Category: Government Spending

MMT Explains What Governments Can Do. It Is Not A Proposal.

At Business Insider, Jim Edwards and Theron Mohamed do a good job explaining MMT in, “MMT: Here’s a plain-English guide to ‘Modern Monetary Theory’ and why it’s interesting.”

They begin with these bullet points:

  • MMT is a big departure from conventional economic theory. It proposes governments that control their own currency can spend freely, as they can always create more money to pay off debts in their own currency.
  • The theory suggests government spending can grow the economy to its full capacity, enrich the private sector, eliminate unemployment, and finance major programs such as universal healthcare, free college tuition, and green energy.
  • If the spending generates a government deficit, this isn’t a problem either. The government’s deficit is by definition the private sector’s surplus.
  • Increased government spending will not generate inflation as long as there is unused economic capacity or unemployed labour, MMT proposes. It is only when an economy hits physical or natural constraints on its productivity — such as full employment — that inflation happens because that is when supply fails to meet demand, jacking up prices.
  • MMT proponents argue governments can control inflation by spending less or withdrawing money from the economy through taxes.
  • Needless to say, traditional economists have some issues with all this.

Just ONE quibble with that, where they write, “It proposes governments that control their own currency can spend freely.” They should have written It EXPLAINS, not that it “proposes.” Big difference.

MMT EXPLAINS that governments that control their own currency can do a lot of things.

David Dayen: The Left Is Taking Aim at Pelosi’s Deficit Obsession

David Dayen writing over at The New Republic: The Left Is Taking Aim at Pelosi’s Deficit Obsession,

There’s also one major hurdle left to topple: the “pay as you go” rule, commonly known as “pay-go,” which demands that all new spending get offset with budget cuts or tax increases. Progressive critics argue that this creates an unlevel playing field, where Republicans blow giant holes in the tax code, as they did last year, while Democrats must pay fealty to the deficit. These critics are now mounting a fight to unshackle a future activist government.

[. . .] Obviously, Pelosi and her allies on pay-go consider the rule good politics, allowing them to rebut charges about “tax and spend” liberals by insisting that every new program is fully paid for. If anybody actually cared about the deficit, instead of habitually using it as a weapon to rein in the opposition party, maybe that logic would be compelling. But even if the politics make sense, the rule leads to bad policy, …

Democrats have fallen for deficit-scare politics for too long. Republicans understand money, and understand that they can spend (or cut taxes) to deliver for their constituents. And they understand that they can trick Democrats into not delivering for their constituents (We the People.) It is time for that nonsense to stop.

Why Health Care Matters and the Current Debt Does Not

After taking note of a slide in this 2012 Randy Wray video, I chased down the source for this much quoted statement from the Federal Reserve Bank of St. Louis, from Why Health Care Matters and the Current Debt Does Not Oct, 2011

As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bill. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar denominated assets.

After a lifetime of feeling vaguely gaslighted, it’s a relief when economists help me understand how things work. In looking for the source, I came across a group of interesting quotes in this post from economist John Harvey (@John_T_Harvey):

“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
— Alan Greenspan

“In the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.”
— Peter Zeihan, Vice President of Analysis for STRATFOR

“In the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.”
— Erwan Mahe, European asset allocation and options strategies adviser

“There is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.”
— Mike Norman, Chief Economist for John Thomas Financial

“There is no inherent limit on federal expenses and therefore on federal spending…When the U.S. government decides to spend fiat money, it adds to its banking reserve system and when it taxes or borrows (issues Treasury securities) it drains reserves from its banking system. These reserve operations are done solely to maintain the target Federal Funds rate.”
— Monty Agarwal , managing partner and chief investment officer of MA Managed Futures Fund

Our growing collection of quotes are here.

There Are No Real Republican “Deficit Hawks.” Here’s Why. Part 2

This posts changes a few words from a previous post.

Democrats are making a terrible mistake fighting the Republican tax cuts spending increases by saying they add to the deficit, that they will “blow a hole in the budget,” etc.

Why are Democrats saying this? They are using the “increase deficits” line because they think they can appeal to a few “deficit hawk” Republicans who spent the Obama years complaining about government sending and “deficits.”

It is a mistake for Democrats to think they can “get Republican votes” by mouthing Republican deficit-fear rhetoric without understanding the strategy behind their rhetoric.

Strategy: Republicans Create Deficits, Stoke Deficit Fear, Then Campaign Against Government Spending

Here’s the thing. There are no real Republican “deficit hawks.” Republicans stoke deficit fear, and then say they are opposed to budget deficits. But they always, always increase deficits. On purpose. There’s a reason.

Continue reading →

There Are No Real Republican “Deficit Hawks.” Here’s Why.

Democrats are making a terrible mistake fighting the Republican tax cuts by saying they add to the deficit, that they will “blow a hole in the budget,” etc.

Why are Democrats saying this? They are using the “increase deficits” line because they think they can appeal to a few “deficit hawk” Republicans who spent the Obama years complaining about government sending and “deficits.”

It is a mistake for Democrats to think they can “get Republican votes” by mouthing Republican deficit-fear rhetoric without understanding the strategy behind their rhetoric.

Strategy: Republicans Create Deficits, Stoke Deficit Fear, Then Campaign Against Government Spending

Here’s the thing. There are no real Republican “deficit hawks.” Republicans stoke deficit fear, and then say they are opposed to budget deficits. But they always, always increase deficits. On purpose. There’s a reason.

Continue reading →

Should Government Balance The Budget?

We hear a lot that government budgets need to be balanced “like a household budget” that is decided “around a kitchen table.”

To balance the budget government has to either tax us more or spend less on things that make our lives better. That takes money out of circulation and does us no favors.

With less money in circulation businesses and households have to turn to the banks to borrow. And they have to pay interest to those banks.

Balancing the budget causes the private sector to turn to the banks and go into debt? The “financial sector” makes big bucks from that while the rest of us have less? Hey, wait a minute… who is pushing this “balance the budget” nonsense?