Modern Monetary Inevitabilities

ALEXANDRIA, VIRGINIA – In a recent Project Syndicate commentary, James K. Galbraith of the University of Texas at Austin Modern Monetary Theory and corrects some misunderstandings about the relationships among MMT, federal deficits, and central-bank independence. But Galbraith does not explore what is perhaps the most important issue of all: the political conditions needed to implement MMT effectively.

MMT owes its newfound relevance to the fact that deflation, rather than inflation, is becoming central banks’ main concern. For a high-debt, high-deficit economy like the United States, deflation is an especially serious threat, because it delays consumption and increases debtor anxiety. Consumers forego major purchases on the assumption that future prices will be lower. Homeowners with mortgages cut back their spending when they see home prices falling and the equity in their homes declining. These cutbacks worry the Federal Reserve, because they add to deflationary pressures and could trigger deeper spending cuts, stock-market declines, and widespread deleveraging.

The Fed’s inability so far to reach its 2% target for annual inflation suggests that it lacks the means to overcome persistent disinflationary forces in the economy. These forces include increased US , which diminishes aggregate demand by weakening employee bargaining power and increasing income inequality; population aging; inadequate investment in infrastructure and climate-change abatement; and technology-driven labor displacement. Making matters worse, US political gridlock assures continued commitment to economically exhausted strategies such as tax cuts for the rich, at the expense of investment in education and other sources of long-term growth. These conditions cry out for significant changes in US government spending and tax policies.

MMT is seen as a way to accomplish the needed changes. It holds that a government can spend as much as it wants if it borrows in its own currency and its central bank can buy as much of the government’s debt as necessary – as long as doing so doesn’t generate unacceptably high inflation. Both tax-cut advocates and supporters of public investment find little not to like.

MMT has been roundly criticized by economists across the political spectrum, from Kenneth Rogoff and Lawrence H. Summers of Harvard University to Paul Krugman of the City University of New York. All contend that it is a political argument masquerading as economic theory. But Galbraith and Ray Dalio of Bridgewater Associates see MMT differently. Dalio argues that MMT is real and, more to the point, it is an inevitable policy step in historically recurring debt-cycle downturns.

In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is

  1. to cut overnight official rates to stimulate credit and investment expansion. The second (MP2)
  2. is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and
  3. proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.

Achieving political agreement on what to finance and how is essential for implementing MP3 effectively. In a financial meltdown or other national emergency, political unity and prompt action are essential. Unity requires a strong consensus on what should be financed. Speed requires the existence of a trusted institution to direct the spending.

In the early 1940s, when the US entered World War II and winning the war became the government’s top priority, the Fed entered full MP3 mode. It not only set short- and long-term rates for Treasury bonds, but also bought as much government debt as necessary to finance the war effort. MP3 was possible because the war united the country politically and gave the Roosevelt administration near-authoritarian rule over the economy.

The core weakness of MP3/MMT advocacy is the absence of an explanation of how to achieve political unity on what to finance and how. This absence is inexcusable. Total US debt (as a share of GDP) is approaching levels associated with past financial meltdowns, and that doesn’t even account for the  associated with infrastructure maintenance, rising sea levels, and unfunded pensions. For the reasons Dalio lays out, a US debt crisis requiring some form of MP3 is all but inevitable.

The crucial question that any effort to achieve political unity must answer is what constitutes justifiable spending. Alexander Hamilton, America’s first Secretary of the Treasury, offered an answer in 1781: “A national debt,” he wrote, “if it is not excessive will be to us a national blessing.” A government’s debt is “excessive” if it cannot be repaid because its proceeds were spent in ways that did not increase national wealth enough to do so. Debt resulting from tax cuts that are spent on mega-yachts would almost certainly be excessive; debt incurred to improve educational outcomes, maintain essential infrastructure, or address climate change would probably not be. Accordingly, it will be easier to achieve political unity if MP3 proceeds are spent on priorities such as education, infrastructure, or climate.

The political test for justifying MP3-financed government spending, is clear: Will future generations judge that the borrowing was not “excessive”? Most Americans born well after WWII would say that the debt incurred to win that war was justified, as was the debt that financed the construction of the Interstate Highway System, which literally paved the way for stronger growth.

As the 1930s and 1940s show, MP3 is a natural component of government responses to major debt downturns and the political crises they trigger. We know much more about what contributes to economic growth and sustainability than we did in the first half of the twentieth century. To speed recovery from the next downturn, we need to identify now the types of spending that will contribute most to sustainable recovery and that in hindsight will be viewed as most justified by future Americans. We need also to design the institutions that will direct the spending. These are the keys to building the political unity that MMT requires. To know what to finance and how, future Americans can show us the way; we need only put ourselves in their shoes.

After Neoliberalism

For the past 40 years, the United States and other advanced economies have been pursuing a free-market agenda of low taxes, deregulation, and cuts to social programs. There can no longer be any doubt that this approach has failed spectacularly; the only question is what will – and should – come next.

