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An MMT Fiscal Responsibility Narrative: Some Truths After A Second Crowd Sourcing Revision

letsgetitdone's picture

Many MMT posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off hand, and I may have forgotten something, I couldn't think of a brief positive MMT narrative related to fiscal responsibility containing primarily the truths, rather than the myths.

So, here's my version, revised, a second time, after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and, a second time. Thanks to Tadit Anderson, Mitch Shapiro, Devin Smith, Dan Kervick, Nihat, James M., MRW, Marvin Sussman, joebhed, Clonal Antibody, Calgacus, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Charles Yaker, Lambert Strether, maltheopia, Ian S., Tyler Healy, PG, for contributing significantly to the critical evaluation of the earlier versions.

More comments, criticisms, recasting in more effective form, are all welcome. But this will be my last round of crowd-sourced revision. I hope all readers will feel free to use this version as they think is best to spread the MMT message about fiscal responsibility. To boil that message down: fiscal responsibility is about the impact of fiscal policy on people; it's not about the old time religion of its impact on a supposedly limited supply of gold standard-based money.

The Narrative

The first four points in the narrative offer some conclusions

-- Austerity requiring budget surpluses cannot work in the United States economy, because surpluses, defined as tax revenue exceeding spending, destroy money in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss of financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. It is mathematically IMPOSSIBLE for the USA to simultaneously run a government surplus, have a trade deficit and increase aggregate private sector wealth! (h/t Ian S.)

-- It is fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove more money from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, a declining rate of addition to financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy, and the Government's ability to sustain greater levels of deficit spending producing outputs of real social value without triggering inflation.

-- REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), while also maintaining or increasing fiscal sustainability, viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

-- REAL fiscally responsible policy, if it works generally as expected, creates greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It is political malpractice to give greater priority to that kind of abstraction than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Let's put an end to the domination of Washington by that kind of malpractice. Let's put an end to the current misguided fiscally irresponsible campaign to promote a “Grand Bargain” that is sure to do nothing but destroy more private sector money and jobs than would be the case if we either did nothing or increased the deficit and created a full employment budget.

-- Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. No solution to this “fiscal crisis,” bipartisan or partisan, is needed. What is needed is a solution to the political problem of getting SS's funding guaranteed in perpetuity by Congress, just the way it guarantees funding for Medicare Parts B and D.

-- The same applies to the so-called Medicare crisis. It too is phoney, and can be solved easily by Congress guaranteeing funding in perpetuity to Medicare Parts A and C.

-- More generally, there is no entitlement funding crisis in the United States, except a political crisis where US politicians are determined to ignore their constituents and cut back on an already inadequate safety net either because they believe in, or want others to believe in false ideas about fiscal responsibility and nature of the Government as a giant household.

And the rest of it provides the reasoning underlying them.

-- The US Government can't involuntarily run out of its own fiat money (USD), since it has the constitutional authority to create it without limit. Congress constrains and regulates this ability. But its existence is still a stubborn fact!

-- Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that's why they can run out of Euros. The US is the issuer of Dollars; so it's supply of dollars is limited only by its desire to create them, and its ability to mark up private accounts, and that's why it can't become Greece, Ireland, or any other Eurozone nation.

-- In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector, and destroys it. When it creates money, it adds it to the private sector. A deficit is the net amount of money creation minus the amount of destruction due to taxation. A surplus is the net amount of money destruction minus the amount of creation due to Government spending. (h/t Golfer1john)

-- Since this is the case, it's clear that present proposals to reduce the deficit by an average of $400 Billion/year over the next 10 years are sure to remove money or Treasury securities (assuming deficit spending is accompanied by issuing debt) from the private sector that otherwise would have been created there in the absence of deficit reduction.

