guest post by Joel O’Bryan PhD
NPR news is running this story on Green New Deal financing by writer Scott Horsley:
When Rep. Alexandria Ocasio-Cortez rolled out her “Green New Deal,” calling for clean energy, universal health care and guaranteed jobs, one of the first questions she got was: How do you plan to pay for it?
The New York Democrat argued that ambitious programs can easily be financed through deficit spending.
“I think the first thing that we need to do is kind of break the mistaken idea that taxes pay for 100% of government expenditure,” Ocasio-Cortez told NPR’s Morning Edition in February.
In doing so, she shined a spotlight on a once-obscure brand of economics known as “modern monetary theory,” or MMT.
The NPR story by Mr Horsley goes on to try to describe in populist terms what MMT is:
There was something of an Oprah effect when she (AO-C) said that,” said economist Stephanie Kelton of Stony Brook University. “People immediately probably started Googling ‘modern monetary theory’ to find out what she was referring to.
Run that Google search and you’ll quickly find Kelton herself. The economist, who advised Bernie Sanders’ 2016 campaign, is one of the best-known evangelists for the theory. Kelton says paying for big government programs is the easy part. If Congress has the will, the Federal Reserve can effectively print the money.
If Congress authorizes a few billion dollars of additional spending, or a few hundred billion dollars, then the Fed’s job is to make sure that those checks don’t bounce,” Kelton told NPR.
Well, right there our “economics expert”, the person who advised Socialist Bernie Sanders, tells a whopper. While the US Congress can and does spend with abandon, it is not the job of the Federal Reserve to “fund the government and “make sure that those checks don’t bounce.” That job goes to the US Treasury, an executive branch under the Secretary of the Treasury, reporting to the President.
The roles of the Federal Reserve and the US Treasury are fundamentally different. The US Treasury has existed since the US was founded in 1789, the first Secretary of Treasury being Alexander Hamilton, the architect of the US Constitution. The US Treasury manages revenues (via the IRS primarily, but also things like import duties) and pays (via revenues and borrowing) the bills for appropriations made by Congress – it is the US Treasury that actually writes the checks to pay the bills. The US constitution expressly says this in the Appropriations Clause:
“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”
Article I, Section 9, Clause 7
Secretary Hamilton brought discipline to the young US Government by ensuring war debts were paid to foreign governments. This earned the US government much needed international trust and future support when the British were still intent on re-taking the “colonies” when the time was right. Without that trust, things might have turned out much different in the War of 1812 when the US had to repeal the British Army from US soil once again. International financial trust is vitally important to the strategic position of any nation in our interconnected world today even more so than in 1812.
Since its creation in 1913 by an act from Congress, the Federal Reserve is a quasi-independent agency that is congressionally empowered to promote the stability of the US dollar. Congress’s latest amendment to that act directs the Federal Reserve to “Promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
The Fed carries out this responsibility primarily via adjusting short term interest rates that banks and chartered financial institutions are charged for over-night loans and how much they’ll receive in interest for “parking” their liquidity (funds not invested elsewhere) with the Federal Reserve banking apparatus. Via these many complex banking transactions, the Fed’s rate controls are the levers on the amount of US dollars flowing in the banking system, and thus encouraging economic growth or pulling it back to keep inflation in check and thus stabilizing the US dollar’s value. The Fed currently does not have a role in “to make sure that those checks don’t bounce” as Ms Kelton falsely claims. That is the US Treasury’s job — always has been, and unless some serious amendment of the US Constitution occurs, it always will be.
That Ms Kelton, supposedly a highly educated academic, makes such a fundamental mischaracterization of the role of the Federal Reserve simply cannot be chalked up to ignorance. I’ll leave it to the reader to ascertain what the proper characterization of Ms Kelton’s assertion might be. That Scott Horsley of NPR, a long-time reporter there, would repeat her mis-characterization of the Fed without challenging it, as a journalist should do when dealt an obvious whopper, likely speaks to Mr Horsley’s motives and/or his own ideological blinders.
Now back to the topic of Modern Monetary Theory (MMT) and how it’s adoption by the Federal Reserve (the Fed) and the US Treasury via Congressional spending would (not “might”) fundamentally alter our entire financial system stability and the promise the US Treasury makes when other’s buy-up US debt instruments in order to fund US government deficit spending as envision by GND and MMT advocates.
To start one must understand the foundational difference of monetary policy versus fiscal policy. Monetary policy is generally consider the setting short-term interest rates to control the amount of liquidity in the banking system. In the longer term this serves to stabilize the US dollar’s value relative to foreign currencies by controlling inflationary growth. The Fed is supposed to carry out these rate actions independent of concerns or desires from the two political branches, Congress and the US President, and it generally does so for themes part.