The neoliberal experiment – lower taxes on the rich, deregulation of labor and product markets, financialization, and globalization – has been a spectacular failure. Growth is lower than it was in the quarter-century after World War II, and most of it has accrued to the very top of the income scale. After decades of stagnant or even falling incomes for those below them, neoliberalism must be pronounced dead and buried.
Vying to succeed it are at least three major political alternatives:
  1. far-right nationalism,
  2. center-left reformism, and the
  3. progressive left (with the center-right representing the neoliberal failure).

And yet, with the exception of the progressive left, these alternatives remain beholden to some form of the ideology that has (or should have) expired.

The center-left, for example, represents neoliberalism with a human face. Its goal is to bring the policies of former US President Bill Clinton and former British Prime Minister Tony Blair into the twenty-first century, making only slight revisions to the prevailing modes of financialization and globalization. Meanwhile, the nationalist right disowns globalization, blaming migrants and foreigners for all of today’s problems. Yet as Donald Trump’s presidency has shown, it is no less committed – at least in its American variant – to tax cuts for the rich, deregulation, and shrinking or eliminating social programs.

By contrast, the third camp advocates what I call , which prescribes a radically different economic agenda, based on four priorities. The first is to

  1. restore the balance between markets, the state, and civil society. Slow economic growth, rising inequality, financial instability, and environmental degradation are problems born of the market, and thus cannot and will not be overcome by the market on its own. Governments have a duty to limit and shape markets through environmental, health, occupational-safety, and other types of regulation. It is also the government’s job to do what the market cannot or will not do, like actively investing in basic research, technology, education, and the health of its constituents.
  2. The second priority is to recognize that the “wealth of nations” is the result of  – learning about the world around us – and social organization that allows large groups of people to work together for the common good. Markets still have a crucial role to play in facilitating social cooperation, but they serve this purpose only if they are governed by the rule of law and subject to democratic checks. Otherwise, individuals can get rich by exploiting others, extracting wealth through rent-seeking rather than creating wealth through genuine ingenuity. Many of today’s wealthy took the exploitation route to get where they are. They have been well served by Trump’s policies, which have encouraged rent-seeking while destroying the underlying sources of wealth creation. Progressive capitalism seeks to do precisely the opposite.
  3. This brings us to the third priority: addressing the growing problem of concentrated . By exploiting information advantages, buying up potential competitors, and creating entry barriers, dominant firms are able to engage in large-scale rent-seeking to the detriment of everyone else. The rise in corporate market power, combined with the decline in workers’ bargaining power, goes a long way toward explaining why inequality is so high and growth so tepid. Unless government takes a more active role than neoliberalism prescribes, these problems will likely become much worse, owing to advances in robotization and artificial intelligence.
  4. The fourth key item on the progressive agenda is to sever the link between economic power and political influence. Economic power and political influence are mutually reinforcing and self-perpetuating, especially where, as in the US, wealthy individuals and corporations may spend without limit in elections. As the US moves ever closer to a fundamentally undemocratic system of “one dollar, one vote,” the system of checks and balances so necessary for democracy likely cannot hold: nothing will be able to constrain the power of the wealthy. This is not just a moral and political problem: economies with less inequality actually perform better. Progressive-capitalist reforms thus have to begin by curtailing the influence of money in politics and reducing wealth inequality.3

There is no magic bullet that can reverse the damage done by decades of neoliberalism. But a comprehensive agenda along the lines sketched above absolutely can. Much will depend on whether reformers are as resolute in combating problems like excessive market power and inequality as the private sector is in creating them.

A comprehensive agenda must focus on education, research, and the other true sources of wealth. It must protect the environment and fight climate change with the same vigilance as the Green New Dealers in the US and Extinction Rebellion in the United Kingdom. And it must provide public programs to ensure that no citizen is denied the basic requisites of a decent life. These include economic security, access to work and a living wage, health care and adequate housing, a secure retirement, and a quality education for one’s children.

This agenda is eminently affordable; in fact, we cannot afford not to enact it. The alternatives offered by nationalists and neoliberals would guarantee more stagnation, inequality, environmental degradation, and political acrimony, potentially leading to outcomes we do not even want to imagine.

Progressive capitalism is not an oxymoron. Rather, it is the most viable and vibrant alternative to an ideology that has clearly failed. As such, it represents the best chance we have of escaping our current economic and political malaise.

Netanyahu Rivals Team Up Against the Prime Minister for Israel’s Elections

Centrist candidates strike an alliance in a bid to unseat the prime minister

If elected, Benny Gantz, a retired Israeli army chief, and Yair Lapid, a former TV anchor turned parliamentarian, agreed to take turns at running the country, they said in a statement Thursday. Mr. Gantz would serve as prime minister for the first 2½ years, and Mr. Lapid would take over for the rest of the four-year term.

The agreement between the centrist politicians is a result of several weeks of discussions amid questions over whether the two men could put aside their personal ambitions to unite against Mr. Netanyahu.

It also comes at a vulnerable moment for Mr. Netanyahu, who is expected to be indicted on corruption charges later this month. He will have a chance to defend himself in a hearing before charges are formally filed, and he has vowed to stay in power and to fight them. He doesn’t have to resign unless convicted. Mr. Netanyahu has denied wrongdoing..

