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.

A Great ‘Job Guarantee’ Twitter Thread

Cory Doctorow has a great thread on Twitter about Pavlina R. Tcherneva’s book The Case for a Job Guarantee. Click the following to see the thread.

The Deficit Myth: MMT & the Birth of the People’s Economy

Extra! Extra! Read all about it. @NathanTankus wrote this fine review on Amazon. Please be encouraged to read them all, mark as ‘helpful’ what you find to be helpful, and (if you qualify under their rules) write your own. On A or elsewhere. Spread the word!

One of the most important books written in the 21st Century
Reviewed in the United States on June 10, 2020
disclosure: I work with Professor Kelton on various projected related to Modern Monetary Theory in my capacity as Research Director for the Modern Money Network

The book is just out and I see there are already a couple of people who have claimed to read it who have given the book bad reviews based on their preconceived notions. As someone who played a small part in the book’s construction, and received my copy before official release, I’d like to provide an informed viewpoint on the quality of The Deficit Myth.

This book is masterfully done and a deeply important read for anyone who cares about creating a just society without mass unemployment while responding to the crises of our age such as systematic racism and climate change. Professor Kelton guides readers through what the national debt is, how government deficits are our surpluses (or how the government’s “red ink” is our “blank ink”), what are the real constraints on government spending (the availability of physical resources) and how we can wage trade peace.

It may seem that Professor Kelton’s vision is “pie in the sky” but that kneejerk instinct is based on ignorance and decades of propaganda and not on her expertise or track record. She knows how the congressional budget process works as someone who has worked on the senate budget committee and as adviser to a major presidential campaign. She does readers a great service by giving them insights and anecdotes grounded in that experience. She also has a fantastic track record of being correct when others were wrong. She was right about the fragility of the Eurozone. She was right we weren’t doing enough fiscal policy-wise during the Great Recession. She was right that quantitative easing wouldn’t cause inflation. She was right that the Trump tax cuts, while increasing inequality, didn’t reduce the federal government’s capacity to respond to the next recession- or depression as we’re seeing now. Buy the book and judge for yourself, but keep in mind how many big things Professor Kelton has been right about and read her erudite analysis with these facts in view.

What she has to say is more important than ever during the Coronavirus Depression. Get the truth straight from her and ignore the lazy “readers” on this website.

Why Do Governments That Issue Their Own Currency Bother To Sell Bonds?

Professor L. Randall Wray on why a government with a sovereign non-convertible currency might choose to issue bonds. Bond sales are not a borrowing operation for the state. Logically, since the dollar is a liability (an IOU) of the government, it’s impossible for the government to borrow back dollars, just like it would be impossible for you to borrow back your own student loan debt, or for Pizza Hut to borrow back its own coupons. Rather, a bond sale is just a swap of one government-issued asset (cash) for another (bonds) which pays interest. It doesn’t change the amount of assets or liabilities out there, only the form.

A government that issues its own non-convertible currency does not need to sell bonds in order to spend. This is because it issues the currency every time it spends (and destroys the currency when it taxes). The main reason such a government might want to sell bonds is because of its effects on interest rates.

If the government is running a deficit, then it is creating more money than it destroys through taxes. This means that the banking system will have excess reserves, more than they need to settle inter-bank payments and meet reserve requirements. Normally, banks don’t want to hold excess reserves, they’d rather purchase some other higher-interest-earning asset.

Continue reading

A collection of graphics

Via twitter and his YouTube channel, Sam Levey — aka @SamHLevey aka @DeficitOwls — has been collecting and sharing graphics for years. Sam has graciously shared them with me. Now we need to figuring out how to best share them with all of you, i.e. where to best put them. He notes: “if you want them stored as a teaching repository (as in, you want there to be a place for MMT-competent people to find the graphics as needed for conversation, then make a dedicated page. Or, if you want them to help actually teach people who are new, intersperse them in explanations.” I have both purposes in mind, and will do both. Grouping may be a challenge. Looking forward to Sam’s help and to subsequent additions from other folks. It’s going to take a little time…

#GlobalMMT

Having noticed an uptick in commentary or explainers that come from and/or are about countries — other than the US — and may not be tracked by the MMT groups in those countries; and in hopes of being useful for the lay reader, macro-curious students and journalists; we offer this page of articles in English, organized by country and publication date.

Recently Added

Most mornings, I read through Twitter from a list of 24 trusted principal MMT sources. Mostly academics. List here. They are a busy lot. When they link to research, commentary, explainers, etc., I send myself an email as a reminder to add the material to the site. Sometimes, I appreciate their use of twitter as teaching tool noteworthy and capture a thread. What with the expanding body of content and work I’ve missed (see below) or didn’t think — or know — to include sooner, I’m always playing catch-up. It’s both exhilarating and a little daunting. Here’s what’s caught my attention over the last few days.

