Category Archives: MMT – Modern Money Theory

MODERN MONETARY THEORY, Basic Principles – Bill Mitchell.

Any economic system, short of slavery, requires productive resources to be transferred, through free will, taxation, from the non-government sector to the government sector in order to do the work of the latter.

The state, generally through its designated agent, the central bank, is the sole supplier of that which it demands for payment of taxes, it’s fiat currency. The taxpayers do not have the capacity to meet their legal tax obligations defined by the state without the state acting first, spending on goods and services from the non-government sector.

Tax liabilities (not tax payments) function to create sellers of goods and services in exchange for the required state tax credits, the latter which we refer to in common parlance as the state’s currency.

State spending therefore, is constrained by what is offered for sale in response to tax liabilities. Spending by such a government is not operationally constrained by revenues, rather it is constrained by the availability of goods and services to buy in the non-government sector.

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There can be no net savings of financial assets in the non-government sector without cumulative government deficit spending.

The government, as the currency monopolist, is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and eliminate mass unemployment.

In accounting terms, the government’s deficit (surplus) is exactly equal at all times to the non-government sector’s surplus (deficit).

There is a tendency in the social media to use the term MMT as a slogan rather than relating to it as a coherent body of academic work in economic theory and practice that has been meticulously developed over more than 25 years.

This tendency manifests in claims that the essence of MMT is that the capacity of the government to fund programs is unlimited and so there is massive scope for all sorts of progressive policies to be introduced.

Basic Principle 1: The beginning of the MMT ‘money story’

Societies that use state money are very different to a barter-type system.

In a monetary society, the state is at the top of the monetary hierarchy. We cannot understand how such a system works unless we understand the functions of the state in this respect.

The MMT ‘money story’ begins with a state desiring to provision itself in order to fulfill the political charter for which it was elected by the people. That meaning applies to democratic systems where the politicians go to the people with a stated mission and the winner forms government.

However, the ’money story’ is not exclusive to democracies;

Any system, short of slavery, requires productive resources to be transferred, through free will, from the non-government sector to the government sector in order to do the work of the latter.

That insight is the beginning of our journey.

Further, the state (generally through its designated agent, the central bank) is the sole supplier of that which it demands for payment of taxes. The taxpayers do not have the capacity to meet their legal tax obligations defined by the state without the state acting first.

But the imposition of the tax liability is an important step in the ‘money story’ to understand. What it means is that the tax liabilities (not tax payments) function to create sellers of goods and services in exchange for the required state tax credits, the latter which we refer to in common parlance as the state’s currency.

So we can think of a currency as being a tax credit with the state.

This provides a further insight that is intrinsic to MMT.

The tax liabilities function to create what we define as unemployment, where people seek work in exchange for the state’s currency.

Thus taxation is a way that the government can elicit productive resources and final goods and services from the non-government sector that it needs to advance its political agenda. It is clear that the non-government sector has to get the currency before it can use it to pay its tax bills.

Where else could the non-government sector get the currency from to meet its legal liabilities to the government, if the latter did not purchase goods and services provided by the non-government sector or make transfers to that sector?

So the state can then provision itself by buying what is being offered for sale with it’s otherwise useless currency.

And thus we understand the basic operations involved.

The state, from inception, as the sole supplier of the funds needed to pay taxes or buy the debt issued by the state, must necessarily impose tax liabilities on the non-government sector before it can spend.

Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes, without a concomitant injection of public spending, by design, creates unemployment (people seeking paid work) in the non-government sector.

The unemployed or idle non-government resources can then be utilised through government spending, which amounts to a transfer of real goods and services from the non-government sector to the government sector.

While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.

Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.

Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.

This understanding provides a further insight.

State spending therefore, is constrained by what is offered for sale in response to tax liabilities.

But, importantly, spending by such a government is not operationally constrained by revenues.

Note here that this conclusion does not apply to the 19 Member States of the Eurozone because they surrendered their currency sovereignty and use a foreign currency instead.

Basic Principle 2: The unemployment and Job Guarantee story

In a normal functioning economy, there will always be some unemployment as people move between jobs. Typically this state should be transitory and a low percentage of those willing and available for work. We call this an irreducible level of unemployment and it might be around 1 to 2 per cent, depending on the nation.

Unemployment in excess of that irreducible minimum is called mass unemployment.

And, bringing together the initial insights above we can conclude that unemployment is the evidence that state spending is insufficient to have hired all people that the state’s taxation has caused to become unemployed.

In the Post-World War 2 period where the so-called ‘Keynesian’ consensus operated, mass unemployment was referred to as ’demand-deficient’ unemployment, which described a situation where there is a shortage of jobs overall relative to the willing supply of labour resources (persons and hours) at the current wage levels.

The tag went beyond description though because it indicated that such unemployment arose because of a deficiency in aggregate spending.

Mass unemployment thus varies over the economic cycle, rising when aggregate spending falls below the level needed to fully employ the available workforce and falling when aggregate spending moves closer to the level needed to fully employ the available supply of labour.

This conception is fully consistent with the way MMT characterises mass unemployment. The difference is the emphasis MMT places on the role of government and the operations of the tax liabilities.

Thus, mass unemployment arises because, after the non-government sector has implemented its spending and saving decisions, the level of spending is insufficient to create sales and output commensurate with the provision of jobs necessary to absorb the willing and available supply of labour.

The MMT emphasis is that this jobs shortage arises because for a given state of tax liabilities, government spending is insufficient.

We thus understand that the remedy is to either to spend more into the Non-government sector (which may involve hiring the unemployed directly) and/or reducing the tax liabilities.

Warren Mosler would say that the government should do this until the unemployed transition back to the non-government sector.

His view is that, initially, the government should provision itself as desired to the ’right size’ as explained. And once the government is at it’s desired ‘right size’ the remaining unemployed can be transitioned back to the private sector.

I would express this a little differently by allowing the possibility that the Job Guarantee pool could be a permanent employment location for some workers if they so choose. Having a small fairly rigid buffer doesn’t reduce its price stability features.

I also understand that one could make a case to render these jobs permanent within the non-Job Guarantee part of the public sector, which then relates directly to Warren’s reference to the ‘right size’.

But the point is that the currency-issuing government always chooses the prevailing unemployment once the spending and saving decisions of the non-government sector are implemented.

In the current era, governments use the unemployed as a buffer stock to provide a price anchor for wages in the general economy.

In the ‘Keynesian’ full employment period, governments saw mass unemployment as a policy target to be kept as low as possible within inflation limits they believed existed.

But in the neoliberal era, governments use unemployment as a policy tool to discipline wage demands and soften sales (thus putting a discipline on firms who might concede wage demands).

The unemployed buffer stock approach (sometimes called the NAIRU approach) is the way in which inflation control is managed.

However, the longer people stay unemployed the higher is the skill loss and non-government employers tend to prefer to hire from those already working or who have been unemployed for only short periods of time.

In other words, the disciplining power of unemployment requires that the unemployed constitute a threat to those still in work so that they will moderate their wage demands.

However, over time, the threat from this unemployment pool starts to wane as the unemployed endure skill losses and firms introduce new technologies and processes.

In this case, the so-called NAIRU has to be pushed higher and higher by contractionary fiscal and monetary policy for the same degree of threat to be maintained.

There are also massive costs involved in both income loss and personal pathologies (social exclusion, psychological harm, et) that further compound the overall disadvantages of the unemployment buffer stock price anchor.

On any reasonable grounds, this approach to price stability is very costly and ultimately, unworkable in a modern economy. High and sustained levels of unemployment, ultimately, undermine the social and political stability of a nation, which creates unintended costs that go far beyond those noted above.

The MMT alternative is that the government introduces a Job Guarantee policy to establish an employed buffer stock which provides a superior price anchor than the current policy that uses unemployment as a buffer stock.

Warren sees the employed buffer stock as a means to promote the transition from unemployment to private sector employment.

I see that it can do that but may also be a permanent pool of workers who will never be able to gain private sector employment at current wages. My bias is not to privilege non-government employment over public employment.

But that doesn’t alter the fact that the Job Guarantee is an anti-inflation policy that further renders the positive externalities of higher paying jobs for anyone willing and able to work.

The Job Guarantee is a macroeconomic stability approach, which means it is much more than a simple public sector job creation policy.

As MMT has gained in popularity, there have been a number of different job guarantee proposals coming out of the woodwork, many of which claim to be derived from MMT.

Note the use of the lower case j and g in the previous paragraph.

However, there is only one Job Guarantee in MMT.

The Job Guarantee within MMT is a technical construct designed to replace the mainstream Phillips curve (the tradeoff between unemployment and inflation).

The Job Guarantee is a superior buffer stock mechanism to mass unemployment for maintaining price stability.

And this means, that even if one didn’t hold the philosophical or moral commitment to the ‘right to work’ they would still advocate a Job Guarantee (MMT style) in contradistinction to the NAIRU-approach which uses unemployment as the buffer stock price anchor.

They would have to agree that in efficiency terms, which relates to resource wastage etc, the employment buffer stock approach is superior to the current dominant alternative.

The Job Guarantee disciplines inflation because the government offers anyone a job at a fixed wage that is at the bottom of the wage structure.

In times of inflation pressures, the government can use fiscal policy to redistribute workers from the inflating sector to the fixed price Job Guarantee sector.

Clearly, it is desirable to keep the Job Guarantee buffer stock at a minimum.

And so fiscal policy adjustments can be implemented to keep the Job Guarantee pool at minimum required levels to achieve desired price stability.

Basic Principle 3: The Public Debt story

In trying to understand, the issuance of public debt, we note that funds spent by the State into the non-government sector (for goods and services) is either lost to the economy when taxes are paid, or remains in the economy as savings until used to pay taxes.

That is just a matter of accounting. The ‘savings‘ are stored as financial assets in various forms.

As a matter of accounting between the sectors, a government fiscal deficit (spending that isn’t matched by taxes) adds net financial assets (adding to non government savings) available to the non-government sector and a fiscal surplus has the opposite effect.

The last point requires further explanation as it is crucial to understanding the basis of MMT.

Given the current bias toward (unnecessarily) matching fiscal deficits (spending greater than tax withdrawals) we say that what is commonly termed the ‘public debt’ is really just the accounting record of the savings, the funds spent by the state that have not yet been used to pay taxes.

In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.

The government, as the currency monopolist, is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and eliminate mass unemployment.

In accounting terms, the government’s deficit (surplus) is exactly equal at all times the non-government sector’s surplus (deficit).

All this ties in with our previous discussion by allowing us to see the limits on government spending.

It is clear that government spending has to be sufficient to allow taxes to be paid.

In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).

It is also clear that if the Government doesn’t spend enough to cover the taxes to be paid and the non-government sector’s desire to save overall, then the manifestation of this deficiency will be unemployment.

In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.

Further, fiscal deficits manifest in the non-government sector as actual cash balances in banks and credit balances in reserve accounts and securities (debt) accounts that are maintained by the central bank in the nation.

All commercial banks hold reserves at the central bank as part of the ‘clearing system’, so that all the transactions that occur on a daily basis can be validated and resolved.

The debt accounts record the outstanding government debt in various forms (short-term and long-term) that has been issued to match the fiscal deficits.

If you think about the process through which net government spending initially create an increase in net financial assets in the non-govemment sector you will appreciate that spending effectively involves the government crediting bank accounts in the non-government sector and taxing involves the government marking down bank account balances.

A fiscal deficit means there is a net accretion in these accounts. Initially, after all the transactions are made between government and non-government and within the non-government sector, that net accretion shows up as increases in the banks’ reserve accounts at the central bank.

Interest may or may not be paid on those balances.

If the deficit is matched dollar-for-dollar with debt issuance then the government would debit (mark down) the balances in the reserve accounts (of the banks that were party to the debt purchases directly or through their clients) and credit (mark up) another ‘account’ which we can call ‘outstanding public debt’.

In other words, the debt issuance effectively just results in funds in reserve accounts being transferred to funds in the ‘outstanding public debt’ account.

When specific debt items (bonds) mature (that is, reaches the time that the government has to pay back the principal), a reverse operation would occur.

The ‘outstanding public debt’ account would be debited (marked down) and bank reserves would be credited (marked up).

And if the central bank was to pay market rate of interest on reserve balances (as many are currently doing) then there is functionally no difference between the impact of leaving funds in the reserve accounts as opposed to issuing debt and transferring the funds to the ‘outstanding debt account’.

This also means that traditional open market operations, where the central bank buys and sells public debt to the non-government sector in order to drain or add reserves such that there is an appropriate balance that allows it to maintain its current interest rate target is unnecessary.

Some further points

First, the debt issuance does not fund the net public spending. It just gives the non-government sector an alternative financial asset in which to store its overall saving.

The net spending would occur without the debt being issued.

Second, the funds used by the non-government second to purchase the debt came from past fiscal deficits that had not been taxed away.

Third, if the government was concerned about the interest rate (yield) it was paying on the debt it issues, then the central bank” can always control that yield through appropriate purchases of that debt itself, which influence the price of the assets in the market and thus the yields.

This changes the interest paid by government from the market yield of the debt purchased to the rate paid by the central bank on reserve balances.

Fourth, the central bank can always purchase any debt that the private sector chooses not to purchase via the primary auctions. There may be legislative or regulative rules that apply here but they are creatures of the government anyway.

The last two observations mean that there is never a reason for government bond yields to rise above a level that the government considers to be acceptable.

Which means that a currency issuing government (which is the consolidation of the Treasury and central bank) can always assume the role of its own largest lender and borrow as much as it likes from itself (subject to laws it itself makes etc).

Fifth, governments always have the option of issuing only short-term debt anyway.

There is a distinction between the interest the government pays and the yields on longer term government bonds, as the government can elect to not sell long-term bonds if it doesn’t want to pay those rates. But it might want long-term bond yields to be lower for other reasons, such as the cost to private borrowers for home mortgages.

But even in that instance, the government can use the banking system to fund those at any rate it elects.

Basic Principle 4: The Price Level story

We define ‘inflation’ as a continuous increase in the price level. A once-off rise in prices in not considered to be an inflationary episode.

In MMT, given the currency is a state monopoly, the state becomes the ‘price setter’ because the price level is necessarily a function of the prices paid by government when it spends or the collateral demanded when it lends.

This ties in with the Job Guarantee as a macroeconomic stabilisation framework within MMT. As the government is offering jobs at a fixed price to anyone with a zero bid for their services in the ‘market’, that spending becomes a price anchor.

A continuous increase in the price level will not be the case unless the state keeps bidding for goods and services in the market at the continuously higher prices.

All spending in the economy carries an inflation risk if it tries to compete on a continuous basis for real resources that are currently fully utilised.

We need to understand that a once-off increase in government (or non-government) spending will typically not generate an inflationary episode.

The price level might rise as mark-ups are applied to the higher costs but such an impact is finite.

Typically, there are spare resources available for purchase, and, as such, the inflation risk is low.

But history tells us that this is not necessarily the case. There are well-documented examples where unemployment has been high and there is a concomitantly high inflation rate. Venezuela and Turkey are current examples. The stagflation that beset the West after the OPEC oil price rises in the 1970s is another example.

We understand those examples, within MMT, by realising that, ultimately, the inflation continues because the government paying more for the same ‘basket’ of goods and services, through various means such as indexation policies.

But it should be understood that the ultimate constraint on government spending is not financial but real, the actual resources that are available for sale.

Principle 5: The fiscal sustainability and fiscal space story

In the mainstream macroeconomics, the concept of fiscal sustainability and fiscal space is defined in financial terms.

For example, the IMF defines fiscal space in this way:

“the room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability, making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt”

MMT rejects these notions outright.

You cannot define fiscal space or sustainability by some given deficit size relative to GDP or some threshold level of public debt to GDP or any other self-referencing ‘financial’ ratio.

The concept of fiscal sustainability cannot be meaningfully defined in terms of any notion of public solvency. A sovereign government is always solvent (unless it chooses for political reasons not to be!).

The concept of fiscal sustainability will not include any notion of financing imperatives that a sovereign government faces nor invoke the fallacious analogy between a household and the government.

The concept of fiscal sustainability will not include any notion of foreign ‘financing’ limits or worries about foreign ownership of a sovereign government’s debt.

We have learned that:

– a sovereign government is not revenue-constrained, which means that fiscal space cannot be defined in financial terms, the capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.

But, saying a government can always credit bank accounts and add to bank reserves whenever it sees fit doesn’t mean it should be spending without regard to what the spending is aimed at achieving.

The concept of fiscal sustainability is more appropriately defined in terms of societal goals such as well-being.

For example, fiscal sustainability is directly related to the extent to which labour resources are utilised in the economy.

The goal is to sustain full employment, which is the base case in an efficient economy that seeks to avoid resource wastage.

Once the government assumes its responsibility to achieve and sustain full employment there are specific requirements imposed on its spending:

1. A macroeconomy is in a steady-state (that is, at rest or in equilibrium) when the sum of the spending injections equal the sum of the spending leakages. Whenever this relationship is disturbed (for example, by a change in the level of injections, however sourced), national income adjusts and brings the income-sensitive spending leakages into line with the new level of injections. At that point the system is at rest again.

It should be understood though that the system is in constant flux and equilibrium defined in this way is being continually disturbed. The resulting income changes work to bring the injections and leakages back into balance.

2. The injections come from export spending, investment spending (capital formation) and government spending.

3. The leakages are household saving, taxation and import spending.

4. For every ’agent’ that spends more than their income, another ‘agent’ necessarily spends less than their income.

Any government, corporation, resident or non-resident can run deficits (spending more than they earn). For example, those who spend more than their incomes include households borrowing to purchase houses, businesses borrowing to invest in new capital equipment, and governments that spend more than they extract in taxes. On the other side, households and businesses that save are running surpluses.

5. An economy at rest is not necessarily one that coincides with full employment or has all desired savings realised.

6. When an economy is ‘at rest’ and there is high unemployment there must be a spending gap and unmet saving desires given that mass unemployment is the result of deficient demand (in relation to the spending required to provide enough jobs overall).

7. If there is no dynamic which would lead to an increase in private (or non-government) spending then the only way the economy will increase its level of activity is if there is increased net government spending, this means that the injection via increasing government spending has to more than offset the increased drain (leakage) coming from taxation revenue.

8. To sustain full employment, the fiscal deficit has exactly offset the gap left by non-government leakages being greater than the injections.

If the fiscal deficit is not sufficient, then national income will fall and full employment will be lost. If the government tries to expand the fiscal deficit beyond the full employment limit, then nominal spending will outstrip the capacity of the economy to respond by increasing real output and while income will rise it will be all due to price effects (that is, inflation would occur).

In some cases, a fiscal surplus will be required to sustain full employment without inflation should the non-government injections outstrip the leakages (say if the export sector is particularly strong).

A government operating according to those rules is conducting a sustainable fiscal policy.

The fiscal balance that arises under those conditions is whatever it is.

There is nothing intrinsically good or bad about a fiscal deficit of 2 per cent of GDP, compared to a deficit of 10 per cent of GDP or a fiscal surplus of 3 per cent of GDP.

Assessing fiscal sustainability requires us to understand the context, which means we have to understand the saving and spending decisions of the non-government sector.

This also ties in with the MMT concept of fiscal space, which is about unmet savings desires as evidenced by the existence of mass unemployment.

In a modern monetary economy, fiscal space has nothing to do with what the current fiscal balance is or has been and what the current public debt ratio is or has been.

A sovereign government can purchase any idle resources that are for sale in its own currency, including all idle labour.

The available resources (goods and services) that are for sale in the currency of issue defines how much fiscal space the government has.

Such a government can never run out of funds in pursuing its goal to ensure all available resources are being productively deployed.

So a past deficit poses no particular constraints on what the government can do in the future, except to say that if the deficit has been properly calibrated to sustain full-employment then there will be less to do should the private sector contract.

Basic Principle 6: The currency sovereignty story

To finish the discussion we can now clarify the MMT meaning of currency sovereignty.

Some people seem to think that monetary sovereignty is about being able to buy everything a nation might need to be prosperous.

I note that Warren prefers not to use the term ‘sovereignty’ because in his view it leads to confusions such as the statement in the preceding sentence.

I prefer to use the designation however.

In common parlance, the term relates to the power of the government. But what I think MMT shows is that there is a sharp difference in the capacity of a government has ‘monetary sovereignty’ (defined below) and one that does not.

The Eurozone governments are ‘sovereign’ in the common parlance but not in the MMT parlance because they use a foreign currency.

That is why I prefer to use the term. However, Warren and I agree on the substance that follows.

In MMT, currency-issuing countries that do not borrow in foreign currencies or peg their currencies by any arrangement are sovereign in that currency.

Such a government, which in MMT represents the base case for conduction monetary and fiscal policy:

1. Spends and taxes in its own currency exclusively.

2. Its central bank sets policy interest rate. The preferred setting is at zero per cent.

4. The currency floats.

5. The Government does not borrow in any foreign currency.

Accordingly, that government can purchase anything that is available for sale in that currency including all idle labour.

As a result no productive resources ever need to be idle if they are looking to be used.

Of course, it does not mean that a country devoid of natural resources or dependent on imports for food and energy will generate prosperity just because its government can ensure all productive resources are working.

If no other nation desires the exports of that sort of country then it remains materially poor regardless of how ‘sustainable’ the government’s fiscal policy is.


This post hopefully will serves as a reference guide in one place to the basic principles of MMT as seen through the eyes of Warren and myself.



Modern Monetary Theory. Japan still to slip into the sea under its central bank debt burden – Bill Mitchell.

The Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT).

President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing, publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018), Japan’s economy has a $5 trillion problem, readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”.

The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT).

That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework.

The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan, total dissonance.

The same old

At some regular interval, which I guess I could work out if I cared, the media runs a story that goes like this.

First, there is a sensational headline, which usually has some massive monetary figure listed that is so large that it befuddles the reckoning of ordinary citizens (even me) who are used to dealing in 10s not trillions.

Of course, that is the intent. Evoke fear and alarm rather than understanding.

Then the story tells us that the Bank of Japan’s balance sheet has expanded by some massive amount. Okay.

Why is that a problem?

Well hints are provided about the dangers of ‘printing money’ (none ever substantiated), it is all nod-nod, wink-wink sort of stuff.

Then the reader is usually told that the central bank risks insolvency if the bonds go south.

The disconnect in the claims is never made obvious, if the central bank is out there ‘printing’ all this money how can it go broke.

The twain is never met here!

Perhaps the journalist or Op-Ed writer hasn’t twigged to this internal inconsistency.

After all, they are just pushing through an 800-1000 word template and all the usual points have to be made. Forget logic and consistency.

Then the reader is told that the strategy hasn’t worked anyway, inflation remains low and despite low interest rates, economic activity is hardly booming, yet the disconnect between that observation and some of the more salacious claims about hyperinflation etc is also never really made.

The observation that despite considerable efforts by the Bank of Japan to kickstart its inflation rate little progress has been made tells us that monetary policy is a relatively ineffective macroeconomic tool.

Which is counter what the mainstream New Keynesian consensus tells us.

That is the real story here that escapes the journalists and commentators.

Finally, the stories usually touch on the assertion that with so much bond buying and such an enlarged balance sheet, the Bank of Japan is not capable of defending the economy from the next crisis.

And the scaremongering is complete.

The reader isn’t allowed to think that maybe fiscal policy is the main game anyway and its capacity is not impeded by past deficits or enhanced by past surpluses.

In other words, the Japanese government has all the ‘fire power’ it ever needs to respond to a non-government sector spending collapse whether it come from domestic demand or via the export markets.

It can also respond to any natural or unnatural disaster.

And so the reader turns the pages and forgets about all this until some time later when the story is recycled by some other bored journalist who has nothing better to do on that particular day.

That was what was dished up in CNN Business’s latest offering cited in the Introduction.

We read gems like:

1. “An epic bond-buying spree by Japan’s central bank means it’s now sitting on assets worth more than the country’s entire economy.”

2. “following years of money printing aimed at jump starting the country’s stagnant economy”.

3. “The years of heavy stimulus have warped parts of Japan’s financial markets and left the central bank with dwindling options to juice growth if a new crisis hits. But the splurge is unlikely to end anytime soon.”

Note the language, “warped”, “juice”, “splurge”, all loaded to make out something is wrong.

4. “Kuroda has said the bank won’t consider ending the protracted stimulus effort until that goal is reached. Risky strategy. But that may be an impossible task, and continuing the stimulus program indefinitely carries significant risks.”

Which risks?

Come in spinner! Just in time. These type of articles all have to quote some doom merchant from the private sector.

So we get a quote from a person with a Masters degree who has been an accountant and worked for Credit Suisse:

“There are limits to how many assets the Bank of Japan can buy.”

Yes, the bank can only buy what is for sale.

And as long as the Japanese Finance Ministry keeps running fiscal deficits and does not change the unnecessary institutional arrangement of matching those deficits with bond issuance then there will be bonds to buy.

The actual concern here from the commentator is revealed next, the fact the central bank is keeping interest rates low is “making it too hard for commercial banks to make profits.”


Negative interest rates have squeezed their margins, and the huge asset purchases have effectively killed regular trading in the once lucrative bond market.

Ah. The corporate welfare argument. They want public debt because it gives them a risk-free asset to make money from.

And, by way of finale, the restatement of the doom:

The Bank of Japan’s ultra-loose monetary policy also leaves it with little in the way of fire power to help prop up the economy in the event of another big crisis.”

So, Japan slips into the sea … eventually. Sorry Jimi.

Data update – Japan goes on in its merry way.

Defying mainstream macroeconomic predictions, that is …

. . . Bill Mitchell

SOFT CURRENCY ECONOMICS. MMT, The Final Analysis – Warren Mosler.

Modern Monetary Theory, MMT, in a Nutshell – Johnsville * MMT, a quick start guide * Modern Money Theory: Deadly Innocent Fraud #1. Government Must Tax To Spend. – Warren Mosler.

“It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?

Operationally, federal spending is not revenue constrained. All constraints are necessarily self imposed and political. And everyone in Fed operations knows it.

The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.

MMT’s full potential and its massive monetary fire power were not locked and loaded until President Nixon took the U.S. off the gold standard on August 15, 1971.”

A rampaging mutant macroeconomic theory called Modern Monetary Theory, or MMT for short, is kicking keisters and smacking down conventional wisdom in economic circles these days. This is because an energized group of MMT economists, bloggers, and their loyal foot soldiers, lead by economists Warren Mosler, Bill Michell, and L. Randall Wray are swarming on the internet.

New MMT disciples are hatching out everywhere. They are like a school of fresh-faced paramedics surrounding a gasping heart attack victim. They seek to present their economic worldview as the definitive first aid for understanding and dealing with the critical issues of growth, unemployment, inflation, budget deficits, and national debt.

MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.

However, Chartalism and Functional finance did not directly spawn this new mutant monetary theory. Rather, Modern Monetary Theory had a hot, steamy, Rummy induced, immaculate conception as its creator, Warren Mosler, has stated:

“The origin of MMT is ‘Soft Currency Economics‘ [1993] at which I wrote after spending an hour in the steam room with Don Rumsfeld at the Racquet Club in Chicago, who sent me to Art LajTer, who assigned Mark McNary to work with me to write it. The story is in ‘The 7 Deadly Innocent Frauds of Economic Policy’ [pg 98].

I had never read or even heard of Lerner, Knapp, Inness, Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations, much of which is also described in the book.

The main takeaways are simply that with the $US and our current monetary arrangements, federal taxes function to regulate demand, and federal borrowing functions to support interest rates, with neither functioning to raise revenue per se. In other words, operationally, federal spending is not revenue constrained. All constraints are necessarily self imposed and political. And everyone in Fed operations knows it.”

The name Modern Monetary Theory was reportedly coined (pun unintended) by Australian economist Bill Mitchell. Mitchell has an MMT blog that gives tough weekly tests in order to make sure that the faithful are paying attention and learning their MMT ABC’s. MMT is not easy to fully comprehend unless you spend some time studying it.

MMT is a broad combination of fiscal, monetary and accounting principles that describe an economy with a floating rate fiat currency administered by a sovereign government.

The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.

MMT’s full potential and its massive monetary fire power were not locked and loaded until President Nixon took the U.S. off the gold standard on August 15, 1971.

There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and 0’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly.

Proponents of MMT say that its greatest strength is that it is apolitical.

The lifeblood of MMT doctrine is a government’s fiscal policy (taxing and spending). Taxes are only needed to regulate consumer demand and control inflation, not for revenue. A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government. This point is graphically described by Warren Mosler as follows:

“What happens if you were to go to your local IRS office to pay your taxes with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.

Yes, it gets thrown away [sic]. Destroyed!”

The 7 Deadly Frauds of Economic Policy, page 14, Warren Mosler


The delinking of tax revenue from the budget is a critical element that allows MMT to go off the “balanced budget” reservation.

In a fiat money world, a sovereign government’s budget should never be confused with a household budget, or a state budget. Households and U.S. states must live within their means and their budgets must ultimately be balanced. A sovereign government with its own fiat money can never go broke. There is no solvency risk and the United States, for example, will never run out of money.

The monopoly power to print money makes all the difference, as long as it is used wisely.

MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings. This is a straightforward accounting identity in MMT, not a theory. Warren Mosler put it this way:

“So here’s how it really works, and it could not be simpler: Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us businesses and households, residents and non-residents what is called the “non-government” sector. In other words, government deficits equal increased “monetary savings” for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny).”

The 7 Deadly Frauds of Economic Policy, page 42, Warren Mosler

Therefore, Treasury bonds, bills and notes are not needed to support fiscal policy (pay for government). The U.S. government bond market is just a relic of the pre-1971 gold standard days. Treasury securities are primarily used by the Fed to regulate interest rates. Mosler simply calls U.S. Treasury securities a “savings account” at the Federal Reserve.

In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.

Under MMT the real problems for a government to address are ensuring growth, reducing unemployment, and controlling inflation. Bill Mitchell noted that, “Full employment and price stability is at the heart of MMT.” A Job Guarantee (JG) model, which is central to MMT, is a key policy tool to help control both inflation and unemployment. Therefore, given the right level of government spending and taxes, combined with a Job Guarantee program; MMTers state emphatically that a nation can achieve full employment along with price stability.

As some background to understand Modern Monetary Theory it is helpful to know a little about its predecessors: Chartalism and Functional Finance.

German economist and statistician Georg Friedrich Knapp published The State Theory of Money in 1905. It was translated into English in 1924. He proposed that we think of money as tokens of the state, and wrote:

“Money is a creature of law. A theory of money must therefore deal with legal history… Perhaps the Latin word “Charta” can bear the sense of ticket or token, and we can form a new but intelligible adjective “Chartal.” Our means of payment have this token, or Chartalform. Among civilized peoples in our day, payments can only be made with pay-tickets or Chartal pieces.”

Alfred Mitchell-Innes only published two articles in the The Banking Law journal. However, MMT economist L. Randall Wray called them the ”best pair of articles on the nature of money written in the twentieth century”. The first, What is Money?, was published in May 1913, and the follow-up, Credit Theory of Money, in December 1914. Mitchell-Innes was published eight years after Knapp’s book, but there is no indication that he was familiar with the German’s work. In the 1913 article Mitchell-Innes wrote:

“One of the popular fallacies in connection with commerce is that in modern days a money-saving device has been introduced called credit and that, before this device was known, all, purchases were paid for in cash, in other words in coins. A careful investigation shows that the precise reverse is true…

Credit is the purchasing power so often mentioned in economic works as being one of the principal attributes of money, and, as I shall try to show, credit and credit alone is money. Credit and not gold or silver is the one property which all men seek, the acquisition of which is the aim and object of all commerce…

There is no question but that credit is far older than cash.”

L. Randall Wray, in his 1998 book, Understanding Modern Money, was the first to link the state money approach of Knapp with the credit money approach of Mitchell-Innes. Modern money is a state token that represents a debt or IOU. The book is an introduction to MMT.

Finally, to finish the historical tour, here is how Abba Lerner’s Functional finance is described by professor Wray:

“Functional Finance rejects completely the traditional doctrines of ‘sound finance’ and the principle of trying to balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjustment of total spending (by everybody in the economy, including the government) in order to eliminate both unemployment and inflation, using government spending when total spending is too low and taxation when total spending is too high.”

Given its mixed history it is not surprising that MMT has been given different labels. Some economists refer to MMT as a “post-Keynesian” economic theory. L. Randall Wray has used the term “neo-Chartalist”. Warren Mosler stated, “MMT might be more accurately called pre-Keynesian.” Given that Georg Knapp’s work was cited by John Maynard Keynes, the use of “pre-Keynesian” does seem more appropriate than “post-Keynesian”.

But under any category, MMT has been considered fringe or heterodox economics by most mainstream economists. It therefore has been relegated to the equivalent of the economic minor leagues, somewhere below triple-A level. However, that perception is changing.

MMT is slowly seeping into the public policy debate. These days Warren Mosler and others with an MMT viewpoint are frequently being interviewed on business news channels. MMT articles are being published. Recently, Steve Liesman, CNBC’s senior economics reporter, used a Warren Mosler quote to make a point. Liesman said: “As Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan .

MMT is not easy for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents. The MMT counter argument is:

“It is a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?”

Emotions run hot in the current economic environment, especially on the internet. In some cases the energetic online promoting of MMT has turned into passive aggressive hectoring, hazing, name calling, badgering, and belittling. So be warned, if you write some economic analysis online that disagrees with MMT doctrine you might find yourself attacked and stung by a swarm of MMTers. If you are an economic “expert” and you do not understand monetary basics you may also get mounted on an MMT wall of shame.

A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.

Another school of economics feeling the heat from MMT are the Austrians. Austrian economist Robert Murphy recently wrote an article critical of MMT, calling it an “Upside Down World”. MMTers lined up to disassemble and refute Murphy’s essay. Cullen Roach at the Pragmatic Capitalist blog shot back this broadside:

“We now live in a purely fiat world and not the gold standard model in which Mises and many of the great Austrian economists generated their finest work. Therein lies the weakness of the Austrian model. It is based on a monetary system that is no longer applicable to modern fiat monetary systems such as the one that the USA exists in.”

Does MMT really offer a path to prosperty? Or did the ancient Roman, Marcus Cicero (106BC-43BC), have it right when he said: “Endless money forms the sinews of war.”? The debate will only intensify. If you value those green, money-thing, government IOU tokens in your wallet then it pays to learn what all the commotion is about.

MMT, a quick start guide

Because of MMT’s growing popularity it might be helpful to present a quick start guide so beginners can get up to speed and understand some of its fundamental elements. As a starting point here are some basics of Modern Monetary Theory (MMT) compared to some other principles of money and economics that might be considered conventional wisdom or old school wisdom.

1. What is money?

Modern Monetary Theory: Money is a debt or IOU of the state.

“The history of money makes several important points. First, the monetary system did not start with some commodities used as media of exchange, evolving progressively toward precious metals, coins, paper money, and finally credits on books and computers. Credit came first and coins, late comers in the list of monetary instruments, are never pure assets but are always debt instruments IOUs that happen to be stamped on metal...

Monetary instruments are never commodities, rather they are always debts, IOUs, denominated in the socially recognized unit of account. Some of these monetary instruments circulate as “money things” among third parties, but even “money things” are always debts whether they happen to take a physical form such as a gold coin or green paper note.”

Money: An Alternate Story by Eric Lymoigne and L. Randall Wray

“Money is a creature of law”, and, because the state is “guardian of the law”, money is a creature of the state. As Keynes stated:

“The Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account… (Keynes 1930)…”

Chartalism, Stage of Banking, and Liquidity Preference by Eric Tymoigne

John Maynard Keynes in his 1930 Treatise on Money, also stated: “Today all civilized money is, beyond the possibility of dispute, Chartalist.”

Old School Wisdom:

“Money is essentially a device for carrying on business transactions, a mere satellite of commodities, a servant of the processes in the world of goods.”

Joseph Schumpeter, Schumpeter on money, banking and finance… by A. Festre and E. Nasica

Conventional Wisdom:

“Money is any object or record, that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.”


2. Why is money needed?

MMT: Money is needed in order to pay taxes.

“Money is created by government spending (or by bank loans, which create deposits). Taxes serve to make us want that money we need it in order to pay taxes.”

The 7 Deadly Frauds of Economic Policy, Warren Mosler

“The inordinate focus of other economists on coins (and especially on government issued coins), market exchange and precious metals, then appears to be misplaced.

The key is debt, and specifically, the ability of the state to impose a tax debt on its subjects; once it has done this, it can choose the form in which subjects can ‘pay’ the tax. While governments could in theory require payment in the form of all the goods and services it requires, this would be quite cumbersome. Thus it becomes instead a debtor to obtain what it requires, and issues a token (hazelwood tally or coin) to indicated the amount of its indebtedness; it then accepts its own token in payment to retire tax liabilities.

Certainly its tokens can also be used as a medium of exchange (and means of debt settlement among private individuals), but this derives from its ability to impose taxes and its willingness to accept its tokens, and indeed is necessitated by imposition of the tax (if one has a tax liability but is not a creditor of the Crown, one must offer things for sale to obtain the Crown’s tokens).”

Money: An Alternate Story by Eric Iymoigne and L. Randall Wray

“Money, in the Chartalist view, derives from obligations (fines, fees, tribute, taxes) imposed by authority; this authority then “spends” by issuing physical representations of its own debts (tallies, notes) demanded by those who are obligated to pay “taxes” to the authority. Once one is indebted to the crown, one must obtain the means of payment accepted by the crown. One can go directly to the crown, offering goods or services to obtain the crown’s tallies, or one can turn to others who have obtained the crown’s tallies, by engaging in “market activity” or by becoming indebted to them. Indeed, “market activity” follows (and follows from) imposition of obligations to pay fees, fines, and taxes in money form.”

A Chartalist Critique of john Locke’s Theory of Property, Accumulation and Money… by Bell, Henry, and Wray

Conventional Wisdom:

Money is needed as a medium of exchange, a unit of account, and a store of value.

