MMT On A Postcard
by Lambert Strether, Naked Capitalism
I like to think that economics should be like plumbing, and if you had my house you’d see why I’d be happy if there were a Sveriges Riksbank Prize for the great plumbers of the world. Good plumbing is very important, as you know if you’ve ever had the pipes fail.
There is also an ethic to plumbing; the plumber should exercise all this skills of their craft as a contractor, shouldn’t put in cheap stuff when good stuff was specified, should warn you if you are about to do something stupid, and needs to deliver toilets that actually flush and sinks that actually drain, and needs to ensure that sewer gas doesn’t blow up the whole house. (We could think of neo-liberals as rotten plumbers who did blow up the house.) And although every plumber has a slightly different toolbox, and a slightly different techniques and points of emphasis, nevertheless there is scientific reasoning behind plumbing — for example, “water runs downhill” — and you can go to plumbing school and learn about it. Of course, I could never be a plumber, though some days I wish I could have been, because I don’t see very well and I’m all thumbs. However, I know enough about plumbing, and enough about my house, to find a good plumber when I need one. A plumber that will free up the pipes and get the job done.
And I like to think of MMT as the kind of plumber I’d like to have work on the economy. I’m not an economist and didn’t go to that school. But I think I know enough about MMT, and enough about political economy, to pick my plumber.
My reasons are simple and pragmatic: I want people like me (working people) to have nice things — concrete material benefits. Lots of them. And I believe MMT — unlike other schools of thought, but especially neo-liberalism — can deliver on that promise, given the chance. But there are obstacles: MMT, like plumbing, isn’t all that simple, it’s not all that well-known, and it’s “heterodox,” where neo-liberalism is Orthodox with a capital O.
So I took on the project of putting “Why MMT” onto a postcard. That’s not the same as getting an entire textbook of MMT onto a postcard, but I hope to at least persuade you to put the postcard up on your fridge and keep it there. Here it is:
Let me just go point by point. (I’m going to be linking mostly to the MMT Primer at New Economic Perspectives, but also to this trenchant article from Professor Paul Davidson, and transcripts from the 2010 Fiscal Sustainability Conference. Not being an expert or especially creative, I have to go to the sources and quote them. I apologize in advance for any severe pain caused to those quoted.)
1) Federal taxes do not fund Federal spending (fiat money system)
[T]he government is the issuer of its currency. It is not like a household. It doesn’t have to raise money by borrowing or collecting taxes in order to spend. Those of us in the private sector have to earn or borrow dollars before we can spend. The government must spend first. And we say this, and sometimes people have a hard time understanding that. How can the government spend first? How can it not spend first? How could the government collect taxes, in dollars, first? It first had to have spent those dollars into existence. The spending has to come before the payment or the collection of taxes. The government must spend first. Government spending is not (we use this term a lot) operationally constrained by revenues. It doesn’t need tax payments and bond sales in order to fund itself. It is not operationally constrained. The only relevant constraints are self-imposed constraints. We talked a little bit about this earlier, things like debt ceilings. That’s a self-imposed constraint. Rules that prevent the Treasury from running an overdraft in its account at the Fed. That’s a self-imposed constraint. It is a constraint that is imposed by Congress. Rules that prevent the Fed from buying Treasury bonds directly from the Treasury, so-called monetizing the debt, is a self-imposed constraint.
So why do we have taxes, then? To give money value! Rebecca Rojer in The New Enquiry:
Forcing people to pay their taxes in a money that is otherwise worthless creates demand for money and gives it its value. This idea, called chartalism, is one of the core building blocks of Modern Monetary Theory. “Modern money” is fiat money, state-issued currency not backed by precious metals or any other commodity. … You cannot trade in fiat money with the state for a fixed quantity of gold or barley, but you still need it to pay taxes.
Sovereigns [like the United States] create money as a tool to obtain the labor and other resources they need to fulfill their political goals. The sovereign steers the ship, at least initially, not some money god. If sovereignty lies with the people, money can be used to serve the common good. If people lack formal political power, more democratic layers of sovereignty may be possible in the shadow of the official sovereign, provided the means of production exists within a community. An understanding of modern money, and its relationship to sovereignty, would be necessary but far from sufficient to bring about such transformations.