Added to page on Student Debt

Complete thread here from Marshall Steinbaum (@Econ_Marshall)

Warren vs. Sanders: Inside the Progressive Debate Over the Student Debt Crisis
• Their competing plans reveal a lot about how these White House hopefuls would govern.
— Kara Voght (@karavoght) Mother Jones (@motherjones) Jan 31, 2010

Student Loan Discharged in Bankruptcy – Just a Blip, or Something Bigger?
— Michael M. Krauss, James Park, National Law Review (@natlawreview) Jan 28, 2020 h/t @RaulACarrillo

Added to Debates & Controversies
Does Modern Monetary Theory Have Any Scholarly Validity?
— John Harvey (@John_T_Harvey) Forbes (@Forbes) Jan 28, 2020 Warning: he unfortunately evokes the household budget analogy.

Modern Money Theory 101: A Reply to Critics • Key words: Modern Money Theory, Price Stability, Full Employment, Financial Stability, Money
— Éric Tymoigne (@tymoignee) and L. Randall Wray Levy Economics Institute of Bard College November 2013

How the Economists Got It Wrong
James K. Galbraith The American Prospect (@TheProspect) Dec 19, 2001

MMT in 25 tweets

On May 28, 2019, Scott Fullwiler posted 25 tweets as MMT 101.

1. From the very beginning in the 1990s, MMT has NEVER argued that ‘printing money’ was necessary. Anyone saying MMT = “print money,” even if they (correctly) incorporate an inflation constraint, is getting MMT dead wrong.

2. The argument from the earliest days–@wbmosler ‘s “Soft Currency Economics,” Wray’s “Understanding Modern Money,” or @StephanieKelton ‘s “Can Taxes & Bonds Finance Govt Spending?”–the MMT argument is that ALL govt deficits are ‘printing money’ ALREADY (!).

3. These and other foundational, early MMT pieces argue that the choice to issue bonds or not is about monetary policy how to set the CB’s interest rate target, not whether to ‘finance’ a deficit or ‘print money.’

4. The argument across literally dozens of publications is consistent–whether or not govt issues bonds when it runs a deficit, the macroeconomic impact of ‘bonds vs. money’ is nil.

5. What matters for macro impact is the deficit itself, and how it is created (spending/taxing priorities), since the deficit is creating net financial wealth in the pvt sector (note I did NOT say ‘real’ wealth (!)).

6. The choice to issue bonds or not in the face of a deficit is simply about 1 risk-free govt asset (say, Tbills) vs. another risk-free govt asset of perhaps slightly longer maturity (but that’s also a policy choice).

7. This is also partly why we predicted back in the 2001 that Japan’s QE wouldn’t be inflationary, and predicted the same for the US in 2008. QE & ‘monetization’ of govt debt is about an asset swap–it’s the deficit itself that has the ‘quantity’ effect, not the financing.

8. Similarly, in the real world, CB’s are defending their national payments systems every minute of every day. This means they accommodate banks’ demand for CB liabilities always at or near their current interest rate target.

9. From an MMT perspective, it’s really weird that people believe a govt running a deficit via overdraft at the CB is inherently inflationary, but the current system, where govt runs a deficit while CB guarantees mkt liquidity for bond dealers to buy govt bonds, isn’t.

10. So, from the beginning 20+ yrs ago, MMT said the ‘choice’ to issue bonds when running a deficit was about how to set CB’s int rate target. W/ bond sales, CB accommodates banks at its tgt rate. W/o bond sales, CB sets rate at ZIRP or uses IOR=tgt rate to set tgt rate <> 0

11. This is just supply and demand from ECON 101. If you push out the supply curve beyond the entire demand curve, either the price falls to 0 or you have a price floor set at <> 0. Those are the only 2 possibilities when ‘printing money’ to run a deficit.

12. Neoclassicals actually agree w/ this, for different reasons. For them, if ‘monetize’ govt debt & CB rate = 0, ‘monetization’ isn’t inflationary. Or, if CB sets rate <> 0 via IOR=target rate, still not inflationary.

13. In both cases, CB’s reserves are considered effectively equivalent to holding, say, Tbills. So, ‘monetization’ or ‘printing money’ is effectively equivalent to ‘printing’ Tbills. IOW, if you blend neoclassical model w/ actual CB ops, ‘printing money’ isn’t inflationary.

14. Putting this all together . . . MMT has NEVER argued that ‘printing money’ as conventionally interpreted is necessary to carry out MMT policy proposals. All deficits create net financial wealth for pvt sector, regardless of ‘finance’ method.

