On the Morality of Modern Monetary Theory:

When the senate passed the $900 billion stimulus package within the annual appropriations bill, some people were very upset. Not that congress took way too long to provide much needed aid and financial relief to people or that the aid was too small. But rather that the government was spending too much. One such person was Rand Paul. 

“(I)f money grows on trees, why not give more money? Why not give it all the time? Why stop at $600 per person? Why not give $1,000? Why not give $2,000? If we can print money with impunity, why not do it?”

Why not indeed, Mr. Paul. 

Imagine if for your entire life you were told that the sky was red. And when you turned on the news, you were greeted with a parade of experts who shouted to the high heavens of the existential nature of a red sky. Your entire notion of how society operates was based on the idea that the sky is red. 

And then someone comes along and tells you that the sky is in fact blue. You go back to the red sky experts and you ask them, “Is it true? Is the sky actually blue?”

“Well, yes.”, they reply, “But we must treat it as if it is red or else the whole thing will come crashing down.” 

“Why is that?”, you ask. 

“China!”, they reply and then walk away muttering something about responsibility. 

This is more or less what is going on in the discourse around economic policy and macroeconomics at the moment. The orthodox assertion that debts and deficits are a rigid constraint on federal spending is being challenged in a big way by the “new” idea of Modern Monetary Theory. Or MMT as the kids are saying. 

I put “new” in quotes because MMT is basically a repackaging of basic Keynesian economics with a shift in how we view taxes and spending. The main thrust is that debt and deficits don’t matter and the only real limiting factor in government spending is the threat of inflation. And the thing is, when you get down to the details of how federal monetary policy actually operates, it’s pretty hard to argue against this. Even Dick Cheney once said that “Ronald Reagan proved that deficits don’t matter”, in reference to Saint Gipper’s increase in public spending.  

The public conception of federal spending is that the government collects money in taxes and spends that money on public programs, infrastructure, defense, and international aid. This is the red sky we were talking about. But the federal government does not spend the money it collects in taxes. That money just goes away. When the government spends money, they aren't writing a check or swiping a debit card to draw from some metaphorical purse. The government allows banks to create the money that is spent by adding zeros to bank accounts. In fact calling it spending is a bit misleading because it implies that the government collected the money before doling it out. What the government is doing is injecting money into the economy. When the government collects taxes, they are taking money out of the economy. Why does the federal government take money out of the economy? To control for inflation. 

There are other reasons for taxation. Taxes give the dollar inherent value since you can only pay US taxes with US dollars. Taxes are also used to influence market behavior. But for the purposes of our conversation let’s just focus on the inflation angle. The common knowledge about inflation is that too much government spending will result in too much currency chasing too few goods and as a result the dollar will lose purchasing power. This is how we think of inflation but the truth is much more complicated. For one thing, a surplus of dollars isn’t the only path to inflation. Disruptions in the supply chain can raise the price of goods and devalue the dollar but only in certain sectors. We just witnessed this phenomenon with the price and availability of N95 masks…….and toilet paper. 

But in general what the MMT crowd and other less cool Keynesians believe is that there is no direct link between massive government spending and inflation. Inflation can be caused by many interlinking factors and spending alone isn’t enough to tip us into an inflationary spiral. Even if there were such a direct causal link, MMT would say that our economy is currently so stagnant and underutilized that an uptick in government spending on public projects would just flow into the empty space between where we are and where we could be with full employment and full engagement of resources. 

There is evidence of this. With every stimulus bill, massive tax cut, and yearly increases to an already bloated military budget that have been passed, inflation has remained pretty stable.

All of this is to say that if we so choose, the money printer most certainly can go brrr. 

So why the focus on debt and deficit? Why do so many politicians and policy makers treat the debt as a scary monster? People are fond of saying things like “how much will it cost?”, or “we don’t have the money”. A popular thing to do is to divide the total amount of the debt by the total population of the country and say that each American owes X amount of dollars. But this just isn’t how federal finance works. 

Every time we run a deficit, we issue treasury bonds to cover the difference. If the government spends $10 and takes back $9 in taxes, a $1 treasury bond is issued and sold to an investor. The interest rate on this bond is set by the government and since the government controls the currency that the bond is issued in, it's the most stable investment that a person can make. On its face, the bond market exists to pay people to voluntarily remove currency from the economy. The problem with the debt isn’t that we can’t afford to pay it. We can always pay it because it is paid in dollars and we can create dollars. The problem is that if everyone decided to call in their bonds all at once, the interest owed alone would result in a massive injection of currency into the economy, thus risking inflation. 

So we basically have three positions here: 

Government spending directly causes inflation and that is bad. 

Government spending can directly cause inflation but we are nowhere close to an inflationary cliff so spending more is fine.

Government spending does not directly cause inflation, there are in fact a multitude of factors that cause inflation and therefore we have a multitude of ways to control for inflation that don’t involve punitively clawing back spending. 

That is a debate worth having. But it is complicated and involves a lot of economic concepts and jargon that are not easily digestible. So as a society we have decided to conflate inflationary risk with the amount of spending it would take to wipe out the national debt. We created a national conception of the government as a household and promoted the inherent good of a balanced budget because most Americans with a household inherently understand that concept. 