Old School Wisdom:

Money is needed because it could “excite the industry of mankind. ”

Thomas Hume, Hume, Money and Civilization… by C. George CajTettzis

Old School Tony Montoya, aka Scarface, Wisdom: money is needed for doing business, settling debts, and emergency situations…

Hector the Toad: So, you got the money? Tony Montana: Yep. You got the stuff? Hector the Toad: Sure I have the stuff. I don’t have it with me here right now. I have it close by.

Tony Montana: Oh… well I don’t have the money either. I have it close by too.

Hector the Toad: Where? Down in your car?

Tony Montana: [lying] Uh… no. Not in the car.

Hector the Toad: No?

Tony Montana: What about you? Where do you keep your stuff‘?

Hector the Toad: Not far.

Tony Montana: I ain’t getting the money unless I see the stuff first.

Hector the Toad: No, no. First the money, then the stuff.

Tony Montana: [after a long tense pause] Okay. You want me to come in, and we start over again?

Hector the Toad: [changing the subject] Where are you from, Tony?

Tony Montana: [getting angry and supicious] What the f **k difference does that make on where I ’m from?

Hector the Toad: Cona, Tony. I ’m just asking just so I know who I ’m doing business with.

Tony Montana: Well, you can know about me when you stop f **king around and start doing business with me, Hector! […]

Hector the Toad: You want to give me the cash, or do I kill your brother first, before I kill you?

Tony Montana: Why don’t you try sticking your head up your ass? See if it fits. […J

Frank Lopez: [pleading] Please Tony, don’t kill me. Please, give me one more chance. I give you $10 million. $10 million! All of it, you can have the whole $10 million. I give you $10 million. I give you all $10 million just to let me go. Come on, Tony, $10 million. It’s in a vault in Spain, we get on a plane and it’s all yours. That’s $10 million just to spare me.

Dialog from Scarface, the movie.

Note: The comment about the $10 million stashed in a Spanish vault highlights a small chink in MMT’s armor. If the taxing power of the sovereign state is sabotaged, or there is widespread tax evasion, then MMT falls apart.

3. Where does money come from?

MMT: The government just credits accounts.

Modern money comes from “nowhere.” Bill Mitchell

Conventional Wisdom: Money comes from the government printing currency and making it legal tender.

4. Government Spending: any limits?

MMT: government spending is not constrained.

“A sovereign government can always spend what it wants. The japanese government, with the highest debt ratio by far (190 per cent or so) has exactly the same capacity to spend as the Australian government which has a public debt ratio around 18 per cent (last time I looked). Both have an unlimited financial capacity to spend.

That is not the same thing as saying they should spend in an unlimited fashion. Clearly they should run deficits sufficiently to close the non-government spending gap. That should be the only fiscal rule they obey.” Bill Mitchell

Conventional Wisdom: government spending should be constrained.

“One option to ensure that we begin to get our fiscal house in order is a balanced budget amendment to the Constitution. I have no doubt that my Republican colleagues will overwhelmingly support this common sense measure and I urge Democrats to as well in order to get our fiscal house in order.”

House Majority Leader Eric Cantor (RVA), June 23th, 2010

5. What is Quantitative Easing?

MMT: It is an asset swap. It is not “printing money” and it is not a very good anti-recession strategy.

“Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system that is, crediting their reserve accounts… So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell…

Invoking the “evil-sounding” printing money terminology to describe this practice is thus very misleading and probably deliberately so.

All transactions between the Government sector (Treasury and Central Bank) and the non-government sector involve the creation and destruction of net financial assets denominated in the currency of issue. Typically, when the Government buys something from the non-government sector they just credit a bank account somewhere that is, numbers denoting the size of the transaction appear electronically in the banking system.

It is inappropriate to call this process “printing money”. Commentators who use this nomenclature do so because they know it sounds bad! The orthodox (neoliberal) economics approach uses the “printing money” term as equivalent to “inflationary expansion”. If they understood how the modern monetary system actually worked they would never be so crass…

So I don’t think quantitative easing is a sensible anti-recession strategy. The fact that governments are using it now just reflects the Neoliberal bias towards monetary policy over fiscal policy…” Bill Mitchell

Conventional Wisdom: Quantitative Easing is “money printing”

James Grant, editor of Grant’s Interest Rate Observer, says Quantitative Easing is just Money Printing.

6. What is the view on personal debt?

MMT: personal debt is not dangerous.

“Americans today have too much personal debt. False. Private debt adds money to our economy. Though bankruptcies have increased lately, that is due more to the liberalization of bankruptcy laws, rather than to economics. Despite rising debt and bankruptcies, our economy has continued to grow. The evidence is that high private debt has had no negative effect on our economy as a whole, though it can be a problem for any individual.”

Free Money: Plan for Prosperity ©2005 (pg 154), by Rodger Malcolm Mitchell

Note: Rodger Mitchell is an MMT extremist. He calls his brand of MMT, “Monetary Sovereignty”. Not all of his views may be in sync with mainstream MMT doctrine.

Conventional Wisdom: too much debt is dangerous.

“The core of our economic problem is, instead, the debt, mainly mortgage debt that households ran up during the bubbleyears of the last decade. Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment.” Paul Krugman

Old School Wisdom: debt is always dangerous.

“Neither a borrower, nor a lender be”

Polonius speaking in Hamlet, by William Shakespeare

7. What is the view on foreign trade?

MMT: Exporters please just take some more fiat money and everyone will be fat and happy!

“Think of all those cars japan sold to us for under $2,000 years ago. They’ve been holding those dollars in their savings accounts at the Fed (they own US. Treasury securities), and if they now would want to spend those dollars, they would probably have to pay in excess of $20,000 per car to buy cars from us. What can they do about the higher prices? Call the manager and complain? They’ve traded millions of perfectly good cars to us in exchange for credit balances on the Fed’s books that can buy only what we allow them to buy…

We are not dependent on China to buy our securities or in any way fund our spending. Here’s what’s really going on:

Domestic credit creation is funding foreign savings…

Assume you live in the US. and decide to buy a car made in China. You go to a US. bank, get accepted for a loan and spend the funds on the car. You exchanged the borrowed funds for the car, the Chinese car company has a deposit in the bank and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. First, all parties are “happy.” You would rather have the car than the funds, or you would not have bought it, so you are happy. The Chinese car company would rather have the funds than the car, or they would not have sold it, so they are happy. The bank wants loans and deposits, or it wouldn’t have made the loan, so it’s happy.

There is no “imbalance.” Everyone is sitting fat and happy…”

Warren Mosler, The 7 Deadly Frauds of Economic Policy

Old School Wisdom: Trade arrangements will break down if a currency is debased.

“Sorry paleface, Chief say your wampum is no good. We want steel knives and firewater for our beaver pelts.” American Indian reaction after Dutch colonists debase wampum in the 1600’s

See also:

Modern Money Theory: Deadly Innocent Fraud #1. Government Must Tax To Spend. – Warren Mosler

MODERN MONETARY THEORY. Australian inflation data defies mainstream macro predictions, again – Bill Mitchell.

Even though inflation has been benign now for some quarters, the market economists, banks, still think it is about to accelerate and the RBA will be hiking interest rates.

But the reality is quite the opposite.

One of the on-going myths that mainstream (New Keynesian) economists propagate is that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions.

Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success.

Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The evidence supports the Modern Monetary Theory (MMT) preference for fiscal policy over monetary policy.

. . . Professor Bill Mitchell

Why should someone who is anti-austerity care about debt – Simon Wren-Lewis.

For a country that can create its own currency there is never any necessity to default.

Most of the posts I have written about austerity have been aimed at countering the idea that in a recession you need to bring down government deficits and therefore debt. But what if you accept all that (you are anti-austerity). Why should you care about debt at all? Why do we have fiscal rules based on deficits? Why not spend what the government needs to spend, and not worry that this resulted in a larger budget deficit?

The story often given is that the markets will impose some limit on what the government will be able to borrow, because if debt gets ‘too high’ in relation to GDP markets will start demanding a higher return. You can see why that argument is problematic by asking why interest rates on government debt would need to be higher. The most obvious reason is default risk. But for a country that can create its own currency there is never any necessity to default.

Being anti-austerity does not mean we can forget about debt completely, as long as we are using interest rates rather than fiscal policy to control demand.

. . . Mainly Macro

Modern Monetary Theory. IMF continues to tread the ridiculous path – Bill Mitchell.

Last week, the IMF released its so-called Fiscal Monitor October 2018.

Apparently the British government, which issues its own currency, has ‘shareholders’ who care about its Profit and Loss statement and the flow implications of the latter for the Balance Sheet of the Government.

Anyone who knows anything quickly realises this is a ruse. There is no meaningful application of the ‘finances’ pertaining to a private corporation to the ‘finances’ of a currency-issuing government.

A currency-issuing government’s ‘balance sheet’ provides no help in our understanding of what spending capacities such a government has.

A currency-issuing government can always service any liabilities that are denominated in its own currency.

. . . Professor Bill Mitchell’s blog

Modern Monetary Theory. The government is not a household and imports are still a benefit – Bill Mitchell.

A government is not a household, is a core Modern Monetary Theory (MMT) proposition because it separates the currency issuer from the currency user and allows us to appreciate the constraints that each has on its spending capacities.

Another core MMT proposition is that imports are a benefit and exports are a cost.

In the case of a household, there are both real and financial resource constraints which limit its spending and necessitate strategies being put in place to facilitate that spending (getting income, running down savings, borrowing, selling assets).

In the case of a currency issuing government the only spending constraints beyond the political are the available real resources that are for sale in that currency.

Beyond that, the government sector thus assumes broad responsibilities as the currency issuer, which are not necessarily borne by individual consumers. Its objectives are different. Which brings trade into the picture.

Another core MMT proposition is that imports are a benefit and exports are a cost.

So why would I support Jeremy Corbyn’s Build it in Britain policy, which is really an import competing strategy? Simple, the government is not a household.

Household consumers are users of the currency and aim to use their disposable incomes to create well-being, primarily for themselves and their families.

We exhibit generosity by extending our spending capacities to others when we give gifts.

But our aims are to get the best deal we can in our transactions. That means we like goods and services that satisfy our quality standards at the best price possible.

Which means that we will be somewhat indifferent to geography. If local suppliers are expensive and imported goods and services are cheaper, then as long as quality considerations are broadly met, we will purchase the imported commodity and be better off in a material sense.

If other nations are willing to send more goods and services to us than they get back in return then the real terms of trade are in our favour.

Exports require we give up our use of those real resources while imports mean we deprive other nations of the use of their resources.

There are nuances obviously.

A nation with lots of minerals (Australia) may not feel it is too much of a ‘cost’ to send boatloads of primary commodities to Japan or China.

We also individually might ascribe to broader goals in our purchasing decisions, although the evidence for this is weak.

For example, some of us believe that imports are only a beneflt if they come from nations that treat their workers reasonably (no sweat shops, killing trade unionists etc) and do not ravage the natural environment in the process of producing the goods.

I would guess those concerns do not dominate our decision making generally because if they did China would not have huge export surpluses.

But there are nuances.

However, a government is not a household. It has a wider remit (objectives) than a household and must consider a broad range of concerns when it uses its currency issuing capacity to shift real resources (as goods and services) from the non-government sector to the government sector to fulfill its elected mandate.

In that sense, imports remain a benefit but the broader concerns make the net decision more complex than it is for the nongovernment sector.

The government must consider regional disparities. When a household is making a decision to purchase a good or service, what is happening elsewhere in the nation might not rank very high in the decision.

The government must consider how best to maintain full employment. A household is really only concerned with their own employment although that doesn’t preclude us being generally concerned with high unemployment rates.

But ’buy local’ campaigns typically do not work when they try to steer household consumption expenditure.

The government can always maintain full employment through its fiscal spending decisions. We know that because it can always purchase the services of all idle labour that wants to work and receive payment in the currency of issue.

So from that starting point, there is no question that mass unemployment is a policy choice, not some uncontrollable outcome of a ’market‘.

In that context, the challenge for government is to work out how to frame the spending capacity to get the best employment outcomes:

* Direct public employment, that is obvious.

* Subsidy of local non-government firms, that is, operate by lowering the unit costs for firms to render them profitable when they otherwise would not be.

* ‘Build it in Britain’ that is, use procurement policies to sustain sales for local firms rather than subsidise their costs.

None of these full employment strategies negate the insight that imports are a benefit to a nation.

But the government has to consider broader concerns than just getting a good or service at the cheapest ’market’ price.

There are more considerations, but that is how we can understand this issue.

FINDING THE MONEY, Modern Monetary Theory – Bryan Gould.

Most of the money in our economy sits in bank accounts, and a large proportion of that money is created by the banks when they make loans, usually on mortgage.

Money, in a developed economy, is what the government says it is.

Governments all around the world have over recent years pursued policies of “quantitative easing”, and on a very large scale and “quantitative easing” is just another way of describing the creation of new money.

So, the chickens are coming home to roost, and with a vengeance. The tragedy for the new government is that the chickens were bred and raised by the previous government, and are only now flying in, in large numbers and with hefty price tags.

We are now getting some idea of the price that has to be paid for those ”business-friendly” policies that were celebrated for their success in producing a “surplus” (at least for the government).

That price includes large numbers of underpaid public servants nurses, teachers, midwives, care workers, Inland Revenue workers and underfunded public services health care, schools, keeping our water and rivers clean, and bio-security at our borders. The bio-security failure alone will cost the current government around $900 million the amount awarded by the courts for the previous government’s negligence in allowing PSA to decimate the kiwifruit industry (and that’s to say nothing of the cost of the myco plasma bovis outbreak).

Through no fault of its own, the new government is having to pay up for the mess made by its predecessor, and that costs money that cannot, it seems, be easily found. Every dollar paid to clean up the mess is said to be a dollar less for the government’s real aims to improve our public services, to rescue our environment, to save families from poverty, to provide recent housing for everyone.

But is that really the case? There may be other shortages labour or land, or skills or technology, or materials but a shortage of money should not be one of them. How do we know that? Because, as an increasing number of experts recognise, and as our own experience teaches us, the government of a sovereign country need never be short of money.

This is because money, in a developed economy, is what the government says it is. Indeed, it is often called fiat money because it exists only by the sayso of the government and, as the economist, Ann Pettifor, says, that means that “we can afford what we can do.”

Most of the money in our economy sits in bank accounts, and a large proportion of that money is created by the banks when they make loans, usually on mortgage. The fact that the commercial banks create over 90% of the money in circulation out of nothing is still disputed by some (including by those who should know better) but is now attested to by the world’s central banks, by top monetary economists (such as Lord Adair Turner, former Chair of the UK’s Financial Services Authority and a leading advocate of “helicopter money”) and by leading economic journals such as the Financial Times and The Economist.

This raises the question if the banks are allowed to create money out of nothing (and then to charge interest on it), why should governments be inhibited about doing so? And indeed, they are not so inhibited, governments all around the world have over recent years pursued policies of “quantitative easing”, and on a very large scale and “quantitative easing” is just another way of describing the creation of new money.

The money created in this way has been directed to building up the balance sheets of the banks in the wake of the Global Financial Crisis, but there is no reason why it should not be applied to other (and more productive) purposes as it has been in many countries, as well as New Zealand, in the past. Japan, for example, both today and immediately after the Second World War, used this technique to get their economy moving and to build the strength of their manufacturing industry; in doing so, they followed the precepts of the great Japanese economist, Osamu Shimomura, who is virtually unknown in the West.

The Chinese government today follows similar policies. President Roosevelt in the US did likewise, before the US entered the Second World War, so as to build the strength of American industry and military capability; and, in New Zealand, Michael Joseph Savage authorised the Reserve Bank to issue interest-free credit in the 1930s so as to take us out of recession and finance the building of thousands of state houses.

All that inhibits our current government from using this technique is the fear that some will disapprove and regard it as taking risks with infiation. But, as John Maynard Keynes observed, “there may be good reasons for a shortage of land but there are no good reasons for a shortage of capital.” He went on to say that, if an increase in the money supply is applied to productive purposes so that output is increased, it cannot be inflationary.

As the new Labour-led government faces financial constraints not of its own making, why not emulate Michael Joseph Savage and authorise the issuing of interest-free credit to be applied to investment in stimulating new production? The Provincial Growth Fund would seem to be an ideal vehicle; funding investment in new infrastructure in this way would free up financial resources that could then be applied to current expenditure, such as paying the nurses and teachers what they deserve.

‘You deserve what you get?’. Modern Monetary Theory and Practice – William Mitchell, L. Randall Wray and Martin Watts.

“There is no such thing as society” Margaret Thatcher.

Neoliberal Economics: ‘You have no one to blame for your meagre allocation but yourself’. Downsizing government and especially reducing the social safety net is consistent with the view that government only needs to ‘get the incentives right’.

Since human survival requires cooperation, selfishness would actually be irrational as it would reduce one’s chances of survival. In all known societies, elaborate rituals and traditions are designed to promote cooperation and even sacrifice for the common good.

Human behaviour is surprisingly malleable, and complexly influenced by custom and tradition. There is nothing natural about humans having ‘unlimited‘ wants. While it is true that modern advertising operates to continually expand our desires. this can be countered through education.

It is ironic that neoclassical economics starts from the presumption that resources are scarce, when the obvious empirical fact is that labour is unemployed. Any theory that begins with the presumption that labour is always fully employed, and hence scarce, is ignoring a glaring inconsistency.

Heterodox Definition of Economics: the study of social creation and social distribution of society’s resources.

Modern Monetary Theory (MMT) is distinguished from other approaches to macroeconomics because it places the monetary arrangements at the centre of the analysis.

The reality is that currency issuing governments such as those of Australia, Britain, Japan and the US can never run out of money. These governments always have the capacity to spend in their own currencies.

Most of the analysis appearing in macroeconomics textbooks, which filters into the public debate and underpins the cult of austerity, is derived from ‘gold standard’ logic and does not apply to modern fiat monetary systems. Economic policy ideas that dominate the current debate are artefacts from the old system, which was abandoned in 1971.

MMT: The sum of the sectoral balances nets to zero when we consider the government, private, domestic and external sectors.

Whereas households have to save (spend less than they earn) to spend more in the future, governments can purchase whatever they like, as long as there are goods and services for sale in the currency they issue.

Our own personal budget experience generates no knowledge relevant to consideration of government matters.

Chapter 1. Introduction

What is Economics? Two Views

US President Harry Truman is said to have sought a one armed economist because he was so frustrated by the propensity of economists to provide policy advice framed as ‘Well. on the one hand‘ X. but on the other hand. Y’, where ‘Y’ typically would be the precise opposite policy path to ‘X’.

The story is. of course. funny but it does bring up a problem that is ubiquitous to all social sciences. Even if we know the result we would like to achieve (say, smarter and happier kids), we do not know with certainty which policy choices would produce the desired outcome. Since the main topic of the social sciences, human behaviour, is complex, we often do not understand its causes, or even its nature, and much less do we know how to influence it in a desired manner. Economics is as difficult as the other social sciences, such as psychology and political science, as it concerns human behaviour in a social sphere that we designate as ‘the economy‘, which itself is hard to define and to delineate from other spheres of social interaction.

Unfortunately, economics is sometimes equated to something like the ‘study of business decision making’, or even relegated to a narrow sub discipline as a ‘decision science’, in a highly artificial hypothesised world of hyper rational automatons that maximise pleasure and avoid pain.

Some even see economics as just a branch of mathematics, a view fuelled in part by the heavy use of mathematics and models in much of the discipline.

This textbook will take a broader perspective of the economics discipline, including it within the social sciences. While we do think it is useful to carve off ‘the economy’ from the rest of social life, and to apply ‘economics’ to the study of that area of life, we recognise that the division is necessarily arbitrary. In truth, there is no completely separate sphere of ‘economic life’, so economics is linked to, and incorporates findings from, the other social science disciplines.

Further, we want to stress that there is no single ‘right’ way to do economics. In this textbook we will use a variety of methods and approaches to build our understanding of ‘the economy’. We will occasionally bring in research and methods from other disciplines. We will use some mathematics and modelling As we believe that economic history as well as history of economic thought helps us to understand our economy today, we will look back in time, both in terms of economic events, but also to examine the insights of the great thinkers of the past.

In the rest of this section we will briefly outline the two main approaches to economics taken by those thinkers, as well as by today‘s economists. It is always risky to pigeon hole individuals and their theories into categories. Just as a politician in a particular political party (say, Labor in Australia. or the Republican Party in America) will hold many views shared by most members of that party, they will likely also hold some views more consistent with those of a rival party. This is true of economists, too. Still. it is useful to identify two approaches to economics that have dominated much of the debate over the past two centuries.

Recalling the story about President Truman’s frustration, we can think of the ‘two hands’ of economics as the orthodox, or neoclassical approach and the Heterodox or Keynesian/Institutionalist/Marxist approach. Let us examine each in turn, while recognising that we must generalise.

Orthodox, Neoclassical approach

‘You deserve what you get’

In the neoclassical approach, there is a presumed, natural human nature: individuals maximise pleasure and avoid pain. Pleasure is defined as ‘utility’, so individuals pursue utility maximising behaviour, avoiding the ‘disutility’ of pain. Further, rational individuals are self interested seeking to maximise their own utility, and they do not receive either utility or disutility from the experiences of others.

Neoclassical economics presumes individuals are ‘rational’, meaning they maximise utility, given constraints. If there were no constraints, individuals would maximise with infinite utility, but they are constrained by their resources that they have at their disposal, which are referred to as ‘individual resource endowments’. Mutually beneficial exchange redistributes resources according to preferences, increasing the utility of both parties to the trade.

In the hypothesised free market, exchanges take place at competitively determined relative prices. (Relative prices are ratios; for example: 1 deer, 3 beavers, 6 rabbits, 2 bushels of wheat, 10 hours of labour services.) Participants in markets take relative prices as signals. Relative scarcity will cause the price to rise, inducing suppliers to produce more of a particular traded commodity, and buyers to demand less. For example. if the supply of students trained in economics is insufficient to meet the demand for economists. the relative wage of economists to (say) that of historians, rises. This signals to students that they ought to switch from the study of history to the study of economics.

At the same time. employers try to find close but cheaper substitutes, say, political science students. As the supply of economists increases, the relative wage advantage for students trained in economics falls. Of course, other factors enter into decisions, but the important point is that relative prices function as signals to both suppliers (economics students) and demanders (employers of economists).

Equilibrium is defined as the set of relative prices that ‘clear’ markets; a ‘general equilibrium’ is a complete set of prices to clear all markets. One interpretation of Adam Smith’s famous ‘invisible hand” analogy is that by producing market clearing prices, the market provides the signals that guide individuals to maximise their utility while also providing the social or public good of ensuring that demand and supply are equilibrate. The hand is “invisible”, guiding individuals and the economy as a whole toward equilibrium, with no need of an authority. For that reason, there is little need for government management of the economy.

Certainly government has some role to play in setting and enforcing rules, in providing national security, and (perhaps) for providing a social safety net. But according to this interpretation of Smith, there is no need for the govemment to direct individuals to serve the public interest because by reacting to price signals and pursuing their own interests, individuals actually act in the public interest.

There is one more important conclusion reached by neoclassical economics: ‘you deserve what you get”. If we all come to the free market to make mutually beneficial exchanges, all seeking to maximise our own individual utility subject to our resource constraints, then the equilibrium allocation is in an important sense ‘fair’. That does not mean that the allocation is equal, some will have more (and achieve greater utility) and others will have less. However, that is because some start with greater endowments (of resources, ability, and drive).

Technically, the idea is that one receives an allocation of resources based on one’s own contribution to the market. If your final allocation is low, it is because you did not bring enough to market: maybe you were born with few resources, you made a constrained choice to obtain little education, and you prefer leisure over work. In other words, you have no one to blame for your meagre allocation but yourself.

To be sure, neoclassical economics also allows for bad luck, congenital disabilities, and so on. Hence, there is a role for social policy to get involved in altering the allocation in order to protect the poorest and least advantaged. However, generally speaking, allocations ought to be left to the market because it will reward each participant according to productive contributions to the market, a dimension of fairness.

In recent years, the neoclassical approach to economics has been invoked in support of the conservative backlash against post war economic and social reforms in Western nations (this is generally called neoliberal outside the USA or neoconservative within the USA). This ‘anti government” movement is closely associated with the terms in office of President Ronald Reagan in the USA and Prime Minister Margaret Thatcher in the UK. When running for President in 1980, President Reagan promised to “get the government off the backs of the people”; Prime Minister Thatcher was famous for arguing that there is no such thing as society, reflecting the individualistic framework shared by neoclassical economics

Ronald Reagan and Maggie Thatcher

Downsizing government and especially reducing the social safety net is consistent with the view that government only needs to ‘get the incentives right’, and then the ‘free market’ would maximise individual welfare while the invisible hand will ensure that signals coming from markets guide individuals to do what is best for the economy as a whole.

While the neoliberal/neoconservative policies are most closely associated with conservative political parties, even the moderate parties continued the policies throughout the 1990s and 2000s. For example. President Clinton (a Democrat) echoed President Reagan’s distaste for social welfare programs when he promised to “end welfare as we know it” in his 1992 election campaign, eliminating the biggest USA anti poverty program (Aid to Families with Dependent Children) and replacing it with a term limited program that tries to force aid recipients to work for their benefits (‘workfare’ rather than ‘welfare’).

Outside the USA the more left wing parties such as the Labour Party in the UK pursued similar strategies (such as ‘work for the dole‘). Neoclassical economic theory provided a strong justification for these economic and social ‘reforms’ as policy would rely more heavily on ‘market outcomes’ while reducing ‘govemment interference” into the workings of the ‘invisible hand’.

Economics, ‘The Dismal Science’: While resources are scarce, our wants are unlimited.

Finally, let us tum to the neoclassical definition of economics, as it provides a very nice summary of the approach taken.

Neoclassical Definition of Economics: The study of the allocation of scarce resources among unlimited wants.

This is often framed as ‘the economic problem”: while resources are scarce, our wants are unlimited. The ‘problem‘ is that we cannot ever satisfy our wants. Many call economics ‘the dismal science’, which comes from this statement of ‘the problem’. While we all try to ‘maximise utility’, resource constraints prevent us from ever achieving maximal bliss.

Another common statement attributed to economists is that ‘there‘s no such thing as a free lunch”, which also derives from the definition. Since resources are scarce, there is always a trade off: if we move resources from one use to another. we necessarily reduce enjoyment in the first use in favour of enjoyment in the second. For example, if we want to have more ‘guns’, we must have less ‘butter’. Or if we want to improve the standard of living enjoyed by ‘Bob’, we must reduce the living standard of ‘Jill”.

Strictly speaking. this would be true only at full employment of all resources However. with the invisible hand guiding the allocation of resources, flexible relative prices ensure that all scarce resources are fully employed. The idea is that prices will always fall until supply equals demand so that no resource is left idle.

Note also that the trade off might only be temporary. For example, if we move resources out of the production of consumption goods and into the production of investment goods that raise productive capacity, then in the future we can have more consumer goods. Through economic growth we can increase the quantity of resources so that both ‘Bob‘ and ‘Jill‘ can have more. This does not violate the admonition that there is no free lunch, however. If we axe to have more production in the future, we need to sacrifice some consumption today, we suffer today with lower consumption, but we are willing to endure the ‘pain’ on the promise that in the future we can enjoy more consumption.

We will have much more to say about the neoclassical approach later in the text. However, it is time to move on to the second approach to economics.

Heterodox, Keynesian, Institutionalist, Marxist approach

Since human survival requires cooperation, selfishness would actually be irrational as it would reduce one’s chances of survival.

There is a second, long, tradition in economics that adopts a quite different framework. Unfortunately, there is no strong consensus about what to call it. Sometimes it is called ‘nonorthodox‘, which appears to define it in opposition to ‘orthodox’ or neoclassical economies. In recent years, many of those working in this tradition have settled on the term ‘heterodox’, but that, too, is usually defined as ‘not in agreement with accepted beliefs”. Yet at one time, those views now associated with ‘heterodox‘ economics were dominant, while the ‘orthodox’ views were considered by most economists as ‘unorthodox’ in the sense that they were not in agreement with the beliefs held by most economists!

Further, unlike neoclassical theory. which is substantially accepted by all orthodox theorists, ‘heterodoxy’ is made up of a number of well established and coherent economic schools of thought. While these share a common approach, they also deviate from one another in important ways.

The three most imponant of these schools of thought are the Marxist (following the work of Karl Marx), the Institutionalist (following the work of Thorstein Veblen), and the Keynesian (followers of John Maynard Keynes).

What are we to do? In spite of the objections we raised, we will conform to the convention and call this second approach the heterodox or Keynesian/Institutionalist/Marxist approach.

Let us examine the shared framework adopted.

First, according to this approach there is no ‘natural’ human behaviour; rather, it is shaped by institutions, culture, and society. There is nothing ‘natural’ about self interested (or, better, ‘selfish’) behaviour, nor would such behaviour be ‘rational‘ in the neoclassical sense. Humans are social animals and in many cultures, selfish behaviour is punished and selfish individuals are ostracised. Since human survival requires cooperation, selfishness would actually be irrational as it would reduce one’s chances of survival. In any event, in all known societies, elaborate rituals and traditions are designed to promote cooperation and even sacrifice for the common good.

Human behaviour varies significantly across societies, and the economic system is one factor that helps to determine appropriate behaviour within any particular society. Selfinterested behaviour is more acceptable in some societies than in others. It is not a coincidence that neoclassical economic theory was developed largely in Western capitalist societies, and particularly in England. The ‘rational’ behaviour attributed by neoclassical economists to all humans actually comes reasonably close as a description of the behaviour of early British capitalists. In the social environment in which they operated, pursuit of their own self interest without regard to the welfare of others (especially that of their employees), may have increased their probability of success as capitalists. Further, they operated in a hostile political climate in which the Crown and their feudal lord cronies wanted to increase their own share of the nation’s rather feeble output.

Government ‘intervention’ was almost always a bad thing, from the perspective of the first capitalists because government operated substantially in the interest of the Crown and the feudal lords.

We will not go into economic history now. What we wish to emphasise is that human behaviour is surprisingly malleable and complexly influenced by custom and tradition.

Further, most decisions are not ‘rational‘ for another reason: the future is uncertain, and even the present and past are uncertain in the sense that we do not fully understand what happened and what is now happening. Clearly, we do not know the future, and we know that we do not. Hence, we cannot know for cenain that any action we take is truly ‘utility maximising’. Should I buy the Renault or the Mazda? Once the decision is made and with the passage of time, I might have a better idea of the best choice, but it is probable that even a decade down the road I will not know which would have been best. Obviously, that choice is relatively unimportant and even simple compared to most economic choices one must make. In truth, we almost never know whether we are ‘maximising’ utility, indeed even with hindsight we often cannot tell if we made the right decision.

According to the heterodox approach, most decisions are not ‘rational’ in the neoclassical sense of the term. Decisions and behaviour depend on a range of other factors, including uncertainty, power, discrimination. prejudice, and segregation. Optiuns available depend on status, social class, race, religion, and gender, for example. These ‘noneconomic’ factors heavily influence and even constrain our choices.

Heterodoxy rejects the notion that economic outcomes are arbitrated by an impersonal market that only seeks to equilibrate ‘demand and supply‘. Actually, market prices are largely administered by firms with market power that allows them to discriminate. Wages are set not to ‘clear‘ the labour market, but rather reflect the outcome of conflicted bargaining processes.

Capitalism is a system defined by class conflict. In general, workers want to earn as much as they can for the effort they expend, while bosses want workers to produce as much as they can but pay them as little as possible. And, as will be discussed later, unemployment cannot be eliminated through wage reductions that eliminate relative excess labour supply; indeed wage reductions can actually reduce the demand for labour and thus increase unemployment.

More generally, wages and other prices are not simply signals of the invisible hand. but rather determine incomes and thus influence business sales and decisions going forward. For that reason, price and wage determination are not usually left to the invisible hand of the market.

Heterodoxy holds a different view of the so called ‘economic problem” of scarce resources and unlimited wants. Wants are largely socially created. and there is nothing natural about humans having ‘unlimited‘ wants. While it is true that modern advertising operates to continually expand our desires. this can be countered through education.

Further, resources are also largely socially created. While it is true that some natural resources have a limited supply, innovations continually produce substitutes. For example. Western societies faced their first major energy crisis in the l9th century when whalers had significantly reduced the number of whales, the source of whale oil used for lighting and other purposes. However, the production of petroleum and then electricity quickly replaced whale oil.

Moreover. the most important resource in any economy is labour. Ironically, in capitalist economies labour is virtually always in excess supply that is, many workers are left unemployed. It is ironic that neoclassical economics starts from the presumption that resources are scarce, when the obvious empirical fact is that labour is unemployed. Any theory that begins with the presumption that labour is always fully employed, and hence scarce, is ignoring a glaring inconsistency.

Let us look at the heterodox definition of economics.

Heterodox Definition of Economics: the study of social creation and social distribution of society’s resources.

Note that unlike the orthodox definition. this one focuses on the creation of resources. Further, most of that creation is social, rather than individual: people work together to produce society’s resources. Distribution, too, is socially determined, rather than determined by a technical relation (one‘s contribution to the production process). For example, labour unions engage in collective bargaining with their employers, who also band together to keep wages low.

The political process is also important in determining distribution; not only does government directly provide income to large segments of society, but it also puts in place minimum wages, benefits, and working conditions that must be met by employers Government is also a creator of resources; it is not just a user of them. It organises and funds innovative research and development (often in its own labs) that is then used to create resources (frequently by private firms). It also purchases directly from firms, encouraging them to increase hiring and output.

Not only do these government activities increase production, but they also affect distribution. This is well understood by voters and their representatives in government as policy creates winners and losers and not usually in a zero sum manner: some policies can create winners while others might create more losers.

Power, discrimination, collusion, and cooperation all play a role in determining ‘who gets what’. The point is that society does not have to let ‘the market’ decide that women should be paid less than men, for example, or that those with less education should remain jobless and thus poor.

Economics, like all social sciences. is concerned with a society that is complex and continually undergoing change. Since economists study human behaviour in the economic sphere, their task is very difficult. Whatever humans do. they could have done something different. Humans have some degree of free will, and their behaviour is largely based on what they think they ought to do. That in turn depends on their expectations of an unknowable future they do not know precisely what the outcome of their actions will be, and they do not know what others will do.

Indeed. humans do not know exactly what happened in the past. nor do they fully understand what is happening today. They must interpret the environment in which they live. and realise that they cannot fully understand it. They can never know if they have truly ‘maximised’ their pleasure. They make plans in conditions of existential uncertainty, and do the best they can do given their circumstances. Their actions are almost always taken with consideration given to the impacts on others, humans are above all social animals and that is why economics must be a branch of the social sciences.

What do economists do?

Like sociologists and political scientists economists are trying to understand particular aspects of human behaviour, for example decisions about levels and patterns of spending, choices about enrolment in post school education and types of employment to pursue, which we argue above, are influenced by institutions; culture; and society; in addition to economic variables. such as income: the prices of goods: and prospective wage rates for different occupations.

In microeconomics our focus is the behaviour of individual consumers and firms. whereas in macroeconomics the focus is the aggregate impacts of these decisions on outcomes. including total output and employment and the rate of inflation. We elaborate on these definitions of microeconomics and macroeconomics below.

In trying to understand particular forms of economic behaviour we need to develop theories that require us to decide on those factors that we think influence the particular economic decisions of interest. In other words, we need to make simplifying assumptions (engage in abstraction). which means we necessarily ignore those factors that we consider to be irrelevant. Otherwise we are trying to replicate the complex reality, as we see it, and we are engaging in description rather than theorising. In the development of theory, concepts are formulated, which can be viewed as the building blocks of theory. A model can be viewed as the formalisation of a theory (see below). To understand any theory (model). it is important that students comprehend the underlying concepts.

Social scientists seek to confront their abstract theoretical models, expressed in the form of conjectures about real world behaviour, with the empirical data that the real world provides. For example. we might form the conjecture that if disposable income rises, household consumption will rise. We would then collect the relevant data for disposable income and household consumption and any other information we thought might bear on the relationship and use various statistical tools (for example, regression analysis) to enumerate the relationship between disposable income and household consumption to see whether our conjecture was data consistent.

In engaging in this sort of exercise, the responsible social scientist is not seeking to establish whether the theoretical model is true, for that is an impossible task, given there is no way of knowing what the truth is anyway. Instead, we seek to develop theories or conjectures that provide the best correspondence with the empirical world we live in. This means our current, accepted body of knowledge comprises theories and conjectures that explain the real world data in the most comprehensive way when compared to the competing theories.

Further, we can rarely refute a theory. As President Truman complained, there are two or more sides to the most important economic questions, so there are competing theoretical approaches yielding different conclusions. Even when a researcher resorts to the analysis of relevant data, (which often entails the use of econometrics), they can never refute a theory with 100 per cent confidence. Often the acceptance of a theory is driven by ideology and politics, rather than a balanced assessment of the competing theories and associated evidence.

Implications for research and policy

Many students, like President Truman. find the inability of economists to come up with definitive answers to economic questions to be rather frustrating. Here it is important to emphasise that, like physical sciences and other social sciences, economics is a contested discipline, as is illustrated by our brief discussion of the two schools of thought. Students will be exposed to some major contemporary debates in macroeconomics later in this textbook, but below we outline a long standing debate in developed economies, such as the UK, USA and Australia, about the impact of an increase in the minimum wage on unemployment.

If there are longstanding debates in economics (and other disciplines), which appear to be unresolved, how can there be progress in our understanding of economic phenomena? This is an important question because decisions made by macroeconomic policymakers have profound effects on the welfare of the population in terms of for example, employment opportunities and wages. Thomas Kuhn developed a way of understanding how progress is made in the social and physical sciences.

What is Macroeconomics?

The study of employment, output and inflation.

