Many Modern Monetary Theory posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off hand, and I may have forgotten something, I couldn’t think of a brief positive MMT narrative related to fiscal responsibility containing primarily the truths, rather than the myths.
So, here’s my version, revised after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and ourfuture.org. Thanks to Tadit Anderson, Mitch Shapiro, Nihat, James M., Marvin Sussman, joebhed, Clonal Antibody, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Lambert Strether, maltheopia, Ian S., for contributing significantly to the critical evaluation of the earlier version.
More comments, criticisms, recasting in more effective form, are all welcome.
The Narrative
– The US Government can’t involuntarily run out of fiat money, since it has the constitutional authority to create it without limit. Congress constrains and regulates this ability. But its existence is still a stubborn fact!
– In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector. When it creates money, over and above what it taxes or borrows, it adds it to the private sector. Since this is the case, it’s clear that present proposals to reduce the deficit by an average of $400 Billion over the next ten years are sure to remove net financial assets from the private sector.
–The Treasury can keep borrowing money if we want it to. There’s no limit on the Government credit card except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money due to a failure to raise the debt ceiling between now and March 31, 2013 it will clearly be the fault of the Congress for refusing to raise the debt ceiling!
– Even though it may seem that foreign nations can place a limit on “the credit card” by refusing to buy Treasury securities at auction, foreign nations holding dollars basically have a choice between continuing to hold them and earning no income, or earning interest on securities. So, as long as other nations are exporting to the US and accepting dollars as payment; those dollars are likely to be invested in Treasury securities.
– Bond markets don’t control US interest rates; the Federal Reserve Bank does by exercising its authority to meet its target interest rates. Bond vigilantes have no power against the Fed. If they fight against its interest rate targets by trying to bid them up; then they will “die” in the flood of reserves the Fed can unleash to drive the interest rates down to its chosen target. The Fed can’t control the money supply. But it does control the price of it with its interest rate targeting.
– The bond markets will buy US debt as long as we keep issuing it; but if one insists on considering the hypothetical case where the markets won’t, the US would still not be forced into insolvency; because the Government can always create the money needed to meet all US obligations.
– The US is obligated by the 14th Amendment to pay all its debts as they come due. Nevertheless, our national debt cannot be a burden on our grandchildren; unless they wish to make it so by stupidly taxing more than they spend. This is true because, assuming the debt ceiling is raised when needed, or repealed, we have an unlimited credit card to incur new debt at interest rates of our choosing. So, we can “roll over” our national debt indefinitely. Or, alternatively, we can create all the money we need to pay off the debt-subject-to-the-limit, without ever incurring any more debt;
– A fiscal policy that measures its success or failure in reducing deficits, rather than by its impacts on public purpose, is fiscally irresponsible and unsustainable. The deficit is a meaningless measure because the US Government has no limits on its authority to create/spend money other than self-imposed ones, so neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government’s capacity to spend Congressional Appropriations at all. Also, a deficit/debt oriented fiscal policy ignores real outcomes relating to employment, price stability, economic growth, environmental impact, crime rates, etc. which actually can affect fiscal sustainability by strengthening or weakening the underlying economy, and, with it the legitimacy of the Government and its fiat currency.
– The Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes! So, their supply of dollars is always limited; while the Government’s supply is a matter of its decisions alone.
– Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. No solution to this “fiscal crisis,” bipartisan or partisan, is needed. What is needed is a solution to the political problem of getting SS’s funding guaranteed in perpetuity by Congress, just the way it guarantees funding for Medicare Parts B and D. The same applies to the so-called Medicare crisis. It too is phoney, and can be solved easily by Congress guaranteeing funding in perpetuity to Medicare Parts A and C.
– However large the Federal Debt becomes, it cannot be a “crushing burden” on our Government, because Federal spending is virtually costless to the Government, if it wants it to be.
– Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that’s why they can run out of Euros. The US is the issuer of Dollars; so it’s supply of dollars is limited only by its desire to create them, and its ability to mark up private accounts, and that’s why it can’t become Greece, Ireland, or any other Eurozone nation.
– Austerity requiring budget surpluses cannot work in the United States economy because surpluses, defined as tax revenue exceeding spending, destroy net financial assets in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss in net financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. It is mathematically IMPOSSIBLE for the USA to simultaneously run a government surplus, have a trade deficit and increase aggregate private sector wealth! (h/t Ian S.)
– It is fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove more net financial assets from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, declining rate of addition to financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy, and the Government’s ability to sustain deficit spending producing outputs of real social value.
– REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), while also maintaining or increasing fiscal sustainability, viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes. REAL fiscal responsibility is Government fiscal policy creating greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It’s political malpractice to give greater priority to that kind of abstraction than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Let’s put an end to the domination of Washington by that kind of malpractice.
Conclusion
Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs. It is a phoney crisis!.
The only real crisis is a crisis of a failing economy and growing economic inequality in which only the needs of the few are served. MMT policies can help to bring an end to that crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.
(Cross-posted from New Economic Perspectives.)
Photo by Evan-Amos under Creative Commons license.




42 Comments

For our narrative to grab people, we need colorful metaphors like “fiscal cliff” and “out-of-control, crushing mountain of debt.” Anything less will not sell in 21st-century America, sad to say.
Great piece, Letsgetitdone. Thanks for posting it!
Book Salon up with Seth Rosenfeld’s Subversives: The FBI’s War on Student Radicals, and Reagan’s Rise to Power hosted by Todd Gitlin
The main problem we’re up against, Joe, is that this is not an honest debate between two theories. The other side is lying. By lying, I mean that certain propositions that are repeated over and over by them not only have no theoretical or empirical support but that all the empirical evidence shows that they are false.
They say the federal government is just like a family. That’s a lie.
They say deficits are bad. That’s a lie.
They say that public debt is bad. That’s a lie.
They say that raising taxes on the rich will solve the nation’s problems. That’s a lie.
Etc., etc., etc.
They.Are.Lying.
And their intentions are bad: To make innocent victims pay for the mistakes of the 1%.
To drive down real wages. To disenfranchise student populations. Etc., etc.
Their bullshit doesn’t require honest, well-intentioned counter-argument.
It requires derision and castigation. It is immoral.
The other side does not perceive what it is doing as lie, nor do those on our side that buy into its BS believe some of the myths. I live in the midst of Romney loving zombies. I have had discussions with several successful business men about MMT. They cannot let go of their myths. If they do admit to any of the MMT points they immediately raise the specter of runaway inflation, which they believe is always just around the corner. But the finale, the statement that caused me to throw up my hands and metaphorically walk away was the statement, after I said that Simpson-Bowles was a recipe for disaster, that, “Therein lies the problem. We have let our ‘priorities’ get in the way of economic decision making.” In other words, only his priorities, his beliefs, which he sees as being a prioiri to everything, are the correct ones. This man and his cohorts (older white men) do not have the ability to look at themselves and their assumptions and question them. For to do so would rock their whole world. This is why the people who broadcast and listen to FOX will not be able to ever accept that perhaps the other side is right. They would have to rebuild their core beings, and that, above everything else is something that is not to be touched. They live the lie.
thanks for doing this! we need to be making this argument as widely, frequently, and plainly as possible. i think it could be boiled down substantially even from this. if i’m understanding it correctly, it seems like there a few basic ideas – and i mean really basic – from which these points flow. stuff that is plainly true when it’s presented to you, but that people who don’t think about these things that much (ie most) have probably never heard before.
as an example, in the second point:
that Seems to be contradictory – if taxing and borrowing removes money from the private sector, shouldn’t taxing and borrowing less remove less? let me underscore that “Seems” – i am sure that i am just missing a step there. but if i tried to share this with people i know, this is the kind of thing that they’ll pick up on, and i am not sure i know an answer.
it’s all about the audience you’re addressing, i’m sure. it’s difficult to be brief and direct, and at the same time, avoid shorthand (jargon, acronyms, etc). it’s great to see that work getting started.
Thanks Joe for this article. If you don’t mind, I am going to save it to be used as a quick explanation of MMT for my arguments. What started my earlier round of discussions with my friends on the right that short piece by Gobry in Forbes in late October. I got a lot of push back from that. Your piece is more thorough but short enough for my “friends.”
Tatere, your point is well taken. Maybe Joe will elaborate on it before I copy this and send it out to those who would jump on that without reading and understand the rest of it.
I should have been clearer. You’re right that the average wingnut doesn’t perceive that he or she is lying. It’s just a matter of priorities — his or hers, that is.
I meant the Pete Petersons of the world, TBTF bankers, CEOs, etc. — the PTB — are lying and know they are lying. Arguments won’t persuade them. They simply do not want to support achievement of any progressive goals.
It’s nice to know there is now a liberal alternative to Reaganomics.
