It’s difficult to have a valid opinion on macroeconomics if, like me, you’re not an economist. That’s especially so considering that the world’s leading economists regularly disagree with one another regarding important macroeconomic principles.
A case in point is illustrated by Modern Monetary Theory. The roots of MMT go back to at least 1905, when German economist Georg Friedrich Knapp published “The State Theory of Money.” But its persona today is something like “new kid on the block that’s shaking things up.”
Some regard MMT proponents as in essence a cult. At the very least, it can be said with confidence that they represent a minority of economists.
Among that minority is Stephanie Kelton, an economics professor at Stony Brook University on Long Island. She’s fairly recently emerged as something of a rock star, if such a thing exists in the world of economics. She’s on TV all the time. She has been an adviser to both Senate Democrats and the Bernie Sanders presidential campaign.
This article arose from a recent lecture by Kelton at Stony Brook that was open to the public, and a subsequent email exchange I had with her.
As noted, I can’t vouch for the validity (or vice versa) of her economic theories. But they are flat-out fascinating. If you fear that the ever-swelling U.S. national debt is a road to fiscal Armageddon, these theories offer an alternative picture: the debt not only does no harm, it’s actually a gargantuan economic stimulus.
The cornerstones of Modern Monetary Theory are that sovereign governments that are the sole supplier of national currency (like the United States) can issue as much currency as they want; have unlimited ability to fulfill promised future payments; and cannot go bankrupt.
As everyone knows, the U.S. government’s promised future payments prominently include the big so-called “entitlements”: Social Security, Medicare, and Medicaid.
In her lecture, Kelton ran a short video containing clips of leading politicians — an equal number of Democrats and Republicans — insisting that the pace of growth in the national debt is unsustainable. Observed Kelton, “They say that Washington can’t agree on anything. That’s baloney.”
But they’re all wrong, she added. She presented a cartoon from 1937, decrying that the national debt had reached $36 billion, followed by examples showing how that opinion never wavered over the decades as the debt grew and grew while America nonetheless prospered.
“Today the gross national debt is $21 trillion and continues to grow,” she said. “The cartoonists, pundits, warnings, and hysteria are still with us. The sky is always falling. They’re scaring us with stories about how it’s unpatriotic, how it’s burdening the next generation, how it’s dooming us to a future of higher taxes, how it’s a catastrophe for the nation.”
Kelton said that what she’s trying to do is “get us to the point where we can open a nice bottle of wine, read the headline that the national debt is at an all-time high, and feel at peace with the world. Because there is no reason to panic.”
People are confused, she said, when they try to compare a household budget — where you get into big trouble if you consistently spend more than you earn — with the government’s deficit spending. “The government can no more run out of money than a carpenter can run out of inches or the scorekeeper at the Stony Brook football game can run out of points,” Kelton said.
The federal deficit, she pointed out, represents the money the government spends into the economy that it doesn’t tax back out. “But guess what?” she said. “The economy has a record as well. It’s the surplus that was created as a result of the government’s deficit spending.” In fact, the bigger the federal deficit, the bigger the surplus for the economy.
She showed a screen with a recent Wall Street Journal headline — “Trillion-Dollar Deficits Could Be the New Normal” — where the word “Deficits” faded out and was replaced with “Surpluses.”
“Don’t you feel better now?” she asked the audience.
The national debt, according to Kelton, is nothing more than the aggregate value of all outstanding Treasury bonds. It’s merely “a historical record of all the dollars that were spent into the economy and not taxed back that are held in the form of Treasuries.”
And if you’re an investor, “they’re very nice to have. They’re safe. They’re liquid. They’re free of default risk. They help you diversify your portfolio. And they pay interest.”
Listening to the lecture, there was lots of information to absorb, and I wasn’t sure I understood everything. So I sent Kelton an email asking: If the government can’t run out of money, why does it need revenue?
Her answer was startling, to my non-economist mind.
“The federal government does not need revenue,” she wrote. “It literally holds the super-patent (if you will) on the U.S. dollar, as Alan Greenspan has explained many times. The government doesn’t need our money. We need their money. Taxes do a lot of things, but providing the government with the money it needs in order to spend isn’t one of them.”
Money issued by the government is intrinsically worthless, she noted. So, she posed a question: Why should anyone accept that money in exchange for real goods and services? And answered it: people have to accumulate enough of it to pay a variety of taxes. So, currency is essentially a tax credit that functions to monetize the economy.
“If the government added money to the economy but never subtracted any, it would diminish the value of the currency,” she said. “Inflation is the obvious result.” And it’s inflation, rather than a runaway national debt, that’s the real bogeyman — “every central banker’s public enemy number one.”
There’s an economic cycle, she pointed out in the lecture: Congress authorizes a budget. The president signs it. Federal agencies are told how much money they have to spend, and they begin spending it. People receive income as a result of the government spending, on which they pay taxes, and which they can use to buy government bonds, thereby increasing the national debt.
Taxes have other functions too, she noted: to redistribute wealth, to influence some behaviors (like tax incentives for “going green”) and disincentivize others (e.g., taxes on tobacco). Also, taxes are important revenue for state and local governments, which are not currency issuers and definitely can go broke.
I also asked Kelton why, if sovereign currency issuers can’t go broke, have so many European and South American governments teetered on the brink of insolvency in recent years?
Answer: A country “can always pay any obligation that comes due in its own currency. But it can get into trouble when it borrows in currencies it does not control. Argentina and Venezuela borrowed U.S. dollars, Italy borrowed euros, etc. It’s the same reason Detroit and Puerto Rico are in trouble: they’re currency users, not currency issuers.”
One thing a country should absolutely not do, according to Kelton, is aggressively try to pay down its debt. “Here’s a historical lesson,” she said. There have been seven times in U.S. history when the government ran surpluses and commenced paying down debt. Each time, the result was a severe recession or a depression.
Referring to the most recent such occasion, when the government was running a surplus in the latter days of the Clinton Administration and began to pay down debt, “look what happened to the private sector’s financial position. It went deeply into the red.”
Households in effect borrowed too much money on the back of the dot-com bubble and then the housing bubble. But that didn’t and couldn’t last: deficit spending isn’t sustainable when households are doing it. But it’s perfectly sustainable, for decades or centuries, when it’s the federal government that’s running up debt.
So, Kelton concluded, what can we afford? When Bernie Sanders was putting forth his aggressive economic agenda — a trillion bucks for infrastructure, free college tuition for all, Medicare for all — his opponent, Hillary Clinton, was calling it fantastical and out of reach, Kelton recalled.
“In D.C., there is a great deal of pressure to pay for things,” she said. “I wish we were having a very different kind of national debate. There’s nothing to prevent the federal government from creating as much money as it wants and paying it to someone.”
For Kelton, the “how to pay for it” question is a huge, destructive missed opportunity.
“As if that’s the most important question to begin with,” she said. “You’re not debating the merits of the proposal. Because of that question, we never end up having the really important debates.”
Do you feel better now?