Interesting essay. My takeaway is, of course, to support my pre-existing opinion. Namely, that deficit hawkishness ¡ª and its concomitant demand for ¡°pay-fors¡± ¡ª is part of a Republican scam.

The scam is that the Republicans, in the aggregate, don¡¯t care about deficit hawkishness when they are in power. Instead, they will drop taxes for the wealthy with no concern for whether this balances the tax-vs-spending equation (i.e, balancing the budget), or caring whether an investment in infrastructure is worth going into debt (except when it¡¯s to shore up their allies in the military-industrial complex). Because that approach allows them to reward their real base: the wealthy elite who do not actually need material assistance, but still desperately desire to add another zero digit to the right side of their net worth number.

And then when the Democrats are in power, the Republicans suddenly change their tune and demand a balanced budget and austerity and ¡°pay-fors¡± because this then hamstrings the Democrats from rewarding their base: the people who are not in the wealthy elite and who actually, really need material assistance (and their allies who care about them getting it).

This is one of a half-dozen of the most fundamental scams that the modern Republican Party utilizes to maintain political power and undermine their opposition. (Others being racism/xenophobia, faux outrage, pseudo-moralism, etc.)
posted by darkstar at 12:24 AM on September 21, 2021 [34 favorites]

A significant part of the scam is that a lot of centrist Dems are in on it
posted by Pope Guilty at 12:54 AM on September 21, 2021 [25 favorites]

The way I think about MMT is this:

First, there are a few different "MMTs" in the wild outside of academia:

-MMT as analytical framework for understanding monetary systems (the actual academic theory)

-MMT as policy prescription: *because* monetary theory works in a particular way, we should manage our fiscal/monetary policy differently than we do

-MMT as empirical observation of how modern monetary systems are operated in practice: if you see that since 2008, it has become quite common to manage monetary and fiscal policy in a co-ordinated way then that starts to look like some elements of the prescriptive MMT are already mainstream and used in practice

-MMT as magic: the idea that MMT removes all constraint from state action and therefore we no longer need to think at all, we can just do.

The last one is ironically also the primary means of attacking MMT as policy prescription. If you have a theory that says that there are no constraints, in a world where there clearly are constraints that exist outside of fiscal and monetary policy, then you must be wrong somewhere.

MMT doesn't say there are no constraints, it only says this:

There are two sets of things the state tries to optimise: its own funding and the economic output gap / inflation.

There are two sets of levers which we conventionally call fiscal policy and monetary policy.

Non-MMT economics says that you use the fiscal levers to manage state funding and monetary policy levers to manage the output gap but accepts that they both have "off target" effects on the other target i.e. even though fiscal policy is "for" managing state funding, it obviously has an output effect.

MMT just says - hold on, this is just convention and actually "fiscal" tools work a lot better for adjusting the output gap than "monetary tools". The prescriptive form says that therefore we should make that explicit and use fiscal tools to manage output while monetary tools are used for managing debt funding.

Logically, if you go from two goals with two levers to two goals with two levers (but wired differently) you are not creating anything magical. It's just a different way of managing those challenges.

Incidentally, the reason why this is such an American discussion is that only a few counties have the combination of being sovereign issuers and having a relatively modest trade to GDP ratio (i.e. it makes sense to think of the country in relative isolation). The latter is 26.6% for the US, 31% for Japan. The UK is in the 60%s so doesn't have access to these tools in the same way, countries in the Eurozone aren't sovereign issuers (measuring their trade dependence is complicated because much of the trade is internal to the zone)
posted by atrazine at 2:03 AM on September 21, 2021 [10 favorites]

A significant part of the scam is that a lot of centrist Dems are in on it

joe 'Why I Won't Support Spending Another $3.5 Trillion' manchin ("Amid inflation, debt and the inevitability of future crises, Congress needs to take a strategic pause.")

vs.

Modern Monetary Theory Has a New Friend in Congress [ungated] - "John Yarmuth is a big fiscal deal. He says we should be open to deficit spending."

If you happened to be watching C-SPAN¡¯s ¡°Washington Journal¡± on June 17, you saw a remarkable display of Modern Monetary Theory¡¯s political influence. Representative John Yarmuth, Democrat of Kentucky, who is the chair of the House Budget Committee, gave a full-throated defense of the deficit-friendly theory to Washington¡¯s sometimes skeptical viewership.

