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Stephanie Kelton does MMT

Here’s a very good video on MMT with Stephanie Kelton, the chair of the Economics department at the University of Missouri at Kansas City talking to Lauren Lyster of RT’s Capital Account. As you know, despite my Austrian bias and my remaining allegiance to what Marshall Auerback calls “deficit terrorism”, I think MMT’s descriptive framework is compelling in many regards. I found Kelton’s explanations the best explanation I have seen of the MMT approach to the debt ceiling and fiscal cliff situation.

Here are a few things to note that she seems to be saying, all of which I agree with:

  • The U.S. government is not revenue constrained: there is no revenue constraint for a sovereign currency issuer. The point here is that all attempts to rein in deficits because of questions about solvency are “artificial”. The U.S. government creates the currency it uses and can never be rendered insolvent involuntarily. My take: Is this scary? Sure, 100%. That’s why there are constraints on government spending – some real and others arbitrary and artificial. People are scared to death that government doesn’t have the self-control to rein in spending unless we manufacture constraints like the debt ceiling. See my post “More on government tax coercion versus fiat money liberty” for more on this.
  • The U.S. government is the only American economic agent that can act counter-cyclically: this point follows from the previous one. In the U.S., you and I would have to “get” dollars to put food on the table and buy stuff and still maintain solvency since the U.S. dollar is the currency of account and legal tender used to pay taxes. On the other hand, the U.S. government doesn’t have to “get” dollars because it creates them. That means it could act counter-cyclically if it wanted to. And the U.S. government is the only economic agent in the U.S. that can act counter-cyclically without fear of insolvency. In the euro zone, no one has this role. See “How austerity in Europe works” for the contrast to the U.S. Also see “Herbert Hoover: Nothing is more important than balancing the budget with the least increase in taxes” for how deficit phobia played out during the Great Depression.
  • If the government did decide to act counter-cyclically, it could either increase spending or reduce taxes: In MMT circles, I believe government spending is considered more expansionary dollar for dollar because of a large fiscal multiplier. But, for ideological reasons i.e. government waste, people might prefer tax cuts. That’s a prescriptive debate. The descriptive element here is to point out that increasing net government spending is stimulative because it adds financial assets on net to the private sector. Whether one chooses to add those financial assets via tax cuts or spending increases is a policy choice. Stephanie says it is the budgeting process that decides how this gets done. That’s what the process is all about. (Update: also, it is a prescriptive choice as to which taxes are cut and on whom. This is a policy choice. For example, during the Great Recession, MMTers advocated a payroll tax cut because it has a high fiscal multiplier). Kelton also emphasizes the fact that spending for the sake of spending is not going to get you a large fiscal multiplier because it’s just waste.
  • Not employing people who want to work is wasteful: Talk about waste, here’s the real waste. At the beginning of the broadcast, Stephanie mentioned a figure for how many man hours of productive capacity we have lost by allowing people to be unemployed who want to work. Unless you can convincingly argue these people are zero marginal product-type workers – and I don’t think you can – then you are forgoing a lot of GDP growth through this deadweight loss. It’s an artificial scarcity of jobs because of the private sector’s capital allocative process. Call it recalculation or whatever you want, those are man hours that can never be recouped because they are time and space constrained.
  • No one seems to understand this: As I complained once after talking to Lauren on her show about these issues, no one really gets national accounting – or if they do, they act like they don’t to support their ideological agenda. The point here is the one that Goldman’s Chief Economist Jan Hatzius made recently: “every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero”. Any net change in the government’s balance means an opposite net change in the economy’s other sectors in aggregate. No government in the world Stephanie knows of sees this and acts upon it responsibly. Again, it’s not about building bridges to nowhere. It’s about using fiscal space afforded the currency issuer to help ride out business cycle troughs.

The key in all this is to recognize that there is a descriptive and a prescriptive side of things. For example, the descriptive is to recognize that a currency issuer can act counter-cyclically without fear of insolvency. But just because the currency issue could act counter-cyclically doesn’t mean it must. That’s a prescriptive policy choice. Personally, I think it’s a good choice for the currency issuer to step in because it’s not doing so causes an artificial scarcity of jobs that leads to economic deadweight loss.

Right now, we are actually debating the opposite i.e. pro-cyclicality, meaning we are not trying to have government boost net spending through tax cuts or increased spending, which is counter-cyclical. We are not letting the chips fall where they may i.e. having government take a neutral stance. If you are a limited government type, you could make an argument that this is the right stance. Instead, though we are arguing over whether government should act pro-cyclically to reduce the deficit. What is pro-cyclicality? It’s when an economic agent moves with the business cycle by boosting its spending at peaks and reducing it at troughs adding a degree of amplification and volatility to the economy. That’s what we are now debating the U.S. government should do in the U.S.. I think it’s absolute madness.

Here’s Kelton. The full video runs just under a half-hour.

P.S. – Mike Norman argues that Kelton was “a bit defensive” about government spending. I disagree 100%. In my view, Stephanie presented the taxes/spending argument as a prescriptive choice, which it is. And that’s an argument that must be made for people to understand the difference between descriptive and prescriptive, empowering people to see a bigger set of policy choices they can advocate instead of the age-old “government must spend” paradigm.

Moreover, Mike Norman fails to recognize the politics here. As I wrote in 2009 after the bank bailouts, “it is the apparent ineffectiveness and unfairness of Obama’s policy initiatives on banks and the economy which has angered middle class Americans – conservatives and liberals alike. The economy is still in the tank despite incipient signs of a technical recovery. And Americans understand that banks and bank staff are making lots of money while thousands lose job and home.

“Why then would you trust government? More likely, you would see government as the problem.” The President should be thankful that he was able to get his agenda through in 2009 and that the economy has improved since then because, in my view, the legacy of the bank bailouts and their conflation with other stimulative efforts is that stimulus is not a word you ever hear anyone on Capitol Hill using anymore. That’s the reality. No one uses the word stimulus here in DC. So, you can forget about big spending. It won’t happen short of a Great Depression. 

P.P.S. – check out the owl in the left side of the shot as Stephanie speaks. Is that symbolic?

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.