Modern Monetary Theory: The Last Progressive Left Standing
By Warren Mosler
(Editor's Note: This post is cross-posted from The Huffington Post at the request of the author)
The headline progressives are in full retreat. They have found out the hard way that their bleeding heart pleadings -- 'yes, the financial markets might destroy us, but how can we cut this or that worthy cause' -- don't cut it. They have fallen into the out of paradigm world that takes it as gospel that the U.S. is at imminent risk of becoming the next Greece; where financial markets can cut off funding and ability to spend and force the giving up of national sovereignty and begging for an IMF bailout, or else, face the option of default or printing money, which launches one down that slippery slope to hyperinflation... bla bla bla...
And so to show they too are indeed fiscally responsible grownups who wouldn't think of instigating such a financial crisis, the headline progressives more than agree that the federal deficit is indeed a very dangerous long term menace that demands appropriate attention. Accordingly, President Obama, on behalf of the Democrats, has proposed over $4 trillion of his version of deficit reduction over the next ten years, with "everything on the table" including Social Security and Medicare. The main difference seems to be that the Democrats include tax hikes, while the Republicans only support spending cuts.
The great irony is that with productivity at an all-time high, and with no actual shortage of the real resources needed to take care of our seniors at a level that makes us feel proud to be Americans, to care for the sick, to educate our children, and to provide for the public infrastructure and institutional structure that facilitates and fosters private sector output and employment, there has never been a better time for the progressive agenda.
The few lonely progressives, who do understand all this and have stayed the course with the progressive agenda, are those who recognize what has come to be known as Modern Monetary Theory (MMT). It is these MMT progressives who realize that a currency like the U.S. dollar is a simple public monopoly, and that the following are facts of actual monetary operations:
1. Federal taxes serve to regulate aggregate demand, not to raise revenue per se.
2. Federal borrowing serves to regulate the term structure of interest rates, and not to fund expenditures.
In other words, MMT teaches us there is no such thing as the U.S. Government running out of dollars, that the U.S. Government is not dependent on foreign borrowing to be able to spend, and that hyperinflation comes only from sustained over spending far beyond full employment and our capacity to produce. Nor can the U.S. government become the next Greece or Ireland. MMT teaches that financially, joining the euro zone put those nations into the positions of U.S. states. So while California or Illinois can become the next Greece or Ireland, and need a federal bailout to avoid default, just like Greece and Ireland needed a bailout from the European Central Bank, the widely proclaimed analogy of Greece and the U.S. Government is entirely false, and tragically counterproductive.
And as for the U.S. national debt and all the talk about borrowing from China, MMT recognizes that U.S. Treasury securities are, functionally, nothing more than savings accounts at the Fed, which the Fed in fact happens to call securities accounts. Yes, the trillions of dollars of U.S. national debt is nothing more than that many dollars in savings accounts at the Fed. So when China buys Treasury securities, which we call going into debt to China, all that happens is the dollars they got from selling things to us that went into their checking account at the Fed, get shifted to their savings account at the Fed. And when we pay back China, which happens every month as some of their Treasury securities come due, all the happens is the Fed shifts those dollars (plus interest) from China's savings account back to China's checking account, all on the Fed's books. (note: there are no grandchildren involved in this process!)
Confronted with MMT, all mainstream financial arguments for defunding and 'strengthening' Social Security and Medicare utterly fail. All mainstream financial arguments for defunding education utterly fail. All mainstream financial arguments against maintaining desired public infrastructure utterly fail. And unemployment, for all practical purposes can be eliminated in short order.
For an example of an MMT supported progressive policy initiative, many MMT progressives today favor the immediate suspension of all FICA taxes, which are highly regressive, punishing taxes on people working for a living that no progressive should tolerate. Eliminating FICA fixes the economy the progressive way, from the bottom up versus the highly regressive top down trickle-down economics practiced by the current administration that would have made even President Reagan blush. Yes, the last two years have seen positive real growth, but with employment remaining near post depression lows, and wages under continuous downward pressure, executive compensation just hit new highs and stocks more than doubled, as this administration presided over the largest transfer of wealth from the least to the most wealthy in the history of the world. Many headline progressives, however, are violently opposed to cutting FICA taxes, fearing such cuts would be considered a defunding of Social Security. And without an understanding of MMT, they are not equipped to successfully defend the combination of FICA cuts AND true Social Security and Medicare strengthening (increased benefits) supported by MMT equipped progressives.
With no actual shortages of food, clothing, and housing for our seniors, no disagreement that they are not being over provisioned by Social Security payments, and a severe shortage of aggregate demand in the U.S. economy in general, MMT progressives categorically reject the notion of any kind of reduction in Social Security or Medicare benefits or eligibility, and support both increased benefits and FICA cuts.
The knowledge that the only constraints on our prosperity are the limits of our productive capacity and available resources, which include everyone who is willing and able to work, sets MMT progressives far apart from today's headline and out of paradigm progressives (and conservatives) who are handicapped by the false notion that deficits per se are a problem, as they support deficit reduction even in the context of today's massive shortfall of aggregate demand. MMT progressives know the US can afford to defend itself, ensure taxes are low enough relative to spending to allow the private sector to employ anyone willing and able to work who doesn't already have a good job, allow government to provide, maintain, and fund the public infrastructure we deem appropriate, including the military, legal system, Social Security system, transportation, health care, and research and education, including the funding of private sector contractors for public purpose as deemed appropriate.
So if you consider yourself populist and progressive, and if any of this rings true and you want to get up to speed on MMT, please read The 7 Deadly Innocent Frauds of Economic Policy.
Moreover, just so you don't have to take my word for it, here are what some of the headline progressive economic and political organizations are saying about the federal budget. And note that none are willing to challenge the Clinton spin on surpluses or challenge the notion that federal deficits per se are to be avoided if possible:
CBCP: "We, like most others who analyze fiscal policy developments and trends, believe that the nation's fiscal policy is on an unsustainable course." and "Economic Downturn and Legacy of Bush Policies Drive Record Deficits"
CPC (Congressional Progressive Caucus): "Eliminates the deficits and creates a surplus by 2021"
Nease Reader, A Leaner, Meaner Defense Strategy Can Reduce the Deficit