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MMT – Letters from America

It was Victor Hugo who said that all the forces in the world are not so powerful as an idea whose time has come.

In the US, inequality and collapsing capitalism means the idea of embracing a socialist politician is gathering momentum. The cynical stock response to how socialism can deliver on its economic promises is to ask, “But how do you pay for it?”

Renegade Inc. went to New York to speak with Bernie Sanders economic adviser, Professor Stephanie Kelton to find out how practical this new American dream really is.

Divided nation

Kelton, who advocates Modern Monetary Theory (MMT) as a way to fund vital public services and thinks the United States is now ready to embrace a socialist president, is nevertheless reluctant from an economist perspective to place modern America politically and economically: “It’s impossible”, she says, “because we are so divided. There are issues around which you could say the country is here on Medicare for all – for example – on providing health care, guaranteeing health care as a right to all people. There is broad bipartisan support even among Republicans when it comes to saying that we ought to be guaranteeing health care for everyone. So on specific issues you can say the country is here but in so many other ways we’re a deeply divided nation.”

For Kelton, the economic divisions “were part of a slow building process that started around the time of Ronald Reagan. Up to this point, socioeconomic mobility was on an upward trajectory but began to recede shortly thereafter:

“For generation after generation families expected to do better than their parents did and the so-called American Dream was kind of alive and well. Then around the time of the early 1980s things began to change. This was the beginning of the unravelling”, says Kelton.

This was a period of increasing deregulation, soaring private debt, the undermining of the social safety net and government attacks on workers and unions. It was, in other words, an epoch characterized by diminishing income and wealth inequalities. The emphasis, as Kelton acknowledges, shifted from the notion of the role of the state as a social-civil society protectionist entity towards laissez faire individualism. Governance was seen less as the responsibility of the state and more the responsibility of the individual. Governments’ were depicted as overblown bureaucracies that undermined economic efficiency.   


The philosophical catalyst for this anti-big government and deregulation agenda is neoliberalism – the idea that free, unfettered markets are efficient when left to their own devices. Markets are deemed to be stymied be governments’ over burdened with rules and taxes which the said governments’ are encouraged to relax in order to create the necessary environment in which entrepreneurs can thrive.

We see the culmination of this narrative today in terms of the rise in a populist politician like Donald Trump, who has been able to politically tap into the legitimate economic grievances of a disenfranchized working class who have largely borne the brunt of neoliberalism. Trump’s repeated use of the simplistic political soundbite, ‘make America great again’ is an example of how he has set about achieving this.

A key ideological component of neoliberalism that helps sustain it, is the notion of economic trickle down – the theory that if those at the top do well, eventually everybody else will too. “That became the term people used with derision to say, “Look this is just a way to justify giving huge windfall gains to the people at the very top on the grounds that they’re the most meritorious of all and that if we do right by them then they’ll do right by the rest of us”, says Kelton.

Arguably, one of the main reasons why many ordinary working people vote for Right Wing politicians like Trump is that they feel betrayed by established politicians who, historically, have promised them a greater share of the wealth they have helped create, only to realize that it remains concentrated at the top. It’s actually worse than that: Neoliberalism is symptomatic, not of wealth trickling down but rather, as Paul Foot remarked, of it ‘gushing up’. 

Structural problem

Some billionaires have come out publicly to argue the case that the neoliberal variant form of capitalism does not serve anybody’s long term interests, least of all capitalists themselves. US venture capitalist, Nick Hanauer, who in reaching a consensus with Jeremy Corbyn, for example, has argued that if capitalism doesn’t change fundamentally, it will destroy itself or be destroyed by revolution.

Another US billionaire capitalist, Ray Dalio, has similarly highlighted the structural problem inherent to the capitalist economy. As is the case with Hanauer, Dalio doesn’t believe capitalism needs to be thrown out completely but advocates its reconfiguration towards the interests of labour – increased minimum wage, wealth taxes etc – at the expense of capital. Dalio believes there is a 60 per cent chance that capitalism will end badly if the necessary regulations are not put in place. 

“He [Dalio] talks about redistribution of opportunity. He’s quite firm on that. As an economist that’s ultimately what you’re doing talking about creating the conditions – if you like – for that opportunity”, says Kelton.

Dalio’s candid recognition of the potential for an impending catastrophe is a surprise to Kelton:

“What he’s basically saying is ‘Listen the pitchforks are coming’. He’s not saying we have to eliminate inequality altogether but that the levels of income, and more importantly wealth inequality, have grown to such extremes that it’s no longer sustainable and will end badly.”

