Gerald Epstein outlines his criticisms of Modern Monetary Theory (MMT). Paul Jay hosts
PAUL JAY Welcome to The Real News Network. I’m Paul Jay.
So we’re going to step into a little bit of a small minefield here, because there is quite a debate. Raging in economic circles about a theory that’s called Modern Monetary Theory, or MMT. It’s a debate that’s happening between advocates of MMT, Modern Monetary Theory, and various economists, from Paul Krugman to others that are further on the conservative side. But there’s also quite a debate going on amongst progressive economists. And MMT I’m going to try to explain just a little bit, and then we’re going to run a clip from one of the principle advocates of MMT. But this is going to be the beginning of a series. We’re going to interview people that are critical of MMT, we’re going to interview advocates of MMT. We’re going to post it all up. And people can watch it and come to their own conclusion.
Now, why are people even talking so much about MMT? Because it’s been around for a little while. And that’s because it’s gained some currency, especially in some circles around some of the new progressive members of Congress, Alexandria Ocasio-Cortez; at the Sanders Institute getaway a few months ago, Stephanie Kelton, who’s one of the proponents of MMT, was on a panel there. And of course there’s this big question that are people trying to answer, which is how are you going to pay for the Green New Deal? And there’s sort of a few choices here. You can tax the wealthy to pay for it. You can borrow money, which will mean primarily borrowing money from the wealthy. But MMT proposes you don’t have to do either of those things. You can actually create the money, because that’s actually, they argue, how the government pays for things anyway; that the borrowing is not the primary way the government pays for things, they more or less create the money. And yes it creates a bigger deficit, but the MMT proponents do not think that is such a terrible thing, up to a point.
Anyway, I don’t know if MMT people are going to like the way I just described the theory. But here’s a little clip from an interview I did in 2011 with Randall Wray. He’s an economist who is one of the main leaders, proponents, of MMT theory. So here’s that clip.
RANDALL WRAY [CLIP]: OK. Well, so, one is the people don’t understand how the federal government spends, so they worry about affordability. I know you could say on even in conventional terms this doesn’t sound like a lot of money, but they’re going to say hold it, the federal government is already broke. How are they going to pay for this? We’ve already got a trillion dollar budget deficit, so you’re going to be adding to the budget deficit. So you need to explain that Bernanke was right, that this is not a question of the government doesn’t have the money. The government creates the money as it spends. If you’re a social security recipient on the first of the month, what happens is that you get a credit to your bank account. Where did the money come from? A keystroke. As Bernanke said, it’s exactly the same way the Fed buys toxic waste from banks. It’s a keystroke. This is the same way the Treasury credits a social security recipient.
PAUL JAY [CLIP] So the critique of this is at some point it becomes inflationary.
RANDALL WRAY [CLIP] OK. Then the second issue is the inflation issue. The way this program is designed, it’s a higher off the bottom scheme. It is a fixed price floating quantity. That sounds a little bit technical, but the idea is the government doesn’t bid against the private sector to get employees into this program. It just offers—it says “We’re going to pay $7.50 an hour. If you want a job, we will pay the wages for the job.” OK? If the private sector wants to hire people out of this program, all they have to do is pay $7.55. OK? And when the private sector offers $7.55, the government doesn’t say “We’ll pay you $7.60.” You see, they don’t bid against the private sector. They have a fixed wage. A fixed wage provides a wage floor. A wage floor. It doesn’t push wages up. It prevents them from falling below the floor.
So the wage itself is not going to pressure private sector wages. There is no limit to the government’s ability to credit bank accounts. So if the government decided to credit everybody’s account by $20,000, the government could do this. The only constraint is government budgets programs—you know, this is not likely to get through Congress, let’s credit everybody’s bank account with $20,000. It’s not likely to get through Congress. But if Congress decided they wanted to do this, there wasn’t a political constraint to it, there is no financial constraint to the government’s ability to do that. Now, that probably would be inflationary.
PAUL JAY So, now joining us to discuss all of this is a critic of MMT and that’s Jerry Epstein. Jerry is codirector of The Political Economy Research Institute and he’s a professor of economics at UMass Amherst. And he recently authored a report titled The Institutional, Empirical, and Policy Limits of Modern Money Theory. Thanks for joining us, Jerry.
