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
Tucson, Arizona
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Good article. Except for all the typos. The typos will allow opponents to dismiss it as badly written nonsense. Why didn’t you proof read it?
Virtually nobody posting here has any idea what MMY really says and that certainly includes Joel O’Bryan, Ph.D.. What don’t you guys save your pennies and buy “Macroeconomics” by Mitchell, Wray, & Watts. It’s an introductory college level economics text so it should strain your brains too much.
I’ve thrown in a few random comments, but it is far too much to try and correct all the nonsense being written here. Let me just try to explain to DOCTOR O’Bryan what Prof. Kelton meant.
When I was young, the Treasury could print money so its job was to insure that its checks did not bounce. But in 1973 or 4 (I forget which), Congress took that ability away so only the FED could create money outside the private sector. There is no limit on how much they can create although it may or may not be a good idea to do so. Then it became the FED’s job to make sure the checks do not bounce by buying Treasury bonds as needed.
As for the FED’s independence, here is what the FED says on its WEB Site:
“There are three key entities in the Federal Reserve System: the Board of Governors, the Federal Reserve Banks (Reserve Banks), and the Federal Open Market Committee (FOMC). The Board of Governors, an agency of the federal government that reports to and is directly accountable to Congress, provides general guidance for the System and oversees the 12 Reserve Banks.”
So by a simple act of Congress, the whole FED system could be redone.
I doubt if anyone here is interested in what MMT really says, but here is a very brief description:
One of the myths that leads any discussion of taxes astray is the idea the taxes pay for government operations. If someone proposes a federal government program, the first question asked is, “How do we pay for it?” This idea is believed by practically everyone. In fact, so thoroughly do they believe in it, they never offer any facts or even arguments to support this belief. “Everybody knows!” I understand that they believe this because it is true that they must pay for the stuff they buy. This belief, however, is responsible for not only many of our economic problems today but has been responsible for the economic disasters of our past.
Let me offer the history which supports my last sentence. The US has had 6 real depressions–6 or more quarters when the per capita GDP decreased. Every single one of them was preceded by a period of “fiscal responsibility.” By this I mean that like a responsible family, the government spent no more than it took in, and significantly (10% or more) paid down the national debt. In fact, it works the other way, too. Every period of “fiscal responsibility” has been followed by a real depression.
The reason these “kitchen table” economic ideas are wrong for the federal government is because there are two significant ways the finances of the government differ from our family finances.
The first is that (through the FED) the federal government can create as much money as it needs out of thin air. I am fond of saying that the US government will run out of money the day after the NFL runs out of points. Unless you have a printing press in your basement, you cannot do this.
The second is that we need money to conduct commerce and so the banks can make loans. Furthermore, as the economy grows, we need more and more money. Where does the money come from, and how does it get to us? Why, it comes to us from the federal government, and we get it when the government spends money and does not take all the money back by taxation, i.e. when the US government has a deficit. So federal deficits are usually necessary (but perhaps not sufficient) to avoid financial disasters.
Because of the first fact, the government does not need your money to pay for government operations. It has an infinite supply. We do have to be careful since too much money chasing not enough stuff will cause prices to go up. We may get excessive inflation. Well, one way to avoid that is for the government to take some back, to tax it back. We may not, however, have to have high taxes.
(Let me make a parenthetical remark. In the interest of brevity I have neglected the issue of federal borrowing. There is really no need for the federal government to borrow. In fact as one economist has said,”Treasury bonds are just a service of the government that provides risk free savings.” So in what follows, you should probably think that the federal deficit is the amount of money created minus the amount taken back by taxation.)
It is certainly true that prices are proportional to the amount of money in the economy, but they are also inversely proportional to the amount of stuff we can produce. In terms of algebra, there’s this little equation:
P = (MV)/S
where P is prices , M is the amount of money in the economy, V, the velocity of M, measures the frequency that money changes hands usefully, and S is the amount of stuff, goods and services, we can produce in some time period.
If we spend the new money in a way that facilitates more production that will yield more money chasing more stuff which does not lead to excessive inflation.
Why is this important?
Using the “kitchen table” ideas, if we want free child care and it costs $X, then we have to tax or borrow $X dollars to pay for it. If we use the way the finances of our government actually work, we have to see how much free child care would increases our production which is probably quite a bit since it would allow more people to work. When we do the figures, it may turn out that if we have to raise taxes at all, it may be a lot less than $X.
