Modern Monetary Theory (MMT)

I was at the recording of this, and quite awestruck by Stephanie's skill as a communicator.

When governments say they can't afford to fix climate change or lift kids out of poverty are they speaking the truth? American economist Stephanie Kelton challenges economic orthodoxy in her book The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. She joins Natasha Mitchell in conversation.

Degrowth lacks a theory of how the state can finance ambitious social-ecological policies and public provisioning systems while maintaining macroeconomic stability during a reduction of economic activity. Addressing this question, we present a synthesis of degrowth scholarship and Modern Monetary Theory (MMT) rooted in their shared understanding of money as a public good and their common opposition to artificial scarcity. We present two arguments. First, we draw on MMT to argue that states with sufficient monetary sovereignty face no obstacle to funding the policies necessary for a just and sustainable degrowth transition. Increased public spending neither requires nor implies GDP growth. Second, we draw on degrowth research to bring MMT in line with ecological reality. MMT posits that fiscal spending is limited only by inflation, and thus the productive capacity of the economy. We argue that efforts to deal with this constraint must also pay attention to social and ecological limits. Based on this synthesis we propose a set of monetary and fiscal policies suitable for a stable degrowth transition, including a stronger regulation of private finance, tax reforms, price controls, public provisioning systems and an emancipatory job guarantee. This approach can support broad democratic mobilization for a degrowth transition.

The central argument of this book is that the foundations for sustainable prosperity lie in an approach to economic management based on modern monetary theory and a job guarantee. This approach builds on the work of Keynes, Kalecki, Minsky, Davidson, Godley and other Post- Keynesian economists—as well as research by behavioral economists including Simon, Kahneman and Loewenstein—to explore the role that a permanent, equitable job guarantee could play in building an inclusive, participatory and just society. Orthodox (neoclassical) economics, in its various forms, has failed to deliver sustainable prosperity. An important reason for this failure is its lack of realistic foundations. It misrepresents both human nature and economic institutions, and its use as a frame for the development and assessment of economic policy proposals has had disastrous consequences for social inclusion and the quality of life of millions of people. This book discusses an alternative, more realistic and more useful set of economic foundations, which could deliver the opportunity of a decent quality of life with dignity to all.  

If global energy consumption returns to its pre-pandemic growth rate, it will be almost impossible to transition to a zero-emission or net-zero-emission energy system by 2050 in the absence of large-scale CO2 removal. Since relying on unproven technologies for CO2 removal is speculative and risky, this paper considers an energy descent scenario for reaching zero greenhouse gas emissions from energy by 2050. To drive the rapid transition from fossil fuels to carbon-free energy sources and ensure demand reduction, funding is needed urgently in order to implement four strategies: (i) technology change, i.e., implementing the growth of zero-carbon energy production, end-use energy efficiency and ‘green’ energy carriers, together with ongoing R&D on CO2 removal; (ii) reducing climate impacts; (iii) reducing energy consumption by social and behavioural changes; and (iv) improving human wellbeing while increasing social justice. Modern monetary theory explains how monetary sovereign governments, with their own fiat currencies, can create the necessary funding without financial constraints, although constraints do result from the productive capacities of their economies. The energy transition could be part-funded by a significant transfer of resources from monetary sovereign countries of the global North to the global South, financed by currency issuance.

MMT had been making inroads before the pandemic in terms of the number of lawmakers who were starting to ask whether they had gotten some big things wrong over the years. I was in meetings in Washington, DC, in February of 2020 with very high-level members of both the House and the Senate. This was leading up to the November 2020 election. So I’m sitting there, and they’re talking about the Trump administration’s massive tax cuts, how they increase the deficit and the national debt, adding some $2 trillion to deficits with total disregard for the fiscal impacts.

This is what Republicans always do when they have power. They don’t care about debt and deficits. They focus like a laser on passing their agenda. So they got their huge tax cuts passed.

Democrats fall for this story every time. When they get into power, they try to tighten the purse strings and say, “We’re going to be good stewards of ‘taxpayer money’ and try to avoid running deficits” and all that. Meanwhile, the Republicans never do that. They just use the deficit to pass their agenda.

Democrats had me come in and they said, “Listen, we think we’ve been misled about the risks of deficits. We don’t think that these things are the bogeyman that we’ve long been told, that it’s the road to ruin.” MMT had caused them to rethink these things.

The job guarantee is a policy innovation that helps create full and meaningful employment for all via direct job creation. It is a voluntary program open to every working-age person who is ready, willing, and able to work. It provides living-wage employment opportunities in public service projects that tackle social and environmental needs. The program is funded nationally, administered locally, and available in every community.

A job guarantee would go a long way toward helping people afford housing by locating living wage jobs in communities with cheaper housing. However, for the Job Guarantee to deliver the stability and prosperity we hope to see in a people’s economy, it should be paired with a guarantee of homes to everyone. Without a Homes Guarantee, real estate developers, mortgage brokers, and landlords will do everything in their power to capture the increased Job Guarantee earnings. Speculators who treat housing as an investment vehicle leave properties vacant to manipulate prices, systematically pushing people into homelessness. Lacking an alternative due to chronically underfunded public housing and a federal government legally barred from building new housing, many people have no choice but to rely on the private sector. Because the private sector has near total control over the housing stock, and housing is so fundamental to life, it is easy for speculators to bully people into paying more and more of their income. If we want our people’s economy to include quality, stable, community-controlled housing for all, we need the Homes Guarantee to provide an alternative to the speculative housing system.

Kalecki is really considering a fully employed private sector that is prone to inflation rather than a mixed private-Job Guarantee economy. The Job Guarantee creates loose full employment rather than tight full employment because the buffer stock wage is fixed (growing with national productivity). The government never competes against the market for resources in demand when it offers an unconditional job to any unemployed workers under a Job Guarantee. By definition, any worker who takes a Job Guarantee job has zero bid in the private market (that is, no private firm is prepared to pay for their labour at the prevailing wages and prices).

The issue comes down to whether the Job Guarantee pool is a greater or lesser threat to those in employment than the unemployed when wage bargaining is underway. This is particularly relevant when we consider the significance of the long-term unemployed in total unemployment. It can be argued that the long-term unemployed exert very little downward pressure on wages growth because they are not a credible substitute.

The Job Guarantee workers, however, do comprise a credible threat to the current private sector employees for several reasons: […] 

Under the JG scheme, the government continuously absorbs workers displaced from private sector employment. The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector. The approach generates full employment and price stability. The JG wage provides a  floor that prevents serious deflation from occurring and defines the private sector wage structure.

[…]

In this paper I develop the argument that the NAIRU is a costly and unreliable target for policy makers to pursue. It is argued that full employment demands that policy emphasise the number of jobs rather than some politically acceptable (though high) unemployment rate. Many commentators who are otherwise sympathetic to the goals of full employment are skeptical of a policy approach that chooses along the lines of the JG to endogenise the budget deficit. There is a fear that it will make inflation impossible to control. To answer these claims, the inflation control mechanisms inherent in the JG model are outlined. The final section indicates other issues that are relevant but not addressed.

Undated, with the usual quotes plus quite a few that are new to me.

According to the Bank of England;

"... Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks.".