¡°Historically, what we have done is said, ¡®What can we afford to do?¡¯ The right question is, ¡®What do the American people need us to do?¡¯¡± he said. He added, ¡°If we relied on taxation, purely on taxation, to fund the government, then a lot of people would suffer very seriously, because we could not provide nearly the services that the American people want us to provide.¡±

I am surprised that Yarmuth¡¯s appearance hasn¡¯t gotten more attention. He is not some anonymous backbencher. He runs the House committee that, in collaboration with its counterpart in the Senate, prepares an annual framework for the federal government¡¯s revenue and spending levels. He is a big fiscal deal and he is on board with Stephanie Kelton, a Stony Brook University economics and public policy professor who has become a leading voice for Modern Monetary Theory. She told me that Yarmuth¡¯s C-SPAN appearance was ¡°pretty remarkable.¡±

...

Yarmuth said his conversion began in 2010 when Representative Paul Ryan, Republican of Wisconsin, was the ranking member of the Budget Committee. (Ryan later became chairman and eventually House speaker and a candidate for vice president.) ¡°He would come up with all these same things¡± that deficit hawks are talking about now, Yarmuth says, such as that federal budget deficits would consume national savings and crowd out investment by the private sector. ¡°And yadda yadda yadda. I realized as time went by that none of the things he predicted were happening.¡±

Congress has tried to tie its hands on deficits by requiring that new legislation not increase the federal budget. The rule is honored more in the breach than the observance, and Yarmuth is not a big fan of it. ¡°Paygo,¡± as it¡¯s called, ¡°is a scam anyway,¡± he told me. He called it ¡°kind of fraudulent.¡±

...

Representative Alexandria Ocasio-Cortez, Democrat of New York, has spoken positively about M.M.T., as have several of her fellow House progressives. Senator Brian Schatz, Democrat of Hawaii, has also expressed sympathy with Modern Monetary Theory and its cousin, the Green New Deal. The Times has reported that Kelton has been a regular participant in conference calls on pandemic relief organized by Senate majority leader Charles Schumer, Democrat of New York.

more re: MMT, SRW on MMT stabilization policy ¡ª some comments & critiques[1] and a proper accounting: Translating ¡°net financial assets¡±[2] :P

oh and: "To be short of money when there's work to get done is like not having enough inches to build a house. We have the materials, the tools, the space, the time, the skills and the intent to build... but we have no inches today? Why be short of inches? Why be short of money?"

the memory bank:

The idea of money as a source of social memory was also crucial for John Locke who figures prominently in our story as the philosopher who inaugurated the modern age of democratic revolutions. Locke was obsessed with money's role both in establishing a progressive social order and in subverting it as its criminal antithesis. Indeed he believed that money launched humanity from the state of nature onto the road to civil government. As long as men¡¯s possessions were limited to perishable products, the scope for property was restricted. Money, by offering a durable store of value convertible against all useful things, unleashed the potential for property accumulation and for the intergenerational transmission of inequality. For Locke then, money was indispensable to that development of cultural memory on which civilisation depends.

also btw!
Who Needs the Government Securities Market?

The sheer quantity of bond purchases necessary to stabilize the Treasury market in early 2020 (along with the ongoing QE purchases thereafter) led to a common complaint in the financial sector that the ¡°the church-and-state separation¡± between fiscal and monetary policy had broken down. The hallowed institution of central bank independence was crumbling as the Fed experimented with ¡°debt monetization¡±¡ª¡°printing money¡± to finance government deficits, rather than allowing the forces of supply and demand in the bond market to keep deficits in check.

What this (possibly disingenuous) line of criticism glosses over, however, is the fact that the debt was already monetized well before the crisis, whether it was on the Fed¡¯s balance sheet or not. Indeed, one reason it was so crucial for the Fed to perform the equivalence of Treasuries and cash in March 2020 is that Treasury securities of all maturities have functioned for decades as a kind of money in the shadow banking system. Much as commercial banks operate by issuing short-term deposit liabilities against long-term assets, shadow banks today finance Treasury holdings by posting them as collateral in short-term repurchase agreements. Because of this, even long-term Treasury bonds have effectively become a money market instrument, a form of shadow money that circulates among financial institutions. So when the Fed rescued the government securities market, it was not simply bailing out the fiscal state. Rather, it was stabilizing the architecture of the shadow banking sector¡ªa sector which cannot function without an implicit (now explicit) guarantee that Treasury bonds will remain convertible to short-term cash in repo markets...

Who benefits from this arrangement? To be sure, the global reputation of the U.S. dollar is probably enhanced by maintaining the appearance (however misleading) that the private sector, and not the Fed, is the ultimate wellspring of demand for Treasury debt. And most mainstream economists would likely point out that depth and liquidity of the government securities is a boon for the U.S. taxpayer, as the high liquidity premium on Treasuries makes for lower financing costs. Still, once you read a bit of Modern Monetary Theory, these arguments start to ring hollow. Yes, there is a liquidity premium on Treasury bonds. But there is much higher liquidity premium on actual cash. If fiscal deficits were monetized directly, say with a trillion-dollar coin, the idea of liquidity premia marginally reducing yields becomes moot.

