Modern Monetary Theory and “Beyond GDP”!

Jay Owen Green Prosperity, Reforming Global Finance, SRI/ESG News, Beyond GDP, Latest Headlines

This article by Prof. Fadhel Kaboub goes a long way to explaining why the economic rhetoric of Republican politicians and their libertarian economists has held back needed public investments in healthcare, infrastructure, education and environmental protection.  Of course deficits matter, but so do all the assets they create in both the public and private sectors.  Yet in GDP  education is classified as a cost, and expenditure, instead of the most fundamental investment all societies make in producing healthy responsible citizens.

GDP still has no asset to account for all these vital public investments in healthcare, infrastructure and supporting small businesses and innovation.  So these valuable investments in growing a prosperous, sustainable future are ignored and recorded only as deficits and debt.  This allows Republican opponents to obsess about incorrect  “debt to GDP ratios“ which could be cut by up to  50% with a stroke of a pen! See our global surveys with GlobeScan on “BEYOND GDP“ in 2007, 2009, 2013 and 2020, all showing that the public favors expanding GDP beyond money to real scientific statistics on health, education and the environment.  Let’s correct these misleading macroeconomic statistics and the policy errors they perpetuate!

The need for Green New Deal investments in transitioning from fossilized sectors to cleaner, greener, knowledge-richer and equitable societies is as vital today, as was our investments in the NASA moonshot and interstate highway systems of the 1960s and the New Deal in the 1930s, without which investments in energy and water infrastructure, e.g. the Hoover Dam, Los Angeles would still be a village.  See also our Green Transition Scoreboard® annual reports on private investments in green technologies and companies from 2009 until 2020. (free at www.ethicalmarkets.com ).  Our research fully supports Biden-Harris investment policies to make this transition to the next Age of  Light we call the  Solar Age.

~Hazel Henderson, Editor“

Modern Monetary Theory Insights for the Biden Administration

This article is part of our series “On the Precipice: A Progressive Agenda in the Biden Era.”

The pandemic-induced economic crisis in the United States has already exposed a wide range of serious deficiencies in healthcare, broadband infrastructure, and affordable housing, along with a dysfunctional unemployment insurance system, unsustainable levels of consumer debt (student loans, medical debt, credit card debt), fragile supply chain systems, and fractured social safety nets. In this moment, the most urgent government action must be focused on economic relief for people who are unemployed because of the pandemic and who cannot pay their rent or mortgage, their bills, put food on the table, or in many cases cannot afford medical services after losing their employer-provided health insurance.

The good news is that it appears that there is a genuine acknowledgement by the political establishment that more economic relief is needed. They have come to recognize the need for more in addition to the CARES Act that was signed into law in March 2020 ($2.2 trillion) and the most recent Pandemic Relief Bill ($900 billion), which was introduced in December 2020. It is likely that the Biden administration will boost economic relief while it attempts the herculean task of distributing 100 million COVID-19 vaccine doses in the first 100 days of the Biden-Harris administration. However, all of this is simply temporary relief that keeps the economy from slipping into a Great Depression. What it does not do is constitute any structural remedy to the deeper socio-economic and ecological problems that we face. For that we must look elsewhere.

PayGo Must Go

The Biden administration has signaled it is going to push for significant investments in infrastructure, renewable energy, and even some student debt relief, in addition to restoring more rigorous environmental and financial regulations. However, it is unlikely that this administration will be radically different from the Obama administration when it comes to long-term concerns about government deficits and the national debt. Despite having won a simple majority control over the House and the Senate, Democrats have many fiscally conservative members in Congress such as the mini factions of Blue Dog Coalition and the New Democrat Coalition who fundamentally oppose large increases in fiscal deficits.

One of the major self-imposed fiscal constraints that Democrats have adopted in recent years is the so-called PayGo (or Pay-as-you-go) rule, which requires that any new spending be offset either by new taxes or by other budget cuts. Coincidently, this is precisely one of the policy priorities of Republican members of the Tea Party Movement (Tea as in “taxed enough already!”). Therefore, PayGo constitutes the single most significant obstacle facing the progressive agenda in the United States. Thankfully, the 117Th Congress has introduced new revisions this year that will exempt pandemic-related economic and health relief, as well as policies to combat climate change from PayGo rules. This is a slight improvement, but it is not sufficient given that other social spending programs will continue to face the same (if not more) constraints.

It is likely that the COVID-19 economic recovery will be just as slow and painful as the post-2008 recovery, unless we are able to supplement economic relief spending with a comprehensive socio-ecological and economic transformation plan like the Green New Deal.

Unfortunately, the Green New Deal has been vehemently opposed by Republicans as well as the so-called moderate Democrats because of the claims that it is unrealistically ambitious, too expensive, and inflationary. Mainstream economic thinking will immediately validate such claims by linking larger budget deficits and a rising national debt to higher inflation rates, higher interest rates, declining private investment (crowding out effect), government insolvency, bankruptcy, currency depreciation, debt crisis, financial instability, and all around economic collapse.

Dangerously Misleading Fiscal Constraints

The empirical reality of government deficits and debt over the last decade has essentially proven mainstream economics wrong. Japan has a debt-to-GDP ratio of more than 260% (one of the highest in the world), yet it is stuck in a deflationary vicious cycle, has negative interest rates, and shows no signs of government bankruptcy or insolvency despite having faced multiple credit score downgrades by the major credit rating agencies.

