MMT and the Struggles of Political Democracy

By J.D. Alt

A principal dilemma of the theory of modern fiat currency (MMT) is the question of how the state spends the money it issues: who decides, and by what process? It may be frustrating to watch U.S. Congressmen and Senators bicker and behave as if their national government has run out of dollars, but it is sobering to consider what would happen should these legislative prodigies suddenly realize that, in fact, there are no currency constraints on their spending at all. It is hard to imagine who, or what, would step in to impose some kind of discipline and planning for the spending spree that would ensue. I suspect that many who actually understand fiat currency are hesitant to overtly embrace it for precisely this reason—because they are unsure what structure exists, or could be put in place, that would rationally manage the remarkable levels of sovereign spending MMT makes possible.

Looking ahead, then, to a time when the cat is out of the bag and modern fiat currency is widely understood and accepted, some effort should be made to imagine how it might best be managed and controlled. This is especially difficult in the United States because of our obsessive belief in laissez-faire capitalism and reflexive fears of socialism. The fact that modern money theory requires the sovereign government to spend the fiat currency it issues appears to implicitly suggest some form of command economy, with the sovereign choosing, by virtue of its spending choices, how resources will be allocated, which industries will be preferred, and what investment goals will be pursued. The extreme aversion of the U.S. political system (the democratic process) to making these kinds of choices was illustrated by the 2009 stimulus bill in which Congress struggled mightily to agree on useful ways to spend $800 billion into the private sector in hopes of alleviating the Great Recession.

There have been times, of course, when this was not the case—but invariably these were times of extreme emergency: The Great Depression and World War II come to mind. Yet even at the height of the depression, Roosevelt struggled continuously with Congressional anti-socialists and laissez-faire business leaders to fully implement the command economy of the New Deal. The mobilization leading up to war with Germany and Japan was the same uphill political struggle until the surprise attack on Pearl Harbor revealed the full dimensions of the existential threat. The U.S. sovereign spending which was then unleashed—fully controlled and managed by the structure of a command economy the likes of which had never before existed on the planet—transformed the world in less than half a decade.

Peacetime in a democracy, it seems, is a much more difficult challenge to finance. This, I would suppose, is because in a war footing the goals—and the means required to achieve them—are, first, relatively easy to agree upon and, second, relatively clear and calculable—conditions that lend themselves nicely to the decision-making structure of a command economy. In peacetime, what exactly the nation should be striving for is not so easy to see—or, perhaps more accurately, the diversity of opinions about what the goals are, or should be, is infinitely more varied.

Given the difficulty of implementing a command economy in a peacetime democracy, it is reasonable, then, to embrace the idea of markets. Rather than the sovereign government choosing how resources are allocated through a democratic political process, the aggregate decisions of the citizens themselves—through their private purchasing decisions—make the choices instead. Adam Smith’s “invisible hand” creates a balance between what is produced and what is consumed. The political process, then, focuses on simply making sure the markets are fair and honest.

Without considering the shortcomings of the market economy model (of which, I understand, there are many) it nevertheless has the undeniable virtue of championing individual initiative, creativity, and personal freedom—notions that appeal mightily to the American psyche. But it is also, it would appear, directly at odds with the theory of modern fiat currency—for how can the sovereign government spend the fiat currency it issues without encumbering the private citizen with the messy (and usually inequitable) process of politically battling for control of that spending? Even worse, MMT appears to transform the “invisible hand” of the market into an upturned palm waiting for a hand-out—a notion that will never sit well with rugged egalitarianism in America.

L. Randall Wray suggests an answer to these questions in his most recent post “Minsky Does Rio” when he notes that “banking is inherently a joint venture” between the sovereign government and the private sector economy. Banks create “money” by giving out loans—and, as Wray tells us, “bankers do not need to use democracy to determine who gets that credit.” In other words, there is another, non-political, process for deciding how the “money” gets distributed—a market actually—and because much of the “bank money” eventually gets converted to sovereign currency through the reserve banking process, the sovereign, in effect, has inserted its currency into the private sector without having to “spend” it.