Much more directly than it benefits ¡°the taxpayer,¡± guaranteed liquidity in government security markets benefits finance capital, and¡ªto risk redundancy¡ªthe very, very wealthy. In the 2010s, the top 1% of U.S. households owned 55% of the domestic household share of public debt. The domestic corporate share of public debt, for its part, has long been dominated by the financial sector, which has held roughly 97% since the 1980s. Older generations might still have an image of lower- and middle-income Americans stashing savings bonds in filing cabinets or safe-deposit boxes. But today, the humble and relatively egalitarian savings bond accounts for an ever-diminishing fraction of the public debt. The lion¡¯s share is in the form of marketable securities, traded among Wall Street firms and high net worth individuals. (This is all documented in Sandy Brian Hager¡¯s excellent book on the subject)...

Perhaps there is another way. For the past 70 years, since the Treasury-Federal Reserve Accord of 1951, the institution of central bank independence in the United States has been defined by the Federal Reserve¡¯s informal mandate to ¡°minimize the monetization of the public debt.¡± Today, the new standing repo facilities make clear that the Fed is more committed than ever to keeping the debt monetized¡ªnot necessarily to provide cheap financing to the Treasury, but rather to maintain private sector financial stability. So, what if, instead of keeping monetization behind the scenes for the purpose of backstopping shadow banks and financial elites, the Fed publicly embraced debt monetization and channeled it to a broader public purpose?

One idea is mandating that the Fed provide accessible, interest-bearing checking accounts (¡°FedAccounts¡±) for the general public.[3] This would involve a huge expansion of Federal Reserve liabilities as it opened new checking accounts for millions of Americans, and correspondingly huge purchases of Treasury securities. Aside from eliminating banking deserts, streamlining the payments system, and putting predatory check cashing services out of business, one benefit of the FedAccounts proposal is that it would displace the engine of private debt monetization that propels much of the shadow banking sector. Consider government money market funds (MMFs), for example. This is a $4 trillion sector whose sole purpose is to convert U.S. Treasuries (and Treasury repo) into cash equivalents. Why should private firms be allowed to profit from this activity when the Fed is already guaranteeing the moneyness of Treasuries? What service do they provide? FedAccounts would displace these funds by offering to pay all depositors the same rate of interest that the Fed currently pays to commercial banks¡ªknown as the interest-on-reserves, or IOR, rate. At 0.15%, the current IOR rate is significantly higher than the 0.01% average return on government MMFs over the past year. What¡¯s more, where MMFs issue cash equivalents (technically equity shares whose value is stabilized at $1), FedAccounts would offer fully guaranteed government money. Essentially, they would cut out the middleman, delivering higher yields directly to consumers.

More ambitiously, the Federal Reserve could leverage its debt monetization powers to fuel a green transition. The legal scholar Saule Omarova has proposed the creation of a National Investment Authority¡ªa kind of public asset manager whose sole purpose would be directing investment capital toward green development. Omarova suggests that the Fed could support the liquidity of debt issued by the NIA in the same way that it currently supports the liquidity of Treasury and Agency securities. Building on Omarova¡¯s proposal, we could imagine the Fed promoting widespread participation in such a National Investment Authority by marketing investment accounts to consumers that offered higher yields than FedAccounts but had more time restrictions or penalties for withdrawals. To incentivize participation, these public investment accounts could be made risk-free¡ªguaranteed against nominal loss¡ªmuch as the possibility of redemption guarantees holders of savings bonds against nominal capital loss today.

These are just a few of the more developed and (with a bit of political imagination) eminently attainable reform programs. But the main thing I want to elicit here is a sense of possibility. There is no law mandating that the Treasury and Federal Reserve coordinate to provide interest-bearing, high-denomination money for the shadow banking sector. Nor, as Nathan Tankus points out, is there any necessary financing purpose to the Treasury issuing a range of maturities paying different interest rates. Issuing and stabilizing Treasury bonds is subsidizing private finance. The clearer we can make that, the better we can demand that the Fed subsidize the things that really matter.

The Exponential Age will transform economics forever - "It's hard for us to fathom exponential change ¨C but our inability to do so could tear apart businesses, economies and the fabric of society."
posted by kliuless at 2:56 AM on September 21, 2021 [18 favorites]

A lot of recent MMT thinking has a stated or unstated premise that the twin perils (in neoclassical economic thinking) of high government deficit spending, i.e., inflation/shortages, and higher interest rates, were no longer in play.

Interest rates are stable, but we are now seeing that premise being potentially refuted in practice at least to the first leg, with some of the most severe inflation and shortages seen in decades, that must be at least suspected for causation by massive deficit spending of the past 18 months.

