I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.
As it happens I did an analysis of the distinction between MMT deficit doves and Keynesian deficit owls last June. So here it is again, an explanation which I hope will clear things up for Dean.
Here are some differences that are very significant for policy activism between a Keynesian deficit dove approach employed by people like Paul Krugman, Brad DeLong, Robert Reich, and Dean Baker, and a Modern Monetary Theory (MMT) approach employed by people like Warren Mosler, L. Randall Wray, Bill Mitchell, Jamie Galbraith, Stephanie Kelton, Marshall Auerback, Scott Fullwiler, and Pavlina Tcherneva. So, here are some contrasts between the two approaches on seven important issues.
1. Government deficit spending for recovery — Keynesian deficit dove position: provide high fiscal multiplier Government deficit spending or tax cuts to stimulate aggregate demand.
MMT position: provide high multiplier Government deficit spending: targeted on payroll tax cuts that will get more money into the hands of working people quickly; providing revenue sharing grants to States for maintaining existing State-level jobs; and direct job creation (job guarantee for anyone who want to work)
Significance: MMT says it’s not just about increasing aggregate demand and GDP. It’s about targeting and getting rid of unemployment!
2. Government fiscal policy over the business cycle — Keynesian deficit dove position: deficit spend in bad (less than full employment) times; have government surpluses in good (full employment) times.
MMT position: Government surpluses withdraw net financial assets from the private sector. Therefore, they should only be run when the private sector is over-heated and demand-pull inflation exists. Since the size of the Government deficit, without explicit Government attempts to raise taxes, is determined by 1) the level of savings of the private sector; and 2) the level of the trade deficit (surplus), it is perfectly possible that the Government may have to run deficits continuously to maintain full employment, if there is demand leakage from a trade deficit and/or private savings that the Government must make up for by deficit spending.
Significance: MMT says: ”Don’t worry about this simple fiscal rule.” Whether deficits are needed depends on the situation and specifically on our trade balance and our desires to save in the private sector.
3. Long Term Deficit Reduction Planning — Keynesian deficit dove position: We can and should engage in long-term deficit reduction planning since the fiscal policy can control the deficit, and since there is a long-term Inter-temporal Governmental Budgetary Constraint (IGBC) on deficit spending due to the potential of the bond markets to impose an insupportable interest burden on the budget when continuous deficits, increasing national debts, and increasing debt-to-GDP ratios accelerate too fast and/or get too high.
MMT position: We cannot and should not formulate or implement plans for long-term deficit reduction. First, because such plans assume that Government fiscal policy can accurately predict the effect on deficits of its attempts to close deficits by austerity measures. In fact, however, raising taxes or cutting programs always reduces net financial assets in the private sector, which in turn reduces aggregate demand and the level of economic activity, which, in its turn, drives up Government expenditures and, inadvertently increases its deficits. We already see this in the UK. the austerity measures of the Conservative/Liberal coalition government aren’t decreasing its deficits, but are increasing them, and driving the UK closer to a double-dip recession.
Second, because we should not be distorting fiscal policy by targeting it at deficits and surpluses, national debts, or debt-to-GDP ratios at all. Fiscal policy should, instead, be targeted on fulfilling public purposes including full employment, price stability, the elimination of poverty, providing universal health care as a right, maintaining public safety, creating an excellent educational system for all of our children, strengthening the social safety net, re-inventing the energy foundations of the economy, and so on. These, and not deficit reduction or debt-to-GDP ratio stabilization should be our real goals, because for fiat currency systems with floating exchange rates, non-convertibility of currency, and no external debts in any other currency or pegs to any external currency or basket of such currencies, there is no IGBC on deficit spending imposed by previous deficit spending.
That is, it doesn’t matter what such a Government’s national debt is, or what it’s debt-to-GDP ratio is. It still has the same capacity it has always had to buy anything it wants to buy for sale in its own currency, since it can always spend/create what its legislature appropriates.
Third, unlike Keynesian deficit doves, who evidently think that without long-term deficit planning and control of deficits, interest rates will rise catastrophically, and eventually consume the Federal budget; MMT deficit owls, point to the capability of the Government to spend without issuing further debt, use coin seigniorage, or issue only short-term (3 months or less) debt as measures the Government can take to either eliminate Treasury bond interest costs altogether, or to lower them to a level arbitrarily close to zero. MMT deficit owls say: Governments sovereign in their own currency are “in charge” in the bond markets, not bond market vigilantes, whose very existence depends on the sufferance of the Government.
Significance: MMT says: long-term deficit reduction plans are a no-no and should be opposed! They’re based on false theories and put constraints on Federal deficit spending that are sure to damage the economy. Most importantly, they hinder progressives in solving real problems
4. Long Term Deficit Reduction Projections — Keynesian deficit dove position: Organizations like the CBO can produce useful long-term projections of deficits and debts that can be used as the basis for long-term deficit reduction plans
MMT position: Organizations like the CBO can produce long-term projections based on certain assumptions; but they aren’t and can’t be useful because the assumptions are always unrealistic, often self-contradictory, and always fail to take into account the emergent character of political and economic reality.
