Jared Bernstein Shows the Costs of Not Understanding Sovereign Currencies

By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives

UMKC has just hosted a well-attended conference on Modern Monetary Theory (MMT) and job guarantee (JG) programs in which the federal government would provide the funds for employer of last resort programs. In conjunction, MMT and JG allow full employment to become the norm. MMT is based on reality, it explains how the monetary system in a nation with a sovereign currency actually functions. Most monetary theory taught in conventional economic classes is a fiction arising from carryovers from the era of the gold standard in which nations lacked a sovereign currency.

Jared Bernstein has just published an op ed in the New York Times entitled “Do Republicans Really Care About the Deficit.” Republican elites, of course, have not really cared about federal budget deficits for decades. That is a good thing that Democrats should embrace in a bipartisan spirit. Bernstein, of course, is correct that the Republicans are hypocrites about federal budget deficits, pretending to care about them when the Democrats hold power and displaying their lack of any real care when Republicans hold power and the context is tax cuts for the wealthy.

Democrats display a similar hypocrisy. Even Democrats like Bernstein who know that the Republicans proposed expansion of the federal budget deficit through tax cuts is not a real economic problem are primed to attack Republican hypocrisy by falsely asserting that the Republican deficits would harm the Nation. Democrats should embrace honesty as the best policy and stop embracing the politically attractive pose of claiming to be the Party that “really cares” about the federal budget deficit. That politically attractive pose is not simply dishonest and financially illiterate, it is also a trap.

The Republican and New Democrat deficit strategy is to force Democrats to make an endless series of “Sophie’s choices.” Choose which excellent program to kill in order to save (temporarily) another from the chopping block because we supposedly cannot afford to provide both. Then repeat the process. The Republicans and New Democrats constantly, and falsely, claim that the federal government cannot afford to provide medical care availability that is routinely provided in most of Europe and Canada. It is a pure myth that the United States cannot afford to provide the safety net of Social Security, Medicare, and Medicaid.

We need to start with first principles. In a nation with a sovereign currency like the United States, federal tax revenues do not fund federal expenditures. If that sentence, which is indisputably correct, strikes you as bizarre then it is a measure of the force of the propaganda you have been fed throughout your life. Today would be an excellent day to free yourself from the hold of that destructive lie. This web site, the Levy Institute, and Bill Mitchell’s sites all have excellent resources that will help you clear out the falsehoods about money that you were force fed. Money cannot be “scarce” for a nation with a sovereign currency. Real resources can be scarce, not a nation’s sovereign currency.

Bernstein knows that federal tax revenues do not fund federal expenditures. His column shows that he is worried solely about realpolitik rather than real economics, conceding that “deficits don’t seem to hurt the economy.”

Do these forces mean deficits don’t matter? Not at all. The problem with structural deficits — ones that go up even in good times — is that they reveal that we’re unwilling to raise the necessary revenues to support the government we want and need. This enables those who whose goal is to shrink government to point to deficits and debt as their proof that we can’t afford it, whatever “it” is, except when “it” is tax cuts.

We need to parse that paragraph carefully, because doing so reveals that Bernstein makes no economic argument that deficits “matter.” He makes only a political argument. Republicans and New Democrats “whose goal is to shrink government” will “point to deficits and debt as their proof that we cannot afford” the safety net. Of course they will. They constantly promote that propaganda. The answer to that cynical, dishonest tactic is not Bernstein’s proposed strategy of embracing it and agreeing with the lies that federal budget deficits harm the economy or our children and grandchildren. Even if Democrats were to heed Bernstein’s advice to base their budget policies on partisan political advantage, it is bizarre that Bernstein thinks that it would be good politics for Democrats to be known as the Party dedicated to increasing federal taxes.

Bernstein’s paragraph expressly makes a claim he knows is false – that federal taxes provide the “necessary revenues to [fund] the government we want and need.” Bernstein makes an analogous criticism of Republicans.

Back in 2015, I testified at a hearing on these issues before the House Budget Committee. One after another, Republican members on the committee denounced rising debt levels. Why then, I asked, do you want to cut taxes? Their answer: It’s spending, not tax cuts that increases the deficit.

That, of course, is crazy. I don’t mean it’s bad economics, or lousy fiscal policy. I mean it’s disconnected from reality, or more precisely, from arithmetic.

Bernstein’s “crazy” claim that federal taxes provide “necessary revenues” is even more “disconnected from reality” than the Republican statements he rightly denounces. Worse, Bernstein doubles and then triples down on this claim.

Do these forces mean deficits don’t matter? Not at all. The problem with structural deficits — ones that go up even in good times — is that they reveal that we’re unwilling to raise the necessary revenues to support the government we want and need. This enables those who whose goal is to shrink government to point to deficits and debt as their proof that we can’t afford it, whatever “it” is, except when “it” is tax cuts.

Note Bernstein’s critical concession – federal elected officials are often “unwilling,” not ‘unable’ to provide “the government we want and need.” Even Bernstein’s sentence that makes this critical concession, however, doubles down on the “crazy” notion “disconnected from reality” that tax “revenues” fund government expenditures. Bernstein closes his column by tripling down on this falsehood.

We need a functional government that raises ample revenues to meet the challenges we face, including an aging population, climate change (and the intense disasters it increasingly causes), inequality, poverty and the winds of geopolitical upheaval.

