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In defense of Modern Monetary Theory

George Will, a great wordsmith, sells newspapers. But his column in the Journal on March 14, which dismisses MMT (Modern Monetary Theory) as a late-night commercial hoax, exposes his economic naiveté. Will and the economists he quotes, Summers and Furman, are members of an old boys club, which includes Paul Krugman. That self-aggrandizing club has been slow to grasp the essence of MMT.

MMT represents an economic model to replace the so-called Neoliberal model that over the past half-century has resulted in massive shifts in wealth to the rich at the expense of the poor and not-so-rich. Indeed, the disappearing middle class has been well documented.

The Neoliberal model obsesses about national deficits and debts, which it misunderstands. And, through its adherents’ inexorable influence on our Congress, it extracts tax benefits for the rich. The model promises investments by the rich will cause trickle-down wealth for everyone. That has not worked out well anywhere!

MMT recognizes the power of a state-issued, sovereign, fiat currency. Federal spending creates money in the economy, while taxes, in effect, destroy money. We call the difference between spending and taxes a deficit, and deficits accumulated over time we call the national debt.

The Neoliberal model by design or ignorance fails to recognize that U.S. Treasury securities, which are private assets, make up the national debt to the penny. Imagine that! The infamous National Debt Clock is also the National Savings Clock. We don’t pay off the national debt. It remains as the record of net private assets created by government deficit spending since our republic began.

Government cannot run out of money as long as it does not promise to convert it into something it can run out of, like gold. Of course, the world rejected the gold standard when President Nixon took us off the international gold standard in 1971.

So, unlike households and businesses, there is no financial limit to government spending. But MMT recognizes that there is a real constraint on spending, because there is a real limit to productive resources; labor, equipment, infrastructure and natural resources.

Therein lies a caution. The purchase of more goods and services than the nation can produce will cause inflation.

Implied in the above is the counterintuitive fact that government, again unlike households and businesses, does not need to tax or borrow to spend. Taxes and borrowing, the sale of treasuries, are useful to avert inflation.

Actually, MMT is not so modern. Marriner Eccles, who was FDR’s Fed chairman, helped steer the nation out of the Great Depression in the 1930s. Eccles understood that our great nation had the productive capacity to afford everyone a decent standard of living. Beardslee Ruml, 1946, chairman of the Fed Reserve Bank of New York, published Taxes for Revenue are Obsolete. Abba Lerner, 1943, advocated full employment in Functional Finance and might be the father of MMT. He would balance the economy, not the budget.

The economic lessons of the 1930s and ’40s fell under the sway of Milton Friedman, a major proponent of free-market capitalism, in the 1970s. He might be the father of the Neoliberal model. But we credit Warren Mosler with rediscovering the MMT model in the early 1990s and stimulating solid academic research. That research is published and available to those willing to learn.

With insights provided by MMT, we are going back to the future with the realization that this great country can afford a Green New Deal, including a federal job guarantee, and universal health care. MMT gives us the vision to look beyond misunderstood deficits and debt to focus on what our nation can do with its great productive capacity.

There is a stark difference between households that must live within their means and sovereign nations that should live up to their capabilities. Don’t be persuaded by the knee-jerk reactions from the old boys club.

Dan Metzger is a retired physicist, former resident of Santa Fe and a proponent of MMT who now lives in North Carolina.

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