This week “Liberty and Justice for All” features a conversation with Randy Wray, one of the founders of what is known as “Modern Monetary Theory” or MMT. A lightly-edited transcript of the conversation is linked here.
MMT is both complicated and controversial If you ask Google if MMT is widely accepted, it will tell you, no. But regardless of controversy, MMT has been “embraced by progressive political groups, climate activists, and left-leaning policymakers.”
The reason they have done so is that proponents of MMT argue that conventional economists are wrong to insist that governments cannot “spend forward”—i.e., spend money, even a lot of money, without having an immediate revenue stream to pay for it.
And the position of MMT on government spending is of vital importance. If we are going to ensure that those who are hungry have a meal, those who are unhoused have a place to live, those who want to learn a place to go to school, those who want a job a place to work, and so on, the government is definitely going to have to spend forward!
This week’s show doesn’t sort out all the thorny issues, but it’s a start. (For those who are interested, there is a Wikipedia entry on some of them that provides links to different contributions to the discussion.)
According to the conventional wisdom, households, governments, and corporations can only responsibly operate on a pay-as-you-go basis. How much they can spend is limited to how much they earn or collect in taxes.
Of course, they also can borrow. Households that are investing in their education or (you should excuse the expression!) “human capital development” can borrow large sums on a pay-you-later basis because years of schooling correlate with higher incomes: the more years in school, on average, the more earnings later.
Governments, too, can safely borrow money, even large sums of money. But if they borrow too much, more than they can easily repay, or even if they spend what they borrow in undesirable or unproductive ways, they can find themselves on the ropes and bad things can happen, like runaway inflation or an impoverished private sector.
And corporations can borrow. Indeed, since the mid-1990s, in one technological boom after another, new companies have lived on nothing but borrowed money for anywhere from 2 years to nearly 20 before they started to turn a profit. Again, just ask Google.
But there is one group of corporations that not only spend what they earn or borrow, but also create new money on demand, more or less out of thin air. They are, of course, banks, which both make and sell money! Money is their product and service. (How this process works is discussed in the conversation below, so I won’t go over it in much detail here.)
About all this, both MMT theorists and conventional economists agree. Where they differ is that MMT also argues that sovereign governments are like banks. Not only can sovereign governments borrow money to the degree they are judged credit-worthy. They can also create new money, again on demand and out of thin air, by writing checks to themselves or others as required.
This is one of MMT’s most important insights. But it does not mean that either banks or sovereign governments can create all the new money they want without limit. Their ability to create money depends upon their standing with their customers and constituents. A bad bank that makes bad loans will sooner or later go out of business, and a bad government that does bad things will sooner or later be dismissed or overthrown.
Also, not all governments are sovereign money creators. In the US, state governments are barred by the Constitution from issuing currency, and in Europe only 21 of the 27 members of the European Union use the Euros from the European Central Bank instead of issuing their own. (The six who do not use Euros are Czechia, Denmark, Hungary, Poland, Romania, and Sweden.)
But the banks and sovereign governments that can and do issue currency—create money—are not at all like households or other companies or governments that can’t or don’t. To do the things they think need doing and people want done, they can create the money required.
We only scratch the surface of the issues raised by these matters here. But the following are two of the most important points.
First, the sovereign debt of the federal government is not a bad thing. On the contrary, it is a necessary and good thing. If the government didn’t go into debt by lending money to Federal Reserve banks, it could not ensure an adequate supply of the money we need to pay our bills, and we would be dependent solely on barter or the banks.#
Second, there is always enough money to do the things we need to do. Money is basically a promise that we will show up when we have to show up and do what we have to do. But because it is money, it shows up for us and can enlist others to do what needs to be done if we are not available or able.
In other words, when our government or elected officials say we can’t afford to assure jobs, healthcare, education, housing, and food to all our citizens, they are really saying either that they don’t know how to assure everyone such things, or they don’t want to.
Which brings us back to “Liberty and Justice for All.” Our purpose with this show is to explore the ways in which we can do such things. The reason we wanted to talk about Modern Money Theory is to clear the decks of one common objection: that we have the only prosperity we can afford.
No, we don’t. A more egalitarian and shared prosperity is possible!
# Some people think we would be better off with only private market money, like gold or some other commodity, or bank-created money, like their lines of credit. In fact, the US had such a system after Andrew Jackson vetoed the re-chartering of the Second Bank of the United States in 1832 and until the Federal Reserve Act was passed in 1913. The repeated financial crises and bank failures during this period convinced most people, including rich bankers like J. P. Morgan, that the federal government needed to get into the business of issuing currency, if only so that it could play a larger role in managing the money supply and influencing the going rate of interest. Another weed patch and for another time.