No, we do not need high taxes to raise “ample revenues” to meet these challenges. Bernstein’s taxation recommendations are bad politics and bad economics. They are so “disconnected from reality [and] arithmetic” that they are “crazy.”

What Bernstein is right about is that the Trump tax and revenue cut plans will increase the federal budget deficit and, vastly more importantly, that they will cause inequality to surge, harm the poor, and intensify CEOs’ already perverse incentives. Democrats have valid, powerful arguments against Trump’s tax cuts. Those are the arguments they should make.

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  1. Disturbed Voter

    A whole lot of interacting things, with all sides motivated to do the wrong thing … is what a failing state is like. Everyone is NIMBY in regards to what expenditures or tax cuts serve them. Their representatives serve lobbying interests more than their constituencies. Democracies are facing the end game of what the monarchists and authoritarians warned about 100 or 200 years ago. In particular, the use of fiat currency is turning into pushing a rope rather than pulling one (law of diminishing returns).

    I agree that tax cuts for the wealthy, is buying the votes of the upper class. But programs and benefits, are buying the votes of the lower class. At some point, the observations and criticisms of Lord Acton “power corrupts” become unavoidable (our tendency is to put off resolution of problems to the next election, next generations). The solution to these problems will be irrational, the result of social and political collapse, just as it has been in the past. That is addressed by Yeats “mere anarchy is loosed on the world”. Batten down the hatches.

    1. Massinissa

      “But programs and benefits, are buying the votes of the lower class”

      Yeah, it would… Except the ‘lower class’ is much more likely to not vote. That, and what have you actually seen the Democrats, much less the republicans, do for the ‘lower class’ lately? Your argument isn’t really backed up by evidence.

      1. Juliania

        They would vote if someone was supporting their programs!

        An example I was thinking of is public transportation. If you consider what the user pays to be like a tax, it is obvious that will never make public transportation an entity unto itself and self supporting, or even profitable.

        (In New Mexico there are still many opponents of the Railrunner train system, for instance – never mind the convenience it is for commuters; the cars it takes off the highways; the lowering of accidents when seniors get a special rate or, perish the thought, are allowed to ride free!)

        The Railrunner needs government assistance and even so it is just limping along with minimal infrastructure and profit margin. Imagine what it could be if it were a government operation like the military supposedly is.

        I’m poor, and I’d be out voting!

      2. Roger Gathmann

        I’ve heard this many times. And I think it is true. So why is it not the governing principle of the Democratic party? Because a government that you voted for that actually gave back to you – that redistributed the wealth created by your exploited labor, rather than lavishing wealth on rentseekers and high end administrators – would surely be very very popular among those who got stuff. With this set of incentives, there must be some “perverse” set of incentives to keep the Democrats from making this obvious move.
        It is funny that nobody ever studies those perverse set of incentives in the way perverse incentives are studied elsewhere (usually with the intent to tamp down “socialistic” programs). Perhaps the class that leads the Democratic party doesn’t have the same incentive set as the party used to have.

    2. Geosprouter

      These programs and benefits are things that every society should be able to provide for all of their citizens, why do the poor need to be penalized for being poor? I just don’t get this line of thinking at all.

      1. Distrubed Voter

        I agree, no reason to penalize the poor … or the rich. I don’t think anyone can judge another’s circumstances. Either you are helpful to whoever or you are not. We can’t help everyone, and given person X, we might not be the right person to help them. So go put yourself in the path of helpfulness, be findable by those you are called to help, don’t waste the time of those you can’t. If enough do this, then more people get helped, and helped effectively.

        But that isn’t what any of our societies are geared to do. We are geared for self and group aggrandizement. Without changing that, we are pissing in the wind of systemic problems. Do help anyway, better to help even one person, rather than none at all.

        And of course, the question remains … help as an individual, as a family, as a community?

        But telling someone else to go help another … instead of doing it yourself, is hypocritical. And telling “you two go fight it out” is malicious.

        1. sj

          I reject your premise that supporting a healthy society and strong infrastructure constitutes a “penalty” that someone must pay. Taxes are the price that one pays to live in a society that is worth living in. It isn’t a punishment — it is payment which should be based on an acknowledgement of what resources that particular taxpayer is actually extracting from society and/or removing from the public domain at large. It follows also that such payment would be in alignment with one’s ability to pay. Ability, not willingness.

          And I also reject your premise that we can’t help everyone. That is a matter of distribution — dogma and political will. It is not a pure fact.

          Moreover, it isn’t incumbent on every being to be personally responsible for helping your person X. Unless, of course, said person X is an actual dependent and “you” have sufficient resources to do the helping. So I cannot fathom what point you think that statement is proving.

  2. H. Alexander Ivey

    vastly more importantly, that they will cause inequality to surge, harm the poor, and intensify CEOs’ already perverse incentives.

    This is what I think is the proper response to complaints about the federal deficit. It isn’t the deficit that is the problem, it is the over-concentration of wealth that is the problem. Deficits, by currency printing governments, are not important. Letting too few people have too much money is. The proper use of taxes are to reduce wealth concentration, not to fund a federal government.