Guys, I’m not an economist. There is a lot I didn’t even try to explain about MMT and the nature of federal fiscal policy. Mostly because this post would quickly become a novella. But also because there isn’t overwhelming consensus on this topic even within leftist Keynesian spaces. MMT isn’t a perfect lens with which to view macroeconomics and it is vulnerable to misuse if adopted in certain ways. If you are interested in the details (and I hope you are), I would strongly recommend checking out the work of prominent MMT’ers like Stephanie Kelton and Nathan Tarkus, as well as MMT agnostics like J.W. Mason and left leaning MMT skeptics like Matt Bruenig. 

What I really want to talk about is something a bit more esoteric than details of fiscal policy. I want to talk about morality and intention. The Democrats have won both runoff elections in Georgia, giving them a tie in the senate with Vice President elect Kamala Harris as the tie breaker. This means the end of Mitch McConnell as a senate majority leader and the chance for Democrats to introduce actual meaningful legislation for an up or down vote. For the first time since 2008, the Democratic party will have the chance to materially improve the lives of Americans. Or, at the very least demonstrate their willingness to do so. 

But not if they keep with the mythology around debt and deficits. 

I don’t think it’s very controversial to say that Americans are hurting right now. Our economy was always a house of cards propped up by a comically unstable base of financialization and debt service. The coronavirus just exposed how fragile this all is. Even before Covid, the looming environmental crisis (which isn’t really looming, it’s happening as we speak) demanded that we devote a massive amount of resources toward eliminating our dependency on fossil fuel. We have a housing crisis, a medical care crisis, crumbling infrastructure, a law enforcement apparatus that desperately needs restructuring (after we abolish it of course). All things that will take money to fix. The history and the economics are pretty clear. Whether you believe the debt is a problem or not, deficit spending is the only way out of this. 

So why is Democratic leadership so focused on the debt. 

Nancy Pelosi is famously a fan of Pete Peterson, the late billionaire who is widely credited with propagating the debt and deficit myth. Joe Biden has been reported as being advised by Larry Summers, who was Obama chief economic advisor and was credited with limiting the ‘08 stimulus. He also wrecked Russia’s economy in the 90’s with hyper capitalization, but who’s counting. Biden’s pick for Secretary of the Treasury, Janet Yellen, is another Obama appointee who has a decent reputation within progressive circles but yet has shown a willingness to toe the line on orthodox capitalist notions of finance. 

It is often said that money is power. Which is pretty intuitive and I would think most people agree. But we need to understand what that means practically. Money is the mechanism through which we direct resources. If you have money, you get to choose what gets used and what gets made. During the recession and subsequent recovery, where wealth became even more stratified than it had already been, one of the economic sectors to stay strong throughout was the luxury goods and services industry. Schools didn’t get built but yachts did. 

Behind our fiscal policy and the ways we choose to talk about it is the underlying belief that those who have a lot of money deserve it and thus they deserve to decide through their money how resources are allocated. The notion that there are public problems that require collective solutions exists but in our economic discourse it takes a back seat to preserving a system that gives an outsized amount of distributive power to the wealthy capitalist class. Again, this is a conscious choice, not a logistical necessity. The economy will not collapse if the government gives everyone $2,000 a month. Instead what will happen is that a very large amount of people will have an opportunity to direct resources in the way they see fit, an opportunity that they have been denied for a long time. 

Budgets are moral documents. How we decide to spend or not spend money tells us where our concerns and priorities lay. Right now our priority is protecting the supremacy of the market. Which in practical terms means maintaining our dependence on those who control the market for our basic necessities. It means preserving financial precarity at margins so that people will be incentivized to produce goods and services for wages far below the value they create. Public spending reduces dependency on private means of production. We choose to look for reasons to reduce public spending because this dependency is the real driver of our capitalist economy. 

It's an economic system that both Democrats and Republicans are ideologically and materially invested in. But it’s killing us. In a myriad of ways, big and small, it is killing us. Death by a thousand budget cuts. We have chosen an economic framework that does not seek to provide for everyone but to keep everyone productive. No matter the amount of suffering and societal instability that such a prime directive entails. There are flaws in the MMT view of economics but there is much more truth in its analysis of fiscal policy. More importantly it allows for a kind of fiscal policy geared toward solving actual material problems instead of outsourcing resource allocation to modern day robber barons. 

Now that Democrats have some measure of power and leverage in congress, it behooves every Democratic voter who believes in the promise of making people's lives better to push them on this. If you voted for a Democrat in the house or senate, then you should want them to be at the very least thinking like a Keynesian and acknowledging the very real need to deficit spend. Every time a Democrat says that we have no money, you should demand that they stop lying about how fiscal policy works. This is more than an academic debate on economics. It’s a moral imperative. 

How do you do that? Well one way would be to call your representative’s or your senator’s office and give them one simple phrase:

Money printer go BRRRRRRRRRRRRRRR.

Solidarity forever.