In macroeconomics we study the aggregate outcomes of economic behaviour. The word ‘macro’ is derived from the Greek word ‘makro’, which means large and so we take an economy wide perspective.

Macroeconomics is not concerned with analysing how each individual person, household or business firm behaves or what they produce or earn that is the terrain of the other major branch of economic analysis, microeconomics. Macroeconomics focuses on a selected few outcomes at the aggregate level and is rightly considered to be the study of employment, output and inflation in an international context. A coherent macroeconomic theory will provide consistent insights into how each of these aggregates is determined and change.

In this regard, there are some key macroeconomic questions that we seek to explore:

1. What factors determine the flow of total output produced in the economy over a given period and its growth over time?

2. What factors determine total employment and why does mass unemployment occur?

3. What factors determine the evolution of prices in the economy (inflation)?

4. How does the domestic economy interact with the rest of the world and what are the implications of that interaction?

A central idea in economics, whether it is microeconomics or macroeconomics, is efficiency getting the best out of what you have available. The concept is extremely loaded and is the focus of many disputes, some more arcane than others. But there is a general consensus among economists that at the macroeconomic level, the ‘efftciency frontier’ (which defines the best outcome achievable from an array of possible outcomes) is normally summarised in terms of full employment. The hot debate that has occupied economists for years is the exact meaning of the term full employment.

We will consider that issue in full in Chapters 11 and 12. But definitional disputes aside, it is a fact that the concept of full employment is a central focus of macroeconomic theory. Using the available macroeconomic resources including labour to the limit is a key goal of macroeconomics. The debate is over what the actual limit is. The related macroeconomic challenge is how to maintain full employment but at the same time achieve price stability, which means that prices are growing at a low and stable rate.

The clear point is that if you achieve that goal then you will be contributing to the prosperity and welfare of the population by ensuring real output levels are high within an environment of stable prices.

This book develops a framework for understanding the key determinants of these aggregate outcomes, the level and growth in output; the rate of unemployment; and the rate of inflation within the context of what we call a monetary system.

All economies use currencies as a way to facilitate transactions. The arrangements by which the currency enters the economy and the role that the currency issuer, the national government, has in influencing the outcomes at the aggregate level, is a crucial part of macroeconomics. Modern Monetary Theory (MMT), which is briefly outlined below, develops a macroeconomic framework that incorporates the unique features of the monetary system.

The MMT approach to macroeconomics

Modern Monetary Theory (MMT) is distinguished from other approaches to macroeconomics because it places the monetary arrangements at the centre of the analysis. Learning macroeconomics from an MMT perspective requires you to understand how money ‘works’ in the modern economy and to develop a conceptual structure for analysing the economy as it actually exists.

Most people are unaware that a major historical event occurred in 1971, when US President Nixon abandoned gold convertibility and ended the system of fixed exchange rates. Under that system, which had endured for about 80 years (with breaks for war), currencies were convertible into gold, exchange rates were fixed, and governments could expand their spending only by increasing taxes or borrowing from the private sector. After 1971, most governments issued their own currencies by legislative fiat; the currencies were not convertible into anything of value, and were floated and traded freely in foreign currency markets.

It is thus essential to understand the notion of a currency regime, which can range through a continuum from fixed exchange rate systems to floating exchange rate systems with varying degrees of exchange rate management in between. Understanding the way the exchange rate is set is important because it allows us to appreciate the various policy options that the currency issuer, the government has in relation to influencing the main objects of our study; employment, output and inflation.

A flexible exchange rate releases monetary policy from defending a fixed parity against a foreign currency. Fiscal and monetary policy can then concentrate on ensuring domestic spending is sufficient to maintain high levels of employment. A consequence of this is that governments that issue their own currencies no longer have to ‘fund‘ their spending. They never need to ‘finance’ their spending through taxes or selling debt to the private sector.

The reality is that currency issuing governments such as those of Australia, Britain, Japan and the US can never run out of money. These governments always have the capacity to spend in their own currencies.

Most of the analysis appearing in macroeconomics textbooks, which filters into the public debate and underpins the cult of austerity, is derived from ‘gold standard’ logic and does not apply to modern fiat monetary systems. Economic policy ideas that dominate the current debate are artefacts from the old system, which was abandoned in 1971.

At the heart of macroeconomics is the notion that at the aggregate level, total spending equals total income and total output. In turn, total employment is related to the total output in the economy. So to understand employment and output determination we need to understand what drives total spending and how that generates income, output and the demand for labour.

In this context, we will consider the behaviour and interactions of the two economic sectors that is, government and non govemment. Then we will unpack the non government into its component sectors, the private domestic sector (consumption and investment) and the external sector (trade and capital flows). In Chapter 4 we analyse in detail the so called National Accounts, drawing on these broad macroeconomic sectors. This approach is called the sectoral balance approach, which builds on the accounting rule that a deficit in one sector must be offset by surpluses in the other in the case of the government non government dichotomy.

More generally, the sum of the sectoral balances nets to zero when we consider the government, private, domestic and external sectors.

If one sector spends more than its income, at least one of the others must spend less than its income because for the economy as a whole, total spending must equal total receipts or income. While there is no reason why any one sector has to mm a balanced budget, the National Accounts framework shows that the system as a whole must. Often though, but not always, the private domestic sector rus a surplus, spending less than its income. This is how it accumulates net financial wealth. Overall private domestic sector saving (or surplus) is a leakage from the overall expenditure cycle that must be matched by an injection of spending from another sector. The current account deficit (the so called external sector account) is another leakage that drains domestic demand. That is, the domestic economy is spending more overseas than foreigners are spending in the domestic economy.

Here it is useful to differentiate between a stock and a flow. The latter is a magnitude per period of time. For example, spending is always a flow of currency per period (for example, households might spend $100 billion dollars in the first three months of 2016). On the other hand, a stock is measured at a point in time. For example, a student’s financial wealth could consist of a deposit account at a local bank, with a balance of $1000 on January 1, 2016.

The sectoral balances framework, outlined later, shows that a sectoral deficit (a flow, say per year) accumulates, as a matter of accounting to a financial debt (a stock). On the other hand, a sequence of sectoral surpluses accumulate to a financial asset which is also a stock.

MMT is thus based on what is known as a stock flow consistent approach to macroeconomics where all flows and resulting stocks are accounted for in an exhaustive fashion. The failure to adhere to a stock flow consistent approach can lead to erroneous analytical conclusions and poor policy design.

From the perspective of fiscal policy choices, an important aspect of the stock flow consistent approach that will be explained in greater detail in Chapter 5, is that one sector’s spending flow equals its income flow plus changes to its financial balance (stock of assets).

The textbook will show that a country can only run a current account deficit if the rest of the world wishes to accumulate financial claims on the nation (financial debt). Often these claims are in the form of government debt. The MMT framework shows that for most govemments, there is no default risk on government debt, and therefore such a situation is ‘sustainable’ and should not be interpreted to be necessarily undesirable. Any assessment of the fiscal position of a nation must be taken in the light of the usefulness of the govemment’s spending program in achieving its national socio-economic goals.

This is what Abba Lerner (1943) called the ‘functional finance” approach. Rather than adopting some desired budgetary outcome, government ought to spend and tax with a view to achieving ‘functionally’ defined outcomes, such as full employment.

0n matters of terminology, we avoid using the term ‘budget’ to describe the spending and taxation outcomes for the currency issuing government. Instead, we use to the term fiscal balance. A government fiscal deficit occurs when its spending exceeds its taxation revenue, whereas a fiscal surplus occurs when govemment spending is less than its taxation revenue.

The use of the term ‘budget’ to describe the fiscal balance invokes the idea that the currency issuing government faces the same ‘budget’ constraints as a household.

A careful understanding of the monetary system will make it obvious that the government is not a ‘big household”. The government can consistently spend more than its revenue because it creates the currency.

Households use the currency issued by the government and must finance their spending. Our access is constrained by the sources of available funds, including income from all sources, asset sales, and borrowings from external parties.

Whereas households have to save (spend less than they earn) to spend more in the future, governments can purchase whatever they like, as long as there are goods and services for sale in the currency they issue.

A sovereign government must spend first before it can subsequently tax or borrow. A household cannot spend more than its revenue indefinitely because continuously increasing private debt is unsustainable. The budget choices facing a household are thus limited and prevent permanent deficits. A currency issuing government can never be revenue constrained in a technical sense and can sustain deficits indefinitely without solvency risk.

In other words, our own personal budget experience generates no knowledge relevant to consideration of government matters.

The alternative narrative, which we present in this book, highlights the special characteristics of the government’s currency monopoly.

Fiscal surpluses provide no greater capacity to governments to meet future needs, nor do fiscal deficits erode that capacity. Governments always have the capacity to spend in their own currencies. The consequences of a fiscal surplus, the government spending less than it is taking out of the economy by way of taxation when a nation runs an external deficit will also be outlined.

In summary, budget surpluses force the non government sector into deficit and the domestic private sector is forced to accumulate ever increasing levels of indebtedness to maintain its expenditure. The textbook will explain why this is an unsustainable growth strategy and how eventually the private domestic sector is forced to reduce its risky debt levels by saving more and the resulting drop in non government spending will reinforce the negative impact of the government fiscal surplus on total spending.

The macro model

To organise the way of thinking in this regard we use a conceptual structure sometimes referred in the economics literature as a model, in this case a macroeconomic model. A model is just an organising framework and is a simplification of the system that is being investigated. In this textbook, we will develop a macroeconomic model, which combines narrative and some algebra to advance your understanding of how the real world economy operates. We will necessarily stylise where complexity hinders clarity, but we will always focus on the real world rather than an assumed world that has no relevance to the actual economy.

All disciplines develop their own language as a way of communicating. One might think that this just makes it harder to understand the ideas and we have sympathy for that view. But we also understand that students of a specific discipline, in this case macroeconomics should be somewhat conversant with the language of the discipline they are studying.

A macroeconomic model draws on concepts and algebraic techniques to advance our understanding of the main economic aggregates (such as output, employment and price level). This textbook design is unique because it specifically develops the MMT macroeconomic model, which will be applicable to the real world issues including economic policy debates. The application to policy is important because macroeconomics is what might be termed a policy science.

By placing government as the currency issuer at the centre of the monetary system we immediately focus on how it spends and how that spending influences the major macroeconomic aggregates that we seek to explain.

The framework will at first, provide a general analysis of government spending that applies to all currency exchange rate systems before explaining the constraints (policy options) that apply to governments as we move from a flexible exchange rate to a fixed exchange rate system. We will consider how the design of the monetary system impacts on the domestic policy choices open to government and the outcomes of specific policy choices in terms of output, employment and inflation.

Fiscal and monetary policy

The two main policy tools that influence what is termed the demand or spending side of the economy are monetary and fiscal policy.

Fiscal policy is represented by the spending and taxation choices made by the government (the ‘treasury’). The net financial accounting outcomes of these decisions are summarised periodically by the government fiscal position. Fiscal policy is one of the major means by which the government seeks to influence overall spending in the economy and achieve its aims.

The textbook will show that a nation will have maximum fiscal space:

– If it operates with a sovereign currency; that is. a currency that is issued by the sovereign government and its value is not pegged to foreign currencies; and

– If it avoids incurring debt in foreign currencies. and avoids guaranteeing the foreign currency debt of domestic entities (firms, households, and state, province, or city debts).

Under these conditions, the national government can always afford to purchase anything that is available for sale in its own currency. This means that if there are unemployed resources, the government can always mobilise them putting them to productive use through the use of fiscal policy. Such a government is not revenue constrained. which means it does not face the financing constraints that a private household or firm faces in framing its expenditure decisions.

To put it as simply as possible ~ this means that if there are unemployed workers who are willing to work, a sovereign government can afford to hire them to perform useful work in the public interest.

From a macroeconomic efficiency argument, a primary aim of public policy is to fully utilise available resources.

The central bank in the economy is responsible for the conduct of monetary policy, which typically involves the setting of a short term policy target interest rate (Fed Funds in the USA, also called bank rate in many counuies). In the recent global economic crisis the ambit of monetary policy has broadened considerably and these developments will be considered in Chapter 15.

The typical roles of a central bank include not only the conduct of monetary policy via the overnight interbank lending rate, but also operating the interbank clearing mechanism (so that bank cheques clear among banks), acting as lender of last resort (to stop bank runs), and regulating and supervising the banks.

MMT considers the treasury and central bank functions to be part of what is termed the consolidated government sector. In many textbooks, students are told that the central bank is independent from government. The MMT macroeconomic model will demonstrate how it is impossible for the two parts of government to work independently if the monetary system is to operate smoothly.

Policy implications for sovereign nations

MMT provides a broad theoretical macroeconomic framework based on the recognition that sovereign currency systems are in fact public monopolies per se, and that the imposition of taxes coupled with insufficient govemment spending generates unemployment.

An understanding of this point will be developed to allow the student to appreciate the role that government can play in maintaining its near universal dual mandates of price stability and full employment. The student will learn that there are two broad approaches to control inflation available to government in designing its fiscal policy choices.

Both approaches draw on the concept of a buffer stock to control prices. We will examine the differences between the use of:

a) Unemployment buffer stocks: The neoclassical approach, which describes the current policy orthodoxy, seeks to control inflation through the use of high interest rates (tight monetary policy) and restrictive fiscal policy (austerity). which leads to a buffer stock of unemployment. In Chapters 11 and 12. students will learn that this approach is very costly and provides an unreliable target for policy makers to pursue as a means for inflation proofing; and

b) Employment buffer stocks: Under this approach the government exploits its fiscal capacity, inherent in its currency issuing status, to create an employment buffer stock. In MMT, this is called the Job Guarantee (JG) approach to full employment and price stability. This model. which is considered by MMT to be the superior buffer stock option, is explained in detail in Chapter 12.

The MMT macroeconomic framework shows that a superior use of the labour slack necessary to achieve price stability is to implement an employment program for those who are otherwise unemployed as an activity floor in the real output sector, which both anchors the general price level to the price of employed labour of this (currently unemployed) buffer and can produce useful output with positive supply side effects.

Macro and the Public Purpose

The households and business firms in a modern capitalist economy make many of the important economic decisions that contribute to determination of the level of employment and output, the composition of that output, the distribution of income, and the prices at which output is sold. Claims are sometimes made that a ‘free market‘ economy comprised of individuals seeking only their own self interest can operate ‘harmoniously’ as if guided by an ‘invisible hand’.

In fact, economists had rigorously demonstrated by the 1950s that the conditions under which such a stylised economy could reach such a result couldn’t exist in the real world. In other words:

There is no scientific basis for the claim that ‘free markets’ are best.

In any case, these claims, even if true for some hypothesised economy, are irrelevant for the modem capitalist economies that actually exist. This is because all modern capitalist economies are ‘mixed‘, with huge corporations (including multinational firms), labour organisations, and big government. Individuals and firms operate within socio political cultural economic structures that are constraining but also enabling.

Sometimes the goals of individuals and firms coincide with what might be called the public purpose, while often they do not. In this section we will discuss the public purpose and the role played by government in trying to align private interests with socially progressive goals.

What is the public purpose? It is not easy to define or to identify the public purpose. One of the basic functions of any social organisation is to provide the necessary food, clothing, shelter, education, health care, legal framework, and socialisation for survival of the society.

While the subject of this course is economics, there is no sharp distinction between the sphere of economics and the spheres of other social sciences that study social processes. We usually think of the economy as the part of the social organisation that is responsible for provision of the material means of survival, the food. clothing, shelter, and so on. However, the economy is always embedded in the social organisation as a whole, affecting and affected by culture, politics, and social institutions.

Even if we can agree that any successful economic organisation should be able to produce adequate food for its population, that still leaves open many questions: What kind of food?; How should it be produced?; How should it be distributed?; and even, What does adequate mean?

Further, the society is comprised of harmonious individuals and groups. There are always conflicting claims and goals that must be moderated. There is no single, obvious public purpose to which all members of a society wish to strive. Even if we can identify a set of goals that the majority of society would like to work toward, that set will surely change over time as hopes and dreams evolve. The public purpose is an evolving concept.

The position taken in this book is that there is no ‘invisible hand’ that ensures that private interests are consistent with the public purpose. Indeed, the economy is just one component of the social organisation that is necessary to establish the always evolving public purpose and that is necessary to work towards achievement of the public purpose.

The ‘market’ is just one institution among a wide variety of social institutions working to delineate social goals that comprise the social and private purposes. Other institutions include political organisations, labour unions, manufacturers. and NGOs (non governmental organisations).

As we noted at the beginning of this Chapter, the national government must play an important role in society as it can help to identify the social purpose and to establish a social structure in which individuals and groups will work toward achieving the social purpose.

While it is admittedly difficult to outline what defines the social purpose, it is possible to identify widely accepted goals. For example, the United Nations Universal Declaration of Human Rights (1948) commits signatory nations to a common set of relatively well defined goals.

The declaration is outlined on the United Nations Home Page:

Now, Therefore THE GENERAL ASSEMBLY proclaims THIS UNIVERSAL DECLARATION OF HUMAN RIGHTS as a common standard of achievement for all peoples and all nations, to the end that every individual and every organ of society, keeping this Declaration constantly in mind, shall strive by teaching and education to promote respect for these rights and freedoms and by progressive measures, national and international, to secure their universal and effective recognition and observance, both among the peoples of Member States themselves and among the peoples of territories under their jurisdiction.

The Articles that define the Declaration include:

– Everyone has the right to life, liberty and security of person.

– No one shall be held in slavery or servitude; slavery and the slave trade shall be prohibited in all their forms.

– Everyone has the right to an effective remedy by the competent national tribunals for acts violating the fundamental rights granted them by the constitution or by law.

– Everyone has the right to freedom of movement and residence within the borders of each State.

– Everyone has the right to a nationality.

– Men and women of full age, without any limitation due to race, nationality or religion, have the right to marry and to found a family. They are entitled to equal rights as to marriage, during marriage and at its dissolution.

– Everyone has the right to own property alone as well as in association with others.

– Everyone has the right to freedom of thought, conscience and religion; this right includes freedom to change their religion or belief, and freedom, either alone or in community with others and in public or private, to manifest their religion or belief in teaching, practice, worship and observance.

– Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart infomation and ideas through any media and regardless of frontiers.

– Everyone has the right to freedom of peaceful assembly and association.

– Everyone has the right to take part in the government of their country, directly or through freely chosen representatives.

– Everyone has the right of equal access to public service in their country.

– Everyone, as a member of society, has the right to social security and is entitled to realisation, through national effort and international co-operation and in accordance with the organisation and resources of each State, of the economic, social and cultural rights indispensable for their dignity and the free development of their personality.

– Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment

– Everyone, without any discrimination, has the right to equal pay for equal work.

– Everyone who works has the right to just and favourable remuneration ensuring for themselves and their family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

– Everyone has the right to form and to join trade unions for the protection of their interests.

– Everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay.

– Everyone has the right to a standard of living adequate for the health and well being of themselves and of their family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond their control.

– Everyone has the right to education. Education shall be free, at least in the elementary and fundamental stages. Elementary education shall be compulsory. Technical and professional education shall be made generally available and higher education shall be equally accessible to all on the basis of merit.

– Everyone has the right freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits.

It is obvious that many of these identified human rights, especially near to the end of this list, are connected to the operation of the economy. For example, we argued above that any successful economy should provide adequate food, clothing, and shelter, and many of the human rights listed in the UN Charter address the material well being of a nation‘s population.

Further, other human rights that superficially appear to be unrelated to economic performance actually presuppose fulfilment of other human rights that are directly related to material well being.

For example, in a modern capitalist economy access to employment (one of the recognised rights) is necessary for full participation in society. Not only does a job provide income that allows one to purchase food, clothing, and shelter, but it also provides access to social networks, generates feelings of self worth as one contributes to social production, enhances social prestige, and helps to provide for retirement in old age.

Indeed, employment has been shown to have a wide range of other benefits to individuals and to society including better physical and psychological health, reduced crime and drug abuse, lower child and spouse abuse, and greater participation in other social and political activities.

To be sure, this list (which is itself only a partial listing of the agreed universal rights) includes many rights that have not been fully achieved even in the wealthiest and most democratic nations. In that sense, these rights are ‘aspirational’, with the signatory nations committing to striving toward achieving them. Again, if we look at the example of the right to work and to an adequate standard of living, those are rights that are routinely violated even in the best of times in the wealthiest of nations. Still, these universally recognised rights provide a measure against which nations can measure their progress.

Concluding thoughts on the public purpose

We conclude with three important points.

First, this reason the public purpose is broad and evolving over time, and for these reasons it varies across time and place. It should include rising living standards, particularly for those at the bottom of society. Environmental sustainability must be included. Reduction of racial, ethnic, and gender inequalities across the full socio political economic spectrum is an important component of the public purpose. This must go beyond simple economic measures such as family income to include full participation in the life of the community. The public purpose also should include reductions of crime. corruption, cronyism, invidious distinction, conspicuous consumption, and other social pathologies.

Second the UN Charter lays out what it sees as ‘universal’ human rights This is a useful, but not wholly satisfactory list to be included in a statement of the public purpose. What is considered to be a human right today might have appeared to be radically Utopian a century ago; and today’s list will appear far too cautiously conservative at some date in the future.

The public purpose is inherently a progressive agenda that strives to continually improve the material, social, physical, cultural, and psychological well being of all members of society. It is inherently ‘aspirational‘ in the sense that there is no end point as the frontiers of the public purpose will continually expand.

Third, the national government as well as international organisations (such as the United Nations) must play important roles in shaping our vision regarding the types of societies to which we aspire. And beyond setting these goals, governments at all levels must take the lead in developing sets of institutions, rules of behaviour, and sanctions for undesirable behaviour in order to move toward reaching the goals set as the public purpose.

As an example that demonstrates these points, a half century ago national governments and international organisations set about to eliminate the devastating disease known as smallpox. While markets and for profit production played a role in helping to develop vaccines, in distributing the vaccines, and in formulating information campaigns, private initiative alone would never have eliminated the disease.

The task was too big, it was not completely consistent with the self interest of profit seeking behaviour, and it required intemational cooperation beyond the reach of even the largest firms.

Hence, governmental organisations had to play a role.

With respect to the aspirational nature of the public purpose, successful elimination of smallpox would not be the end, but rather would serve as the beginning of a new campaign, to eliminate another disease, and then another and yet another.

Perhaps in a long distant future, a human right to a disease free life would be recognised, adding to an ever increasing list of established rights that all nations would be expected to protect.

While we cannot, of course, imagine such a future, it was not so long ago that the Congress of the US did not recognise the voting rights of women and African Americans. Today, any nation that denies the vote to members of society on the basis of gender, religion, race or ethnicity, or national origin is considered to be in violation of human rights, and thus, to be an international pariah, even though such restrictions were considered acceptable just a few generations ago. For example, white US women over the age of 21 did not secure the vote until the 1920 Presidential election, whereas in the UK suffrage was extended to all women over the age of 21 in 1928. In Australia aborigines were granted the right to enrol and vote in Federal elections in 1962. Many developed countries did not give women or minorities the vote until the 20th Century.

The public purpose is inherently progressive; it can never be finished.

Chapter 2:. How to Think and Do Macroeconomics

. . .


Modern Monetary Theory and Practice. An Introductory Text

by William Mitchell, L. Randall Wray and Martin Watts

get it at

Modern Monetary Theory. Public Broadcasters put out economic misinformation – Bill Mitchell.

On May 1, 2018, the Australian Broadcasting Commission (ABC) published this travesty – Federal budget jargon buster: Work through the waffle – trying, no doubt, to give the impression that they are clever and the average citizen is dumb – read their introduction to see that.

Some of the entries are factual such as what ‘bracket creep’ is in a progressive tax structure.

Then you get to the “Jargon buster” entry for “Debt vs. deficit” and we read that:

Politicians of all stripes are fond of comparing the budget to a family’s finances, but this often leads to confusion.

Not confusion, plain and simple deception which creates a fictional world.

There is no comparison between the fiscal balance of a national, currency-issuing government and a household.

Households use the currency and must finance their spending. A sovereign government issues the currency and must spend first before it can subsequently tax or borrow.

A currency-issuing government can never be revenue-constrained in a technical sense and can sustain deficits indefinitely without solvency risk.

Our own personal budget experience generates no knowledge relevant to consideration of government matters.

This is related to the claims that governments have to ‘live within their means’.

Conservative politicians often claim the government will run out of money if it does not curb spending. They attempt to give this statement authority by appealing to our intuition and experience – that is, they draw on the household budget analogy, and claim that governments, like households, have to live within their means.

This analogy resonates strongly with voters because it easily relatable: we intuitively understand that as individuals, we cannot indefinitely live beyond our means.

A currency-issuing government has no intrinsic financial constraints: government will never run out of money to build a hospital or pay health professionals, but the materials to build the facility and the skilled workers to run it may not be available.

Fiscal space is thus more accurately defined as the available real goods and services available for sale in the currency of issue. These are the ‘means’ available to government to fulfil its socio-economic charter.

The currency-issuing government can always purchase whatever is for sale in its own currency.

The ABC then claim that:

When a politician says they are balancing the books and returning the budget to surplus, it gives the impression that they are clearing the government’s debt.

The reality is that the deficit is just the amount of money the government spends beyond what it receives in a financial year.

Just because you return the budget to surplus does not mean that the debt incurred by the previous deficits disappears.

Yes it does, as soon as the most-dated debt instrument reaches maturity it automatically disappears.

Public debt is issued at maturities (a certain time when it is paid back) irrespective of what happens to it after it is issued in the primary market.

Eventually the holder of the debt, at the time of maturity, will get their cash.

Public debt is the stock that relates to the flow of expenditure that is the deficit (the net outcome of two flows – spending and taxation).

If the government is running a fiscal surplus it is taking more out than it is putting in, which squeezes the non-government sector for liquidity, and forces that sector to shed financial wealth.

Of course, as I have previously noted that there is no sense that you can relate the debt issuance to increasing the spending capacity of the currency-issuing government.

The Australian public have probably forgotten by now but in 2002, the Federal government created a “Review of the Commonwealth Government Securities Market” as a result of the public debt market becoming very thin (not much for sale).

This situation arose because the Government had been retiring its net debt position as it was running fiscal surpluses. They came under pressure from the big financial market institutions (particularly the Sydney Futures Exchange) to continue issuing public debt despite the increasing surpluses.

The financial markets wanted the corporate welfare embodied in the public debt – it is risk free and a perfect vehicle to park funds in uncertain times and also as a benchmark to price private financial assets that do carry risk.

At the time, the federal government was continually claiming that it was financially constrained and had to issue debt to ‘finance’ itself.

But, given they were generating surpluses, then it was clear that according to this logic, the debt-issuance should have stopped.

The upshot was that the Government agreed to continue to issue debt even though it was running surpluses as a sop to the corrupt financial sector who needed their dose of corporate welfare.

The contradiction involved in this position was not evident in the debate although I did a lot of radio interviews trying to get the ridiculous nature of the discussion into the public arena.

The ABC article continued to ‘explain’ (not!) debt and deficits by citing current Australian government debt levels and claiming that:

… $317.2 billion sounds like (and is) a lot of money, by international standards Australia’s public debt is quite low, sitting at 18 per cent of GDP — which is the value of what Australia’s economy produces each year.

They could have said that it was irrelevant and just the record of non-government accumulation of net financial assets as a result of the government bestowing wealth on the non-government sector via their fiscal deficits.

But, no, they wanted us to believe it is “a lot of money” as a warning.

And then, we read:

While government debt can pose problems, it is not quite the same as personal debt and can often serve a purpose.

And the wheels have fallen off well and truly by this time.

They might have actually dared to articulate what “problems” government debt can pose rather than just assert it.

I presume they might have tried to rehearse the tedious conservative claim is that the sovereign issuer of currency is at risk of default if the public debt ratio rises above some threshold (often construed as 80 per cent).

But, the reality is clear, as long as the government only issues debt in its own currency and provides no assurances about convertibility into another currency, the default risk is zero. They might for political reasons decide not to pay up but that is a different matter altogether and highly unlikely.

And in their attempt to be ‘cute’ (“not quite the same”) the ABC journalists lie. Australian government debt (which carries no credit risk) is nothing like personal debt which carries credit risk.

And we know that government debt is non-government wealth whereas private debt reduces private wealth.

Further, while private debt allows the non-government sector to spend more than it earns for a time, public debt levels gives the government no extra spending capacity.

This brings us to the other side of spending more than one earns – saving.

We know that a currency-issuing government does not save in its own currency. Such a notion is nonsensical.

Fiscal surpluses do not represent ‘public saving’, which can be used to fund future public expenditure.

Saving is an act of foregoing current spending to enhance future spending possibilities and applies to a financially constrained non-government entity, such as a household.

Fiscal surpluses provide no greater capacity to governments to meet future needs, nor do fiscal deficits erode that capacity.

The constraints on government spending are not financial but are defined by the availability of real resources that are available for sale in the currency that the government issues.

The ABC journalists continue the downhill slide:

Governments take on debt by issuing bonds to investors who are paid a return, with ratings agencies allotting a credit rating to government debt. A high credit rating, such as the one Australia has, allows governments to borrow at very low rates, with investors trading profit for security.

Tell that to Japan who in the early 2000s had its credit rating downgraded to around junk and yields didn’t blip.

Ratings agencies are irrelevant. Investors know that debt from a currency-issuing government is risk free. And the government can always control yields on its debt at any maturity if it chooses.

Later, ABC journalists have an entry for “Structural deficit” and the readers are informed:

… structural deficit refers to a situation where the current tax structures of a country will fail to cover the expenses under normal economic conditions.

Or should I say ‘disinformed’.

A structural deficit has a very clear meaning – it is the fiscal position that would arise given the current policy parameters (tax and spending) if the economy was at full employment.

Full capacity or full employment is not the same thing as “normal economic conditions”.

You can see how language slips and concepts are lost.

In fact, the concept ‘structural balance’ was previously referred to as the ‘Full Employment or High Employment Budget’ balance.

The change in nomenclature is very telling because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation.

So a ‘Full employment Budget’ would be balanced if total outlays and total revenue were equal when the economy was operating at total capacity. If the fiscal balance was in surplus at full capacity, then we would conclude that the discretionary structure of fiscal policy was contractionary and vice versa if the fiscal balance was in deficit at full capacity.

This is nothing like “under normal conditions”.

Further the use of the term “fail to cover” is ideologically loaded.

Finally, then ABC journalists claim that:

Governments commonly run deficits in times of economic downturn as a means of insulating the economy and ensuring services are not impacted, with the understanding that surpluses during peak times will help pay down the debt incurred by going into deficit.

The history of Australia (since data was available) and other nations shows they, as a matter of norm, run fiscal deficits.

Fiscal surpluses have been very rare events in our history – abnormal – and have corresponded with rising non-government sector indebtedness and recession soon after.

To offer a history where governments actually oscillate between deficits and surpluses over a cycle is a revisionist exercise. They do not even though they talk about doing that.

Modern Monetary Theory. On the path to MMT becoming mainstream – Bill Mitchell.

Over the last few years, it is clear that Modern Monetary Theory (MMT) is achieving a higher profile and the attacks are starting to come thick and fast. I see these attacks as being a positive development because it demonstrates that recognition has been achieved and a threat to mainstream ideas is now perceived by those who desire to hang on to the status quo.

Hostility and attack is a stage in the process of a new set of ideas becoming accepted, ultimately. Clearly, some new interventions never receive acceptance because they are proven to be flawed in one way or another. But I doubt the body of work that is now known as MMT will be discarded quite so easily given my assessment that it is coherent, logically consistent and grounded in a strong evidence base.

As part of this evolution there are now lots of what I call ‘sort of’ contributions coming from mainstream commentators. One of the ways in which mainstreamers save face is to claim they ‘knew it all along’ and that the existing body of practice can easily accommodate what might be considered ‘nuances’ or ‘special cases’. We are seeing that more now, with the more progressive mainstream economists claiming there is nothing ‘new’ about MMT, that it is just what they knew anyway.

Even though that approach is disingenuous it is part of the evolution towards acceptance. People have positions to protect. These ‘sort of’ contributions demonstrate a sort of half-way mentality, a growing awareness of MMT but with a deep resistance to its implications. A good example is the UK Guardian’s editorial (April 15, 2018) The Guardian view on QE: the economy needs more than a magic money tree.

As a little historical aside about stages in acceptance of new ‘things’ (ideas), at the Third Biennial Convention of the Amalgamated Clothing Workers of America in 1919, held in Baltimore, Nicholas Klein, a delegate from Cincinnati was given the floor to “say some few words of encouragement to the Schloss Brothers strikers of Baltimore, who had been on “strike for five consecutive weeks”.

He spoke to the delegates about the strength of worker organisation and the importance of the Union.

His contribution is recorded in the Proceedings of the Third Biennial Convention of the Amalgamated Clothing Workers of America (Baltimore, Maryland, May 13-18, 1919).

To illustrate his point, he finished with a excellent example of how social perceptions and opinions change when new ideas emerge that challenge the cognitive dissonance of the mainstream.

Here is what he said:

“I close by telling you the story, because I think it explains better than anything else, at this time, the great possibilities which can come to labor. There is a story told about the making of the first railway. There was an old man, it is said, whose name was Stevenson, who made the first locomotive. You know, just like in the labor movement they said locomotives were impossible. You had to have horses or cattle to pull a train; that nothing would go without something being attached to it. There would be no locomotion.

And when old man Stevenson proposed a train something to be run without the aid of horses or oxen, he was ridiculed. One day a test was made, and they laid two pieces of wood and upon these two pieces of wood they placed some thin sheets of metal, and upon that crude arrangement was placed the first locomotive.

And it is said in the story that thousands of people were out to see the first test of that locomotive, and of course the people all shouted, and pointed to their heads, and said the man was crazy, and they said the locomotive was out of the question; it was impossible, and the crowd yelled out: “you old foggy fool! You can’t do it! You can’t do it” and the same everywhere. The old man was in the cab, and somebody fired a pistol and the signal was given. He pulled the throttle open and the engine shot out, and in their amazement the crowd, not knowing how to answer to that argument, yelled out: you old fool! You can’t stop it! You can’t stop it! You can’t stop it!” (Applause)

And my friends, in this story you have a history of this entire movement. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to. And that is what is going to happen to the Amalgamated Clothing Workers of America.”

Relatedly, the idea of locomotives replacing horses was the subject of vigorous debate in the coal mining districts of Britain in the early part of the C19th.

This historical account from a book published in 1857 by Samuel Smiles The Life of George Stephenson and of his son Robert Stephenson (Harper Brothers, New York) is interesting.

In Chapter VII George Stephenson’s Farther Improvement in the Locomotive Robert Stephenson as Viewer’s Apprentice and Student, Smiles discusses the resistance in local communities to George Stephenson’s locomotives.

We read that:

The voice of the press as well as of the public was decidedly against the “new-fangled roads.” [the idea that] steam-carriages were to supersede the use of horses entirely, and travel at a rate almost equal to the speed of the fleetest horse!” was too chimerical to be entertained, and the suggested railway was accordingly rejected as impracticable.

The “Tyne Mercury” was equally decided against railways. “What person,” asked the editor (November 16th, 1824), “would ever think of paying any thing to be conveyed from Hexham to Newcastle in something like a coal-wagon, upon a dreary wagon-way, and to be dragged for the greater part of the distance by a ROARING STEAM-ENGINE!” The very notion of such a thing was preposterous, ridiculous, and utterly absurd.

It is almost comical to read these historical accounts now.

But Groupthink, vested interests and all the related sources of resistance has been a powerful force holding back the acceptance of new ideas that are superior to the old.

The media has long been an important vehicle in giving voice to these vested interests.

Which brings me to the Guardian Editorial cited in the Introduction.

The UK Guardian maintains the myth that:

Quantitative easing succeeded in staving off disaster. I will come back to that.

Their latest tack is that Brexit will open up new possibilities for Britain once it escapes the provisions of the Lisbon Treaty that ban central bank bailouts. The Editor notes that Jeremy Corbyn’s early suggestion (2015) for a ‘Peoples’ QE’ was forbidden under EU membership but would become possible once Britain leaves the EU.

They don’t endorse Brexit but just “observe that the quiver of the argument against printing money might lose an arrow or two if we leave the EU”.

The Editor observes, however, that Lisbon Treaty notwithstanding:

In fact, the Bank of England, while the UK was in the EU, did print hundreds of billions of pounds to avoid economic disaster. At the push of a button, the Bank conjured up £435bn to buy up gilts government bonds and exchange them for bank deposits. On the national balance sheet this sum is listed as debt, but it is not in the strictest sense because it is not owed to anyone. Turns out there is a magic money tree.

Well, in fact, that is not a factual statement.

Even a simple excursion to the Bank of England demonstrates the propaganda element in the Guardian’s claim.

The Bank states clearly:

The Bank of England can purchase assets to stimulate the economy. This is known as quantitative easing. Quantitative easing does not involve literally printing more money. Instead, we create new money digitally. Quantitative easing is when a central bank like the Bank of England creates new money electronically to make large purchases of assets. We make these purchases from the private sector. The market for government bonds is large, so we can buy large quantities of them fairly quickly.

The purchases are of such a scale that they push up the price of assets, lowering the yields (the return) on them. This encourages those selling these assets to us to use the money they received from the sale to buy assets with a higher yield instead, like company shares and bonds.

As more of these other assets are bought, their prices rise because of the increased demand. This pushes down on yields in general. The companies that have issued these bonds or shares benefit from cheaper borrowing because of these lower yields, encouraging them to spend and invest more.

No printing presses involved. And no direct spending effect. Whether it was successful “in staving off disaster” as the Guardian claims is another matter. The data suggests otherwise.

The recovery really didn’t come until George Osborne curtailed his obsessive austerity pursuit and allowed the deficit to grow in 2012.

If QE had have done anything significant for the real economy, then we would have expected business investment to have picked up. It didn’t do anything remarkable between 2010 and 2017. In historical terms the Business Investment ratio was around 12.6 per cent in 1998. it is now at 9.3 per cent and showing no signs of returning to the previous higher levels.

