The Radical Theory That the Government Has Unlimited Money
Everyone knows governments need to tax before they can spend. What Modern Monetary Theory presupposes is, maybe they don't.
Photo illustration by Lia Kantrowitz
Tall, bearded, with gentle brown eyes, Occupy Wall Street veteran Jesse Myerson spends his days knocking on doors in the rundown neighborhoods of southern Indiana reminding voters of the enormous wealth of their country. His message, as an organizer for the progressive grassroots group Hoosier Action, is that the United States is a spectacularly rich nation and some of that wealth could, and should, be spread to the poor people of southern Indiana.
“People have been in a terrible amount of economic pain and that has led to the spiritual death of communities,” Myerson told me of the places he goes to. Opiate addiction is rife, as is suicide. “There’s no well-organized vehicle for people to make sense of their pain except for right-wing xenophobic initiatives.”
He says his group’s biggest competition for the hearts and minds of poor Indianans is a white supremacist group called the Traditionalist Workers’ Party. “They’re organizing along the same lines as us—these oligarchs are being tyrannical and exploiting us and we need peace and prosperity—except the difference is they are organizing along a framework of scarcity,” he said. “They are saying, ‘There is not enough to go around so we white people got to stick together and make sure we are taken care off.’”
By contrast, Myerson said, “We organize along the value of abundance, that there is enough to go around, that we can all afford freedom and dignity.”
You don’t hear “there is enough to go around” much in mainstream American politics. Republicans in particular criticize safety net and stimulus programs on the grounds they would increase the federal deficit; some have pushed radical legislation that would slash spending. But Democrats sometimes make anti-deficit arguments, too, as they did when Republicans backed a $1.5 trillion tax cut bill. Ambitious proposals that would cost a lost of money, like Bernie Sanders’s “Medicare for all,” are routinely derided for what they would cost. The federal government has run a deficit every fiscal year but four since 1970, leading to a national debt (the accumulation of all those deficits) of $20.6 trillion and change. When asked about this by pollsters, most voters say that the country is on the wrong track, debt-wise, and want Congress to address the issue.
Myerson isn’t bothered by the deficit: “We’re the richest country in the history of countries, in the history of riches. Of course we can afford it.” He notes no one seems to worry about the price tag when Congress increases the Pentagon budget or decides to invade a faraway country.
His optimism about government spending is due to his exposure to Modern Monetary Theory, a school of economics that says our panic over government budget deficits is delusional, a misguided and atavistic remnant of the gold standard. MMT has become increasingly influential on the left, giving progressives like Myerson a reason to believe that a high price tag shouldn’t stop the US from instituting wide-ranging social reforms like Medicare for all.
Modern Monetary Theory’s basic principle seems blindingly obvious: Under a fiat currency system, a government can print as much money as it likes. As long as country can mobilize the necessary real resources of labor, machinery, and raw materials, it can provide public services. Our fear of deficits, according to MMT, comes from a profound misunderstanding of the nature of money.
Every five-year-old understands money. It’s what you give the nice lady before she hands you the ice cream cone—an object with intrinsic value that can be redeemed for goods or services. Through the lens of Modern Monetary Theory, however, a dollar is nothing but a liability issued by the US government, which promises to accept it back in payment of taxes. The dollar in your pocket represents a debt owed you by the federal government. Money isn’t a lump of gold but rather an IOU.
This mildly metaphysical distinction ends up having huge practical consequences. It means the federal government, unlike you and me, can’t run out of cash. It can run out of things money can buy—which will drive up their price and be manifest in inflation—but it can’t run out of money. As Sam Levey, a graduate student in economics who tweets under the name Deficit Owls told me, “Macy’s can’t run out of Macy’s gift certificates.”
Especially for those who want the government to provide more services to citizens, this is a convincing argument, and one that can be understood by non-economists. “I’ve never heard a more persuasive account of how money works,” Myerson told me. “I’ve seen these guys debate all sorts of people. I’ve never seen anybody beat them.”
