Stephanie Kelton has become a spokesperson for an insurgent group of economists who are propagating the notion that most current economists do not understand the nature of money and have been causing the United States and other countries unnecessary grief. These people refer to their viewpoint as Modern Monetary Theory (MMT). If MMT is correct, the United States and other countries become free to direct the necessary funds to battle poverty, unemployment, the coronavirus pandemic and global warming. A new economic era is created. What could be more important than resolving the applicability of MMT. Kelton defends this theory and its consequences in her recent book The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy.
The United States and a few other countries have complete monetary sovereignty. That is, they spend, tax, and borrow in a currency that does not need to be converted into some other quantity such as gold or some other currency. Such money is referred to as a fiat currency.
“The main arguments that I present apply to any monetary sovereign—countries like the US, the UK, Japan, Australia, Canada, and others—where the government is the monopoly issuer of a fiat currency. MMT changes how we view our politics and economics by showing that in almost all instances federal deficits are good for the economy. They are necessary. And the way we have thought about them and treated them is often incomplete and inaccurate.”
“The taxpayer, according to the conventional view, is at the center of the monetary universe because of the belief that the government has no money of its own. Therefore, the only money available to fund the government must ultimately come from people like us. MMT radically changes our understanding by recognizing that it is the currency issuer—the federal government itself—not the taxpayer, that finances all federal expenditures. Taxes are important for other reasons that I will explain in this book. But the idea that taxes pay for what the government spends is pure fantasy.”
The underpinnings for MMT are very old. Perhaps so old that they have long faded from modern economic textbooks, but they have not been forgotten by historians and anthropologists. When Kelton was still a graduate student, she encountered a book titled Soft Currency Economics by Warren Mosler, who was not an economist by training, but an investor. His main point was that economists misunderstood the relationship between governmental taxing and spending. Governments don’t tax in order to be able to spend, they spend in order to tax. That notion requires a bit of explaining and Kelton initially was not buying it, but she would eventually see the light.
“Warren [Mosler] saw things that most economists were missing. To many of us his ideas sounded completely original, but most weren’t. They were only new to us. It turns out they could be found (and we found them) in canonical texts, like Adam Smith’s Wealth of Nations or in John Maynard Keynes’s two-volume classic, A Treatise on Money. Anthropologists, sociologists, philosophers, and others had long ago arrived at similar conclusions about the nature of money and the role of taxes, but the economics profession largely lagged behind.”
“Taxes are there to create a demand for government currency. The government can define the currency in terms of its own unique unit of account—a dollar, a yen, a pound, a peso—and then give value to its otherwise worthless paper by requiring it in payment of taxes or other obligations. As Mosler jokes, ‘Taxes turn litter into currency.’ At the end of the day, a currency-issuing government wants something real, not something monetary. It’s not our tax money the government wants. It’s our time. To get us to produce things for the state, the government invents taxes or other kinds of payment obligations. This isn’t the explanation you will find in most economics textbooks, where a superficial story about money being invented to overcome the inefficiencies associated with bartering—trading goods without the use of money—is preferred.”
Kelton provided an example of how this relationship between money and taxes works, but we will consider another example, one provided by David Graeber (an anthropologist) in his book Debt:The First 5,000 Years. One of Graeber’s concerns was understanding how money and money-driven markets came to originate. He points out that there is no evidence of a classical barter economy ever existing. Consider a small kingdom or a domain ruled by a lord. There would be an economy based on exchange by gifting. If someone needed something possessed by another, the other, if possible, would provide the goods as a gift with the understanding that the person in need would return the favor with a roughly equivalent gift. Peer pressure would help keep such exchanges satisfactory to both participants. Barter was viewed as a path to perdition because the temptation to try to get the better of the deal would be too great. The peasants of this entity would conduct their business in this manner and give some portion of what was produced to the ruler as tribute.
Now suppose this leader decided he wanted to maintain a squad of soldiers to protect his lands or to attack a neighbor. These soldiers would have nothing to contribute to the local peasants yet must be supported with food and supplies. A clever way to promote this trade would be to issue to the soldiers a supply of objects with no intrinsic value. They would attain value when the lord issued a tax on the peasants requiring them to provide the lord with some number of these valueless objects. With the imposition of the tax, the objects acquired a value and forced the peasants to exchange goods with the soldiers in order to acquire the number of objects needed to pay their tax. Instantly a form of money, a fiat currency, was created along with a market in which goods could be valued and exchanged. The tax was a way to guide the behavior of the lord’s subjects. If the lord decided he needed a larger number of soldiers, he would acquire them and produce more objects to give them for exchange. Note that for the system to work, the peasants must have the capability to produce enough to satisfy the needs of the soldiers. If the number of soldiers became too great for the economy to support, the extra objects possessed by the soldiers could not buy more produce. Rather, these excess objects would produce what we moderns call inflation: too much money seeking too few products.
This example illustrates essentially how a currency-issuing country like the United States actually operates. It issues fiat money backed by nothing but the requirement that it must be used to pay taxes. The amount of money that the country can create and place in the economy is only limited by the desire to avoid inflation, because inflation is itself the indication that the government is driving the economy, by spending or injecting more money, to produce more goods than it is capable of producing.
As currency issuer, the lord can increase the money supply simply by producing more of the objects and distributing them. In a modern country like the US the Fed would merely make an entry in a bank account in order to create money. Money is created all the time. Every time a loan is issued by a bank, there is no money transferred from a reserve account to that of a user. An account is merely created and the bank records that there is a certain amount of funds in that account. More money has come into existence.
Getting back to the ancient lord, things would become more complicated if he wished to exchange goods with another lord using his objects as currency. In order to use them in this manner he would have to replace his object by something recognized be his partner as having value. Hence, we get coins with precious metals included in order to provide something of universal value. This notion of tying the value of money to precious metals would persist until Richard Nixon took the United States off the gold standard.
We, and nations such as Britain and Japan are issuers of fiat money and have what Kelton refers to as currency sovereignty. All have currencies that are accepted around the world at a stable value. All are producing what we misguidedly refer to as a “deficit” and are doing well. But they could be doing even better if they created more money and ran larger deficits. We seem to have learned the wrong lessons from all those years on the gold standard.
The proponents of MMT are trying to reeducate people about the true nature of money. The consequences of their viewpoint are enormous. National debt is just an accounting item. Balancing the federal budget is a very harmful waste of time. Spending should be at the level required to provide what society needs. The implications are enormous. Consider Kelton’s chapter on the national debt. She begins with this statement.
“The national debt poses no financial burden whatsoever.”
To pay any interest on the national debt, the Federal Reserve merely produces a credit to whatever account it is due. These transfers are tallied by tradition, but they have no economic impact. The issuing of bonds in a value equal to the deficit spending of government is also a tradition. Its main economic impact is that it provides a means of controlling interest rates. Kelton suggests that the Fed could buy back all the bonds issued as easily as it pays the interest on them, with little if any adverse effects. If the Fed were to credit the value of the bond to the account of each bond holder it would merely be exchanging non-interest-earning dollars for interest-earning dollars. The net wealth of the bondholders would be unchanged, but the interest earned would disappear. There would be no new surge of excess dollars into the economy. The loss of income would be slightly deflationary.
How can two such different economic viewpoints exist
within a discipline which likes to refer to itself as a science? If MMT is correct, and I have begun to think
it is, then we must begin to act accordingly.
Otherwise, there is no way we will ever be able to deal with the
situations in which we find ourselves.
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