And the Guardian even recognises why, even though it wanted readers to believe that QE had done a remarkable job of saving the UK from permanent recession.

We read:

Having sold their gilts back to the Bank, investors bought up company stocks and bonds or property sending prices to record highs instead of creating new activity in the real economy, higher growth and jobs The result was that the injection of money caused a stock-market boom in the financial economy, but on the real economy the target of the policy it had little effect.

Which makes one wonder about the editorial process at the Guardian, particularly when it comes to the so-called Editorial Comment, given the sub-title of the Editorial was that QE “succeeded in staving off disaster”.

No it didn’t. it did very little in fact. It certainly bestowed massive capital gains on holders of the financial assets that the Bank of England purchased and, in that sense, increased inequality, given the skewed nature of ownership of those assets.

But in terms of the real economy as the Guardian concedes, “it had little effect”.

Which then brings the Editorial to the ‘sort of’ MMT narrative.

1. “Government spending, however it is financed, needs to be the main agent of recovery” that is, fiscal policy should be the primary macroeconomic policy tool to ensure the economy maintains growth and avoids recessions.

The ‘sort of’ tag relates here to the “however it is financed” qualifier. This is mainstream resistance to the reality constraining the full exposition of what the UK government can actually do, and which was hinted at in the opening paragraph of this Editorial (when it recognised that governments can simply spend its own currency without ‘financing’).

The Editorial notes that an effective use of fiscal policy was resisted because government “ministers were ideologically resistant to” deploying it.

The Guardian then suggests what Jeremy Corbyn should do if it wanted to be imaginative:

Its plans could have seen the central bank instructed to hand over funds to a state body so it could buy services and goods without issuing debt.

The MMT solution.

Run deficits to advance well-being and only reign them in with higher taxation if the economy hits full capacity and is in danger of accelerating inflation.

The Editor sees “two objections to this” proposal:

One is the Bank would have to pay interest on excess reserves, which would inevitably build up; or let its target rate fall to zero. Both occur today and are managed. The second is hyperinflation. Yet all spending, government or private carries an inflation risk.

Pure MMT being espoused there.

Note the language being used “all spending government or private carries an inflation risk”.

If you do a string search of my writing you will find those exact words. Pure MMT. Mainstream macroeconomists never make that essential point when talking about fiscal deficits.

They leave the readers with the impression that government deficit spending is a special category of inflation risk. It is not and the Guardian editor clearly understands that.

And in relation to the inflation risk, we get some more pure MMT from the Guardian editor:

A future chancellor could commit to using fiscal policy to make sure nominal spending keeps pace with the real capacity of the economy to produce goods and services and withdraw the stimulus if annualised GDP growth exceeded [that capacity].

Again, if you do a string search of my writing you will find those exact words.

This is not the way a mainstream macroeconomists talks or writes.

This way of constructing the inflation problem is pure MMT.

And in conclusion, the Guardian recognises that the UK growth is languishing and in that vein:

The lack of demand in the economy needs urgent attention. Enlarging the economy may need bigger thoughts than politicians have so far entertained.

Exactly, what the MMT economists, such as yours truly, have been saying for years now, as advanced economies have been languishing in a state of excess capacity and elevated levels of unemployment.

The point is that now we have mainstream editorials using MMT language and constructs, which I think is progress.

There remains resistance for sure. But think about that speech made in 1918 to the delegates at the Third Biennial Convention of the Amalgamated Clothing Workers of America.

The arguments and criticisms are coming up with different points now.

We are debating inflation rather than insolvency.

We are recognising the central bank can control yields and only considering the impacts of that.

You won’t find those sorts of insights in a mainstream macroeconomics textbook yet, but time is ticking. Our next textbook is due out in November 2018 and I hope it will eventually form part of the mainstream teaching curriculum in world universities.

Part of the ongoing resistance to MMT ideas is the rather odd claim that the population are not capable of absorbing its implications without engaging in destructive behaviour.

This came up again from our German friends at Makroskop who appear intent on just repeating the same assertions about the political impractability of basing policy on the principles of MMT over and over again.

Most recently (April 16, 2018), Martin Hopner published a further entreaty Die Debatte um MMT: Eine Nachlese.

Martin Hopner thinks that there is a case for keeping the public in the dark about what the government can and cannot do with respect to its currency, maintain the lie that it can run out of money and that spending is funded by taxes because the citizens would not be able to handle it if they knew the truth.

They would go crazy and overspend or something and chaos would follow.

I don’t think this view is grounded in an understanding of human psychology.

The most recent article reasserted his view that (translating from German and summarising Quotes are my translations. But I am mostly paraphrasing the argument):

1. Humans are not robots. Good start although some days I feel like one.

2. Given that MMT exposes the truth about government spending capacity and its technical limitations (real rather than financial resource constraints), the “state could do more than it pretends to do” in the advanced world.

In other words, governments lie to people about running out of money and claim elevated levels of unemployment are inevitable because they cannot create jobs without risking insolvency.

3. If governments use their flat-currency capacity for example “state financing via the central bank or helicopter money” and avoid accessing “capital markets” then this would rely on “the behaviour of citizens” (spending, saving, etc) being consistent with a “stable, inflation-free growth path”.

Yes, true.

And MMT advocates strengthening the automatic stabilisers which are ‘private market’ driven to allow fiscal policy to be highly responsive to changes in non-government spending and saving behaviour.

Elaborate forecasting is not required to know that there are people queuing up in the morning at a Job Guarantee agency wanting to register for a guaranteed job.

The government immediately knows its current degree of expansion is insufficient.

And vice versa, when the Job Guarantee pool is draining. The speed of that drain and the spatial distribution quickly informs government about shifts in non-government activity.

Almost on a minute-by-minute basis given our IT systems these days.

4. But Martin Hopner doesn’t think this will work because were are not robots. And his problem is that we are susceptible to confusion, scares and our “real life experiences of the functioning of the economy and thus of the money” are mainstream.

The public have no experience with the ideas espoused by MMT.

5. Which means that the idea that the state is still being responsible by “printing money” (there it is again) and spending without borrowing “is incompatible with everyday experience”.

Which means?

That Martin Hopner asserts that MMT is a “highly simplified, presociological (and therefore not ‘modern’) theory of action because we, allegedly, suppose that such radical departures can be introduced without the unintended effects on the citizens”.

And what are those “unintended effects”?

Well he “does not pretend to be able to predict in detail the effects” although he thinks people will lose confidence in the currency.

This is a repeating argument

He just asserts, again that:

Inflation would inevitably have to break out once the myth that governemnt spending was not revenue constrained.


Presumably, because either the government would overspend or the citizens would stop saving (having lost confidence in the currency) and went on a spending spree.

Martin Hopner thinks both would happen.

He also thinks that the MMT notion that governments do not need to fund its spending is “practically unable to be eradicated because it is a perfect fIt of our everyday experiences”.

And so it is easy for politicians to use the ‘household budget analogy’ to gain political traction over its rivals.

So there is nothing new there.

We are basically stupid, habit-driven, and unable to be educated beyond our primitive daily experience of having to go out to work to get money in order to spend. We think the government is the same and if it says it is not then we go crazy and chaos results.

I disagree with all of that.

Humans have a great capacity to learn and be educated into adopting highly sophisticated understandings.

The media is highly influential. So how many people who read that Guardian editorial would go away and resist its simple (proMMT) narrative?

Not many.

And in the last several years, the public has been confronted with major challenges from very senior monetary officials.

Remember, former US Federal Reserve Bank Governor Alan Greenspan’s famous admission on NBC’s Meet the Press (August 7, 2011) relating to a potential US debt downgrade:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Then the next governor, Ben Bernanke, a more modern man altogether because he knows the process doesn’t involve a printing press, was asked by the US 60 Minutes program by Scott Pelley (December 3, 2010) about OE and the growing fear that it would unleash an inflationary spiral.

The transcript included this Q&A (Source):

Pelley: Many people believe that could be highly inflationary. That it’s a dangerous thing to try.

Bernanke: Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that‘s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that‘s what we’re gonna do.

Okay, no printing presses. QE lowers interest rates only.

Lower interest rates may or may not stimulate spending depending on a host of other things including the state of confidence, unemployment dynamics etc.

We also might recall an earlier interview between Scott Pelley and Ben Bernanke on the US 60 Minutes program (March 12, 2009) Ben Bernanke’s Greatest Challenge.

The interview is largely a litany of mainstream statements but at one point Bernanke provided a very clear statement about how governments that issue their own currency actually spend.

At around the 8 minute mark of the segment, Bernanke starts talking about how the Federal Reserve Bank (the US central bank) conducts its ‘operations’ (in this case, how it conducts government spending).

Interviewer Pelley asks Bernanke (Source):

Is that tax money that the Fed is spending?

Bernanke replied, reflecting a good understanding of what we call central bank operations (the way the Federal Reserve interacts with the member banks):

It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.

That is, the US government spends by creating money out of ‘thin air’.

And we have now lived through nearly a decade of major shifts in government policy.

Large deficits to stimulate growth – working.

Massive expansions of central bank balance sheets (QE) in the UK, Japan, Europe, the US all accompanied by the sort of claims that Martin Hopner is making (although he does it more politely) that hyperinflation would result and currencies would be trashed.

We have observed none of those things happening.

And has our behaviour changed dramatically? Not in any unpredictable (broadly) ways.

When unemployment started rising we increased our saving ratios as you would expect.

When the fiscal stimulii started to work we loosened our spending again but modestly.

Investment has been slow to pick up because it is asymmetric due to the irreversibility of capital formation. All as expected.

Borrowing didn’t go through the roof at zero interest rates. Why not? Because credit worthy borrowers were cautious in the milieu of high unemployment and previous credit binges.

And, of course, the Japanese have been going through this process for a quarter of a century. They have seen credit rating agencies embarrassed as they downgrade Japanese government debt to junk status only for the public to observe nothing of consequence follows.

They have seen on-going deficits, low to zero interest rates, low inflation (bordering at times on disinflation), high gross public debt levels.

I haven’t seen major behavioural shifts in the economic behaviour of Japanese residents.

In fact, as I noted in my three-part response to Martin Hopner, destructive non-government behaviour accompanied the intensification of the myth narrative about fiscal deficits and the promotion of fiscal surpluses.

We had credit binges, criminal behaviour by our financial sector, and then crisis.


The UK Guardian Editorial is a sign of progress. One small step as they say.

But for years we were ignored “you old foggy fool! You can’t do it! You can’t do it”.

Then we were ridiculed “you old fool! You can’t stop it! You can’t stop it! You can’t stop it!”

And whenever. we might become mainstream.


It was Charles Dickens’ Mr Micawber who famously defined the principles of successful economic management, when he said “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Most people, with experience of running their own household accounts, will nod in agreement. But while Mr Micawber no doubt got it right for individuals and households, he may not have been so percipient when it comes to public finances. A government’s role in managing the country’s economy is very different from running your own affairs.

We have had until recently a government whose most important goal was, it seems, to run a “surplus”, and most people would no doubt again agree that a surplus has to be preferable to a deficit. But, as we are beginning to find out, a surplus is not all unalloyed benefit.

The surplus we are talking about, first of all, is not the country’s surplus (that is quite a different matter, the country has been in deficit from one year to the next over a long period) but the government’s, and whether there is a surplus or a deficit in the government’s finances will impact rather differently from what one may expect on the lives of most citizens.

If the government is in surplus, it is really just another way of saying that it takes more from us in taxation than it spends on public services it takes spending power away from us, in other words, but doesn’t make good the loss the economy as a whole by increasing its own spending to compensate.

The result from the viewpoint of the economy rather than the government is not necessarily benign, we are likely to have a smaller economy and a lower level of economic activity than would otherwise be the case.

There is also, of course, a potential downside if the government runs a deficit. It will then in all likelihood have to borrow in order to finance the shortfall, and that will come at a cost, assuming that someone can be found who is willing to lend though this will not normally be a problem since lenders like lending to governments (often at low rates) because their credit is good. Borrowing so often frowned upon is a perfectly sensible policy option if the outcome is a more vibrant economy and it is even more sensible if the borrowing is for capital rather than current expenditure, something many of us are familiar with when we borrow on mortgage to buy a house.

So, we might conclude that elevating the achievement of a government surplus so that it is the government’s primary goal may not have quite so much going for it as we might have thought, and we haven’t even begun to look at the other side of the equation, which is the price we pay when the government does not spend the money it takes in.

The government’s accounts, in other words, are laid out like any other accounts. There are two columns Mr Micawber’s income and expenditure. It follows that a surplus can be achieved either by taxing more than is needed or by spending less than is needed.

The problem for a government that seeks to achieve a surplus by cutting pubic spending is that there is a cost to such cuts, as we are beginning to find out. Right across the board from health care (rotting hospital buildings and all) through to underfunded schools and underpaid public servants such as nurses the country is worse off and less able to function efficiently.

A properly run economy will need both the public and private sectors working together in unison each accepting the responsibility that is properly theirs.

A surplus might please the ideologues and be seen as the badge of good government, but even Mr Micawber might see that we will all be better off if we use all our resources whether in public or private hands to the best effect.

A surplus is of little use as figures in a balance sheet if the price we pay is that essential services are run down.

Bryan Gould

Soddy, Fuller And Modern Monetary Theory – Dave Svetlik * How Fiat Money Works – Chris Mayer * Wealth, Virtual Wealth and Debt – Frederick Soddy, M.A., F.R.S.

Dave Svetlik.

Born in the late 1800’s, Frederick Soddy and R. Buckminster Fuller led extraordinary lives. Soddy won the Nobel Prize in chemistry in 1921 and Fuller became known for his work in architecture, the geodesic dome, and visionary thinking. Sodd was a British citizen, Fuller an American. Both were deeply rooted in science and the laws of physics, and both spent the latter half of their life trying to apply their knowledge of physical reality to making the world work for everyone.

Inevitably their quest led them to the field of economics and the study of monetary systems. Remarkably, though they never worked together, both men reached a similar conclusion:

Money and economics were largely disconnected from physical reality and productive capability. The result was the unnecessary impoverishment of much of humanity.

Soddy and Fuller were both impacted by World War I. As a British scientist, Soddy saw the devastation caused across Europe by the first war to fully employ scientific knowledge in the act of destroying others. Fuller served as a rescue boat commander in the US. Navy.

Both men were struck by how nations could seemingly never afford to do any of the tasks necessary to improve the living conditions of people before or after a war, but could always afford whatever it took to go to war.

As Fuller stated in his books Operating Manual for Spaceship Earth (1963), and Critical Path (1981), whenever the financil power structure controlling a nation’s politicians feels its interests threatened:

“…vast new magnitudes of wealth come mysteriously into effective operation. We don’t seem to be able to afford to do peacefully the logical things we say we ought to be doing to forestall warring by producing enough to satisfy all the world needs. Under pressure we always find that we can afford to wage the wars.”

Soddy wrote in a similar vein referring to World War I in his book Wealth, Virtual Wealth and Debt (1926):

“Then, for the first time in history, we saw science used without artificial financial restrictions for the purposes of destruction. A degree of liberality and unity of purpose prevailed which is never lavished upon the less spectacular but more necessary task of construction. Year after year the industrialized nations produced an ever-mounting tide of munitions of war, There seemed no physical limit to the extent which a nation, shaken out of its preconceived habits of economic thought by the imminent peril at its doors, could turn out the material necessities for its existence.

Whereas now [post war] we have returned to peace and squalor, to idle factories and farms reverting to grass, we are back as a nation to the pre-war conditions with a million and a quarter workers unemployed, unable to feed and clothe ourselves adequately on a military standard, and unable even to build houses in which to live under existing economic conditions. Yet we have the same wealth of natural resources, the same science and inventiveness, with much more favorable conditions for production and an army of unused man-power being demoralized by enforced idleness! A nation dowered with every necessary requisite for an abundant life is too poor to distribute its own wealth, and is idle and deteriorates not because it does not need it but because it cannot buy it.”

The contemporary version of this incongruity is called austerity. Nation after nation is being told by its politicians that it cannot afford to do anything to help its people. “There is no money to buy it and people must tighten their belts.” Yet all of these nations have abundant physical and human resources waiting to be used and all of these nations mysteriously find whatever money it takes to fight the so-called “war on terrorism.” It is an unnecessary, artificially created state of poverty imposed in the midst of plenty.

Though they did not define it in current terminology, Soddy and Fuller had obviously been thinking in the realm of Modern Monetary Theory (MMT). They understood that food, clothing, a furnished house, a car and a lawnmower were wealth. Money was simply the claim to wealth, a medium of exchange accepted as valid by a society. It had no value in and of itself. But the manipulation of money exerted great power over the availability of wealth and who had legal claim to ownership.

Having witnessed the enormous productive capability that mysteriously became available during times of war, Soddy and Fuller were fully aware that production of wealth was almost limitless and subject only to the current state of scientific/technical knowhow. In his 1926 writings in Wealth, Virtual Wealth and Debt, Soddy concludes:

“There is no longer any valid physical justification for the continuance of poverty. The phenomenon of unemployment and destitution at one and the same time today is solely due to ignorance of the nature of wealth and the principles of economics.”

Scarcity in peacetime was the result of faulty economic thinking and manipulation of the money supply by the financial power structure. Nations were said to be in debt. They had spent too much money waging war and now there was no money left. People needed to “sacrifice.” The productive capability available during the war was forced into idleness. In Soddy’s words:

“The popular notion that because a nation has in the past generation produced it is unable to do so in the next, that God and usury provide so much and no more, and if we consume much one year we must make up for it in the future, is the inversion of the truth. It contains just enough of the truth as it applies to individuals that wealth is a real quantity, incapable of spontaneous generation and multiplication to be plausible; but in national terms it is as fallacious as abstaining from drinking from a river because last year was hot and everyone drank so much.”

Being scientist/technologists, Fuller and Soddy felt the need to define wealth, to quantify it in an equation. They knew the components of wealth were physical resources, matter and energy and the level of knowledge available to most effectively employ these resources. Simplistically stated:


Energy stored in fossil fuels Earth’s energy savings account is, of course, unavailable after the fuels are burned. But both Fuller and Soddy understood that expanding human knowledge would eventually make it possible for humanity to operate on Earth’s energy income using solar, wind, tidal, biofuels, etc. (but for lack of political will and resistance from the fossil fuel industry, we have reached this potential today).

Additionally, the First Law of Thermodynamics says the total amount of matter and energy in the universe is constant and can be neither created nor destroyed, only interchanged. Since knowledge can only grow, wealth can only grow.

It is critical to understand that wealth is governed by the laws of physics and is incorruptible, whereas money is governed by the laws of man and is infinitely corruptible.

It is also important to note that wealth can be applied productively by enhancing the human condition, or counterproductively by harming the human condition.

An example of the counterproductive is weaponry. War is ultimately about who can claim ownership of productive wealth artificially limited by misguided monetary policy. Wealth wasted counterproductively by waging war further reduces available productive wealth and the result is a downward spiral.

However, we can choose an upward spiral. By aligning our man-made economic thinking with physical reality, we can lay the path to ongoing human success. This is the promise of Modern Monetary Theory.

Modern Monetary Theory (MMT): How Fiat Money Works – Chris Mayer.

There are plenty of theories out there that seek to explain the intricacies of money and its role within the economy. The problem is, ”money” today looks an awful lot different than it did several years ago. That’s why, for the last year or so, Chris Mayer has been extolling the virtues of the Modern Monetary Theory (MMT).

Warren Mosler tells a good story that shows how our economy works at its most basic level.

Imagine parents create coupons they use to pay their kids for doing chores around the house. They “tax” the kids 10 coupons per week. If the kids don’t have 10 coupons, the parents punish them. “This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties,” Mosler writes.

So now our household has its own currency. This is much like the US. government, which issues dollars, a fiat currency. (Meaning Uncle Sam doesn’t have to give you something else for it. Say, like a certain weight in gold.) If you think through this simple analogy, all kinds of interesting insights emerge.

For example, do the parents have to get coupons from their kids before they can pay them to do any chores? Obviously not. In fact, the parents have to spend their coupons first by paying their children to do chores before they can collect the tax. “How else can the children get the coupons they owe to the parents?” Mosler writes.

“Likewise,” he continues, “in the real economy, the federal government, just like this household with its own coupons, doesn’t have to get the dollars it spends from taxing or borrowing or anywhere else to be able to spend them.”

The government creates dollars. It doesn’t even have to print them. The vast majority of spending is simply done by adding electronic dollars to bank accounts. Therefore, the U.S. government can’t go bankrupt. It pays all its bills in U.S. dollars, of which it is the sole issuer.

the state is… at best, bumbling and incompetent and wasteful. At worst, it is an evil force on society.

This sounds really obvious, but it is amazing how many people even very smart people forget this simple fact. They get hysterical about the fiscal deficit or the national debt. (This is not to say there aren’t bad consequences from issuing too many coupons, or from government spending in general.) The only way the U.S. government can default is if it chooses to do so.

Going back to Mosler’s example, let’s ask another question: How can the kids “save” coupons in excess of the weekly tax? Well, they can only do that if the parents spend more than they tax. There is no other way to hoard coupons. In the real economy, the same is true. The private sector can save dollars only if the government spends more than it taxes. Spending pours fiat money into an economy; tax payments drain it away.

Another question: Do the parents have fewer coupons if they spend more than they tax?

No. The parents make the coupons. They don’t even need physical coupons. They can simply track them on a piece of paper or in a spreadsheet. Likewise, the US. government doesn’t have any fewer dollars after running deficits. It can’t run out. (There are real-world restraints on how much government spends.) To borrow from another Mosler analogy:

The US. government can no more run out of dollars than a scorekeeper can run out of points.

You don’t have to like this. (I don’t.) It’s merely a description of how a fiat currency system works. That’s the world we live in. Too many people tackle economic questions ideologically. I can be as guilty of this as anyone. My own view of the state is that it is, at best, bumbling and incompetent and wasteful. At worst, it is an evil force on society. (My sympathies lie with those old American radicals, such as Lysander Spooner [1808-87]. If you don’t know who he is, look him up. He was a great American. I have his six-volume collected works here on my bookshelf.)

Nonetheless, after much reading and thought, I agree with Mosler: The state’s ability to enforce tax liabilities, fines and fees drives the demand for money. Or as Mosler says, “Taxes drive money.” This is a view of money called “chartalism” and it is one I subscribe to. It has been around a long time. And it forms one of the building blocks of a school of thought Mosler helped to found, called Modern Monetary Theory (MMT).

It’s hard to talk about MMT with people, because they are often quick to draw hasty cartoonish conclusions about what MMT is or represents. (I have to admit, I choked on MMT a bit at first, too.) Over the last several months, I’ve read a handful of books and perhaps a dozen academic papers on MMT. So I believe I can speak by the card.

On one level, MMT is simply a description of how a fiat currency system works. On another level, there are policy prescriptions that flow from this understanding. My only advice on the latter is this: Don’t let your politics deter you from making sense of MMT. (MMT itself is politically agnostic.)

I’d recommend both of Mosler’s books. Start with The 7 Deadly Innocent Frauds of Economic Policy. It’s a short book, just over 100 pages and written in plain English. Mosler has a gift for making complex things simpler. If you try to think through the issues in an honest way, you’ll come away with some “Ah-a!” moments.

Then you can move on to Soft Currency Economics. Believe me, these books will challenge your long-held Views on money. (Always a good thing, in my mind. What’s the point of only reading things you know you’ll agree with? Challenge yourself… or ossify.) If you want more, pick up Randall Wray’s primer Modern Money Theory.

Mosler himself is an interesting character. Unlike most economists, he is no armchair theorist. Mosler made a lot of money in markets. And in markets, you get paid to be right, which is where all too many economists fail.

For an investor, macroeconomics has limited uses most of the time. Mosler’s career shows this can be otherwise.

Warren Mosler is, like me, a former banker. He began his career in banking in 1973, working to collect on bad loans. After a year of that, he became a lender. And I can tell you: This is great training for an investor. As Mosler recounts, he had ongoing discussions with his boss about the “logic of banking” and the “theory of lending.” As every lender learns, you want to make loans where the odds are heavily in your favor so that profits easily make up for small (but expected) losses. Investing is not much different.

Anyway, Mosler was a good banker with a head for the odds and the payoffs. Eventually, he would move on to manage the bank’s $10 million investment portfolio. He came up with a bunch of good, if unconventional, ideas. He made the bank a lot of money pursuing no-risk trades. Mosler had a knack for smoking out mispricing in the market for things like bonds and CDs.

He went on to join the Wall Street broker Bache & C0, followed by Bankers Trust and then the investment-banking firm of William Blair & Co. in Chicago. (In his books, he recounts his adventures at these places.) He made each firm a bunch of money with his “free lunch” trades, just as he did in his banking days.

In 1982, he co-founded his own fund, Illinois Income Investors. Over the next 15 years, III would rack up a remarkable record with only one losing month and that was a 0.1% loss due to a timing issue that reversed the next month. Managed Account Reports ranked 111 No. 1 in the world through 1997, when Mosler left the firm.

One great story Mosler tells in both books is how he cleaned up on another free lunch in lira-denominated bonds in the early ’90s. This was before the euro and back when there was worry over a default by Italy’s government. Italy’s national debt was 110% of GDP and interest rates were high on its bonds

But Mosler knew that it was the sole issuer of lira. Italy could not default unless it wanted to. Mosler actually met with senior officials in Rome to let them in on the “secret.” Long story short, Italy didn’t default. Mosler’s fund made over $100 million.

For an investor, macroeconomics has limited uses most of the time. Mosler’s career shows this can be otherwise. But then again, you have to study economics that actually describe the real world. And Mosler’s economics, or MMT, does that rather well.

Modern Money Theory: Deadly Innocent Fraud #1. Government Must Tax To Spend. – Warren Mosler

Wealth, Virtual Wealth and Debt (1933) – Frederick Soddy, M.A., F.R.S.

Dr. Lee’s Professor of Chemistry in the University of Oxford; Nobel Prize Winner in Chemistry, 1921


“That which seems to be wealth may in verity be only the gilded index of far-reaching ruin; a wrecker’s handful of coin gleaned from the beach to which he has beguiled an argosy; a camp-follower’s bundle of rags unwrapped from the breasts of goodly soldiers dead; the purchase-pieces of potter’s fields, wherein shall be buried together the citizen and the stranger.”

JOHN RUSKIN, Unto this Last, 1862.

Science the World Ferment.

What has gone wrong with the world? In the throes of the Great War, many discovered for the first time that they were living in a scientific civilisation, and even scientific men themselves realised the difference between the leaven of theory and its practical aspect in a world boiling in ferment. Science then almost emerged from its esoteric seclusion to become a cult at least, something worth cultivating, for professional ends. So indispensible in wartime, it seemed curiously insignificant among the public services in time of peace. Fortunately for science the danger passed. There are scientific professions, many of them, but science is not a profession. It is a quest. What has gone wrong in the world? Let us follow the quest.

The time is opportune. Much of what has been attributed to our inevitable destiny, superiority of character, unquenchable spirit, invincibility of purpose, and other human qualities, takes on a new valuation with the discovery that we are living in a scientific era. As much might be said of the virtues attributed to democracy and free political institutions; or again, of the capitalist system in its pride, of an Empire on which the sun never sets and of the phenomena of class hatred and slums on which the sun never rises. Science has changed the nature of our economic life, and older systems based on a different mode of living are, on all hands, admitted to be working most dangerously if, indeed, they have not already become impossible.

They remain only because there is nothing constructive to replace them, and are conventionally defended for fear of anarchy and chaos following their open repudiation. Everything in the world now is so delicate, which is merely another way of saying that nobody seems to have any real understanding of how the economic system works at all or why it works so dangerously, that the policy of all parties seems to be rather to bear the ills we have than to fly to others which we know not of. The people in this respect have frankly given up real hope that Governments, of whatever complexion, will find any solution even for any of the immediate practical problems of the day, and it is a period of marking time.

The Great War itself is seen to be not a separate historical event but more and more as an inevitable consequence of the same ultimate cause. The sudden rise of the Western world to a position of dominating material greatness and power, the dangerous and manifold insoluble social problems that accompanied it, and now threaten our times, and the phenomenon of modern worldshattering war on the scale we have just survived, are all now more generally seen to be due primarily to the changes introduced into the economics of life by the discoveries of a handful of scientific pioneers in possession of a new and fruitful method of gaining natural knowledge, and to the failure of the older humane sciences to cope with the new situation.

On the one hand, a larger class than ever before have attained to a higher standard of life, greater leisure and opportunity for culture, carrying along with them hosts of servants and dependents, who minister to their comforts and luxuries and share, to some extent, their prosperity. But the workers in the more fundamental and essential industries, such as agriculture, mining and manufactures, have been cheapened by competition with rather than benefited by machinery, and, worse, are deprived by it in increasing numbers of their customary livelihood.

For the propertyless masses, if there has been any improvement whatever in the average standard of life, it is so small as to be doubtful and in comparison with the general progress of wealth production contemptible. The lot of the masses has certainly become more strenuous and insecure, being now never free from the spectre of unemployment and consequent submersion into destitution and degradation. So that, at the other extreme, a larger class than ever before, because of the increase of the world’s wealth, are existing in conditions of poverty and economic thraldom that would have shocked a poorer age.

By neglecting the changes that have come over the science of production in the past century, it may be possible to argue that the lot of the majority today is a little better or at most but little worse than it was. But this is not the real question at issue.

Rather we have to find out how it comes about that science, which, without economic exhaustion, provided the sinews of war for the most colossal and destructive conflict in history, with the man-power of the nations engaged in military service, has not yet abolished poverty and degrading conditions of living from our midst in the piping times of peace.

It is impossible for those who profess to understand economics and government to escape the charge of knowing nothing whatever of these subjects so long as poverty and unemployment exist in an age of brilliant scientific achievement. Never tired of attributing economic heresies to others, the state of the whole world is the monumental evidence of their own.

The Glasgow of James Watt and Adam Smith.

It is significant to reflect that Glasgow, which produced James Watt, the inventor who brought the steam engine to practical success, was the home of Adam Smith, the father of the system of political economy under which the scientific era has developed. Whilst the former in 1774 was perfecting an engine destined to lift men from the drudgery of animal labour and to establish over the whole world a new mode of livelihood, the latter in 1776 was erecting into a theoretical system the conditions under which, till then, men had pursued their economic livelihood. The world might have assimilated either the steam engine or the economics, but it is difficult to understand how it could possibly digest two such mutually incompatible productions simultaneously. Ever since, the world has been attempting to move in two opposite directions at one and the same time, towards a higher standard of life for some and a lower standard for others.

The Glasgow of James Watt and Adam Smith was a city of 28,000 people, hardly less provincial than Kirkcaldy, the birthplace of the author of The Wealth of Nations, and the place to which most of his outlook on the subject can be traced. The Glasgow of James Watt and Adam Smith is, today, a city of over a million people, the second largest in the British Empire. It is a monument as much to the work of the one as the other, being, on the one hand, the centre of the great Clydebank marine engineering industry and, on the other, of the social revolution against rent, interest and profit, fostered by unemployment, house-shortage and high cost of living, famous for its ships and street orators in every corner of the globe.

The Economic Paradox.

This book is not concerned with the possibly sensational future progress of science, but is, in origin, rather of the nature of a return to present problems from one such anticipation now a generation old, concerned with the discovery of atomic energy. Though one would hardly guess it in normal times, under the revealing experiences of the Great War many of the consequences which it was natural to anticipate would follow the control of physical powers greater than any we now possess were shown to have come about already with the powers actually available. Then, for the first time in history, we saw science used without artificial financial restrictions for the purposes of destruction.

A degree of liberality and unity of purpose prevailed which is never lavished upon the less spectacular but more necessary tasks of construction. Year after year the industrialised nations produced an ever-mounting tide of munitions of war, with the flower of their man-power withdrawn from production. There seemed no physical limit to the extent which a nation, shaken out of its preconceived habits of economic thought by the imminent peril at its doors, could turn out the material necessities for its existence.

Whereas now we have returned to peace and squalor, to idle factories and farms reverting to grass, we are back as a nation to the pre-war conditions breeding a C3 race, with a million and a quarter workers unemployed, unable to feed and clothe ourselves adequately on a military standard, and unable even to build houses in which to live under the existing economic system. Yet we have the same wealth of natural resources, the same science and inventiveness, with much more settled and favourable conditions for production and an army of unused manpower being demoralised by enforced idleness!

The sensationalism of the scientific prophet could hardly imagine anything so sensational as this. A nation dowered with every necessary requisite for an abundant life is too poor to distribute its wealth, and is idle and deteriorates not because it does not need it but because it cannot buy it. This book attempts to give an original analysis into the causes underlying this surprising contradiction.

The Prospect.

As often happens in these swiftly changing times, even with pure science, new subjects and fields of discovery are past their most active period of growth before they become accepted as a normal and permanent part of our social inheritance and enter into the ruminations of philosophers or the curricula of universities. As regards the applications of science of most economic importance, the mass production of all kinds of commodities by mechanical power, new modes of transport and communication, and by far the greater part of the inventions by which the physical sciences have been harnessed to the chariot of life to do useful and profitable work, we are merely witnessing now the full fruition of an insight into the laws and processes of Nature obtained quite long ago.

Contrary to common belief, such developments are not inexhaustible. A mechanical invention, like a bicycle, after a rapid initial period of everchanging design, reaches its final expression, and so it is in general with the great group of the mechanical applied sciences founded on the perfection of the steam engine in the first instance, and, in general, on the proper understanding of the laws of energy and its transformation, which is the necessary prelude to the control of natural forces.

It would appear that in due course something like an end may be reached to major developments. Even in the younger group of electrical sciences the same tendency may already be seen. True, there have been great and sweeping advances in the pure parent sciences of physics and chemistry, but these as yet for the most part are still immeasurably beyond any practical application at all. So that an interregnum, as regards substantial practical progress, is likely to occur. The older fields will be worked out probably before the newer are effectively opened up. The biologists are already claiming that this century will be their innings, as last century admittedly was that of the physical sciences in practical world-revolutionising discoveries, and it is to be hoped that in due course they will implement the promise.

Among the more thoughtful, the profound misgivings as to where such applications of science as we have already made have led and are leading civilisation naturally cloud the outlook as regards the future. They are very different in inception and spirit from those which characterised Butler’s Erewhon, and other jaundiced satires of the Victorians, but they are of somewhat similar trend.

Have we obtained dominion of the major powers of Nature to fall a victim to our own machinery and ultimately to be destroyed by it? Is our civilisation to end in breeding the Robot and the rentier, and to go down under class conflicts at home and fratricidal wars abroad? Is there much point in multiplying by a million the powers already conferred by science if the use we make of those we already have are sufficient to endanger the future of civilisation?

There is this difference between the criticism of today and the earlier, more interested and professional disparagement to which, in the Victorian era, science was subjected. No one now is disposed to put the blame upon science or the scientific workers for the state of social affairs their discoveries and inventions have produced. Whoever else may have profited, scientists themselves have not. No one now sees the evil in the greater knowledge of and mastery over the forces of Nature, nor in the material fruits of this knowledge in lightening the labour of living, and in providing material necessities and comforts in abundance. The sourest and most jealous fanatic today could hardly maintain that good and nourishing food, sufficient fuel, clothes and houses, efficient and rapid means of locomotion, transport and communication and the multifarious interests of modern life are in themselves evil. The evil is rather that these things, which science makes so prodigally, are not more universally obtainable. The medical man will tell you precisely what is essential for the maintenance and preservation of a healthy body. What the Victorian theology attributed to sin and the devil, medical science today would ascribe to poverty and disease.

It is an indication of the backsliding that has occurred from the high standards of the terrible Victorians that an author recently referred to his own great-grandfather, who was responsible for the English Poor-Law, as “not the inhuman devil which his works would imply, but a painfully conscientious, duty-loving Victorian Englishman.”

Physical Science and the Humanities.

There is always a tendency for complementaries to be treated as opponents. If we start from monistic prepossessions, that Nature is a divine harmony and expresses some single superlaw, philosophy is presented with the very difficult task of trying to pieceout at least three jig-saw puzzles that have been wilfully mixed up. Neither mechanical nor biological science, nor the humanities alone, can solve human problems, but each can contribute its quota. In mechanics the basis of the rapid progress made from sweeping generalisations to practical achievement is due to the entire freedom of its problems from the disturbing element of life. It might be thought a policy of despair to seek aid from such a study in problems that have hitherto defied solution by humanists. Nevertheless, life obeys physical laws. Its methods are at the poles from those of the engineer, but it cannot work mechanical miracles. Physics is complementary to it, and life works according to, not against the principles of the physical sciences.

Indeed, it may be doubted whether, strictly, any other aspect of life has yet come within range of exact scientific inquiry. Life itself is an experience which has yet to find the proper methods of investigation. The biological sciences are almost entirely concerned as yet, because of this, with the physical chemistry of living processes, rather than with life. Biology threatens to give us children without parents by ectogenesis, much as chemistry gives us, by synthesis, indigo innocent of any connection with the indigo plant. But in spite of these imitations there is still something infinitely more interesting and difficult to understand about the natural processes. Still, it is no small thing to be sure that life cooperates with and does not violate natural physical laws, much as the engineer achieves his triumphs by understanding rather than defying the powers he controls. Neither individuals nor communities can escape conforming to the laws of matter and energy, however they may apply them to their own ends.

In this country, especially, there has been a long divorce between natural and human knowledge. The boycott of science and its control by hostile vested interests are still most remarkable features for an age pre-eminently distinguished only by its science. The universities and public schools, in this, set the standard and fashions of popular education, and we shall not escape lightly the penalty of these obscurantist policies.

Their effect on economics, essentially a subject with the closest relations with the world of facts and physical realities, has been singularly disastrous, and the hopeless muddle into which the affairs of the world have been allowed to get is largely to be traced to no clear recognition of the physical principles underlying that subject.