This is apparent when we look back at CBO, OMB, and other fiscal projections in the past. In 2002 and after, where were the surpluses as far as the eye can see being projected by CBO at the end of the Clinton Administration? Where were the projections of the housing bust of 2007 and thereafter and its effects back in 2006? Where were the projections in 2007 of the great crash of 2008? Where are the projections right now of what happens if the United States suddenly decides to stop issuing debt instruments while doubling its deficit spending? The answer is that projections like these could not be made by CBO because their projections are always based on assumptions that cease to hold because of their sensitivity to unanticipated political occurrences.
Significance: MMT says: Since long-term deficit projections are invalid, and since they don’t affect the Government’s fiscal capacity. Stop doing them! And stop worrying about them! Worry about jobs, poverty, education, energy foundations, health care, global warming, the environment, the rise of global plutocracy, etc. These are the real problems!
5. Funding Government spending — Keynesian deficit dove position: Government spending must, over the long-term, be funded by some combination of taxing and borrowing.
MMT position: Government spending isn’t “funded.” It occurs under the authority of the Government to issue currency, which authority is unlimited by any constitutional requirement for “funding.” There is therefore no intrinsic Government Budgetary Constraint, (GBC) either static or inter-temporal. This means that we never need to ask the question, “how will we pay for it?” when considering Government deficit spending. There are many things we do need to consider: the likely results of such spending, how it’s targeted, its implications for full employment; its impact on inflation. However, we never have to ask “how will we pay for it?” or worry that “the Government is broke and can’t afford it,” because the Government of the United States is the currency issuer, not the currency user and it always spends and simultaneously issues “currency” when it does so.
Significance: MMT says: We never have to worry about the Government finding financial resources or “how are we gonna pay for it!” So, we can just do what’s right when it comes to balancing off the real resources being used to create real wealth!
6. Social Security Solvency — Keynesian deficit dove position: The Keynesians accept the Government’s projections that Social Security will become insolvent and unable to pay full benefits by 2037. So they advocate doing something about that by raising the current salary cap on FICA taxes, and sometimes even raising the retirement age, though not by as much as deficit hawks want to see it raised. Even if a Keynesian deficit dove opposes all changes except for raising the FICA salary cap, they still acknowledge that there is a long-term SS FICA revenue shortfall that must be met either with increased taxes, or by cutting Social Security benefits, and which ought not to be handled through deficit spending.
MMT position: In contrast, MMT says that since Government spending isn’t and need not be “funded,” there is no Social Security revenue shortfall problem. The only problem is Congress and whether it is willing to guarantee Social Security at present or increased levels for retirees. Stephanie Kelton has put this very well:
”Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.
In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”
It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”
Significance: MMT says: There is no revenue shortfall problem for Social Security because SS payments need not be funded, only appropriated, by Congress. The real problem is a Congressional and presidential guts problem; not a Social Security revenue problem!
7. Proposed progressive reform programs — Keynesian deficit dove position: Whatever programs are proposed must fit within “progressive” deficit reduction plans and their projected glide path toward a declining public debt-to-GDP ratio. However, important the programs, the problems they address, and the expected benefits from them, the overall deficit reduction plan with its various targets must have priority and provides spending constraints for the various progressive reform programs.
MMT position: Progressive reform programs must always be evaluated in the specific economic and social context of the proposed legislation and the key issue is always the assessment of their likely impact and the real benefits and costs (including side effects) of this legislation. Considerations of the size of deficits, debt-to-GDP ratios, or trends in such statistics are not among the impacts that are relevant. Impacts on employment, inflation, and a whole host of social, economic, and political factors are all relevant. And whether or not there is deficit spending, is certainly important because Government deficit spending adds to private sector net financial assets. However, prioritizing a long-term deficit reduction plan over progressive measures that will result in greater benefits for Americans is fiscally irresponsible because it sacrifices real increases in well-being to an erroneous theory about non-existent Governmental Budgetary Constraints.
Since Keynesian deficit doves as well as deficit hawks are doing just that with their long-term deficit reduction plans, they too are committed to fiscal irresponsibility over the long term. And in their willingness to compromise with deficit hawks out of a shared belief that their really is a long-term deficit problem, they also are willing to allow a certain amount of deficit reduction activity in the short and medium term, even though they know this is likely to be damaging to our already suffering economy.
Significance: MMT says: Escape from real fiscal irresponsibility (trying to target abstract fiscal indicators of budget performance rather than real outcomes of spending) and fiscal unsustainability (pursuing fiscal policy that reduces real economic capacity by destroying industry, manufacturing, and people skills) to true fiscal responsibility (targeting government spending at full employment, price stability, and other real public purposes) and true fiscal sustainability (Government spending that at least maintains and generally increases the real, rather than nominal capacity of the economy to produce the goods, services, and conditions that people value and fulfill public purposes).