  3. Steve Ruis

    We keep asking the question whether we can “afford” to have a national healthcare system, just like the rest of the developed world, without mentioning that we are currently paying twice what any other nation is paying for healthcare that ranks nowhere need the top of the pack in health outcomes. We cannot only afford it, we can afford it twice over, so the point is not whether we can afford it, but what will we do with the enormous amounts of money saved by doing it.

    1. PKMKII

      That speaks to the other common misconception about government spending that typically is paired with the “deficits/debt is a massive problem!”, which is the idea that government spending exists in some alternate economic universe which does not interact with our own. They assume that big government spending means the money just poofs out of existence once the government spends it, rather than flowing into the economy that is both public and private. So it doesn’t occur to them that public expenditures can negate private ones.

  4. Andy S

    First, a disclaimer: I am not an economist or policy wonk. I do not have the academic chops to provide a detailed critique of MMT. That being said, I think the whole MMT debate sort of overlooks the larger problem – human nature.

    An MMT-based approach to fiscal policy might be a workable framework, but there is still an underlying reality. There are still limits to government spending, MMT just changes the nature of those limits. Under MMT, the federal government must still tax, regulate and determine budget priorities even if the accounting rules are different.

    Here is the iron law that MMT fails to address: Powerful interests will always seek to be the beneficiaries of government largess (both in direct funding and favorable regulation) while avoiding he costs (taxes and unfavorable regulations). These interests will attempt to sway and corrupt government at all levels no matter the accounting principals that are in use.

    I most often see MMT promoted as a way to create funding for a program that currently has insufficient political support (universal healthcare, job guarantees, etc). After all, if the government was already spending enough money on (fill in the blank with your favorite underfunded program), then would there be as much support for MMT? So here’s the issue that the MMT crowd fails to adequately address: a program that lacks sufficient political support for funding in a non-MMT world will still lack the political support in an MMT world.

    But you say there will be enough funding to go around? Nope, remember there are still limits to spending, MMT just changes what those limits are. MMT might provide justification for more spending, but what makes anyone think that spending will be directed any differently?!

    Go ahead, open the spigots! Think of all the ships we could buy for the U.S. Navy! More F-35’s! All the tools and toys that the CIA, NSA, TSA, and other alphabet agencies need to to their job. And really, really nice wall at the southern border.

    MMT might be an viable alternative to manage fiscal accounting at the sovereign government level, but it is only a system of accounting. If government priorities and policies suck in a non-MMT environment, they will still suck in an MMT environment.

    1. RabidGandhi

      I think this is the most common misunderstanding of MMT:

      “MMT might be a viable alternative to manage…”

      “MMT is.. a system of accounting”

      “MMT promoted as a way to create funding…”

      All of these quotes show a major misconception of MMT, falsely believing that it is a policy that could be implemented that merely entails printing vast sums of money. Yet this false understanding is directly contradicted by Bill Black in the article, who says

      MMT is based on reality, it explains how the monetary system in a nation with a sovereign currency actually functions.

      In other words, MMT is not a policy that governments can opt to implement; rather it is an explanation of a reality that exists no matter what policies are being put in place. This means that if Black et al are right, then the US government functions in a fully MMT environment whether it chooses to accept this or not.

      A good analogy is the Einsteinian concept of gravity. Einstein refined and corrected the Newtonian theory. Yet this correction did not affect whether apples will fall to the ground; they still do. Rather what it changed was our understanding of why apple hits earth. Similarly with MMT, it is an “explanation of how a monetary system functions”, not a policy proposal.

      1. Andy S.

        Okay, so MMT proponents contend that MMT is a tautology, a self-evident truth that requires no confirmation or refutation. I can work with that. However, my next question is this : If MMT is self-evidently true – the world as it is and not as some would wish it – why in the world are we even debating it?

        I would suggest that the primary reason that MMT is brought forth in the public debate is because its proponents want to change first, the frame of reference, and second, the policy outcomes of federal level decision makers. (As an aside, I’m sure there are some that look at MMT in a purely academic way, but I don’t think they are very active in most public discussions). MMT proponents are mostly trying to solve a problem, and they are trying to do it by having us look at fiscal policy through a different lens with the hope of achieving a different outcome.

        Adopting a new framework is not necessarily a bad approach to problem solving. Here’s a simple analogy from mathematics: When attempting to solve a geometry problem, you can make the task much easier by the proper choice of coordinate systems (cartesian, spherical, etc.). Each of these coordinate systems are fundamentally “true” and will lead to a solution. However, is some cases the path to the solution is more obvious when working under one coordinate system rather than the other.

        So I ask, “What problems are MMT proponents trying to solve?” Be honest here.

        If MMT proponents were brutally honest, then I think that the answer to that question is that they would like to see a different set of fiscal priorities and outcomes (i.e. who and how do we tax and where do we spend?) emanate from Washington. After all, if you were satisfied with current fiscal policies, would you really care whether the policy makers believed in MMT or not?

        I will go out on a limb and categorically state that shifting the framework of fiscal policy formulation from its current form to one guided by MMT principles with do absolutely nothing to change the policy outcomes. Why? Because the policy outcomes are mostly a result of the political process and not the accounting principles! If the political class and entrenched special interests want to spend wads of federal funds on guns and little on butter, MMT will not change that outcome. Only the public explanations will be changed.