While this is a neat process, it obviously has its own downsides (which are repeatedly and eloquently chronicled at NEP by William K. Black). The least obvious (and most hurtful) of these problems, however, is that the reserve banking system effectively “hides” the sovereign spending, creating the illusion that the banking system, itself, is actually “creating” the money. With the sovereign spending component of reserve banking effectively hidden, the true and logical narrative of our monetary system becomes corrupted at a fundamental level—and we are led to believe (as President Obama, himself, leads us to believe) that our sovereign government must either collect taxes or borrow dollars in order to have dollars to spend. The irreparable damage this belief renders upon our society is being played out right now before our eyes.

This leads me to wonder if it is possible to create another market mechanism which would enable sovereign spending to proceed without “the need to use democracy”—but which would not hide the underlying logic of that sovereign spending from view. What comes to mind is something that might be called “cooperative reserves”. The underlying goal of cooperative reserves is to encourage and assist private citizens to form cooperative associations which, in one way or another, help them to live happy, healthy, and productive lives. It doesn’t really matter what the cooperative venture is—so long as it doesn’t interfere with the rights or well-being of other citizens; it could be a frivolous undertaking, such as planting flowers in public places—or it could be more serious, such as designing and building a carbon-neutral residential co-op in New York City—or establishing an Early Reading Program for a community of children. The point is that if a group of citizens forms a cooperative association, and creates a formal business plan for the achievement of a stated cooperative goal, the sovereign government would issue fiat dollars to that association for the purpose of achieving the goal. These fiat dollars would then get “spent” by the cooperative association rather than by the sovereign government.

Obviously, there are details to be worked out. What is appealing about this idea, however, is that at a fundamental level cooperative reserves might enable the “cooperative gene” in our society to more effectively compete with the “selfish gene”. Genetic theory tells us that if this were to happen, our society as a whole would become more successful—but, at present, there is little support for it. While the “joint venture” between the sovereign government and the banking industry does an impressive job supporting the interests and efforts of the “selfish gene”, the “cooperative gene” is left to beg for grants and gifts from an elite class of wealthy foundations, or to wage political battle for a few dregs of sovereign spending allocated by parsimonious U.S. Congressmen (most of whom are, by nature, competitors rather than cooperators.)

Cooperative reserves also have the potential merit of reinvigorating and strengthening the effectiveness of our democracy itself. While the task of sovereign spending seems to “paralyze” the peacetime U.S. political apparatus—bifurcating it into viciously bickering, non-productive factions—issuing dollars on a neutral, non-judgmental basis to citizen’s co-ops puts the spending choices directly in the hands of relatively small groups which, by definition, are cooperating to achieve a specific collective good. If someone does not agree with a stated cooperative goal, they are not compelled (as in the political process) to prevent that goal from being funded—instead, they simply will choose not to join that particular group. Instead, they have the option of joining a different cooperative group pursuing goals more to their liking.

I’m aware this sounds hopelessly idealistic. But remember, I’m looking ahead to the day when modern fiat currency is fully understood, appreciated, and embraced by the national mainstream. That, in itself, appears hopelessly idealistic at the present moment.

54 Responses to MMT and the Struggles of Political Democracy

  1. Emer O Siochru

    Or just distribute the fiat money on an equal per capita basis as a citizens income…

    • Alaska does that with their oil royalty revenues.

      Or just reduce taxes on a per capita basis, some via distributions to States, who pass them on to local governments, where citizens can decide via their representatives (or via co-ops) how to employ them.

  2. ” It is hard to imagine who, or what, would step in to impose some kind of discipline and planning for the spending spree that would ensue.”

    They are the elected representatives of the people. They should get whatever finance bill they can get through Congress.

    And if that means it destroys the economy, then that is what the people voted for.

    Either you believe in democracy, or you have to justify some form of autocracy by Very Clever People. And then explain why they get to decide

    The main injection mechanisms from government should be via effective automatic stabilisers – primarily a Job Guarantee.

    And government can ‘spend’ by reducing taxation just as easily as it can via building roads. 30% spend and 28% taxation has the same savings offset as 5% spend and 3% taxation.

