MMT Part 3: What Good Is It?

In the first two parts of this series we explored what Modern Monetary Theory is.  What are the nuts and bolts that comprise its construction as theory.  The next stage of our discussion should deal with how MMT could be applied in the real world.  How could it help us not only understand the world around us a bit better, but how it could ultimately make it better.  I believe MMT can do that.

Let’s start here:

MMT’ers go to great lengths to disassociate themselves from any particular ideology or political philosophy.  Leading MMT thinkers and authors insist often and loudly that they are simply trying to describe how money and thereby the economy, government and the private sector work.  Whether a capitalist, socialist, communist, or any other -ist, everyone should want to know how the system they exist in operates.  I’ve seen this from my own experience.

That said, observations from MMT often run afoul of cherished conventional wisdom, standard economic orthodoxy, and important political ideologies.  This does not endear itself to closer examination.  I have found difficulty grappling with how some pieces of MMT run counter to some of my own long-held beliefs.  This “friction” creates its own challenge of adoption as a mainstream point of view.

So what do many MMT’ers think we should DO with this theory?  And how does this jibe with the current political discussion taking place around the world about government’s role, size, and functions?  Because this is really what the argument is about.  If the government is the sole issuer of the sovereign currency that underpins our society at every level, then what should the government do?

First some ground rules:

We now know that after reading the first parts of this series that the government can never run out of money. Therefore, affordability is NEVER an obstacle.  The federal government can afford anything it wants to simply by creating more currency with the click of a mouse over at the Treasury Department.  This is a bracing thought that should make you think many nasty thoughts about the majority of our political discussions over the last several years.

That said, it doesn’t mean that government ought to spend as much as it wants.  There are many real and important constraints to unlimited printing and spending:

1) Too much spending can cause inflation.  Too much money chasing too few goods can cause inflation.

2) Too much spending could hurt our exchange rates.

3) Too much spending could take away real resources from the private sector.

4) Government shouldn’t do everything.  Incentive could be undermined.

5) Budgets provide important quality controls to evaluate the effectiveness of government programs.

For example, if the federal government decides that it wants to put solar panels on every building in America in 2015, it can AFFORD to do so.  But is is limited by some very real-world problems.  Do we have enough manufacturers of solar panels to pull it off in the time allowed?  Do we have enough of the natural resources available to make that many panels?  Do we have enough qualified workers to manufacture them?  If we pull all available qualified workers into the solar industry, what will this do  to other industries in the country?

In WW2, the government basically co-opted workers, factories, and nearly every available resource to meet the war effort.  Without strict price controls and rationing, this could have lead to real shortages and runaway inflation.  But at no point did the government run out of money needed to wage the war effort, nor was there any danger of them EVER running out of money to do so.

(Note that defaulting on our national debt was not listed as a consequence of unlimited government spending.  By definition any sovereign issuer of currency can NEVER EVER EVER default on its debts)

Other unintended consequences can arise.  A corrupt government many steer money towards organizations or programs of friends, associates or the well-connected rather than more deserving programs.  Welfare programs at some point and some size could indeed undermine the personal incentive of an individual to seek employment.  Bail-outs and “too-big-to-fail” are also consequences that we’ve seen in our very recent past.

L. Randall Wray, a leading thinker in the MMT world acknowledges these real constraints and then turns his mind to what of government should be.  What is its “public purpose”?  I like that description very much.  Let’s steal it.

The Job Guarantee

Wray (and others) define Public Purpose as: “One of the basic functions of any social organization is to provide the necessary food, clothing, shelter, education, health care, legal framework, and socialization for survival of the society”.

Arguably access to paid employment is absolutely necessary in a modern capitalist system.  It allows you to purchase the food, clothing and shelter that every human on earth deserves, but it also arguably offers many other tangible and intangible benefits beyond the obvious.