“These guys” were gathered in September at the first-ever Modern Monetary Theory Conference, a Kansas City event that brought together 225 academics, activists, and investors in person and thousands of livestream viewers.
In the UMKC Student Center Auditorium, Stephanie Kelton, a tall, telegenic former economic adviser to Bernie Sanders, told the enthusiastic crowd the basic problem of the American economy today is “lack of aggregate demand” leading to “chronic unemployment.” In other words, America’s problem isn’t an inability to make stuff (supply) but rather the inability to afford to buy all the stuff we are able to make (demand). Our productive potential outstrips our capacity to consume.
“The government can afford to pay for any program it wants. It doesn’t have to raise taxes,” Kelton added. Because politicians on both left and right don’t get that, “Kids go hungry—bridges don’t get built.”
Although rarely heard on mass media, among economists this viewpoint is not particularly controversial. Oxford economist Simon Wren-Lewis told me in an email. “Most mainstream, non-ideological economists would agree the US needs more infrastructure investment, and the best way to finance that is through public borrowing.” He continued: “Most people think austerity is mainstream macroeconomics, although it is not. Those who are anti-austerity look for some alternative theory, which MMT provides.”
Unemployment and underemployment caused by insufficient spending is a problem economists know how to fix. Every econ 101 textbook recognizes government can increase demand at will either by cutting taxes (letting the private sector keep more money, which it will then spend) or by increasing spending directly (creating dollars and pouring them into the economy via government expenditures).
The problem is either of these policies will increase the budget deficit, regarded by most politicians as a bad thing. Conservatives fear increased government spending will “crowd out” private sector investment. A MMT advocate might reply that crowding out only can occur when the economy is already operating at full capacity. Today, stagnant wages and low interest rates indicate the economy still has plenty of slack before inflation kicks in.
MMT disciples do think that deficit spending could lead to inflation, which they see as the only downside to more spending. That is what happened back in the 1960s, when Lyndon Johnson refused to raise taxes to pay for the Vietnam War and his Great Society, even as the private sector economy was booming. The result was rising inflation in the 1970s, one of several economic factors that led to the election of Ronald Reagan.
But for the past 35 years, inflation has been negligible. The Federal Reserve has been consistently undershooting its own 2 percent inflation target since it was adopted in 2012. Right now, deflation is a bigger threat to the global economy. To those who subscribe to MMT, it seems obvious that we need to be spending more, and frustrating that not enough people understand.
The original prophet of MMT is Warren Mosler, who 30 years ago was a Wall Street investor trying to gain competitive advantage over other traders by peering deeply into exactly how the federal government taxed, borrowed, and spent.
Fit, tanned, and currently residing in St. Croix in order to lower his tax bill, the 68-year-old multimillionaire makes an odd spokesman for a progressive economics movement. As his friend and hedge fund partner Sanjiv Sharma told me, “Warren is more politics agnostic.”
As a boy, he was fascinated by machinery, how it worked, how to fix it, how to put it together. Mosler told me he planned to major in engineering, but he switched to economics after taking a course and finding it much easier. After graduating from the University of Connecticut in 1971, he was hired by a local bank and found himself being promoted rapidly. Soon, he left New England for Wall Street.
“I look at things at an elemental level,” Mosler told me. He got down in the weeds to examine precisely how the Federal Reserve and the Treasury interacted with the general economy. He wanted to understand what happened to balance sheets when the Treasury collected taxes, traded bonds, spent and created money. He came to believe that the conventional wisdom has the relationship between the government and the private sector ass-backward.
Most of us assume government has to tax before it spends, that like you and me it has to earn money before it purchases goods. If it wants to spend more than it taxes—and it almost always does—it must borrow from the bond market. But by examining the granular way government accounts for its spending, Mosler saw that in every case, expenditures come first. When your Social Security check is due, the Treasury doesn’t look to see if it has enough money to pay it. It simply keystrokes that money directly into your bank account and debits itself simultaneously, thereby creating the money it pays you out of thin air.