    • I agree with Neil. Big wheel capitalists like McCully and ivory tower elitists are always coming up with some new reason to eschew democracy. If we had listened to these people over the past four centuries, legislatures wouldn’t even have any democratic control over spending bills and tax policies. But the growth in parliamentary control over fiscal decisions has corresponded with the most prosperous period in the history of humanity by far. The elitists are almost always wrong about democracy. I believe fiscal and monetary policy both belong in the hands of legislatures.

      As a practical policy matter and administrative matter, the operations of the central bank and treasury could be overseen by an executive branch macroeconomic policy board. That board could then make recommendations to Congress for legislative action in every relevant legislative period. The government should explicitly target an annual deficit based on macroeconomic conditions, and the board would make recommendations to Congress about what the current target should be, and about what proportion of deficit spending should be financed by issuance and sales of interest-bearing notes and what proportion should be financed by the issuance of non-interest bearing units of the currency. The proportions will vary based on measurements of the demand for low-risk government debt, as well as policy estimates of the economic advisability of satisfying that demand. (Sometimes we actually want the private sector to “reach for yield”, and so will not want to satisfy the all of the demand for “safe assets”. We also want to incentivize investments in real growth and national development, not in rent-seeking behavior, so a national investment policy should guide the implementation of these incentives.) Adjustments in these targets should be updated quarterly. Congress is then free to either act on them, or go its own way. The legislative process is always a mess, but so be it. Let people representing different regions and interests haggle over the details.

      Automatic stabilizers are a useful component of macroeconomic stabilization policy, but they are not a total solution. There can be no “automatic pilot” for running such a complicated beast as the US economy. Also tax and spending decisions are are often made with specific purposes in mind, so you can’t look at all of these issues from the austere perspective of macroeconomics. For example, if the public someday decides to impose much heavier marginal income tax rates on the wealthy to achieve public purposes in the area of social justice, or to launch a big new public investment project, then that is going to screw up all of the automatic stabilizers.

      • Mark me up with Neil and Dan.

        “Democracy is the worst form of government, except for all those other forms that have been tried from time to time” is how Churchill so succinctly summed it up.

        The Fed offers the perfect example of rule by undemocratic means. It is a dictatorship of technocrats and Scientist-kings. How has that worked out?

    • Exactly right, Neil.

      Even without MMT, we have come close to full employment many times, and it didn’t take “remarkable levels” of “spending sprees”. It happened (and ended) mostly by accident as far as government was concerned, as a natural result of business cycles and automatic stabilizers. (Yes, and sometimes bubbles.)

      Once MMT is implemented and we have full employment and a low population of JG workers, there is no room for more spending without more taxation, else the result will be inflation. With everyone employed, who will produce the additional goods to be bought by the increased spending? Ironically, we will be in exactly the position that people think we are in today, people who think government is constrained the same way a household is constrained. There will be no lack of leaders who will recognize that and constrain the government, or insist that additional transfers of goods to the public sector be balanced by removal of income from the private sector.

      That said, JD, your idea of co-op ventures is a good answer to the JG question “What would they do?”

      • John, you are completely omitting the trade deficit and savings desires. The deficit will always be necessary as long as people wish to save money and as long as the trade deficit is an endogenous result. There is almost no way to predict how large the trade deficit could get given enough aggregate demand, 10% of GDP? More? Its not like the world has a lack of poor people needing jobs to manufacture widgets for sale to America.

        • True, but those things will expand in tandem with employment, not all at once after full employment is reached. There is no reason to think that at full employment, additional stimulus by increased government deficit would go entirely to imports or savings, and good reason to think that it would not.

      • Oh and one more thing. Since 1980, we have experienced exactly 3 short periods when the unemployment rate got to 5%. That comprises 7 years out of 33 for a grand total of 5% or less unemployment 21% of the time. And all three of those periods coincide with the three largest private debt = money expansions in history (yes, all nominal economic facts are generally larger than those preceding them) but even as a % of the economy, the same thing is true. $60 trillion in new money (all sector total credit instruments from FRED) between 1980 and today, and that still wasn’t enough to maintain full employment.

