THE COLLEGE HILL INDEPENDENT


Everything But the Kitchen Sink

How Modern Monetary Theory reimagines government spending

by Jesse Barber

Illustration by Eve O'Shea

published March 15, 2019


 

A few weeks ago, a group of children confronted Senator Dianne Feinstein to plead for her to make a commitment to fighting climate change by endorsing the Green New Deal—a nonbinding resolution co-authored by Representative Alexandria Ocasio-Cortez that proposes converting 100 percent of energy production to renewable sources and guaranteeing a “family-sustaining wage” for all people in the US. “We’re the ones that are going to be impacted,” one child told her. The children and the adults in the group stressed both the urgency of climate change and the ambition required to address it. “There is no way to pay for it,” Feinstein harshly explained. “That’s the big reason… it just doesn't work like that.”

If any of these audacious children were versed in Modern Monetary Theory (MMT) they would have called bullshit. MMT proponents—some progressive academics, others lefty activists—say the US government thinks about spending and the national deficit all wrong. The US government could pay for large parts of the Green New Deal today because the national government can never run out of its own money. The question of 'how to pay' for big policy proposals like the Green New Deal is a misunderstanding of how spending works. As President Roosevelt did with the original New Deal or President Truman did with weapons production for WWII, the government could simply spend the Green New Deal or Medicare For All into existence.

In a nutshell, MMT supporters say that the government can spend much more money than it currently does because inflation, not the deficit, should be the limit to government spending. Because the US government spends by simply creating money, they claim that, with appropriate economic governance, ambitious programs such as the Green New Deal can be paid for today, simultaneously improving the lives of people who are left out of the private economy and combatting climate change. At a minimum, MMT explains that the US government has been underspending. At its most extreme, it calls for a complete revolution in governance, addressing social inequality by providing a job, housing, and healthcare for every American.

The College Hill Independent spoke with several leading MMT proponents who have continually attempted to make the theory accessible to politicians, major media outlets, and Twitter followers—helping propel MMT into the national spotlight. Presidential candidate Senator Bernie Sanders and newly elected Representative Ocasio-Cortez have both had economic advisors from the MMT community. A Huffington Post article published in October called it the “Biggest Idea in Washington.”

 

MMT and the faucet model

Politicians from across the aisle criticize the Green New Deal by asking, “How are we going to pay for it?” MMT says that this approach to government spending is a falsehood. At its core, MMT is about the nature of money. Rohan Grey, founder and president of the Modern Money Network—a progressive student-driven economic initiative—and doctoral fellow at Cornell Law School, told the Indy that studying the economy without studying how money itself functions is like describing the game of football as two sides, running around, trying to score points without describing the rules that structure the game.

I started following the MMT Twitter-sphere—a mix of tenured economics professors and radical activists—about 9 months ago after being introduced to it by a friend. Growing increasingly curious about MMT, I contacted some professional MMTers through Twitter, who were eager to give me their time, and I reached a conclusion: MMT envisions the private economy like a kitchen sink. Government spending is the faucet and taxation is the drain. The US government introduces money into the private economy through spending and drains money out through taxes.

The flow of the faucet has nothing to do with how much water goes through the drain. This is one of many places where MMT deviates from mainstream understandings of economics: the theory claims that the government’s ability to pour dollars into the economy is not limited by the amount of taxes that it collects­—after all, the government’s doing so creates money. MMT, therefore,  claims that the actual mechanism by which the US government spends is not a bank account full of tax dollars, as many politicians assume, when they ask, “Where are we going to find the money for Medicare For All?”

“As a monopoly supplier of US currency with full financial sovereignty, the federal government is not like a household or even a business,” Stephanie Kelton, leading MMT proponent, professor of public policy and economics at Stony Brook University, and former economic policy advisor for Bernie Sanders, wrote in a HuffPost opinion article. “Congress can pass any budget it chooses, and our government already pays for everything by creating new money.”

If an individual or a business spent more money in a month than it raised in revenue (i.e., ran a deficit), it could eventually go bankrupt. However, a government that has its own sovereign currency (meaning it is not attached to any other currency or backed by a physical substance like gold) cannot go bankrupt for lack of money. This fact differentiates the US government budget from state and municipal budgets, who must fund their expenditures with tax revenue or borrowing capital. “You never run out of money when you're the issuer of money,” explained Grey. “That's as silly as saying that the referee in a football game has run out of points to issue.”

If the government spends more money than it collects in taxes, mainstream economics calls this “the national deficit." However, MMT does not see the deficit as necessarily negative as mainstream economists do. The more water that flows out of the faucet, the more money there is for everyone in the sink, the non-government sector. As Kelton put plainly in an episode of The Wilderness podcast, “red ink for the government is black ink for the people,” meaning the bigger the national deficit, the more aggregate wealth there is for everyone else.

