Understanding of Modern Monetary Theory (MMT) in the United States has grown substantially in the past year. I myself first encountered it during the past year, culminating in my participation in the Second International MMT Conference held at the New School in New York City in September 2018. I've been immersing myself in the MMT literature since then though I'm far from mastering it. (I still flunk the MMT Weekend Quiz on Bill Mitchell's blog more often than not.) I've also been trying to understand U.S. politics more from an MMT-ish perspective. From that background I'd like to discuss some challenges which, in my opinion, MMT advocates in the U.S. are facing as we enter 2019 and the 2020 election cycle. This post discusses one of those challenges; subsequent posts will discuss others.
We take as a gospel that a household must live within its means.
Whether a household is a single individual, a traditional family or some other combination of individuals, the household's expenses must not significantly exceed its income -- income which is generally derived by the individuals' selling their ability to work to employers -- the owners of the means of production. If the household borrows to cover large purchases, it ought to have a plan to pay the lenders back. Otherwise, financial ruin awaits.
In short, the household budget must be balanced overall and debts must be paid.
We also take for granted that the budgets of companies, non-profit organizations, and state and local governments must be balanced overall and that debts must be paid back.
We deem this true despite the fact that these entities have different kinds of revenue sources than households. Companies have sales of products and services, but they can borrow from banks or, if larger, sell commercial paper or bonds. Non-profits' revenues are similar but more restricted. State and local governments raise revenue through taxation and borrow through bond sales. But when it comes to spending, companies, non-profits and state and local governments are in the same position as households. They have to get the money before they can spend it. They do not get to "create money" or "issue currency". Their budgets must be balanced overall and they have to pay back their debts.
Consequently, we say that public finance at the state or local government level works like a household's budget. This is the household budget analogy.
Let's explore how these budgetary realities might play out in the life of a person embarking on a political career. Let's imagine that someone named Sara D___ graduated from college about six years ago. Let's say she either went to law school or got an M.S.W. and is now working in a community service agency. She has risen to a position that entails both budgetary and supervisory responsibilities.
Sara's work has brought her into contact with local elected officials and their staff members. While she's favorably impressed with some of the staff members, she realizes that many of the local elected officials are unimpressive at best and incompetent at worst. She enters the Democratic party primary race for a position in the lower house of the state legislature. She doesn't win her first time out, but the incumbent she was challenging subsequently retires and she wins on her second attempt.
Sara goes on to win two more two-year terms and secures a position on the legislature's Budget and Finance Committee. In the state where she resides, members of that committee have real input into the horse-trading that goes on within the legislature and between the legislature and the government. (It's not a case of "Three Men in a Room" as it is in New York state.) So Sara acquires a deep understanding of political and economic reality in her state. She understands:
Trends in state government spending.
How political interests try to shift state spending to certain areas, leaving other areas underfunded.
The incidence of taxation on her state's residents.
Balancing the state budget. By law her state government's budget must be balanced. Sara understands how that gets done and she calls attention to that in her re-election campaigns.
How politicians contrive to push those deficits "off the books" so that they can increase government spending without being seen to vote for higher taxes.
Sara and her staff also participate in conferences of state legislators from throughout the country, so she's aware of the strengths and weaknesses of her state's finances compared to those of other states.
Sara has married and now has two young children. She wants to continue in politics and government but realizes she's coming to a career crossroads. One possible path would be to run for the upper house of her state's legislature. Another would be to seek appointment to become the state commissioner of either budget or taxation. Her skills have impressed the current governor and also impress some of the leading gubernatorial candidates in the next election. A third alternative is to run for U.S. Congress. The incumbent in her district has gotten complacent and he might be vulnerable.
Sara goes for Door Number Three: she decides to run for Congress.
But here she faces a new problem. She's been studying MMT and realizes that the federal government, unlike state and local governments, does get to create money. The federal government is the sovereign currency issuer. She understands that to get the economy to full employment -- which she and her constituents want -- the federal government must almost always spend in excess of its tax receipts in order to make up for the lack of aggregate demand with respect to consumption and investment.
So Sara realizes that the approach to public finance which she took when she was in state government is likely to be counterproductive once she becomes a lawmaker at the federal level. She has to be able to fend off her opponent's charges that she is turning her back on the "principles of sound finance" which she espoused earlier in her career.
How should Sara respond, first during her campaign for Congress, and then after she is elected?
Eric Rauchway on Roosevelt, Keynes and Monetary Policy
James E Keenan | January 9 2019
To respond, send email to: jkeenan at pobox dot com. Include MMT in the Subject line.