        • True, the automatic stabilizers – notably the progressive income tax that takes higher and higher percentages of rising incomes – are too powerful, and choke off the boom. The Fed also steps in to raise rates, which encourages saving and discourages borrowing, raising the need for deficits at the very time that the deficit is rapidly shrinking.

          • That seems less a result of automatic stabilizers and more to do with the nature of the “boom” being an unsustainable private sector ponzi scheme – i.e. dot-com and housing bubbles.

            • It is the nature of all cyclical things that the trends during each phase are unsustainable. Whether it was a ponzi scheme or a bubble or just robust growth, it is unsustainable. It doesn’t end because it is a “bad” way to grow, it ends because it is the nature of cyclical activity to reverse itself periodically – helped, in this case, by counter-cyclical government actions. JG would dampen the cycles, prevent the extremes on the downside, but will not end them.

              • Right, but you implied that the housing bubble was brought to an end because of high taxation levels, not the fact that the underlying “strength” of the boom was based off of a ponzi scheme. As Auburn points out – pretty sad statistic by the way – the only time we got below 5% unemployment since 1980 it was precisely because of a massive private sector debt expansion that collapsed shortly thereafter.

                There is nothing unsustainable – as MMT is quite clear on – about gradually increasing public sector debt supporting private sector growth – as an alternative to what we’ve done since 1980, our politics and ideologies have simply not brought us down such a path thus far.

                • I would differentiate between the boom and the mortgage fraud situation. It could have been perfectly possible for housing prices to collapse without collapsing the entire economy, if the government had pursued the policy you suggest: gradually increasing deficits, in line with gradually increasing private sector savings. Instead, they allowed the boom to raise tax receipts too much, shrink deficits too much, with no compensating action – except for one quarter when they had a tax rebate that held off the collapse. After that, having seen that it worked, they failed to continue it.

                  It’s essentially what happens every time. The economy booms, tax receipts increase faster than GDP, deficits shrink, the Fed raises rates, and the recession begins.

    • Except for one thing Neil

      some form of autocracy by Very Clever People is exactly what you get anyway.

      How many voters can claim to understand the nuance in this sort of financing? Next to none. So ultimately we are still relying on appeal to authority.

    • Distribution of newly created money through spending by a legislature is less democratic and closer to the concept of “autocracy by Very Clever people” than transferring the money directly and equally to all citizens. Tax cuts too do not benefit everyone equally. If the purpose of taxation is purely to remove excess liquidity in the aggregate, cutting taxes may do the work. But if it also has a public purpose of reducing income and wealth disparities, cutting taxes works exactly aganst that objective.

  3. John Turner, Australia

    J D Alt wrote; “Banks create “money” by giving out loans—and, as Wray tells us, “bankers do not need to use democracy to determine who gets that credit.” In other words, there is another, non-political, process for deciding how the “money” gets distributed—a market actually—and because much of the “bank money” eventually gets converted to sovereign currency through the reserve banking process, the sovereign, in effect, has inserted its currency into the private sector without having to “spend” it”.
    I have some doubts about that concept. The private banks create a debtor and a creditor when they fund a purchase. The seller exchanges a real asset for a financial asset. The debt is wiped out when the purchaser repays the loan by extracting from circulation currency equal to the initial purchase price plus any interest. In effect, bank money is a temporary creation that does not end up permanently in bank reserves.
    If I am wrong please add to my understanding.

    • Yes, bank money is temporary, being destroyed when the loans are repaid. That is why bank money alone is an unsustainable way to do it. It depends on an ever-increasing amount of private sector debt to the banks, as more loans must be issued to pay the interest on the previous loans. When it stops increasing, as it did in 2008, the results can be disastrous.

    • Individual loans are temporary but as they are paid they are replaced by new loans. When the total loans goes up money is created and as the total goes down money is destroyed. It went up constantly for a long time before the GFC. US government debt is the same, mostly short term loans which are repaid by taking out new short term loans. In theory the US Gov has only borrowed it’s money for a few months or years in reality much longer than that.