“There are a lot of deficits that we have in the economy,” Grey told the Indy. “We have a health care provisioning deficit. We have an education provisions deficit. We have a housing supply deficit. There are a lot of deficits that are bad, but the government deficit is just a record of the money that has been spent into the economy minus the money that's been taken back out.”    

The real indicator of excessive government spending, MMTers say, is inflation. If the dollars in the private economy outgrow the ability of the economy to provide goods and services for those dollars to buy, it may cause inflation. Until that point, there is nothing inherently bad about running up a deficit. To return to the metaphor, MMTers say that the limit to how much water can be poured into the sink should not be how much water pours out of the tap, but rather whether the capacity of the sink can withstand the water that is introduced.

MMT economists also say there is much more room in the sink than people think. The government has yet to test the limits of the sink and thus has missed the opportunity to encourage maximum growth. With the unrecognized capacity of the sink, the government has the ability to put into place ambitious policy plans like the Green New Deal, Medicare for All, or a federal jobs guarantee—a program that would provide a living wage to all people who want one. But MMT does not just advocate for more government spending; it advocates for more government spending in the right way.

“We are also interested in the question of distribution. What if your sink is tilted one way and all the water accumulates in one corner of the sink?” Pavlina Tcherneva, an associate professor of economics at Bard College, explained to the Indy. “How the government spends, how it runs the faucet, how it helps balance the sink [the economy] really matters, because it looks like [savings have] been accumulating to one part of the sink.”

“We have the public financial resources,” said Professor Tcherneva. “We're interested in how to mobilize the real resources to guarantee basic economic security for people, like jobs for all, Medicare, decent housing, education. Those are some basic human necessities we think we can fund, and economic policy should provide.”

Mainstream economics disagrees with MMT on several points, including how inflation and its negative effects are created and the political feasibility of MMT’s policy prescriptions.

 

The practicality question

How possible, then, is something like the Green New Deal or the federal jobs guarantee? What happens if politicians start using MMT as their frame for the economy today? MMTers argue that the type of deficit spending that MMT advocates for has frequently been used in US history and can be employed today.

“Today, some critics are saying ‘Oh, if we adopted the MMT paradigm, you know, the sky would fall,’” Tcherneva told the Indy. But she is quick to stress that we are already funding our deficits the way MMT describes. There are plenty of examples where the US government has chosen to do something important and spent the money. “Whether that was putting a man on the moon, whether it was launching a New Deal in the depths of a depression, whether it was waging war in the trillions of dollars, whether it was rescuing the financial sector overnight," said Tcherneva. "All it took was Congress to appropriate the budget."

Fadhel Kaboub, an associate professor of economics at Denison University, compares the Green New Deal to the country mobilizing its war efforts during World War II, describing how, in the months preceding the war, the US government completely retooled the economy to produce weapons at a historic rate, reaching full employment and beyond. Price controls and wartime bonds were used to release inflationary pressures and the US economy and quality of living skyrocketed because of jobs that the government spent into existence—rather than funded using tax revenue.

Kaboub advocates for the government to treat our current situation similarly. Instead of a foreign military threat, he said, today we are facing a climate crisis, an income inequality crisis, an unemployment and poverty crisis: “We want Congress to use the power of the purse like it did in 1940 to fund the Green New Deal, to completely retool the economy and to allow us actually to win this thing, to fight climate change in the next 10 or 12 years.” In addition, Kaboub said that by offering a living wage and a stable job to anyone who wants one, the private economy will have to raise their wages and improve their benefits to compete with the public sector—increasing economic stability for everyone.

 

Orthodox critiques

Critics of MMT and the Green New Deal often latch onto the issue of inflation. The mainstream understanding is that deficits lead to inflation. Deficits will lead to interest rates going up, which will “crowd out” the private sector and stunt economic growth. This is what the majority of high school and college economics instructors teach and one of the central issues from which MMT diverges.

MMTers respond to such critics by saying that inflation is more complicated than simply putting too much money into the private economy. “I have a very hard time finding historical cases where inflation was produced because of a robust, extremely strong aggregate demand,” said Professor Tcherneva, meaning that increasing government spending at high rates of growth, and thus a possibly increasing deficit, will not necessarily lead to inflation. After all, the $1.5 trillion dollars of taxes just cut by the GOP did not create meaningful inflation, and federal jobs guarantee could cost only $350 billion, estimates Stephanie Kelton in a March 7th Bloomberg Opinion article.

MMTers say that inflation occurs when spending outpaces the currently available supply of workers and productive capacity. Because there is unused capacity and potential for growth in the economy, for example the potential labor of the millions of unemployed people in the US, the economy has the ability to absorb increased government spending if it is spends in the right ways. Again, think of it like the extra capacity in the sink.

