Modern Monetary Theory Cuts Deficits That Matter


Let’s quickly dip into Modern Monetary Theory (MMT), using “The Deficit Myth” by economist Dr. Stephanie Kelton. In the book, she gives this general definition:

MMT … offers … a realistic description of how a modern fiat currency works, along with some prescriptive ideas about how to transform that understanding into better public policy.

Public Money

The federal government creates U.S. dollars, and is the only entity that can do so. When the government spends money, it creates the money to spend. It creates coins by minting, reserve notes by printing, or, most often by far, bank reserves by typing on a keyboard. The money then goes into the bank account of the payee. The government doesn’t have to tax or borrow to get money. It just has to spend, and it can never run out.

By the U.S. Constitution, Congress is the only entity that can authorize spending money. Since Congress represents the people, so all money is public money. It is not necessarily the taxpayer’s money. It is public money, and so should go toward the benefit of all the people.

Taxes

Just as spending creates money, taxing destroys money. The Federal Reserve Bank (The Fed) spends into the economy by typing on a keyboard to increase a number for a bank account. It taxes money out of the economy by typing on a keyboard to decrease that number. Again, the government doesn’t need taxes for spending. But taxes are useful to cool inflation, to create demand for the U.S. dollar, to cut income and wealth inequality, and to encourage public health and safety.

Net Deficit

When Congress creates a spending bill, it customarily figures out how to “pay for” it by raising taxes or lowering other spending. The Congressional Budget Office (CBO) provides a deficit report showing the net deficit impact over ten years. Congress tries to “pay for” the spending bill by getting that net deficit impact to be zero. But that is at best a waste of time and effort. Since Congress creates money by spending, it need not ponder how to “pay for” it.

Productive Capacity

There is no limit to the amount of money Congress can create by spending. However, there is a limit to the amount of money the productive capacity of the national economy can absorb. When the labor, material and factories are humming along near 100%, any more money spent into the economy will cause inflation.

So, instead of asking, “How will we pay for it?,” we should ask, “How will we resource it?” In other words, how will we find and employ the labor, material, machinery and know-how so that we can use the money created, and so keep inflation under control?

Inflation

The current way we try to control inflation is via the Fed setting interest rates for lending. The Fed aims for a certain unemployment rate — lowering it by cutting rates and heating the economy; raising it by raising rates and cooling the economy. This method, which sets monetary policy, is indirect and so does not work very well. Also, it is based on pain — keeping a certain number of people unemployed.

A more direct method would be for Congress to respond to higher inflation or higher unemployment numbers — cutting spending or raising taxes if inflation is high; raising spending or cutting taxes if unemployment is high. But this method, which sets fiscal policy, is too slow. By the time Congress debates, marks up and passes a bill, inflation or unemployment could well have shot up higher.

Instead of setting fiscal policy after the fact, Congress could look ahead to see what the effects of a spending bill would be. Instead of wasting time on a deficit report, the CBO could produce an inflation report showing how much, if any, of the spending bill would have to be offset by targeted tax increases or spending cuts. If the productive capacity of the economy would be exceeded, then offsets would be needed. Congress could then put them right into the spending bill. In that way, Congress would be working on the important question, “How will we resource it?”

Job Guarantee

The capitalist economy has been marked throughout history by boom and bust cycles, accompanied by inflation and unemployment. MMT recommends a federal job guarantee to smooth out these cycles. With this program, the federal government would fund jobs at a living wage for every person who wants one. This funding would be open-ended until everyone wanting a job was hired. Local groups and governments would decide what work needs to be done, and create jobs that would be useful to the community.

The job guarantee would stabilize the economy in several ways. Persons who lost a job could sign up for a federal guaranteed job. That would stabilize consumer income and prices. Also, having a fixed price for labor would stabilize wages. Further, having a pool of workers in the job guarantee program, would serve business with immediately employable workers. Furthermore, the job guarantee would serve as an automatic stabilizer — raising government spending during a cold economy, and lowering government spending during a hot economy.

Deficits That Matter

MMT shows us that we need not sweat budget deficits. What matters are the moral deficits — the shortfall in what people need for the pursuit of happiness. The book points out the deficits in good jobs, individual savings, health care, education, infrastructure, stable climate and democracy. These are not luxuries. With knowledge of how our money works, we can cut the deficits that matter. And we can better keep an economy of full employment and stable prices.

Sources

“The Deficit Myth” by Stephanie Kelton

Modern Monetary Theory

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By Quinn Hungeski, TheParagraph.com, Copyright (CC BY-ND) 2021

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Kathleen M Hicks
Kathleen M Hicks
3 months ago

“Productive Capacity” is the only concept I can wrap my head around.

Katimarie
Katimarie
1 month ago

Still trying to understand this paradigm of economics.
So could this principal be implemented by the Chamber of Commerce, say, who knows local businesses and would issue a living wage to locals seeking employment?Businesses would apply to a Federal Guaranteed Jobs data list and receive grants to pay the living wages to meet their productive goals.
This seems like a subtle but profound shift. Potentially increased flexibility and self-worth.