Seeking “some education” Jared Bernstein recently asked some questions about MMT (Modern Money Theory).This series is my effort at some answers. Part I is about deficit spending. Part II covers inflation. Part III explains the view of the place of the Fed in the MMT framework according to this writer. And Part IV critiques Jared’s views on Paul Krugman’s “finance-ability” notion.
The last issues raised by Jared are the “timing issues.” He says:
Timing issues re revenue raising vs. printing money: A theme of my work, to which MMTers often object, I think, is that we need to raise more revenues to pay for public goods. I recently wrote, for example, that, given our aging population, it will take something like 3% more of GDP to meet our obligations to Social Security and Medicare/Medicaid by 2035. MMTers push back that as long as we’re below potential, we can print the money to support government spending, so stop getting so wound up about “payfors.”
I doubt that MMT writers often say “print the money.” MMT writers don’t think most of the government money is created through printing at all, but that most of it comes from the Fed creating reserves in the Treasury Spending Account or in the accounts of financial institutions that are part of the Quantitative Easing or other portfolio swaps implemented by the Fed.
Apart from that, however, there may well be a problem with that 3% of GDP more number Jared cites. I know that it is based on CBPP modeling efforts, and Jared apparently believes it’s very solid. But think tank models and CBO projections over a long period of time are likely to be highly unreliable, because they cannot and do not take account of substantial changes in politics and the economy which can vastly change the parameters in models. For example, what if the recent low levels of growth in the economy were replaced by levels averaging 5%? Would entitlement spending then rise by 3% of GDP? Can you assume with any confidence a combination of technological and political changes would not increase growth rates to that level?
That said, however, why can’t we increase entitlement spending by that 3% if we so desire? In part IV, I explained why we need not rely on debt instruments for spending. Assuming that this MMT-based view is correct, what’s the problem with that policy choice?
Jared implies that the problem with it is that we have to raise more revenue to “pay for” it. But, as explained in Part IV, there is no “finance-ability” problem, so we do not have to raise any more revenue.
The truth is that “taxes don’t fund spending,” and neither does bond revenue, as Stephanie Kelton showed in her classic article. Taxing and bond sales now accompany the federal financing process, but the actual funding comes from Congressional appropriations followed by Federal Reserve creation of new high-power money in the Treasury spending account through “keystroking.”
That is the reality of our federal spending process. We need an unknown level of taxing to drive the value of our currency. But we need neither tax nor bond revenues to fund Treasury spending, nor do they do that in fact.
Jared goes on:
But while assuming full employment is a mistake, so is assuming a) enough slack to warrant all that printing, and b) even more so, the political will to do so. Though we should always be willing to deficit spend in the near term when economic conditions warrant it, should we not structure long-term fiscal policy to avoid structural deficits (a structural deficit is one that persists even at full employment)? At least in a political sense of protecting vital social insurance programs, isn’t the prudent approach, as difficult politically as it may be, to try to lock in a level of revenue collection that meets our future obligations?
The answer is no! The prudent approach is to end austerity budgeting and solve all the problems that face American society expeditiously by bringing all of our productive resources on line as quickly as we can to get to public purpose. We have been shortchanging the American people and American society since the middle 1970s at least.
And it shows in levels of anger, rage, and hatred not seen for a very long time. If public policy continues to fall short of public purpose for much longer, the levels of anger and dissatisfaction will be so high that our political will be on the brink of an explosion the likes of which we have never seen.
It is always the time for prudence, but the issue here is what the prudential approach is. Is it to continue to tinker and make incremental adjustments while America and the world burn, or is it to use the increased policy space afforded by monetary sovereignty to address and solve our many problems? The answer is obvious to me. Why isn’t it to Jared?
Jared says that it is a mistake to assume that there is enough slack in the economy to assume that all that “printing” can be absorbed by it. But this is merely his repeated concern about inflation already addressed in Part II of this series.
MMT policy ideas call for full employment budgeting based on previous data about the levels of the current account deficit and the levels of savings people seem to want. These levels imply an annual, perhaps continuing, deficit of 12% of GDP.
That figure is based on previous data on sectoral balances, and on the sectoral financial balances model. It is not “assumed.”
It is based on what Jared calls a “structural deficit,” since we are saying that to maintain full employment a deficit of 12% of GDP annually is necessary. Should we avoid a deficit like this using long-run fiscal policy as Jared suggests? Why?
Is it unhealthy for the private sector to save 6% of GDP per year? Why so?
Is it unhealthy to have a current account deficit of 6% of GDP at full employment? I say no, not so long as people in other nations are willing to sell their goods to us in return for our own currency, and we are willing to maintain a full employment budget so none of our citizens are denied a full time job at a living wage with generous fringe benefits provided by a federally-funded, locally administered job guarantee.
What happens when foreign nations become unwilling to sell their goods to us? That may happen but any such transition will be gradual since foreign nations have so much invested in Treasury Bonds. They will not destroy the value of those bonds through too-rapid divestment. So, we will have plenty of time to adjust to changes and to begin to produce the consumer goods we need again. There is no reason to believe that will present a problem.
End of Part V