Sacred Headwaters #27: Modern Monetary Theory (MMT)

MMT is a heterodox economic theory that recommends a new approach to fiscal policy (government spending). What is it, and why does it matter -- or does it?

Sacred Headwaters is a bi-weekly newsletter that aims to guide a co-learning process about the existential issues and planetary limitations facing humanity and about how we can reorient civilization in a way that will enable us to thrive for centuries to come. If you’re just joining us, consider checking out the first issue for some context and head over to our new table of contents to browse the whole library. The newsletters are not strictly sequential, but this exploration is meant to build on knowledge and understanding over time. Subscribe below if you haven’t already, and please share with friends, family, and colleagues who may be interested:

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Issue #27: Modern Monetary Theory (MMT)

This issue is the second in a series of four newsletters focused on debt. In this series, I’m trying to build a narrative that makes it clear how important debt is as a cultural, political, and economic construct in the broader challenges of achieving a sustainable and equitable civilization.

• Issue #26: Student Loan Debt (Nov 23, 2020)

• Issue #27: Modern Monetary Theory (MMT) (Dec 7, 2020)

• Issue #28: Money, Debt, and Society (Dec 21, 2020)

• Issue #29: International Debt (Jan 18, 2021)

I realize that it may feel a bit silly to read about an alternative theory of fiscal and monetary dynamics when most of us have not thought about economic theory since high school, if at all. In this introduction, I’m going to explain, as briefly as I can, what Modern Monetary Theory is. Perhaps more importantly, though, I’m going to try to convince you that it’s worth learning about.

MMT is an increasingly popular macroeconomic theory among the political left that aims to provide a more accurate description of the dynamics of currency, employment, and inflation than traditional macroeconomics. It’s focused on the transition from the Bretton-Woods gold standard system of international currency to what’s called “fiat money:” the US dollar today is not worth anything other than US dollars. You can’t exchange it for gold or anything else at a fixed rate. This has been the case since President Nixon unilaterally ended the dollar-gold convertibility guarantee in 1971. It was also true, or effectively true, for significant other portions of the 20th century, but it has been consistently true since 1971.

Fiat money implies one indisputable fact, a fact that MMT builds upon: the US government — and other governments with similar degrees of what is called “monetary sovereignty” — cannot run out of money. We could never default on our debt because our debt is issued in US dollars, which are in turn created by the US government. So, despite the political rhetoric — Obama said, “Well, we are out of money now;” Prime Minister Theresa May said, “There’s no magic money tree;” the list goes on and on — countries like the US and the UK absolutely do have a magic money tree. We cannot run out of money. This is a defining feature of our position as monetary sovereigns, and frankly, it can’t be argued — it is fact, even though we are told every day by politicians and reporters that the government is running out of money.

So if we have access to unlimited money, why don’t we spend more? Well, right now, the answer is that we don’t spend more because of what MMT economist Stephanie Kelton calls “the deficit myth” — the idea that the government must have a balanced budget. MMT theorists emphasize that the real constraint on spending is inflation. When the government spends money, that money is credited into private bank accounts directly by the Federal Reserve. Your tax dollars, my tax dollars — they never pay for government expenditures. They disappear; when we mail the IRS a check, that money is simply subtracted from a private bank’s account with the central bank. So government spending is, on its own, a direct addition to the money supply. Taxes are, by the same token, a subtraction from the money supply. When there’s more money floating around (due to increased government spending into the economy), there’s more competition to purchase real resources, which drives up the price of those resources, causing the process we call inflation.

None of what I’ve said so far really departs from economic orthodoxy, or even from a factual explanation of how the system works. But it points out a key problem with how our system works: we’ve made the central bank “politically independent,” to the point that’s possible, and we’ve tasked it with managing inflation and unemployment. The Fed (the US central bank) has target rates for inflation and unemployment in a healthy economy, and it uses what’s called “monetary policy” to achieve those goals. Historically, this meant controlling interest rates through bond sales; over the last two decades, it’s increasingly come to include more direct control of the money supply.

This is where MMT departs from traditional thinking. Congress has access to two tools that directly impact inflation: spending and taxation. But Congress has yielded all responsibility for controlling inflation and employment levels to the Fed, who have their own toolkit that is, according to MMT economists, insufficient. We’ve hamstrung our own ability to maximize employment and minimize inflation. Another facet of this is that the Fed considers a certain rate of involuntary unemployment — what is generally referred to as the unemployment rate — “optimal.” The “unemployment rate” before COVID-19 in the US was 3.5%, or almost six million people, which was unusually low. That means there were nearly six million Americans who wanted to work but couldn’t; best case, many of them had financial support through state unemployment insurance, but many of them didn’t. MMT argues that we can aim higher: we don’t need to doom millions of people or society as a whole to the mental and physical costs of being unable to find work.

To summarize briefly, before I start trying to explain why I think this is important…MMT is a macroeconomic theory that purports to be a better fit for the realities of fiat money and the modern financial system, freeing us to use a more effective toolkit to manage inflation while maximizing well-being.