The very first economists in France did have an understanding of the natural knowledge of their time. But though never so necessary as in the scientific era that was to follow, the physical foundations of the subject became more and more neglected, in favour of conventional ideas derived from legal attitudes towards property rights and human interindebtednesses.

But this is merely a single example. Everywhere the idea that the few thousand, at most, active creative workers in science can really be exercising any important influence on the destinies of great nations and that, without these, and the ferment they have introduced, present civilisation would probably not be different from that of previous epochs has yet to receive due political recognition.

As for scientific investigators, they are for the most part too intently preoccupied in their highly specialised and abstruse inquiries to give time to social problems. Their activities regulate more and more automatically the principles that appertain to the normal business of the body politic, but are as completely divorced from the consciousness of society as breathing is from volition. They consider themselves capable of doing better work in the laboratory than in affairs. They recognise that the ability to make the simplest and smallest contribution to the stock of knowledge demands many years of serious preparation and study, many fruitless purely negative results, and that, in the end, the discoveries made are not likely to be those sought for, but the by-products, as it were, of a life of ceaseless quest into the unknown. They probably more than suspect that something quite analogous applies in any other field of inquiry, and not least to the confusions of politics. This makes them realise that their own political opinions are usually no more original than those of other people and are not in the least likely to be any more helpful.

The Author’s Path from Physical Science to Economics.

Some may be interested to know how it was that the author came to stray so far from the confines of his own subject and to lay himself open to the abuse which passes for argument in the matters that affect the pocket rather than the mind or soul. At least, in defence, he may claim that in consequence he has himself seen things clear and seen things whole which he could not otherwise have done, even though he fail to convey the vision to his readers.

In the closing years of last and the opening years of this century the discovery of radioactivity, and its interpretation in terms of existing knowledge, revealed the existence of stores of potential energy in the atoms of the radioactive elements of the order of a million times greater than any previously known. These stores were and remain impossible to harness to any practical physical purpose, and are given out at very slow rates in a purely natural process of transmutation of the radioactive elements into lead and helium. There is no doubt of their existence in these elements, and the existence of similar stores in other elements has been legitimately inferred, though not as yet experimentally proved. Following the very well-known reasoning that applies in chemistry, it appears certain that any process of artificial transmutation would be able to liberate these stores and to render them available as the energy of coal and fuel now is.

Many purely speculative deductions along the same vast lines have since been made from the theory of relativity, and it is to atomic energy, in the first instance, that physicists and astronomers now look to account for the maintenance of the heat of the sun and stars, and in general, the live energy of nature, over cosmical periods of time. It is unnecessary to enter further into this field, as few scientific discoveries have attracted more widespread interest than radioactivity, or have been more fully interpreted for the benefit of the nonscientific public. The names of Becquerel, M. and Mme. Curie, Rutherford, J. J. Thomson, Ramsay, Joly, Bragg and other pioneers in this field are household words.

It was natural to consider what sort of a world it would be if atomic energy ever became available. To compare such a world to that of today, it was necessary to contrast the latter with the world before the dawn of history and the art of kindling a fire. Just as the savage died of cold on the site of what now are coal-mines, and perished with hunger on corn fields now energised with the fertilisers produced at Niagara, so, it seemed, we were leading a pettifogging existence, fighting one another like wild beasts for a share of the supplies of energy somewhat niggardly vouchsafed by Nature, whilst all round us existed the potentialities of a civilisation such as the world had not then even imagined possible.

The Part played by Energy in Human History.

In that way, some conception of the part played by energy in human history began to take shape, and progress in the material sphere appeared not so much as a successive mastery over the materials employed for the making of weapons, as the succession of ages of stone, bronze and iron, honoured by tradition, but rather as a successive mastery over the sources of energy in Nature, and their subjugation to meet the requirements of life. The whole of the achievements of our civilisation, in which it is differentiated from the slow, uncertain progress recorded by history appeared as due to the mastery over the energy of fire reached with the advent of the steam engine. It, therefore, there is at hand not merely in the remote stars, but at our feet, an unlimited source of energy of the order of a million times more powerful than any known, what tremendous social consequences await the discovery of artificial transmutation!

Yet how far is human society from being safely entrusted with such powers? If the discovery were made tomorrow, there is not a nation that would not throw itself heart and soul into the task of applying it to war, just as they are now doing in the case of the newly developed chemical weapons of poison gas warfare.

In The World Set Free Mr. H. G. Wells, just before the outbreak of the Great War in 1914, devoted himself with his customary brilliance and insight to the question, and so vividly depicted the probable consequences that it would be superfluous for anyone of lesser gifts to pursue the topic, at least until the practical realisation of the disturbing dream comes nearer. For this is one of the newer developments of pure science, already referred to as still immeasurably beyond practical application. It may come quickly or again it may never come. At present there is hardly a hint even of how to begin. If it were to come under existing economic conditions, it would mean the reductio ad absurdum of our scientific civilisation, a swift annihilation instead of a none too lingering collapse.

“If what you tell us is true,” a scientific colleague, one of the Professors of Engineering, remarked to Rutherford in Montreal as long ago as 1902, “then we ought all, it seems, to be leaving the work we are doing and to concentrate our attention on the solution of this problem.” Possibly many have since had the same thought. Yet, in scientific research, nothing is less likely than that the discoverer will discover what he sets out to discover. La Salle set out to discover China by sailing westwards from Europe. Lachine is not in China, but in the middle of the Province of Quebec, a tramride from Montreal, on the great modern trans-continental route of the CPR. to the Orient. But the name still recalls the derision with which La Salle’s pioneer attempt was greeted by his contemporaries.

Scientific discovery could record episodes as strange. Pasteur studying fermentation discovered the important property of optical isomer is, which has developed almost into a science in itself, in passing on the road to the recognition of the part played by bacteria. But the most important part of his work was neither in brewing nor saccharometry. It revolutionised surgery, and to it countless millions owe their very lives.

Scientific discovery is a growth rather than a journey to plan. The voyage may be west to discover the east, and it is through fog and by dead-reckoning to put places upon, rather than to hit them off from a map. That transmutation may one day be possible and that the Coal and Oil Age will give place to an Atomic Age may be confidently expected, but when, and whether in this civilisation’s cycle, none can guess.

The Real Capitalist a Plant.

Still one point seemed lacking to account for the phenomenal outburst of activity that followed in the Western world the invention of the steam engine, for it could not be ascribed simply to the substitution of inanimate energy for animal labour. The ancients used the wind in navigation and drew upon water-power in rudimentary ways. The profound change that then occurred seemed to be rather due to the fact that, for the first time in history, men began to tap a large capital store of energy and ceased to be entirely dependent on the revenue of sunshine.

All the requirements of pre-scientific men were met out of the solar energy of their own times. The food they ate, the clothes they wore, and the wood they burnt could be envisaged, as regards the energy content which gives them use, value, as stores of sunlight. But in burning coal one releases a store of sunshine that reached the earth millions of years ago. In so far as it can be used for the purposes of life, the scale of living may be, to almost any necessary extent, augmented, devotion to the primitive ideas of the peoples of Kirkcaldy and Judea notwithstanding.

Then came the odd thought about fuel considered as a capital store, out of the consumption of which our whole civilisation, in so far as it is modern, has been built. You cannot burn it and still have it, and once burnt there is no way, thermodynamically, of extracting perennial interest from it. Such mysteries are among the inexorable laws of economics rather than of physics. With the doctrine of evolution, the real Adam turns out to have been an animal, and with the doctrine of energy the real capitalist proves to be a plant. The flamboyant era through which we have been passing is due not to our own merits, but to our having inherited accumulations of solar energy from the carboniferous era, so that life for once has been able to live beyond its income. Had it but known it, it might have been a merrier age!

So, if atomic energy is ever tapped, an outburst of human activity would occur such as would make the triumphs of our times seem tawdry, and primitive humanity’s struggle for energy as the fantastic memory of some horrid dream.

Is Science Accursed?

But what is gained merely by magnifying a scale? Would an enlarged reproduction of the present age satisfy any human soul? Awkward questions demand an answer. With all this new wealth the poverty of our ancestors has not been abolished, but has come back in a monstrous form. A growing army of unemployed, without proper means of subsistence, haunt a world capable of producing far more than it consumes, so that in a sense, new in history, the poor have become subservient to the rich even for permission to earn their livelihood.

Is science accursed?

What is the evil genius that perverts even the fulfilment of our sanest hopes and labours, and makes progress more like a nightmare climb among slippery slopes of ever increasing steepness, than the mass march of humanity along a broad high road, made straight and smooth by increasing knowledge, order and law?

It is idle to aspire to a more dangerously exalted civilisation until something of the definiteness and certainty of the economics of a fuel-engine can be extended to the economy of men. So that the crying need becomes not for ever and ever greater accessions of physical power, but the knowledge how to secure the fruits of what we already possess. The strong still plunder the weak, nations and individuals alike, whereas there is that in the growth of knowledge which would make the whole world kin. But that cannot come about until we understand what is wrong, nor whilst we attribute to an economic system mysterious powers which a physicist would laugh at.

Applied Science and Root Science.

So as we drop back into the present from, as it were, a telescopic anticipation of a far remote future, the voices of the marketplace fall somehow upon ears that hear with a difference. Scientific men are temperamentally unsuited to the tasks of government, but they might make valuable technical contributions in the wider problems of transport, the better utilisation of our natural resources, the more efficient training of labour. The nitrogen of the air might be wedded to the spirit of the waterfall to fertilise our soil in peace-time, so that we may breed more men, and again, to make high explosives in war-time to blow up the surplus, a veritable sine qua non of modern civilisation.

Or, again, in agriculture, science could assist in breeding better brands of wheat, in making a Burgoyne’s Fife that will outcrop the traditional Square Head’s Master and stand the climate better. In Empire development, too, with its wealth of tropical possessions uninhabitable by the white man, science alone can hope to cope with the scourge of malaria and allay the ravages of sleeping sickness, and if our civil servants were pathologists, instead of morbid students of the pathology of human nature, much might be achieved. Again, looking on what government is, and on how the actions of the peoples may be swayed by expert appeals to their feelings and enthusiasms, psychology, the youngest of the sciences, might be roped in to lead humanity out of the morass into which it has been tumbled by the too rapid growth of knowledge.

Whilst, like the undertow of life, breaking on the obstructions that bar its flow, a ceaseless warning booms religiously of the scientific spirit and its search after truth for its own sake, without which there can be no hope of regeneration for society.

Science and Government.

Are we any nearer the root of the matter? This book deals with none of these things. It does not deny their scope and possibilities in these days of universal education and the growth of intellectual interests, should civilisation last. It is concerned rather with the difference that comes over the familiar viewed from a fresh standpoint. The contribution of a physical scientist from the starting-point of physical science, it has nothing to do with technology or engineering, with psychology or the inculcation of the scientific spirit, but with the problem of government in its highest form! Just as in biology, materialism has proved itself fruitful and vitalism sterile in the winning of new knowledge, not in the least because organisms are merely machines, but because whatever else they may be, they obey the ascertainable laws of physics and chemistry, so in the tasks of government it would seem that a great clarification may result by applying to their elucidation common physical conceptions that are a truism in the inanimate world.

The theme, in various stages of development, has already been the subject of numerous public lectures and discussions and of two pamphlets. The validity of the argument and the deductions therefrom, though sufficiently challenging have never been publicly challenged. But some have desired a fuller and less elliptical treatment. The attempt to meet this led the author very much further into the subject than he ever hoped or expected to be able to penetrate, and finally, in his own estimation, to the definite solution of the economic paradox of the age. He found himself rather like Saul of Tarsus being converted into St. Paul, setting out to persecute the economists and ending, if not by becoming one, they may not be quite as forgiving a body as the early Christians, hopeful of ultimate reconciliation.

At least he now has a more lively respect for the subtle pitfalls with which the subject abounds, and the impossibility of avoiding them all without some such mariner’s compass as the physicist’s law of conservation. Behind and aloof from the jostling of the individual members of the community, each intent on his own affairs, there exists an almost unknown science of national economics, as far removed from disinterested controversy as the propositions of geometry, and as simple, relatively, as the gas-laws obeyed by all gases in common are in contrast to the infinite complexity of the laws that regulate the behaviour of their component molecules. In this vital field at least there should, in this age, be no longer any room for bickering.

Scientific men have been repeatedly urged to cooperate in finding the solution of the problems that threaten our times. This is an unauthorised and individual contribution to a subject which is usually tabooed by them. It must not be taken as representing any but the author’s own original studies in the subject. It would be a pity if it were taken as in any way reflecting upon the reputation for vision and nobility of thought which contemporaneous science has inherited as the result of the work of its early pioneers, after they were safely dead.

Modern Monetary Theory. The Government Has Unlimited Money – Tom Streithorst.

Everyone knows governments need to tax before they can spend. What Modern Monetary Theory presupposes is, maybe they don’t.

Tall, bearded, with gentle brown eyes, Occupy Wall Street veteran Jesse Myerson spends his days knocking on doors in the rundown neighborhoods of southern Indiana reminding voters of the enormous wealth of their country. His message, as an organizer for the progressive grassroots group Hoosier Action, is that the United States is a spectacularly rich nation and some of that wealth could, and should, be spread to the poor people of southern Indiana.

“People have been in a terrible amount of economic pain and that has led to the spiritual death of communities,” Myerson told me of the places he goes to. Opiate addiction is rife, as is suicide. “There’s no well-organized vehicle for people to make sense of their pain except for right-wing xenophobic initiatives.”

He says his group’s biggest competition for the hearts and minds of poor Indianans is a white supremacist group called the Traditionalist Workers’ Party. “They’re organizing along the same lines as us, these oligarchs are being tyrannical and exploiting us and we need peace and prosperity, except the difference is they are organizing along a framework of scarcity,” he said. “They are saying, ‘There is not enough to go around so we white people got to stick together and make sure we are taken care of ”’

By contrast, Myerson said, “We organize along the value of abundance, that there is enough to go around, that we can all afford freedom and dignity.”

You don’t hear “there is enough to go around” much in mainstream American politics. Republicans in particular criticize safety net and stimulus programs on the grounds they would increase the federal deficit; some have pushed radical legislation that would slash spendin. But Democrats sometimes make anti-deficit arguments, too, as the did when Republicans backed a $1.5 trillion tax cut bill. Ambitious proposals that would cost a lot of money, like Bernie Sanders’s “Medicare for all,” are routinely derided for what they would cost.

The federal government has run a deficit ever fiscal year but four since 1970, leading to a national debt (the accumulation of all those deficits) of 20.6 trillion and change. When asked about this by pollsters, most voters say that the country is on the wrong track, debt-wise, and want Congress to address the issue.

Myerson isn’t bothered by the deficit: “We’re the richest country in the history of countries, in the history of riches. Of course we can afford it.”

He notes no one seems to worry about the price tag when Congress increases the Pentagon budget or decides to invade a faraway country.

His optimism about government spending is due to his exposure to Modern Monetary Theory, a school of economics that says our panic over government budget deficits is delusional, a misguided and atavistic remnant of the gold standard. MMT has become increasingly influential on the left, giving progressives like Myerson a reason to believe that a high price tag shouldn’t stop the US from instituting wide ranging social reforms like Medicare for all.

Modern Monetary Theory’s basic principle seems blindingly obvious: Under a Fiat currency system, a government can print as much money as it likes. As long as a country can mobilize the necessary real resources of labor, machinery, and raw materials, it can provide public services.

Our fear of deficits, according to MMT, comes from a profound misunderstanding of the nature of money.

Every five-year-old understands money. It’s what you give the nice lady before she hands you the ice cream cone, an object with intrinsic value that can be redeemed for goods or services. Through the lens of Modern Monetary Theory, however, a dollar is nothing but a liability issued by the US government, which promises to accept it back in payment of taxes. The dollar in your pocket represents a debt owed you by the federal government.

Money isn’t a lump of gold but rather an IOU.

This mildly metaphysical distinction ends up having huge practical consequences. It means the federal government, unlike you and me, can’t run out of cash. It can run out of things money can buy, which will drive up their price and be manifest in inflation, but it can’t run out of money. As Sam Levey, a graduate student in economics who tweets under the name Deficit Owls told me, “Macy’s can’t run out of Macy’s gift certificates.”

Especially for those who want the government to provide more services to citizens, this is a convincing argument, and one that can be understood by noneconomists. “I’ve never heard a more persuasive account of how money works,” Myerson told me.

“I’ve seen these guys debate all sorts of people. I’ve never seen anybody beat them.”

“These guys” were gathered in September at the first ever Modern Monetary Theory Conference, a Kansas City event that brought together 225 academics, activists, and investors in person and thousands of livestream viewers.

In the UMKC Student Center Auditorium, Stephanie Kelton, a tall, telegenic former economic adviser to Bernie Sanders, told the enthusiastic crowd the basic problem of the American economy today is “lack of aggregate demand” leading to “chronic unemployment.” In other words, America’s problem isn’t an inability to make stuff (supply) but rather the inability to afford to buy all the stuff we are able to make (demand). Our productive potential outstrips our capacity to consume.

“The government can afford to pay for any program it wants. It doesn’t have to raise taxes,” Kelton added. Because politicians on both left and right don’t get that, “Kids go hungry-bridges don’t get built.”

Although rarely heard on mass media, among economists this viewpoint is not particularly controversial. Oxford economist Simon Wren-Lewis told me in an email. “Most mainstream, nonideological economists would agree the US needs more infrastructure investment, and the best way to finance that is through public borrowing.” He continued: “Most people think austerity is mainstream macroeconomics, although it is not. Those who are anti-austerity look for some alternative theory, which MMT provides.”

Unemployment and underemployment caused by insufficient spending is a problem economists know how to fix. Every economics 101 textbook recognizes government can increase demand at will either by cutting taxes (letting the private sector keep more money, which it will then spend) or by increasing spending directly (creating dollars and pouring them into the economy via government expenditures).

The problem is either of these policies will increase the budget deficit, regarded by most politicians as a bad thing. Conservatives fear increased government spending will “crowd out” private sector investment. A MMT advocate might reply that crowding out only can occur when the economy is already operating at full capacity. Today, staanant wages and low interest rates indicate the economy still has plenty of slack before inflation kicks in.

MMT disciples do think that deficit spending could lead to inflation, which they see as the only downside to more spending. That is what happened back in the 1960s, when Lyndon Johnson refused to raise taxes to pay for the Vietnam War and his Great Society, even as the private sector economy was booming. The result was rising inflation in the 1970s, one of several economic factors that led to the election of Ronald Reagan.

But for the past 35 years, inflation has been negligible. The Federal Reserve has been consistently undershooting its own 2 percent inflation target since it was adopted in 2012. Right now, deflation is a bigger threat to the global economy. To those who subscribe to MMT, it seems obvious that we need to be spending more, and frustrating that not enough people understand.

The original prophet of MMT is Warren Mosler, who 30 years ago was a Wall Street investor trying to gain competitive advantage over other traders by peering deeply into exactly how the federal government taxed, borrowed, and spent.

Fit, tanned, and currently residing in St. Croix in order to lower his tax bill, the 68 year-old multimillionaire makes an odd spokesman for a progressive economics movement. As his friend and hedge fund partner Sanjiv Sharma told me, “Warren is more politics agnostic.”

As a boy, he was fascinated by machinery, how it worked, how to fix it, how to put it together. Mosler told me he planned to major in engineering, but he switched to economics after taking a course and finding it much easier. After graduating from the University of Connecticut in 1971, he was hired by a local bank and found himself being promoted rapidly. Soon, he left New England for Wall Street.

“I look at things at an elemental level,” Mosler told me. He got down in the weeds to examine precisely how the Federal Reserve and the Treasury interacted with the general economy. He wanted to understand what happened to balance sheets when the Treasury collected taxes, traded bonds, spent and created money. He came to believe that the conventional wisdom has the relationship between the government and the private sector backwards.

Most of us assume government has to tax before it spends, that like you and me it has to earn money before it purchases goods. If it wants to spend more than it taxes, and it almost always does, it must borrow from the bond market. But by examining the granular way government accounts for its spending, Mosler saw that in every case, expenditures come first.

When your Social Security check is due, the Treasury doesn’t look to see if it has enough money to pay it. It simply keystrokes that money directly into your bank account and debits itself simultaneously, thereby creating the money it pays you out of thin air.

When you pay your taxes, the same process happens in reverse. The federal government subtracts dollars your account and eliminates the same amount from the liabilities side of its ledger, effectively destroying the money you just paid to it.

Unlike households or firms or even state and local governments, the federal government is authorized to create dollars. It adds money into the economy when it spends, and it takes it out when it taxes.

“There’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody,” is how Alan Greenspan, then the Fed chairman put it to Congressman Paul Ryan during a 2005 hearing.

Wren-Lewis, the Oxford economist, told me MMT sounds more radical than it really is. “In my view a lot of what they say is mainstream. When interest rates are at their lower bound their anti-austerity policy is totally mainstream,” he said. “In terms of their theoretical framework, I would describe it as being quite close to 1970s Keynesian, with the addition of a very modern understanding of how bank money is created.” Kelton told me MMT isn’t trying to change the way government spends and taxes, it is merely describing the way it already does.

Mosler’s understanding of money provided him with an insight: Any government that prints its own currency can’t go bankrupt. That insight made him millions.

In the early 1990s, Italy was struggling with high debt and low tax receipts; economists and traders feared it was heading for collapse. Italian government bond yields inevitably shot up. Mosler recognized that Italy could not be forced into default: It could print as many lira as it needed. (This was in the pre-euro days.) He borrowed lira from Italian banks at an interest rate lower than Italian government bonds were paying and used that money to buy Italian government debt other investors were dumping. Over the next few years, this trade made him and his clients more than $100 million.

It was after that that Mosler wanted to start a dialogue with academic economists. He wrote to Harvard, Princeton, and Yale, laying out his analysis of Federal Reserve payments and their startling implications, but was ignored. But then, using his contacts with Donald Rumsfeld, wrangled a lunch with Arthur Laffer (of supply-side Laffer curve fame). Laffer told Mosler not to expect anything from Ivy League economics departments, but there was this wacky heterodox group called the post-Keynesians, and they might be interested.

These economists, including Randy Wray, Bill Mitchell, and Stephanie Kelton taught Mosler about the chartalists, an early 20th-century group of economists who like Mosler saw money as debt created by the state. (MMT is sometimes called “neo-chartalism.”)

Abba Lerner’s functional finance is another precursor to MMT. Lerner, a mid-century British economist, insisted public officials ignore the deficit and instead focus on maintaining sufficient demand to keep the economy at full employment. If unemployment was too high government should either spend more or tax less. When inflation threatened, it should cut spending or increase taxes. For Lerner, as for the MMT crowd, there’s no reason to care about the size of a government deficit.

Mosler explained to the post-Keynesians that taxation and borrowing did not finance government spending. At first Kelton didn’t believe him. “Warren is putting out this stuff and it is way out there. It is the inverse of everything that we’ve been taught,” she told me. She decided to write a paper disproving Mosler’s theories, but in the end, after looking deep into the way the Federal Reserve, the Treasury, and the private banking system interact, she concluded, to her surprise, that he was right. “I went through all of this research,” she said, “and I got to exactly the same place Warren got, just with a lot of complicating details.” Tax and bond sales do come after spending; their purpose is not to fund the government but rather to take money out the system to keep it from overheating.

Though Mosler came from outside academia, his theories dovetailed with some work done by economists. “What Warren did in some sense was remind people of things we should have known,” she told me. “He made original contributions to be sure, but he also reminded us of what was in the literature and was well-established 60, 80 years ago, and then we just unlearned all those lessons.”

Kelton and Wray introduced Mosler to Wynne Godley’s sectoral balance analysis, which suggests government deficits are not just harmless, they are actually beneficial.

To simplify Godley’s theories, every economy has two sectors: the private sector and the public or government sector. When the government spends more than it taxes, it runs a deficit. And that deficit in the public sector inevitably means a surplus for the private sector.

Kelton explained it to me this way: Imagine I’m the entire government, and you are the entire private sector. I spend $100 either going to war or fixing bridges or improving education. The private sector does the work required to achieve those goals, and the government pays it $100. It then taxes back $90, leaving $10 in the private sector’s hands. That is the government running a deficit. It is spending more than it receives back in taxes. But you, the private sector, have $10 you didn’t have before.

In order to accumulate money, the private sector needs a government deficit.

Mosler’s hedge fund profited from this theory. In the late 1990s, just about everybody thought the Clinton budget surplus strengthened the US economy. But Mosler realized the Clinton budget surplus meant the government was taking more money out of the private sector in taxes than it was putting in in spending. Mosler reasoned this private sector deficit (the flip side of the government surplus) would inevitably lead to recession, so he bet on interest rates to fall (which they did in 2001) and his hedge fund again made out like bandits.

These days, MMT advocates are interested in larger issues than lining their pockets. For Kelton, the biggest problem with the American economy is unemployment and underemployment. She told me 20 million Americans want full-time work but can’t get it. This strikes her as a shocking waste of resources and talent. To create jobs, she says, we need to boost aggregate demand and the only way to do that is to increase spending.

“You can’t make spending the enemy in an economy that depends on sales,” she told me. “Capitalism runs on sales. What you have to do to boost the economy, to boost GDP, is you have to increase spending.”

One way to stimulate spending is a tax cut, especially one whose benefits go to average Americans rather than the top 1 percent. “A tax cut for working people has the same pocketbook effect as a pay raise,” Kelton told me. “When was the last time your employer gave you a raise?”

While MMTers would favor just about any fiscal stimuli, including infrastructure spending or tax cuts, their signature policy is a federally funded but locally administered job guarantee. Anyone who wanted work, either full or part-time, would be paid $15 an hour on projects deemed valuable by their local community. This might mean building roads, but it might also including caring for the elderly or working at daycares. Needed services would be provided and unemployed and underemployed people could find work.

“It is,” Randy Wray said at a panel during the conference, “an extremely effective anti-poverty program.” Full-time, those jobs would pay over $31,000 a year, enough to take a family of five out of poverty. Wray and Kelton told a panel at the conference this program would create 14 to 19 million jobs, add $500 to $600 billion to the GDP, and add less than 1 percent to inflation. Mosler calls this a “temporary jobs program” because he is confident the extra demand created by this federal spending would spark an upsurge in private sector hiring.

Ten years after the financial crisis, the American economy remains in sorry shape. Kelton calls it “a junk economy.” Although official unemployment is relatively low, that masks a long-term stagnation in wages and a huge number of discouraged workers, not counted in unemployment statistics. Real median wages are lower today than they were when Jimmy Carter was president.

For the fjrst time in history, most Americans are likely to be worse off than their parents.

Donald Trump won last year at least in part because he recognized for many of us, the American dream is dead and our economy is crap.

MMT says it can fix it, and that all it would take to create jobs and build a better America is to end the worrying about government deficits. “You hear people all the time saying government is living beyond its means,” Kelton said. “Absolutely not. We are living far, far below our means.”

Mosler says politicians are only obsessed by the deficit because voters are: “We’ve created an electorate who believe the deficit is too large and has to come down.” MMT-supporting academics, and leftwing activists, are hoping by changing people’s minds they can transform America. Mosler is confident that once people understand the insights of MMT, they won’t forget them. “Nobody goes back,” he told me.

Myerson isn’t so sanguine. He isn’t convinced winning the intellectual debate will be enough. “The billionaires have the power so the economics that supports their agenda is going to be the predominant one.” If MMT became mainstream and increased public spending became the norm, power and wealth would shift away from the ruling class. Myerson suspects that won’t happen without a struggle. He remembers something that Ann Larson and Laura Hanna of the group Debt Collective said at the conference:

“There will be no trickledown MMT. It’s going to have to come from organizing people.”

Deadly Innocent Frauds of government monetary policy

Warren Mosler

Deadly Innocent Fraud #1: Government Must Tax To Spend

Deadly Innocent Fraud #2: With government deficits, we are leaving our debt burden to our children

Deadly Innocent Fraud #3: Federal Government budget deficits take away savings

Deadly Innocent Fraud #4: Social Security is broken

Deadly Innocent Fraud #5: The trade deficit is an unsustainable imbalance that takes away jobs and output

Deadly Innocent Fraud #6: We need savings to provide the funds for investment

Deadly Innocent Fraud #7: It’s a bad thing that higher deficits today mean higher taxes tomorrow

The New Keynesian fiscal rules that mislead British Labour – Bill Mitchell.

The British Labour Party is currently leading the Tories in the latest YouGov opinion polls (February 19-20, Tories 40 per cent (and declining), Labour 42 per cent (and rising). They should be further in front, given the disarray of the Conservatives as they try to negotiate within their own party something remotely acceptable about Brexit.

When there is this degree of political capital available, in this case for the Labour Party, a party should use it to redefine policy agendas that have gone awry. To build a narrative that will advance their cause for the future decades.

British Labour has a chance to break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements.

In part, under Jeremy Corbyn and John McDonnell, Labour is making progressive noises on a number of fronts. But ultimately, where it really matters, the macroeconomic narrative, they are remaining firmly neoliberal and this will blight their chances of pursuing a truly progressive agenda.

One of the glaring mistakes the Labour Party has made is to accept advice from neoliberal economists (so-called New Keynesians) who have instilled in them a need for fiscal rules. This is an analysis of the sort of advice that Jeremy Corbyn and John McDonnell are getting and why they should ignore it.

l have written about fiscal rules in the past. There is only one fiscal rule that a progressive government should adhere to and I outlined that in this blog post The full employment fiscal deficit condition (April 13, 2011).

See also the suite of blog posts Fiscal sustainability 101 Part 1 Fiscal sustainability 101 Part 2 Fiscal sustainability 101 Part 3 to learn how Modern Monetary Theory (MMT) constructs the concept of fiscal sustainability.

The discussion in those blog posts rejects fiscal rules that are defined exclusively in terms of financial ratios, the type that the neoliberals use to reduce the scope of government and bias policy towards austerity and elevated levels of labour underutilisation.

I wrote about the madness in the British Labour Party signing up to neoliberal ’fiscal rules’ in this blog post, British Labour Party is mad to sign up to the ’Charter of Budget Responsibility’ (September 28, 2015).

One discussion paper that seems to have influenced the Shadow Chancellor in entering these type of neoliberal agreements was published on May 20, 2014 as Discussion Paper No. 429 from the National Institute of Economic and Social Research.

The NIESR paper Issues in the Design of Fiscal Policy Rules was written by Jonathan Portes (who is the Director of the NIESR) and an Oxford academic, Simon Wren-Lewis.

l have noticed that SWL seems to get involved with vituperative exchanges with Twitter participants who challenge him on matters relating to Modern Monetary Theory (MMT). He seems to think it is smart to label people, who refuse to accept his New Keynesian blather on Twitter, as being plain dumb.

SWL was a member of Labour’s economic advisory committee that John McDonnell formed after becoming the Shadow Chancellor. He later fell out with Corbyn it seems and urged the Party to dump Corbyn as leader and install Owen Smith instead.

On July 26, 2016, he wrote that “What seems totally clear to me is that given recent events a Corbyn-led party cannot win in 2020, or even come close.”

Well that prediction might still be relevant in 2020, but the last national election outcome, where Corbyn went close (even with many of the Blairites in his own party whiteanting him) suggested that SWL hasn’t much grip on reality.

Anyway, we digress.

In their discussion of issues that arise in the design of fiscal rules, Portes and SWL fail to mention the concept of full employment in the NIESR article. Their discussion is pitched entirely in terms of ‘financial ratios’.

It is hard to see that the general public will be enamoured with a government that delivers a target fiscal deficit (for example) but at the expense of elevated levels of unemployment and poverty. Fiscal policy has to relate to things that matter.

The belief (assertion) that by running fiscal surpluses or getting a public debt below some threshold will automatically deliver prosperity (jobs for all, growing real wages, first-class public services, etc) is one of the greatest con jobs that mainstream economists have foisted upon us. Fiscal policy has to relate to targets that matter like jobs, wages growth, and the like.

Depending on what the external and the private domestic sectors are doing (with respect to spending and saving), a fiscal deficit of 10 per cent of GDP might be appropriate just as a fiscal deficit of 2 per cent, or even a fiscal surplus of 4 per cent. Context matters not some particular ratio.

As an aside, the NIESR was a foremost Keynesian research group after being founded in 1938, as the academy was embracing the rejection of neoclassical thinking (which has morphed into the modern day neoliberalism) and recognising the positive role that government fiscal policy could play.

lts capacity to engage in quantitative research to support policy was valuable.

In more recent times, it has declined and is part of the neoliberal misinformation machine. The Keynesian roots has become New Keynesian, which eliminates all the meaningful insights of the original.

I have been asked by a lot of people to comment on the NIESR paper (cited above) and I have been reluctant to do so, given how flawed it is.

But given it has been so influential in framing the way in which the British Labour Party hierarchy thinks about macroeconomics, l have decided to consider it. It is hard to discuss the paper though in non-technical terms accessible to my broad readership, given the way it is framed. So at times, this essay will disappear into jargon. Not much though. I am trying to bring the message as fairly and simply as I can, so as to demonstrate the stupidity of the analysis but not be unfair (misrepresent) the authors.

Generally, the NIESR paper falls into the realm of what I call fake knowledge.

The simple response is that it spends several pages outlining the theory of optimal debt and fiscal policy then admits such a thesis “undeveloped”.

Not to be discouraged by the inability of the ‘optimal theory’ to say anything definitive about the real world, the authors, then proceed to draw conclusions from the theory anyway, which just amount to standard assertions.

Wren-Lewis just should stick to Twitter. He seems to like that. It would save us the time reading the other stuff. in effect, the substantive conclusions from the paper have no basis in theory and could have been tweets.

Let me explain why.

The motivation of the authors is to discuss what might be a “simple rule to guide fiscal policymakers”.

They point out that central bankers have used the “Taylor rule for monetary policy”, which is a simplification in itself. But I won’t get bogged down in discussing whether decision-making in central banks has or had become so mechanistic. It has not been but that is another story.

Mainstream monetary economists certainly teach students that central banks operate in the mechanistic way described by the Taylor rule, which is just a formula the textbooks claim is used to set interest rates.

But then these characters also teach students that central banks can control the money supply, that the money multiplier is responsible for determining how the monetary base scales up into the broad money supply, that expanding bank reserves will allow banks to make loans more easily, that expanding bank reserves is inflationary and al st of the litany of lies.

None of the central propostions that are taught to macroeconomics students in this regard are valid. They are fake knowledge, a stylised world of how these neoliberal economists want to imagine the real world works because they can then derive their desired policy regimes from it.

In the real world central banks and commercial banks do not function in this way.

Some of these monetary myths spill over into the analysis presented by Portes and SWL, which I will indicate presently.

Their motivation is to “search for such a rule” that might apply to fiscal policy, although they conclude at the outset that “one single simple rule to guide fiscal policy may never be found”.

They surmise that this is because:

1. “basic theory suggests that fiscal policy actions should be very different when monetary policy is constrained in a fundamental way. They cite the case of the so-called zero lower bound” as constraining fiscal policy options. In fact, no such constraint exists. Whether interest rates are zero or something else, the currency-issuing government has the same capacities and options.

There is no evidence that monetary policy suddenly becomes effective as a counter-stabilising tool at some positive target policy rate and should be preferred over fiscal policy.

The authors also suggest that the exchange rate regime will constrain fiscal policy. This is correct, which is why Modern Monetary Theory (MMT) theorists argue against pegged arrangements, they reduce the sovereignty of the government.

If a nation pegs its exchange rate then it strictly loses its sovereignty because the central bank has to conduct monetary policy with a view of stabilising the external value of the currency, which then limits the flexibility of domestic policy.

That is why the Bretton Woods fixed exchange rate system collapsed in August 1971. It biased nations running external deficits towards elevated levels of unemployment and crippling interest rates, which proved to be politically unsustainable.

2. Portes and SWL then say: “The second reason why a fiscal equivalent of a Taylor rule may be elusive also reflects national differences, but in this case differences in political structure.”

Here we get the bizarre notion introduced that theory describes an “optimal policy” but that ”there may be a trade-off between rules that mimic optimal policy, and rules that are effective in countering deficit bias” because politicians cannot be trusted to exhibit the ‘correct’ degree of austerity and instead become drunk on net spending (their concept of a “deficit bias”).

These ‘deficit drunk’ governments are labelled “non benevolent” because they allegedly trash the future of our children. Heard that one before? Sure you have, along with ‘governments running out of money’, ‘tipping points’, etc. To solve the problem of these ‘deficit drunk’ governments, Portes and SWL think technocratic constraints are needed to prevent governments responding to the desires of the population as represented by their mandate.

Of course, imposing technocratic constraints against a democratically elected government has become a major characteristic of the neoliberal era. Portes and SWL fit right in with that trend.

All this is part of the ‘depoliticisation’ trend that has seen elected governments shed political responsibility for key decisions that have damaged the well-being of the vast majority of people in their nations by appealing to ‘external’ authorities.

The ‘we had to do it, we had no choice’ ruse, the ‘Dennis Healey, we had to borrow from the IMF because we were running out of money‘ ruse, the ‘we need to outsource fiscal policy to economic experts because politicians just want votes’ ruse.

These external authorities might be so-called independent central banks (even though they are not independent see later), the IMF, and fiscal boards (such as the Office of Budget Responsibility in the UK).

We examine that trend in our new book Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017)

Further, the term ‘deficit bias’ is loaded. Portes and SWI would claim that continuous fiscal deficits illustrate this bias. However, in most nations, such continuity is necessary to support the saving desires of the non-government sector, while sustaining full employment.

There would be no ‘bias’ there. Just responsible fiscal practice. I will discuss that in more detail presently. Refer back to the blog post The full employment fiscal deficit condition.

Further, the so-called New Keynesian ‘optimum‘ is unlikely to have any relevance for the well-being of the population, and, in particular, the most disadvantaged citizens in society.

The standard New Keynesian ‘model’ didn’t even have unemployment in it.

