By Michael Hoexter
Michael Hoexter is an energy efficiency and renewable energy policy analyst and marketing professional located in the San Francisco Bay Area. He is concerned that flaws in economic thinking are derailing effective policy action on climate and energy challenges.
Currently, on the world political stage, there is little discussion of an alternative progressive framework for economics that would significantly counteract the push towards fiscal austerity. One hears now and again protests about the damage already done and yet to be done by fiscal austerity, but the public in general has little knowledge of a comprehensive alternative framework. There are signs that the Modern Monetary Theory (MMT) view is reaching a wider audience, but it is probably the case that even most well informed political insiders remain in the dark. The public at large is exposed in both media and policy circles to two flavors of the same neoliberal economics that sees no positive leadership role or well-thought-out supporting role for government in the economy. In the upcoming US Presidential election, the American public must choose between two candidates, superficially different, but who offer in practice weaker and stronger versions of the same approach to governing. The lack of a perceived alternative engenders apathy and cynicism in many.
Even if people with progressive sympathies become aware of MMT and other post-Keynesian alternatives to the status quo, they are faced with a weighty political and intellectual task: MMT’s view of the economy and public finance suggests a very different progressive political strategy than that offered by the current thought leaders on the progressive side of the political spectrum. In theUS, one of the primary focuses of most mainstream progressives currently is the demand that the government collect more tax revenue from the wealthy as a means to preserve government social and economic programs. As readers of NEP know, this contradicts almost exactly the observations of modern monetary operations upon which MMT is based: a currency-issuing government does not “use” tax monies to “pay for” programs but simply, electronically, via “keystrokes”, credits bank accounts to pay for goods and services without drawing upon a reserve of collected tax revenue. A sovereign, non-convertible currency-issuing government can use its power to raise/lower taxes in order to achieve, in a targeted manner, economic outcomes aimed at promoting the public purpose (i.e. democratically decided upon ends), including controlling for inflationary pressures. In the MMT account, taxes are a tool that is used to keep the economy operating at the “right” temperature (with low inflation and high employment), but they are not a source of “revenue” to the sovereign issuer, which simply destroys the tax money when it collects it.
An MMT-informed progressive politics would focus on fighting for the positive benefits to society of the programs and social goals that were democratically demanded by providing the necessary “keystrokes” without predicating this provision on the collection of a certain amount of tax revenue. Secondarily, such a political orientation might lead one to advocate for higher taxes on the wealthy or a more progressive tax structure overall, but only as a means, and perhaps not the most effective means in the long-term, to achieve greater social equality and to prevent the continued growth of a plutocracy/oligarchy. The collected taxes are not “revenues” to the currency-issuing federal government, though they are revenues to state governments or to national governments that do not control their own currency.
Thus, while the reactionary right and the pliable center are united around a “hard money” economic ideology that spurs the continued and damaging drive towards laming or privatizing the functions of government, progressives would be at least temporarily divided if they do start to take the MMT alternative seriously. A reversal and re-ordering of policy prescriptions would be in order if progressive activists and pundits adopt some or all of what MMT has to offer.
Simon Johnson and James Kwak’s latest book, White House Burning: The Founding Fathers, Our National Debt, and Why it Matters to You is, in part, an effort by two left-of-center economists to take up the fight against the fiscal austerity wave or at least its most damaging effects. Johnson and Kwak are the authors of the Baseline Scenario blog on the financial crisis and the 2010 book 13 Bankers, an account of the 2008 financial crisis and the grip of the financial industry upon theUS government. Johnson is a former chief economist at the IMF, a professor at MIT’s Sloan School of Management, a New York Times economics blogger, and a fellow at the Peterson Institute for International Economics. Kwak is a former McKinsey consultant, software entrepreneur and now a law professor atUniversity ofConnecticut.
At first glance the title of the book suggests an emergency, a grave existential threat to theUSgovernment, and seems to be intended to cause alarm in the reader. J&K have chosen to title their book after a raid during the War of 1812, actually occurring in 1814, when the British burned down the White House, Capitol and Treasury buildings. This military defeat and humiliation of theUSgovernment surprisingly did not lead to the utter humiliation of theUSat the end of the war, nor, obviously, to the re-conquest of theUSby its former colonial power.