Here I should address the pre-2008 pre-2016 hope and change “tax the rich” meme being pushed by the same crowd that brought us Obama. MMT, as such, isn’t against taxing the rich, and many MMTers are for it. For example, I think it’s good to tax the rich to prevent the formation of an aristocracy of inherited wealth, to prevent the rich from buying the government up with their loose cash, and for the sake of their children, to whom wealth often does not bring happiness. However, a program of taxing the rich is often coupled with the claim that such taxes are needed to fund services, a claim that puts us squarely into “it’s what they know that ain’t so” territory.
2) The US can never run out of money (it’s a currency issuer)
Can the government run out of money? The U.S. government can’t run out of money any more than the Washington Nationals Baseball team stadium can run out of points. Every time a ball game is played at Washington National Stadium, some team scores some points and they appear on the screen and then the other team scores and some more points appear on the screen. And there’s nobody behind the screen going, ‘Hey Johnny, we’re running out of points here’, you know, right? Look in the trust fund. That’s not the way it happens. You just add the points.
Same exact thing with the way the government operates. And this is the quote that Marshall brought up earlier and the one that Warren likes to use a lot, and I like it too. So here it is in writing so that you know we didn’t make it up. This is Ben Bernanke in an interview on Sixty Minutes just last year when Pelley asked him, “Is that tax money the Fed is spending?” And Bernanke says, “It’s not tax money." The banks have accounts at the Fed much the way that you do, have an account at a commercial bank. So when we want to lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed.
Note that this demolishes the constant refrain of Beltway institutions like the Peterson Institute, or Bowles-Simpson, or the Can Kicks Back, that “we’re running out of money.” Not only are we not, we can’t. The United States is sovereign in its own currency, creates it by fiat, and literally and truly cannot run out. Bill Mitchell writes:
[T]he government in a fiat monetary system is not “revenue-constrained”.
Intuitively this is hard to accept because we are so wedded to the idea that nothing is certain but death and taxes and that the latter is to raise money for governments to spend. The issue of taxation is also very emotional – as we see in some comments on my blog – taxation is linked by conservatives to concepts of slavery; loss of freedom; etc.
So the idea of a government that is not revenue-constrained is hard to grasp at the emotional level.
It is. It is indeed.
3) Real resources limit Federal programs (and not money).
Quoting (at Warren Mosler’s suggestion) Professor Paul Davidson:
The U.S. dollar is not legally convertible into anything by the government on demand [and hasn't been since Nixon closed the gold window]. It is, however, designated by the government as the only means of discharging federal tax liabilities. Tax liabilities are an ongoing debt the private sector owes the government, and they create a continuous need for dollars. The private sector obtains the needed dollars primarily as payment for the transfer of real goods and services to the government, and it is government spending or lending that provides the dollars needed to pay taxes. For purposes of this analysis, government spending includes spending by the government or any of its agents. For example, when the central bank buys foreign currency, it is the same, for cash flow analysis, as the treasury buying military equipment. This is commonly referred to as viewing the treasury and central bank on a consolidated basis.
The imperative of taxation is to create sellers of real goods and services willing to exchange them for the unit of account selected by the government. Dollar denominated tax liabilities function to create sellers of real goods and services who must have dollars to extinguish their tax liabilities. Raising revenue, per se, is of no consequence to the government, as dollars are not a limited government resource, but a liability, or tax credit, that can be issued at will. The government’s ability to raise revenue does not limit what it is able to purchase. The purchasing power of the government is limited only by what is offered for sale in exchange for dollars.
“[W]hat is offered for sale in exchange for dollars”: That is the real resources. Look around you. Is there work that needs to be done? Are there the real resources to do it? Then we can afford to do it. Rebecca Rojer writes:
Those at the very tip of our economic pyramid understand that fiat money is unlimited, but most everyone below believes it to be scarce.
How those at the tippy top must be laughing!
4) So, no SS/Medicare financing problem
Stephanie Kelton on Social Security:
"Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.
