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An MMT Fiscal Responsibility Narrative: Some Truths After 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 after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and Thanks to Tadit Anderson, Mitch Shapiro, Nihat, James M., Marvin Sussman, joebhed, Clonal Antibody, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Lambert Strether, maltheopia, Ian S., for contributing significantly to the critical evaluation of the earlier version.

More comments, criticisms, recasting in more effective form, are all welcome.

The Narrative

-- The US Government can't involuntarily run out of fiat money, 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!

-- 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. When it creates money, over and above what it taxes or borrows, it adds it to the private sector. Since this is the case, it's clear that present proposals to reduce the deficit by an average of $400 Billion over the next ten years are sure to remove net financial assets from the private sector.

--The Treasury can keep borrowing money if we want it to. There's no limit on the Government credit card 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 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 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 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;

-- 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.

-- 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.

-- 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.

-- 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.

-- 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.

-- Austerity requiring budget surpluses cannot work in the United States economy because surpluses, defined as tax revenue exceeding spending, destroy net financial assets in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss in net 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 net financial assets from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, 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 deficit spending producing outputs of real social value.

-- 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 fiscal responsibility is Government fiscal policy creating 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's 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.


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. 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 crisis is a crisis of a failing economy and growing economic inequality in which only the needs of the few are served. MMT policies can help to bring an end to that 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 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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Submitted by lambert on

... dominates US discourse, I wonder how much the experience with Confederate dollars affects people's thinking?

(Of course, the Confederate Dollar failed because the Confederacy failed, not because of arbitrary financial ratios...)

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Submitted by letsgetitdone on

thinks the confederacy ended up with worthless money because it wouldn't tax.

Btw, have you seen the discussion on this at NEP here and here.

Submitted by YesMaybe on

Surely, since the US can create as many dollars as it decides to, money is not a real constraint. However, there are real constraints, and they have to be understood and taken into account.

Under the non-MMT deficit-hawk viewpoint, money constraints (which are fake, but are taken as real through make-believe) serve as stand-ins for all the others. But when we give up on that misconception regarding money, it leaves us with a new problem: how to gauge our constraints and how to structure our plans and policies to be reasonable in light of the constraints.

I'm thinking primarily of energy constraints having to do with peak oil, etc. But there is climate change, water supplies, etc. The power to print money may free us from some deficit scare-monging. But the freedom gained is not absolute (we can't print energy), and its limitations must be faced, whether wittingly or not.

Submitted by YesMaybe on

I don't harp on this topic because I have anything against MMT, and I certainly am not in favor of austerity or deficit-hawking. The reason is that when you tell people the government can just create money, the natural response for many many people is "there's no such thing as a free lunch." So the person who's presenting the MMT outlook had better be prepared for it with either (a) an explanation of how in fact there are free lunches to be had, or (b) an explanation of how every thing is 'paid for' once the idea of hard money is abandoned.

Submitted by YesMaybe on

That's an excellent post. In the general outline, I think it's right. There is a strong suggestion there that governments implementing MMT would have to make a strong push towards sustainability. And it also points out that the same is true in the non-MMT, though of course countries aren't actually doing it. Still I am far less sanguine on two points which I think are essential:

1. This quote from Randy Wray: “Very large nations like the US and China can indeed run up global commodities prices and he is right to be concerned about equity issues. However, I am sure he will agree we are a very long way from global full employment of resources, and rising resource prices will increase flows, anyway.“ Here, I fundamentally disagree. The world is at peak oil. Granted there's a lot of oil still out there, but if we tried to increase production or maintain it at the current plateau for another 5-10 years, it would just result in that much steeper a drop when it comes. And when you factor in carbon dioxide, it clear that even if we weren't at full employment of resources, when it comes to fossil fuels we absolutely must not increase our use. The primary resource which is being underutilized and which it would be good to use fully is labor (i.e. eliminate unemployment). However, if this comes with increasing fossil fuel usage (which of course is required if we're to build massive solar panel factories, housing, etc.), that's a somewhat dubious bargain. And if it labor is to replace fossil fuel energy, we're faced with the issues of scale (how much energy is in a barrel of oil compared to the amount of work a person can do in a year).