When the government can borrow at negative real rates it is not close to maxing out. When government spending is invested, as opposed to paying for current consumption, it generates a positive return like any other investment. We should be using negative real rates for a fiscal program that would substantially reduce unemployment.
But the idea that the government has an infinite capacity to create dollars is ludicrous. If it were true, the government could send each of us a prepaid credit card with a million bucks.
You will know that borrowing is reaching diminishing returns when the interest rate starts to go up.
That’s pretty much what MMT says.
With the qualification that the interest rate rises when prices begin to rise.
Thanks.
The argument about the imaginary current crisis is true. But it sometimes sounds as though MMT think any amount of borrowing can go on forever. Maybe it’s trying to make a complicated point understandable for readers. But it can’t go on forever.
Don’t worry about debt now. First we put people to work, preferably rebuilding the collapsing infrastructure. We get a substantial return on that investment. We get more people paying into social security and Medicare.
Over the long run, when the economy is sound we should aim for deficits that make debt a declining percentage of GDP.
All this is classic Keynes. Where does MMT differ?
Just to pick one point: “–The Treasury can keep borrowing money if we want it to. There’s no limit on the Government credit card except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money due to a failure to raise the debt ceiling between now and March 31, 2013 it will clearly be the fault of the Congress for refusing to raise the debt ceiling!”
The limit to government borrowing can be determined by it’s ability to borrow. To wit, someone has to lend them the money. Lend them money at zero or below real rates mind. Just because for the last 5 years it has been able to borrow $100+ billion a month doesn’t make it so that it always will be able to.
Now this may seem facile but let’s be perfectly literal. The limit to government borrowing is just like everyone’s. It is limited by the willingness or ability of lenders to lend to it. Just ask Greece or Spain. Truth be told the unwillingness of lenders, ie. bond buyers, to lend to some sovereign nations has actually increased the demand for US Treasury paper.
Nothing lasts forever. Treasury paper is the biggest bubble in history.
This is a very clear explanation, and I like it. But as someone who is new to this, the obvious mainstream objection is that if the government creates as much money as it wants to it will lead to inflation. I know the dangers of mild inflation are overrated, but high inflation is a problem. What’s the reply to this objection? Anyone who wants to argue for this theory needs to know how to respond on this issue. Can someone explain this?
I think of MMT as an extension of Keynes, to keep it simple.
Thanks.
Why would a government following MMT principles continue to spend at full employment — just begging for inflation?
It’s one step more complicated. Greece and Spain are never good examples because they use the Euro and can’t create their own currency. The US government has one step beyond a private lender in that it can issue bonds and the fed can buy them if no one else will. It creates money. The real limit is loss of purchasing power for the dollar because its supply is growing faster than the supply of goods and services.
This is pretty much all incorrect. I’ll let Joe explain.
re: “The limit to government borrowing is just like everyone’s. It is limited by the willingness or ability of lenders to lend to it. Just ask Greece or Spain. Truth be told the unwillingness of lenders, ie. bond buyers, to lend to some sovereign nations has actually increased the demand for US Treasury paper.”
the Fed can buy and retire all US debt if they so decide; all previous owners would be made whole…the reason they dont is because US Treausurys are the world’s money supply…a $100,000 US note is money to the banking system just as a $10 federal reserve note in your wallet is money to you…
MMT should be our plan-b when the next collapse occurs ,and as Milton Friedman said.when lifting the quote of Rosa Luxembourg ,”a crisis lets the best ideas lying around to be implemented ” .Shock doctrine hysteria certainly doesn’t foster a climate for creating new ideas .
Obviously MMT is anathema to the ruling class whose entire agenda and wealth redistribution schemes are based upon debt-leveraged economics .Minsky ,as all MMT advocates know ,did exceptional work in this area ,and I’ve done some on my own . We still should be spreading the word so we have at least 10% support when the time is right .At this time it would be a monumental feat to get beyond extractionist choices of cuts and hikes ,and make expansionist growth the focus ,i.e., jobs ,consumption and revenues .However ,once again ,this is antithetical to the juice -loan leverage of debt -based wealth extraction.
Thank you, LGID! Wonderful!
No theory of money will save us. MMT is in the end an attempt to sustain the unsustainable. That being an economic system based upon credit and over consumption of everything. We have had a good run the last 100 years but we have borrowed as much as we can from the earth.
The amount of money and credit had been accelerating relentlessly for the 25 years or so prior to the crash of 08. At the same time each ‘recovery’ had been more sluggish and the gains ever more poorly distributed. If more money and more credit was the answer then the last 30 years would have put us into a wonderful place.