-- The Government of the United States offers the functional equivalent of interest-bearing savings accounts to investors, usually wealthy individuals, large corporations, and foreign nations. The savings accounts are usually called US Treasury securities, and the sum of their face values is called the debt-subject-to-the-limit; or more colloquially, the national debt, even though comparable savings accounts in banks, are for some reason, not called bank debt. (h/t PG)

-- The Treasury can keep accepting deposits (“borrowing money”) and issuing securities if we want it to. There's no limit on this Government “credit card,” just as there is no limit to the deposits a bank can accept, except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money, due to a failure to raise the debt ceiling between now and March 31, 2013, it will clearly be the fault of the Congress for refusing to grant further authority to the Treasury to elicit and accept further deposits, also known as refusing to raise the debt ceiling!

-- Even though it may seem that foreign nations can place a limit on “the credit card” by refusing to buy Treasury securities at auction, foreign nations holding dollars basically have a choice between continuing to hold them and earning no income, or earning interest on them by buying securities. So, as long as other nations are exporting to the US and accepting dollars as payment; those dollars are likely to be invested in the interest-bearing “savings accounts” known as Treasury securities.

-- Bond markets don’t control US interest rates; the Federal Reserve Bank does by exercising its authority to meet its target interest rates. Bond vigilantes have no power against the Fed. If they fight against its interest rate targets by trying to bid them up; then they will “die” in the flood of reserves the Fed can unleash to drive the interest rates down to its chosen target. The Fed can't control the money supply. But it does control the price of it with its interest rate targeting.

-- The bond markets will buy US debt as long as we keep issuing it; but if one insists on considering the hypothetical case where the markets won't, the US would still not be forced into insolvency; because the Government can always create the money needed to meet all US obligations.

-- The US is obligated by the 14th Amendment to pay all its debts as they come due. Nevertheless, our national debt cannot be a burden on our grandchildren; unless they wish to make it so by stupidly taxing more than they spend. This is true because, assuming the debt ceiling is raised when needed, or repealed, we have an unlimited credit card to incur new debt at interest rates of our choosing. So, we can “roll over” our national debt indefinitely. Or, alternatively, we can create all the money we need to pay off the debt-subject-to-the-limit, without ever incurring any more debt. One way to do this is through Proof Platinum Coin Seigniorage (PPCS). A second way is through subordinating the Fed to Treasury and then using the Fed's ability to create money out of thin air to pay back all debt instruments (“savings account balance”) when they fall due. The first way is legal now. The second is constitutional, but would require politically unlikely action by Congress to authorize it.

-- A fiscal policy that measures its success or failure in reducing deficits, rather than by its impacts on public purpose, is fiscally irresponsible and unsustainable. The deficit is a meaningless measure because the US Government has no limits on its authority to create/spend money other than self-imposed ones, so neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government's capacity to spend Congressional Appropriations at all. Also, a deficit/debt oriented fiscal policy ignores real outcomes relating to employment, price stability, economic growth, environmental impact, crime rates, etc. which actually can affect fiscal sustainability by strengthening or weakening the underlying economy, and, with it the legitimacy of the Government and its fiat currency. In short, responsible fiscal policy is not about its impact on Government debt. It's about its impact on people!

-- The Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes! So, their supply of dollars is always limited; while the Government's supply is a matter of its decisions alone.

-- However large the Federal Debt becomes, it cannot be a “crushing burden” on our Government, because Federal spending is virtually costless to the Government, if it wants it to be.


Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation, and smack of a campaign to create hysteria among the public. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs. It is a phoney crisis!.

The only real crises is one of a failing economy and growing economic inequality in which only the needs of the few are served, and also one of lack of political desire or will to solve these real problems. MMT policies can help to bring an end to the first economic crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to the political action we need to solve the political crisis and eventually toward fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.

(Cross-posted from New Economic Perspectives.)

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okanogen's picture
Submitted by okanogen on

To make it relevant to current events, start with "The "fiscal cliff" is an artificially manufactured crisis since...."

letsgetitdone's picture
Submitted by letsgetitdone on

crowd source challenge. Word smith to bits!

Btw, Jamie Galbraith and Stephanie Kelton starred today at the EPS meeting in DC. Carried by C-Span, Video is here. Stephanie's presentation is here.

