 |
| Image credit |
The headline is wrong, but the article is good.
MMT is a theory of how the economy works that is not intrinsically left-wing. It may be interpreted and applied differently by people of diverging political convictions.
To be more precise: MMT shows how the economy works, especially its monetary infrastructure, demonstrating that there are powerful instruments of steering the economy toward the public purpose.
At this point, however, the technical, non-political structure of MMT leaves its adherents with a political choice that cannot be resolved by the intrinsic logic of MMT.
What do you wish to use fiscal spending for? What do you consider to be the public purpose?
A "right-wing" application of MMT might divert government resources from "renewables" toward different social priorities, a "left-wing" strategy might strengthen "green" energy schemes by heavy subsidies, starving other purposes of government resources.
Making its appearance in the 1990s, MMT's Keynesian emphasis on effective demand and the benign character of demand management used to be politically almost neutral during the Golden Age of capitalism, when all major political parties, left, center and right, subscribed to it.
Of course, in an age when the self-proclaimed left and almost all leading parties are of neoliberal persuasion, MMT might be looked at even as "right-wing" in that by its purely technical analysis it debunks as dysfunctional favourites of the "left" such as the EU and its neoliberal austerity bias.
Here is the story of the founder of MMT, Warren Mosler:
The original prophet of MMT is Warren Mosler, who 30 years ago was a Wall Street investor trying to gain competitive advantage over other traders by peering deeply into exactly how the federal government taxed, borrowed, and spent.
Fit, tanned, and currently residing in St. Croix in order to lower his tax bill, the 68-year-old multimillionaire makes an odd spokesman for a progressive economics movement. As his friend and hedge fund partner Sanjiv Sharma told me, “Warren is more politics agnostic.”
As a boy, he was fascinated by machinery, how it worked, how to fix it, how to put it together. Mosler told me he planned to major in engineering but he switched to economics after taking a course and finding it much easier. After graduating from the University of Connecticut in 1971, he was hired by a local bank and found himself being promoted rapidly. Soon, he left New England for Wall Street.“I look at things at an elemental level,” Mosler told me. He got down in the weeds to examine precisely how the Federal Reserve and the Treasury interacted with the general economy. He wanted to understand what happened to balance sheets when the Treasury collected taxes, traded bonds, spent and created money. He came to believe that the conventional wisdom has the relationship between the government and the private sector ass-backward.
Most of us assume government has to tax before it spends, that like you and me it has to earn money before it purchases goods. If it wants to spend more than it taxes—and it almost always does—it must borrow from the bond market. But by examining the granular way government accounts for its spending, Mosler saw that in every case, expenditures come first. When your Social Security check is due, the Treasury doesn’t look to see if it has enough money to pay it. It simply keystrokes that money directly into your bank account and debits itself simultaneously, thereby creating the money it pays you out of thin air.
When you pay your taxes, the same process happens in reverse. The federal government subtracts dollars your account and eliminates the same amount from the liabilities side of its ledger, effectively destroying the money you just paid to it. Unlike households or firms or even state and local governments, the federal government is authorized to create dollars. It adds money into the economy when it spends and it takes it out when it taxes. “There's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody,” is how Alan Greenspan, then the Fed chairman, put it to Congressman Paul Ryan during a 2005 hearing.
Wren-Lewis, the Oxford economist, told me MMT sounds more radical than it really is. “In my view a lot of what they say is mainstream. When interest rates are at their lower bound their anti-austerity policy is totally mainstream,” he said. “In terms of their theoretical framework, I would describe it as being quite close to 1970s Keynesian, with the addition of a very modern understanding of how bank money is created.” Kelton told me MMT isn’t trying to change the way government spends and taxes, it is merely describing the way it already does.
Mosler’s understanding of money provided him with an insight: Any government that prints its own currency can’t go bankrupt. That insight made him millions.
In the early 1990s, Italy was struggling with high debt and low tax receipts; economists and traders feared it was heading for collapse. Italian government bond yields inevitably shot up. Mosler recognized that Italy could not be forced into default: It could print as many lira as it needed. (This was in the pre-euro days.) He borrowed lira from Italian banks at an interest rate lower than Italian government bonds were paying and used that money to buy Italian government debt other investors were dumping. Over the next few years, this trade made him and his clients more than $100 million.
It was after that that Mosler wanted to start a dialogue with academic economists. He wrote to Harvard, Princeton, and Yale, laying out his analysis of Federal Reserve payments and their startling implications, but was ignored. But then, using his contacts with Donald Rumsfeld, wrangled a lunch with Arthur Laffer (of supply-side Laffer curve fame). Laffer told Mosler not to expect anything from Ivy League economics departments, but there was this wacky heterodox group called the post-Keynesians, and they might be interested.
These economists—including Randy Wray, Bill Mitchell, and Stephanie Kelton—taught Mosler about the chartalists, an early 20th century group of economists who like Mosler saw money as debt created by the state. (MMT is sometimes called “neo-chartalism.”) Abba Lerner’s functional finance is another precursor to MMT. Lerner, a mid-century British economist, insisted public officials ignore the deficit and instead focus on maintaining sufficient demand to keep the economy at full employment. If unemployment was too high government should either spend more or tax less. When inflation threatened, it should cut spending or increase taxes. For Lerner, as for the MMT crowd, there’s no reason to care about the size of a government deficit.
Mosler explained to the post-Keynesians that taxation and borrowing did not finance government spending. At first Kelton didn’t believe him. “Warren is putting out this stuff and it is way out there. It is the inverse of everything that we’ve been taught,” she told me. She decided to write a paper disproving Mosler’s theories, but in the end, after looking deep into the way the Federal Reserve, the Treasury, and the private banking system interact, she concluded, to her surprise, that he was right. “I went through all of this research,” she said, “and I got to exactly the same place Warren got, just with a lot of complicating details.” Tax and bond sales do come after spending; their purpose is not to fund the government but rather to take money out the system to keep it from overheating.
Though Mosler came from outside academia, his theories dovetailed with some work done by economists. “What Warren did in some sense was remind people of things we should have known,” she told me. “He made original contributions to be sure, but he also reminded us of what was in the literature and was well-established 60, 80 years ago and then we just unlearned all those lessons.”
Kelton and Wray introduced Mosler to Wynne Godley’s sectoral balance analysis, which suggests government deficits are not just harmless, they are actually beneficial. To simplify Godley’s theories, every economy has two sectors: the private sector and the public or government sector. When the government spends more than it taxes, it runs a deficit. And that deficit in the public sector inevitably means a surplus for the private sector.
Kelton explained it to me this way: Imagine I’m the entire government and you are the entire private sector. I spend $100 either going to war or fixing bridges or improving education. The private sector does the work required to achieve those goals and the government pays it $100. It then taxes back $90, leaving $10 in the private sector’s hands. That is the government running a deficit. It is spending more than it receives back in taxes. But you, the private sector, have $10 you didn’t have before. In order to accumulate money, the private sector needs a government deficit.
Mosler’s hedge fund profited from this theory. In the late 1990s, just about everybody thought the Clinton budget surplus strengthened the US economy. But Mosler realized the Clinton budget surplus meant the government was taking more money out of the private sector in taxes than it was putting in in spending. Mosler reasoned this private sector deficit (the flip side of the government surplus) would inevitably lead to recession, so he bet on interest rates to fall (which they did in 2001) and his hedge fund again made out like bandits.
The source.
No comments:
Post a Comment