        If you want to change the policy outcomes, then you have to change the political inputs. You have to change the will and the priorities of the political class. MMT will not solve that problem.

        1. Hiho

          “If MMT is self-evidently true – the world as it is and not as some would wish it – why in the world are we even debating it?”

          Because the elites have always used junk economics to protect and increase their wealth.

          Imagine what would happen if the world embraced MMT. Bondholders would no longer be able to parasite government, no more privatizations to make a killing, no more private financing of public infrastructures, banks would lose their monopoly in money creation…

          There are so many powerful interests trying to make sure that we never understand how the monetary system actually works. Too much it is at stake.

          1. Andy S.

            Do you really believe that the “elites” couldn’t find some way to abuse their power even if everyone believed MMT was true? Any set of rules can be corrupted.

            MMT or not, there are still practical limits to federal spending. That means some things will get funded and some things won’t. Do you think that a change in accounting will change the spending priorities of the current political class?

            MMT or not, the federal government will still tax and regulate. Do you think that powerful interests will work any less to ensure that the burden of those taxes and regulations fall on someone else?

            MMT will not force politicians to fund universal healthcare, strengthen the social safety net, rethink their support for decades of foreign wars or dismantle the growing surveillance state. If anything, MMT will provide justification to increase spending on the very things that many MMT proponents abhor. The MMT debate, will technically interesting, is mostly a sideshow to what really ails this nation.

            In other words, it solves the wrong problem.

            1. Hiho

              I totally agree with you. Yet you do not understand the main point. We are already operating under a mmt system, it is not a political choice to be made. What I said is that the elites do not want us to understand how mmt works.

              I did not say thay they do not want a mmt system implemented, because first of all this system is already in place, and secondly as you said, it has been rigged in favor of ’em.

              By the way no mmt defender has ever said that there is no limit in the amount of money that can be printed/spent.

              Get it now?

        2. skippy

          MMT is not an ideology, that the currant sociopolitical pool are ignorant or play ignorant is another thing all together.

          MMT is just a tool for informing policy space within its framework, hence when some say X means no, one can say false. Enough people being able to countenance the dominate narrative of neoliberalism, regardless of the shifting sands and moving goal posts, removes their ability to craft the narrative.

          disheveled…. such was Joan Robinson’s advice on learning economics, not to become one, but to dispel the pettifoggery used to craft the narrative.

          1. jgordon

            MMT is an ideology. The proponents of MMT take a tiny subset of data available from the financial environment of recent United States history, and then extrapolate universal economic principles from that data.

            It doesn’t take much digging into MMT theory to discover the first problematic assumption with it: that foreigners will always be thrilled to send resources to the US in exchange for dollars no matter what the US does, and that this happy state of affairs can never change.

            MMT, or rather the current government financing scheme operating in the US, is like doing a leveraged buyout of a trusted brand name and then surreptitiously crappifying the brand name products, with the assumption being that customers will never notice and never stop buying no matter how bad the products get.

            1. jsn

              None of the “problematic assumptions” you’ve made are in the literature you refer to. Please provide primary source links for these common claims.

              You may disagree with the MMT school progressive politics, that’s your concern, but what they describe is the actual operation of our current monetary system as used to great benefit by FIRE and MIC sectors at the expense of everyone else for at least two generations now.

    2. SJB

      RabidGhandi beat me to the first point I wanted to make–the MMT leaders are simply pointing out that we are already operating in an MMT world, and we have been since we went to a pure fiat world in 1971. They just want to help the rest of us to understand that fact so that we can see that there are options available to us to make the world a better place to live, and put an end to so much of the unnecessary suffering we are imposing on ourselves for no good reason.

      But I think your overall point is spot on, and this actually occurred to me while watching some of the MMT conference this weekend–if there is potential to do so much good, we must also recognize the potential for doing even more bad than is currently being done. Surely many in the military, the 1% and the corporate class, etc. already understand the reality of the monetary situation, but not all. And even those who do know can figure out how to take advantage of a world in which everyone knows and understands MMT. Understanding MMT is a necessary, but not sufficient, path to a better world for the rest of us.

      What is needed, and maybe is already being worked on, is the development of policy tools to prevent a new scam from making our current problems even worse than they already are.

      1. Vatch

        the MMT leaders are simply pointing out that we are already operating in an MMT world

        I don’t think we are in an MMT world, although there are similarities between MMT and our world. In an MMT world, the government can increase or lower the money supply by fiat. In our system, it’s not so simple. The government has to borrow money that has been created by fiat, and the government has an obligation to pay back what it has borrowed, and to pay interest on the borrowed money. I understand that it is practically impossible that the U.S. government will pay back the trillions that it owes, but that means that the government must pay interest in perpetuity. That doesn’t seem to be a pure MMT environment to me.

        1. Grumpy Engineer

          You make an important point here. The US government doesn’t actually control its own currency. The US Federal Reserve (which is technically a independent organization) actually controls the creation of US dollars. The US government can only borrow unlimited amounts of money as long as the Federal Reserve is willing to issue/lend new dollars to make that happen. In theory, the Fed could cut the Feds off. [In reality, though, I don’t think they ever will.]