GERALD EPSTEIN Thanks a lot for having me, Paul.
PAUL JAY So, Jerry, why don’t we start with what what are the parts of MMT theory that you do agree with?
GERALD EPSTEIN Well, one of the parts I agree with is the goal of a lot of MMT ideas, which is the goal of economic policy ought to be full employment, and ought to be to have the government provide social goods that are useful for society. So these are parts of MMT that I agree with, that many other heterodox or Keynesian economists agree with, people on the left. The real issue is how to bring that about, what are the limits on policy to bring that about, and how useful this idea of all you need to do is print money, have a keystroke, as the clips just said, ow useful is that as a way of describing how policy works?
So I wrote my critique to try to say we have a lot of shared goals, but the arguments that MMT are making, particularly as they start to enter the policy world, for progressives, can be kind of dangerous, in a sense, for the left.
PAUL JAY And why dangerous?
GERALD EPSTEIN OK, well, there are several aspects. The argument in my paper is about the institutional limits to MMT. So let me give you an example. Randy Wray says there’s no problem with–excuse me–there’s no problem with affording to pay to engage in any kind of policy. All the Fed has to do is, the Federal Reserve, has to print money. They used the term ‘afford’ in a very narrow, technical way. What they say is that countries that print their own money and have their money accepted in the home country and overseas would never have to go bankrupt. They would never have to default on their debt, because all they have to do is print money. And this is technically true, but it doesn’t really tell you what the impact of printing all this money would be. They mention inflation. We’ll come back to that. But they don’t talk about what the impacts are on investment, on economic growth, and financial instability. You know, when the Federal Reserve printed a lot of money and lowered interest rates quite a bit in the early 2000s, we ended up with the financial crisis.
So they don’t talk a lot about the real economic impacts. They just say, well, we can afford it in a technical sense. My argument is that that’s not really enough.
PAUL JAY Now, one of the things that used to get said is that if a government wants to have a program, it has two choices. Tax it to get the money to pay for it, or borrow the money to pay for it. MMT seems to be saying no, in fact, the government doesn’t have to do that. Up to a point, it can make the money, and in fact does do it. It gives quantitative easing, the way that the Fed gave a lot of money to the big banks to get out of the crisis of ’07-’08 as an example. That wasn’t really revenue from taxation, nor was it borrowing. The Fed essentially created it. So let’s say the government actually does this already, so why not do it to pay for, for example, a Green New Deal, or a full jobs program?
GERALD EPSTEIN So this is the–their argument is very appealing to progressive politicians. You know, they’re saying–when you look at the economic policy programs of a number of progressive politicians, of Bernie Sanders, Elizabeth Warren, AOC, there are a lot of great ideas out there. There’s the Green New Deal, which has a lot of different components to it. Elizabeth Warren has proposed, among other things, daycare and child care, universally. Bernie Sanders has proposed a number of things, including Medicare for All. So it would be quite appealing for these politicians to say–everybody’s always asking us how do we pay for it, how do we pay for it? And for them to say, well, you know, we don’t have to pay for it. All we have to do is print money. That’s what we’re learning from MMT.
This is a dangerous illusion. It’s a dangerous illusion because if you just think about it, if all of these policies were implemented, if we won and all these policies were implemented, starting from this point, we would have over full employment. Overcapacity utilization.
So you know, if you’re using all of your capacity, if there’s full employment, and you try to expand output even more for a Green New Deal or some other policy, then that will lead to bidding up of wages, and bidding up of costs for all kinds of production. You will get inflation. Randy Wray said that.
So then either the government does have to tax more to cut back on demand in the economy, or one of these policies has to be cut back. In other words, this group of policies by progressives, they can’t avoid saying how they’re going to pay for it. They can’t avoid saying, you know, talking about national priorities. Because if they do try to say, well, we don’t have to pay for it, then they have to fight among themselves. Elizabeth Warren has to fight with AOC and say I want universal child care to come first. Bernie Sanders would probably have to fight with Elizabeth Warren, saying yeah, I want Medicare for All to come first.