Other interesting presentations there, as well. Definitely an anti-fiscal cliff conference. Might have some memes to pick up!

athena1's picture
Submitted by athena1 on

Modern Monetary Theory is an economic system based on the principals of social justice and the observation that an economic system supposedly without a goal is like a highway system not designed to connect cities. Everything people design has a purpose, and the purpose of the current economic system is to redistribute wealth and power upwards. There is an alternative which is scientifically valid and based in morality. It's called Modern Monetary Theory.

It was developed by x y and z. Bill Black is a former Wall Street regulator who threw a lot of banksters in jail. So and so is a whatever. We invite you to lean more here:

Submitted by lambert on

... because the entire ZOMG!!!! Teh Debt!!!! discourse in DC right now is based on an utterly false understanding of the real operations of the money system. MMT by contrast is driven by a quest for evidence drawn from history and from investigation of how money is handled in actual practice today instead of by made up origin myths and simplified diagrams in textbooks. MMT is the real deal.

I urge any readers who have regarded this subject matter is peripheral or optional or not of interest to think again and study these posts carefully. These fiscal matters are not precisely the belly of the best (rents are that) but they are certainly vital organs that must be disabled...

okanogen's picture
Submitted by okanogen on

MMT completely defuses the phony "Fiscal Cliff" and the need for any kind of "Grand Bargain" at all. It's a fake, artificial, manufactured crisis, wurlitzered by the wealthy, to herd the sheep to slaughter.

athena1's picture
Submitted by athena1 on

The people we need to "win for Christ" (LOL) are the "Krugman and Krugman only" types. And personally, I still don't really get the difference between Krugman's working hypothesis and MMT?
And thanks, LGID for helping me with the "bond terrorists" thing.

I just still need the difference between Krugman and MMT dumbed down a bit more.

Just to know what you're working with, my impression is that there might not BE a difference? I'm thinking Krugman might actually be proposing the same macro theory but kinda doesn't want to "see" it? Or something?
(Apologies to Krugman if he reads here. If you do...I'm firmly on Team Krugman is NOT some sold out hack. I absolutely believe Krugman is a Good Guy.)

Clonal Antibody's picture
Submitted by Clonal Antibody on

boils down to the issue of deficits. Krugman maintains that managing deficits is a relevant policy instrument - in other words, deficits should not be reduced now, but will need to be reduced at some future date. And that deficit increases or reductions are the way to conduct fiscal policy.

MMT maintains, that deficits are never a policy instrument. Deficits will go up and down with economic conditions, and should never enter a policy discussion. The relevant policy variables to look at and address are full employment of resources (citizen employment in the main,) inflation and economic mal-distribution of income and wealth. These issues are to be tackled via the two major policy instruments of spending and taxation. Period. Therefore budget deficits per se are never of any concern. The real concerns have to be

1) are you spending enough, or too much in the aggregate
2) are you taxing enough or too much in the aggregate
3) what are the areas for federal spending that are beneficial to the society
4) what are the areas for federal spending that are detrimental to society
5) what should the level of taxation be in the aggregate.
6) can we set taxes as automatic stabilizers - without it becoming a political football in every congressional session.
7) where should taxation be directed? What behaviors do we have to curb? What behaviors do we have to encourage?

athena1's picture
Submitted by athena1 on

I think I actually get it. Deep stuff.

"Policy should be based on morality"? And since we're willing to just fucking progressively tax more, the whole deficit issue really takes care of itself? Not "deficits don't matter" but "deficits take care of themselves with progressive taxation"?

Is that it?

Clonal Antibody's picture
Submitted by Clonal Antibody on

Re-instituting progressive taxation without an increase in federal spending will send the economy in a tailspin. Remember that in the aggregate, today we need to increase the money in the system, and not reduce it. Households are repairing their balance sheets (repaying debts!) - this means that the money in the system is reducing - remember that debt **EQUALS** money - private debt or government debt. Private debt always has to be repaid - repayment always means destroying money - a reduction in money supply. Government debt never has to be repaid - taxation is the destruction of money - a reduction in the money supply.