The reason for the authors’ selection of this incident as the pivotal vignette for their book on contemporary USfiscal policy is not at first obvious but J&K quickly explain their choice. J&K feel, as do some other historical commentators, that the US was ill-prepared to defend itself from British attack not because of some inherent military weakness but because the US government had not set up strong enough centralized banking and taxation authority for the government. Not enough soldiers and material could be mustered to defend Washingtonin August of 1814, in part because of lack of funds and the lack of a strong currency. The political faction that had ruled early 19th Century America, the “small government” Jeffersonian Democrat-Republicans opposed what J&K feel were the more prudent Hamiltonian/Federalists who advocated setting up a national commercial and banking system backed by the US government with sufficient power to tax. The US federal government at the eve of the war of 1812 was not collecting enough taxes to pay the army and buy war material from abroad. Still influential Thomas Jefferson, the President from 1801-1809, and the eminence grise of the Democrat-Republicans had a suspicion of bankers and large commercial interests. The early policies of Alexander Hamilton, the first Secretary of the Treasury, included an excise tax, and were partially rolled back in the decade prior to the war. While this incident highlights two unique historical personalities and a policy dispute from the distant past, the general political struggle was between a more centralized federal “big” government philosophy and a more decentralized, confederal “small” government, a political/cultural issue that continues to re-emerge in political conflicts in the US and abroad.
By selecting this metaphor, J&K maintain that government borrowing is one of the most critical attributes of a functioning government, especially during an emergency. Therefore, in their view, the defining strength, function, and service of government is to maintain its credit rating as a borrower. Ironically, Johnson and Kwak, in 13 Bankers and in numerous posts and editorials, in which they call for diminishing the power of large commercial banks by breaking them up, find themselves now siding with the opposite side, theHamilton side, of the Hamilton-Jefferson political conflict.
Also the metaphor seems to be an effort by J&K to be noticed by the Obama White House itself: if a book suggests an existential threat to the home of the Presidency, someone at1600 Pennsylvania Avenueis sure to pick it up. Though perhaps a clever ploy, the book offers so many different interpretations that it is unclear what those readers will take away from it. The notion that public debt is threatening the Obama Presidency seems to resonate more with the foolish efforts of the current Administration to cut deficits during a time of private sector over indebtedness, i.e. a debt deflation.
J&K’s primary policy prescription for today’s politicians and the broader public is to collect more taxes, including from the wealthy but also from ordinary people, and to use tax collection to reduce, the US debt to below 50% of GDP sometime in the future (it is currently around 69% and rising). J&K see maintaining theUS’s ability to borrow funds from abroad as a critical function of government and they praise theUS’s generally high credit rating, though they, as do others, see storms on the horizon. J&K make efforts to distinguish their position from those of the loudest advocates for fiscal austerity, deficit cutting, and public debt reduction. J&K believe that in the near future, due to the weakness of the overall economy, that budget deficit cutting should not be the primary focus of politicians.
Furthermore, J&K make some strong and interesting arguments from a modified neoclassical/New Keynesian (NK) perspective that support social spending more generally. J&K are strong believers in social insurance programs like Social Security and Medicare and make clear New Keynesian arguments that from the point of view of individual citizens, pooling risk across the entire society is an economically rational way to approach funding these social programs. Furthermore they are rightly critics of President Obama’s health reform, seeing in it an avoidance of the much more efficient single-payer/Medicare-for-all alternative. They also show a concern for addressing our climate and energy challenges, proposing a new carbon tax and a higher gasoline tax, the latter to disincentivize car use specifically with its imposition of external costs on cities. They also are fans of a value added tax as a means of reducing income taxes, which in their analysis disincentivizes saving. They propose cushioning the regressive aspects of carbon and value added taxes by rebates after tax collection.
Despite these commitments to progressive ideals and policy goals, the overall message of the book is that the financial viability of the USgovernment depends upon ultimately reducing the national debt and reducing budget deficits in the medium and longer-term. The accompanying website for the book as of April 20, 2012, has a page titled “Debt for Beginners” that in the body of the text only discusses public debt. This titling is a misleading sleight of hand which suggests, along with the deficit hawks they claim to oppose, that public debt is the problem and private debt is not a major challenge for the American people. J&K in their account of the economic crisis in 13 Bankers do show that they know that private sector leveraging, excessive household debt and now deleveraging play a role in our economic woes. That J&K now define “debt” overall as public debt is troubling.
Unfortunately, Johnson’s association with the Peterson Institute for International Economics, though maybe incidental, links Johnson to Wall Street billionaire Pete Peterson ,the funder and chief co-organizer of the anti-public debt, anti-social spending madness that has swept America and elsewhere.. Over the past few decades but increasingly in the last 4 years, Peterson has done untold damage via his misguided and/or malevolent campaign to dismantle government social programs and lame the ability of government to spend money for the public good that Johnson and Kwak are ostensibly defending. Are they functioning as useful idiots for Peterson? I would hope not. Still J&K are reinforcing the “hard money” ideology that is the foundation for Peterson’s campaign against government spending.
There has been no widely accepted theory about how governments work within economies, which leaves economists and commentators like J&K room to interpret or shade their account for political ends or to even contradict their own seeming political and ethical commitments. Johnson and Kwak offer material in White House Burning that could support a number of different narratives about fiscal policy but in the end, it seems that “hard money” views provide the overarching story which they tell. J&K vacillate in their descriptions of and evaluations of how public finance works. As a reader you are able to see in these variations the gaps in conventional economic models of the monetary, fiscal and economic operations of government, into which MMT has made some advances.