So, those are the differences I see between the MMT position and the deficit dove position most often expressed by Dean Baker. Now, let’s move on to some of Dean’s other points.
Expansionary Policy Will Often be In Order?
”My reading of Keynes is that economies will often be constrained by demand, absent intervention from the government. That means that expansionary fiscal and/or monetary policy will often be in order to keep an economy running near full employment.”
Well, first, if monetary policy involving manipulation of interest rates alone is used then MMT’s position is that any expansion toward full employment that’s achieved that way will be at the expense of increased private sector debt, because the money created through increased bank loans won’t expand net financial assets in the private sector. So, if we rely solely on monetary policy, then even if there’s success, there will also be a debt bubble somewhere in the system that will need to be dealt with. So, second, fiscal expansion becomes critical in reaching full employment, if we want to achieve it without increasing the private sector debt-to-GDP ratio, which is not a good thing for future private sector stability.
Also, third, according to MMT, there’s more to this story than just “. . . expansionary fiscal and/or monetary policy will often be in order . . . “ Specifically, Government deficits, will have to occur, year after year if the private sector always wants to save and to import more than it exports. That follows from the Sectoral Financial Balances (SFB) Model:
Domestic Private Balance + Domestic Government Balance + Foreign Sector Balance = 0.
There’s no escaping such a deficit, if the private sector is to be a net saver, even if the foreign sector balance becomes zero. That is, the foreign sector balance, must become negative (the US has to have a trade surplus), if the private sector is going to save, and the Government sector is not to run a deficit. Further, the deficit in the foreign sector will have to be greater than the surplus in the Government sector, for the private sector balance to net save. Given the present terms of trade, and the private sector’s desire to de-leverage, it’s pretty plain that it will be some years before an expansionary fiscal policy won’t be necessary, if we are to have full employment in the United States. So, the more accurate way to say the above is: “. . . expansionary fiscal and/or monetary policy will be in order for the foreseeable future . . .“
Keynes’s Three Channels
Dean next points to:
”I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.
I don’t think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits than we would see if we also aggressively used channels two and three.”
Dan Kervick did a good job of explaining why MMT generally prefers the first channel rather than the second and third. To be brief, when interest rates are near zero as they are now, the second channel can’t be used any more. Also, even if it could be used, for reasons I’ve already stated the cost would be increasing private sector debt during a time when people want to save. Not good.
As for the third channel, as Dan Kervick points out, why would we want to create full employment at the price of lower wages for people here, when we can use the first channel and avoid that consequence.
But moving back to the first channel, Dean Baker envisions it as involving tax cuts and government spending to create deficits. But, from the MMT point of view there are other alternatives.
The first is placing the Fed under Treasury and enabling Treasury to create money through the Fed without needing to issue debt. So, if this is done, even though Government spending would exceed tax revenues, there would be no technical “deficit” of funds available to the Treasury without borrowing.
MMT also recognizes another variation on that theme that is in the Executive’s present authority to fill the public purse beyond what has been appropriated by Congress by using Proof Platinum Coin Seigniorage (PPCS). I’ve explained that in a number of places, but this post will do so well enough.
Most MMT writers don’t favor using this option in the expansive way I do, but that doesn’t affect my point, which is that PPCS created by depositing platinum coins with arbitarily high face values at the Fed will produce enough revenue credited to the Treasury General Account (TGA) to close any future gaps between tax revenues and Government spending that occur, while still adding net financial assets (in this case, reserves) to private sector accounts.
I hope these considerations explain why MMT writers prefer fiscal policy to the other channels.
”I think most of the conventional arguments over the deficit are very much wrongheaded, but on the other hand, a large deficit is not an end in itself. I suppose my preference for also pushing channel two and especially channel three is what separates me from the MMT crew.”
I think you agree with MMT that the deficit is not an end in itself. In fact, many of the considerations above should make clear that neither the deficit, nor a balanced budget is an end in itself for MMT.
The end for MMT is achieving public purpose including full employment with price stability as one aspect of it. Since the MMT view is that fiscal policy is much more useful for doing this than monetary policy MMT focuses on how fiscal policy should be set.
Its general view is that alternative budgetary plans have to be assessed from the viewpoint of their anticipated outcomes, without regard to deficits or surpluses as outcomes valued in themselves. Of course, full employment is positively valued and unemployment negatively valued, but a whole range of valued outcomes is relevant for such assessments. Those are the ends, and fiscal policy is the means. Monetary policy and trade policy are also means, but are not nearly as important as fiscal policy in their effective short-term impact.
While it was good to find out that most of the leading MMT economists are Dean Baker’s friends and that they’re mostly on his side in political debates, I think it’s fair to conjecture that in spite of these relationships Dean’s post suggests that he knows very little about what MMT economists think in any specific terms. I hope this post succeeds in making this lack of knowledge clear and in suggesting that a very worthwhile thing to do would be to remedy that and find out about the MMT view of the world, since, in my view, it builds way beyond Keynes to a new synthesis of post-keynesian macroeconomic thought.
(Cross-posted from Correntewire.com