In order to prevent this, the structural problems of capitalism have to be addressed – an issue, says Kelton, that Dalio recognises:

“I think he’s identifying a structural problem and it’s going to take structural solutions. And so some of the things that I think economists and policymakers have to think about are ways to institutionalize new safeguards and protections and ways for people to gain entry into the economy. It’s not enough just to say, ‘We’ll help educate you so that you can find employment.’… I think we do have to directly create those job opportunities for people.”

A new vision

In the view of Kelton, it’s climate change that’s the catalyst most likely to force the hand of governments to make moves towards addressing the kind of structural problems acknowledged, for example, by the Yellow Vest movement in France.

“We need to make sure that schools are better funded, that people have a chance to get ahead. But if at the end of the day there’s not an economy into which young people can graduate and find good paying jobs, then all you’re doing is competing for the small pool of jobs that exist but you going to have different people who are unemployed”, says Kelton, who argues that the condition for this vision to come fruition is that “people see the world as it could be relative to the way it is today.”

Kelton pitches her vision further:

 “You know, look at our communities. The idea that there’s not enough work that needs to be done. Improving everything from preparing for a Green New Deal, shoring up our coastal regions, preparing for wildfires and floods and you know, urban communities that are blighted….Show people what we’re tolerating today and then fold the page over and show them what it could be.”

Kelton expands on this theme:

“It’s a vision of people who are living in an economy that has broadly shared prosperity, where it’s working for everyone and not just a handful of people at the very top. So in the richest country in the world why do we have millions of kids living in poverty? Why do we have people in elder care facilities lying in a bed in a dark room alone when we could have somebody sitting holding their hand, playing checkers, reading to them. We can invest in so many ways in this economy and I think it’s just as simple as showing people the small changes that can have meaningful impact.”

Kelton notes that these kinds of humane interventions are at odds with a rapacious neoliberal capitalist system that prioritizes the maximization of profit above human need. Instead, Kelton offers an alternative, socialist, prescription that re-orientates the notion of success away from the obsession with balancing budgets towards human outcomes:

“The hallmark of success is show me a balanced economy. Are people broadly sharing in the prosperity? Is all the income and wealth going to people at the very top and everybody else is falling farther and farther behind?”, asks Kelton.

The economist adds:

“That is not a measure of success. Policymakers should not be championing their success in shrinking the budget deficit while they wreck their economies in the process. You’re forcing your economy to balance the budget instead of using your budget to deliver a broadly prosperous economy.”

Rallying against the prevailing orthodoxy

The ‘people before profit’ vision outlined by Kelton runs contrary to the prevailing socioeconomic orthodoxy of mainstream economics and the political and corporate media establishment that act as its echo chamber. A common refrain from the media commentariat and politician’s is how budget deficits are to be paid for? 

“In the case of the US, the government has control of its own currency, it issues the US dollar. When it spends it spends more dollars into the economy and that’s… the bottom line is that’s the way the government already pays for everything. They pay by spending their currency into the economy”, says Kelton.

Kelton’s economic analytical framework is “a lens through which I understand both the working of the US economy and the limitations in terms of what governments can do when they have monetary systems that look more like ours and when they have monetary systems that look a lot less like ours”, says Kelton, who adds:

“In the case of countries that currently use the euro, that’s a very different monetary system. And countries that are operating under the EMU don’t have the degree of fiscal space, can’t use their budgets to the fullest possible as we can here in the US.”

The two things are different, because, says, Kelton, “in the case of the US, the US government retains control of its currency. So it is the issuer of the US dollar. If Congress authorizes payments and those payments are to be carried out in the central bank, we’ll clear the payments in its own currency. Then we’ve got fiscal space opened up. Whereas Italy, for example, can say (and just recently did put forward a budget) we want to spend in these ways and have the European Commission say, ‘Oh no no,’ and just deny them the right to exercise their own discretion with respect to their budget.”

Kelton has two reservations about MMT as a movement and as an idea:

“One is that we won’t get there fast enough in terms of recognizing the policy space that we have to fund big ambitious investments that are absolutely needed with respect to climate change. That we’re not going to figure it out soon enough and we’re going to continue to behave as if we’re on a gold standard and we have to worry about the budget outcomes. And the other is that the first people to pick it up and really run with it are going to have very different ideas about who ought to benefit from the insights that MMT brings. In other words, it’s just used to justify another round of tax cuts that look like the last round and that we end up doing things that exacerbate rather than tackle income and wealth inequality.”