  4. The government would still have to decide which proposed cooperatives get the cash, right JD? It can’t just give out the money to everyone who fills out the paperwork, and in whatever quantity they request.

    • You could make it part of JG. Let local governments decide which projects to do, and the Feds fund it (the labor portion of it). The constraint is the availability of JG workers. If the local government decides to plant flowers or pave the streets with gold, they buy their own flowers and gold.

  5. Emer O'Siochru

    Or why not distribute the government fiat money to everyone on an equal per capita basis as part of a citizens basic income, and tax it back in the usual way. That way, the government does not get to decide where the money is spent without citizen oversight. Money can be seen as a social commons held in trust by the government with current and future citizens/residents its beneficiaries. The citizens income would not be a transfer from working and rich to dependent and poor but a dividend as of right. Cooperatives can be incentivised by tax breaks – within reason. Even the right wing Tea Party people accept the unearned inheritance of wealth even if they disagree with social transfers. This is a citizens inheritance of a social commons , a ‘dollar dividend’, which heretofore had been ‘enclosed’ by the banks.
    BTW, how do the banks fare under this model? Is it proposed to limited lending against existing assets by banks? Because if it is not, the extra money circulating through the dollar dividend could easily be captured by the banks in another property or other bubble.

    • How about negative income tax brackets? At certain brackets the government pays you a little extra. Move the 0% bracket somewhere around the median income. Probably figure out a way to help fund employers, so the employer can pay out the extra (instead of withholding) to those who don’t make enough to pay taxes because a lump sum at tax time is probably not as effective.

      • Already got ’em. It’s called earned income credit. And there are other refundable credits, too. Employers don’t need to be “funded”, since they can net these credits out against the amount they send in as withholding for the higher-paid employees.

      • Not everyone pays tax as they are not in the paid economy but contributing nonetheless; like mothers or elderly. Anyway, this not about taxes or even social payments but about a dividend from a Commons held in Trust for the people by the Fed, or in our case – Ireland, by the ECB.

  6. Your post begins admirably as you describe the difficulty the sovereign has in deciding how to distribute MMT monetary largess.

    In my view, the argument breaks down at the level of money-supply-increase-effect. The argument seems to stop at first level of money supply effect – the initial economic activity that results from borrowing or new money creation. The fact that secondary effects are several times larger is ignored.

    The secondary effects of new money occur over time, potentially a very long time. The secondary effects are very wide ranging including changes in work habits, changes in retirement expectations, changes in the tools of trade, and obviously, measurable change in money supply.

    The first level effects are easily seen. It is the secondary effects that are politically much more difficult to observe, predict, and allocate.

  7. How about the government simply distribute the newly created money among all the citizens equally and let market take care of where it should end up?

    Of course, the government should continue to invest in areas the market cannot effectively address. The above is only a suggestion for how the government can stimulate economy, when needed, by introducing new money into the system without a command control structure.

  8. [quote]and because much of the “bank money” eventually gets converted to sovereign currency through the reserve banking process, the sovereign, in effect, has inserted its currency into the private sector without having to “spend” it.[/quote]

    I know banks create money when they make loans, but I thought it was extinguished when it’s paid back? Or is that a moot point because there’s always new bank money being created as the old is extinguished?

  9. And this is why, I tend to agree with Mosler, continually choose a size of Govt, and then adjust the tax collections to control aggregate demand.

  10. Regarding your point that fear of the freedom that an MMT-driven understanding of currency permits may inhibit its acceptance, I think one can add to this a deep-seated psychological need to see money as an absolute, objective, substance in terms of which personal worth is measured. It’s a key element in the powerful, particularly Western, myth of the “self-made man”, that all those billions stashed away (in offshore accounts!) are a tribute to one’s genius and hard work. It’s also what motivates the goldbugs to insist on a return to the gold standard (and why the labor theory of value-based grounding of currency through government’s MMT role as employer of last resort would not placate the goldbugs). Perhaps part of it also is that we see money first as children, all those bright shiny coins and ornate bits of paper and, at that age, unavoidably imagine the value inheres in the things themselves. Maybe what we need is a thesis on the phenomenology of money?