That in and of itself seems like a compelling argument for why MMT is important, if it’s valid. Removing the “government deficits are bad” constraint from Congressional policy-making would free us to treat the climate emergency like an actual emergency: we don’t have to ask, “bUt HoW wIlL wE pAy FoR iT???” because the answer is obvious. We’ll pay for it the same way we pay for everything — the central bank will credit money on a spreadsheet to a private bank who will transfer that money to the relevant companies, municipalities, etc. We need to be cautious about inflation, but MMT actually allows us to focus on inflation as the main constraint, rather than getting bogged down in imaginary constraints like a “balanced budget.”

These particular implications only apply to countries with high monetary sovereignty: the US, UK, Canada, Japan, Australia. Eurozone countries don’t have monetary sovereignty because they use the Euro and aren’t able to create money on their own. Many Global South countries have low degrees of monetary sovereignty because they carry too much debt in other currencies (like the US dollar), thanks in large part to institutions like the IMF and World Bank. But MMT theorists feel that their approach has implications for international policy, trade, and more, even if many of their recommend policies can only be implemented within countries with high degrees of monetary sovereignty.

I actually think learning about MMT is important whether or not it prescribes a valid approach to fiscal policy. Much like Kate Raworth’s writing about Doughnut Economics, the MMT discourse exposes something pernicious about economics as an academic discipline, which in turn exposes a more universal fault in our virtually hegemonic Western epistemology. Former Fed Chairman Alan Greenspan (who is not a MMT economist) has repeatedly stated the core insight that MMT builds off of: “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.” And yet, despite this being indisputable, our political discourse — driven as it is by DC-based economic advisors, the media, and large corporations — is centered around the undeniably wrong idea that the federal government can, in fact, run out of money. Even Senator Bernie Sanders regularly emphasizes that he can pay for his proposals through a more progressive tax code.

What I’m trying to point out here is that academic economics does not and has never existed in a vacuum. Politics, political discourse, and academic research exist in a system full of feedback. Economics is an excellent example of how flawed our understanding of this is, but it’s true across the board. Without getting too deep into the history, most of today’s political discourse is centred around a belief in the fundamental “truth” of a relatively marginal school of economic thought that grew in academic acceptance through concurrent growth in political prominence. Imagine a scenario where MMT takes off, where it’s taught in macroeconomic textbooks as “the way things are” in 30 years. Will that have happened because of some sort of epic, objective knowledge battle, locked away in the ivory towers of the academy? No, it will have happened because prominent politicians and public figures championed MMT as a way of understanding macroeconomics, but the result will be that most of us consider it “true.” As a fun but indicative aside, the Nobel Prize in Economics was created by the Swedish Central Bank (not Alfred Nobel’s will); it has been used to legitimize previously fringe economic theories and policies that are now considered truth by the public and our representatives.

And of course, these theories are self-fulfilling — the more we understand economic theories as inherent laws of nature, the more we behave as if they are, reinforcing their conclusions. The idea of a “rational economic man,” assumed to represent real human behavior by a century of economic theorists, has been a major driver of the degradation of relationships and reciprocity characterized by earlier and/or co-existent civilizations.

What I’m getting at here is that economics is an emblematic example of our misunderstanding of the relationship between “science” and “truth.” The rallying cry “believe science” that we saw throughout this election cycle is another manifestation of it. Science as we know it is not and cannot be “objective,” independent from the humans performing the experiments or the sociopolitical environments in which they exist. This applies especially strongly to social sciences (though I believe it applies universally); I bring it up because I think it’s an extremely important thing to recognize: what we consider “truth” at any given time may, intentionally or unintentionally, be a tool for reinforcing and perpetuating the status quo.

Epistemic digression aside, the readings in this issue will explore MMT in more detail: what it is, what sorts of policies it proposes, and how it might integrate (or not) with frameworks like degrowth. I’d like to think that this is a given with all of these newsletters, but on this topic I feel like I need to emphasize it: this is not an exhaustive look at MMT. It’s not even a comprehensive primer. It is an attempt to explain what it is and why it’s something we might want to learn about, and to provide some resources to begin that exploration.

From “An Antidote to Deficit Phobia” by Pavlina R. Tcherneva. This graph reframes government budget deficits as the necessary inverse to private sector surpluses (and government surpluses, like in the late ‘90s under Clinton as necessarily indicating a private sector deficit), based on the fact that money is only created by one agent in the system: the federal government, also known as the currency issuer.

