ALEXANDRIA, VIRGINIA – In a recent Project Syndicate commentary, James K. Galbraith of the University of Texas at Austin defendsModern 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 market concentration, 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
- to cut overnight official rates to stimulate credit and investment expansion. The second (MP2)
- 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
- 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 hidden debts 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.
Here’s my succinct request to Donald Trump and all the Democrats and Republicans trying to unseat him.
The founders wanted to create a new kind of country where individuals — and individual communities — could pursue happiness as they saw fit. They didn’t achieve that instantaneously, and we still don’t have it in meaningful respects, but they set up the machinery to make it achievable. This doesn’t mean the founders were against unity in all circumstances. Their attitude could be described as in necessariis unitas, in non-necessariis libertas, in utrisque caritas. In essential things unity, in non-essential things liberty, and in all things charity. In other words, they understood that unity was a powerful tool, best used sparingly and only when truly needed. Odds are good that this was — or is — the basic, unstated rule in your own family. Good parents don’t demand total unity from their children, dictating what hobbies and interests they can have. We might force our kids to finish their broccoli, but even then we don’t demand they “celebrate broccoli!” I wish my daughter shared my interest in certain things, but I have no interest in forcing her too, in part because I know that’s futile. Spouses reserve unity as an imperative for the truly important things. My wife hates my cigars and has a? fondness for “wizard shows.” But we tend to agree on the big things. That seems right to me.
What is fascinating to me is that in the centuries since the Enlightenment, unbridled unity, enforced and encouraged from above, has been the single greatest source of evil, misery, and oppression on a mass scale, and yet we still treat unity like some unalloyed good.
Just Drop It
Okay enough of all that. Let’s get to the here and now. Joe Biden promised this week that if he’s president, he will unite the country. Newsflash: He won’t. Nor will any of the other Democrats. Donald Trump won’t do it either — and certainly hasn’t so far. George W. Bush wasn’t a uniter. Barack Obama promised unity more than any politician in modern memory — how did he do?
For the reasons spelled out above, our system isn’t designed to be unified by a president — or anybody else. The Era of Good Feelings when we only had one party and a supposed sense of nationality was a hot mess. It’s kind of hilarious to hear Democrats talk endlessly about the need to return to “constitutional norms” in one moment and then talk about the need to unify the whole country towards a singular agenda in the next. Our constitutional norms enforce an adversarial system of separated powers where we hash out our disagreements and protect our interests in political combat. Democracy itself is not about agreement but disagreement. And yet Kamala Harris recently said that as president, she’d give Congress 100 days to do exactly what she wants, and if they don’t she’ll do it herself. You know why Congress might not do what she wants it to do? Because we’re not unified on the issue of guns. In a democracy, when you don’t have unity, it means you don’t get the votes you need. And when you don’t get the votes you need, you don’t get to have your way. Constitutional norms, my ass.
So here’s my explanation for why I don’t want politicians to promise national unity. First, they can’t and shouldn’t try. Tom Sowell was on the 100th episode of my podcast this week, and one of the main takeaways was that we shouldn’t talk about doing things we cannot do. Joe Biden has been on the political scene since the Pleistocene Era. What evidence is there that he has the chops to convince Republicans to stop being Republicans? When President Bernie Sanders gives the vote to rapists and terrorists still in jail, will we be edging closer to national unity? When President Warren makes good on her bribe of college kids with unpaid student loans, what makes you think this will usher in an era of comity and national purpose?
But more importantly, when you promise people something you can’t deliver you make them mad when you don’t deliver it. I’m convinced that one of the reasons the Democrats spend their time calling every inconvenient institution and voter racist is that they are embittered by Barack Obama’s spectacular failure to deliver on the promises he made and the even grander promises his biggest fans projected upon him. When you convince people they’re about to get everything they want and then you don’t follow through, two reactions are common. The first is a bitter and cynical nihilism that says nothing good can be accomplished. The second is an unconquerable conviction that evil people or forces thwarted the righteous from achieving something that was almost in their grasp. The globalists don’t want us to have nice things! The corporations keep the electric car down! The Jooooooooz bought off Congress! The Establishment pulled the plug! The Revolution was hijacked! The system was rigged! The founders were Stonecutters!
(7 min) Run as a “uniter” in it to win it.
Republican leaders need to mount an intervention.
Up to now I have not favored removing President Trump from office. I felt strongly that it would be best for the country that he leave the way he came in, through the ballot box. But last week was a watershed moment for me, and I think for many Americans, including some Republicans.
It was the moment when you had to ask whether we really can survive two more years of Trump as president, whether this man and his demented behavior — which will get only worse as the Mueller investigation concludes — are going to destabilize our country, our markets, our key institutions and, by extension, the world. And therefore his removal from office now has to be on the table.
