Monday April 27th… Dear Diary. The main purpose of this ongoing blog will be to track United States extreme or record temperatures related to climate change. Any reports I see of ETs will be listed below the main topic of the day. I’ll refer to extreme or record temperatures as ETs (not extraterrestrials).😉
Main Topic: Modern Monetary Theory…A Solution For The Climate and COVID-19 Crisis Whose Time Has Come
Dear Diary. Yesterday we delved into more traditional ways of thinking about economic policy, suggesting that the COVID-19 crisis would suck up nearly all of the proverbial oxygen in the room, leaving precious little monetary resources for a Green New Deal. Here is a quote from yesterday’s post:
“Unless we think outside of the box concerning traditional economics, countries and corporations tasked with implementing parts of any Green New Deal will demand payment for their services, leaving precious little for big ticket items.“
Well, some economists have been thinking outside of the box for years in conjunction with funding the Green New Deal. Today I will introduce some of my readers to something called Modern Monetary Theory, or MMT for short. This MMT is a very progressive economic way to reorganize society, which needs a big overhaul in light of how fast our traditional way of life got broken due to COVID-19. Remember that most people were living paycheck to paycheck in a supposed “boom economy” before this horrid pandemic struck.
First, let’s define what the MMT is via some of this Wikipedia article:
Modern Monetary Theory or Modern Money Theory (MMT) or Modern Monetary Theory and Practice (MMTP) is a macroeconomic theory and practice that describes the practical uses of fiat currency in a public monopoly from the issuing authority, normally the government’s central bank. Effects on employment are used as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. MMT is an evolution of chartalism and is sometimes referred to as neo-chartalism. Its macroeconomic policy prescriptions have been described as being a version of Abba Lerner‘s theory of functional finance.
MMT advocates argue that the government could use fiscal policy to achieve full employment, creating new money to fund government purchases. According to advocates, the primary risk once the economy reaches full employment is inflation, which can be addressed by raising and gathering taxes and issuing bonds to reduce money and the velocity of money in the system. MMT is debated, with active dialogues  about its theoretical usefulness, the clear useful real world practical applications and implications, together with the varying effectiveness of its targeted use and varying challenges of its policy prescriptions.
U.S. money supply change from a year ago ($ Billions).
Percent change in U.S. money supply vs. year ago. Money supply increases about 6% per year.
MMT’s main tenets are that a government that issues its own fiat money:
- Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
- Cannot be forced to default on debt denominated in its own currency;
- Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
- Can control demand-pull inflation by taxation and bond issuance, which remove excess money from circulation (although the political will to do so may not always exist);
- Does not need to compete with the private sector for scarce savings by issuing bonds.
These tenets challenge the mainstream economics view that government spending is funded by taxes and debt issuance. The first four MMT tenets do not conflict with mainstream economics understanding of how money creation and inflation works. For example, as former Fed Chair Alan Greenspan said, “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” However, MMT economists disagree with mainstream economics about the fifth tenet, on the impact of government deficits on interest rates.
Further information: NAIBER
Economist Stephanie Kelton explained several policy claims made by MMT in March 2019:
- Under MMT, fiscal policy (i.e., government taxing and spending decisions) is the primary means of achieving full employment, establishing the budget deficit at the level necessary to reach that goal. In mainstream economics, monetary policy (i.e., central bank adjustment of interest rates and its balance sheet) is the primary mechanism, assuming there is some interest rate low enough to achieve full employment. Kelton claims that cutting interest rates is ineffective in a slump, because businesses expecting weak profits and few customers will not invest at even very low interest rates.
- Government interest expenses are proportional to interest rates, so raising rates is a form of stimulus (it increases the budget deficit and injects money into the private sector, other things equal), while cutting rates is a form of austerity.
- Achieving full employment can be administered via a federally funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice versa.
- Under MMT, expansionary fiscal policy (i.e., money creation to fund purchases) can increase bank reserves, which can lower interest rates. In mainstream economics, expansionary fiscal policy (i.e., debt issuance and spending) can result in higher interest rates, crowding out economic activity.
Economist John T. Harvey explained several of the premises of MMT and their policy implications in March 2019:
- The private sector treats labor as a cost to be minimized, so it cannot be expected to achieve full employment without government creating jobs as well, such as through a job guarantee.