Improved psychological well-being, such as enhanced self-worth

Access to social networks

Reduced crime rate

Provides for retirement needs in old age

Greater family harmony

Enhanced social prestige

Increased political and social activity

While there is often disagreement among the basic rights every human on earth should enjoy, the disagreement around the public purpose of our government is arguably the foremost basis of nearly all of the political disagreements between conservatives, liberals, moderates and others.  Conservatives might agree with the 1968 UN Charter of the basic rights of man, but disagree that it is the federal government’s role to help provide for those rights.

All of this said, one of the cornerstone proposals of some MMT’ers is the Job Guarantee or Employer of Last Resort

What is it, and what is it not?

A) Everyone should be able to have a job if they want one.

1) There is no need to eliminate current social safety net programs

2) The Job Guarantee can be added to a “small government” or “big government”.  As the employer of Last Resort, it simply exists to catch those that for whatever reason fall out of the private sector.  High private sector employment makes this a small program.

3) Traditional economic programs can still be employed to help the private sector, whether or the demand or supply side.

4) If the private sector cannot or will not provide the number of jobs necessary to employ everyone that wants a job, the Job Guarantee Program provides a “residual employer” that provides a job for anyone that is willing to show up and work.

5) A very basic set of wages and benefits would be put into place, effectively providing a “minimum floor” that private employers must surpass in order to maintain employees.  The wage can’t be too good, but simply good enough, based on the job and work needed.

If you can’t become self-employed, if no company will add you to their work force, or replace someone with you, then you need to have a fall-back position.

Right now there are 20 million people that want a full time job and only 5 million jobs available to fill that need.  How does it help our nation’s economy to have 15 million people sitting around on their hands?  This creates a huge gap between what our economy could produce and what it is producing.

Remember, the federal government is not constrained by needing to raise taxes or sell bonds to pay workers.  They simply credit the bank accounts of these workers with a keystroke of a computer. If they credit more money that they collect in taxes then a deficit occurs. This government deficit shows up as a credit on bank balance sheets.  There is absolutely nothing monetarily that prevents the government from implementing this program.  A sovereign issuer of currency can always afford full employment if it removes it’s own self-imposed restraints.

Australia had a program very similar to this for many years.  While it wasn’t a formal “program” it was an informal commitment to full employment through high aggregate demand and direct job creation when the private sector could not or would not hire enough workers. India has one now.

We may never rid ourselves of the boom and bust high and lows of market intensive capitalism, but that doesn’t mean that we can’t rid ourselves of the unemployment that results from it.

There wouldn’t be any further need to have endless debate and gridlock over the tender emotions and easily shaken confidence of our largest corporations.  There would be no further need to dollop huge tax breaks and cheap money into their accounts to hopefully make them hire more people that they don’t need, crossing our fingers that for some reason independent businesses will do the right thing and do something other than what is in their own self-interest.

This is simply one example of what we could accomplish if we cast aside the arguments and rationale of the past when it comes to where money comes from and how it works.

We wouldn’t have to wait on climate change action,

Or infrastructure improvements,

Or food programs for our most vulnerable citizens,

Or force the VA to continue to limp along with 30 year old computers and 50 year old bureaucracy.

We wouldn’t have to keep having the same old poisonous argument every year about how we need to have the rich “pay their fair share”.  As if raising their tax rates would either a) make them pay more taxes, or b) matter much at all in the budgetary scheme of things.  There are plenty of very important reasons for progressive taxation policy and higher taxes on capital than labor, but needing the rich to pay more taxes so we can pay for stuff is not necessary.

I plan on continuing with this thread throughout the year.  It took me at least that long for some of this to sink in.  Hopefully you’ll find it prods you to think differently about how your country works and how it could work.

Sourcing:

MMP Blog #3 The Public Purpose – L. Randall Wray http://neweconomicperspectives.org/2012/02/mmp-blog-37-public-purpose.html 

The Job Guarantee -Edited By Michael J. Murray and Mathew Forstater

What is a Job Guarantee – Billy Mitchell – here

Your Nation Owes You a Job – The Nation – http://www.thenation.com/article/179476/your-government-owes-you-job?utm_content=buffer1995f&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer#

St. Louis Federal Reserve – http://www.stlouisfed.org/