With smart spending, MMTers claim, we can grow the economy in the right way, serving the people who are not currently being served and providing a quality job for everybody. Moreover, MMTers claim there are a range of ways to address inflation concerns if they arise, including by regulating how banks operate and by taking money out of the private economy through taxes. They take inflation very seriously, but unlike deficit hawks, they just don't treat it like a Boogieman that may be waiting around every corner.

While some mainstream economists accept MMT’s basic analysis of deficit spending, many disagree with them here. New York Times columnist Paul Krugman criticized a few MMT-based economic conclusions in a series of strongly worded articles in the last month. He believes that increased government spending while operating at full employment could slow economic activity. Lawrence Summers, in an opinion column for the Washington Post, wrote about the danger of a collapsing exchange rate, given increased government spending. In a post on New Economic Perspectives, an MMT-dedicated blog, William K. Black called recent articles about MMT “the massive, coordinated assault” by the “most elite forces of orthodoxy” and a “counterrevolution against the ascendancy of progressive core policies.” In another blog post, Larry Randall Wray, a professor of economics at the University of Missouri-Kansas City, explained that the numerous recent articles from ‘neoliberal’ economists have consistently misrepresented the ideas of MMT and the arguments of MMT-supporting economists, to which Stephanie Kelton joined in with a response to Krugman of her own in Bloomberg Opinion. Bill Gates called MMT “some crazy talk” in an interview with The Verge, but then agreed with its approach to deficit spending.

Another common critique of MMT is that it is apolitical. While measures like price controls, credit policy, and taxation can address inflation, national policy is rarely received with bipartisan support. Some critics fear that partisanship and bureaucracy would prohibit politicians from responsibly stabilizing the economy if inflationary pressures do arise. In short, spending more money is risky and the US political landscape cannot be trusted to handle time-sensitive decisions.

Proponents of MMT have an answer to that as well. “We are not so stupid that these critics of ours think that we are sitting around saying, ‘Let’s spend a bunch today and then if something bad happen we’ll wake up that morning and try to do [something],’” Grey told the Indy. “What we are talking about is designing a framework that already bakes in the way to respond in those moments.” Additionally, Grey suggested, laws can be passed to give independent agencies the ability to adjust conditions as they happen, like the Federal Reserve does for interest rates.

 

Money as a public good

While many MMTers support specific policy prescriptions like a federal jobs guarantee and the Green New Deal, proponents of MMT also have something to say about what our future should look like and the government’s role in a just economy. It represents a radical shift in the way we think about money. “If you understand that the currency is a public good…because it's a public monopoly,” said Professor Tcherneva, “then the government has a very crucial obligation to serve the public purpose… to employ the public's money for the public good.” Grey added, “A job guarantee is a way of saying, ‘let’s stop acting like jobs grow on rich people or jobs grow from the private sector and start acknowledging the truth,’ which is that the public sector is the entity capable of providing jobs for everybody.”

In other words, MMT says, unemployment, entrenched poverty, inadequate access to healthcare, and a certain quality of life are, in a way, a governmental choice. The US government controls the flow of money and is thus responsible for providing enough of it for all people. They are obligated to use the monetary system to address inequality and poverty.

Rohan Grey described a vision of a just economy plainly: “The key is we want to spend more money, but we want to spend it the right way, not on bailing out banks, not on giving tax cuts to the wealthy, not on funding the military industrial complex. We want to spend it on things that will actually improve people's lives.”

For many, the Green New Deal is the first step in the direction of a more just economic system, a system that currently does not work for many people. The Green New Deal, Professor Tcherneva says, not only attempts to address climate change, but also makes sure everyone has a “good job,” and a basic quality of life—through a federal jobs guarantee. In that way, it fights on two fronts. It addresses climate and social concerns in the appropriate way: together.

A federal job guarantee, which is part of the proposed Green New Deal and has long been supported by MMTers, has the potential to support those who are not served by the private economy. “Those people who are always stuck in unemployment and become labeled as unemployable, which ... is usually a reference to women, minorities, people with disabilities, people who have a criminal record ... they tend to be the first to be fired when the recession hits and they tend to be the last people to be hired when the economy starts to boom,” Professor Kaboub told the Indy. The federal jobs guarantee would help change that. “You take people as they are, where they are, and you do on-the-job training if necessary, paid on-the-job training,” continues Kaboub. “Whereas the current system they say ‘oh you're unemployed it’s really your fault.’”

Beyond specific policy prescriptions, MMT advocates for a new way of thinking about money and about the government’s responsibility to the people. “We are wealthy enough to be able to provide for some basic economic rights,” said Professor Tcherneva. “And that is the moral principle that a lot of us in the MMT community ascribe to.”

 

JESSE BARBER B’19 sorta looks like Bernie Sanders circa 1961.