Podcast: Planet Money — Modern Monetary Theory (22 minutes)

This interview with Stephanie Kelton does what I tried to do above — introduce Modern Monetary Theory — much more effectively, given that most of what I know about MMT comes directly from Kelton’s work. It’s a short overview of the underlying idea, centered around a very simple but remarkably insightful question from a 13 year old listener in the UK: “can’t the government just print money to pay for things like healthcare and schools?” The answer, of course, is yes (though “printing” is not necessarily the right word anymore), but the question serves as a jumping off point for Kelton to explain how MMT grants access to a more diverse toolkit for managing the real concern: inflation. It includes an excerpt from another non-MMT progressive economist who raises an excellent question: can we really rely on taxation as a tool for mitigating inflation when it’s so politically difficult to raise taxes? It’s certainly an important question, but Kelton makes two points in response: first, she argues that we have been underspending for a long time and have room to spend more without risking inflation. How much room, we can’t be totally sure, but she’s sure that there’s some. Second, Kelton emphasizes the need to build “automatic stabilizers” into fiscal policy. We already have some of these: the cost of federal support for unemployment insurance rises and falls depending on the demand for it, meaning that when there’s a recession, we automatically spend more into the economy without Congress having to approve additional spending. When the economy does well, that spending automatically goes down. One of MMT’s core aims is to develop new fiscal policies that function as automatic stabilizers so the whims of Congress aren’t as directly responsible for control of inflation and unemployment.

Guaranteed Jobs Through a Public Service Employment Program (20 minutes)

One such “automatic stabilizer” that’s popular among MMT economists is the idea of a job guarantee. This idea is not new, nor is it unique to MMT: Franklin Delano Roosevelt’s proposal for a Second Bill of Rights placed the right to a job front and center; Martin Luther King Jr. actively campaigned for a job guarantee during the Civil Rights Movement; Senator Bernie Sanders calls for one regularly. It is similar but not identical to the idea of a universal basic income (Issue #18). You don’t need to be an MMT enthusiast to endorse a job guarantee, but the authors of this particular proposal represent the “who’s who” of MMT, and MMT offers a unique take on the jobs guarantee that emphasizes its macroeconomic impacts (in addition to its real social value). The core proposal of MMT is to allow fiscal policy — government spending — to take a bigger role in economic stabilization (controlling employment and inflation through the inevitable up-and-downs of the capitalist business cycle). People rightly question how much control Congress should be exerting day-to-day and automatic stabilizers — like a job guarantee — are MMT’s answer to that. We can build programs like the Public Service Employment program proposed in this report that, by nature, increase spending during economic downturns, supporting the economy and maintaining full employment, and decrease spending when the economy does well, allowing the private sector to absorb jobs back from the PSE. A job guarantee doesn’t require agreeing with MMT to be seen as good policy, but MMT provides another lens through which to perceive its potential benefit.

Degrowth and MMT: a Thought Experiment (10 minutes)

One thing that sticks out at me in the MMT literature is the idea that we are not operating our economies at their full capacity: that there’s additional “slack” we can take up before we cause inflation to rise meaningfully, and that to maximize human well-being — particularly of those who are chronically un- or under-employed — we should use government spending to take up that slack. But when we read about degrowth in issue #7, we learned that decoupling GDP growth from resource use (so-called “green growth”) has yet to be meaningfully demonstrated and is likely impossible. Even decoupling it from carbon emissions has proven extremely difficult. So, there seems to be a risk that “taking up the slack” in our collective economies will accelerate growth, in turn accelerating resource use and/or emissions, which we cannot afford to do. Degrowth economist Jason Hickel takes on this tension directly in this article, arguing that once we allow MMT to show us that taxation is not a tool required to finance spending, we can see it for what it is (in addition to how MMT sees it): a tool that can be used to manage resource use and diminish the power of the ultra-wealthy. He believes we can use MMT-inspired policy — like the job guarantee — to create an environment of abundance that will ultimately disrupt the capitalist growth incentive, allowing us to produce a system that facilitates well-being without requiring growth.

The Living New Deal Map (5 minutes)

This isn’t strictly MMT-related, but a lot of MMT literature cites Franklin Delano Roosevelt / New Deal era policies as inspirations for large scale government spending and work programs. This interactive map shows more than 16,000 projects that were created by New Deal projects and are still in use today. This includes public libraries, post offices, state parks, community buildings, roads, airports, schools, and more. It’s quite stunning and an amazing demonstration of what a government jobs guarantee might be able to accomplish.

Book Recommendation: The Deficit Myth, Stephanie Kelton

You may have noticed that the last few issues haven’t had book recommendations. I stopped including them as a matter of default, but will continue including them when I have a book that I strongly feel is worth reading. This is one of those.

Despite being a book about fiscal (and monetary) policy, The Deficit Myth is a surprisingly easy read. It’s that way by design: Kelton, one of the more prominent MMT economists, has worked on the Hill as an economic advisor. She came away from that experience feeling strongly that government approaches to economic policy won’t change until the public forces them to change. This book is her effort to facilitate that public pressure. While the book covers a variety of topics, including some of the history of currency in the US and the descriptive and prescriptive elements of MMT, it’s primary focus is disentangling fact from fiction in the political discourse surrounding the government’s budget deficits and so-called debt. She deftly demonstrates how — almost irregardless of what you think about MMT as a theory — the idea of the national debt has become a weapon, wielded bluntly by both political sides to accomplish their agenda. Kelton argues that we can facilitate economic well-being for all Americans by exposing that narrative for what it is: fiction. While it may come across as an afterthought, Kelton also demonstrates a realistic understanding of the scale and scope of the climate crisis and explains how she sees MMT-inspired policy as a key to our efforts to mitigate climate change both domestically and internationally.

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