Public & private debt

Kelton makes a clear differentiation between public and private debt, the latter of which is worrying for the economist, particularly in relation to the 44 million Americans saddled with over half a million dollars in outstanding student loan debt. Moreover, given the fact that the private sector is the driver for growth in the US against a backdrop of private sector spending paid for through rising debt, it’s the balance between public and private debt that mainly concerns Kelton. There is no reason why the US government cannot cancel private debts like student loans – money that could otherwise be used to free-up cash flow, build-up savings or put a down-payment on a property.

How well does public and private debt stick together?

“MMT is not hostile to the idea of private credit or of banks extending loans to allow businesses to borrow, to invest, or people to borrow to buy homes or whatever the case may be. So private credit is fine”, says Kelton, who adds:

“The trick is they’ve got to be able to service the loans or the lender is going to face people who are defaulting on their loans and then it becomes a loss for the bank and so forth. So you’re going to get broader problems in your financial system if people aren’t able to service their debts. The private and public sector’s balance sheets are interdependent in many ways and so when you think about government deficits becoming surpluses, to some other part of the economy, then government deficits are a way that the federal government channels dollars – if you like – into the rest of the economy.”

The link between public and private debt is, therefore. an important one. The former is an asset of the non-government sector and generates income because, as Kelton states, “the interest on that debt becomes interest income to bond holders.”

What are the implications for the wider economy?

“Government deficits themselves provide net financial assets – dollars to the rest of the economy. So if the government is depriving people of dollars by reducing deficits, balancing budgets or even moving into surplus then it can create a financial strain in the rest of the economy”, says Kelton, who points to the example of the Clinton years:

“There was much celebrating by Democrats at the time because the government’s budget moved into surplus…But government surpluses are effectively sucking dollars out of the economy. And so what happened is the government’s budget moved into surplus and the private sector’s budget moved deeply into deficit. It’s that interplay between the two when the government’s deficits get too small it denies the rest of the economy and the private sector of those dollars”, says Kelton.

In terms of scale, sucking money out of an entire economy means a reduction in GDP and the amount of money in circulation. In the UK context, the private economy has borrowed from the banks in order to make up the shortfall increasing the level of private sector debt.

As professor Steve Keen has argued on Renegade Inc:

“This is what caused the financial crisis and the current slump in the economy. To actually have a monetary economy your money factories have to be producing more money for us to spend….The government is the only institution that owns its own bank, the central bank. The central bank finances what the government wants to do and can finance it indefinitely so long as we continue accepting British pounds as forms of payment within Britain – which we do. So if the government runs a deficit it’s actually injecting money into the economy. Unlike money coming from the banking sector, it doesn’t come with an obligation to repay. It comes with an obligation to pay tax but not to pay it all back. Government is one of our two money factories. A government running a surplus is a government destroying money and telling us to grow at the same time.”

The UK suffered a financial crisis under then Tory Chancellor, George Osborne. His government then imposed austerity (ie it took more money out of the economy than it put in). But the more logical approach, according to Stephanie Kelton’s thinking, would have been to utilize “a combination of tax cuts, spending increases or some of the two.”

“He [Osborne] needed to relax fiscal policy not tighten it. It’s exactly the opposite of what needed to be done”, says Kelton. Instead the government, for ideological purposes, used a false analogy by equating the government budget to a household budget which in turn fed into Theresa May’s, ‘There is no magic money tree’ epithet. “We’re not like a household. Our government is not like a household. Your government, it’s not like a household. The dangers and problems arise when they behave as if they are; when they start trying to play by the same rules that apply to the rest of us. That’s when you wreck your economy”, added Kelton.

More widely, the economist sees hope in a future with Bernie Sanders at the helm:

“It’s not in a sense a false hope. He always says this is going to be hard. He always says, no president can deliver on an ambitious agenda of the kind that we’re talking about. It’s going to take all of us. And it’s going to be a fight. And it’s going to be opposed by very powerful interests. If we’re talking about Medicare for all or employment for all or green new deal, the fossil fuel industry, pharma, it ain’t going to be easy, is what he would say. But you know he’s prepared to stand up and fight and I think millions of people are prepared to fight with him.”

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