15. Choice to issue bonds or not when running a deficit is about how to set CB’s target rate, not ‘financing’ a deficit. This means that interest on national debt is a policy variable, or at least can be (for monetary sovereign, of course).

16. So, choice to issue bonds or not is not about ‘quantity’ impact of a deficit, but about ‘how’ CB chooses to achieve its target rate. Hitting interest rate tgt by overdraft to govt & pay IOR=tgt rate=2% has no difference of macro significance from . . .

17. … hitting interest rate target by govt instead issuing tbills while CB ensures mkt liquidity at tgt rate = 2% to banks & bond dealers.

18. Now, there are places where MMT scholars argued for no bond issuance, govt gets CB overdraft, & CB sets tgt rate= 0 (permanent ZIRP). Note, tho, that this is (a) not arguing in favor of ‘printing money’ even in neoclassical view (it’s Krugman’s liquidity trap, actually) …

19. (b) and is therefore, simply a policy proposal for low interest rates on govt debt. It is also NOT arguing for ZIRP in a neoclassical world–Wray did his Ph.D. under Minsky. Minsky was against manipulating short term rates; instead favored credit regs/margins of safety.

20. That is, when MMT proposes ZIRP, it is proposing it for ONLY the govt debt, NOT for the economy overall as in a New Keynesian model. There are dozens of MMT publications on regulating credit, and more on the way. MMT was about macroprudential before that was a thing.

21. Minsky was adamant that manipulating short-term interest rates was actually destabilizing (he blamed the rise of money manager capitalism on Volcker’s high rates). Raise margins of safety to slow credit rather than raising the overnight, risk-free rate.

22. A benefit of margins of safety is that raising interest rates to slow credit leads to higher hurdle rates that can only be met by riskier projects, while raising margins of safety slows credit by favoring the LESS risky loans.

23. Particularly given that the problem of a debt bubble is that credit QUALITY is bad, it’s really weird from an MMT perspective that it’s mostly MMT arguing in favor of macro policy that target credit quality …

24. … while neoclassicals go to lengths to NOT talk about credit quality–use a Taylor rule to manipulate short-term rates, increase liquidity requirements, increase capital, but little to nothing about underwriting. (Shocker–we now have a corp debt bubble.)

25. So, MMT is NOT arguing for ‘printing money’ and ‘ZIRP’ in the conventional, neoclassical world. MMT is arguing for stabilizing demand side of the economy w/ a mix of govt’s budget position (at low rates, however ‘financed’) & credit quality/margins of safety.

Recently Added

To Op-Eds and Explainers: Alexandria Ocasio-Cortez is a fan of a geeky economic theory called MMT: Here’s a plain-English guide to what it is and why it’s interesting
Jim Edwards (@Jim_Edwards) Theron Mohamed (@Theron_Mohamed) Business Insider (@BusinessInsider) March 30, 2019


Six items and a new page: On Debt & Deficit

Side Bar Menu: New Economic Perspectives, Books, #GlobalMMT, Events

Added today

To News & Op-Eds
NO MORE ECONOMIC MALPRACTICE • African-American Faith Leaders Take on the Establishment
— Delman Coates (@iamdelmancoates), Sojourners (@Sojourners), Sept 12, 2019

To Green New Deal

Green New Deal 09.13.2019 (IRVINE AUDITORIUM) from Weitzman School of Design on Vimeo.

(10:27:51)
PROGRAM
27:20 | Welcome and Opening Remarks from Wendell Pritchett, Penn Provost
36:34 | Beyond Hagiography—Mining the New Deal Legacy
Featuring Jen Light (MIT) Nancy Levinson (Places) Nicholas Pevzner (Penn) Raj Patel (Texas) Mary Annaise Heglar. Moderators Karen M’Closkey (Penn) Francesca Ammon (Penn)
4:16:23 | Radicalizing Pragmatism—The Nuts and Bolts of a Green New Deal
Featuring Rhiana Gunn-Wright (New Consensus) David Roberts (Vox) Leah Stokes (UCSB) Kerene Tayloe, Esq (WE-ACT) Moderators Allison Lassiter (Penn) Ellen Neises (Penn)
6:10:08 | Building Power—Bold Visions for a Green New Deal
Featuring Kate Aronoff (Type Media Center) Kate Orff (Columbia) Varshini Prakash (Sunrise) Stephanie Kelton (Stony Brook) Peggy Deamer (Yale/The Architecture Lobby) Moderators Daniel Aldana Cohen (Penn) Billy Fleming (Penn)
8:33:45 | Tools and Advocacy for Change
9:03:45 | Designing a Green New Deal
Featuring Jane McAlevey in conversation with Naomi Klein and Julian Noisecat