Warren Mosler in The Radical Theory That the Government Has Unlimited Money
(Warren Mosler during an unsuccessful 2010 run for a Connecticut US Senate seat. AP Photo/Jessica Hill)
The original prophet of MMT is Warren Mosler, who 30 years ago was a Wall Street investor trying to gain competitive advantage over other traders by peering deeply into exactly how the federal government taxed, borrowed, and spent.
Fit, tanned, and currently residing in St. Croix in order to lower his tax bill, the 68-year-old multimillionaire makes an odd spokesman for a progressive economics movement. As his friend and hedge fund partner Sanjiv Sharma told me, “Warren is more politics agnostic.”
As a boy, he was fascinated by machinery, how it worked, how to fix it, how to put it together. Mosler told me he planned to major in engineering, but he switched to economics after taking a course and finding it much easier. After graduating from the University of Connecticut in 1971, he was hired by a local bank and found himself being promoted rapidly. Soon, he left New England for Wall Street.
“I look at things at an elemental level,” Mosler told me. He got down in the weeds to examine precisely how the Federal Reserve and the Treasury interacted with the general economy. He wanted to understand what happened to balance sheets when the Treasury collected taxes, traded bonds, spent and created money. He came to believe that the conventional wisdom has the relationship between the government and the private sector ass-backward.
Most of us assume government has to tax before it spends, that like you and me it has to earn money before it purchases goods. If it wants to spend more than it taxes—and it almost always does—it must borrow from the bond market. But by examining the granular way government accounts for its spending, Mosler saw that in every case, expenditures come first. When your Social Security check is due, the Treasury doesn’t look to see if it has enough money to pay it. It simply keystrokes that money directly into your bank account and debits itself simultaneously, thereby creating the money it pays you out of thin air.
When you pay your taxes, the same process happens in reverse. The federal government subtracts dollars your account and eliminates the same amount from the liabilities side of its ledger, effectively destroying the money you just paid to it. Unlike households or firms or even state and local governments, the federal government is authorized to create dollars. It adds money into the economy when it spends, and it takes it out when it taxes. “There’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody,” is how Alan Greenspan, then the Fed chairman, put it to Congressman Paul Ryan during a 2005 hearing.
Wren-Lewis, the Oxford economist, told me MMT sounds more radical than it really is. “In my view a lot of what they say is mainstream. When interest rates are at their lower bound their anti-austerity policy is totally mainstream,” he said. “In terms of their theoretical framework, I would describe it as being quite close to 1970s Keynesian, with the addition of a very modern understanding of how bank money is created.” Kelton told me MMT isn’t trying to change the way government spends and taxes, it is merely describing the way it already does.
Mosler’s understanding of money provided him with an insight: Any government that prints its own currency can’t go bankrupt. That insight made him millions.
In the early 1990s, Italy was struggling with high debt and low tax receipts; economists and traders feared it was heading for collapse. Italian government bond yields inevitably shot up. Mosler recognized that Italy could not be forced into default: It could print as many lira as it needed. (This was in the pre-euro days.) He borrowed lira from Italian banks at an interest rate lower than Italian government bonds were paying and used that money to buy Italian government debt other investors were dumping. Over the next few years, this trade made him and his clients more than $100 million.
It was after that that Mosler wanted to start a dialogue with academic economists. He wrote to Harvard, Princeton, and Yale, laying out his analysis of Federal Reserve payments and their startling implications, but was ignored. But then, using his contacts with Donald Rumsfeld, wrangled a lunch with Arthur Laffer (of supply-side Laffer curve fame). Laffer told Mosler not to expect anything from Ivy League economics departments, but there was this wacky heterodox group called the post-Keynesians, and they might be interested.
These economists—including Randy Wray, Bill Mitchell, and Stephanie Kelton—taught Mosler about the chartalists, an early 20th-century group of economists who like Mosler saw money as debt created by the state. (MMT is sometimes called “neo-chartalism.”) Abba Lerner’s functional finance is another precursor to MMT. Lerner, a mid-century British economist, insisted public officials ignore the deficit and instead focus on maintaining sufficient demand to keep the economy at full employment. If unemployment was too high government should either spend more or tax less. When inflation threatened, it should cut spending or increase taxes. For Lerner, as for the MMT crowd, there’s no reason to care about the size of a government deficit.