Opinion polls project a tight contest, but some indicate that Mr. Gantz’s Israel Resilience party and Mr. Lapid’s Yesh Atid party could together secure more seats in Israel’s parliament than Mr. Netanyahu’s Likud.

“The new ruling party will bring forth a cadre of security and social leaders to ensure Israel’s security and to reconnect its people and heal the divide within Israeli society,” the parties said in a statement.

The two parties also said they would add former Israeli army chief Gabi Ashkenazi to their slate. Mr. Ashkenazi is seen as an important player in attracting votes from the right, which will be important if Messrs. Gantz and Lapid are to unseat Mr. Netanyahu.

Both Mr. Gantz and Mr. Lapid are running as anti-Netanyahu candidates, while emphasizing a commitment to addressing social problems in Israel like education, housing, health care and traffic.

They have struck a more moderate tone than Mr. Netanyahu on handling relations with the Palestinians. Before the agreement, Mr. Lapid’s camp said it was unsure whether Mr. Gantz supported a two-state solution to the Israeli-Palestinian conflict, citing at least one in his party who has opposed it in the past.

Mr. Netanyahu’s Likud party said the election would be a choice of “either a left-wing government of Lapid-Gantz with preventative support from the Arab parties, or a right-wing government with Netanyahu at its helm.”

As an alliance became more likely, Mr. Netanyahu issued statements and videos painting Mr. Gantz and Mr. Lapid as weak and leftist, while describing himself and his party as strong and right.

.. Israeli politicians must submit their party lists to Israel’s Central Election Committee by Thursday. Those lists must disclose whether the politicians will run as one ticket.

.. “For the first time since 2009 we have a competitive race for the premiership,” said Yohanan Plesner, president of the Jerusalem-based Israel Democracy Institute. “The main question is whether this new list can lure or be attractive enough for some center right and soft right voters. This is probably the question that will determine the outcome of the election.”

Mr. Gantz entered politics late last year, brandishing his security credentials but saying little about his policy positions to try to lure a broad swath of the electorate. He has consistently polled second to Mr. Netanyahu and his Likud party.

Mr. Lapid’s party finished second in the 2013 elections, the first contest after it was created, but has slid in the polls ever since. Mr. Lapid served for a year as the finance minister in Mr. Netanyahu’s government.

Who’s Afraid of the Budget Deficit?

Democrats shouldn’t put themselves in a fiscal straitjacket.

On Thursday, the best House speaker of modern times reclaimed her gavel, replacing one of the worst. It has taken the news media a very long time to appreciate the greatness of Nancy Pelosi, who saved Social Security from privatization, then was instrumental in gaining health insurance for 20 million Americans. And the media are still having a hard time facing up to the phoniness of their darling Paul Ryan, who, by the way, left office with a 12 percent favorable rating.

There’s every reason to expect that Pelosi will once again be highly effective. But some progressive Democrats object to one of her initial moves — and on the economics, and probably the politics, the critics are right.

.. The issue in question is “paygo,” a rule requiring that increases in spending be matched by offsetting tax increases or cuts elsewhere.

You can argue that as a practical matter, the rule won’t matter much if at all. On one side, paygo is the law, whether Democrats put it in their internal rules or not. On the other side, the law can fairly easily be waived, as happened after the G.O.P.’s huge 2017 tax cut was enacted.

But adopting the rule was a signal of Democratic priorities — a statement that the party is deeply concerned about budget deficits and willing to cramp its other goals to address that concern. Is that a signal the party should really be sending?

.. Furthermore, there are things the government should be spending money on even when jobs are plentiful — things like fixing our deteriorating infrastructure and helping children get education, health care and adequate nutrition. Such spending has big long-run payoffs, even in purely monetary terms.

Meanwhile, the federal government can borrow money very cheaply — the interest rate on inflation-protected 10-year bonds is only about 1 percent. These low borrowing costs, in turn, reflect what seems to be a persistent savings glut — that is, the private sector wants to save more than it’s willing to invest, even with very low interest rates.

Or consider what happened after Democrats enacted the Affordable Care Act, going to great lengths to pay for the additional benefits with tax increases and spending cuts. A majority of voters still believed that it increased the deficit. Reality doesn’t seem to matter.

.. Anyway, the truth is that while voters may claim to care about the deficit, hardly any of them really do. For example, does anyone still believe that the Tea Party uprising was a protest against deficits? From the beginning, it was basically about race — about the government spending money to help Those People. And that’s true of a lot of what pretends to be fiscal conservatism.

.. In fact, even the deficit scolds who played such a big role in Beltway discourse during the Obama years seem oddly selective in their concerns about red ink. After all those proclamations that fiscal doom was coming any day now unless we cut spending on Social Security and Medicare, it’s remarkable how muted their response has been to a huge, budget-busting tax cut. It’s almost as if their real goal was shrinking social programs, not limiting national debt.

.. So am I saying that Democrats should completely ignore budget deficits? No; if and when they’re ready to move on things like some form of Medicare for All, the sums will be so large that asking how they’ll be paid for will be crucial.