The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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I think Professor Randy Wray (UMKC), one of the leading proponents of Modern Monetary Theory, has given up butting heads with debt-hawks, and has adopted a new, and perhaps more realistic approach. Recently, he gave a radio interview in which he said that the states (and counties and cities), desperately needed financial help, and that this help only could come from the federal government.
As I’ve noted previously on this blog, ( Why the states are in financial trouble ) it is mathematically impossible for any monetarily non-sovereign entity to last long-term without an outside source of income. You and I are monetarily non-sovereign, and to survive long term we need a salary and/or investment income sufficient to prevent us eventually from going bankrupt. We cannot survive indefinitely on the money we have saved, no matter how much that may be.
The states (and counties and cities) also are monetarily non-sovereign, and they too need an outside source of income. Taxes, coming from money that already exists in the state, are not sufficient to support a state long term, because inflation makes that money decline in value each year. For a state, outside income might come from exports or tourism. Examples are Alaska’s exports of oil and Nevada’s tourism.
Most states find even these outside sources of income insufficient to pay for education and infrastructure, two huge expenses the federal government could and should support. So most states have entered into a downward spiral of borrowing, which causes their credit ratings to drop and interest payments to increase, then borrowing more, which causes further ratings drops, and on and on and on.
Professor Wray suggested, in his interview, that the government should provide economic aid to the states and this would re-energize the economy, which eventually would reduce the federal deficit. Now Randy knows the following three things:
1. Re-energizing the economy does not reduce the federal deficit. GDP growth does not reduce the deficit. Yes, GDP growth can increase taxes, but taxes are not necessary for spending. More importantly, deficit growth is necessary for GDP growth (See: Summary)
.and
2. There is no economic or financial reason to reduce the federal deficit, though reducing state deficits is necessary. The federal government is Monetarily Sovereign. The states are not.
3. There is no negative economic results from federal deficits.
So if increasing deficits are what drives a growing economy, why did Randy suggest stimuli as a way to decrease deficits? My belief: By positioning a stimulus plan as a way to reduce the federal deficits, he may be trying to provide political cover for our leaders to do what must be done, i.e. financially support the states. If so, that is a clever approach, which I have termed “jiujitsu economics.”
I’ve written Randy to see whether that, in fact, is what he had in mind. I’ll let you know what he says.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”
#Monetary Sovereignty - Mitchell 
Rodger, I recently wrote a comment on a post by Randy and Marshall to the effect that progressives need to cooperate on addressing the deficit hawks instead of quibbling with each other, and also to be politically savvy about confronting the deficit hawks. It is counter-productive for MMT’ers to be attacking the left because most progressives are clueless about monetary policy, as well as trying to influence the national political debate with wonky economic argument about monetary economics, especially given the time constraint.
The austerians are winning hands down, and the the president and most of the Democratic Establishment is on board with them. So progressives have to unite in a smart way to head off what is otherwise coming down on our heads as a nation and world in the next congressional session under a GOP dominated House.
I applaud Randy’s alliance with Bill Black in calling attention to mortgage fraud. It is having an effect, along with Yves Smith and others. Similarly, MMT’ers and their allies need to address pressing economic problems politically, that is, strategically, rather than standing on principle and arguing with a wall that is not listening.
Warren Mosler wisely focused on a payroll tax holiday and a limited one was adopted. No way of telling how influential Warren was in bringing it about, but he was the first candidate in the political arena to surface it.
Arguing for federal aid to the states and municipalities is a good idea for several reasons. First, it is needed as stimulus and only the federal government is in a position to provide it. There is a good precedent for it. The Fed as lender of last resort rescued the financial system. Are the states and municipalities any less significant to the economy and is the federal government any less able to rescue them? Of course not.
I think that Randy and other MMT’ers make a good point in arguing to increase GDP through stimulus, since growing GDP not only increases the denominator of debt and deficit to GDP, but also eventually decreases the numerator by increasing taxes and reducing automatic stabilization. These are things that people can understand more easily than arguments about how the monetary system works.
The latter is more a long term process of explanation and understanding that we cannot wait on. We need to be making the case for it, obviously, but we need to be moving strategically on a lot of other fronts, too.
Secondly, it allows MMT’ers to make the argument that households, firms and states, being revenue constrained as currency users, are fundamentally different from the monetarily sovereign federal government, which is not revenue constrained because it is the monopoly currency issuer.
This is particularly significant because the underlying mistake sidetracking the political debate is the false analogy that equates government finance with nongovernment finance when the two stand in an inverse budgetary relationship as user and issuer.
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Tom, I agree that the politicians and the populace probably never will understand the difference between federal financing and personal financing. I’m disappointed that the mainstream economists don’t understand it. It’s remarkable that guys going to Sweden to collect their awards, can’t fathom Monetary Sovereignty.
Also I agree re. the payroll tax holiday. In fact, my 1998 book Free Money said in a section titled, “Which Taxes Should Be Cut First”: “Which taxes cuts are most politically acceptable? And, which tax cuts would boost the economy fastest? I believe the answer to both questions is the same. Eliminate Social Security and Medicare taxes.” (Page 149)
I believed it in 1998 and I believed it in 9/8/09 when I wrote (with Warren’s and Randy’s help): Ten Reasons to Eliminate FICA, and I believe it now.
If the battle can be won, and the country saved, by giving political cover to our leaders with “jiu jitsu economics,” I’m all for it.
Rodger Malcolm Mitchell
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Mr. Mitchell,
I stumbled on this blog and it made for a fascinating read. I google on “monetary sovereign”, MMT but it seems these ideas are not very popular in the mainstream. You and the MMT people might as well discover a new paradigm of economics or you guys could be delusional as some critics treat you.
My questions are
1. How does other school of economic thoughts treat you and MMT’s idea?
2. What are the main criticism of your idea ?
3. The ideas espoused here in your blog, are they just mostly on monetary theorem, a fragment of an economic theory, or have you come up with a complete principle of an economic principle ?
4. Since you are strongly convinced that your idea is correct, what do you think eventually will happen to vindicate your theory and convince the mainstream ?
I am just an interested reader on economics subject so I apologize if my questions are not coherent and please excuse for my less than adequate command of English.
Nathan
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Nathan, I can’t speak for the mainstream. Although I am not MMT, my writings are similar.
Fundamental to MMT and to Monetary Sovereignty is the simple fact that a monetarily sovereign government has the unlimited power to create its sovereign currency, and a monetarily non-sovereign government does not. This is not a belief or a philosophy or a hypothesis. It is a definition.
Yet, it is this definition the mainstream ignores.
Given this definition, one can see that for a monetarily sovereign nation:
1. Neither taxes nor borrowing finance government spending.
2. Neither the government, nor any agency of the government (Social Security, Medicare, Congress, et al) can be forced into bankruptcy.
3. Federal “debt” and “deficits” are not unsustainable.
4. The sole constraint on federal spending is inflation.
Taken to extremes, totally unconstrained (i.e. infinite) money creation would cause inflation, while totally constrained (i.e. zero) money creation would eliminate all money from the economy, causing depression.
The points of contention for federal spending are:
1. Where is the dividing line between inflation and recession?
2. How harmful to the population is inflation vs. recession?
This Monetary Sovereignty blog contains many posts addressing these issues.
I invite you to contact any of the mainstream writers and ask their opinions on the above issues. In all probability you will not receive an answer, but in the unlikely event you do, I’ll be glad to post it.
Rodger Malcolm Mitchell
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