          As for paying back the debt, it’l never actually happen. They’ll just roll the debt over into newer and bigger loans. After all, it’s exactly what the Japanese government has done for nearly 30 years straight. Their debt-to-GDP ratio is enormous, but yet things keep going. Of course, I’m not sure that the Japanese example is the one we want to follow. Despite the fiat currency-enabled perpetual deficit spending, Japan’s economy has been struggling mightily since 1991. They call it the “lost decade”, but given that it’s been going on for 27 years now, they really ought to call it something else.

          1. voteforno6

            The chairman of the Federal Reserve is nominated by the President, and confirmed by the Senate. The Federal Reserve was created by an act of Congress, and can have its charter changed by Congress. How does that make it independent?

            The U.S. government does not borrow money. It creates money by spending, and removes it from circulation through the receipt of taxes. The U.S. government has a monopoly on the printing of dollars; it makes no sense that it would have to borrow them from some other entity.

            1. Vatch

              If the US government doesn’t borrow money, then why do they make interest payments to people who loan money by buying treasury bonds?

              1. voteforno6

                If the government has the monopoly on issuing a currency (in this case, dollars), then why would it need to get that currency from someone else? From what I’ve read from MMT-oriented economists, this transaction isn’t actually the government borrowing money. It’s simply an asset swap. It seems to me to be an artifact from when the U.S. was on the gold standard, but it does have some uses, such as helping to keep inflation in check.

                1. UserFriendlyyy

                  A better way to think about it is that bonds and cash are functionally equivalent, with the caveat that bonds pay interest. The government can print as much of eather as it wants and banks and other institutions treat both practically the same.

              2. Mel

                The government that your political donors have given you is a government that believes that very rich people must get a slice off the top of everything that’s happening. That’s why the government borrows back money from the people to whom they supplied it, and pays interest, whenever the government wants to do anything.

                1. Vatch

                  Many US treasury bonds and notes are owned by foreign governments, such as China and Japan. It’s not just very rich individuals who load money to the US government.

              3. RabidGandhi

                Government bonds are the main way central banks control the money supply, thus controlling interest rates. By buying or selling bonds on the open market, the central bank absorbs or expands liquidity in order to meet its overnight interest rate targets.

                In short, bonds are a monetary policy tool; they are not a government financing tool.

                1. Vatch

                  I disagree. The bonds aren’t needed as a government financing tool, yet that is how they are used (along with taxes). MMT describes a plausible possibility, but it does not describe what is actually happening in the US economy.

                  1. RabidGandhi

                    Your point refers exactly to my original post above. MMT is not proposing “hey let’s set up the economy this way” rather it is saying “this is the way the economy actually works, whether you like it or not”.

                    The fact that governments dissimulate this reality by creating artificial constraints on their own spending (constraints that are easily ignored when convenient) does not affect the reality of the way a monetary system actually functions.

                    You can claim all you want that bonds are used to finance spending, buying into the fiction as given, but that is just ignoring the fact that doing so is a bookkeeping impossibility in double entry accounting. No matter how the fiction is spun, a liability does not cancel out a liability.

                    1. Vatch

                      The simple fact is that if there were no taxes and no government bonds, the US government would not spend money. If MMT described reality, then there would be no need to pay back the debt.

                      Of course I agree that there are serious contradictions in the way that our economy works. Debt based economies will collapse if everyone pays back the debt that they owe; in fact, it is mathematically impossible to pay back all debts in such an economy.

                      Even in a true MMT economy, taxes would be necessary to finance most government spending. New money would only be created when the money supply needs expansion. And government bonds wouldn’t exist.

                  2. Robert Bostick

                    Vatch, When you buy a CD you transfer non-interest bearing dollars from your checking account to obtain an interest-bearing Treasury bond. The dollars go into a reserve account at the Fed and T-bond goes into a securities account at the Fed. You have thereby preserved the value of your dollars as would happen with any savings account.

                    In the aggregate, the Federal Reserve has $20 trillion in T-bonds in security accounts. Neither reserve or security accounts enter the real money supply. Only when securities are redeemed do they enter the money supply, but in most instances, they are rolled over. Interest payments are merely electronic markups of checking accounts.

                    There is no actual debt in the household sense of the word for the USG because all dollars used to buy Treasury bonds must first come from government spending.

                    In fact, what we have is $20 trillion in National savings, not debt.

              4. JTFaraday

                It’s to give value to the money/ dollar. MMT-ers say that the ability to tax gives value to the dollar, which is ultimately true, but frequently skip the part where taxes pay the interest on the national debt. This is arguably its real value.

                This is how Alexander Hamilton envisioned it, and this is why he had US Fedgov buy up worthless revolutionary war debt. He wanted the elites to back the new government by giving them a financial stake in its ongoing existence by paying them interest on the debt.

                What the Freedom Caucus doesn’t understand is that the national debt is also a political asset. The same way your paycheck is a political asset of your boss.

                1. GrkStav

                  but frequently skip the part where taxes pay the interest on the national debt. This is arguably its real value.

                  Federal taxes (i.e. federal tax receipts, the total amount in USD “collected/subtracted” from taxpayers’ balances) no more “pay the interest on the national debt” than they pay any other expenditure of the Federal Government. I.e. not in the least, not at all.

                  The U.S. Dollar is the United States’ (and mostly the world’s) “tribute money” (and, thereby, a significant component of their/its “mercantile money”).

                  The sole, self-authorized issuer of X can always meet its obligations in X in full and on time.

