Most of the emphases of this school of thought are right on target. They specifically highlight the implications of sovereignty for the federal debt. A sovereign debt crisis in the U.S. is not a risk the way it is in Greece because we have the freedom to monetize our debt. Of course these guys also talk about functional finance, stabilization policy, and liquidity preference. This is all very good - it can be hard to get a New Keynesian to talk about liquidity preference sometimes! So the real sticking point seems to be the debt. We agree debt monetization removes the risk of a sovereign debt crisis - this is quite standard analysis and not anything that really distinguishes Galbraith, Davidson, and Skidelsky from Reich, Stiglitz, and Krugman. I think the Krugman point (recently, in a disagreement with Galbraith) is the important point to make - debt monetization provides budgetary flexibility (on top of the already substantial flexibility provided by our credit rating and the nature of sovereign governments), but it ultimately just kicks the can down the road. Problems emerge later in terms of inflation and interest rates, but more importantly real growth rates. Janos Kornai's famous observation that governments face "soft budget constraints" doesn't mean that they face no budget constraints. I read and buy into Keynes, Minsky, and Lerner - but I also read and buy into Reinhart and Rogoff (and, well, Keynes!) on the risks involved.
One intriguing option raised by Joe Firestone in the comment section of the last post is to stop issuing debt instruments and just start crediting bank accounts. He provides this link to that option, and L. Randall Wray discusses it further here. They essentially want to cut out the middle man of the Federal Reserve. I don't know enough about the implications of this, and I'd love to hear more discussion in the comment section, but two thoughts immediately come to mind. First, this would bring an end to independence in monetary policy, which is not a pleasant prospect for most economists. Second, as James Macdonald argues, public debt has historically been an essential element in restraining government. Hoarded treasure (aside from being macroeconomically inefficient) ensures that sovereigns are unaccountable to their citizens. Citizen creditors ensure that their government stays accountable. Cutting out this debt instrument gives a sovereign all the revenue-raising power of government bonds, without any of the risk of nervous creditors restraining policy. Perhaps a robust republic can be maintained in such an environment, but if the Macdonald point is right, the chance of abuses are very real.
OK, enough talk. Time for some links. Thanks to Joe Firestone for sharing most of these:
- New Economic Perspectives is a post-Keynesian blog I've followed for a little while now.
- Warren Mosler's blog
- This is Bill Mitchell's blog. Mitchell is at the University of Newcastle's Centre for Full Employment and Equity.
- Here is an interview of Randall Wray and Bill Mitchell, talking about MMT. This is the first one, there are several more that follow.
- Firedoglake and Corrente post regularly on Modern Monetary Theory. I've pulled the MMT tagged posts here (FDL) and here (Corrente) for your convenience.
- Recently these guys had a "fiscal sustainability teach-in" at my alma-mater, The George Washington University. The website for that event is here. I know a guy that was involved in this (Alex Lawson - big activist/advocate if any readers know of him), so I heard updates from it. It did a lot of important work I think - trying to educate people on why Social Security isn't the big risk a lot of people think it is. Of course, as my comments above suggest, I also think they down played more genuine risks.
- Joe Firestone shares this New Deal 2.0 post with me to "address some of the concerns" about the long-term debt. Of course nothing Wray writes in here is new to me or controversial to me, nor does it address the concerns I have. I'm not worried about our ability to pay back our debt. I understand why public debt is different from private debt. And regular readers can attest to the fact that I'm not shy about running up deficits. The bigger concern for me is the impact on real growth rates. And that, of course, is precisely the point that this blog post ignores. Anyway, I have two other reasons for highlighting this: (1.) New Deal 2.0 is another good site worth following, and (2.) an interesting historical point they make. The only time we've ever retired the debt was in 1835. In 1837 we had a severe depression. Does anyone know if these two events are related? I imagine at the time the federal budget was too small to make this sort of macroeconomic difference, but it's possible. Nothing says "liquidity preference" quite like a sinking fund. Anyway - just a query. Joe also provides, this, this, this, this, and this to "address my concerns".
- I'll also share once again the Levy Institute's website. This group does a lot of work with Minsky's theories, and also has strong post-Keynesian influences. This is their program on Monetary Policy, and this is an interesting recent working paper from them outlining what "fiscal responsibility" should mean. I thought this was an especially good passage. It highlights the MMT argument, and it provides an interesting philosophical justification and explanation of the role of government:
"If the government acts not as a self-interested individual, but in order to allow citizens to achieve their intended expenditure decisions, it must engage in policies that support private sector decisions in such a way that they lead to public good. It should act to coordinate and offset the incompatible combination of firms’ and households’ intentions. If households follow the rule of virtue and seek to save too much, then the government should run a fiscal deficit that is just equal to the shortfall between households’ desires to save and firms’ expectations of profits. By doing so it can allow each individual to achieve his desired objective. But, it also avoids the loss in income that would result from the mismatch. Here the government can intervene to make private vices into public virtue by encouraging prodigality when the private sector desires to be frugal. Government prodigality is the equivalent of supporting public virtue! This is the fiscal policy of a responsible government, responsible to insure that private sector decisions can be achieved rather thwarted by the law of unintended consequences."