In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”
It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”
Exactly the same logic applies to Medicare.
5) So, unemployment means the deficit isn’t big enough
Bill Mitchell, on What Causes Mass Unemployment:
The purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.
Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue.
To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed.
The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).
It is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment.
6) The Jobs Guarantee enables democratic control over a living wage
How would the JG work from the perspective of a working person (not an owner?) Or from the perspective of the millions of permanently disemployed? The MMT Primer:
If you are involuntarily unemployed today (or are stuck with a part-time job when you really want to work full time) you only have three choices:
- Employ yourself (create your own business — something that usually goes up in recessions although most of these businesses fail);
- Convince an employer to hire you, adding to the firm’s workforce;
- Convince an employer to replace an existing worker, hiring you.
The second option requires that the firm’s employment is below optimum — it must not currently have the number of workers desired to produce the amount of output the firm thinks it can sell. …
If the firm is in equilibrium, then, producing what it believes it can sell, it will hire you only on the conditions stated in the third case — to replace an existing worker. Perhaps you promise to work harder, or better, or at a lower wage. But, obviously, that just shifts the unemployment to someone else.
It is the “dogs and bones” problem: if you bury 9 bones and send 10 dogs out to go bone-hunting you know at least one dog will come back “empty mouthed”. You can take that dog and teach her lots of new tricks in bone-finding, but if you bury only 9 bones, again, some unlucky dog comes back without a bone.
The only solution is to provide a 10th bone. That is what the JG does: it ensures a bone for every dog that wants to hunt.
It expands the options to include:
- There is a “residual” employer who will always provide a job to anyone who shows up ready and willing to work.
It expands choice. If you want to work and exhaust the first 3 alternatives listed above, there is a 4th: the JG.
It expands choice without reducing other choices. You can still try the first 3 alternatives. You can take advantage of all the safety net alternatives provided. Or you can choose to do nothing. It is up to you.
If I were one of the millions of people permanently disemployed, I would welcome that additional choice. It’s certainly far more humane than any policy on offer by either party. And the JG is in the great tradition of programs the New Deal sponsored, like the CCC, the WPA, Federal Writers’ Project, and the Federal Art Project. So what’s not to like? (Here’s a list of other JGs). Like the New Deal, but not temporary!
OK, what do you mean by “democratic control over the living wage,” then? The MMT Primer describes JG program design:
The national government provides funding for a universal program that would offer a uniform hourly wage with a package of benefits. The program could provide for part-time and seasonal work, as well as for other flexible working conditions as desired.
The package of benefits would be subject to congressional approval, but could include health care, child care, old age retirement or social security, and usual vacations and sick leave. The wage would be set by government and fixed until government approved a rate increase — much as the minimum wage is usually legislated. …
And this program wage cannot be “market determined”. It must be socially determined: government offers an infinitely elastic demand for labor at the wage (plus benefits) it chooses to pay. It sets the wage as public policy, then hires all those who accept the offer of a job. To get workers, the private sector will have to offer something better than the JG compensation package. It could be a higher wage, better benefits, better working conditions, or better opportunities for career enhancement.
Intuitively: What the JG does is set a baseline for the entire package offered to workers, and employers have to offer a better package, or not get the workers they need. When I came up here to Maine I’d quit my job voluntarily and so wasn’t eligible for unemployment. Then the economy crashed, and I had no work (except for blogging) for two years. There were no jobs to be had. I would have screamed with joy for a program even remotely like this, and I don’t even have dependents to take care of. It may be objected that the political process won’t deliver an offer as good as the Primer suggests. Well, don’t mourn. Organize. It may be objected that a reform like the JG merely reinforces the power of the 0.01%. If so, I’m not sure I’m willing to throw the currently disemployed under the bus because “worse is better,” regardless. Anyhow, does “democratic control over the living wage” really sound all that squillionaire-friendly to you? Aren’t they doing everything in their power to fight anything that sounds like that? The JG sounds like the slogan Lincoln ran on, to me: “Vote yourself a farm!”