Also, LGID, did you ever see this?
http://www.youtube.com/watch?v=WpMPu5p_QXU
Yes; and we’ve already surrendered in the “War on Poverty,” decades ago, so we can’t use that saw again or I am sure we would have.
Then again, does anyone expect the corporatists to be anything but deceptive?
While we have been naive, even worshipful, they have been at class warfare with the rest of us probably since before invention of the wheel.
Who makes full and far disclosure to the other side in a war?
Econobuzz, You’re right. But there are many people who believe the lies of the other side. So, for them, the onlookers, we need our own narrative. Without onlookers, however, I agree with you. Then we need to tell them we know they are crooks and just get out of our collective face!
GDP, you’re right! Some are just closed-minded because the austerian views are matters of identity for them.
Thanks tatere, The key is that when the government spends it creates money in the non-government sector; when it taxes it destroys money in the private sector. So if the government runs a deficit it creates more money in its transactions with the non-government sector than it destroys. There’s a net of new money to the private sector.
Now that’s not strictly true because of the way we deficit spend. Each time we do we sell debt instruments of equal face value to the deficit to drain the money back out of the non-Government sector. So, what’s left after that? The answer is that the debt instruments that have been sold, analogous to savings deposits that pay interest, are left as an addition of net financial assets to the private sector. The owners of these get interest from them, newly created money; and in addition, if the owners want to draw on the securities they can do that by using them as collateral since the Treasury securities are such safe investments. The bottom line is that the securities left in the private sector are probably more inflationary than the cash reserves would have been.
GDP, Please feel free to use it as you think appropriate. I want to spread the narrative as broadly as possible. Btw, there’s a new version out now here. It contains an explicit statement letting you use the narrative as you please.
It’s even worse. I think they’re trying to create a neo-feudal America. They do it every day in their political work. Peterson starts a number of paper organizations all devoted to spreading the gospel of deficit hawkism. The heads are his retainers. They, in turn, hire their retainers, and you get a hierarchical structure of vassalage with the Lord, Peter G. Peterson and his family at the center of the structure.
The Government has an infinite capacity to create dollars; it would just be malpractice to do that and especially to spend those dollars. We can get rid of the deficit without running surpluses. See here for how to do it.
Oh, and btw, the interest rates won’t go up until the Fed and the Treasury want them to go up. As I say above the market doesn’t control the interest rates.
MMT recognizes the possibility that depending on conditions, it may need necessary to run deficits more or less permanently if one wants full employment. That’s not Keynes, is it? See here.
Rapier, it’s not about whether nations want to lend us dollars. It’s about whether they want to export more they import to us. If they do, then will accumulate dollars.What will they do with them
– They can sit in the foreign nation’s reserve (checking) account at the Fed and earn minimal or no interest.
– They can sit in securities in the nation’s securities account and earn more interest
–The nation can buy other foreign currencies with its dollars. But if they do too much of that they’ll drive down the value of their dollars getting even less return than the other two alternatives
– The nation can buy products or other assets with its dollars. However, we won’t sell them many assets they’d want to buy, and if they buy products, then their net trade surplus with us goes down. They don’t want that, since that’s why they’re running a trade surplus in the first place.
So what will they do?
Just because the Government can create unlimited money doesn’t mean it should. What it means is that it has no solvency problems, and that the austerian claims that it has are false. Of course, the government can create too much money and create demand-pull inflation. But good fiscal policy won’t deficit spend past full employment, and will begin to increase and take other measures when it starts to observe demand-pull inflation. One such measure is the MMT policy of a Federal Job Guarantee. A JG can enable achieving full employment without demand-pull inflation we approach it.
Also, btw, this is one of Krugman’s objections to MMT. Here’s an account of the debate between K and MMT people on this point.
That’s true. But that’s not what the austerians are arguing, and also MMT doesn’t advocate deficit spending to that point.
The reason why they don’t is because the financial community wants a risk-free vehicle to park their USD and get a little interest while they are doing. It’s all about “welfare” for the rich and foreign nations. See here.
You’re missing the point. Deficit spending ought to be used to create real wealth — goods and services having real value. That’s what MMT really advocates. It’s not a monetary solution. It’s about getting people to recognize that nominal financial resources and real wealth are two different things, and that constraints on Government’s use of its currency power to help create real wealth are just impoverishing people.
Thanks for the link. It’s hilarious!
Thanks for that link. Very useful discussion.