On the other hand, Fiscal Policy is set by the US Congress via appropriations (spending) and authorizations to the US Treasury to borrow money (via sales of bonds, T-bills, etc). A current news topic lately is indeed the current “debt ceiling” authorized by Congress to the US Treasury to borrow to pay the bills is rapidly being approached again according to recent reporting on discussions between Speaker of the House Nancy Pelosi and Treasury Secretary Steven Mnuchin. But that’s another story, for another time.
The key point is the US Treasury must borrow (offer bonds/T-bills/notes to buyers at interest rates to attract them to the auctions with their money) to fund deficit spending as part the US Congress’s fiscal policy for the federal government. In the bond market where the Treasury operates everyday, the buyer’s demand a suitable rate of return on the money they lend to US Government. But without the trust that US government won’t just “start printing money” on wild spending demands from Congress, many lenders wouldn’t endure the risk and would walk away and put their money elsewhere to work for them. Those lenders that don’t walk-away will demand very high interest rates under the very real risk of high inflation/erosion of US dollar value compared to other currencies like the Euro, the Japanese Yen, etc. Such high interest rates to the US Treasury sales it would set in motion what is termed “fiscal dominance” at the Federal reserve. Fiscal dominance is where normal monetary policy of dollar stability, controlling inflation concerns are replaced by simply a re-write of the Fed charter by Congress to simply “assist the US Treasury in printing money.” In other words, the fiscal demands of paying for things like GND and Medicare-for-All overrides the normal monetary policy of dollar stability, thus the term “Fiscal Dominance” is very bad place for a government to find itself. As the downward spiral would be a trap that would be extremely painful to reverse.
Once the bond market’s confidence in the US Government’s “full faith and credit” is shattered by an adoption of MMT to pay for everything the Progressives want, high inflation will return to the US, just as it was in the late 1970’s economic malaise of “stag-flation”. Maybe even hyper-inflation if the economic insanity goes on too long. This is because any human run market is governed as much by human behavior and psychology as it is real values. Just look at how the crypto-currencies (Bitcoin, etc) undergo daily wild swings simply based on psychology for proof of that statement. And long-term values of the US dollar would be shattered by simply printing dollars, regardless of what useful idiots Ms Kelton, Bernie Sanders, or AO-C claim.
High inflation (and its worse form, hyper-inflation) rapidly destroys savings accounts as bank CD and money market interest rates do not keep up with the rising cost of living for those living on their fixed incomes and retirement accounts. This is how the Left intends on stealing the Trillions of dollars the US middle class has tucked-away in their IRA’s and 401k’s. They don’t need to change the laws on IRAs or 401k to actually taking the money via altered tax codes, that would provoke a vicious middle class backlash at the ballot box for Democrats. The Progressives simply plan on doing it by stealth, by adopting MMT which will destroy private retirement accounts’ values with high (hyper) inflation as they print Trillions of dollars without going to bond markets to pay for every socialist wish list item they can imagine to buy more political power, and leaving the Federal Reserve powerless to stabilize a plummeting US dollar value on the world’s currency markets.
This is exactly how Venezuelans were lured to support Hugo Chavez’s socialism for so many years as their country lurched towards the ruin it now suffers, by promising people free stuff while the government stole their future and their savings from Venezuela’s once vibrant middle class right under their noses. It was all fun and good times until they literally ran out of OPM (the bank accounts they were stealth stealing from essentially became worthless via inflation). It just happened faster in Venezuela than it would in the US because they had to borrow money in foreign currency. That the US has what many economists call a “fiat” currency doesn’t change that ultimate dynamic, it just would delay the outcome, and make a recovery from an MMT adoption catastrophe even harder than Venezuela’s will ultimately prove to be.
That Socialist Bernie Sanders openly admired and praised the Chavez government’s stealing their citizens’ futures is also why he embraced the economic theft of MMT for the US, as advocated by Ms Kelton at Stony Brook his campaign economic policy advisor in 2016. And it is now MMT that the economic illiterates like Congressperson Ocasio-Cortez (a Sander’s ally) also embraces to “pay” for their Green New Deal destruction of the US economy and work ethic … Venezuela-style.
Climate Change and the “green” policy prescriptions offered for it have not been about the “science” for several decades now. Climate Change is the economic vehicle by which progressive democrats and outright socialists like Sanders and AO-C intend to take-over the country. They are using irrational “climate crisis” fear-mongering on an ill-informed populace, promises of OPM-paid “free stuff” which thus they will drive the US into the dirt with all the misery, despair, and deprivation that socialism always brings. MMT is magical money drug that they intend to use to bring that destruction in the pursuit of their raw political power.
Joel O’Bryan, PhD