When you pay your taxes, the same process happens in reverse. The federal government subtracts dollars your account and eliminates the same amount from the liabilities side of its ledger, effectively destroying the money you just paid to it. Unlike households or firms or even state and local governments, the federal government is authorized to create dollars. It adds money into the economy when it spends, and it takes it out when it taxes. “There's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody,” is how Alan Greenspan, then the Fed chairman, put it to Congressman Paul Ryan during a 2005 hearing.
Wren-Lewis, the Oxford economist, told me MMT sounds more radical than it really is. “In my view a lot of what they say is mainstream. When interest rates are at their lower bound their anti-austerity policy is totally mainstream,” he said. “In terms of their theoretical framework, I would describe it as being quite close to 1970s Keynesian, with the addition of a very modern understanding of how bank money is created.” Kelton told me MMT isn’t trying to change the way government spends and taxes, it is merely describing the way it already does.
Mosler’s understanding of money provided him with an insight: Any government that prints its own currency can’t go bankrupt. That insight made him millions.
In the early 1990s, Italy was struggling with high debt and low tax receipts; economists and traders feared it was heading for collapse. Italian government bond yields inevitably shot up. Mosler recognized that Italy could not be forced into default: It could print as many lira as it needed. (This was in the pre-euro days.) He borrowed lira from Italian banks at an interest rate lower than Italian government bonds were paying and used that money to buy Italian government debt other investors were dumping. Over the next few years, this trade made him and his clients more than $100 million.
It was after that that Mosler wanted to start a dialogue with academic economists. He wrote to Harvard, Princeton, and Yale, laying out his analysis of Federal Reserve payments and their startling implications, but was ignored. But then, using his contacts with Donald Rumsfeld, wrangled a lunch with Arthur Laffer (of supply-side Laffer curve fame). Laffer told Mosler not to expect anything from Ivy League economics departments, but there was this wacky heterodox group called the post-Keynesians, and they might be interested.
These economists—including Randy Wray, Bill Mitchell, and Stephanie Kelton—taught Mosler about the chartalists, an early 20th-century group of economists who like Mosler saw money as debt created by the state. (MMT is sometimes called “neo-chartalism.”) Abba Lerner’s functional finance is another precursor to MMT. Lerner, a mid-century British economist, insisted public officials ignore the deficit and instead focus on maintaining sufficient demand to keep the economy at full employment. If unemployment was too high government should either spend more or tax less. When inflation threatened, it should cut spending or increase taxes. For Lerner, as for the MMT crowd, there’s no reason to care about the size of a government deficit.
Mosler explained to the post-Keynesians that taxation and borrowing did not finance government spending. At first Kelton didn’t believe him. “Warren is putting out this stuff and it is way out there. It is the inverse of everything that we’ve been taught,” she told me. She decided to write a paper disproving Mosler’s theories, but in the end, after looking deep into the way the Federal Reserve, the Treasury, and the private banking system interact, she concluded, to her surprise, that he was right. “I went through all of this research,” she said, “and I got to exactly the same place Warren got, just with a lot of complicating details.” Tax and bond sales do come after spending; their purpose is not to fund the government but rather to take money out the system to keep it from overheating.
Though Mosler came from outside academia, his theories dovetailed with some work done by economists. “What Warren did in some sense was remind people of things we should have known,” she told me. “He made original contributions to be sure, but he also reminded us of what was in the literature and was well-established 60, 80 years ago, and then we just unlearned all those lessons.”
Kelton and Wray introduced Mosler to Wynne Godley’s sectoral balance analysis, which suggests government deficits are not just harmless, they are actually beneficial. To simplify Godley’s theories, every economy has two sectors: the private sector and the public or government sector. When the government spends more than it taxes, it runs a deficit. And that deficit in the public sector inevitably means a surplus for the private sector.
