issue the tickets before it can redeem them for rides on the subway.
Since money is simply a unit of debt, it doesn’t matter much if government spending is paid for with newly printed money or newly issued Treasuries. Sure, one pays interest while the other doesn’t, but that interest can always be paid with printed money.
In short, Modern Monetary Theory attempts to throw off the old shackles and constraints of a commodity (i.e. gold standard) currency and fully embrace our fiat system.
Theory Vs. Reality
What to say about this revisionist perspective? First, it’s important to note there is strong data that contradicts some basic claims of Modern Monetary Theory. Let’s address some key points.
Possibility of Default? It simply isn’t true that nations that issue their own currency cannot default on their debt. As pointed out by Charles Seville of the Fitch Ratings agency, countries such as Brazil and Russia that issue their own currency have defaulted on their debt in the past. During the Great Depression, even some nations that abandoned the gold standard defaulted on their debt. Which countries defaulted depended more on the nation’s fiscal health and access to financial markets than on the ability to print money in one’s own currency. Political upheaval, war, economic shocks, or sufficiently strong recessions can lead to situations in which the best or only possible solution is to default rather than devalue the currency by printing.
Perhaps this is why, as a recent survey shows, economists from across the ideological divide reject the notion that deficits don’t really matter.
UNIVERSAL BASIC INCOME (UBI)
Basic income, also called universal basic income (UBI), citizen’s income, citizen’s basic income, basic income guarantee, basic living stipend, guaranteed annual income, or universal demogrant, is a theoretical governmental public program for a periodic payment delivered to all citizens of a given population without a means test or work requirement.
Basic income can be implemented nationally, regionally, or locally. An unconditional income that is sufficient to meet a person’s basic needs (i.e., at or above the poverty line) is sometimes called a full basic income; if it is less than that amount, it may be called a partial basic income. The expression ‘negative income tax’ (NIT) is used in roughly the same sense as basic income, sometimes with different connotations in respect of the mechanism, timing or conditionality of payments. Some welfare systems are sometimes regarded as steps on the way to a basic income, but because they have conditions attached, they are not basic incomes. One such system is a guaranteed minimum income system, which raises household incomes to a specified minimum. For example, Bolsa Família in Brazil is restricted to low-income families, and the children of recipients are obligated to attend school.
Several political discussions are related to the basic income debate, including those regarding automation, artificial intelligence (AI), and the future of work. A key issue in these debates is whether automation and AI will significantly reduce the number of available jobs and whether a basic income could help alleviate such problems.