Mosler explained to the post-Keynesians that taxation and borrowing did not finance government spending. At first Kelton didn’t believe him. “Warren is putting out this stuff and it is way out there. It is the inverse of everything that we’ve been taught,” she told me. She decided to write a paper disproving Mosler’s theories, but in the end, after looking deep into the way the Federal Reserve, the Treasury, and the private banking system interact, she concluded, to her surprise, that he was right. “I went through all of this research,” she said, “and I got to exactly the same place Warren got, just with a lot of complicating details.” Tax and bond sales do come after spending; their purpose is not to fund the government but rather to take money out the system to keep it from overheating.
Though Mosler came from outside academia, his theories dovetailed with some work done by economists. “What Warren did in some sense was remind people of things we should have known,” she told me. “He made original contributions to be sure, but he also reminded us of what was in the literature and was well-established 60, 80 years ago, and then we just unlearned all those lessons.”
Kelton and Wray introduced Mosler to Wynne Godley’s sectoral balance analysis, which suggests government deficits are not just harmless, they are actually beneficial. To simplify Godley’s theories, every economy has two sectors: the private sector and the public or government sector. When the government spends more than it taxes, it runs a deficit. And that deficit in the public sector inevitably means a surplus for the private sector.
Kelton explained it to me this way: Imagine I’m the entire government, and you are the entire private sector. I spend $100 either going to war or fixing bridges or improving education. The private sector does the work required to achieve those goals, and the government pays it $100. It then taxes back $90, leaving $10 in the private sector’s hands. That is the government running a deficit. It is spending more than it receives back in taxes. But you, the private sector, have $10 you didn’t have before. In order to accumulate money, the private sector needs a government deficit.
Mosler’s hedge fund profited from this theory. In the late 1990s, just about everybody thought the Clinton budget surplus strengthened the US economy. But Mosler realized the Clinton budget surplus meant the government was taking more money out of the private sector in taxes than it was putting in in spending. Mosler reasoned this private sector deficit (the flip side of the government surplus) would inevitably lead to recession, so he bet on interest rates to fall (which they did in 2001) and his hedge fund again made out like bandits.
These days, MMT advocates are interested in larger issues than lining their pockets. For Kelton, the biggest problem with the American economy is unemployment and underemployment. She told me 20 million Americans want full-time work but can’t get it. This strikes her as a shocking waste of resources and talent. To create jobs, she says, we need to boost aggregate demand and the only way to do that is to increase spending. “You can’t make spending the enemy in an economy that depends on sales,” she told me. “Capitalism runs on sales. What you have to do to boost the economy, to boost GDP, is you have to increase spending.”
One way to stimulate spending is a tax cut, especially one whose benefits go to average Americans rather than the top 1 percent. “A tax cut for working people has the same pocketbook effect as a pay raise,” Kelton told me. “When was the last time your employer gave you a raise?”
While MMTers would favor just about any fiscal stimuli, including infrastructure spending or tax cuts, their signature policy is a federally funded but locally administered job guarantee. Anyone who wanted work, either full- or part-time, would be paid $15 an hour on projects deemed valuable by their local community. This might mean building roads, but it might also including caring for the elderly or working at daycares. Needed services would be provided and unemployed and underemployed people could find work.
“It is,” Randy Wray said at a panel during the conference, “an extremely effective anti-poverty program.” Full-time, those jobs would pay over $31,000 a year, enough to take a family of five out of poverty. Wray and Kelton told a panel at the conference this program would create 14 to 19 million jobs, add $500 to $600 billion to the GDP, and add less than 1 percent to inflation. Mosler calls this a “temporary jobs program” because he is confident the extra demand created by this federal spending would spark an upsurge in private sector hiring.
Ten years after the financial crisis, the American economy remains in sorry shape. Kelton calls it “a junk economy.” Although official unemployment is relatively low, that masks a long-term stagnation in wages and a huge number of discouraged workers, not counted in unemployment statistics. Real median wages are lower today than they were when Jimmy Carter was president. For the first time in history, most Americans are likely to be worse off than their parents. Donald Trump won last year at least in part because he recognized for many of us, the American dream is dead and our economy is crap.
MMT says it can fix it, and that all it would take to create jobs and build a better America is to end the worrying about government deficits. “You hear people all the time saying government is living beyond its means,” Kelton said. “Absolutely not. We are living far, far below our means.”
Mosler says politicians are only obsessed by the deficit because voters are: “We’ve created an electorate who believe the deficit is too large and has to come down.” MMT-supporting academics, and left-wing activists, are hoping by changing people’s minds they can transform America. Mosler is confident that once people understand the insights of MMT, they won’t forget them. “Nobody goes back,” he told me.(…)
Ikus Defizit Hontzak (Deficit Owls): https://mailchi.mp/dd84cb3eb189/deficit-owls-monthly-newsletter-the-state-of-modern-money-406783