So, what does the JG for the economy? MMT was put together by economists; from an economists perspective, what is it good for? Why did they do that? The Primer once more:
some supporters emphasize that a program with a uniform basic wage also helps to promote economic and price stability.
The JG/ELR program will act as an automatic stabilizer as employment in the program grows in recession and shrinks in economic expansion, counteracting private sector employment fluctuations. The federal government budget will become more counter-cyclical because its spending on the ELR program will likewise grow in recession and fall in expansion.
Furthermore, the uniform basic wage will reduce both inflationary pressure in a boom and deflationary pressure in a bust. In a boom, private employers can recruit from the program’s pool of workers, paying a mark-up over the program wage. The pool acts like a “reserve army” of the employed, dampening wage pressures as private employment grows. In recession, workers down-sized by private employers can work at the JG/ELR wage, which puts a floor to how low wages and income can fall.
Finally, research indicates that those without work would prefer to have it:
Research by Pavlina Tcherneva and Rania Antonopoulos indicates that when asked, most people want to work. Studying how job guarantees affect women in poor countries, they find the programs are popular largely because they recognize — and more fairly distribute and compensate — all the child- and elder care that is now often performed by women for free (out of love or duty), off the books, or not at all.
Enough of this crap jobs at crap wages malarky!
7) The Jobs Guarantee wage determines the value of the dollar
Quoting Professor Paul Davidson once again:
The proposed [JG] program recognizes that the government is a monopoly supplier of its currency. Price is set through the [JG] wage, which defines the purchasing power of the currency.
The current monetary system is a classic monopoly with the traditional analysis of monopoly sufficient to describe all aspects. The government is the monopoly issuer of the dollars needed by the private sector to pay taxes. … With a gold standard, gold can always be considered fully employed as gold can always be sold to the government at the fixed price. Likewise, with an [JG] policy, labor can always find a buyer. … The government sets the [JG] wage and lets the market allocate all other resources accordingly. This is the same process that determines relative value under a gold standard. Under the ELR proposal, the government adjusts fiscal and monetary policy to maintain the ELR pool much the same way that a government adjusts fiscal and monetary policy to maintain a buffer stock of gold with a gold standard.
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All this said, the house design as a whole is not up to the plumber, but the architect. In a democracy, we the people are the architect! And it is up to us to design an ethical house, and also to determine the plumber to hire — I hope MMT — and to design the plumbing. Democratically.
ACKNOWLEDGEMENT: I would like to thank letsgetitdone (Joe Firestone), Scott Fullwiler, and Warren Mosler for their help with the points on the card. Any errors on the card or in the post are, of course, my own.
NOTE : Granted, it’s 52 chapters of Primer goodness. Professors! But many of those chapters are responsive to questions or critiques, and others address issues brought up by particular schools, like the Austrians. So just like Wagner’s music is better than it sounds, the MMT Primer is shorter than it looks. So it’s a textbook that needs to be popularized and simplified like the work of every other economic school. Of course, MMT doesn’t have think tank and entire economics departments funded by well-endowed squillionaires to get that work done. Go figure.
NOTE : The metaphor that MMT is a toolkit or smorgasbord is appealing but limited. I can’t do justice to Joe Firestone’s work on “knowledge claim networks,” but here’s a discussion.
NOTE : At this point, the real economists blanche, and point out that JG jobs are conceived of as “transitional,” and aren’t supposed to replace private jobs, merely to supplement them. And that is probably where the temper of the country is, right now. But I think democratic control over the living wage is a good thing to have until the glorious day when the soviets really do take power, or, more prosaically, until a lot more co-operatives start shaping the political economy to the liking of their members.
NOTE : Why doesn’t the minimum wage do this? You must be employed:
But the more important point is this: with the JG in place, the program wage and benefits set an effective floor, an effective minimum wage. As Hyman Minsky used to always argue, without the JG the legislated minimum wage is a lie. The true minimum wage is zero — if you cannot find a minimum wage job, you get a zero wage. With the JG in place, the true minimum is the program wage (plus benefits).
NOTE: OK, there should be no plumbing! We should all use composting toilets in our back yard! I’m down with that, I’m a permaculturalist! It’s just a metaphor!