But they’re letting the military off the hook. They’re not as part of their program saying, yeah, we do have to pay for it. We do have to identify national priorities. Let’s cut back on the military. We do have to cut back on luxury consumption by the rich. Let’s raise the high marginal tax rates. AOC did call for higher marginal tax rates, and she was criticized by the MMT people, saying why are you talking about how we have to pay for it? Well, it’s because, in fact, AOC might understand in the current situation if the Green New Deal were implemented we would have over full employment, and it would have to be paid for.
So I think the idea that there is a free lunch out there, which MMT seems to promote, is a dangerous illusion that undermines the credibility of progressive policies and progressive economics. And in this moment, when we really have an opportunity to make inroads and perhaps implement some of these policies, I think we have to be very careful about what kinds of economic ideas we promote.
Note that this argument I’ve just gone through is part of MMT itself, but they just don’t emphasize it when they’re talking about policy.
PAUL JAY Meaning they say themselves there is a point where you’ll have to tax. If you get to full employment, if inflation goes above a certain target. I think sometimes they have said above 6 percent. If you get past that, then you do need to tax in order to keep the economy from becoming too inflationary.
GERALD EPSTEIN And I think if you were to hypothetically get past that, if all of these policies were implemented, then from the beginning you need to say, yeah, we do have to cut back on military spending. We do have to raise taxes. We do have to talk about national priorities. And if you notice, you don’t really see a lot of the progressive politicians–except for Bernie, who’s been doing this for many, many years–talk about national priorities and cutting back on military spending, for example.
PAUL JAY Now, is it a contribution of MMT–and I guess it’s not the only theory that has said this, but they’re the ones that emphasize it–to break this conundrum of that you can only tax or borrow; that the reality is that the Treasury, the Fed, does create money, and you could do it towards these projects even if it’s limited how far it can go. But you’re not stuck only borrowing or taxing.
GERALD EPSTEIN Yeah. I mean, that is true for very particular countries. A large part of my paper, in fact, that makes the argument that this applies only to a very small slice of the human population. The ability to do this in any big way really depends on the country being able to issue internationally accepted money. Because after all, a lot that we buy comes from abroad. So if we were to increase the money supply by a lot, it would spill over into the global financial sector. If the rest of the world didn’t want to accept our dollars, which they do now because we’re the key currency.
We have we issued the internationally accepted currency in the world, the main one. And so yeah, we can afford to increase the money supply, as Randy Wray was talking about, or credit banks with our money, even if it spills over into the rest of the world, because the rest of the world wants dollars. Now, this is what the French called an exorbitant privilege. And we have it. But not many other countries have it. So their policy is really limited to very few countries, and specifically primarily to the United States.
PAUL JAY But in your paper you suggest that even in the United States there’s a limit at which people–you know, people that play with currencies and global trade might start preferring either Chinese Renminbi, or EUs, or such.
GERALD EPSTEIN Right. So, Randy Wray in one of his books said, you know, we don’t have to worry about this problem in our lifetime. The dollar is always going to be king. But international currencies don’t work that way. There have been transitions back and forth between currencies like the British pound, the dollar, other currencies. And now that we have a country–China, particularly–that wants to have an international currency that is gaining military power and diplomatic power, economic power, that I think we have to realize that there’s going to be a rival for the dollar. And maybe not today, maybe not next year, but I think in our lifetime the rivalry is going to be real. So that’s one point.
The final point I make is that even if we would have the dollar as king forever, that doesn’t mean that we want to keep printing money, because it does spill over into the rest of the world. It creates inflationary pressures on other countries. Because the dollar is king and the dollar is used so much, it can trade financial instability asset bubbles and other kinds of problems in the rest of the world. So a progressive policy would take into account the impacts of our monetary policy on other countries. And I think MMT–that’s why I call the MMT is a bit of an America First macroeconomic policy.
PAUL JAY OK, Jerry, that’s good for now. So what we’re going to do, just to explain the process, as I said, we’re going to interview people for and critical of MMT. And if we can we’ll give each–all of them the chance to even do short responding pieces to the others. And we’ll keep this thing going, because clearly we all want to know how to make these policies real. And when people ask “How are you going to pay for it?” there’s got to be an answer.
GERALD EPSTEIN I assume you’ll come back to me at some point to respond to them.
PAUL JAY Yeah, we will. That’s the way we’re going to do it. All right. Thanks a lot, Jerry.
GERALD EPSTEIN Thanks, Paul.
PAUL JAY And thanks for joining us on The Real News Network.