An MMT Fiscal Responsibility Narrative: Some Truths
Many MMT posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off hand, and I may have forgotten something, I couldn’t think of a brief positive MMT narrative containing primarily the truths, rather than the myths. So, here’s my version. Comments, criticisms, recasting in more effective form, are all welcome.
— The US Government can’t involuntarily run out of fiat money because it has the constitutional authority to create it without limit. Congress constrains and regulates this ability; but its existence is still a stubborn fact!
— In addition to taxing and borrowing money and, most importantly, the Government has an unlimited capacity to create it. When it taxes and borrows, it removes it from the private sector. When it creates it, over and above what it taxes or borrows, it adds it to the private sector.
–The Treasury can keep borrowing money if we want it to. There’s no limit on the Government credit card except the one imposed arbitrarily by Congress.
— Bond markets don’t control US interest rates; the Federal Reserve Bank does by exercising its authority to meet its target interest rates. Bond vigilantes have no power against the Fed. If they fight against its interest rate targets; then they “die.”
— The bond markets will most probably buy US debt for the foreseeable future; but if they don’t, then the US won’t be forced into insolvency; because the Government can always create the money needed to meet US obligations.
— We’re obligated to pay all US debts as they come due. Nevertheless, our national debt cannot be a burden for our grandchildren; since we have an unlimited credit card to incur new debt at interest rates of our choosing, or, alternatively can create all the money we need to pay off debt subject to the limit, without incurring any more debt; unless they wish to make it so by stupidly taxing more than they spend.
— Since the US Government has no limits on its authority to create/spend money other than self-imposed ones, neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government’s capacity to spend Congressional Appropriations at all. That’s why a fiscal policy that measures its success, not by its policy impacts, but by its success or failure in reducing deficits isn’t fiscally responsible, or likely to be sustainable.
— The Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes! So, their supply of dollars is always limited; while the Government’s supply is a matter of its decisions alone.
— Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. So, no solution to this “fiscal crisis,” bipartisan or partisan is needed. What is needed is a solution to the political problem of getting SS’s funding guaranteed in perpetuity by Congress, just the way it guarantees funding for Medicare Parts B and D.
— However large the Federal Debt becomes it cannot be a “crushing burden” on our Government, because federal spending is virtually costless to the Government, if it wants it to be.
— Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that’s why they can run out of Euros. The US is the issuer of Dollars; so it’s supply of dollars is limited only by its desire to create them, and that’s why it can’t become Greece, Ireland, or any other Eurozone nation.
— Austerity cannot work in the United States economy because budget surpluses, defined as tax revenue exceeding spending, destroy net financial assets in the private sector. Unless, these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss in net financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. For a Government and economy like the US, with both a trade deficit and a substantial output gap, evidenced by high unemployment and under-employment, a policy of deficit reduction aiming toward budget surpluses (austerity) is destructive and will only push the economy further into recession or depression.
— REAL Fiscal Responsibility is a pattern of fiscal policy intended to achieve public purposes, while also maintaining or increasing fiscal sustainability viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.
— It is fiscally irresponsible to frame and follow a deficit reduction plan when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove net financial assets from the private sector every year the plan is pursued. Eventually, if pursued for long enough, declining financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy and the Government’s ability to sustain productive deficit spending producing outputs of real social value.
So, current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation because they are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” and cuts to popular discretionary spending and entitlement programs. It is a phoney issue.
The only real crisis is a crisis of a failing economy and growing economic inequality in which only the needs of the few are served. MMT policies can help to bring an end to that crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.
(Cross-posted from New Economic Perspectives.)