2. Regarding whether we can have economic growth without increasing use of non-renewable resources. Or, more to the point, in the face of decreasing use of non-renewable resources and climate change. As a practical matter, it just doesn't look very good to me. I agree that it's possible in theory and up to a point. For example, if a transition away from fossil fuels using fossil fuels had been undertaken 20 or 30 years ago. But I'm very doubtful that that door is still open to us. I think we are past the point of no return as far as net energy (from all sources combined), in the sense that we will have a decline and that we can no longer prevent that. We might be able to cushion the fall, but I see no realistic chance of maintaining the current levels of prosperity (nevermind giving the rest of the world the level of prosperity Americans currently have).

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Submitted by letsgetitdone on

is for increasing use of fossil fuels; and I'm certainly. I'd introduce a crash program for transitioning to solar and wind within 10 years. Real Manhattan Project stuff. I think it's a matter of survival. I'd ration fossil fuels and have price controls right now; and I'd implement a Green New Deal using MMT. I think most MMT economists would favor that.

I don't think you've really discussed my point that economic growth can occur without increasing our use of non-renewables. I think that's possible because most of the areas of growth will not be resource intensive. I guess we'll just have to see.

Submitted by YesMaybe on

Crash program, mobilization, price controls, rationing, etc. is along the lines of what I think is sorely needed. Unfortunately, I don't see a snowball's chance in hell of that happening. But I'm definitely with you on the need for it.

Now, regarding economic growth, it does seem to get hairy. Perhaps you've read this article by Dr. Tom: This is pretty well-reasoned in terms of asymptotic analysis (i.e. we certainly won't be able to have exponential growth for too long a time). But it is pretty detached from our concrete situation. If we measure GDP the way it's measured now, it seems to me that any move towards sustainability will reduce GDP. There are things like permaculture and natural farming, where we genuine gains can be made while reducing fossil fuel usage. But when it comes to manufacturing (whether we're building solar panels, batteries, trains, whatever), it is still an industrial process which will have as a bottleneck natural resources and capital (in the sense of actual factories, not dollars) which also requires natural resources for its production. We can retool factories we have now, but it's not clear it's economic growth, since we're replacing one thing with another. And, fundamentally, if we implement rationing on energy, it seems pretty logical that energy supply will be the economy's bottleneck. And I think that would mean that, unless we can develop renewable energy fast enough to make up for the decrease in fossil fuel usage, the bottleneck would be getting narrower and the economy would shrink. To put it plainly: I think there has been a good case made that net energy and economic growth go hand in hand (Gail Tverberg has written some about this).

Of course, maybe a complete transition mobilization could actually get renewable energy developed at a sufficient scale and speed. I honestly don't know, it doesn't seem like that has been discussed too much in peak oil circles (probably because they realize there is no way it's going to happen). They generally look at current trends and ask what would happen if they continue or if one double or tripled or whatever some rates.

P.S. though: what resources do you think Randy meant were underutilized (besides labor)?

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Submitted by letsgetitdone on

and agree with it. I don't think one can escape the argument that there are physical limits to growth. But, for me the overriding question is whether we can stabilize population growth, transition to renewable resource use and produce enough for that population so that everyone can be free from want before we run out of resources. I don't know whether we can do that, but I think that's the task ahead, and that task is going require both increased world economic growth and much more equal distribution of the fruits of that growth across the world's population than we have now.

On Randy Wray's unused resources, I think he's referring to labor idled all over the world by neoliberalism and finance capitalism.

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Submitted by letsgetitdone on

There are real resource constraints. MMT always recognizes the distinction between nominal financial resources and real resources. Only the former are unlimited.