How to Apply a Modern Monetary Theory Solution to an Economic Downturn
by Robert Coutinho
A while back I wrote about Modern Monetary Theory. I have been digesting just how such information could be used to help our society. Although the originators of the theory probably have more complete suggestions, I wanted to share with you what could be done with our economic system. Please keep in mind that the following might (very likely would) require Constitutional Amendment or a Third Republic (which is likely to occur soon, but that’s another whole ball of wax).
Using the fiat currency reality of MMT, we know that the issuing government can, at will, create and destroy money. The most common method for creating it is by spending it into existence on goods and services (or giving it to people who are incapable of providing goods and services). The most common (possibly the only) method of destroying it is by taxes. The purpose of government spending should be to buy the goods and services it needs.
That is it.
The purpose of government taxes is to prevent out-of-control inflation. That is it. In addition to taxes, the government (from here on in I will be referring to the government as that which issues the fiat currency, please keep in mind that US states and EZ countries such as Greece are NOT issuers of fiat currency) can use lender-of-last-resort prices to help set the inflation rate. Whether we are talking about the Federal Reserve or the Treasury Department is actually, from a macroeconomic perspective, irrelevant.
Thus: (not all suggestions are mine, go here to read from one of its originators: http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf )
The government can (and should) offer anyone (of legal age and not 100% disabled, of course) a job at minimum wage with benefits. This should be limited only by the person’s eligibility to work in the United States (illegal immigrants can be excluded if you want). The minimum wage would, then, as a virtual guarantee, really be the minimum wage. The reason is that few, if any, people would work for less money. Thus, if they could automatically get a government job, they would take that instead of one offering less money (perhaps some would rather work for a different boss or something, but that’s small potatoes in the macro economy). This would, for the first time, establish a real minimum wage in the country.
Any business that could not offer the same wages and benefits would simply be priced out of the market by the government. The jobs being offered should include a certain amount of time to allow these transient workers to look for employment in the private sector (through job training, searching, etc.) What the government did with these people would vary over time, but could include nearly anything that would be safe (thus, one would not put such workers as prison guards, but might have them file papers or conduct data entry).
The government would no longer link expenditures to taxes. Since taxes are for the purpose of curbing inflation (the reality, not the myth), there is little to no sense in pretending that taxes must equal expenditures. After a transition period, the Treasury Department (includes the Federal Reserve, as mentioned above) would start setting an inflation rate. We need the transition period because we now have lots of people working who were unemployed before.
How do we set the inflation rate? Taxes and Overnight Lending Rates. How do we currently control inflation? To be perfectly honest, although not always through deliberate planning of such, we control inflation through taxes and the Overnight Lending Rates. The Fed rate is done with planning towards inflation. The taxes are not currently done that way.
Some of the arguments against such a policy would be epithets such as “Socialism” or “Communism” or “Government take-over of [fill in the blank]”. Let me ask you this, “Would such a system be harmful to society? If so, how?” How is it useful for us to have twenty percent of our eligible workforce either unemployed or under-employed? In addition, as was often done during the Great Depression, the government could outsource the transient labor to local officials (states, local communities, etc.) They would probably need to put into place safeguards against cheating of all kinds. They would also need to establish a minimum level of benefits for workers.
All of these things are the types of things our elected officials should be capable of doing! Why else would we elect them?
The only real problem with “creating” money to pay government expenditures is the possibility of inflation (or even hyperinflation). Thus, we need to have a flexible tax policy to deal with the items that cause such inflation. Again, after the transition period, we would have Treasury look at the real inflation rate. This would include food and energy prices (where it currently excludes them). Due to the volatility of such prices, one could use a running three-year average for these items. This would prevent one month of increase (or decrease) from disproportionately affecting the value. Next, Treasury would highlight for congress and the president which items appeared to be fueling inflation above the “acceptable” level.
Thus, we would look at why such inflation was occurring and could easily slow things down (if needed) through taxes. Remember, taxes take money out of the system. That is one of their only purposes (at least when the money is a fiat, non-exchangeable currency). The other purpose is to set value (since one needs the sovereign currency to pay one’s taxes), so all other values become related to the tax base.
Politically this could be a major problem for our elected officials. They would be under enormous pressure to allow more inflation in certain areas (whichever ones the lobbyists wanted). This would have to be prevented. Whether such prevention occurred through banning lobbyists or through threatening politicians with tar-and-feathering (or some other method), such prevention would be mandatory to a viable running of such a system. In addition, there might be enormous pressure from workers to get the minimum wage raised, however, such an action would, virtually by definition, cause either an increase in the GDP (through increased purchasing power fueling expansion) or job loss (due to workers’ pay requirements shutting down companies).
Either way, the effect would be noticeable and could be remedied if the more undesirable outcome (unemployment) occurred. It would not be too hard to convince previously-employed people that the minimum wage got too high. They would feel it in their pocket books (as the fewer goods being produced would lead, at least initially, to inflation).
I have not lain out everything here, but it gives you, the reader, some idea of what is really possible. That our politicians appear to be completely oblivious to the reality of how money is created (and destroyed), what taxes actually do, how the accounts at the Federal Reserve actually work, and what the implications of the Chinese, Japanese, German and other foreign entities holding Treasury Certificates really is (hint: we don’t need them to buy the bonds, they do it because they don’t plan on spending the money any time soon and would like to earn whatever nominal interest they can get) all lead to a great deal of unnecessary suffering, waste, loss of opportunity, and, ultimately, political nonsense.
We do not need to balance the budget in order to prevent our children from having to pay our debts. Our children will consume the goods and services they produce, just as we consume the goods and services that we produce. We should not be cutting educational funding. Educational funding is likely the only source that will allow us to retire with some semblance of financial security.
In other words, our children need to be innovative enough to produce more with less, just as we have done, as did our parents. Without innovation, this can not happen. Thus, the worst of all possible political plans is to cut educational funding (where do such politicians expect to get innovation?)
One last point: for all the Baby-Boomers out there who are worried about retirement funding: is it the amount of money that you need or how much that money can obtain for you that really counts. Financially, those shooting for retirement are (more or less) competing against each other and (to some extent) the younger generations for the goods and services that will be produced in the future (that is, when the BB generation is retired). If there are more goods and services per person available, then the cost for said items will likely be less. If there are fewer goods and services available per person then retirement is “gonna be a bitch!” Either way, the Social Security payments can be met by the government; the only problem will be how much those payments will buy.
It is not Insolvency that faces us in the future, it is Inflation, and that is the real lesson of MMT.
Robert Coutinho is a disabled pharmaceutical chemist living in Massachusetts. He has been learning about life, the universe, and everything since he was born in 1963. He has had little else to do since his disability began in 1997.