The point is that we are asking the wrong question. “How do we pay for it?” The right question is “How much will it increase the value of our production?
There are occasions when money creation of any kind will cause unwanted inflation. If the economy is constrained, if there is no way to increase production, the increasing M will not increase S as it usually does. For example, during and after WWI, the German economy was constrained by the allied sea blockade and the lack of arable land. Over one million Germans died from starvation during this period. Then the economy was further constrained by reparations in kind in which Germany was forced to send much of what it did produce, mainly steel and cattle, to France and the UK. Prices were rising rapidly. In the midst of this humanitarian crisis, the Weimar government decided to print a lot of money which led to further inflation. But the important fact to note is that like most (all?) cases of hyperinflation, the initial cause of the hyperinflation was not the excess printing of money. The excess printing of money was caused by the initial inflation.
Today our economy is not constrained, so the federal government could spend a lot more money. If this money is spent in such a way that it goes to the people who need it and will spend it and not to the people who do not need it and will use it to specute, not only will will production increase and prices not rise too much, but wealth inequality will be reduced.
So, we see that the main purpose of taxes is not to raise revenue, but to control the amount of money in the economy to avoid excessive inflation. Taxes can also have side benefits. A carbon tax would help combat climate change. A wealth tax as Senator Warren proposes would reduce inequality which is bad for the economy since the Rich spend less and speculate more, but that is a topic for another discussion.
Reference: Balanced Budgets and Depressions
Thayer, Frederick C., The American Journal of Economics and Sociology, Vol. 55, No. 2
“… since 1791, there have been six significant economic depressions among the innumerable “business cycles.” Each sustained period of budget-balancing was immediately followed by a significant depression. There are as yet no exceptions to this historical pattern.
This is the record of six depressions:
1. 1817-21: in five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.
2. 1823-36: in 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.
3. 1852-57: in six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857.
4. 1867-73: in seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.
5. 1880-93: in 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.
6. 1920-30: in 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.
…
The question is whether this consistent pattern of balance the budget-reduce the national debt-have a big depression is anything other than a set of coincidences. According to economic myths, none of these sequences should have occurred at all. How on earth, for example, could we virtually wipe out the national debt in the mid-1830s, then fall immediately into one of the six recognized collapses in our history? …”
“MMT could be used to pay for the Green New Deal”
So AOC is a genius after all?
PS My kitchen table and kitchen it is in is paid for.
Did you print the money you used to pay for the kitchen and the table therein?
If I did then my “room” wouldn’t be a kitchen and I’d be pretty depressed. 😎
But my kitchen was in my PS.
““MMT could be used to pay for the Green New Deal”
So AOC is a genius after all?”
When asked how she’d fund the GND, one of her early of many answers was, “Just pay for it.”
Her degree is in economics. Are talking about genius or tulips?
Please focus. I have been trying to talk about MMT, not AOC. You may want to consider my comment a little above these where I point out that “How do you fund it?” Is the wrong question to ask, Actually since the we have a fiat currency, AOC’s answer makes perfect sense since the government can just create as much money as it needs. A better question is ,”How much inflation will the new funds cause?” A still better one is “How much of an increase in production will the GND and its funding cause?”
But perhaps you may prefer to talk about your kitchen. What kind of counters does it have?
AOC only wants to apply what you and MMT proposes.
Including not letting the people who earn it keep but rather giving it (via the Robbing Hoods in Big Government) to those who don’t want to work.
(No wonder they “need” it!)
Great way to “produce” votes!
PS I remember Obama claiming, “You didn’t build that.” Was he a proponent of MMT?
I don’t see any need to reply to mindless boilerplate that has no place in a discussion of the economics of MMT.
I’ll take that as a “yes”, they are inline with MMT but I can’t defend the actual application of the theory.
At the beginning of the interglacial gold literally lay openly accessible under every tree root. It was only useful to hold flapping tent ends. With each pharaoh’s tomb, gold disappeared under the soil, the rest disappeared into vaults.
At some point, the gold standard had to prove as illusory. As a real benchmark today government bonds are fitting. And nothing else.
Damn glad I don’t have much time left, according to that clock, I’m 224,000 dollars in dept!