Understanding MMT Feed Items

Dr Steven Hail discusses universal basic income versus genuine job guarantee schemes to offset accelerating technological change and rising inequality.

WE LIVE IN AN ERA of inequality, relative poverty, social exclusion, insecurity and underemployment.

e are told that accelerating technological change will wipe out millions of jobs and drive us even further towards a society of “haves” – in their well-paid jobs made productive by cheap, robotic work-mates and “have-nots”  driven out of paid employment by the androids.

For many, the obvious answer to all this is a universal basic income (UBI) — an unconditional payment made to all adults, so that they can still function as consumption machines and at least survive – even though there are no jobs left for them to do.

In a sense, a UBI can certainly be afforded by currency-issuing governments. Those governments are hardly going to run out of the currencies they issue.

But there are some problems with a UBI:

Modern Monetary Theory (MMT) is a framework for understanding government fiscal policy, taxation, and money creation and how they affect the economy. It offers a way of thinking about deficits, debt, and the role the government can play in achieving public purpose. Tax liabilities come first, allowing government spending that provides an initial injection of currency that enables tax compliance and directs economic activity. This spending initiates aggregate demand and contributes to macroeconomic conditions.

Modern Money Systems and Differing Currency Regimes

Modern Monetary Theory (MMT) reveals how the monetary operations and policy limitations vary for governments under different monetary regimes such as flexible exchange rates (examples include the U.S., Japan, the Euro area, and the UK), fixed exchange rates (such as those in, Bulgaria and Saudi Arabia), currency boards (like Hong Kong), and dollarization scenarios (seen in Ecuador and El Salvador). MMT explores the differences in policy options that governments experience without self-imposed restrictions compared to those operating under a variety of restrictions, including fixed exchange rates and monetary unions.

We hear a lot about the supposed intergenerational effects of government borrowing. Apparently, if the government borrows ‘too much’ now, it will impose a financial burden on future generations. People living in the future will have to pay for our government’s current spending in excess of taxation. For example, current Fed Chair Jerome Powell argues, ‘Over the long run, of course, it [government debt] does [matter]. You know, we’re effectively … borrowing from future generations. And every generation really should pay for the things that it, that it needs. It can cause the federal government to buy the things that it needs for it, but it really should pay for those things and not hand the bills to our children and grandchildren’.

So, is such a view justified? Fortunately, the answer is no. The argument expressed above is based upon a profound misunderstanding if the actual nature of the monetary system in general and government debt in particular. It is founded on the erroneous view that the US government is a currency-user and needs to acquire funds from taxes to pay the value of bonds when they mature. It is also based on the idea that at some point in the future, the total level of outstanding government debt needs to be paid down to zero (or at least reduced in size). From this perspective, future taxpayers will be handing over their money to pay down the public debt, which will become especially troublesome if the public debt gets ‘too big’ now.

This post was previously published in 2011 and 2017 at other locations. It is republished here with permission and references President Trump’s then OMB Director, Rick Mulvaney.

Mulvaney spread the myth among the American public, and there is a good possibility that if a re-elected Trump decides to push the line that the austerity hawks are selling, then he, too, will begin to call Social Security “a ponzi scheme” too.

And then he will use that meme as a rationale for delivering the $2.8 Trillion in its special Treasury bond accounts to the private sector. Now, here is my previous post on the “Ponzi scheme” fairy tale.

Rick Perry’s loose talk about Social Security being a Ponzi scheme, is generating a lot of contrary ink, or electronic bits as the case may be. Cullen Roche has provided an excellent analysis, accompanied by a great discussion which begins this way.

NEARLY 30 YEARS AGO, a New York fund manager named Warren Mosler noticed a discrepancy between what he saw day-to-day in his interactions with the Federal Reserve and the way almost all academic economists write about money. The way they write, you would think currency-issuing governments need to tax before they can spend — Mosler noticed it is the other way around.

Getting this wrong is not trivial. It biases policy narratives. It misleads politicians into thinking that there is something inherently good or sustainable about budget surpluses. It misleads them into worrying about finding the money to meet their commitments when that is the wrong question to ask.

Mosler wrote a book called Soft Currency Economics and reached out to the leading lights of the profession, eventually discovering a group who were interested enough to discuss his ideas. The group called themselves post-Keynesians, although, in fact, they are the modern-day economists who remain closest to the works of the great 20th-century economist John Maynard-Keynes.

The term ‘magic money tree’ is much beloved by the critics of modern monetary theory (MMT). Their story of the magic money tree begins with money’s traditional creation myth; money springs from barter and represents a cost-saving alternative to barter [1]. In the story, money is a private-sector invention, and only later do governments get in on the act. According to their fable, private sector business generates money from ‘productive’ activity. The state siphons off some of this ‘proper’ money in the form of taxation in order to fund public services.

This is an often wasteful and invariably inefficient process. The government can, of course, borrow money from the private sector, but this brings its own dangers; borrowing must be repaid, and it places a burden on future taxpayers. Of course, the higher borrowing will raise interest rates, adding to the supposed intergenerational burden. This was famously noted by Margaret Thatcher.