Kelton explained it to me this way: Imagine I’m the entire government, and you are the entire private sector. I spend $100 either going to war or fixing bridges or improving education. The private sector does the work required to achieve those goals, and the government pays it $100. It then taxes back $90, leaving $10 in the private sector’s hands. That is the government running a deficit. It is spending more than it receives back in taxes. But you, the private sector, have $10 you didn’t have before. In order to accumulate money, the private sector needs a government deficit.
Mosler’s hedge fund profited from this theory. In the late 1990s, just about everybody thought the Clinton budget surplus strengthened the US economy. But Mosler realized the Clinton budget surplus meant the government was taking more money out of the private sector in taxes than it was putting in in spending. Mosler reasoned this private sector deficit (the flip side of the government surplus) would inevitably lead to recession, so he bet on interest rates to fall (which they did in 2001) and his hedge fund again made out like bandits.
These days, MMT advocates are interested in larger issues than lining their pockets. For Kelton, the biggest problem with the American economy is unemployment and underemployment. She told me 20 million Americans want full-time work but can’t get it. This strikes her as a shocking waste of resources and talent. To create jobs, she says, we need to boost aggregate demand and the only way to do that is to increase spending. “You can’t make spending the enemy in an economy that depends on sales,” she told me. “Capitalism runs on sales. What you have to do to boost the economy, to boost GDP, is you have to increase spending.”
One way to stimulate spending is a tax cut, especially one whose benefits go to average Americans rather than the top 1 percent. “A tax cut for working people has the same pocketbook effect as a pay raise,” Kelton told me. “When was the last time your employer gave you a raise?”
While MMTers would favor just about any fiscal stimuli, including infrastructure spending or tax cuts, their signature policy is a federally funded but locally administered job guarantee. Anyone who wanted work, either full- or part-time, would be paid $15 an hour on projects deemed valuable by their local community. This might mean building roads, but it might also including caring for the elderly or working at daycares. Needed services would be provided and unemployed and underemployed people could find work.
“It is,” Randy Wray said at a panel during the conference, “an extremely effective anti-poverty program.” Full-time, those jobs would pay over $31,000 a year, enough to take a family of five out of poverty. Wray and Kelton told a panel at the conference this program would create 14 to 19 million jobs, add $500 to $600 billion to the GDP, and add less than 1 percent to inflation. Mosler calls this a “temporary jobs program” because he is confident the extra demand created by this federal spending would spark an upsurge in private sector hiring.
Ten years after the financial crisis, the American economy remains in sorry shape. Kelton calls it “a junk economy." Although official unemployment is relatively low, that masks a long-term stagnation in wages and a huge number of discouraged workers, not counted in unemployment statistics. Real median wages are lower today than they were when Jimmy Carter was president. For the first time in history, most Americans are likely to be worse off than their parents. Donald Trump won last year at least in part because he recognized for many of us, the American dream is dead and our economy is crap.
MMT says it can fix it, and that all it would take to create jobs and build a better America is to end the worrying about government deficits. “You hear people all the time saying government is living beyond its means," Kelton said. "Absolutely not. We are living far, far below our means.”
Mosler says politicians are only obsessed by the deficit because voters are: “We’ve created an electorate who believe the deficit is too large and has to come down.” MMT-supporting academics, and left-wing activists, are hoping by changing people’s minds they can transform America. Mosler is confident that once people understand the insights of MMT, they won’t forget them. “Nobody goes back,” he told me.
Myerson isn’t so sanguine. He isn’t convinced winning the intellectual debate will be enough. “The billionaires have the power so the economics that supports their agenda is going to be the predominant one.” If MMT became mainstream and increased public spending became the norm, power and wealth would shift away from the ruling class. Myerson suspects that won’t happen without a struggle. He remembers something that Ann Larson and Laura Hanna of the group Debt Collective said at the conference: “There will be no trickle-down MMT. It’s going to have to come from organizing people.”
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