- The public sector’s deficit is the private sector’s surplus and vice-versa, by accounting identity, a reason why private sector debt increased during the Clinton-era budget surpluses.
- Idle resources (mainly labor) can be activated by money creation. Not acting to do so is immoral.
- Demand can be insensitive to interest rate changes, so a key mainstream assumption, that lower interest rates lead to higher demand, is questionable.
- When the economy is below full employment, there is a “free lunch” in creating money to fund government expenditure to achieve full employment. Unemployment is a burden; full employment is not.
- Creating money alone does not cause inflation; spending it when the economy is at or above full employment can.
MMT claims that the word “borrowing” is a misnomer when it comes to a sovereign government’s fiscal operations, because what the government is doing is accepting back its own IOUs, and nobody can borrow back their own debt instruments. Sovereign government goes into debt by issuing its own liabilities that are financial wealth to the private sector. “Private debt is debt, but government debt is financial wealth to the private sector.”
In this theory, sovereign government is not financially constrained in its ability to spend; it is argued that the government can afford to buy anything that is for sale in currency that it issues (there may be political constraints, like a debt ceiling law). The only constraint is that excessive spending by any sector of the economy (whether households, firms, or public) could cause inflationary pressures.
MMT economists advocate a government-funded job guarantee scheme to eliminate involuntary unemployment. Proponents argue that this can be consistent with price stability as it targets unemployment directly rather than attempting to increase private sector job creation indirectly through a much larger economic stimulus, and maintains a “buffer stock” of labor that can readily switch to the private sector when jobs become available. A job guarantee program could also be considered an automatic stabilizer to the economy, expanding when private sector activity cools down and shrinking in size when private sector activity heats up.
Comparison of MMT with mainstream Keynesian economics
MMT can be compared and contrasted with mainstream Keynesian economics in a variety of ways:
|Funding government spending||Advocates taxation and issuing bonds (debt) as preferred methods for funding government spending.||Emphasizes that taxation and debt issuance are not required to fund spending.|
|Purpose of taxation||To pay down debt creation from the central banks loaned to the Government at interest, which is spent into the economy and needing to be paid back by the taxpayer.||Primarily to drive demand for the currency. Secondary uses of taxation include addressing inflation, addressing income inequality, and discouraging bad behaviour.|
|Achieving full employment||Main strategy uses monetary policy; Fed has “dual mandate” of maximum employment and stable prices, but these goals are not always compatible. For example, much higher interest rates used to reduce inflation also caused high unemployment in the early 1980s.||Main strategy uses fiscal policy; running a budget deficit large enough to achieve full employment through a job guarantee.|
|Inflation control||Driven by monetary policy; Fed sets interest rates consistent with a stable price level, sometimes setting a target inflation rate.||Driven by fiscal policy; government increases taxes or issues bonds to remove money from private sector. A job guarantee also provides a NAIBER, which acts as an inflation control mechanism.|
|Setting interest rates||Managed by Fed to achieve “dual mandate” of maximum employment and stable prices.||Emphasizes that an interest rate target is not a potent policy. The government may choose to maintain a zero interest-rate policy by not issuing public debt at all.|
|Budget deficit impact on interest rates||At full employment, higher budget deficit can crowd-out investment.||Deficit spending can drive down interest rates, encouraging investment and thus “crowding-in” economic activity.|
|Automatic stabilizers||Primary stabilizers are unemployment insurance and food stamps, which increase budget deficits in a downturn.||In addition to the other stabilizers, a job guarantee would increase deficits in a downturn.|
There are criticisms, though. Here is the main one I will highlight in the Wikipedia article:
New Keynesian economist and Nobel laureate Paul Krugman argues that MMT goes too far in its support for government budget deficits and ignores the inflationary implications of maintaining budget deficits when the economy is growing. Krugman described MMT devotees as engaging in “calvinball” — a game from the comic strip Calvin and Hobbes in which the players change the rules at whim.Austrian School economist Robert P. Murphy states that MMT is “dead wrong” and that “the MMT worldview doesn’t live up to its promises.” He observes that MMT’s claim that cutting government deficits erodes private saving is true “only for the portion of private saving that is not invested” and argues that the national accounting identities used to explain this aspect of MMT could equally be used to support arguments that government deficits “crowd out” private sector investment.[70
One of my best progressive friends is Brad Friedman of The Brad Blog, broadcasting on Progressive Voices. In response to yesterday’s post he sent me this message:
So, here is that explanation from MMT economist Stephanie Kelton via the following article:
We Must Spend Our Way to Recovery, Says Economist
“How are you going to pay for it?,” a standard retort to Medicare for All, seems to have melted away. Today, how can we not pay for it?