          2. Roy A More

            You are correct that we’re currently using “Federal Reserve Notes” but the US Treasury can issue “US Notes” and actually have. These do not require Treasury to borrow nor tax in order to issue. They do not carry interest. They can be made to be accepted as legal tender. The Federal Reserve pays interest at a rate that it sets. As QE exposed, they can expand their balance sheet as much as they want without having to go to “savers” or anyone else in order to do so. The net interest margin it receives is passed over to the US government (after paying Interest On Reserves to banks which it can opt not to do). The US government could “buy” back all of the debt it has issued. It would just be changes in computer balances.

            It goes on from there but more of this country needs to understand, I believe, that whenever someone says at the federal level that they’re spending taxpayer money or leaving a debt burden to our children they are either uninformed or lying. See Mosler for these and more : https://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

      2. Grumpy Engineer

        @SJB: You said, “if there is potential to do so much good, we must also recognize the potential for doing even more bad than is currently being done“.

        Thank you, thank you, thank you for making that point! Too many people seem to think that MMT allows unlimited deficit spending, and that such spending will obviously make everything hunky-dory. Alas, neither of these is true.

        Why can’t deficits be unlimited? Because there are a finite amount of resources that the government can purchase and a finite number of people they can hire. Spending more than that will either poach resources and people from the private sector (or from state and local government) or will cause inflation. [Venezuela is a good example of this.]

        And also, it matters what you spend it on. If Donald Trump fully embraced MMT and spent several trillion dollars to hire every single engineer in the country to work on new weapons systems, would we really better off as a nation? Or what if he decided to “prop up pension funds” by directly buying shares of stock at inflated prices from well-connected companies? There are all sorts of ways unlimited deficit dollars could be wasted, used to show favoritism or to enrich the 1%, or otherwise be abused.

        And indeed, that was part of the problem with our last major attempt with increased deficit spending for social benefit: the ARRA that Jared Bernstein himself infamously helped justify. We supposedly spent many billions of dollars on “shovel-ready” projects, but too few of those projects were adequately staffed, and somehow most of the money got consumed in paper-pushing exercises in the Washington DC area. Income levels rose appreciably near DC, but everywhere else they continue to fall. People noticed the disparity, and I think it helped Trump reach the White House.

        1. RabidGandhi

          Why can’t deficits be unlimited? Because there are a finite amount of resources that the government can purchase and a finite number of people they can hire…. Venezuela is a good example of this.

          That is certainly not the case in Venezuela, as the country has vast resources that the government’s ridiculous monetary policy has left untapped.

          Nevertheless, making the question about real resources instead of fiat money is a tenet of MMT. Here’s Bill Mitchell:

          If a nation can only access limited quantities of real resources relative to its population, then no matter what capacities the government might have, that nation, in all likelihood, will be poor.

          The problem in this neo-liberal era is that currency-issuing governments use the myth that they are financially constrained to avoid fulfilling the responsibility to achieve full employment no matter how resource rich the nation might be.

          1. Grumpy Engineer

            It’s not just Venezuela’s monetary policy. There are hard technical constraints also.

            Specifically, Venezuela’s “vast resources” are trapped in the ground. Without the equipment to extract and process those resources (or the people to operate said equipment), those resources will remain in the ground indefinitely. Even if Venezuela adds a couple more zeros to the peso bills that they’re currently printing by the truckload, those resources won’t magically come out of the ground in usable form in response.

            And unfortunately, I don’t think anybody in the Venezuelan government has realized that the country desperately needs more farming and oil-drilling equipment. They sending all of their newly-printed pesos to the wrong place, focusing on the military and retail sector subsidies. And because they spend so incredibly much (effectively turning the Venezuelan government into the 800-lb gorilla of the Venezuelan economy), other spending gets largely pushed out. The “behind the scenes” economy that helps supply food and medicine and end-user goods has withered in response.

            I’ll say it again. It matters what you spend it on.

            1. RabidGandhi

              Oh I definitely agree that it matters what you spend it on, but I don’t see how the Venezuela example furthers your point about inflation. You claimed Venezuela has “a finite amount of resources that the government can purchase and a finite number of people they can hire”. They are obviously not at any finite point because there is still extensive poverty and untapped human resources.

              The big resource they are not optimising is not oil– which as an export commodity has a poor GDP multiplier– but rather the population who are still quite poor and the economy is underindustrialised. This is exactly why I quoted Mitchell on government’s duty to ensure full employment.

              1. Robert Bostick

                MMT always uses the phrase “to support public purposes” to describe one of the fundamental purposes of deficit spending.

              2. pslebow

                Yes. Monetary policy alone won’t do it. It requires a companion fiscal policy to exploit the untapped human resources. This means investing in education and funding projects that benefit the population as a whole.

        2. Basil Pesto

          There are all sorts of ways unlimited deficit dollars could be wasted, used to show favoritism or to enrich the 1%, or otherwise be abused.

          I don’t doubt that this is true – I daresay abuse is a possibility in all economic systems. But if we accept that what MMT teaches us is a straightforward description of how money actually works in many countries (the US, Australia, the UK? etc) then it means that so much of our political process and political decision making is caught up in a sort of economic fallacy. This in turn effects both policy and voter decisions and even choices. That can’t be acceptable.

