MMT and the New New Deal

L. Randall Wray | November 20, 2015

Yesterday, Senator Bernie Sanders gave an important speech in which he invoked President Roosevelt’s “Second Bill of Rights” in defense of his platform. As Bernie rightly pointed out, all of Roosevelt’s New Deal social programs to which we have become accustomed were tagged as “socialism”—just as pundits are branding Bernie’s proposals as dangerous socialist ideas. You can see Bernie’s prepared remarks here.

Just before Bernie’s speech, I was asked to do an interview with Alex Jensen, on TBS eFM’s “This Morning” English radio program in Seoul, Korea. I was sent a list of questions and jotted down very brief responses. Unfortunately, in our radio interview we were only able to get through a few of these. You can listen to the interview here (“1119 Issue Today with Professor L.R. Wray”).

As you will see, in addition to the subject of MMT and its critics, we talked about the platform of Senator Sanders and why his proposals have caught the imagination of the US population.

Here are some of the questions and my brief (written) answers.

  1. So what is so unique and special about the MMT? What are the advantages? What are the most important values that are embedded in MMT?

We begin by recognizing there is a difference between a currency user and the currency issuer. This should be obvious, but it has been lost in economics discourse. Almost all economists, policymakers, and the popular media start from the presumption that a government’s budget is just like a household’s. That is obviously false.

What has been lost is an understanding of the operation of sovereign currency systems. That is what we’ve tried to bring back. And we’ve updated it and brought in a much more detailed analysis of monetary operations involved in fiscal policy.

  1. How is it the response to the 2008 financial crisis? In what measure can economic policies based on the MMT prevent crises of a similar kind?

There are two aspects to this. First there is the financial instability angle—understood by Hyman Minsky and ignored by almost all economists and policymakers. It is not just that they “never saw it coming” but rather they helped bring on the crisis by deregulating and moving to self-supervision.

Then there is the chronically tight fiscal policy—so that economic growth occurs only with private borrowing—something Larry Summers and Paul Krugman sort of finally recognize. And when the crisis did hit and the private sector retrenched, the fiscal policy response was far too small.

  1. There also are a lot of criticisms of MMT. Especially when it comes to its unconventional, rather alternative view on fiscal balance. What is your response to the opponents of MMT? How would you answer those who cast skepticism about the feasibility of applying MMT to actual financial polity?

I haven’t seen any criticism that was based on sound reasoning. Some complain that what we say isn’t new. We never claimed to have invented all this—we are mostly recovering what was lost. Others either don’t understand what we’re saying or purposely throw up strawmen to attack. Most do not understand sovereign currency, central banking, or banks.

Most of MMT is descriptive. So this is not a matter of proposing something that is politically infeasible. It is a description when we say sovereign government cannot run out of its own currency.

When we do move to policy, our prescriptions are well grounded in the facts of experience—that is to say, in the way the economy really works. However, that does not mean that we believe it is politically easy.

  1. How can this be designed into a sophisticated policy and successfully implemented? Are there any strategies that you have in mind?

Abba Lerner laid out the general design, calling it functional finance. The budget ought to be formed to achieve full employment with relative price stability—not in order to achieve some specific “balance” of the budget (i.e., a deficit-to-GDP or debt-to-GDP ratio). We ought to add to his goals policy to maintain financial stability.

A key component of any such strategy should be the ELR or JG program that Minsky advocated.

  1. How can a country’s financial condition remain sound and stable when the state can issue money whenever needed? Are there any limits or countermeasures to such problems? How can we deal with the inflation or stagflation stemming from excessive issuance of currency?

The danger of spending too much money is inflation; there might also be an impact on exchange rates. The solution to the first problem is to avoid spending more once full employment is reached; and to carefully target spending even before full employment to avoid bottlenecks. The solution to the second is to float the currency.

  1. Why is austerity not effective in raising the employment rate?

Because austerity necessarily destroys jobs. The only way that can increase the employment rate is to chase people out of the labor force after they’ve given up all hope of finding a job.

  1. How can the MMT influence the international finance? Is there any chance the US can become an entity like OPEC which decides the price of oil? In other words, if the US can decide the amount of money they want to print, can’t it also decide the price of US currency, disturbing the international monetary system?

As a major oil producer the US can of course influence the price of oil. We can expand our oil buffer stock program. But I’m not sure that is a good idea at all. We need to reduce oil consumption.

We could do that with other commodities, but again I’m not sure why that would be a good idea. I’d just operate a bufferstock program for labor—through the ELR/JG program—to set the base wage. I’d let most other prices float. And I’d let the dollar float. Of course, the value of the dollar is mostly determined by the rest of the world, not by US policy.

As the issuer of the main international reserve currency it is important for the US to provide it. We do that by running current account deficits, or by lending dollars. If the world’s demand for dollars remains high, the US will continue to lend dollars and to run trade deficits.

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