on April 2, 2020
The recently passed $2.1 trillion stimulus proves that Congress has always had the power to fund big spending packages, without worrying about how to offset the costs. That is according to Modern Monetary Theory, an economic school of thought that’s been gaining prominence in recent years, including among rising progressive political stars like Congresswoman Alexandria Ocasio-Cortez.
Stephanie Kelton, Modern Monetary Theory’s most prominent advocate, spoke to Capital & Main about the federal government’s response to COVID-19 and the oncoming economic recession. Kelton is a professor of economics and public policy at New York’s Stony Brook University. She has served as a chief economist for Democrats on the U.S. Senate Budget Committee and as an advisor to Senator Bernie Sanders’ 2016 and 2020 presidential campaigns. Her new book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, will be published in June.
This interview has been edited for length and clarity.
Capital & Main: Congress and the White House have passed the biggest aid package in U.S. history. How is the government going to pay for this massive spending bill?
Stephanie Kelton: Congress always has the option to write a bill that isn’t “paid for.” They give the Fed instructions that they’re going to be spending money, and the Fed makes the payments without offsetting that spending. In other words, it adds to the deficit.
But in Washington-speak, “pay for” means no-deficit spending. How are you going to fully offset your spending so that it doesn’t add to the deficit? When the Democrats won back the House in 2018 and Nancy Pelosi became speaker, they passed a rules package that reinstated PAYGO, a budget rule requiring all new spending to be offset with either budget cuts or tax increases.
The federal government is already expected to run a budget deficit exceeding $1 trillion this year. Is this a problem?
No — it’s exactly what we need to happen. I would like to see the deficit increase significantly for proactive reasons rather than seeing the deficit increase the ugly way: because we allow the economy to collapse.
“Congress always has the option to write a bill that isn’t ‘paid for.’ But in Washington-speak, ‘pay for’ means no-deficit spending.”
The way we talk about the deficit is mostly wrong. The point that Modern Monetary Theory makes is that the government’s deficit is by definition a financial contribution to some other part of the economy. So we don’t want to lament, hand-wring or complain about an increase in the size of the government deficit, which is nothing more than a bigger financial contribution. Their red ink is our black ink.
All we ever talk about is the government deficit from the perspective of the government’s balance sheet. That’s not what’s important. Let’s look at it from the perspective of the rest of us: It’s a financial contribution into our bucket.
We were already on track to have deficits in excess of $1 trillion this year. Now we’re passing legislation. Spending is also going to shoot way up to support the weak economy, and taxes are going to collapse. So deficits are going to be orders of magnitude above a trillion dollars.
During the 2008 Great Recession, Congress passed a stimulus bill that ultimately wasn’t sufficient, and didn’t take a second shot at legislation. Is the recent aid package going to be enough? If not, do you think the political reality in Washington has shifted so that additional spending can be rolled out as needed?
I absolutely do, and that’s reassuring. Congress has passed three bills for $8.3 billion, $104 billion and just over $2 trillion. Already, President Trump was tweeting that phase four needs to be $2 trillion for infrastructure investment to put people back to work. Democratic Speaker Pelosi was on TV talking about a phase four.
But the government is dropping coins in our pockets with strings attached: “Here’s a loan, you’ll pay it back.” There are loans to businesses. And rent, mortgage and tax deferrals are just another form of a loan. That’s not telling somebody, “Keep that money and do something else with it.” That’s telling somebody, “You don’t have to send that money right now, but in a few months’ time, you’re going to owe for your past rent, as well as your current rent.”
“The next package absolutely has to include a big beautiful pot of money for state and local government.”
It’s not how I would have designed it. I’d be more optimistic if they were learning some of the other lessons from 2008 to 2010.