          Abuse potential is there but it can be mitigated. The question of what you spend it on is a question for political campaigns and would be for the citizenry to decide. Those policies may not necessarily lead to positive outcomes but hey, bad political decisions are hardly an MMT-exclusive problem. As long as spending is not beyond the nation’s means, catastrophe doesn’t necessarily have to ensue. Another way to help mitigate abuses might be with sensible and thoughtful legislation, though I’m not sure what form that would take.

  5. Norm

    A helpful discussion would address the question of “Whose ox would get gored if MMT were to be established as the way that governments and others perceived and explained the economy?” Some folks (banks, etc) are doing quite nicely with current situation of madly issuing T-Bills not only to pay for everything the government does but also to pay the interest on yesterday’s t-bills.

    Entrenched interests have a stake in maintaining the fantasy that somehow we’re on something like a gold standard where money isn’t really created by fiat and that all this debt must and will be paid off. A better understanding of who these entrenched interests are, the extent to which an embrace of MMT would undermine their power, and how hard they will fight to maintain the status quo would be a good first steps in learning how to challenge their hegemony.

  6. pslebow

    MMT confuses the word “can” with the word “does”. The government can do lots of things but the reality lies within what it does do.
    Deficits do matter under the current system. If legislation was passed providing for the ability to create money rather than borrow as proposed in the Chicago Plan, Positive Money, the NEED act, etc. then indeed, deficits wouldn’t matter.

    To just assert something doesn’t make it true: “In a nation with a sovereign currency like the United States, federal tax revenues do not fund federal expenditures. ” This is, on its face, incorrect. The government MUST account for all expenditures either through borrowing or taxing. That the tax money takes a circuitous route through the various accounts doesn’t change that.

    The reason the right doesn’t really have an issue with deficits, as Richard Wolff points out in his recent September Economic Update https://www.youtube.com/watch?v=LnjYK87S5fc , is that it replaces taxes, which confiscates their wealth, with voluntary interest bearing loans to the government. A pretty good tradeoff for the rich.

    1. Jim Haygood

      The government MUST account for all expenditures either through borrowing or taxing.

      Quite so. Would governments make tax evasion a criminal offense if they really didn’t need the revenue? In fact, governments live hand to mouth. That’s why withholding tax was implemented in 1943 under the fiscal strain of WW II — gov needed the funds NOW, and still does.

      A permanent structural deficit means that the Trump administration likely will boost total federal debt to $30 trillion by 2024, assuming a recession occurs during the period. Even if nominal GDP carried on rising at 4 percent annually (consisting of 2 percent inflation and 2 percent real groaf) to $26 trillion by 2024, debt would be around 115 percent of GDP.

      But if a recession pulls nominal GDP groaf down to 3 percent, then GDP reaches only $24 trillion in 2024, and debt hits 125 percent of GDP. Watching the 2024 Democratic presidential candidate rip the R party (accurately) for its fiscal irresponsibility will be a hoot — straight outta the old Frank Roosevelt political playbook.

      Debt at a triple-digit percentage of GDP crushes groaf. Humans sense this, and are responding by reproducing at less than replacement rates. Baroque fairy tales of thin-air purchasing power created by the magic wand of UMKC alchemists in pointy wizard hats just don’t resonate with therm.

      1. GrkStav

        Would governments make tax evasion a criminal offense if they really didn’t need the revenue?

        They would, they have, and they do.

        Making tax evasion (remember, taxes are payable ONLY in that currency) a criminal offense renders the fiat currency in question ‘valuable’, a “must have (some of it)” to discharge one’s tax obligations and thus avoid being criminally charged, prosecuted, etc. As a result, the self-same fiat currency becomes desirable to accept in exchange for real goods and services (including labor). That is how the fiat currency issuer may ‘provision itself’ AND motivate and reward non-government entities to act or not act.

        It really is not that complicated. Fiat currencies are “tribute money”, the money with which ‘tribute’ can be ‘paid (with finality).

    2. Vatch

      MMT confuses the word “can” with the word “does”.

      This short sentence is an excellent summary of much of the trouble associated with discussions of MMT. Thank you.

    3. H. Alexander Ivey

      …federal tax revenue do not fund federal expenditures

      I think Professor Black is saying that tax revenue is not absolutely needed to fund federal expenditures, rather, since the USA prints its own money (and they control the creation of credit in the banking system—if not the shadow banking system), the federal government can simply pay for its expenditures by printing money.

      If one interprets the sentence more narrowly, it is correct to say revenues fund expenditures.

  7. Steven Greenberg

    I certainly believe the MMT explanation of how the monetary system works, but I have come to realize that there are a couple of important factors that MMT proponents ignore.

    One factor is the belief that the money created in the private sector by lending is somehow always a less important economic force than money created by the sovereign power. The accounting balance of assets and liabilities (money lent and obligation to repay) is a static balancing. The economy is dynamic, however. Money lent can be spent immediately. The obligation to repay is in the future. In the time span between when the money is lent and when it must be repaid, there is a lot of economic activity going on. The effects of this cannot be ignored.

    The other factor is mark-to-market valuation of assets. I’ll defer discussion of that to a later comment.

    There is plenty of evidence in economic history, both recent and not so recent, to demonstrate the importance of the two factors mentioned above.