In their account, J&K are promoting the political-economic belief that somehow when the US government spends more money than it receives in taxes in any given year that it must borrow the currency that it itself creates at almost zero cost from either its own citizens or those outside the US. The message of White House Burning is that the US must maintain its good credit rating in order to borrow dollars at some point in the future when it needs them. White House Burning leaves the reader with the impression that this borrowing is how, above the amount of taxes collected, theUS can finance deficit spending.
Johnson and Kwak seem to know better and at points in their historical narrative, the inconsistencies in their overall position show themselves. In discussing the issuance of paper currency and the suspension and eventual exit from the gold standard, J&K acknowledge in passing some of the historical realities of fiat currency issue but seem to want to exclude them from their “hard money” narrative. J&K write dismissively of the early experiments in paper currency as inherently inflationary and seeming policy “mistakes”: the issuance of Continentals during the Revolutionary War and the issue of Greenbacks during the Civil War. In their view, it seems, these were not hard currencies and therefore are suspect. Roosevelt’s suspension of the gold standard is described as an episode in crisis management but its critical role in transforming the role of money in the economy is lost in the account. In the 1930’s were a critical period in the development of modern money technologies and Keynesian fiscal policy but J&K seem to miss or don’t want to alert the reader to a qualitative shift during this period.
A critical event or set of events in the emergence of modern money was the breakdown of the Bretton Woods system in the early 1970’s. J&K discuss a number of the events involved but seem to accord the emergence of a non-convertible fiat currency as largely a “non-event” and not the emergence of a new monetary technology. They manage to sidestep its significance in part by claiming or implying that the US dollar’s continuing role as the preferred reserve currency in the 1970’s and beyond hides the fact that the dollar remains dependent upon the willingness of other countries to lend us our/their money in order to be issued, i.e. a virtually convertible currency. Dean Baker, is his review of White House Burning, points out that J&K’s assumption that the dollar’s global reserve currency is a benefit to the US is unwarranted: the ballooning of the US’s trade deficits are for the most part attributable to efforts by countries with export-led development to maintain dollar reserves which has had the side benefit for them of shutting down competing US manufacturers. Thus what would be the story of an evolution or a change in the quality and type of money, instead becomes the story of “more of the same”.
Ultimately, then it is no accident that J&K have chosen to title their book after an historical event that occurred during an era of hard currencies, when monetary technologies were limited by the supply of precious metals. In 1814, theUSgovernment during the “hard money” era was almost required to view money and tax collection as the management of a store of physical monetary entities that needed to be collected or borrowed from abroad. However, J&K’s primary mistake is to bring into the current era aspects of monetary technology and government monetary operations that no longer persist. Despite their manifest intelligence and good will they have in crucial areas of their book dumbed-down money and the evolution of monetary systems into a narrative that is all-too-familiar and might be called “Goldbugism Lite”.
There are other, also common, flaws in J&K’s macroeconomic model, leading potentially to policy mistakes in the future. Accepting J&K’s premise for the moment that it is important for the purpose of funding government that the government have a good to excellent credit rating, the solution that J&K are offering doesn’t directly address that issue, and in fact might do damage to the economic health of the US and therefore its credit rating. In setting the goal of future debt reduction and cutting government budget deficits in the future, J&K engage in the all-too-common accounting error of most non-Post-Keynesian economists by using stock-flow inconsistent accounting in describing the flows of funds between the three great sectors of any economy: the public sector, the private sector, and the rest of the world. The goal of cutting budget deficits in a world which assumes that this must occur by levying taxes requires that government must then either receive an increase in payments from the private sector or the rest of the world. Thus reducing national debt, with the exception of the very much possible but still frowned-upon route of “printing” the money, would require either a large trade surplus (with the rest of the world) and/or a net surplus with the private sector, potentially slowing that portion of the economy by taking money away from it.
Rather than set the reduction of budget deficits as an overarching, assumed goal, policymakers should be asking what type of deficits or surpluses government should be running with the private sector and the rest of the world and for what reason. Perhaps it makes sense to reduce the size of the private sector or certain aspects of it by running a government budget surplus (more taxes collected than money given out) under certain economic conditions. But these conditions need to be specified. In inheriting or accepting a “hard-money” model of money and macroeconomics, J&K seem to be allowing an unthinking economic “reflex” to structure their “take-home message”.
In the end, I am convinced that Johnson and Kwak believe in human progress and using the tool of human rationality to improve our individual and collective well-being. They are also aware of some of the empirical evidence that is used by Post-Keynesians and Modern Money Theorists to construct a more plausible narrative of a dynamic monetary system. Despite these commitments, their breadth of knowledge and their often admirable efforts to expose hypocrisy and corruption in our current political economic system, White House Burning misdirects our attention to public debts and continues to promote an antiquated conception of how money and government work.