If you understand the dominant New Keynesian framework, which has become the basis for a new consensus emerging among orthodox macroeconomists like Portes and SWL, then you will know the following.

1. The basic New Keynesian approach has three equations which in themselves are problematic. They claim authority based on the microfoundations that are alleged to represent rigourous optimising behaviour by all agents (people, firms, etc) captured by the model structure.

2. Because the ‘optimal’ theory, specified in the basic structure (Calvo pricing, rational expectations, intertemporal utility maximising behaviour by consumers, who face a trade-off between consumption and leisure, etc) cannot say anything much about real world data, the empirical models are modified (adjustment lags are added, etc). As a result ad hocery enters the applied domain where substantive results that are meant to apply to policy are generated.

3. But it is virtually impossible to builds these ‘modifications’ into their theoretical models from the first principles (intertermporal optimisation, etc) that they start with.

4. Which means that like most of the mainstream body of theory the claim to micro-founded ‘rigour’ is unsustainable once they respond to real world anomalies (of their theory) with ad hoc (non rigourous) tack ons.

5. The results they end up producing in empirical papers are not ‘derivable’ from first-order, microfounded principles at all. Their claim to theoretical rigour fails, At the end of the process there is no rigour at all. It becomes a false authority that they hide behind to justify their assertions.

The Portes-SWL paper is no exception.

Further, the ’Great Moderation’ was considered a move closer to the New Keynesian utopia (‘the business cycle’ was declared ‘dead’, for example).

Yet all we witnessed during this period in the 1990s and up to the onset of the GFC, was the redistribution of national income capital as real wages failed to keep pace with productivity growth, increased inequality and private debt, elevated levels of unemployment, the emergence of underemployment, and the dynamics being put in place which manifested as the GFC.

And, the burden of the GFC was not borne by the banksters or the top-end-of-town. Their criminality largely escaped unscathed while millions of workers lost their jobs and many became impoverished.

The belief that one can derive ‘optimal’ rules from a New Keynesian model that have any relevance to people or the world we live in is another characteristic of the neoliberal era. My profession basically went from bad to worse over this period.

However, none of that reality discourages Portes and SWL, who begin their analytical section by outlining this so-called New Keynesian “Optimal debt policy”.

Two propositions enter immediately:

1. taxes impose costs in terms of social welfare because they “are distortionary”. This means that they prevent people from making ‘optimal’ decisions.

The microeconomic theory these authors rely on claims that tax distortions include workers not working hard enough because the imposition of taxes create incentives for them to take more leisure.

This is a body of theory that also says unemployment is a choice workers make when the real wage (after tax) is so high that they prefer to take leisure instead of working. No problem, the workers are ‘optimising real income’ by being unemployed leisure is part of this ‘real’ income measure in these models.

If you thought that sounded like nonsense then you are right. Quits do not behave countercyclically, which would be required if unemployment was a choice made by workers.

Further, the research evidence suggests that the imposition of taxes does not alter the desire of workers to offer hours off work in any significant way.

For a start, most workers do not have continuous (hours) choices available to them. They work 40 hours (or whatever) or not at all.

But this is a digression.

Further what about carbon taxes and other similar taxes, which, even in the mainstream theory, correct market failure and enhance efficiency?

2. Then we read the “government would like to minimise these costs [from the taxes] but they need taxes to pay for government spending and any interest on debt.

Which is an absolute lie in terms of the intrinsic nature of a monetary system where the national government issues its own currency.

It is a convenient lie because they rely on it to derive the results in their paper. They also need this ‘optimality’ smokescreen to persuade politicians to take the results seriously as if their ‘assumptions’ are, in reality, natural constraints on governments.

The lie also implicitly biases the reader to accepting the ‘lower’ taxes are better than higher taxes, a proposition that depends on other assumptions they choose not to disclose because they are smart enough to know that that would push the discussion into the ideological domain and these characters want us to pretend that economics is ‘value free’ and everything they are writing is derivable from ‘optimal’ theory.

One of the first lectures an economics student is forced to endure contains assertions that there is a divide between what mainstream economists call ‘positive’ economics (value free) and ‘normative’ statements (value laden).

Mainstream theory holds itself out as being ‘positive’ and then blames dysfunctional outcomes on the ‘normative’ interventions of policy makers, who choose to depart from the ‘optimal’ world of positive economics.

If you thought this was an elaborate joke played on the students then you would be correct.

And in terms of the above, the correct statement would be that governments impose voluntary constraints on themselves, engineered by conservative ideologues. They have created accounting processes that ‘account‘ for tax receipts into, say Account A, which they then ‘account’ for their spending from. A sort of administrative fiction to give the impression that the tax receipts provide the wherewithal for government spending.

But anyone knows that these institutional practices can be altered by the government whenever they choose (unless they are embedded in constitutions and then it takes more time).

The reality is that unlike the assertion on of Portes and SWL (which drive their overall results):

Governments do not need taxes to pay for government spending. That is an ideological constraint designed to limit spending. Intrinsically, a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

Modern Monetary Theory (MMT) tells us that taxation serves to create real resource space (idle non-government productive resources), which governments can then bring into productive use to fulfill its elected socio-economic mandate. That taxation reduces the inflation risk of such spending but does not ‘fund’ it.

The fact is that a currency-issuing government can purchase anything that is for sale in its own currency including all idle labour.

MMT also recognises other roles for taxation such as taxes on bads designed to divert consumers or producers away from these goods and services. But that is another story.

Further, a government never needs to issue debt to ‘fund’ deficits.

That is another institutional practice that carries over from the fixed-exchange rate, gold standard days. It is no longer necessary and an understanding of MMT leads one to realise it is largely an exercise in the provision of corporate welfare that should be abandoned.

The point is that if you build ‘economic models’ based on these voluntary constraints, as if they are intrinsic constraints, then the results turn out radically different to the outcomes of an analytical exercise where you assume, correctly, that the government does not need taxes to ‘fund’ spending or to issue debt to fund deficits. Then the mainstream results largely collapse.

I suspect the authors in question implicitly know this. If they don’t then you can draw your own conclusions.


The paper I am using to represent the New Keynesian approach has, by all indications, been somewhat influential in the formation of the macroeconomic approach currently being espoused by the British Labour Party. In that sense, the critique aims to disabuse the Labour politicians and their apparatchiks of building policy options based on fake economic knowledge, and, instead, embrace the principles of Modern Monetary Theory (MMT), which provides an accurate depiction of how the monetary system actually operates and the policy options for a currency-issuing government such as in Britain, and the likely consequences of deploying these options.

The one major lesson that comes out is that the New Keynesian approach is an elaborate fraud. It plays around with so-called ‘optimising’ models asserting human behaviour that no other social scientist believes remotely captures the essence of human decision-making, and then derives conclusions from these models that are claimed to apply to the world we live in. Prior to the GFC, these ‘models’ didn’t even consider the financial sector.

The fact is that nothing of value in terms of specifying what a government should do can be gleaned from a New Keynesian approach. It is barren.

Above, we noted that one discussion paper that seems to have influenced the Shadow British Chancellor was published on May 20, 2014 as Discussion Paper No. 429 from the National Institute of Economic and Social Research.

The NIESR paper Issues in the Design of Fiscal Policy Rules was written by Jonathan Portes (who at the time of writing was the Director of the NIESR before he was ‘let go’) and an Oxford academic, Simon Wren-Lewis.

Here I begin by examining the way that the authors try to use the New Keynesian theory as an authority for specific policy conclusions, which they essentially admit (not in those words) cannot, in fact, be derived from the ‘optimal’ theory.

To specify what they call the ‘optimal’ state, Portes and SWL write out some simple mathematical expressions and note: that the government must satisfy its budget constraint (there is no default), and we ignore financing through printing money.

It is interesting that in defending the New Keynesian position against say Modern Monetary Theory (MMT), proponents make a claim for superiority based on their mathematical reasoning and the apparent absence of such optimising mathematics in MMT.

When useful, MMT uses formal language (mathematics) sparingly. Mostly, propositions can be established without resort to mathematics, which avoids creating a wall of comprehension that most people cannot break down.

Further, there is nothing sophisticated about the mathematics that New Keynesians use. It is just simple calculus really, the sort that I learned as an undergraduate studying mathematics. Hardcore mathematicians laugh at the way economists deploy these tools and parade them as if they are generating something deep and meaningful.

We move on.

Note that while the imposition of taxes is deemed a “cost” by Portes and SWL (discussed in earlier), their ‘model’ doesn’t allow the interest payments on the debt to be a ‘beneflt’. They are silent on that. Conveniently so.

Anyway, the equation they write out which captures the constrained optimisation process is claimed to be an ex ante financial constraint, akin to the financial constraints facing a household that must earn income, borrow, reduce savings or sell assets in order to spend.

As we know, the ‘household budget analogy’ applied to a currency-issuing government is wrong at the most elemental level.

Nothing relating to the experience of a household (the currency user) is relevant to assessing the capacities of or the choices available to such a government (currency issuer).

Further, why do they ignore “financing through printing money”? Not that “printing money” is a term that could be associated with the real world practice of government spending anyway.

They ignore it because it would not allow them to generate the results they desire.

The reality is that these so-called ‘budget constraints’ do not depict real ex ante financial constraints. They are, at best, ex post accounting statements, meaning they have to add up. There is nothing much more about them than that.

They may also reflect current institutional practice which is a political rather than an intrinsic financial artifact.

But, if the authors were to be stock-flow (accounting) consistent (which most mainstream models are not meaning they deliberately leave things out and that flows do not accumulate properly into the corresponding stocks), then they would have to include the change in bank reserves arising from central bank monetary operations associated with fiscal policy (for example, crediting banks accounts on behalf of the government).

But those operations are absent in their approach, which means their analysis is incomplete in an accounting sense. Conveniently so.

Of course, one of the glaring omissions of the New Keynesian models that people learned about after the GFC was that they didn’t even have a financial sector embedded in their basic structure. But that is also another story again.

The upshot of Portes and SWL’s mathematical gymnastics, simple though they are, is that the ‘optimal’ fiscal policy requires “tax smoothing”, so that:

if for a period government spending has to be unusually high (classically a war, but also perhaps because of a recession or natural disaster), it would be wrong to try and match this higher spending with higher tax rates. Instead taxes should only be raised by a small amount, with debt increasing instead, but taxes should stay high after government spending has come back down, to at least pay the interest on the extra debt and perhaps also to bring debt back down again.

So, they are saying:

1. Taxes are necessary to fund government spending but temporary deficits (to cope with wars or deep recessions) should be funded by debt.

2. When economic activity improves, there should be a primary fiscal surplus (”taxes at least pay the interest on the extra debt”) and spending should be cut to allow that outcome.

3. Public debt should be a target policy variable (the lower the better) but in the short-term is a “shock absorber to avoid sharp movements in taxes or government spending”.

4. This is a ‘deficit dove’ construction. We will have austerity but it will be delayed.

The questions one needs to ask is under what conditions would a primary surplus be a responsible state for a government to achieve? Portes and SWL want the primary surpluses to be a target goal for government. But such a target is unlikely to be a desirable state.

Remember, a primary fiscal balance is the difference between government spending and taxation flows less payments on outstanding public debt.

One could imagine a situation where a government would sensibly run a primary surplus or even an overall fiscal surplus (inclusive of interest payments on public debt) if it was accompanied by a robust external surplus, which was pumping net spending in the economy and financing the desire of the private domestic sector to save overall.

Then a fiscal surplus would be required to prevent inflationary pressures from emerging. But it would also be consistent with full employment, the provision of first-class public services, and the fulfillment of the overall saving desires by the private domestic sector. Think Norway.

That is not remotely descriptive of where the UK (or most nearly all nations) are at or have been at in recent decades.

The absurdity of the reasoning that arises from the sort of economic framework that Portes and SWL deploy is illustrated when they start tinkering with the parameters of the ‘model’ to see what transpires.

The exercise is trivial. The model has some equations with parameters that link the variables that describe the equation structures. The parameters are conceptual but to get certain results one has to make assumptions about their values (at the most basic level whether they are positive or negative or above or below unity, etc).

Then one muses about what specific assumptions imply for the results.

One such tinkering by Portes and SWL generates an interpretation that taxes:

gradually fall to zero. How can this happen, given that the government has spending to finance? The answer is that debt gradually declines to zero, and then the government starts to build up assets. Eventually it has enough assets that it can finance all its spending from the interest on those assets, and so taxes can be completely eliminated.

Which then raises the question of how the government gets access to any of the real resources that are available for productive use in the society.

If taxes are zero, why would people offer their labour (and other resources) for the public use? And, how will government make non-inflationary real resource space in order for them to spend (command real resources from the non-government sector)?

But discussing those issues will take us away from the main focus.

In essence, none of their mathematical ‘cases’ (the scenarios they defined with differing parameter values) can be established in reality. This is a common problem of this sort of economic reasoning.

What happens next? They ditch the ‘optimal’ results derived from the calculus and start making stuff up asserting their ‘priors’.

So as not to spoil their story, the authors just assert that “there are two reasons for believing that policy should aim to steadily reduce debt in normal times” even if the ‘optimal’ condition indicates the opposite.

First, they introduce the standard argument that “shocks may be asymmetric” with “large negative shock”(s) not being offset in the other direction.

This is a sort of ‘war chest’ argument. That a government will not be able to respond fully in a major downturn if it starts with high levels of public debt.

Why? It will not be attractive to bond investors, it will run out of money, etc.

Tell that to Japan! Fake knowledge.

Second, they write that:

large negative shocks like a financial crisis might mean that we enter a liquidity trap, so that fiscal expansion is required to assist monetary policy, while large positive shocks could be dealt with by monetary rather than fiscal contraction. There is no equivalent upper bound for interest rates, so prudent policy would reduce debt in normal times to make room for the liquidity trap possibility.

This is the standard mainstream claim that monetary policy is the more effective counter-stabilising (and preferred) policy, except in a deep recession when interest rates are cut to zero and have no further room to fall.

So to counter that ineffectiveness when rates are zero, fiscal policy has to be used. But, in general, monetary policy should be prioritised.

But then the same assertion follows. So that fiscal policy can be on standby for those times when interest rates are zero, the government should have low levels of outstanding debt.

Why? The same argument. It will not be able to fund a new fiscal stimulus if it hasn’t eliminated the impacts from a previous stimulus exercise.

That is a plain lie.

The authors just assert that the capacity of a government to net spend is inversely related to the current stock of outstanding debt.

Why? No reason can be derived from their ‘optimal’ models to justify that assertion.

And, again, tell that to Japan!

The post-GFC period has demonstrated that ’monetary policy’ is not a very effective counter-stabilising tool. Governments that used fiscal policy aggressively in the GFC resumed growth much more quickly than those that didn’t. The stimulatory effects of monetary policy are, at best, ambiguous.

Further, the truth is that the capacity of the government to spend is in no way constrained by its past fiscal stance whether it be surplus, balance or deficit.

A surplus today does not mean that the government is better placed to run a deficit tomorrow. It can always run a deficit if the non-government spending and saving decisions push it that way.

The same goes for outstanding debt, which under current institutional arrangements, will be influenced by the shifts in the flows that make up fiscal policy.

But the level of debt doesn’t constrain or alter the government’s ability to net spend.

The authors might claim that bond markets will rebel and stop funding the deficits. Even if the recipients of this corporate welfare decided to cut off their noses to spite their faces and stopped buying the debt that would not alter the government’s capacity to spend.

First, if it persisted in the unnecessary practice of issuing debt, it could instruct the central bank to set the yield and buy all the debt that the private bond markets didn’t want at that (low to zero) yield. Including all of it!

In other words, the government can always play the private bond markets out of the game if it chooses. Even in the Eurozone, where the Member States are not sovereign, the ECB has demonstrated it can set yields at whatever level it chooses. It can drive yields on long-term public debt into the negative! Who would have thought? No New Keynesian that is for sure. They think deficits ‘crowd out’ private investment spending via higher rates (see below).

Second, the government can also alter a rule or two or change legislation that embodies these voluntary accounting constraints that I noted earlier. That is the right of the legislature and beyond the power of bond markets!

In another one of their musings about parameter values, Portes and SWL tell us that:

there is an additional reason why it might be desirable to eliminate government debt completely, and that is because it crowds out productive capital. In simple overlapping generation models, agents save to fund their retirement, and this determines the size of the capital stock. If agents have an alternative means of saving, which is to invest in government debt, then this debt displaces productive capital.

Really now!

Again, the authors are just rehearsing the standard and deeply flawed mainstream macroeconomic theory, which has the loanable funds model of financial markets embedded.

According to this specious approach, savings are finite and investment competes for the scarce resources. The ‘interest rate’ on loans then brings the two into balance.

The logic then says if there is a shift in the investment demand outwards (capturing in this instance the entry of the government bond to compete with corporate bonds), then the interest rate has to rise to ration off the higher demand for loans, given the finite supply (savings). Wrong at the most elemental level.

First, savings are not finite. They rise with income and if net public spending increases (rising deficit) then national income will rise and so will saving.

Second, and more importantly, real world banks do not remotely operate in a loanable funds way. They will generally extend loans to creditworthy borrowers. This lending is not reserve constrained. Banks do no wait around for depositors to drop their cash off, which they can then on lend.

Loans create deposits (liquidity). Not the other way around, as is assumed by the ‘crowding out’ argument which these authors introduce to their analysis.

So even if the government is selling debt to the non-government sector, the banks still have the capacity (under our current system) to increase private investment.

Further, there is the standard ideological assertion that public spending is ‘less efficient’ (unproductive) compared to “productive capital” (private investment).

The research evidence doesn’t support that assertion. it is just a made up claim to justify privatisation and cuts to government activities.

It has been used to justify the handing out of millions of dollars of public funds to investment bankers, lawyers, accountants etc to sell off public assets at well below market prices to grasping private investors.

We have a long record now of how disastrous most of these selloffs have been from the perspective of the quality, scope and affordability of services that were previously provided by the state.

The next furphy that Portes and SWL introduce is the intergenerational equity argument aka government debt imposes burdens on our grand kids claim.

They claim that lower debt will mean that “Future generations will enjoy a world with lower distortionary taxes, while the current generation will bear the cost of achieving that goal.”

Again, this conclusion follows their assumption that taxes pay back the debt so deficits today force future generations to incur higher costs.

Refer to the previous discussion of the actual role of taxes in a flat monetary system.

The reality is that each generation chooses its own tax and public spending profile via the political process. The way in which intergenerational inequities occur is via real resource utilisation.

We can kill the planet and the kids will then miss out. Alternativelv. we can ensure the kids get access to first-class public infrastructure (education, health, recreation, etc) and have jobs to go to when they develop their skills and knowledge.

Then the kids benefit from today’s fiscal deficits.

But after all of their tinkering with mathematical coefficients (which I have only skimmed here), the authors admit that the “analysis of the optimum long run target for government debt is undeveloped” but:

the case for aiming for a gradual reduction in debt levels seems to be reasonably strong in practice, particularly given the currently high levels of debt in most countries

In other words, the mathematical reasoning leads to nothing definitive so we will just assert things anyway.

It helps economists like this gain promotion as academics and other status that they might enjoy such as picking up ’Inside Job’ type commissions and misrepresenting ideological reports as independent research.

Remember Mishkin in Iceland?

Please read my blog Universities should operate in an ethical and socially responsible manner for more discussion on this point.

I make that comment generally rather than specifically about the authors (Portes and SWL) in question. I don’t know what they do on the side.

So, after all that, what have Portes and SWL to fall back on? Not much. Assertion based on false assumptions.

That doesn’t stop them though.

In Section 3, they still claim ‘authority’ from the discussion on optimal fiscal rules to make the following assertion:

It follows from the previous section that a welfaremaximising government would in general be expected to follow fiscal policies which broadly satisfied the following conditions: a gently declining path of debt over the medium term, but with blips in response to shocks broadly stable tax rates and recurrent government consumption.

Noting it doesn’t follow at all from any results about “welfaremaximising” behaviour that they present. The simple optimising model presented, by the authors’ own admission, is “undeveloped” and incapable of any definitive result.

The results that they claim were derived from the “previous section” are assertions.

But their point is clear. They claim that OECD governments (in general) have not followed these rules and instead the public debt ratios have “steadily increased since the 1970s”, which is evidence of what they call “deficit bias”.

Their claim then is that for various reasons, governments have been acting contrary to “welfare-maximising” behaviour meaning they are acting badly.

Simple isn’t it. Make up a benchmark using flawed assumptions that you know does not apply in the real world. Then label any departures from that fantasy world ‘bad’ and QED, you can then claim in the ‘real world’ that the government is behaving badly.

However, one can contest the benchmark.

If public debt is such an issue, why is the 10-year bond yield for Japanese government bonds at 0.058 per cent (at the time of writing) and why did ‘investors’ pay the Japanese government for the privilege of buying that debt (negative yields) at certain times last year?

Moreover, why are ‘investors’ agreeing to negative yields on all government bond maturities from 1-Year to 8-Years at present.

Further, back in the 1990s, the financial commentators and mainstream macroeconomists were claiming the outstanding Japanese government debt was the mother of all ticking time bombs and they have used this scare tactic long and hard for decades across all nations.

I recall reading some commentator claiming long ago Japan was facing the “mother of all debt-bunnies”, whatever that meant. I guess the ‘bunnies’ hopped away somewhere.

I have gone back through the records I keep and found regular references over the last 27 years to the impending insolvency of Japan because it is violating the economists’ notion of welfare maximising’ debt behaviour.

Across the Pacific, the US was apparently “near to insolvency” on Thursday, September 26, 1940.

Here is an Associated Press story from The Portsmouth Times (Ohio), which was headlines in the New York Times on the same day.

The story quotes one Robert M. Hanes, who at the time was the President of the American Bankers’ Association:

“The evangelists of the new social order are undermining the confidence of the American people in political and economic freedom.

It is a matter of grave concern that we have come to accept deficit financing as a permanent fiscal policy. We not only proceed from year to year on an unbalanced federal budget, but we have permitted the compounding of the federal debt to a huge total which threatens the entire country.

Unless we put an end to deficit financing, to profligate spending, and to indifference to the nature and extent of government borrowing, we shall surely take the road to dictatorship.

By subtle propaganda, special pleading and similar devious device The American people are being persuaded to surrender more and more of their independence to the direction and control of government. This is an evil that feeds on itself.

Deficits and borrowings call for continually larger taxation, which must be met by private enterprise.”

We can find similar remarks throughout history. And, yet, nothing happens. I guess you can cut the Americans some slack such is their penchant for OTT way of doing things.

The point is these economic models that claim public debt should be minimised to prevent costly tax burdens are pie-in-the-neoliberaI-sky sort of stuff.

Further, higher public debt to GDP ratios means that the nongovernment sector has more risk free debt as a proportion of GDP than previously and corresponding income flows.

Why is MMT so popular? – Simon Wren-Lewis.

Although MMT has been around for some time, it recently held its first international conference and has in the last few years attracted a devoted band of followers online. According to an article in The Nation, it has ‘rock star appeal’.

There are short and simple explainers around, but what these and MMT followers are typically not so good at is in explaining exactly why and how they differ from mainstream macroeconomics.

To understand this, we need to go back to the 1960s and 70s. Then there was a debate between two groups in macro over whether it was better to use monetary policy or fiscal policy as an instrument for stabilising the economy. I prefer to call these two groups Monetarists and Fiscalists, because both sides used the same theoretical framework, which was Keynesian.

To cut a long story short the monetarist won that argument, although not quite in the way they intended. Instead of central banks controlling the economy in a hands off way using the money supply, they instead actively used interest rate changes to control output and inflation.

Fiscal policy was increasingly seen as about controlling the level of government debt. I have called this the Consensus Assignment, because it became a consensus and because I don’t think there is another name for it.

The one or two decades before the financial crisis were the golden years for the Consensus Assignment, in the sense that monetary policy did seem to be relatively successful at controlling inflation and dampening the business cycle. However many governments were less successful at controlling government debt, and this failure was termed ‘deficit bias’.

MMT is essentially different because it rejects the Consensus Assignment. It regards monetary policy as an unreliable instrument for controlling the economy, and MMT prefers to use fiscal policy instead. They are, to use my previous terminology, fiscalists.

If you are always using government spending or taxes to control the economy, you are right not to worry about the budget deficit: it is whatever it needs to be to get inflation to target. Whether you finance those deficits by creating money or selling bonds is also a secondary concern – it just influences what the interest rate is, which has an uncertain impact on activity. For this reason you do not need to worry about who will buy your debt, because you can create money instead.

The GFC exposed the Achilles Heel in the Consensus Assignment, because interest rates hit their lower bound and could no longer be moved to stimulate demand. Alternative measures like QE really were as unreliable as MMT thinks all monetary policy is. What governments started to do was use fiscal policy instead of monetary policy to support the economy, but then austerity happened in 2010.

Now we can see why MMT is so popular. Austerity is about governments pretending the Consensus Assignment still works when it does not, because interest rates are at their lower bound. We are in an MMT world, where we should be using fiscal policy and not worrying about the deficit, but policymakers don’t understand that. I think most mainstream macroeconomists do understand this, but we are not often heard. The ground was therefore ripe for MMT.

Policymakers following austerity when they clearly should not annoys me a great deal, and I am very happy to join common cause with MMT on this. By comparison, the things that annoy me about MMT are trivial, like a failure to use equations and their wordplay. You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly.

MMT is particularly attractive because it does away with the perennial ‘where is the money going to come from’ question. Instead it replaces this question with another: ‘will this extra spending raise inflation above target’. As long as inflation is below target that does not appear to be a constraint. In the US right now interest rates are no longer at their lower bound, but inflation is below target, so it appears to MMTers that the government should not worry about how extra spending is paid for.

Of course having a fiscal authority following MMT and a central bank following the Consensus Assignment once rates are above their lower bound could be a recipe for confusion, unless you believe what happens to interest rates is unimportant. I personally think we have strong econometric evidence that changes in interest rates do matter, so once we are off the lower bound should we be fiscalists like MMT or should we return to the Consensus Assignment? That is a question for another day.


The Rock-Star Appeal of Modern Monetary Theory

The Sanders generation and a new economic idea.

by Atossa Araxia Abrahamian

In early 2013, Congress entered a death struggle, or a debt struggle, if you will, over the future of the US economy. A spate of old tax cuts and spending programs were due to expire almost simultaneously, and Congress couldn’t agree on a budget, nor on how much the government could borrow to keep its engines running. Cue the predictable partisan chaos: House Republicans were staunchly opposed to raising the debt ceiling without corresponding cuts to spending, and Democrats, while plenty weary of running up debt, too, wouldn’t sign on to the Republicans’ proposed austerity.

In the absence of political consensus, and with time running out, a curious solution bubbled up from the depths of the economic blogosphere. What if the Treasury minted a $1 trillion coin, deposited it in the government’s account at the Federal Reserve, and continued on with business as usual? The workaround was technically authorized by an obscure law that applies to commemorative platinum coins, and it didn’t require congressional approval, so the GOP couldn’t get in the way. What’s more, the cash would not be circulated, so it wouldn’t cause inflation.

The thought experiment was catnip for wonks and bloggers, who described it as “ludicrous but perfectly legal” (Slate); “a monetary parlor trick” (Wired); “really thrilling” (Business Insider); “a large-scale trolling project” (The Guardian). The idea made its way onto late-night TV, political talk shows, White House press conferences, and lived on as a hashtag: #mintthecoin.

At the heart of the attention was an acknowledgement that money wasn’t the problem here, politics was.

For a small but committed group of economists, academics, and activists who adhere to a doctrine called Modern Monetary Theory (MMT), though, #mintthecoin was the tip of the economic iceberg. The possibility of a $1 trillion coin represented more than mere monetary sophistry: It drove home their foundational point that fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend.

According to this small but increasingly vocal cohort of economists, including Bernie Sanders’s former chief economic adviser, once we change the way we think about money, we can provide for everyone: We don’t have to “find” the money to “pay” for universal health care by “cutting” the budget elsewhere. In fact, our government already works that way: Spending must precede taxation, or there would be no dollars in the economy to tax. It’s the political will to spend on certain things, not the money to afford it, that’s lacking.

“The idea that you can’t feed hungry kids and build a bridge is a huge problem,” says Stephanie Kelton, an economist at the University of Missouri, Kansas City. “It’s cruel to say we want more money for education and food but have to wait for legislation.”

Kelton, who spoke about the coin on MSNBC, is MMT’s most mediagenic expert. She’s 48 years old, whip-smart, impeccably coiffed, and brims with enthusiasm, important for someone who spends half her time telling Wall Street types to rethink their basic approach to economics. When Sanders ran for the Democratic nomination, Kelton became his chief economic adviser at the recommendation of several prominent left-wing economists, including Dean Baker and Jamie Galbraith. Before that, she served as chief economist on the Senate Budget Committee and moonlighted as the editor of a blog called New Economic Perspectives.

Kelton sees the fundamentals of her work as “a descriptive analysis that could be exploited by either side: Democrats and Republicans can use the insight to push tax cuts or increase spending.” Indeed, the idea of a big-spending economic stimulus to fix the country’s infrastructure served as a common ground for Trump and Sanders voters who liked the idea of jobs perhaps more than they disliked the idea of national indebtedness. If that’s what voters want, then MMT is a rare bird: an economic theory that not only validates their hunches, but contends that they’re the key to a healthy, stable, prosperous economy for all.

Modern Monetary Theory emerged as a distinct school of economic thought in the 1990s, when Kelton and her colleagues, mainly professors with homes in heterodox economics departments like the University 6 Missouri, Kansas City, and Bard’s Levy Institute, published research and discussed their theories, albeit mainly among themselves on a now-defunct listserv called “Post-Keynesian Thought” and at an annual conference that started in 2003.

The various strains of thought that make up MMT have their roots in Adam Smith and John Maynard Keynes, along with more contemporary thinkers like Hyman Minsky and Abba Lerner, but only recently have researchers connected the dots in quite this way. “We’ve rediscovered old ideas,” Kelton said, “and assembled them into a complete macroeconomic frame.”

To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward.

Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government, which is ultimately the source of all dollars, taxed or untaxed, pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT’s adherents like to point out that the federal government never “runs out” of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn’t a scarce commodity like silver or gold. “To people who’ve worked in financial markets, who work at the Fed, this isn’t controversial at all,” says Galbraith, who, while not an adherent, can certainly be described as “MMT-friendly.”

The decisions about how to issue, lend, and spend money come down to politics, values, and convention, whether the goal is reducing inequality or boosting entrepreneurship. Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment, and we’re a long way off from that, particularly if we include people who have given up looking for jobs or aren’t working as much as they’d like to among the officially “unemployed.”

The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.

MMT didn’t get much traction outside of academia at first. In fact, it was (and remains) on the fringes of the economics profession itself. “We all had offices in the same alley at the Levy Institute,” Kelton recalls.

Then along came Warren Mosler, a wealthy financier who, as a result of his banking work, had come to some unorthodox and complementary ideas about money. Eager to share his views, Mosler finale a meeting with Donald Rumsfeld in the steam room of the Chicago Racquet Club. Rumsfeld led him to Arthur Laffer, the right-wing economist who came up with the “Laffer curve” theory promoting low taxes, and Laffer, in turn, connected Mosler with his future collaborator, the economist Mark McNary. In an independently published paper titled “Soft-Currency Economics,” Mosler, drawing on McNary’s research, argued that taxes are what create a demand for federal spending and that deficits don’t cause countries to default on their debt.

Mosler sought comments on his work from academic departments, too. He didn’t have any luck with Ivy League institutions, but the man made it on Wall Street for at least one reason: He won’t take no for an answer. So Mosler sent his paper to the “Post-Keynesian Thought” listserv and found a group of kindred spirits willing to engage.

Stephanie Kelton recalls initially disagreeing with some of Mosler’s theories about taxes; then her colleague L. Randall Wray told her to do her own work and show how he was mistaken. “I wrote it up in the Cambridge Journal of Economics and set out to prove he was wrong,” Kelton recalls, “but I arrived at the same place he did.”

From then on, Mosler became something like the movement’s sugar daddy, funding graduate research, making donations to the Center for Full Employment and Price Stability at the University of Missouri, even opening a research centre in Switzerland. He was an unlikely addition to the gang: He lives in St. Croix for the taxes, has a thing for fancy cars, made a nice chunk of money investing, and has run for office in St. Croix and in his home state of Connecticut. Mosler isn’t particularly ideological, but after some hesitation, he describes himself over the phone as “basically progressive.” Still, he insists that he is simply opening the public’s eyes to basic math. “It’s a theory insofar as arithmetic is a theory,” Mosler tells me.

“If you eliminate the tax on people working for a living and [let them] keep more money, the average family would have $625 of payroll pay. Why won’t politicians do that? Because they believe the tax money is used to make Social Security payments. But that’s a mistake.” Even so, Mosler notes, “if anyone would propose that, it’s not a big-spending liberal—it’s something the Tea Party might propose.”

Early in his foray into MMT, Mosler hired Bard economist Pavlina Tcherneva to help him with the research. Tcherneva had her 15 minutes of fame in 2015, when Bernie Sanders held up a graph she’d made showing how few gains in income American workers have seen since the Reagan years. (It went viral online under the Vox headline “The most important chart about the American economy you’ll see this year”) Today, Tcherneva’s research is focused on how MMT can provide jobs.

“There is no reason why society should tolerate unemployment,” she tells me in her office at Bard on an unseasonably warm day in February. “It’s a basic human right. By pegging a dollar amount to one hour of labor by having full employment, money will mean something in socially useful terms, and we can design a system to support and tighten the labor market and let people opt out of shitty jobs. Trump has his finger on the pulse of joblessness,” she adds. “It’s a direct recognition, a precise recognition, of their plight. But we need something concrete to offer.”

In Europe, where a generation of young people remain under- or unemployed, more spending, better social welfare, and a guaranteed job are a particularly attractive combination. But eurozone countries share a common currency, so the European Union would have to allow all of its members to borrow more, not less, to stimulate the economies of its more beleaguered states. There is some, if limited, buy-in from governments, though probably nowhere near enough to change the policy. In Greece, for example, Rana Antonopoulos, who runs Bard’s “Gender Equality and the Economy” program, serves as the alternate minister of labor in the Syriza government; she’s proposed pushing the government to be the employer of last resort.

Despite the lack of official interest, austerity has given these MMT economists rock-star status. Kelton recalls a conference a few years back in Rimini, Italy, where her group sold out their initial venue and had to move the event to a basketball stadium. “When we were driving there, the parking lot was packed,” she says. “We asked the driver what was happening, and he said it was for us.” She thought he was kidding—until she saw the MMT signs in the background.

On this side of the Atlantic, the financial crisis, the tepid recovery, and the Occupy movement have paved the way for alternative ways of thinking about the economy, and the events of 2008-12 have made it clear that the US government had the money, it just chose to bail out the banking sector, not spend it on social welfare. This all served to validate many of the points that Kelton and her colleagues have been making for decades.

“We built credibility,” Kelton says, “and that helped us get established as a school of thought. The New Economic Perspectives blog helped us get a voice. It also gave us a historical record about being right about things like how the US downgrade wouldn’t make interest rates go up; that quantitative easing wasn’t inflationary; and that the eurozone would run into trouble. We were saying that in 1998!”

Kelton’s work with Sanders further boosted the gang’s legitimacy. She didn’t transform him into a “deficit owl,” but observers note that during his run, Sanders did make moves to refocus the conversation around social goods, speaking of education, health care, and infrastructure deficits instead of obsessing over abstract negatives on a balance sheet. “He didn’t ‘go there,’” Tcherneva says, “but it was a teachable moment. The frame was useful because it concerns concrete things. People don’t lose sleep over government deficits.”

MMT has something else that most obscure economic doctrines don’t have: a band of devoted bloggers and commenters, and a “street team” of young, politically engaged people who learned about these theories online and have taken it upon themselves to spread the gospel wherever they go with an almost religious fervor.

During the recession, the popular economics blog Naked Capitalism began publishing articles about the movement; economists Tyler Cowen and Paul Krugman, though not particularly sympathetic to MMT (in part because of their concerns about inflation), at least responded to them. In 2012, a Columbia Law School student, Rohan Grey, started a group called the Modern Money Network, which has hosted a series of symposiums with big-name speakers like the former Greek finance minister, Yanis Varoufakis. On YouTube, videos of MMT lectures, seminars, and tutorials abound. “I’ve been amazed by the activism,” Tcherneva says. “We’ve always wanted to democratize our ideas, and we now can thanks to the magic of social media.”

It’s hard to imagine radical changes being made to the way politicians talk about money. It could take decades, even centuries, to make a dent in entrenched ideas about debt, scarcity, and supply. Even so, the time seems ripe for MMT: There is, particularly among young people, an enormous appetite for new solutions to the problems that modern economies face, from automation to offshoring. And the financial crisis has shaken the public’s trust in established ways of thinking. Take the universal basic income: A few years ago, it seemed unrealistic and utopian, but today, versions of the UBI have been embraced by Silicon Valley moguls, economists on the left and the right, and politicians around the world.

MMT is less prescriptive: It describes the way that money works in a way that an 8-year-old can grasp more readily than a PhD, which in itself is unnerving. “The contribution of MMT is not the discovery of new facts,” Galbraith says. “It’s a teaching core of things which are factually uncontroversial.” But its implications can be radically humane. What’s threatening to the establishment, Galbraith adds, “is that the narrative is very compelling.”


Atossa Araxia Abrahamian is a journalist and the author of The Cosmopolites: The Coming of the Global Citizen


Modern Monetary Theory is an unconventional take on economic strategy

by Dylan Matthews

About 11 years ago, James K. “Jamie” Galbraith recalls, hundreds of his fellow economists laughed at him. To his face. In the White House.

It was April 2000, and Galbraith had been invited by President Bill Clinton to speak on a panel about the budget surplus. Galbraith was a logical choice. A public policy professor at the University of Texas and former head economist for the Joint Economic Committee, he wrote frequently for the press and testified before Congress.