    I would love to see a discussion of both factors by the MMT theorists.

    Keynesian explanations of why monetary policy is not the only factor driving the economy still apply after all these years. After all, these too are just explanations of how things work whether you choose to act on that knowledge or not.

    1. voteforno6

      How is money created in the private sector? The federal government has the monopoly on the printing of dollars; it just isn’t possible, then, for some private interest to be able to create dollars on its own.

      1. Steven Greenberg

        MMT discusses how money is created in the private sector. In the banking sector it comes from fractional reserve banking. The bank only has on hand a fraction of the money on deposit with the bank. The rest of it is lent out to people to use right away. As long as the depositors don’t suddenly all come together to withdraw their money, there is no problem with the depositors acting as if their money is still in the bank, and the borrowers think they can spend what is lent to them immediately. One of the purposes of the Federal Reserve System is to provide a backup to banks in the cases where more depositors than usual want to withdraw their money at the same time. MMT tends to think of this as a different kind of money, because all the lent money comes with with a promise to pay it back that is on the books of the bank. This is the accounting balance that must and does net out to zero. My point is that the difference between what you can spend now and what you eventually have to pay back is quite economically important. It shouldn’t even be necessary for me to point that out, it is so obvious.

        1. voteforno6

          Okay, I see where you’re coming from now. It’s a fine distinction, I think. These banks aren’t actually creating money, though, are they? They’re making promises, that are backstopped by the Federal Reserve. The Federal Reserve actually creates the money, which it then credits to the accounts of those banks. This isn’t a no-strings-attached transaction, though, as there are limits to what the feds will backstop, correct?

          1. pslebow

            That is not the way things work. The Fed does not create the money or credit it to bank accounts. Virtually all money used in the economy really is created by bank loans – you can call it credit if you want, but we use that bank-created money to pay our bills and taxes. This is clearly and transparently explained by the folks at PositiveMoney.org or the American Monetary Institute monetary.org.

            1. pslebow

              Not sure what the significance of that is. Money now gets its credibility from the government. Don’t see much distinction between bonds and notes except bonds have an interest penalty attached requiring inflating the money supply to cover. I’d take payment in bonds or notes if offered the choice.

        2. JEHR

          Steven Greenberg, you are describing one of the myths of how money is created (See here):

          The conception of the money multiplier is really as simple as that. But while simple it is also wrong to the core! What it implies is that banks first of all take deposits to get funds which they can then on-lend. But prudential regulations require they keep a little in reserve. So we get this credit creation process ballooning out due to the fractional reserve requirements.

          Well that is not at all like the real world. It is a stylised text-book model which isn’t even close to how things actually operate. The way banks actually operate is to seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share.

    2. pslebow

      “Money lent can be spent immediately. The obligation to repay is in the future. In the time span between when the money is lent and when it must be repaid, there is a lot of economic activity going on. The effects of this cannot be ignored.”
      Yes! and this is what MMT completely ignores.

  8. shinola

    IIRC, the TBTF banks/Wall St. were bailed out by the FRB buying up their near worthless paper “assets” at artificially inflated prices.
    Where did the Fed get the money to buy billion$ worth of crap? They created it!
    (I’m not the sharpest tool in the kit, so if I got this wrong please feel free to correct)

    I attended the NC meet up in KC last week & ended up sitting across from a Canadian economist. I mentioned to him that it seemed like MMT could be rather dangerous in the wrong hands.
    Shortened version of his answer: Oh yes, definitely!

    1. pslebow

      The Fed can only create money in reserves. This is money that does not enter the economy and, in the case of quantitative easing and “worthless paper assets” it just shored up the banks devalued reserve assets.

      I don’t believe MMT is “dangerous” – it doesn’t give a prescription on how to reform the monetary system. It just uses the current convoluted paradigm and re-defines terminology ( such as the word “debt”) to fit their explanations. Its so complex in an of itself that you won’t find a politician with evil intent able to understand it.

      1. shinola

        “Its so complex in an of itself that you won’t find a politician with evil intent able to understand it.”

        Thank gawd.

  9. Steven

    I haven’t heard much about MMT’s position on taxing the wealthy. I believe it is almost axiomatic that the accumulation of large fortunes eventually destroys the social cohesiveness of the societies from which those fortunes were derived. This is especially a problem for advanced industrial civilization with its specialization and division of labor. Compound interest (and that’s what we’re talking about here because the rich don’t spend, they ‘invest’) is an exponential function, i.e. the accumulation of ‘wealth’ (actually public indebtedness) can’t go on forever.

    Right now MMT seems to be a political strategy that hopes to secure a buy-in from the likes of the Koch brothers and Trump by simply ‘printing’ money (i.e. incurring more government debt) rather than stripping ‘big people’ of their out-sized fortunes.

    1. pslebow

      I do believe MMT proponents would like to remain as agnostic as possible to attract people from the right. They make claims that taxing is unnecessary to fund government. Maybe someday down the line this could be true, but money needs to be recirculated out and back into the economy via government spending to maintain public programs and to, as you point out, restore some balance in wealth and income. The honest solution is proposed in the 2011 National Emergency Employment Act (NEED Act house bill 2990 (see http://www.monetary.org) which eliminates bank-created money based on interest-bearing loans and bonds in favor of government-created money.

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