Tuesday, January 29, 2013

Telling the world about Modern Monetary Theory

Mike Norman does not think that MMT advocates are doing a very good job at communicating the concept of fiat currency. He criticizes MMT advocates as being too wonky for the lay audience. I agree with him only in one respect. Nowhere on the Web is there a brief catchy definition of MMT. Here is one my friends and I put together, which will have to do until we come up with something better.
Modern Monetary Theory is a school of economics asserting that:
-- The currency itself is a simple public monopoly; -- Governments provision themselves by creating taxes that cause people to sell real goods and services to get the funds they need to pay their taxes, and then by purchasing the goods and services they desire with their otherwise worthless currencies;
-- Since the economy needs the government's money to pay its taxes, the value of the currency depends on the prices govt. pays when it spends;
-- For a given size of government, unemployment is the evidence that the government is either overtaxing the economy, or spending too little to compensate for any residual desire to save;
-- Governments with fiat currencies create money at will when they spend, and destroy money when taxes are paid, further indicating that taxes function to regulate the economy, and not to collect revenue per se; 
-- The currency is a governmental tool that in a democracy is created and maintained to promote public purpose, and to provide for the general welfare.
We know, this needs to be shorter. Our real problem is the problem of shifting public debate from an idea that, however obviously erroneous, has been implanted in the public mind for decades: that the federal budget bears any resemblance to a household budget. Shifting public opinion is a little like turning an ocean liner, it cannot be done quickly.

I had never heard of Modern Monetary Theory until the spring of 2010, when I atteneded the Fiscal Sustainability Teach-In Counter Conference; which was organized to counter a Pete Peterson anti-Social Security conference that was organized for the same day. As I recall, Warren Mosler opened the conference and just blew me away with his presentation on Modern Monetary Theory. It was like watching little Toto pulling back the curtain. When I found out that Mosler was running for the US Senate from Connecticut, I immediately offered my services and found my self managing his Senate campaign.

Thus I found myself in the position of having to explain MMT to hundreds of voters who were not interested in economic theory, but were interested in policies that could lead to economic recovery. I heard all the common Weimar inflation fear mongering, but the real problem was getting heard at all.

Warren Mosler's campaign was a turning point, and I am very proud of the role I played in it. We managed to catapult his ideas for economic prosperity into the mainstream, specifically his idea for a FICA holiday. Unfortunately it was only a tiny FICA holiday, which is why the recovery was so muted. Even more unfortunate, the FICA holiday has ended, withholding has gone up with its deleterious effect upon our economy.

Pete Peterson and his fellow deficit hysterics have been pouring money into his propoganda machine, buying politicians, think tanks, and even journalists to parrot his talking points. MMT is limited to a group of determined bloggers, mostly eonomists, trying to ge the word out.

So it is remarkable that we were able to catapult the idea of the Platinum Coin into the mass media, at least for a few weeks. Still, we need to do a better job of getting the word out. I am working on putting together a MMT talk show. Send word to marshall@prestovivace.biz if you would like to know more.

Edit -
There is a great discussion of this over at Mike Norman's blog.


Ralph Musgrave said...

Making the wording such that the lay audience can understand it is not easy. Here’s my attempt which (needless to say) I think encapsulates the essence of MMT better than the wording in the above article.

1. Dollars are created when government (and their central banks) spend. Contrary to popular belief, governments DO NOT NEED to collect taxes or to borrow before they spend. They can simply create dollars from thin air.

2. Too much of the latter sort of “money creation” leads to excess inflation, and too little leads to households not having what they regard as enough money. So spending declines and unemployment rises.

3. It follows that attempting to balance the budget or avoid deficits or anything of that sort is a TOTAL AND COMPLETE waste of time. It’s pointless. If unemployment is excessive, government needs to create money and spend it (and/or cut taxes). Conversely, if inflation is excessive, government needs to do the opposite: that is, withdraw money from the private sector via a budget surplus, and “unprint” the relevant money.

Dave said...

Starting with the idea that taxes drive money, whether true or not, probably isn't going to work with the public. People acquire money in order to buy the goods and services they need to survive on a daily basis and see taxes as something that gets added on to that. If you didn't have a need to participate in the economy, you wouldn't have to pay taxes. This also contradicts another idea that taxes and spending are separate issues. The government, could, in theory, not tax at all. So long as they maintained 1. the threat of prison for not transacting in the domestic currency, 2. a monopoly on base money issuance and 3. a notional demand for that base money thru #1 and tight control of #2.

Brendan said...

Re: So it is remarkable that we were able to catapult the idea of the Platinum Coin into the mass media

Perhaps not so remarkable, because the idea seems at first glance to be simply crazy, hence it has sensationalist value, which the press loves.

What MMT people seem largely unaware of is the moral dimension behind the inability to grasp the ideas involved. The idea that money is created by computer strokes or by simply crediting private accounts seems, to the average mind, to be nothing less than a con game. Money in the public's mind is something you work to earn; it doesn't come free. To retort that it's different for governments, simply adds to the public's suspicion that government and politicians are crooked and parasitical.

Perhaps more profoundly, the ordinary man does not conceive of money properly, namely as an abstraction, as an "idea." Money is created by work, by productivity in the public's mind. If it is "backed" by gold, this satisfies the notion that money is something "real" and "concrete," so that paper money is simply a token for the "real" wealth, which is gold, and which is something comparatively rare and hard to extract, and hence gives "value" to the currency. It is these firmly entrenched reifications of money as wealth, coupled with the moral ideas concerning the "work" behind the creation of wealth, that the MMT people do not face squarely. They proselytize as if the public were intellectual, but the average man, is not an intellectual, he is an active and practical type, and the same applies to your average politician and government official.

I think the recent article by Stephanie Kelton comes closer to the way MMT must proceed: namely by focusing on what real wealth and prosperity are and what are the conditions for it, including what the currency must be viewed and adminsitered to promote prosperity. The confusion of money equals wealth; money equals something "solid" or "real" is what has to be reframed.

Another point is this. There is a certain distrust of government in the American psyche. MMT is seen as a very pro-government way to conceive financial reality. We've already seen a certain reaction to this even with MMT ranks as it created a Monetary Realism alternative to the theory.
I think that MMT has to be clear that a fiat regime can be terribly abused, because it actually entails tremendous power; and this abuse is in fact the case today in the US, as the banking industry has effectively hijacked a power that properly should be a public monopoly with the overall public weal in view. This is manifestly not the case in a country in which Wall St. has effectively coalesced and "bought" the government and created a security state as well. MMT simply comes across as not having its feet on the ground.