This week we'll pause our discussion about the Israel-Palestine conflict and the U.S. government's ongoing support for Israel's war efforts. Let's circle back to one of Political Economy Watch's original concerns: the way discussions about aspects of the U.S. political economy are framed in the mainstream press and media. Specifically, how do we talk about federal deficits and the national debt? Has Modern Monetary Theory (MMT) -- one of the lenses through which this newsletter looks at the political economy -- had an impact on that framing?
Reading Recommendations
Rather than providing a recap of MMT here, we're going to encourage you to check out two recent internet postings which both reflect the MMT perspective -- though only one of the two does so explicitly.
In Praise of Fiscal Irresponsibility is a post from this past week on a Substack blog called Banking Observer written by one Brian Flaherty. Though Flaherty doesn't mention "Modern Monetary Theory" or "MMT," this post's subtitle is a dead giveaway: "Let's stop treating the deficit like a serious issue." Flaherty's starting point is a recent article in The Economist lamenting the lack of discussion of the federal deficit in the U.S. presidential race. Flaherty notes that because the U.S.
"... the government is a currency issuer that has the exclusive legal right to make new dollars, dollars are an unlimited resource for them. ...
"You and I can run out of dollars. But by virtue of being a currency issuer, the federal government cannot."
So the U.S. government, unlike households, businesses and even state and local governments, is not financially constrained when it comes to spending in pursuit of the public purpose. The U.S. government can never fail to "find the money" when it comes to spending approved by Congress. It can, however, compete with the non-government sector of the economy for the real resources it needs to carry out its programs. That poses the possibility of price competition between the two sectors over resources, i.e., inflation. At this point Flaherty addresses the concern that persistent federal deficits will cause inflation. He cites the experience of Japan over the past three decades to show that there is no line of causation between running deficits and inflation.
Flaherty's argument is succinctly put; check him out.
Scotonomics: Moving past straw-man version of Modern Monetary Theory is an excerpt from last October from "Scotonomics," a weekly newsletter published by The National, a leading newspaper in Scotland. As part of the United Kingdom, the Scottish government is not politically or monetarily sovereign. Its parliament ("Holyrood") only has the ability to make laws in areas in which the British parliament in London ("Westminster") has consented to "devolved powers." The Scottish National Party (SNP), an at least nominally pro-independence party, leads the government; Scotland uses the British pound sterling as its currency. If Scotland were to become independent from Britain, it would have to decide whether to retain the use of the British currency -- in which case it would not be monetarily sovereign -- or to issue its own, new, national currency (as would be consistent with the MMT approach). Surprisingly, the SNP has not called for a new Scottish currency post-independence -- a position which has long been excoriated by British MMT advocate and public intellectual Richard Murphy whom we've previously mentioned at Political Economy Watch.
All that is to say is that Scottish political life is a place where the MMT lens on political economy is particularly salient. The Scotonomics post contains a list of "bullet points" that will enable you to quickly refresh your knowledge of MMT and its political relevance.
Back to the U.S. and Federal Deficit Spending: Has MMT "Won"?
In his many YouTube interviews in recent years, Warren Mosler, the grandfather (or, perhaps, godfather) of Modern Monetary Theory, has often asserted that MMT "has won." I'm not entirely sure what Warren means by "winning"; I suspect that means that his basic analysis of monetary operations in the United States has not been refuted. But when I look at the people in the United States who are paid to think about, write about or pass laws about the political economy -- economists, business journalists, the White House, the Federal Reserve, the congress -- I only see scant evidence that MMT has changed the way these people see the world.
Case in point: an opinion piece from just this week in the Washington Post: "How would Trump and Harris affect U.S. debt? The difference is huge.". The article is by contributing columnist Natasha Sarin,
"... a professor of law at Yale Law School with a secondary appointment at the Yale School of Management in the Finance Department. Previously, she served as deputy assistant secretary for economic policy and later as a counselor to Treasury Secretary Janet Yellen. ... Before her government service, Sarin was a professor at the University of Pennsylvania Carey Law School and the Wharton School."
So we're talking about someone who is very high up in the mainstream macroeconomic policy world -- perhaps a future member of the President's Council of Economic Advisors in a Democratic administration or even a successor to Yellen at Treasury. What does Sarin have to say about the 2024 presidential candidates? If we reduce this Post column to bullet points it would read:
In this election season, neither Trump nor Harris is talking about federal deficit spending and the growth in the national debt.
"That’s unfortunate, because the issue is pressing. The national debt is on an unsustainable path ..."
But Harris's taxation and spending plans would add less to the federal deficit than would Trump's; therefore Harris is more fiscally responsible.
"Any fair fiscal comparison shows this election is not a close call. If the deficit is your top issue, Harris is the clear choice."
Now to be fair to Sarin, in her column she does call attention to two relevant concerns:
Harris is pledging to raise taxes on large corporations and the extremely rich; Trump wants to lower taxes on the rich.
Trump views tariffs as a wonder drug that will cure whatever ails the economy.
Harris's proposals are much more logically coherent than Trump's -- though that's a low bar to surpass -- and they acknowledge impacts on the distribution of income more than Trump's. But when we look at Sarin's overall framing of the issues, we see that it is utterly conventional and shows no trace of the intellectual impact of MMT.
She assumes that for a currency-issuing government, the same financial constraints apply as they do to households and businesses. FALSE.
She assumes that the size of the federal deficit in a given year ought to be a policy goal.
She assumes that the size of the federal deficit in a given year can to be a policy goal, i.e., that it is actually targetable (and not merely the difference between actually conducted spending and taxes actually collected).
She ignores the fact every Treasury debt instrument issued to "fund" federal spending is an injection of a financial asset into the non-government sector of the economy. Consequently, she fails to examine what the impact of a reduction of such fiscal injections would be on both the overall level of economic activity and on the distribution of income and wealth.
Granted, Sarin does acknowledge the challenges that the federal government will face in the coming years:
"The country will almost certainly need more government investment in the years ahead because of national security concerns, an aging population and the existential threat posed by climate change."
But she fails to recognize that this is strictly a question of the federal government's ability to mobilize real resources to meet these challenges. The federal government can always "find the money" it needs to meet these challenges because it is the source of the money in the first place.
Needless to say, there are many important differences between Kamala Harris and Donald Trump. The impact their policies would have on the national debt is not one of them.
Your thoughts on the way the political economy is being discussed during this election season? Discuss them in the Comments section below.