“We are happy to publish this succinct evaluation of MMT by seasoned US government official, Thornton Parker, also author of “What If Boomers Can’t Retire?”
It is easy to get lost in a cloud of details and controversy about Modern Monetary Theory (MMT) and miss how it relates to the United States today. The federal government runs a budget deficit when it pays more dollars into the economy than it takes out with taxes. Everyone agrees that budget deficits may be inflationary because they increase the number dollars in the economy. But from that point on, MMT and the conventional belief about the deficits differ.
The most basic point of MMT is that the federal government is the sole creator of US dollars. All others, including people, companies and state governments, are dollar users. It creates new dollars for others to use by paying them into the economy when it runs budget deficits.
The conventional belief is that the government is just like all others and must get dollars before it can spend them. When it runs a budget deficit, it must borrow from the economy by selling securities in order to get the dollars it needs to make payments. Most government leaders hold the conventional belief and the laws that control the government’s fiscal operations are based on it.
But the belief cannot be right. If the government pays back only the dollars that it borrows from the economy, it will not increase the number of them in the economy and deficits cannot be inflationary.
The MMT explanation must be right because it shows where the dollars come from that are added to the economy when the government runs budget deficits.
Conversely, the only way to prove that the conventional belief is right would be to show how budget deficits can increase the number of dollars in the economy and be inflationary if the government borrows them and then pays them back.
The key to understanding this is in what actually happens when the government appears to borrow. Unlike a taxpayer who transfers purchasing power to the government, a securities buyer just trades dollars for securities of the same value. The securities are forms of money that can be sold or be used as more liquid money for many purposes. A buyer does not give up any value so the government gains none in return.
In accounting terms, a buyer just exchanges cash for securities while retaining the same total value of assets and net worth. In contrast, a taxpayer winds up with fewer assets and a smaller net worth. This is why taxes take dollars out of the economy but security sales do not.
What is called the national debt is just the running total of new dollars that were created and paid into the economy by budget deficits, less those removed by surpluses, since 1792. Every time surpluses were run for several years to reduce the debt significantly, a major depression or the Great Recession followed. After each reduction of the debt, large budget deficits were needed to pay enough dollars back into the economy for it to recover.
For the federal government, fiscal responsibility includes using budget deficits properly to meet the dollar needs of the economy. It does not include limiting or reducing the debt as state governments do.
Federal budget deficits may, or may not, lead to inflation. The United States is a member of the global economy where goods, services, investments, interest, and profits shift constantly among countries. If more dollars leave this country than come in, (as when we buy more things from other countries than we sell to them) it has a negative balance of international payments, and budget deficits are needed to replace those dollars in our economy and avoid a recession or even a depression.
Inflations do not spread evenly across the economy. Some sectors may have rising prices while in others, prices are going down. And some inflationary pressures may come from the structure of the economy itself, as when a few large companies dominate markets and can raise prices when they want to.
But if the government creates too many dollars, prices may rise in many sectors and lead to unhealthy results. Broad inflation may be like a fever; a symptom that the country is trying to do more than it can with its physical, human, or other resources, or that taxes are too low. The “guns and butter” expenditures for the Viet Nam War and the War on Poverty without controls on the economy, and when taxes were too low to drain off the excess purchasing power, is an example.
This leads to the problems the country faces of reducing its contributions to global warming, acting to minimize the effects of climate change, and absorbing the losses that climate change will bring. The tasks include changing the nation’s energy base; moving communities to higher elevations; coping with dwindling supplies of fresh water; and maybe backing up or supplementing the insurance industry.
Few people today know how the government drafted men; limited inflation with wage and price controls; rationed food and fuel; built the world’s largest fighting force; developed atomic energy and volume production of penicillin; and allocated materials, manufacturing, and transportation capacities to win World War II. All this and more was done in six years.
The tasks we face may well be greater and there is another big difference. After the worst years, the Allies saw that they would win the war. That point may not come for the effects of global warming.
After the war, the Industrial College of the Armed Forces developed a correspondence course to teach officers what had been done. It consisted of twenty-eight small, hard-backed volumes titled “Emergency Management of the National Economy”. All that knowledge is largely forgotten now, but something like it may be needed again. Developing it will require the correct understanding the role of federal budget deficits.
Too little thought has gone into managing the shift from today’s economy to one that is sustainable and serves more people. We cannot rely on luck and free markets to pull it off. Complex intermediate steps will be required.
The private sector will find ways to finance many of the actions that are needed, but the government will have to make unprecedented expenditures. This is not a discussion of how to manage and make best use of the country’s limited resources. Ethical Markets (ethicalmarkets.com) has been doing this for forty years as a guide for both public and private sectors. Its Green Transitions Scoreboard® has documented progress annually since 2009.
This discussion is to emphasize that for the government, US dollars are not limited resources—the are enabling tools that it creates by running budget deficits.
Federal budget deficits are the horse and all others are in the cart.
The more one thinks about this, the more liberating it becomes. All the time and energy spent on avoiding government shutdowns; debates on whether balanced federal budgets are prudent or destructive; fears about government bankruptcy and burdens for future generations; debt ceilings; and questions about how to pay for major actions is wasted. Worries about the futures of Social Security, Medicare, and other programs that have their own “revenue sources” are needless. Thinking can be shifted to realistic planning and developing ways to make best uses of our resources that are truly limited including the most valuable and irreplaceable resource—TIME.
Thornton Parker served in the executive office under presidents Johnson, Nixon, Ford, Carter and Reagan, mostly in the Office of Management and Budget. He is the author of What if Boomers Can’t Retire, that explained more than twenty years ago why many pension plans that relied on stock price growth were inherently weak.