Today, federal spending has to be increased, and taxation on the bottom has to be reduced (in other words a FICA holiday) - The rich can be taxed but that will only reduce the savings of the rich - it will have no beneficial impact on the economy as a whole. Only a detrimental one without increasing Federal spending - however, it will reduce the power of the rich. The federal spending on the bottom will have the maximum impact on the economy, as the poor spend all of their income, and have very low savings.

The purpose of government spending has to be (let me rephrase St.Paul) to empower the least among us - and (to rephrase Matthew) make it harder for a rich man to become more powerful!

letsgetitdone's picture
Submitted by letsgetitdone on

Very well put and seems to help athena1. I really like the list of important questions, too.

letsgetitdone's picture
Submitted by letsgetitdone on

I'm ready for that yet; but all help is appreciated!

Submitted by Hugh on

It is a good start. This is clearer than other explanations of MMT. The best thing would be to pass it to people who don't know what MMT is and see if they understand the concepts. I have often said that I developed my own resources approach because it is conceptually much simpler and has far less intellectual baggage than a straight money approach like MMT.

Inflation is mentioned only once and almost as an afterthought although interest rates are discussed. Inflation is a big concern for many when they first come across a discussion of fiat currency. So I would address the inflation issue as quickly as possible, as when the power of fiat money creation is raised.

Inequality is only mentioned once, and that in the conclusion. ("Crises" in the last paragraph should read "crisis".) It is actually quite a bit more important than that. MMT tends to dwell on money creation and aggregates but most of what keeps real social purposes from being met is distribution. Again distribution of resources is a lot less charged than income and wealth distribution.

The gold standard is only mentioned once. It too is important because we were on a gold standard until 1971 and most economic thinking, including that of so-called liberal economists like Krugman, or in the comparison of the government to a household, still tacitly assumes we are on a gold standard.

For athena1 above, Krugman is a Keynesian, that is he is a neoclassical economist, as most of the economics profession has been for the last 40 years, but in addition he also believes in temporary deficit spending to boost aggregate demand. I tend to be very critical of Krugman. He doesn't understand fiat, money, or debt and he doesn't understand the limits of aggregates, and so does not understand the problem of inequality and distribution.

athena1's picture
Submitted by athena1 on

I kind of think people who get all het up over that should be met with mockery and scorn, and exposed for the Randians they are. There are a lot of covert libertarian concern trolls out there. The only thing that makes them hard to sniff out is the fact that progressives make jokes that are identical to their arguments.

Cujo359's picture
Submitted by Cujo359 on

Even though there's a lot of explanation of what MMT tells us, I'm not seeing why. I suspect that's because there's something I need to "unlearn", IOW, old ideas about money that ought be re-examined.

I have a very simplistic concept of what money is, which is that it's essentially a way we keep score of how much of the economy we're allowed access to. If I work for someone, he doesn't have to pay me in a stack of frozen food and ten gallons of gas this week, and an easy chair next. He gives me money in exchange for the work I've done for him, and then I use it to buy (or "access") what I need.

I sort of get why outstanding debt is a money supply, because that means that we get access to the resources we need before we've earned them. But I can gain that access with money I've saved, too. What's the difference, besides that I have to pay interest on debt?

I view the real source of wealth in an economy to be all the things that are in it that can produce what we need. It's bulldozers, computers, and the skills people have, not the stacks of virtual cash in banks. Debt's just one way we allow access to those resources.

I'm not arguing so much as explaining that when we use our household metaphors to try to understand how money works in a national economy, it's just that it clearly works differently for us than it does for a government that can issue its own currency. How does that work? How much currency is enough, and how do we figure that out? Those are the sorts of questions that occur to me. It seems to me that the question of how much currency there is ought to be related to the size of the "real" wealth-building tools available, but maybe that's not really a consideration. When I can't answer questions like that, I feel like I don't understand what MMT is.

