MMT Going Mainstream?

Modern Monetary Theory (MMT), an approach to economics that emphasizes the facts about how fiat monetary systems actually work in the real world and the implications of these facts for fiscal policy and economics is beginning to go mainstream. As it does, more and more people are contributing to shaping the approach and are adding to the debate about it. Very recently John Carney of CNBC created a stir in the MMT community by writing favorably about MMT.

While doing so, however, he expressed his disagreement with the emphasis of the primary MMT founders, Warren Mosler, Bill Mitchell, and Randy Wray, as well their initial students and collaborators on the policy idea of a Job Guarantee (JG) as a way of achieving both full employment and price stability. Carney believes a JG program will be: “massively inflationary”, a bureaucratic nightmare, and economically stagnating. So either the JG isn’t part of the MMT core, or MMT is just wrong.

Carney’s post touched off an explosion of blog-based discussion and commentary here, here, here, here, here, and here. Some believe that the JG policy is somehow grafted on to the basic MMT description of the facts and operations of fiat monetary systems, and is not essential to MMT as an approach to the economy. And Peter Cooper at heteconomist was motivated to write a series on the subject with each new installment driven by the commentary on his earlier posts about the issue.

Until now I’ve resisted commenting on the discussion, because my main concern in writing about MMT has been to popularize its overall point of view, while concentrating on myths and fairy tales from neoliberal ideology it debunks. I’ve also been concerned with exploring the political implications of using Proof Platinum Coin Seigniorage (PPCS) in the context of the MMT approach to provide a basis for progressives to become much more aggressive in their advocacy of fiscal policy to heal the various economic and societal problems facing the US.

From my point of view, the internal debate among MMT sympathizers, initially appeared as a distraction from the more serious work of popularization. But after reading many of the post and comments it became clear to me, that the issue of what is at the core of MMT, and how to tell what is and is not part of the core, is a very important one, that has not, perhaps been entirely clarified by the debate. So the purpose of this series is to explore that question of MMT scope. I’ll start with Cullen Roche’s post on the JG and the mainstream MMT position.

Cullen Roche and the Job Guarantee

I think Cullen Roche posed the issue very well here: http://pragcap.com/the-evolution-of-mmt/comment-page-1#comment-94869

”It’s not that I think the JG “cannot” be a component of MMT (Bill drew a very clear line in the sand saying that the JG is “central” to MMT and not “peripheral”), but that our knowledge, understanding and implementation of modern money need not involve the JG.  The JG might be central to the idea the founders had when creating MMT, but that just means it’s central to the original concept of MMT as they saw it.  And they have by no means proven the JG to be the optimal usage of the government’s monopoly currency supplier powers (despite substantial evidence and persuasive arguments).   I’ll cover this in more detail in the near future, but I simply don’t believe the JG is the optimal usage of these monopoly powers and in fact could come at substantial long-term cost.  Instead, I think there are better options which can also lead to price stability and full employment.”

I think Cullen puts this issue well, but in an incomplete way. He doesn’t say why the JG idea has become central to the MMT founders, and in not making clear their reasoning about this, I think he’s missing something important that was also missed By John Carney, Rogue Economist, and numerous other bloggers and commenters writing on the subject over the past week. The original practitioners of the MMT approach don’t simply describe monetary realities and then say that this description is where MMT stops. They also emphasize that since money is ultimately a creature of the Government, which, in turn, is obligated by the constitution to provide for the general welfare, its fiscal policy should be guided by the standard of whether or not it fulfills the public purpose; and also should be evaluated after the fact by whether its impact has been to get society closer to the public purpose rather than to produce gains for just a small part of the population.

The Argument for the Job Guarantee

I know that the term “public purpose” is an abstraction and that for some schools of economics which don’t recognize the reality of collectives, that the term is meaningless; but for most Americans terms like “public interest,” “the general welfare,” and “the public purpose” are important normative standards written into our founding documents, and have a place both in common and in positive law. Bill Mitchell, Warren Mosler, Randy Wray, Stephanie Kelton, Scott Fullwiler, Marshall Auerback, Pavlina Tcherneva, Mat Forstater, Jan Kregel, Eric Tymoigne, Rob Parenteau, Yeva Nersisyan, Michael Hudson, Bill Black, and Jamie Galbraith, have all written about fiscal policy with that or a similar standard in the forefront of their writing. For them, the fiscal policy side of MMT is about achieving public purpose including full employment and price stability, because 1) these goals are written into our laws; and 2) high unemployment is causally related to a host of other effects of poor fiscal policy. As Randy Wray put it during his talk at the Washington, DC Fiscal Sustainability Teach-In Counter-Conference on April 28, 2010:

[00:13:52] But… the sociologists and political scientists would point to these other things, which are also huge, and they are almost always ignored by economists. OK, just run through very quickly: poverty, social isolation, crime, regional deterioration — because unemployment usually is regionally concentrated and all the Americans know we can identify parts of the country that suffer from unemployment to a greater extent than others — health issues, family breakdown, school dropouts. You know, this is well established in the literature outside economics. It promotes violence, ethnic hostility, even terrorism. The loss of human capital, because when people are unemployed for a long periods of time they become unemployable, partly because of behavioral changes, but also because of the way that potential employers perceive them. Two years unemployed, I don’t want to take a chance on you. So, whether it’s a real human capital loss or a perceived capital loss, it will prevent them from having the same job opportunities they would have had if we hadn’t gone through this two year period. OK, and hysteresis: long-term unemployed become unemployable because of all these things I’m mentioning here. You become homeless and this is going to have a very long-term impact on your employability.

In short, the MMT founders think that the real costs of unemployment are far, far worse, than any short-term price increases or side effects that might result from instituting a JG program substituting a full employment buffer stock that would serve as a counter-cyclical automatic stabilizer during both recessions and expansions, for the present unemployed buffer stock, that may contain demand-pull inflation, but only by incurring the real costs spoken of above by Randy. From an MMT viewpoint, further, there is no choice about using some kind of buffer stock to achieve price stability, given an economy that relies on the Government’s own monopoly fiat currency and private sector markets. Warren Mosler put it this way in his comment on Cullen’s post:

“. . . so it comes down to ‘pick one’-
gold
fx
unemployment
employed/jg/elr
wheat
whatever!
I pick ‘employed/jg/elr
as it works best as a buffer stock based on any/all criteria for a buffer stock. . . .“

Considering all the research done by MMT founders on the JG, as well as statements like these which are very plentiful in the MMT literature, I think Warren’s is nearly a decisive argument that the JG is a core component of MMT, provided, of course that one accepts that full employment with price stability is an important component of “public purpose” or “the general welfare,” and that also one thinks that the Government’s fiscal policy ought to fulfill the the public purpose. Since all the MMT founders and later MMT adherents such as myself agree with this, it’s not surprising that we think that the JG is a core component of MMT.

But what if one either doesn’t accept “public purpose” as a normative standard guiding Government monetary and fiscal policies, or what if one thinks that full employment with price stability is either not a means that should be used to accomplish the public purpose, or if one thinks that another means can better accomplish public purpose and still lead to full employment and price stability? Then one’s verdict on whether the JG is a part of the MMT core will be different.

I’ll discuss this issue in Part Two.