What’s more, his father, John Kenneth Galbraith, was the most famous economist of his generation: a Harvard professor, best-selling author and confidante of the Kennedy family. Jamie has embraced a role as protector and promoter of the elder’s legacy.

But if Galbraith stood out on the panel, it was because of his offbeat message. Most viewed the budget surplus as opportune: a chance to pay down the national debt, cut taxes, shore up entitlements or pursue new spending programs.

He viewed it as a danger: If the government is running a surplus, money is accruing in government coffers rather than in the hands of ordinary people and companies, where it might be spent and help the economy.

“I said economists used to understand that the running of a surplus was fiscal (economic) drag,” he said, “and with 250 economists, they giggled.”

Galbraith says the 2001 recession — which followed a few years of surpluses — proves he was right.

A decade later, as the soaring federal budget deficit has sharpened political and economic differences in Washington, Galbraith is mostly concerned about the dangers of keeping it too small. He’s a key figure in a core debate among economists about whether deficits are important and in what way. The issue has divided the nation’s best-known economists and inspired pockets of passion in academic circles. Any embrace by policymakers of one view or the other could affect everything from employment to the price of goods to the tax code.

In contrast to “deficit hawks” who want spending cuts and revenue increases now in order to temper the deficit, and “deficit doves” who want to hold off on austerity measures until the economy has recovered, Galbraith is a deficit owl. Deficit Owls certainly don’t think we need to balance the budget soon. Indeed, they don’t concede we need to balance it at all. Owls see government spending that leads to deficits as integral to economic growth, even in good times.

The term isn’t Galbraith’s. It WAS COINED by Stephanie Kelton, a professor at the University of Missouri at Kansas City, who with Galbraith is part of a small group of economists who have concluded that everyone — members of Congress, think tank denizens, the entire mainstream of the economics profession — has misunderstood how the government interacts with the economy. If their theory — dubbed “Modern Monetary Theory” or MMT — is right, then everything we thought we knew about the budget, taxes and the Federal Reserve is wrong.

Keynesian Roots

Modern Monetary Theory” was coined by Bill Mitchell, an Australian economist and prominent proponent, but its roots are much older. The term is a reference to John Maynard Keynes, the founder of modern macroeconomics. In “A Treatise on Money,” Keynes asserted that “all modern States” have had the ability to decide what is money and what is not for at least 4,000 years.

This claim, that money is a “creature of the state,” is central to the theory. In a “fiat money” system like the one in place in the United States, all money is ultimately created by the government, which prints it and puts it into circulation. Consequently, the thinking goes, the government can never run out of money. It can always make more.

This doesn’t mean that taxes are unnecessary. Taxes, in fact, are key to making the whole system work. The need to pay taxes compels people to use the currency printed by the government. Taxes are also sometimes necessary to prevent the economy from overheating. If consumer demand outpaces the supply of available goods, prices will jump, resulting in inflation (where prices rise even as buying power falls). In this case, taxes can tamp down spending and keep prices low.

But if the theory is correct, there is no reason the amount of money the government takes in needs to match up with the amount it spends. Indeed, its followers call for massive tax cuts and deficit spending during recessions.

Warren Mosler, a hedge fund manager who lives in Saint Croix in the U.S. Virgin Islands — in part because of the tax benefits — is one proponent. He’s perhaps better know for his sports car company and his frequent gadfly political campaigns (he earned a little less than one percent of the vote as an independent in Connecticut’s 2010 Senate race). He supports suspending the payroll tax that finances the Social Security trust fund and providing an $8 an hour government job to anyone who wants one to combat the current downturn.

The theory’s followers come mainly from a couple of institutions: the University of Missouri-Kansas City’s economics department and the Levy Economics Institute of Bard College, both of which have received money from Mosler. But the movement is gaining followers quickly, largely through an explosion of economics blogs. Naked Capitalism, an irreverent and passionately written blog on finance and economics with nearly a million monthly readers, features proponents such as Kelton, fellow Missouri professor L. Randall Wray and Wartberg College professor Scott Fullwiler. So does New Deal 2.0, a wonky economics blog based at the liberal Roosevelt Institute think tank.

Their followers have taken to the theory with great enthusiasm and pile into the comment sections of mainstream economics bloggers when they take on the theory. Wray’s work has been picked up by Firedoglake, a major liberal blog, and the New York Times op-ed page. “The crisis helped, but the thing that did it was the blogosphere,” Wray says. “Because, for one thing, we could get it published. It’s very hard to publish anything that sounds outside the mainstream in the journals.”

Most notably, Galbraith has spread the message everywhere from the Daily to Congress. He advised lawmakers including then-House Speaker Nancy Pelosi (D-Calif.) when the financial crisis hit in 2008. Last summer he consulted with a group of House members on the debt ceiling negotiations. He was one of the handful of economists consulted by the Obama administration as it was designing the stimulus package. “I think Jamie has the most to lose by taking this position,” Kelton says. “It was, I think, a really brave thing to do, because he has such a big name, and he’s so well-respected.”

Wray and others say they, too, have consulted with policymakers, and there is a definite sense among the group that the theory’s time is now. “Our Web presence, every few months or so it goes up another notch,” Fullwiler says.

A Divisive History

The idea that deficit spending can help to bring an economy out of recession is an old one. It was a key point in Keynes’s “The General Theory of Employment, Interest and Money.” It was the chief rationale for the 2009 stimulus package, and many self-identified Keynesians, such as former White House adviser Christina Romero and economist Paul Krugman, have argued that more is in order. There are, of course, detractors.

A key split among Keynesians dates to the 1930s. One set of economists, including the Nobel laureates John Hicks and Paul Samuelson, sought to incorporate Keynes’s insights into classical economics. Hicks built a mathematical model summarizing Keynes’s theory, and Samuelson sought to wed Keynesian macroeconomics (which studies the behavior of the economy as a whole) to conventional microeconomics (which looks at how people and businesses allocate resources). This set the stage for most macroeconomic theory since. Even today, “New Keynesians,” such as Greg Mankiw, a Harvard economist who served as chief economic adviser to George W. Bush, and Romer’s husband, David, are seeking ways to ground Keynesian macroeconomic theory in the micro-level behavior of businesses and consumers.

Modern Monetary theorists hold fast to the tradition established by “post-Keynesians” such as Joan Robinson, Nicholas Kaldor and Hyman Minsky, who insisted Samuelson’s theory failed because its models acted as if, in Galbraith’s words, “the banking sector doesn’t exist.”

The connections are personal as well. Wray’s doctoral dissertation was advised by Minsky, and Galbraith studied with Robinson and Kaldor at the University of Cambridge. He argues that the theory is part of an “alternative tradition, which runs through Keynes and my father and Minsky.

And while Modern Monetary Theory’s proponents take Keynes as their starting point and advocate aggressive deficit spending during recessions, they’re not that type of Keynesians. Even mainstream economists who argue for more deficit spending are reluctant to accept the central tenets of Modern Monetary Theory. Take Krugman, who regularly engages economists across the spectrum in spirited debate. He has argued that pursuing large budget deficits during boom times can lead to hyperinflation. Mankiw concedes the theory’s point that the government can never run out of money but doesn’t think this means what its proponents think it does.

Technically it’s true, he says, that the government could print streams of money and never default. The risk is that it could trigger a very high rate of inflation. This would “bankrupt much of the banking system,” he says. “Default, painful as it would be, might be a better option.”

Mankiw’s critique goes to the heart of the debate about Modern Monetary Theory — and about how, when and even whether to eliminate our current deficits.

When the government deficit spends, it issues bonds to be bought on the open market. If its debt load grows too large, mainstream economists say, bond purchasers will demand higher interest rates, and the government will have to pay more in interest payments, which in turn adds to the debt load.

To get out of this cycle, the Fed — which manages the nation’s money supply and credit and sits at the center of its financial system — could buy the bonds at lower rates, bypassing the private market. The Fed is prohibited from buying bonds directly from the Treasury — a legal rather than economic constraint. But the Fed would buy the bonds with money it prints, which means the money supply would increase. With it, inflation would rise, and so would the prospects of hyperinflation.

“You can’t just fund any level of government that you want from spending money, because you’ll get runaway inflation and eventually the rate of inflation will increase faster than the rate that you’re extracting resources from the economy,” says Karl Smith, an economist at the University of North Carolina. “This is the classic hyperinflation problem that happened in Zimbabwe and the Weimar Republic.”

The risk of inflation keeps most mainstream economists and policymakers on the same page about deficits: In the medium term — all else being equal — it’s critical to keep them small.

Economists in the Modern Monetary camp concede that deficits can sometimes lead to inflation. But they argue that this can only happen when the economy is at full employment — when all who are able and willing to work are employed and no resources (labor, capital, etc.) are idle. No modern example of this problem comes to mind, Galbraith says.

“The last time we had what could be plausibly called a demand-driven, serious inflation problem was probably World War I,” Galbraith says. “It’s been a long time since this hypothetical possibility has actually been observed, and it was observed only under conditions that will never be repeated.”

Critics Rebuttals

According to Galbraith and the others, monetary policy as currently conducted by the Fed does not work. The Fed generally uses one of two levers to increase growth and employment. It can lower short-term interest rates by buying up short-term government bonds on the open market. If short-term rates are near-zero, as they are now, the Fed can try “quantitative easing,” or large-scale purchases of assets (such as bonds) from the private sector including longer-term Treasuries using money the Fed creates. This is what the Fed did in 2008 and 2010, in an emergency effort to boost the economy.

According to Modern Monetary Theory, the Fed buying up Treasuries is just, in Galbraith’s words, a “bookkeeping operation” that does not add income to American households and thus cannot be inflationary.

“It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.”

The theorists just “have no idea how quantitative easing works,” says Joe Gagnon, an economist at the Peterson Institute who managed the Fed’s first round of quantitative easing in 2008. Even if the money the Fed uses to buy bonds stays in bank reserves — or money that’s held in reserve — increasing those reserves should still lead to increased borrowing and ripple throughout the system.

Mainstreamers are equally baffled by another claim of the theory: that budget surpluses in and of themselves are bad for the economy. According to Modern Monetary Theory, when the government runs a surplus, it is a net saver, which means that the private sector is a net debtor. The government is, in effect, “taking money from private pockets and forcing them to make that up by going deeper into debt,” Galbraith says, reiterating his White House comments.

The mainstream crowd finds this argument as funny now as they did when Galbraith presented it to Clinton. “I have two words to answer that: Australia and Canada,” Gagnon says. “If Jamie Galbraith would look them up, he would see immediate proof he’s wrong. Australia has had a long-running budget surplus now, they actually have no national debt whatsoever, they’re the fastest-growing, healthiest economy in the world.” Canada, similarly, has run consistent surpluses while achieving high growth.

To even care about such questions, Galbraith says, marked him as “a considerable eccentric” when he arrived from Cambridge to get a PhD at Yale, which had a more conventionally Keynesian economics department. Galbraith credits Samuelson and his allies’ success to a “mass-marketing of economic doctrine, of which Samuelson was the great master . . .which is something the Cambridge school could never have done.”

The mainstream economists are loath to give up any ground, even in cases such as the so-called “Cambridge capital controversy” of the 1960s. Samuelson debated post-Keynesians and, by his own admission, lost. Such matters have been, in Galbraith’s words, “airbrushed, like Trotsky” from the history of economics.

But MMT’s own relationship to real-world cases can be a little hit-or-miss. Mosler, the hedge fund manager, credits his role in the movement to an epiphany in the early 1990s, when markets grew concerned that Italy was about to default. Mosler figured that Italy, which at that time still issued its own currency, the lira, could not default as long as it had the ability to print more liras. He bet accordingly, and when Italy did not default, he made a tidy sum. “There was an enormous amount of money to be made if you could bring yourself around to the idea that they couldn’t default,” he says.

Later that decade, he learned there was also a lot of money to be lost. When similar fears surfaced about Russia, he again bet against default. Despite having its own currency, Russia defaulted, forcing Mosler to liquidate one of his funds and wiping out much of his $850 million in investments in the country. Mosler credits this to Russia’s fixed exchange rate policy of the time and insists that if it had only acted like a country with its own currency, default could have been avoided.

But the case could also prove what critics insist: Default, while technically always avoidable, is sometimes the best available option.


Modern Monetary Theory
MMT or Modern Money Theory, also known as Neo-Chartalism, is a macroeconomic theory that describes and analyses modern economies in which the national currency is fiat money, established and created by the government.
The key insight of MMT is that “monetarily sovereign government is the monopoly supplier of its currency and can issue currency of any denomination in physical or non-physical forms. As such the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay.”
In sovereign financial systems, banks can create money but these “horizontal” transactions do not increase net financial assets as assets are offset by liabilities. “The balance sheet of the government does not include any domestic monetary instrument on its asset side; it owns no money. All monetary instruments issued by the government are on its liability side and are created and destroyed with spending and taxing/bond offerings, respectively.”
In addition to deficit spending, valuation effects (e.g. growth in stock price) can increase net financial assets. In MMT, “vertical” money (see below) enters circulation through government spending.
Taxation and its Legatum tender enable power to discharge debt and establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met.
In addition, fines, fees and licenses create demand for the currency. This can be a currency issued by the government, or a foreign currency such as the Euro.
An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government
can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities by itself.
Theoretical Background
MMT synthesises ideas from the State Theory of Money of Georg Friedrich Knapp (also known as Chartalism) and Credit Theory of Money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner, Hyman Minsky‘s views on the banking system and Wynne Godley‘s Sectoral balances approach.
Knapp, writing in 1905, argued that “money is a creature of law” rather than a commodity. At the time of writing the Gold Standard was in existence, and Knapp contrasted his state theory of money with the view of “metallism“, where the value of a unit of currency depended on the quantity of precious metal it contained or could be exchanged for. He argued the state can create pure paper money and make it exchangeable by recognising it as legal tender, with the criterion for the money of a state being “that which is accepted at the public pay offices”.
The prevailing view of money was that it had evolved from systems of barter to become a medium of exchange because it represented a durable commodity which had some use value, but proponents of MMT such as Randall Wray and Mathew Forstater argue that more general statements appearing to support a chartalist view of tax-driven paper money appear in the earlier writings of many classical economists, including Adam Smith, Jean-Baptiste Say, J.S. Mill, Karl Marxand William Stanley Jevons
Alfred Mitchell-Innes, writing in 1914, argued that money existed not as a medium of exchange but as a standard of deferred payment, with government money being debt the government could reclaim by taxation. Innes argued:
Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, and present it to the Treasury in liquidation of his legal debt. He has to redeem or cancel that portion of the debt…The redemption of government debt by taxation is the basic law of coinage and of any issue of government ‘money’ in whatever form.
— Alfred Mitchell-Innes, The Credit Theory of Money, The Banking Law Journal
Knapp and “chartalism” were referenced by John Maynard Keynes in the opening pages of his 1930 Treatise on Money and appear to have influenced Keynesian ideas on the role of the state in the economy.
By 1947, when Abba Lerner wrote his article Money as a Creature of the State, economists had largely abandoned the idea that the value of money was closely linked to gold.
Lerner argued that responsibility for avoiding inflation and depressions lay with the state because of its ability to create or tax away money
Vertical Transactions
MMT labels any transactions between the government sector and the non-government sector as a vertical transaction. The government sector is considered to include the treasury and the central bank, whereas the non-government sector includes private individuals and firms (including the private banking system) and the external sector – that is, foreign buyers and sellers.
In any given time period, the government’s budget can be either in deficit or in surplus. A deficit occurs when the government spends more than it taxes; and a surplus occurs when a government taxes more than it spends. MMT states that as a matter of accounting, it follows that government budget deficits add net financial assets to the private sector. This is because a budget deficit means that a government has deposited more money into private bank accounts than it has removed in taxes. A budget surplus means the opposite: in total, the government has removed more money from private bank accounts via taxes than it has put back in via spending.
Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity:
where G is government spending, T is taxes, Sis savings, I is investment and NX is net exports.
The conclusion that MMT draws from this is that it is only possible for the non government sector to accumulate a surplus if the government runs budget deficits. The non government sector can be further split into foreign users of the currency and domestic users.
MMT economists aim to run deficits as much as the private sector wants to save and for real resources to be fully used e.g. full employment. As most private sectors want to net save and globally, external balances must add up to zero, MMT economists usually advocate budget deficits.
Interaction between government and the banking sector
MMT is based on a detailed empirical account of the “operational realities” of interactions between the government and its central bank, and the commercial banking sector, with proponents like Scott Fullwiler arguing that understanding of reserve accounting is critical to understanding monetary policy options.
A sovereign government typically has an operating account with the country’s central bank. From this account, the government can spend and also receive taxes and other inflows. All of the commercial banks also have an account with the central bank, by means of which the banks manage their reserves (that is, the amount of available short-term money that a particular bank holds).
So when the government spends, the treasury debits its operating account at the central bank, and deposits this money into private bank accounts (and hence into the commercial banking system). This money adds to the total deposits in the commercial bank sector. Taxation works exactly in reverse; private bank accounts are debited, and hence deposits in the commercial banking sector fall.
Government bonds and interest rate maintenance
Virtually all central banks set an interest rate target, and conduct open market operationsto ensure base interest rates remain at that target level. According to MMT the issuing of government bonds is best understood as an operation to offset government spending rather than a requirement to finance it.
In most countries, commercial banks’ reserve accounts with the central bank must have a positive balance at the end of every day; in some countries, the amount is specifically set as a proportion of the liabilities a bank has (i.e. its customer deposits). This is known as a reserve requirement. At the end of every day, a commercial bank will have to examine the status of their reserve accounts. Those that are in deficit have the option of borrowing the required funds from the central bank, where they may be charged a lending rate(sometimes known as a discount rate) on the amount they borrow. On the other hand, the banks that have excess reserves can simply leave them with the central bank and earn a support rate from the central bank. Some countries, such as Japan, have a support rate of zero.
Banks with more reserves than they need will be willing to lend to banks with a reserve shortage on the interbank lending market. The surplus banks will want to earn a higher rate than the support rate that the central bank pays on reserves; whereas the deficit banks will want to pay a lower interest rate than the discount rate the central bank charges for borrowing. Thus they will lend to each other until each bank has reached their reserve requirement. In a balanced system, where there are just enough total reserves for all the banks to meet requirements, the short-term interbank lending rate will be in between the support rate and the discount rate.
Under an MMT framework where government spending injects new reserves into the commercial banking system, and taxes withdraw it from the banking system, government activity would have an instant effect on interbank lending. If on a particular day, the government spends more than it taxes, reserves have been added to the banking system (see vertical transactions). This will typically lead to a system-wide surplus of reserves, with competition between banks seeking to lend their excess reserves forcing the short-term interest rate down to the support rate (or alternately, to zero if a support rate is not in place). At this point banks will simply keep their reserve surplus with their central bank and earn the support rate.
The alternate case is where the government receives more taxes on a particular day than it spends. In this case, there may be a system-wide deficit of reserves. As a result, surplus funds will be in demand on the interbank market, and thus the short-term interest rate will rise towards the discount rate. Thus, if the central bank wants to maintain a target interest rate somewhere between the support rate and the discount rate, it must manage the liquidity in the system to ensure that there is the correct amount of reserves in the banking system.
Central banks manage this by buying and selling government bonds on the open market. On a day where there are excess reserves in the banking system, the central bank sells bonds and therefore removes reserves from the banking system, as private individuals pay for the bonds. On a day where there are not enough reserves in the system, the central bank buys government bonds from the private sector, and therefore adds reserves to the banking system.
It is important to note that the central bank buys bonds by simply creating money—it is not financed in any way. It is a net injection of reserves into the banking system. If a central bank is to maintain a target interest rate, then it must necessarily buy and sell government bonds on the open market in order to maintain the correct amount of reserves in the system.
Horizontal Transactions
MMT economists describe any transactions within the private sector as “horizontal” transactions, including the expansion of the broad money supply through the extension of credit by banks.
MMT economists regard the concept of the money multiplier, where a bank is completely constrained in lending through the deposits it holds and its capital requirement, as misleading. Rather than being a practical limitation on lending, the cost of borrowing funds from the interbank market (or the central bank) represents a profitability consideration when the private bank lends in excess of its reserve and/or capital requirements (see interaction between government and the banking sector).
According to MMT, bank credit should be regarded as a “leverage” of the monetary baseand should not be regarded as increasing the net financial assets held by an economy: only the government or central bank is able to issue high-powered money with no corresponding liability. Stephanie Kelton argues that bank money is generally accepted in settlement of debt and taxes because of state guarantees, but that state-issued high-powered money sits atop a “hierarchy of money”.
The Foreign Sector
NOTE: Some MMT economists view this distinction as misleading, regarding the currency area itself as a closed system, and do not differentiate between the external and domestic sectors. They view the world (closed system) split into several currency areas, not necessarily the size of a country.
Imports and exports
MMT analyzes imports and exports within the framework of horizontal transactions. It argues that an export represents a desire on behalf of the exporting nation to obtain the national currency of the importing nation if there are floating exchange rates and they use different currencies. The following hypothetical example is consistent with the workings of the FX market, and can be used to illustrate the basis of this aspect of MMT:
”An Australian importer (person A) needs to pay for some Japanese goods. The importer will go to his bank and ask to transfer 1000 yen to the Japanese bank account of the Japanese firm (person B). After looking up the relevant exchange rates for that day, the bank will inform him that this will cost him 10 dollars. The bank removes 10 dollars from the importer’s account, and goes to the FX market. It finds an individual (person C) who is willing to swap 1000 yen for 10 dollars. It transfers the 10 dollars to that individual. Then it takes the 1000 yen and transfers it to the Japanese exporter’s bank account.”
Thus, the transaction is complete. What made the transaction possible (i.e. acceptably priced to the importer) was person C in the middle of the FX swap. Thus MMT concludes that it is a foreign desire for an importer’s currency that makes importing possible.
MMT proponents such as Warren Mosler argue that trade deficits need not be unsustainable and are beneficial to the standard of living in the short run. Imports are an economic benefit to the importing nation because they provide the nation with real goods it can consume, that it otherwise would not have had. Exports, on the other hand, are an economic cost to the exporting nation because it is losing real goods that it could have consumed. Currency transferred to foreign ownership, however represents a future claim over goods of that nation.
Cheap imports may also cause the failure of local firms providing similar goods at higher prices, and hence unemployment but MMT commentators label that consideration as a subjective value-based one, rather than an economic-based one: it is up to a nation to decide whether it values the benefit of cheaper imports more than it values employment in a particular industry. Similarly a nation overly dependent on imports may face a supply shock if the exchange rate drops significantly, though central banks can and do trade on the FX markets to avoid sharp shocks to the exchange rate.
Foreign sector and commercial banks
Although a net-importing nation will transfer a portion of domestic currency into foreign ownership, the currency will usually remain within the importing nation. The foreign owner of the local currency can either (a) spend them purchasing local assets or (b) deposit them in the local banking system. In each scenario, the money ultimately ends up in the local banking system.
Foreign sector and government
Using the same application of vertical transactions MMT argues that the holder of the bond is irrelevant to the issuing government. As long as there is a demand for the issuer’s currency, whether the bond holder is foreign or not, governments can never be insolvent when the debt obligations are in their own currency; this is because the government is not constrained in creating its own currency (although the bond holder may affect the exchange rate by converting to local currency). Similarly, according to the FX theory outlined above, the currency paid out at maturity cannot leave the country of issuance either.
MMT does point out, however, that debt denominated in a foreign currency certainly is a fiscal risk to governments, since the indebted government cannot create foreign currency. In this case the only way the government can sustainably repay its foreign debt is to ensure that its currency is continually and highly demanded by foreigners over the period that it wishes to repay the debt – an exchange rate collapse would potentially multiply the debt many times over asymptotically, making it impossible to repay. In that case, the government can default, or attempt to shift to an export-led strategy or raise interest rates to attract foreign investment in the currency. Either one has a negative effect on the economy. Euro debt crises in the “PIIGS” countries that began in 2009 reflect this risk, since Greece, Ireland, Spain, Italy, etc. have all issued debts in a quasi-“foreign currency” – the Euro, which they cannot create.
Policy Implications
MMT claims that the word “borrowing” is a misnomer when it comes to a sovereign government’s fiscal operations, because what the government is doing is accepting back its own IOUs, and nobody can borrow back their own debt instruments. Sovereign government goes into debt by issuing its own liabilities that are financial wealth to the private sector. “Private debt is debt, but government debt is financial wealth to the private sector.”
In this theory, sovereign government is not financially constrained in its ability to spend; it is argued that the government can afford to buy anything that is for sale in currency that it issues (there may be political constraints, like a debt ceiling law). The only constraint is that excessive spending by any sector of the economy (whether households, firms or public) has the potential to cause inflationary pressures.
Some MMT economists advocate a government-funded job guarantee scheme to eliminate involuntary unemployment. Proponents argue that this can be consistent with price stability as it targets unemployment directly rather than attempting to increase private sector job creation indirectly through a much larger economic stimulus, and maintains a “buffer stock” of labor that can readily switch to the private sector when jobs become available. A job guarantee program could also be considered a powerful automatic stabilizer to the economy, expanding when private sector activity cools down and shrinking in size when private sector activity heats up.
The post-Keynesian economist Thomas Palleyargues that MMT is largely a restatement of elementary Keynesian economics, but prone to “over-simplistic analysis” and understating the risks of its policy implications. Palley denies the MMT claim that standard Keynesian analysis doesn’t fully capture the accounting identities and financial restraints on a government that can issue its own money. He argues that these insights are well captured by standard Keynesian stock-flow consistent IS-LM models, and have been well understood by Keynesian economists for decades. He also criticizes MMT for essentially assuming away the problem of fiscal – monetary conflict. In Palley’s view the policies proposed by MMT proponents would cause serious financial instability in an open economy with flexible exchange rates, while using fixed exchange rates would restore hard financial constraints on the government and “undermines MMT’s main claim about sovereign money freeing governments from standard market disciplines and financial constraints”. He also argues that MMT lacks a plausible theory of inflation, particularly in the context of full employment in the ‘Employer of last resort‘ policy first proposed by Minsky and advocated by Bill Mitchell and other MMT theorists; of a lack of appreciation of the financial instability that could be caused by permanently zero interest rates; and of overstating the importance of government created money. Palley concludes that MMT provides no new insights about monetary theory, while making unsubstantiated claims about macroeconomic policy, and that MMT has only received attention recently due to it being a “policy polemic for depressed times”.
Marc Lavoie argues that whilst the neochartalist argument is “essentially correct”, many of its counter-intuitive claims depend on a “confusing” and “fictitious” consolidation of government and central banking operations.
Austrian School economist Robert P. Murphy states that MMT is “dead wrong” and that “the MMT worldview doesn’t live up to its promises”. He observes that the MMT claim that cutting government deficits erodes private saving is true only for the portion of private saving that is not invested, and argues that the national accounting identities used to explain this aspect of MMT could equally be used to support arguments that government deficits “crowd out” private sector investment. Daniel Kuehn has voiced his agreement with Murphy, stating “it’s bad economics to confuse accounting identities with behavioral laws […] economics is not accounting.”
New Keynesian economist and Nobel laureate Paul Krugman argues that MMT goes too far in its support for government budget deficits and ignores the inflationary implications of maintaining budget deficits when the economy is growing.
The chartalist view of money itself, and the MMT emphasis on the importance of taxes in driving money is also a source of criticism. Economist Eladio Febrero argues that modern money draws its value from its ability to cancel (private) bank debt, particularly as legal tender, rather than to pay government taxes.
Modern Proponents
Economists Warren Mosler, L. Randall Wray, Stephanie Kelton, Bill Mitchell and Pavlina R. Tcherneva are largely responsible for reviving the idea of chartalism as an explanation of money creation; Wray refers to this revived formulation as Neo-Chartalism.
Bill Mitchell, Professor of Economics and Director of the Centre of Full Employment and Equity or CofFEE, at the University of Newcastle, New South Wales, refers to an increasing related theoretical work as Modern Monetary Theory.
Pavlina R. Tcherneva has developed the first mathematical framework for MMT and has largely focused on developing the idea of the Job Guarantee.
Scott Fullwiler has added detailed technical analysis of the banking and monetary systems.
Rodger Malcolm Mitchell’s book Free Money (1996) describes in layman’s terms the essence of chartalism.
Some contemporary proponents, such as Wray, situate chartalism within post-Keynesian economics, while chartalism has been proposed as an alternative or complementary theory to monetary circuit theory, both being forms of endogenous money, i.e., money created within the economy, as by government deficit spending or bank lending, rather than from outside, as by gold. In the complementary view, chartalism explains the “vertical” (government-to-private and vice versa) interactions, while circuit theory is a model of the “horizontal” (private-to-private) interactions.
Hyman Minsky seemed to favor a chartalist approach to understanding money creation in his Stabilizing an Unstable Economy, while Basil Moore, in his book Horizontalists and Verticalists, delineates the differences between bank money and state money.
James K. Galbraith supports chartalism and wrote the foreword for Mosler’s book Seven Deadly Innocent Frauds of Economic Policy in 2010.
Steven Hail of the University of Adelaide is another well known MMT economist.


The ‘fountain pen of money’ – Bryan Gould. 

Steven Joyce, NZ Minister of Finance, has recommended the formal establishment of a committee to help the Governor of the Reserve Bank decide on where to take interest rates, thereby following the example of other central banks around the world.

Also Grant Robertson, Labour’s shadow Finance Minister, has made a similar recommendation concerning a Monetary Policy Committee to help the Governor, but has also followed another overseas example by supporting an extension of the Governor’s remit, so that he would, in addition to restraining inflation, be required to take account of the desirability of full employment.

Most people believe, and it is a belief assiduously promoted by the banks themselves, that the banks act as intermediaries between those wishing to save and those wishing to borrow, usually on mortgage.

In this view, the banks are benefactors, bringing together those with money to spare and to deposit with them, and those who wish to borrow, often for house purchase.

The banks make their money, so it is said, by charging a higher rate of interest to the borrowers than they pay to the depositors, the equivalent of a small fee for the administrative costs of bringing the parties together.

But this benign view of their operations is inaccurate and misleading. The banks do not lend you on mortgage money deposited with them by someone else.

They lend you money that they themselves create out of nothing, through the stroke of a pen or, today, a computer entry.

The banks make their money, in other words, by charging interest on money that they themselves create. Not surprisingly, they are keen to lend as much as possible.

But the consequences of this bizarre scenario go much further. It is the willingness, not to say keenness, of the banks to lend on mortgage that provides the virtually limitless purchasing power that is constantly bidding up the prices of homes in Auckland and, now, elsewhere.

It is the banks that are fuelling the housing unaffordability crisis, a crisis that is leaving families homeless and widening the gap between rich and poor.

So far, the government has washed its hands of this aspect of the crisis.

It is content to leave the crucial decisions on monetary policy to the Reserve Bank.  That way, it can disclaim responsibility and leave the Governor, himself a banker, to carry the can.

Leaving monetary policy (which is usually just a matter of setting interest rates) to the Reserve Bank is usually applauded as ensuring that it does not become a political football. But monetary policy should have a much greater role than simply restraining inflation and has a huge influence on so many aspects of our national life.

Why should the Government be able to hide behind the Governor of the Reserve Bank and duck responsibility for a policy of the greatest importance to so many Kiwis?  Why should ministers not be held to account in Parliament and to the country for failing to deliver outcomes they were elected to deliver?

It is no surprise a former Governor of the Reserve Bank should seek to defend the banking system from its critics. But in denying the accuracy of points I made in the Herald about how the banks operate, Don Brash accused me of “peddling nonsense”.

I made two basic points. First, I asserted the banks do not, as usually believed, simply act as intermediaries, bringing together savers (or depositors) and borrowers to their mutual benefit.

Secondly, I said the vast majority of new money in circulation is created by the banks “by the stroke of a pen”, and they then make their profits by charging interest on the money they create.

If this is “nonsense”, the “peddlers” include some very distinguished economists.

In my original piece, I referred to a Bank of England research paper, published in the bank’s first Quarterly Bulletin 2014, which describes in detail the process by which banks create money.

“One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. That ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. Rather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.

Bank deposits make up the vast majority – 97 per cent of the amount of money currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money – the so-called ‘money multiplier’ approach, but that is not an accurate description of how money is created in reality.

Banks first decide how much to lend depending on the profitable lending opportunities available to them – which will, crucially, depend on the interest rate set. It is these lending decisions that determine how many bank deposits are created by the banking system.

The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Central Bank.

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”

Commercial banks create money, in other words, by placing loans [or credits] into the bank accounts of borrowers. They then charge interest on, and demand security for and repayment of, those loans.

They have no capacity to create money in any other way or for any other purpose [though the central bank can pursue “quantitative easing” to increase the money supply if it thinks that is needed].

Is it wise to entrust such wide-ranging powers – so significant in their impact on the whole economy – to the banks, and then to arrange that the only person able to regulate that impact was himself a banker – the Governor of the Reserve Bank.

Bryan Gould

Modern Money Theory: Deadly Innocent Fraud #7: It’s a bad thing that higher deficits today mean higher taxes tomorrow. – Warren Mosler. 

Fact: I agree – the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

Why does government tax? Not to get money, but instead to take away our spending power if it thinks we have too much spending power and it’s causing inflation.

Why are we running higher deficits today? Because the “department store”has a lot of unsold goods and services in it, unemployment is high and output is lower than capacity. The government is buying what it wants and we don’t have enough after-tax spending power to buy what’s left over. So we cut taxes and maybe increase government spending to increase spending power and help clear the shelves of unsold goods and services.

And why would we ever increase taxes? Not for the government to get money to spend – we know it doesn’t work that way. We would increase taxes only when our spending power is too high, and unemployment has gotten very low, and the shelves have gone empty due to our excess spending power, and our available spending power is causing unwanted inflation.

So the statement “Higher deficits today mean higher taxes tomorrow” in fact is saying, “Higher deficits today, when unemployment is high, will cause unemployment to go down to the point we need to raise taxes to cool down a booming economy.” Agreed!

Modern Money Theory: Deadly Innocent Fraud #6: ​We need savings to provide the funds for investment. – Warren Mosler. 

Fact: Investment adds to savings.

This innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, with results in real investment being directed in a manner totally divorced from public purpose. It might be draining over 20% annually from useful output and employment – a staggering statistic, unmatched in human history. And it directly leads the type of financial crisis we’ve been going through.

“The paradox of thrift”

(The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving. The paradox is, narrowly speaking, that total saving may fall because of individuals’ attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy.

Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy. Wikipedia)

– In our economy, spending must equal all income, including profits, for the output of the economy to get sold.

– If anyone attempts to save by spending less than his income, at least one other person must make up for that by spending more than his own income, or else the output of the economy won’t get sold.

– Unsold output means excess inventories, and the low sales means production and employment cuts, and thus less total income. And that shortfall of income is equal to the amount not spent by the person trying to save.

Think of it as the person who’s trying to save (by not spending his income) losing his job, and then not getting any income, because his employer can’t sell all the output.

So the paradox is, “decisions to save by not spending income result in less income and no new net savings.” Likewise, decisions to spend more than one’s income by going into debt cause incomes to rise and can drive real investment and savings.

“Savings is the accounting record of investment.” Professor Basil Moore

Unfortunately, Congress, the media and mainstream economists get this all wrong, and somehow conclude that we need more savings so that there will be funding for investment. What seems to make perfect sense at the micro level is again totally wrong at the macro level. Just as loans create deposits in the banking system, it is investment that creates savings.

So what do our leaders do in their infinite wisdom when investment falls, usually, because of low spending? They invariably decide “we need more savings so there will be more money for investment.”(And I’ve never heard a single objection from any mainstream economist.) To accomplish this Congress uses the tax structure to create tax-advantaged savings incentives, such as pension funds, IRA’s and all sorts of tax-advantaged institutions that accumulate reserves on a tax deferred basis. Predictably, all that these incentives do is remove aggregate demand (spending power). They function to keep us from spending our money to buy our output, which slows the economy and introduces the need for private sector credit expansion and public sector deficit spending just to get us back to even.

In fact it’s the Congressionally-engineered tax incentives to reduce our spending (called “demand leakages”) that cut deeply into our spending power, meaning that the government needs to run higher deficits to keep us at full employment. Ironically, it’s the same Congressmen pushing the taxadvantaged savings programs, thinking we need more savings to have money for investment, that are categorically opposed to federal deficit spending.

And, of course, it gets even worse! The massive pools of funds (created by this deadly innocent fraud #6, that savings are needed for investment) also need to be managed for the further purpose of compounding the monetary savings for the beneficiaries of the future. The problem is that, in addition to requiring higher federal deficits, the trillions of dollars compounding in these funds are the support base of the dreaded financial sector. They employ thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation. For the most part, that means investing in publicly-traded stocks, rated bonds and some diversification to other strategies such as hedge funds and passive commodity strategies. And, feeding on these “bloated whales,” are the inevitable sharks – the thousands of financial professionals in the brokerage, banking and financial management industries who owe their existence to this 6th deadly innocent fraud.

Modern Money Theory: Deadly Innocent Fraud #5: The trade deficit is an unsustainable imbalance that takes away jobs and output. – Warren Mosler. 

Facts: Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.

In economics, it’s better to receive than to give. Therefore, as taught in 1st year economics classes: Imports are real benefits. Exports are real costs.

Put more succinctly: The real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it must export.

A trade deficit, in fact, increases our real standard of living. How can it be any other way? So, the higher the trade deficit the better.

The mainstream economists, politicians, and media all have the trade issue completely backwards. Sad but true.

To further make the point: If, for example, General MacArthur had proclaimed after World War II that since Japan had lost the war, they would be required to send the U.S. 2 million cars a year and get nothing in return, the result would have been a major international uproar about U.S. exploitation of conquered enemies. We would have been accused of fostering a repeat of the aftermath of World War I, wherein the allies demanded reparations from Germany which were presumably so high and exploitive that they caused World War II. Well, MacArthur did not order that, yet for over 60 years, Japan has, in fact, been sending us about 2 million cars per year, and we have been sending them little or nothing. And, surprisingly, they think that this means they are winning the “trade war,”and we think it means that we are losing it. We have the cars, and they have the bank statement from the Fed showing which account their dollars are in.