Submitted by Hugh on

I talk in terms of resources, but my ideas are very similar to yours. Money is the medium through which we distribute access to society's resources. Most people have brain freeze as soon as money enters the conversation. But if instead we ask first what kind of a society do we want, what kind of lives do we want for ourselves and everyone else in our society, then it becomes about how to distribute our resources to create that society. Ask someone if it makes sense to concentrate most of our resources in the hands of an unproductive few and they will think that's nuts. Ask them if they think that billionaires should have most of their wealth taxed away from them, and they will react in horror. People have been conditioned to think about money in certain ways, to give it mystical powers as if it was an end in itself. That is why I hold a resources approach is superior to money approaches, including MMT, because the social purpose of the resource and its distribution is there every step of the way. Resources are never divorced from their social purposes, the kind of lives we want, as money is from its.

Cujo359's picture
Submitted by Cujo359 on

I also think in terms of resources, when you get down to it. Things we haven't yet made into something, like trees and iron ore, are a part of our wealth, too, as is land. I'm an engineer, so I think in terms of what is required to create something. Viewed that way, the American economy looks worse than it did forty years ago. One can also take the view that an economy is really about making it possible for people to have what they need, and enough of what they want to be satisfied. In that view, I also think we are worse off from that point of view than we were forty years ago. Yes, we have iPhones, computers, and smart bombs now, but we also have more poverty, and far more people unable to get the health care they need.

But I have to point out one thing I don't quite agree with - money's power isn't mystical. At least, it's not to individuals and businesses. For us, money's a resource, too, and if it's a scarce resource, our personal economies are in bad shape. When we don't have money and can't acquire debt, we can't acquire the resources to do what we do. That's another thing people need to keep in mind when discussing monetary or fiscal policy. Our mental model of money is a necessary one as individuals, however badly that works as a mental model for a national economy.

Cujo359's picture
Submitted by Cujo359 on

A St. Bernard of some sort. I found the image here many years ago. I love his expression, which has that put-upon look that seems to be saying "What are you bothering me about?"

athena1's picture
Submitted by athena1 on

What about inflation? (I'm starting to think I've argued with/learned from incognito PK at the big skeptic forum before a while back. Hmmm...)

I'm pretty sure Krugman would argue if you increase the quantity of something, anything, it's value decreases. So, this would also apply to fiat currency units.

What's the response to that? Because I'm thinking giving currency to people and not the FIRE sector like QEs do, is fundamentally different? (If something about QE and ZOMG HYPERIFLATION woo is the answer.)

Or do we not have to worry about that until demand is back up?

Submitted by Hugh on

Inflation can, doesn't have to, but can occur in situations where you have too much money chasing too few goods. The Fed has pumped trillions and trillions of dollars into the banks and through them to the rich and there has been little inflation because the velocity of that money in the real economy is pretty close to zero. Now that money has created bubbles in stocks and commodities, but that is another story. Speculation in commodities has indirectly raised prices (inflation) on some goods, like gasoline. But the current picture remains what I call inflation within deflation. Overall, we have deflation but there is still some selective inflation going on.

But even if you increase money going to people who live in the real economy, inflation will not automatically happen. Currently, we have both overcapacity and high unemployment. In this kind of situation, new demand can be met without increasing prices up to the point where there is no more old capacity or unemployed workers available.

In my resources approach, I note that there are four ways resources are distributed by government: spending, taxation, legislation, and regulation. This is something that I think gets lost in MMT and other money explanations. One does not create money for money's sake but to effect a different distribution of society's resources.

athena1's picture
Submitted by athena1 on

That's what I was thinking based on what Someone very clearly explained to me Somewhere. My delivery was clumsy, but I grok the concept.

FWIW, Someone seemed genuinely intrigued by my original ideas based on Someone else's more socially radical ideas regarding the crisis. Someone seemed to covertly respect Someone else, too. It was all a bit uncomfortable, to be honest, lol.

Submitted by lambert on

You write:

One does not create money for money's sake but to effect a different distribution of society's resources.

Money is created for public purpose, adding... The real question is, "Who is the public?" and from there we get into questions of disenfranchisement, hegemony and so forth.