I believe that the only responsible choice for the Republican Party today is an intervention with the president that makes clear that if there is not a radical change in how he conducts himself — and I think that is unlikely — the party’s leadership will have no choice but to press for his resignation or join calls for his impeachment.
It has to start with Republicans, given both the numbers needed in the Senate and political reality. Removing this president has to be an act of national unity as much as possible — otherwise it will tear the country apart even more. I know that such an action is very difficult for today’s G.O.P., but the time is long past for it to rise to confront this crisis of American leadership.
Trump’s behavior has become so erratic, his lying so persistent, his willingness to fulfill the basic functions of the presidency — like
- reading briefing books,
- consulting government experts before making major changes and
- appointing a competent staff — so absent,
his readiness to accommodate Russia and spurn allies so disturbing and his obsession with himself and his ego over all other considerations so consistent, two more years of him in office could pose a real threat to our nation. Vice President Mike Pence could not possibly be worse.
The damage an out-of-control Trump can do goes well beyond our borders. America is the keystone of global stability. Our world is the way it is today — a place that, despite all its problems, still enjoys more peace and prosperity than at any time in history — because America is the way it is (or at least was). And that is a nation that at its best has always stood up for the universal values of freedom and human rights, has always paid extra to stabilize the global system from which we were the biggest beneficiary and has always nurtured and protected alliances with like-minded nations.
Donald Trump has proved time and again that he knows nothing of the history or importance of this America. That was made starkly clear in Secretary of Defense Jim Mattis’s resignation letter.
Trump is in the grip of a mad notion that the entire web of global institutions and alliances built after World War II — which, with all their imperfections, have provided the connective tissues that have created this unprecedented era of peace and prosperity — threatens American sovereignty and prosperity and that we are better off without them.
So Trump gloats at the troubles facing the European Union, urges Britain to exit and leaks that he’d consider quitting NATO. These are institutions that all need to be improved, but not scrapped. If America becomes a predator on all the treaties, multilateral institutions and alliances holding the world together; if America goes from being the world’s anchor of stability to an engine of instability; if America goes from a democracy built on the twin pillars of truth and trust to a country where it is acceptable for the president to attack truth and trust on a daily basis, watch out: Your kids won’t just grow up in a different America. They will grow up in a different world.
The last time America disengaged from the world remotely in this manner was in the 1930s, and you remember what followed: World War II.
You have no idea how quickly institutions like NATO and the E.U. and the World Trade Organization and just basic global norms — like thou shalt not kill and dismember a journalist in your own consulate — can unravel when America goes AWOL or haywire under a shameless isolated president.
But this is not just about the world, it’s about the minimum decorum and stability we expect from our president. If the C.E.O. of any public company in America behaved like Trump has over the past two years —
- constantly lying,
- tossing out aides like they were Kleenex,
- tweeting endlessly like a teenager,
- ignoring the advice of experts —
he or she would have been fired by the board of directors long ago. Should we expect less for our president?
That’s what the financial markets are now asking. For the first two years of the Trump presidency the markets treated his dishonesty and craziness as background noise to all the soaring corporate profits and stocks. But that is no longer the case. Trump has markets worried.
.. The instability Trump is generating — including his attacks on the chairman of the Federal Reserve — is causing investors to wonder where the economic and geopolitical management will come from as the economy slows down.
- What if we’re plunged into an economic crisis and we have a president whose first instinct is always to blame others and
- who’s already purged from his side the most sober adults willing to tell him that his vaunted “gut instincts” have no grounding in economics or in law or in common sense. Mattis was the last one.
We are now left with the B team — all the people who were ready to take the jobs that Trump’s first team either resigned from — because they could not countenance his lying, chaos and ignorance — or were fired from for the same reasons.
I seriously doubt that any of these B-players would have been hired by any other administration. Not only do they not inspire confidence in a crisis, but they are all walking around knowing that Trump would stab every one of them in the back with his Twitter knife, at any moment, if it served him. This makes them even less effective.
Indeed, Trump’s biggest disruption has been to undermine the norms and values we associate with a U.S. president and U.S. leadership. And now that Trump has freed himself of all restraints from within his White House staff, his cabinet and his party — so that “Trump can be Trump,” we are told — he is freer than ever to remake America in his image.
And what is that image? According to The Washington Post’s latest tally, Trump has made 7,546 false or misleading claims, an average of five a day, through Dec. 20, the 700th day of his term in office. And all that was supposedly before “we let Trump be Trump.”
If America starts to behave as a selfish, shameless, lying grifter like Trump, you simply cannot imagine how unstable — how disruptive —world markets and geopolitics may become.
We cannot afford to find out.