Same with China – they think that they are winning because they keep our stores full of their products and get nothing in return, apart from that bank statement from the Fed. And our leaders agree and think we are losing.

This is madness on a grand scale.

We are benefiting IMMENSELY from the trade deficit. The rest of the world has been sending us hundreds of billions of dollars worth of real goods and services in excess of what we send to them. They get to produce and export, and we get to import and consume.

Is this an unsustainable imbalance that we need to fix? Why would we want to end it?

As long as they want to send us goods and services without demanding any goods and services in return, why should we not be able to take them? There is no reason, apart from a complete misunderstanding of our monetary system by our leaders that has turned a massive real benefit into a nightmare of domestic unemployment.

All we have to do is keep American spending power high enough to be able to buy BOTH what foreigners want to sell us AND all the goods and services that we can produce ourselves at full employment levels.

Where’s the “foreign capital ?” There isn’t any! The entire notion that the U.S. is somehow dependent on foreign capital is inapplicable.

Modern Money Theory: Deadly Innocent Fraud #4: Social Security is broken. – Warren Mosler.

Fact: Federal Government Checks Don’t Bounce.

As we’ve already discussed, the government never has or doesn’t have any of its own money. It spends by changing numbers in our bank accounts. This includes Social Security.

It doesn’t matter what the numbers are in the Social Security Trust Fund account, because the trust fund is nothing more than record-keeping, as are all accounts at the Fed.

50 years from now when there is one person left working and 300 million retired people (I exaggerate to make the point), that guy is going to be pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. etc. etc. What we need to do is make sure that those 300 million retired people have the funds to pay him??? I don’t think so! This problem obviously isn’t about money. What we need to do is make sure that the one guy working is smart enough and productive enough and has enough capital goods and software to be able to get it all done, or else those retirees are in serious trouble, no matter how much money they might have.

We know our government neither has nor doesn’t have dollars. It spends by changing numbers up in our bank accounts and taxes by changing numbers down in our bank accounts. And raising taxes serves to lower our spending power, not to give the government anything to spend.

The first thing our misguided leaders cut back on is education – the one thing that the mainstream agrees should be done that actually helps our children 50 years down the road. Should our policy makers ever actually get a handle on how the monetary system functions, they would realize that the issue is social equity, and possibly inflation, but never government solvency.

The amount of goods and services we allocate to seniors is the real cost to us, not the actual payments, which are nothing more than numbers in bank accounts. And if our leaders were concerned about the future, they would support the types of education they thought would be most valuable for that purpose. They don’t understand the monetary system, though, and won’t see it the “right way around”until they do understand it.

Meanwhile, the deadly innocent fraud of Social Security takes its toll on both our present and our future well-being.

Modern Money Theory: Deadly Innocent Fraud #3: Federal Government budget deficits take away savings – Warren Mosler. 

Fact: Federal Government budget deficits ADD to savings.

Government deficits equal increased “monetary savings” for the rest of us, to the penny.

Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting. For example, if the government deficit last year was $ 1 trillion, it means that the net increase in savings of financial assets for everyone else combined was exactly, to the penny, $ 1 trillion. (For those who took some economics courses, you might remember that net savings of financial assets is held as some combination of actual cash, Treasury securities and member bank deposits at the Federal Reserve.)

This is Economics 101 and first year money banking. It is beyond dispute. It’s an accounting identity. Yet it’s misrepresented continuously, and at the highest levels of political authority. They are just plain wrong.

When the government account goes down, some other account goes up, by exactly the same amount.

Deficit spending doesn’t just shift financial assets (U.S. dollars and Treasury securities) outside of the government. Instead, deficit spending directly adds exactly that amount of savings of financial assets to the non-government sector. And likewise, a federal budget surplus directly subtracts exactly that much from our savings. And the media and politicians and even top economists all have it BACKWARDS!

The last six periods of surplus in the more than two hundred-year US history have been followed by the only six depressions in our history.

And after the sub-prime debt-driven bubble burst, we again fell apart due to a deficit that was and remains far too small for the circumstances. For the current level of government spending, we are being over-taxed and we don’t have enough after-tax income to buy what’s for sale in that big department store called the economy.

When the January 2009 savings report was released, and the press noted that the rise in savings to 5% of GDP was the highest since 1995, they failed to note the current budget deficit passed 5% of GDP, which also happens to be the highest it’s been since 1995.

The only source of “net $U.S. monetary savings”(financial assets) for the non-government sectors combined (both residents and non-residents) is U.S. government deficit spending.

But watch how the very people who want us to save more, at the same time want to “balance the budget” by taking away our savings, either through spending cuts or tax increases. They are all talking out of both sides of their mouths. They are part of the problem, not part of the solution. And they are at the very highest levels.

The government deficit equals the savings of financial assets of the other sectors combined .

So now we know: – Federal deficits are not the “awful things” that the mainstream believes them to be. Yes, deficits do matter. Excess spending can cause inflation. But the government isn’t going to go broke. – Federal deficits won’t burden our children. – Federal deficits don’t just shift funds from one person to another. – Federal deficits add to our savings.

The right-sized deficit is the one that gets us to where we want to be with regards to output and employment, as well as the size of government we want, no matter how large or how small a deficit that might be.

Modern Money Theory: Deadly Innocent Fraud #2: With government deficits, we are leaving our debt burden to our children. – Warren Mosler. 

Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.

Professional economists call this the “intergenerational” debt issue. It is thought that if the federal government deficit spends, it is somehow leaving the real burden of today’s expenditures to be paid for by future generations.

The idea of our children being somehow necessarily deprived of real goods and services in the future because of what’s called the national debt is nothing less than ridiculous.

Nor is the financing of deficit spending anything of any consequence. When government spends, it just changes numbers up in our bank accounts.

The entire $13 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed. And what happens when the Treasury securities come due, and that “debt” has to be paid back?

Yes, you guessed it, the Fed merely shifts the dollar balances from the savings accounts (Treasury securities) at the Fed to the appropriate checking accounts at the Fed (reserve accounts).

Nor is this anything new. It’s been done exactly like this for a very long time, and no one seems to understand how simple it is and that it never will be a problem.

When I look at today’s economy, it’s screaming at me that the problem is that people don’t have enough money to spend. It’s not telling me they have too much spending power and are overspending.

When we operate at less than our potential – at less than full employment – then we are depriving our children of the real goods and services we could be producing on their behalf. Likewise, when we cut back on our support of higher education, we are depriving our children of the knowledge they’ll need to be the very best they can be in their future. So also, when we cut back on basic research and space exploration, we are depriving our children of all the fruits of that labor that instead we are transferring to the unemployment lines.

A U.S. Treasury security is nothing more than a fancy name for a savings account at the Fed. The buyer gives the Fed money, and gets it back later with interest. That’s what a savings account is – you give a bank money and you get it back later with interest.

It’s all a tragic misunderstanding.

China knows we don’t need them for “financing our deficits” and is playing us for fools. Today, that includes Geithner, Clinton, Obama, Summers and the rest of the administration. It also includes Congress and the media.

Paying off the entire U.S. national debt is but a matter of subtracting the value of the maturing securities from one account at the Fed, and adding that value to another account at the Fed. These transfers are non-events for the real economy and not the source of dire stress presumed by mainstream economists, politicians, businesspeople, and the media.

The deadly innocent fraud of leaving the national debt to our children continues to drive policy, and keeps us from optimizing output and employment. The lost output and depreciated human capital is the real price we and our children are paying now that diminishes both the present and the future. We make do with less than what we can produce and sustain high levels of unemployment (along with all the associated crime, family problems and medical issues) while our children are deprived of the real investments that would have been made on their behalf if we knew how to keep our human resources fully employed and productive.

Modern Money Theory –  Part 3. Spending by the Issuer of Domestic Currency, the Government. Taxes Drive Money –  L Randall Wray.

A key distinguishing characteristic of MMT is its view on how government really spends.

The government of the nation issues a currency (usually consisting of metal coins and paper notes of various denominations) denominated in its money of account.

The sovereign government alone has the power to determine which money of account it will recognize for official accounts (it might choose to accept a foreign currency for some payments, but that is the sovereign’s prerogative).

Further, modern sovereign governments alone are invested with the power to issue the currency denominated in its money of account.

The sovereign government imposes tax liabilities (as well as fines and fees) in its money of account, and decides how these liabilities can be paid, that is, it decides what it will accept in payment so that taxpayers can fulfill their obligations.

Finally, the sovereign government also decides how it will make its own payments. 

Most modern sovereign governments make payments in their own currency and require tax payments in the same currency.

Ultimately, it is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations.

Neither reserves of precious metals (or foreign currencies) nor legal tender laws are necessary to ensure acceptance of the government’s currency.

It is the tax liability (or other obligatory payments) that stands behind the curtain.

Tax obligations to government are met by presenting the government’s own IOUs to the tax collector.

Taxes Drive Money

L Randall Wray

From his book: Modern Money Theory, a primer on Macroeconomics for Sovereign Montary Systems. 

Modern Money Theory: Deadly Innocent Fraud #1. Government Must Tax To Spend. – Warren Mosler. 

Fraud #1: Government Must Tax To Spend.

Many economists value complexity for its own sake. A glance at any modern economics journal confirms this. A truly incomprehensible argument can bring a lot of prestige! The problem, though, is that when an argument appears incomprehensible, that often means the person making it doesn’t understand it either.

Money is created by government spending (or by bank loans, which create deposits). Taxes serve to make us want that money – we need it in order to pay the taxes. And they help regulate total spending, so that we don’t have more total spending than we have goods available at current prices – something that would force up prices and cause inflation. But taxes aren’t needed in advance of spending – and could hardly be, since before the government spends there is no money to tax.

Nor is the public debt a burden on the future. How could it be? Everything produced in the future will be consumed in the future. How much will be produced depends on how productive the economy is at that time. This has nothing to do with the public debt today; a higher public debt today does not reduce future production – and if it motivates wise use of resources today, it may increase. 

Fiscal policy is what economists call tax cuts and spending increases, and spending in general. 

Whenever there are severe economic slumps, politicians need results – in the form of more jobs – to stay in office. First they watch as the Federal Reserve cuts interest rates, waiting patiently for the low rates to somehow “kick in.” Unfortunately, interest rates never to seem to “kick in.” Then, as rising unemployment threatens the re-election of members of Congress and the President, the politicians turn to Keynesian policies of tax cuts and spending increases.

Galbraith’s Keynesian views lost out to the monetarists when the “Great Inflation”of the 1970s sent shock waves through the American psyche.

Public policy turned to the Federal Reserve and its manipulation of interest rates as the most effective way to deal with what was coined “stagflation”- the combination of a stagnant economy and high inflation.

Deadly Innocent Fraud #1:

The federal government must raise funds through taxation or borrowing in order to spend.

In other words, government spending is limited by its ability to tax or borrow. Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

We all know how data entry works, but somehow this has gotten turned upside down and backwards by our politicians, media, and, most all, the prominent mainstream economists.

Just keep this in mind as a starting point:

The federal government doesn’t ever “have” or “not have” any dollars.


If the government doesn’t tax because it needs the money to spend, why tax at all? 


The federal government taxes to regulate what economists call “aggregate demand” which is a fancy word for “spending power.” In short, that means that if the economy is “too hot,” then raising taxes will cool it down, and if it’s “too cold,” likewise, cutting taxes will warm it up. Taxes aren’t about getting money to spend, they are about regulating our spending power to make sure we don’t have too much and cause inflation, or too little which causes unemployment and recessions.

The dollars we need to pay taxes must, directly or indirectly, from the inception of the currency, come from government spending. 

So while our politicians truly believe the government needs to take our dollars, either by taxing or borrowing, for them to be able to spend, the truth is: We need the federal government’s spending to get the funds we need to pay our taxes.

Yes, there can be and there are “self-imposed”constraints on spending put there by Congress, but that’s an entirely different matter. These include debt-ceiling rules, Treasury-overdraft rules, and restrictions of the Fed buying securities from the Treasury. They are all imposed by a Congress that does not have a working knowledge of the monetary system. And, with our current monetary arrangements, all of those self imposed constraints are counterproductive.

The fact that government spending is in no case operationally constrained by revenues means there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

This, however, does NOT mean that the government can spend all it wants without consequence. Over-spending can drive up prices and fuel inflation.

Governments, using their own currency, can spend what they want, when they want, just like the football stadium can put points on the board at will.

The consequences of overspending might be inflation or a falling currency, but never bounced checks. The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upwards in bank accounts at its own Federal Reserve Bank.

Taxes create an ongoing need in the economy to get dollars, and therefore an ongoing need for people to sell their goods and services and labor to get dollars. With tax liabilities in place, the government can buy things with its otherwise-worthless dollars, because someone needs the dollars to pay taxes.

Keep in mind that the public purpose behind government doing all this is to provide a public infrastructure. This includes the military, the legal system, the legislature and the executive branch of government, etc. So there is quite a bit that even the most conservative voters would have the government do.

In fact, a budget deficit of perhaps 5% of our gross domestic product might turn out to be the norm, which in today’s economy is about $750 billion annually. However, that number by itself is of no particular economic consequence, and could be a lot higher or a lot lower, depending on the circumstances. What matters is: The purpose of taxes is to balance the economy and make sure it’s not too hot nor too cold. And federal government spending is set at this right amount, given the size and scope of government we want.

If the government simply tried to buy what it wanted to buy and didn’t take away any of our spending power, there would be no taxes – it would be “too much money chasing too few goods,”with the result being inflation. In fact, with no taxes, nothing would even be offered for sale in exchange for the government money in the first place.

To prevent the government’s spending from causing that kind of inflation, the government must take away some of our spending power by taxing us, not to actually pay for anything, but so that their spending won’t cause inflation: to regulate the economy, and not to get money for Congress to spend.

But as long as government continues to believe this first of the seven deadly innocent frauds, that they need to get money from taxing or borrowing in order to spend, they will continue to support policies that constrain output and employment and prevent us from achieving what are otherwise readily-available economic outcomes.

Fort Knox is a Myth. 

Modern Money Theory – Part 2. Government budget deficits are largely Non-Discretionary: The case of the Great Recession of 2007 – L Randall Wray.

The sum of deficits and surpluses across the three sectors (domestic private, government, and foreign) must be zero. 

While household income largely determines spending at the individual level,

At the level of the economy as a whole spending (demand) determines income.(Reversing that causation.) 

Individual households can certainly decide to spend less in order to save more. But if all households were to try to spend less, this would reduce aggregate consumption and national income. Firms would reduce output, thus would lay off workers, cut the wage bill, and thereby lower household income.

This is Keynes’s well-known “paradox of thrift”: Trying to save more by cutting aggregate consumption will not increase saving.

The national conversation, in the United States, the United Kingdom, and Europe presumes that government budget deficits are discretionary. If only the government were to try hard enough, it could slash its deficit.

In the aftermath of the Great Recession of 2008, many government budgets moved sharply to large deficits.

While observers attributed this to various fiscal stimulus packages (including bailouts of the auto industry and Wall Street in the United States, and bank bailouts in Ireland), The largest portion of the increase in the deficit after 2008 in most countries came from automatic stabilizers and not from discretionary spending.

The automatic stabilizer – and not the bailouts or stimulus – is the main reason why the economy did not go into a freefall as it had in the Great Depression of the 1930s. As the economy slowed, the budget automatically went into a deficit, putting a floor on aggregate demand.

With counter-cyclical spending and pro-cyclical taxes, the government’s budget acts as a powerful automatic stabilizer: deficits increase sharply in a downturn.

Slow growth has been the major cause of the rapidly growing budget deficit, and the slow growth, in turn, is due to a high propensity to save by the retrenching household sector.

Given loss of jobs, and stagnant or falling incomes for most Americans, the likelihood that the household propensity to spend will reverse course soon seems unlikely.

Summary if the main points.

1: The three balances must balance to zero.

(Domestic private + Government + Foreign.) 

This implies it is impossible to change one of the balances without having a change in at least one other.

2: At the aggregate level, spending determines income.

A sector can spend more than its income, but that means another spends less.

3: Government Income is Non-discretionary. 

While we can take government spending as more-or-less discretionary, government tax revenue depends largely on economic performance. Tax receipt growth is highly variable, moving procyclically (growing rapidly in boom and collapsing in slump). Government can always decide to spend more (although it is politically constrained), and it can always decide to raise tax rates (again, given political constraints), but it cannot decide what its tax revenue will be because we apply a tax rate to variables like income and wealth that are outside government control. And that means the budgetary outcome – whether surplus, balanced, or deficit – is not really discretionary.

4: Foreign Income is Non-Discretionary.

Turning to the foreign sector, exports are largely outside control of a nation (we say they are “exogenous” or “autonomous to domestic income”). They depend on lots of factors, including growth in the rest of the world, exchange rates, trade policy, and relative prices and wages (efforts to increase exports will likely lead to responses abroad). It is true that domestic economic outcomes can influence exports – but impacts of policy on exports are loose (as discussed, slower growth by a large importer like the United States can slow global growth). On the other hand, imports depend largely on domestic income (plus exchange rates, relative wages and prices, and trade policy; again, if the United States tried to reduce imports this would almost certainly lead to responses by trading partners that are pursuing trade-led growth). Imports are largely pro-cyclical, too. Again, the current account outcome – whether deficit, surplus, or balanced – is also largely nondiscretionary.

(Hans: Private Sector positive Income is made possible at the aggregate level by government spending. 

Government Deficit/Surplus + Foreign Deficit /Surplus Private Income/Surplus must equal 0.

Therefore: The Government in setting spending and tax policies influences Private Sector Income and thereby demand in the economy. 

Contrary to what Neoliberal economic theory proclaims it is the Government which ‘makes the market’ by way of it’s spending, tax and interest rate policies, thereby influencing the Private Sector Income level and it’s spending capacity. Without government there is no Market.

The best domestic policy is to pursue full employment and price stability – not to target arbitrary government deficit or debt limits, which are mostly nondiscretionary anyway.

What is discretionary?

Domestic spending – by households, firms, and government – is largely discretionary. And spending largely determines our income.

L Randall Wray

From his book: Modern Money Theory, a primer on Macroeconomics for Sovereign Montary Systems. 

Modern Money Theory – Part 1. The Basics of Macroeconomic Accounting – L. Randall Wray. 

​You cannot possibly understand the debate about the government’s budget (and critique the deficit hysteria that has recently gripped many nations) without understanding basic macro accounting.

It is a fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability.
A government deficit is the flow of government spending less the flow of government tax revenue measured in the money of account over a given period (usually a year). This deficit accumulates to a stock of government debt – equal to the private sector’s accumulation of financial wealth over the same period.
If the government always runs a balanced budget, with its spending always equal to its tax revenue, the private sector’s net financial wealth will be zero.
One sector’s deficit equals another’s surplus.
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0
For example, let us assume that the foreign sector runs a balanced budget (in the identity above, the foreign balance equals zero). Let us further assume that the domestic private sector’s income is $100 billion while its spending is equal to $90 billion, for a budget surplus of $10 billion over the year. Then, by identity, the domestic government sector’s budget deficit for the year is equal to $10 billion. The domestic private sector will accumulate $10 billion of net financial wealth during the year, consisting of $10 billion of domestic government sector liabilities.
As another example, assume that the foreign sector spends less than its income, with a budget surplus of $20 billion. At the same time, the domestic government sector also spends less than its income, running a budget surplus of $10 billion. From our accounting identity, we know that over the same period the domestic private sector must have run a budget deficit equal to $30 billion ($20 billion plus $10 billion). At the same time, its net financial wealth will have fallen by $30 billion as it sold assets and issued debt. Meanwhile, the domestic government sector will have increased its net financial wealth by $10 billion (reducing its outstanding debt or increasing its claims on the other sectors), and the foreign sector will have increased its net financial position by $20 billion (also reducing its outstanding debt or increasing its claims on the other sectors).
It is apparent that if one sector is going to run a budget surplus, at least one other sector must run a budget deficit. In terms of stock variables, in order for one sector to accumulate net financial wealth, at least one other sector must increase its indebtedness by the same amount. It is impossible for all sectors to accumulate net financial wealth by running budget surpluses. We can formulate another “dilemma”: if one of three sectors is to run a surplus, at least one of the others must run a deficit.
No matter how hard we might try, we cannot all run surpluses simultaneously. It is a lot like those children in Lake Wobegon (an imaginary town featured in Garrison Keillor’s Prairie Home Companion weekly radio show in the United States) who are supposedly all above average. For every kid above average there must be one below average. And for every deficit there must be a surplus.

No matter how much others might want to accumulate financial wealth, they will not be able to do so unless someone is willing to deficit spend (services a debt).
We conclude that while causation is complex, and while “it takes two to tango”, causation tends to run from individual deficit spending to accumulation of financial wealth, and from debt to financial wealth. Since accumulation of a stock of financial wealth results from a budget surplus, that is, from a flow of saving, we can also conclude that causation tends to run from deficit spending to saving.
Aggregate spending creates aggregate income. At the aggregate level, taking the economy as a whole, causation is more clear cut. A society cannot decide to have more income, but it can decide to spend more. Further, all spending must be received by someone, somewhere, as income. Finally, as discussed earlier, spending is not necessarily constrained by income because it is possible for households, firms, or government to spend more than income. Indeed, as we discussed, any of the three main sectors can run a deficit with at least one of the others running a surplus. However, it is not possible for spending at the aggregate level to be different from aggregate income since the sum of the sectoral balances must be zero. For all of these reasons, we must reverse causation between spending and income when we turn to the aggregate; while at the individual level, income causes spending, at the aggregate level, spending causes income.
Deficits in one sector create the surpluses of another.
Of course, much of the debt issued within a sector will be held by others in the same sector. For example, if we look at the finances of the private domestic sector we will find that most business debt is held by domestic firms and households.
this is “inside debt” of those firms and households that run budget deficits held as “inside wealth” by those households and firms that run budget surpluses. However, if the domestic private sector taken as a whole spends more than its income, it must issue “outside debt” held as “outside wealth” by at least one of the other two sectors (domestic government sector and foreign sector). Because the initiating cause of a budget deficit is a desire to spend more than income, the causation mostly goes from deficits to surpluses and from debt to net financial wealth. While we recognize that no sector can run a deficit unless another wants to run a surplus, this is not usually a problem because there is a propensity to net save financial assets. That is to say, there is a desire to accumulate financial wealth – which by definition is somebody’s liability.
It is necessary to emphasize that everything in this narrative applies to the macro accounting of any country. While examples used the Dollar, all of the results apply no matter what currency is used. Our fundamental macro balance equation, Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0, will strictly apply to the accounting of balances of any currency. Within a country there can also be flows (accumulating to stocks) in a foreign currency, and there will be a macro balance equation in that currency also.

Note that nothing changes if we expand our model to include a number of different countries, each issuing its own currency. There will be a macro balance equation for each of these countries and for each of the currencies. Individual firms or households (or, for that matter, governments) can accumulate net financial assets denominated in several different currencies; vice versa, individual firms or households (or governments) can issue net debt denominated in several different currencies. It can even become more complicated, with an individual running a deficit in one currency and a surplus in another (issuing debt in one currency and accumulating wealth in another). Still, for every country and for every currency there will be a macro balance equation.

L Randall Wray

From his book: Modern Money Theory, a primer on Macroeconomics for Sovereign Montary Systems. 

MMT – Modern Money Theory. Why Government Surpluses are NOT a good thing. 

Bill English announced a $1.83 billion government surplus 

That’s $1.83 billion of potentially productive capital that Billy has pulled out of the economy. This is NOT a good thing. Why?

Modern Money Theory

We are no longer on the Gold standard. Now the value of our economy is determined by currency speculation. Our Government IS our currency, it controls it, it creates it and it demands tax payments in it, thus making sure people will only accept dollars as payment.

“The last time the United States was debt free was 1835.” – Rand Paul, US Republican Senator
“The U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.” – Paul Krugman, New York Times

The Math
Govt.Debt/Surplus + Private Debt/Surplus + Foreign Debt/Surplus = The Economy
This is a zero sum game, there is only one pie, the Economy, the only variable is how it’s carved up.
Somebody’s profit is ALWAYS someone else’s debt. This is not a moral statement, just 0+0+0=ZERO

Now here’s the clincher, keep in mind the bollocks we get from the clowns we have elected to represent our interests.
If the government runs a surplus the Economy suffers: either 1 + -1 + 0 = 0 or 1 + 0 + -1 = 0
Either way either we are privately in debt or in debt to the world. 
Or both: 2 + -1 + -1 = 0

Modern Monetary Theory and Practice

The Global Financial Crisis demonstrated beyond any doubt the poverty of the mainstream, free-market economic approach that is almost universally taught in university courses around the world.

The failure of the system to self-regulate exemplified what Marx, Keynes, Kalecki and other heterodox economists have known for a long time – that the Capitalist system is inherently unstable and requires strong government oversight.

The mainstream approach is inherently misleading and erroneous.

Modern Monetary Theory is a way of doing economics that incorporates a clear understanding of the way our present-day monetary system actually works – it emphasizes the frequently misunderstood dynamics of our so-called “fiat-money” economy. Most people are unnerved by the thought that money isn’t “backed” by anything anymore – backed by gold, for example. They’re afraid that this makes money a less reliable store of value. And, of course, it is perfectly true that a poorly managed monetary system, or one which is experiencing something like an oil-price shock, can also experience inflation. But people today simply don’t realize how much bigger a problem the opposite condition can be. Under the gold standard, and largely because of the gold standard, the capitalist world endured eight different deflationary slumps severe enough to be called “depressions.” Since the gold standard was abolished, there have been none – and, as we shall see, this is anything but coincidental.

The great virtue of modern, fiat money is that it can be managed flexibly enough to prevent *both* deflation and also any truly damaging level of inflation – that is, a situation where prices are rising faster than wages, or where both are rising so fast they distort a country’s internal or external markets. Without going into the details prematurely, there are technical reasons why a little bit of inflation is useful and normal. It discourages people from hoarding money and encourages healthy levels of consumption and investment. It promotes growth – provided that a country’s fiscal and monetary authorities manage it properly.

The trick is for the government to spend enough to ensure full employment, but not so much, or in such a way, as to cause shortages or bottlenecks in the real economy. These shortages and bottlenecks are the actual cause of most episodes of excessive inflation. If the mere existence of fiat monetary systems caused runaway inflation, the low, stable rates of consumer-price inflation we have seen over the past thirty-plus years would be pretty difficult to explain.

The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.

Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual. This has led to a public discourse about things like budget deficits and Treasury debt which has become, without exaggeration, utterly detached from reality. Time and time again, these pundits declaim that hyperinflation is imminent, that interest rates are on the verge of an uncontrollable upward spike, and that the jig will be up for sure just as soon as the next T-bond auction fails. But even though, time after time, it is the pundits’ prognostications which fail, no one seems to take any notice. This must change. A reality-based economics is needed to make these things make sense again, and Modern Monetary Theory is here to put everyone on notice that a quite different jig is the one that’s really up.

The gold standard was finally and completely abolished over the course of a two-year period which started in 1971, when Richard Nixon ended the convertibility of the dollar for gold and devalued U.S. currency for the first time since the end of World War II. In 1973, the U.S. stopped trying to peg the dollar to any currency or commodity, instead allowing its value to be set on a freely-floating international currency market. The monetary system we inaugurated then is the one we still have now.

It is not the same as the one which has been adopted by most of Europe – and this very prominent source of confusion about the role of money in the world today will receive close scrutiny at the proper point. But first, we need to carefully unpack the implications of taking both gold and any sort of “peg” out of the monetary equation in the first place. In 1971, gold-linked money became fiat-money – not for the first time, of course, but for the first time in a long time. And it wasn’t just any currency. It was, by far, the world’s most important currency, economically. It was also the world’s reserve currency – the good-as-gold and backed-by-gold currency which the entire non-communist world used to settle transactions between various countries’ central banks. And yet, what everyone, and especially every American was told at the time was that it really wouldn’t make much difference.

The political emphasis, at the time, was entirely on the importance of making sure that no one panicked. The officials of the Nixon administration acted like cops who had just roped off a fresh crime scene: “Just move right along, folks,” they kept intoning. “Nuthin’ to see here. Nuthin’, to see.” All of the experts and pundits said essentially the same thing – this was just a necessary technical adjustment that was only about complicated international banking rules. It wouldn’t affect domestic-economy transactions at all, or matter to anyone’s individual economic life. And so it didn’t – at least, not right away or in any way that got linked back to the event in later years. The world moved on, and Nixon’s action was mainly just remembered as a typical, high-handed Nixonian move – one which at least carried along with it the virtue of having pissed off Charles De Gaulle.

But what had really happened was epoch-making and paradigm-shattering. It was also, for the rest of the 1970s, polymorphously destabilizing. Because no one had a plan for, or knew, what all of this was going to mean for the reserve currency status of the U.S. dollar. Certainly not Richard Nixon, who was by then embroiled in the early stages of the Watergate scandal. But no one else was in charge of this either. In the moment, other countries and their central banks followed Washington’s line. They wanted to forestall any kind of panic too. But, inevitably, as the real consequences of the new monetary regime kicked in, and as unforeseen and unintended knock-on effects began to be felt, this changed.

The world had a choice to make after the closing of the gold window, but even though it was a very important choice, with very high-stakes outcomes attached to it, there was no international mechanism for making it – it just had to emerge from the chaos. Either the U.S. dollar was going to continue to be the world’s reserve currency or it wasn’t. If it wasn’t, the related but separate question of what to use instead would come to the fore. But, as things unfolded, no other choice could be imposed on the only economic powerhouse-nation, so all the other little nations eventually just had to work out ways to adjust to the new status quo.

Even after Euro-dollar chaos, oil market chaos, inflationary chaos, a ferocious multi-national property crash and a severe, double-dip American recession, the dollar continued to be the reserve currency. And it still wasn’t going to be either backed by gold or exchangeable at any fixed rate for anything else. But while the implications of this were enormous, almost no one understood them at the time, or ever, subsequently, figured them out. For the 1970s was the period during which Keynesianism was decertified as the reigning economic philosophy of the capitalist world – replaced by something which, at least initially, purported to have internalized and improved upon it. This too was a choice that wasn’t so much made as stumbled into. The chaotic, crisis-wracked world we now live in is the one which subsequent versions of this then-new economic perspective have helped to create.

Conventional, so-called “neo-classical” economics pays little or no attention to monetary dynamics, treating money as just a “veil” over the activity of utility-maximizing individual “agents”. And, as hard as this is for non-economists to believe, the models which these ‘mainstream’ economists make do not even try to account for money, banking or debt. This is one big reason why virtually all members of the economics profession failed to see the housing bubble and were then blind-sided by both the 2008 financial collapse and the grinding, on-going Eurozone crisis which has followed in its wake. And the current group-think among ‘mainstream’ economists is yet another case where failure is no obstacle to continued funding – or continued failure. The absence of any sort of professional, intellectual or academic accountability will be a theme here.

The public policy reversal that began with Margaret Thatcher and Ronald Reagan promised that the deregulation of capitalism would lead to greater shared prosperity for everyone. Today, even though the falsehood of this claim is brutally obvious, the same economic nostrums and stupidities that were used to justify it in the first place continue to be trotted out and paid homage to by a class of financial-media personalities who equate making a lot of money with understanding money. It does not seem to occur to them that financial criminals and practitioners of bank-fraud can get rich through sociopathy alone.

What needs to be said is this: Keynesian economics worked before, and the improved version – now generally called “post-Keynesian” – will work again, to deliver what the market-fundamentalism of the past three decades has patently and persistently failed to deliver *anywhere in the world*. Namely – a prosperity which is shared by everyone. The principal purpose of Modern Monetary Theory is to explain, in detail, why this this worked in the past and how it can be made to work again.

Here’s how: start with a 100% payroll tax cut for both workers and employers – one that will only expire (if it does at all) when we have achieved full employment. This will not de-fund Social Security. And yes, we’ll come back to this point and cover it in great detail in due course. But first, stop and think back on the effect which federal revenue-sharing had on the economy in 2009 and 2010. If you’re thinking there were fewer teachers, nurses, policemen and fire-fighters getting laid off, you are correct. If you’re thinking that more roads, dams, bridges and sewer systems were getting repaired, you’re right again. But if you think that adding 800 million dollars to the deficit over two years is a guaranteed way to generate hyper-inflation, double-digit interest rates and bond-auction failures, leading ultimately to a frenzied worldwide rush to dump dollar-denominated financial assets, well, now would be a good time to ask yourself why you believe this.

One more point – one more plank in this three-point program to restore fiscal and monetary sanity: let’s give everyone who wants to work and is able to work some *work to do*. A currency-issuing government can purchase anything that is for sale in its own currency, including the labor of every last unemployed person who is still looking for a job. So, a key policy recommendation of Modern Monetary Theory is the idea of a “Job Guarantee”. The federal government should take the initiative and organize a transitional-job program for people who just can’t find work in the private sector – as it currently exists in real-world America today. Because the smug one-liner that starts and ends with: “Government can’t create jobs – only the private sector can create jobs!” is about the un-funniest joke on the planet right now.

The government creates millions of jobs already. Isn’t soldiering a job? Isn’t flying the President around in Air Force One a job? What about all the doctors and nurses down at the V.A. hospital, and the day-care workers on military bases? They certainly all appear to be employed. When you go into a convenience store to buy some – uh – local-and-organic Brussels sprouts, say, how closely does the clerk examine the bills and coins you tender? Did any clerk or cashier ever squint or turn your five-dollar bill sideways and back and ask, “Hmm.. are you sure this money came from work that was performed in the private sector?” No. They didn’t. Because the money governments pay to public employees is exactly the same money everyone else gets paid in.

A guaranteed transition-job would need to be different from the familiar examples cited above in certain ways. It would be important to make sure that such a program always hired “from the bottom”, not from the top. That’s an important way of making sure that such programs don’t create real-resource bottlenecks by competing with the private sector for highly skilled or specialized labor. Hence, a transition-program job would more closely resemble an entry-level job at a defense plant. Such a job only exists because of Pentagon orders for fighter planes or helmets or dog food for the K-9 units. There is no sort of ambiguity about where the stuff is going or how it is being paid for. And when the people who mow the lawn or sweep the parking lot get paid, they know, without having to think about it, that their wages will spend exactly the same way down at the grocery store as everyone else’s.

Defence spending is actually quite a good analog to the idea of a transitional-job program – one that would provide work to any and every person who wanted it. The only time the American economy ever achieved an extended, years-long period with zero unemployment, low, well-controlled inflation rates and with no significant financial aftershock at the end was the World War II era – broadly defined to include the Lend-Lease buildup of 1940 and 1941. This solution to the problem of mass unemployment worked in the 1940s and it would work today. In the 1940s, of course,the jobs were almost all war-related. But, economically, this makes no difference.

The connection between war and economic prosperity has been noticed before. It led some 19th Century thinkers (and also Jimmy Carter) to wonder whether there could be a “moral equivalent of war”. Well, there can be – by way of the Job Guarantee. The biggest pre-condition has been met, because one result of most wars has been that they forced the combatant countries off the gold standard. Now, all countries have left it. What matters next is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available – if they are not already being used to produce something else – then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.

Money is 100% fungible. Whether the job-guarantee program makes fighter planes or wind turbines makes no economic difference – the workers employed by it will spend their wages on the same things other workers buy. What matters, economically, is whether there are sufficient real resources and labor available to produce these goods and services in line with the increased demand for them. If there are, no additional government intervention is necessary in order to mobilize them. The same private-profit motivation which induces a company to produce one widget can be relied upon to induce the production of another one.

Most popular misconceptions about job-guarantee work as inefficient “make-work” ignore these private-sector dynamics. It is simply assumed that if the publicly-funded workers don’t personally contribute to making shoes or soap, their wages will result in “more money chasing the same goods” – and that this will automatically cause inflation. This is an obvious fallacy which has been empirically falsified many, many times, but most people continue to treat it as an article of economic faith. So, one of MMT’s most pressing tasks today is to make the case that we can, indeed, end mass unemployment without undermining price stability.

There are many other economic problems and challenges in the world today. Modern Monetary Theory is not a panacea for them. Even if its insights and policy recommendations become widely known, and even if they are someday fully implemented, societies will still face challenges such as inequality, regulatory capture and predatory financial behavior, including the kind of predatory mortgage lending that led to the worldwide crash in 2008. In order to understand these additional economic problems and dangers, we need to look at economics in a larger context, and correctly situate Modern Monetary Theory within this wider frame.

Modern Monetary Theory is based on earlier work which also focused on the relationship between the state and its money – ideas which come under the generic designation of “Chartalism”. MMT also remains firmly within the Keynesian tradition of macroeconomnic theorizing, and recognizes an extensive interconnectedness with other economists whose work is categorized as “post-Keynesian”. Some of MMT’s other notable academic progenitors include Hyman Minsky, Abba Lerner and, more recently, the English economist Wynne Godley, whose emphasis on achieving consistency in the analysis of economic stocks and flows presaged the emphasis which MMT-orbit economists put on it today.

The label “Modern Monetary Theory” is not particularly apt. It became attached to its advocates through the informal agency of Internet comment-threading, not because anyone considered it either very useful or very descriptive. In other words, it “just stuck”. In fact, the identity of the first person to use the “MMT” label is lost to online history. So, to be clear, MMT is only modern in the broad sense in which virtually everything that got started in the Western world in the 19th Century is called “modern”. It is not exclusively monetary either – it has quite a bit to say about fiscal policy as well. And it was not, initially, theoretical – it started as a body of quite empirical observations about the dynamics of the monetary system and the many ways they are being misunderstood these days.

A primer on MMT – L Randall Wray

Modern Monetary Theory and Practice: An Introductory Text