While traveling earlier this month I had occasion to visit a friend (a former co-worker) who has taken up podcasting and who gave at least a mention to Modern Monetary Theory (MMT) a few years back. I offered to sit for an interview about MMT and he took up the offer. We ended up chatting for nearly two hours. We're currently editing the podcast, so it's not yet available for listening or downloading. When it is, I'll be sure to post the URL on Political Economy Watch.
I hand-wrote four pages of notes in preparation for the podcast and I'd like to share them with you here now, in advance of the podcast's publication. My thinking was: If I had just one hour to talk about MMT with someone, what are the topics I would want to be prepared to cover? The notes are in bullet-point format and are fairly unpolished. Nonetheless, I hope it provides you with a little refresher about MMT. I welcome your reactions to this content and the different format; please share them in the Comments section at the end of the webpage.
Notes for Podcast Interview on Modern Monetary Theory
conducted Tuesday, October 1, 2024
The Big Picture: Modern Monetary Theory addresses the question: Is the United States government financially constrained when it comes to mobilizing resources in pursuit of the public purpose?
Key aspects of that question:
Focus is on the federal government, which is constitutionally endowed with power to create the currency.
Mobilizing resources: both human and material resources, which are presumed to exist outside the government itself.
Public purpose: government is tasked with doing things that can’t be done effectively by individuals, families or other organizations.
Who determines the public purpose, what the public purpose is, and how the public purpose is determined vary from one society to another.
But all states must have a way of determining the public purpose and must mobilize resources in pursuit thereof.
All societies, at all times, face constraints on their real resources.
But MMT’s focus is on whether a government like the U.S. federal government is financially constrained in pursuit of the public purpose.
Is the U.S. federal government ever constrained because it can’t “find the money”?
MMT’s answer: No. The U.S. government never needs to “find the money” first because it creates the money by spending it into existence.
Spending precedes taxation:
Throughout history, states have faced the question of mobilizing resources for the public purpose.
Various approaches have been tried:
Plunder
Slave labor
Corvee labor
Taxation in kind
These are difficult to sustain or they don’t accommodate the scope of resources the state needs.
Monetary taxation supersedes these.
Impose a tax obligation which must be satisfied in units sanctioned by the state.
The tax obligation creates a demand for tokens issued by the state and denominated in those units.
How do you get those tokens? You provide resources to the state in exchange for those tokens (the currency).
The state has to issue those tokens – i.e., spend – before it can tax.
Hence taxation drives the currency, i.e., one of the purposes of taxation is to drive demand for the currency.
Critique of the Household Budget Analogy (H.B.A.)
H.B.A. argues that the federal government’s budget and spending are analogous to those of individuals and households.
The latter need to amass funds before spending.
That’s done via sale of labor-power or borrowing
Individuals, households and firms are all currency users.
So are state and local governments in the U.S. (and national governments in Eurozone countries).
These entities must “find the money” somewhere outside of, and logically anterior to, themselves.
H.B.A. argues that the U.S. federal government is the same.
Hence, budget deficits seen as bad.
Hence, national debt (accumulation of budget deficits) seen as bad (“unsustainable”).
Alleged burden on our grandchildren
Alleged subservience to China
Basis for “budget limit” crises, shutdown of government, threats to default on debt payments.
Believed by most Democrats since the Carter administration
Believed by Republicans when Democrats are in power
MMT critique: H.B.A. as deficit myth
U.S. federal government is a currency issuing level of government (an aspect of monetary sovereignty, discussed below).
Stephanie Kelton: “If the votes are there, the funds are there.”
“One person’s spending is another person’s income. One person’s debt obligations are another’s financial assets.”
U.S. national debt is sum of all spending by federal government since 1789 that has not yet been taxed back.
The Spectrum of Monetary Sovereignty
U.S. government:
Issues its own currency by spending dollars into existence.
Spends only in that currency.
Insists that taxes be paid in that currency
Does not tie the exchange value of that currency to anything else.
No fixed exchange rates with other currencies.
Not convertible into precious metals.
Does not issue debt instruments in any other currency.
Hence, U.S. government never faces a macroeconomic policy constraint: monetary sovereignty.
Contrast with countries that borrow (or are forced to borrow) in currencies other than their own.
e.g., most other countries have to borrow in U.S. dollars, which compels them to produce for exports sold in dollars
Contrast with countries that do not have their own currencies:
Eurozone countries
African countries which use the CFA franc
MMT and Policy
MMT describes the way modern capitalists’ governments spend and tax, particularly as affected by their degree of monetary sovereignty.
Countries which have a high degree of monetary sovereignty have “fiscal space” to do things which countries without high monetary sovereignty cannot.
e.g., federal Job Guarantee
But which policies such countries should pursue requires discussion of political and social values – what is the public purpose which the government tries to pursue?
That values discussion is politics.
MMT does not say what a government ought to do.
MMT does say that what a monetarily sovereign government can do is not financially constrained.
It’s only constrained by the real resources available to it.