    But with the MMT view of fiat currency, money has to be seen as a social phenomenon, the antithesis to Margaret Thatcher’s famous riposte that “there’s no such thing as society” (although one might have thought the mere existence of human language alone would already have refuted her point adequately). And, just as you say, this feeds also into the “reflexive fears of socialism” that dominate political discourse in the US.

  11. Denmark seems to have the right formula. Their unemployment rate is 4 percent, yet their public debt is only half of GDP.

  12. but it is sobering to consider what would happen should these legislative prodigies suddenly realize that, in fact, there are no currency constraints on their spending at all. J. D. Alt

    And how would that be a problem if fiat was only legal tender* for government debts? Then, if the monetary sovereign overspent relative to taxation, only it and its payees should suffer from the resulting price inflation in fiat.

    *Fiat could and would still be VOLUNTARILY used for private debts but alongside purely private currencies too.

  13. As someone who has thought a lot about the implications of MMT for federal support of community-owned and controlled high-speed Internet access networks, I find your post intriguing, J.D.

    My initial reaction is that the model you describe would be especially applicable to cooperative enterprise focused on the provision of “infrastructure/commons” services, including communication, energy, education and healthcare. In my view, none of these are well suited to competitive market structures (for various reasons, including high-fixed cost structures that lead to natural monopolies and/or high levels of positive or negative externalities that are not adequately reflected in market-based transactions). Though cooperatives can and do exist in a range of otherwise competitive markets, I think they are especially appropriate to the provision of basic infrastructure services, where profit-focused operations tend toward abusive monopolies that typically require ongoing (and too often insufficiently effective) regulatory oversight.

    I like the contrast you draw between the existing “selfish gene” financial system and your proposed “cooperative gene” funding mechanism. And since the functioning of infrastructure and “commons” services tend to be inherently “cooperative” and poorly suited to competitive models, I think they are a good place to begin applying the “cooperative gene” funding model.

    With regard to Dan K’s good point about a screening process, I think that could (and should) be managed, and could learn lessons from existing government funding mechanisms. For example, ongoing and stimulus-specific government programs have provided funds for various forms of telecom projects. And while their screening methods have attracted criticism (especially from the right), they function reasonably well and can be and have been improved upon.

    I just read parts of Diane Ravitch’s latest book about education reform and believe your proposal has application in that arena. Ravitch contrasts the corporate-backed top-down NCLB and Race to the Top approach to “reform” (top-down, profit- and competition-focused, inhumane, focused on narrow metrics, etc.–and not very effective) with an approach that is more locally and democratically controlled and responsive to the real needs of students, families, communities and teachers. As I read the book I kept thinking about how Ravitch’s wise and practical approach to education could benefit from MMT-aware national policies, in the same way that I believe is the case for telecom and other “infrastructure” sectors.

    I also suspect that this could apply to healthcare (broadly defined to include agriculture and food supply), where existing market mechanisms have failed dismally, and where I’ve long believed that cooperative models (owned and controlled by end-users) have lots of positive potential. And on the energy front, rural electric cooperatives (as well as munis) have proven themselves to be generally more efficient and responsive to consumer needs than investor-owned utilities.

    I’ve also been wondering how MMT relates to the growing public banking movement, including whether a system of federal, state and local “public” banks (similar to the one in North Dakota, or operated through the existing post office system, and/or including credit unions, etc.) could provide the infrastructure to support the “cooperative gene” funding mechanisms you’re suggesting.

    I strongly encourage you to keep thinking and writing in this direction, and welcome any response you have to my comment.

    • Mitch, my short reply is one of total thankfulness that someone understood EXACTLY what I was trying to communicate! I much appreciate the ideas you suggest….What is in the back of my mind, specifically, is affordable housing. Short on time right now for a better reply. Thanks again, though.

      • Glad to hear we’re on roughly the same wavelength J.D. I agree about affordable housing. As it turns out, an old friend of mine has been involved in that area for years, and I’ve been looking for an excuse to touch base with her. Maybe this will give me one.