It's also worthy of note that this is basically a US-only discussion. No Eurozone country can do issue debt under any MMT (mis)conception, because those countries can't print the currency in which their debt is denominated; and the UK and Japan can't take any risk with their currency, to say the least of the microeconomy hard currency issuers (Canada, Australia, New Zealand, Singapore, Switzerland, Norway, Denmark and Sweden).
posted by MattD at 6:41 AM on September 21, 2021 [1 favorite]

Is there a Post Modern Monetary Theory?

Thinking it should model the situation where most value is stored in the cloud and 99.9% of transactions require low latency internet connection and then, with just a few hours notice, a Massive Solar Flare Storm fries the Internet for months and wipes out most of the bitcoin and other repositories forever.

(How many non-virtual facebook likes can I get for a small home grown onion?)
posted by sammyo at 10:00 AM on September 21, 2021

Interest rates are stable, but we are now seeing that premise being potentially refuted in practice at least to the first leg, with some of the most severe inflation and shortages seen in decades, that must be at least suspected for causation by massive deficit spending of the past 18 months.

Why would you suspect that? The actual cause is that delays and inflation are caused by a disease and a serious lack of infrastructure investment in the US over the past few decades.
There are 4 rail lines that connect the west to the rest of the US, I think by Chicago (or maybe St Louis) it explodes to more. The capacity is severely limited. If that massive deficit spending had been on more raillines, then there would be limited capacity constraints.

There are also only a few highways, but truckers have been effected by COVID so trucking is down. Regulations haven't been eased.

So have meat management and packing plants, by the lower income people who generally work there dying, and by harsh immigration restrictions started by Trump and carried forward by Biden.

Monetary theory can't fix everything.
posted by The_Vegetables at 11:19 AM on September 21, 2021 [1 favorite]

I'm not sure I buy MMT, but AOC is definitely smarter than me on economics and seems to buy it so I'm reserving judgment. When Trump said that governments can't go bankrupt because they can always print more money was that an effective endorsement of the theory?
posted by BrotherCaine at 1:17 PM on September 21, 2021

In his own Trumpy way it was a pretty good summary. An example I liked from Kelton¡¯s book was Monopoly money: if you run out of printed cash when you¡¯re playing the board game, you can continue playing with Post-Its, casino chips, peanuts, or whatever. The token does not matter, only the relative distribution of wealth and actual availability of property to buy.
posted by migurski at 1:29 PM on September 21, 2021

Kliuless I know that you¡¯ve front-page posted on MMT before, but your comment is here is really much more worthy as a front-page post.
posted by moorooka at 3:04 PM on September 21, 2021

Following on with what the vegetables says above, seems like inflation is less about giving people money and more about covid stuff. Shipping, for example: /192695/An-Absolute-Magnet-for-Bad-Tempered-Online-Debate
posted by booooooze at 10:07 AM on September 22, 2021

There's some interesting discussion near the end of the podcast on the inflation topic. Adam Tooze makes a few observations:

1) As everyone already said: there isn't a general increase in prices. There are sharp increases in specific goods (lumbers, microchips, used cars). Not only are these explained by things other than "deficits" but economists don't really have theories about this or how it impacts us: Someone who knows a lot about microchip supply lines rental car inventories is an industry analyst, which is different.

2) Year-on-year core inflation is about 4%, but month on month is way down. This is also consistent with seeing a spike rather than a price spiral.

3) The mechanism for the price spiral we got in the '70s involved expectations of price increases being baked into contracts and amplifying the rises. (This is literally textbook, in the sense I read about this in textbooks when I took classes.) You can look at those contracts then if you're a historian, but we don't have that now and labor isn't powerful enough to extract guarantees like that as concessions.
posted by mark k at 7:39 PM on September 22, 2021 [1 favorite]

> There are 4 rail lines that connect the west to the rest of the US

Just for the record, wanted to clarify that this isn't quite true. Amtrak has only four east-west paths¹ over the Rocky Mountains. There are two more freight-only connections² without counting Canadian routes.

The worst bottleneck is currently Chicago, where multiple routes converge to get around Lake Michigan. Improvements are in the works to the tune of about $1B, on a 50-year timeline. I assume more funding would compress that.


1: There is a "southern-border" route from LA through Tucson and San Antonio; a "desert" route through Flagstaff and Albuquerque; the "Transcontinental" route through Salt Lake City / Denver / Omaha; and a "northern border" route from Seattle to Spokane to Minneapolis.
2: One running through Las Vegas, and another through Boise.
posted by Kadin2048 at 7:33 AM on September 25, 2021 [1 favorite]