What are the lessons you hope Congress will apply from the last recession? And with more government spending expected, what course should Congress pursue?
In 2008, more than a third of the $787 billion American Recovery and Reinvestment Act, or the so-called Obama stimulus, was tax cuts. That was designed to get votes from Republicans, which it didn’t end up getting anyway. That didn’t do much.
“The St. Louis Fed has some extraordinarily grim numbers. They’re projecting the unemployment rate could hit 32%, placing 47 million jobs at risk. That’s worse than the Great Depression.”
We have a different kind of crisis today. First, we have to deal with the virus itself by getting money and resources—like ventilators and personal protective equipment—to frontline health care workers. There has to be a major commitment to prevent our health care system from collapsing.
Then, job losses. The St. Louis Fed has some extraordinarily grim numbers. They’re projecting the unemployment rate could hit 32 percent, placing 47 million jobs at risk. That’s worse than the Great Depression. Levels of unemployment that are way into the double digits — you’re not going to snap back from that. There’s not going to be any “V shape” recovery. This will be catastrophic.
What would I do? Not allow the unemployment rate to spike like that. The goal should be to keep workers on payroll, as we keep them out of the workplace. Keep them whole through this transition period, so that they can pay their rent, mortgage and car payments; their cable, electric and water bills. People are locked into those recurring payments. If you start having a bunch of people miss their payments, you’re looking at the potential for a banking crisis as defaults cascade through the system.
For the rest of this fine article just hit the following link:
All of this paints a fairly rosy picture, but our current way of handling economics has been so engrained in our culture it will be very difficult to implement MMT in my view. It will take a game changing landslide election to do so in this country. Ironically, because of Trump’s handling of COVID-19, we may get this, short of a revolution.
Here is more for what MMT might do for the Green New Deal:
Hot & Bothered: Bold Visions for a Green New Deal
We can only decarbonize fast and reduce social inequalities at the same time with a new political economy.Daniel Aldana Cohen and Kate Aronoff ▪ April 4, 2020
Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez on November 14, 2019 introducing legislation to transform public housing with the Green New Deal (Chip Somodev/Getty Images)
This podcast episode is part of a special mini-series on Designing the Green New Deal. The Hot & Bothered podcast will return from a hiatus next Thursday, April 9. Tune in with Kate and Daniel for weekly episodes on how we tackle climate change amid the coronavirus emergency.
To win a Green New Deal, we need to deepen and expand mass movements and coalitions. Last fall at the University of Pennsylvania, we organized a massive conference on Designing a Green New Deal, with contributions by academics, journalists, organizers, and designers. In this four-part mini-series, we bring you audio of the discussions.
We can only decarbonize fast and reduce social inequalities at the same time with a new political economy. And only new methods of physical design, from buildings to landscapes, will successfully build a new no-carbon world. This episode features Stony Brook economics professor Stephanie Kelton, author Kate Aronoff, Architecture Lobby Founding Member Peggy Deamer, author and SCAPE Founding Principal Kate Orff, and Sunrise Movement executive director Varshini Prakash—whose signing takes the conversation to a whole new level.
Daniel, Kate, and special guest (and conference co-organizer) Billy Fleming introduce the episode. The conference was co-hosted by the McHarg Center for Urbanism and Ecology and the Socio-Spatial Climate Collaborative, or (SC)2.
Audio Player00:0000:00Use Up/Down Arrow keys to increase or decrease volume.
Podcast (hot-bothered): Download
Check out the full Hot & Bothered archive here. Hot & Bothered is produced by Colin Kinniburgh. Music: Mercurias Meet Victor Rice, “Carregar (Instrumental),” courtesy of Total Running Time.
The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (Stephanie Kelton, Public Affairs)
We all must reimagine what our world should and could be like for the rest of the 21st century and beyond during this awful year of 2020. Drop me notes if you think the MMT can be a big structural part of what will become, optimistically, a brave new world.
Now here are some of today’s articles and notes on the horrid COVID-19 pandemic:
Here is more climate and weather news from Monday:
(As usual, this will be a fluid post in which more information gets added during the day as it crosses my radar, crediting all who have put it on-line. Items will be archived on this site for posterity. In most instances click on the pictures of each tweet to see each article.)
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Guy Walton “The Climate Guy”