The Fed has actually admitted not having a reliable theory of inflation (plain English translation: Fed actually does not know what causes inflation, yet somehow, mainstream economists are sure that a Green New Deal will be inflationary!). Keep in mind that the Fed and all major central banks have been targeting a 2% inflation rate for more than a decade now (Japan for three decades) and have used every trick in the textbook to escape the deflationary pressures without any success. Large deficits and rising national debt are not automatically inflationary and cannot automatically increase interest rates. In other words, mainstream economics is theoretically flawed, empirically incoherent, ideologically biased towards austerity, morally bankrupt, and ecologically dangerous.

So are we doomed? Well, only if we continue to listen to mainstream economists who have been virtually wrong about everything that actually matters: the climate crisis, economic inequality, financial crisis, austerity, unemployment, inflation, private sector debt, racial wealth gap, and much more. But we have an opportunity for a paradigm shift in economic theory and in public policy. We can shift to a Green New Deal program and not worry about all of these faulty economic arguments again if we embrace Modern Monetary Theory (MMT).

The Urgency of a Green New Deal

The 2019 Green New Deal resolution was put forward to address both the climate crisis as well as the inequality and socioeconomic exclusion crises in the United  States. These crises cannot be addressed incrementally, but rather with radical and intersectional policies that address the multidimensional roots of the problems of ecological degradation, unemployment, poverty, inequality, racial injustice, and socio-economic exclusion. To paraphrase from Dr. Martin Luther King Jr.’s famous 1963 speech “March on Washington for Jobs and Freedom,” we have no time for the tranquilizing drug of gradualism and incrementalism. He was, of course, referring to the civil rights movement, but our context today not only deals with the existential climate crisis, but also racial and economic inequities that remain deeply structural to this day. Anything short of radical solutions (going to the roots) simply amounts to smokescreen policies that preserve the status quo.

The United Nations’ Intergovernmental Panel on Climate Change (IPCC) report gives us 10 years to act (not think, plan, or debate) on a massive scale to mobilize all of our resources to rapidly decarbonize the global economy in order to keep global warming below the 2°C limit above pre-industrial levels by the end of this century (ideally 1.5°C, but we are already on track to exceed that limit by mid-century). The IPCC report calls for a rapid mobilization and “acceleration of far-reaching, multilevel and cross-sectoral climate mitigation [….] by both incremental and transformational adaptation.” That is what Martin Luther King Jr. would call “the fierce urgency of now.” That is what a Green New Deal ought to urgently deliver at the national level and globally under a Global Green New Deal framework.

Designing a Green New Deal

The Green New Deal framework is inspired by the original New Deal program of the 1930s, which was a comprehensive economic development program funded by the federal government and locally implemented in every congressional district. A core feature of the Green New Deal framework is the Job Guarantee program (JG) which ensures living wage employment with a comprehensive benefits package to anyone who is ready, willing, and able to work.

A Green New Deal must be economically, socially, and ecologically restorative. It must also be comprehensive and permanent so that none of the existing socio-economic deficiencies are allowed to persist or to reemerge after the program is phased out. This is why the Job Guarantee program is so important. The JG operates as a permanent buffer against economic fluctuations that typically hurt the most vulnerable members of society such as the long-term unemployed who tend to be the first to be fired during the recession, and last to be hired during the recovery. The long-term unemployed are often labeled by private sector employers as “unemployable.” They tend to be the most vulnerable in society: women, ethnic minorities, formerly incarcerated individuals, people with disabilities, and people with limited work experience, educational background, and vocational training.

The Job Guarantee program provides a public option in the labor market. It takes people as they are, where they are, and provides on-the-job paid training at a living wage with a broad and comprehensive benefits package that can include assistance with housing, mental health, legal aid, soft skills, family counseling, career counseling, recovery, and rehabilitation services. The goal is to avoid setting people up for failure by offering a job without providing the ecosystem of services that allows them to thrive.

How to Pay for it?

The Green New Deal program is a federally-funded, locally-administered program. Therefore, no financial burden will be placed on local states and municipalities. The conventional wisdom on federal government spending says government spending is limited by the amount of tax revenues and by the willingness of private credit markets to lend to the government. Therefore, the conventional wisdom falsely assume that the federal government’s fiscal policy space is very limited.

However, Modern Monetary Theory (MMT) argues that the fiscal spending capacity of a country like the United States is much higher than what we think. The U.S. enjoys a high degree of monetary sovereignty because it issues its own fiat currency; only accepts its own currency in payment of taxes, and it doesn’t fix the value of its currency to gold, silver, or foreign currencies. MMT never claims that the spending capacity is unlimited. Instead, MMT states that the real constraint that limits a country’s spending has to do with the risk of inflation, which is determined by two factors: the availability of real resources (productive capacity) and the concentration of market power in the economy (abusive price-setting behavior).

The good news is that with adequate planning, strategic investments, and a coherent industrial policy, the U.S. can actually increase its fiscal spending capacity because resources are producible. We can train workers, we can build more productive capacity, and we can acquire higher productivity rates over time. In other words, the first source of inflation risk can be dealt with and can in fact be a source of job creation, economic stability, and shared prosperity.

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