Got an education yesterday on modern monetary theory yesterday, and I have to say it is a lot to grasp. I was reading this MMT post over at Pragmatic Capitalism and I have to say it really gave me pause. It definitely lays out fundamentally how the US economy functions in reality (or as close to it as we can get via models). It more people in positions of power read it and then did what is best for The People, we might actually get somewhere towards a path of better economic growth.
The Problem with Modern Monetary Theory in the Wrong Hands
The biggest problem I see us facing with knowledge and understanding of Modern Monetary Theory is that politicians will opt to use the information for political gain rather than to promote economic health and recovery. We already see this in the extremely irresponsible actions of Congressmen John Boehner and Eric Cantor, and their partner in the Senate Mitch McConnell. That gang of three is insisting on hard line spending cuts (which according to MMT is akin to a tax hike) while at the same time desiring lower taxes. They have shown a willigness to use the credit-worthiness of the US as bargaining chip with their counterparts on the other side of the aisle.
What Modern Monetary Theory Says Is the Medicine for Increasing US Growth
As best I can decipher from my relative newness to MMT, the medicine the US economy needs is a combination of increased (productive) spending, a reduction in non-productive spending, and perhaps a selective reduction in taxes. By now you have to be scratching your head thinking… “But won’t that increase the debt? Won’t we hit the debt ceiling again?”
The short answer is yes, that will increase “the debt,” and yes, the debt ceiling would be in jeopardy. The important distinction however, is that the debt (as thought of by average Americans) is conceptually misunderstood, and according to MMT, the debt ceiling should be abolished outright.
Stepping Out of the Household Mindset in Order to Understand US Government Debt
The major problem average Americans (like me) have when trying to wrap our minds around economic models is we have a fundamentally flawed paradigm to work from. We conceptualize income, expense, debt, and cash based on our own household or business model paradigm. Concepts of successfully managing a household checking and savings account simply do not apply. Modern Monetary Theorists proclaim this paradigm is fundamentally WRONG when applied to the US economy and US government spending – and the MMT’ers are right!
“Why?” you ask? It is simply a function of the structure of government spending and money creation itself. For our good friend Uncle Sam, unlike you and I, money (literally) does grow on trees. Uncle Sam controls the level of money supply in the system. With the click of a mouse or push of a button on the printing press, an infinite supply of money is at its disposal. You might be attempted to argue, “But isn’t money printing to pay debt inflationary?” but you would be again basing your argument from a fundamentally flawed point of view. The act of money printing is in fact merely changing the duration (and interest rate) of already existing money spent. Money created by government spending is inflationary. Money issued by the Federal Reserve to purchase Treasury Bonds merely has the impact of reducing the interest rate on already existing money created via spending.
So What Is the Medicine for US Economic Growth in 2011-2012?
By now you should have the idea in your mind that the Modern Monetary Theory suggests that increased productive spending with lower taxation (increasing “debt” near term) is the answer. We need to further inflate spending but do so selectively in ways that increase the productivity of workers/citizens. Personally my favorite suggestion is to further expand the expenditure on renewable energy initiatives. Using solar power to create plentiful hot water is a no-brainer for virtually every household (and to a lesser extent apartment buildings) in America. Using solar PV panels to generate electricity is close to being economical for homeowners (and businesses!) – and should be a priority for spending. Scholarship programs for health care, social sciences, and engineering degrees should be a spending priority. Increasing the security and prosperity of other nations globally is more difficult but also should be priority – for it also increases our security and prosperity.
Any of the above suggested spending initiatives would result in increased productivity and standard of living along the lines of those suggested in Modern Monetary Theory. Government spending’s number 1 priority after all, should be to improve the lives for whom the money has been created and spent. I hope you take the time to comment with your own suggestions or criticisms of either my suggestions or my understanding of MMT.