WaPo Covers MMT, But Does Its Usual Bad Job: Part One, Some Basics and Solvency
It was very welcome to see The Washington Post cover MMT with a reasonably favorable post by Dylan Matthews, published on Ezra Klein's blog called “You know the deficit hawks. Now meet the deficit owls.” I'm pretty familiar with the deficit owls, having blogged about them soon after they were first named by Stephanie Kelton, in July of 2010, intermittently since, and most recently here. So, I thought I'd review Dylan's post in the spirit of correcting any mistakes in the record made by The Post and Ezra's blog in its first real effort to cover MMT. Hopefully Ezra, Dylan Matthews and others associated with WonkBlog learn from these mistakes and not simply double-down on them.
Some Background and Recognizing That “There Is No Solvency Constraint”
“In contrast to “deficit hawks” who want spending cuts and revenue increases now in order to temper the deficit, and “deficit doves” who want to hold off on austerity measures until the economy has recovered, Galbraith is a deficit owl. Owls certainly don’t think we need to balance the budget soon. Indeed, they don’t concede we need to balance it at all. Owls see government spending that leads to deficits as integral to economic growth, even in good times.”
This is OK for a start but it leaves the impression that Deficit Owls think we ought to run deficits all the time if we want the economy to grow, and that's a distortion of their position. So, let's try this.
Deficit owls, believe that there is no structural deficit, and that most of the present US deficit will go away when full employment is reached, but probably not all of it, unless the private savings levels in the economy are balanced by an equal or greater foreign sector deficit (trade surplus). They also believe that in times of unused productive capacity like these, Government deficits are caused by the state of the economic system, and that explicitly managing them by taxing more or spending less will not improve its condition, but only result in a downward economic spiral making conditions still worse.
On the other hand, if real economic problems like unemployment, alternative energy capacity and production, infrastructure renewal, education, and industrial innovations are addressed through Government deficit spending, then aggregate demand spurring private sector business activity and ending U6 unemployment will result. In addition, deficit owls believe that in a fiat money system, where there is no debt in foreign currencies, and no “peg” to such currencies, solvency is never a problem for the Government, and that while inflation partly caused by Government deficit spending can become a problem in such a system, this can only happen when full employment is achieved.
Dylan goes on:
“Modern Monetary Theory” was coined by Bill Mitchell, an Australian economist and prominent proponent, but its roots are much older. . . . “
I think this is just an error. It's a small thing, but it's important to stop the propagation of myths. Stephanie Kelton, an important thinker in the core MMT group, who is thoroughly familiar with Bill's work, says that the MMT name was given to the approach by others and then was adopted by MMT economists, including Bill.
“This claim, that money is a “creature of the state,” is central to the theory. In a “fiat money” system like the one in place in the United States, all money is ultimately created by the government, which prints it and puts it into circulation. Consequently, the thinking goes, the government can never run out of money. It can always make more.”
Not quite what MMT says. Yes, a fiat currency is necessary, but also necessary for currency sovereignty is to have a non-convertible currency, a floating exchange rate, and no debt in a currency not your own. These qualifications are very important because examples (e.g. Weimar, Zimbabwe) that are often given contradicting the claim that there's no solvency problem for Governments like the US don't fulfill these conditions.
“This doesn’t mean that taxes are unnecessary. Taxes, in fact, are key to making the whole system work. The need to pay taxes compels people to use the currency printed by the government. Taxes are also sometimes necessary to prevent the economy from overheating. If consumer demand outpaces the supply of available goods, prices will jump, resulting in inflation (where prices rise even as buying power falls). In this case, taxes can tamp down spending and keep prices low.
But if the theory is correct, there is no reason the amount of money the government takes in needs to match up with the amount it spends. Indeed, its followers call for massive tax cuts and deficit spending during recessions.”
This is pretty good. But it doesn't include one more thing that taxes may be good for, and that's economic leveling. Inequality in the United States is greater than in most other modern OECD nations. Specific types of taxes are one instrument that can be used to create greater equality.
MMT writers don't normally advocate taxation for this purpose. But the truth is that we have an inequality problem and it is contributing to undermining our democracy. So a Government fiscal policy incorporating much heavier taxes on very wealthy people may well contribute to the public purpose which is, after all the overall goal of MMT fiscal policy.