        More generally, I think the time is right to reach out to progressive leaders focused on various issues/sectors, in an effort to educate them about MMT and connect them with MMT’s leading thinkers, so they can come to appreciate how an MMT-aware policy perspective can be a fundamental game changer for the specific issues they’re focused on. Given the situation in Europe and the U.S. (i.e., austerity economics/politics is proving itself a dismal and cruel failure), I suspect there’s more of an opening for this than there was before.

        Personally, I like the idea of a book and/or multimedia project that lays out a concise description of MMT and its broad implications, followed by segments describing progressive policies that would be enabled by an MMT-based understanding of economics and public finance. The latter could be written by–or at least informed by–progressive experts/activists in each policy arena.

        This could provide a practical focus for building strong and ongoing links between the MMT community and the progressive advocates whose policy proposals have been constrained (or dismissed) by the “we’re out of money” meme that has been adopted even by most supposedly progressive pols and economists.

        Perhaps this kind of MMT-centric “public education” project would be an appropriate task to take on for members of the growing MMT community who recognize it as an important opportunity and/or have helpful contacts within the progressive policy community. I’d volunteer for this, and have recently taken a few (very) small baby steps in that direction within the “community broadband network” sector of which I’m a part. Of course virtually all the people we’d want to reach will be extremely busy and focused on whatever fight is directly in front of them, but I’m convinced that a strong case can be made that MMT does, in fact, open up a whole new range of progressive possibilities, and that it’s at least worth a sustained effort to build these bridges.

      • With regard to the concept of affordable home loans, I was once a member of a cooperative style group called Mutual Home Loans. Membership involved buying a designated number of shares according to the amount of loan needed to purchase a house. The member agreed to pay for the shares via monthly installments in return for a 2.5% interest home loan. The scheme operated without Government support, but it was a legitimately registered business under the Companies Act. When it proved highly successful, the banks lobbied to have the legislation changed by forcing the Company out of the Companies Act and into the Finance Act, where it was refused a licence.
        The point is that the scheme did work. Essentially, it was based on the members being allocated a number on joining. The members with the lowest numbers were the first to be offered the loan thus there were additional premiums added on a graduated scale to the low numbers. There was a time delay between joining and being offered a loan, but that was related to the growth in the membership. Within a certain period, the scheme could become entirely self funded and once the shares were paid up, the member had the choice of either cashing them in to extinguish the balance of the loan or retain them for the dividend they would provide. The concept was completely verified by a major firm of certified actuarial accountants. I was one of the recipients of a loan, but had to convert it to a bank loan when the banks and the Government forced the company to be wound up.

  14. Banks don’t create money, they used to do that. Banks distribute money in the form of credit, the reserve system is supposed to regulate the upper limit. This distribution is local and may be over a short term or a long term, but generally it is for productive purposes since the distribution is circular, credit must be returned to the issuer after period of time, often with interest. McVickar stated, the banker’s purpose is to manage the credit of the community. It is the Town Fathers (Mothers) that regulate the growth of the community.

    When the government injects credit into the system, the credit is borrowed and must be returned. Congress cannot spend unlimited amounts of credit, regardless that it can be created. All credit is borrowed, including our money. The difficulty is returning it to the issuer, nobody wants to give it up. They (Austrians in particular) think it is their property. When you accept money in exchange for labor, it comes with conditions, just like a bank loan. To repay credit, it should be used productively. Money was created to harness the power of labor. Money and labor are inseparable. The value of a coin is not in the metal, it is in the amount of labor it represents, including mental labor. Labor is capital and capital is labor. A man sitting in a chair is not labor, money sitting in a mattress is not capital. The old New England expression “Will it pay?” says it all. Yankees had the reputation for being economical with their labor.

    So a question to ask, when is there too much money in the economy, locally and nationally? When is there too little? If there is a vision, don’t expect the free market to get you there. Don’t expect another’s self-interest to get you there. It was determined in 1700 that a project needs a planner-manager (projector), undertakers, and a broker to manage the capital. Not much has changed. Today we trust and verify with a second pair of eyes. The Obamacare roll-out lacked a second pair of eyes, a quality control testing protocol.

    I mentioned that I grew up in Guilford; the in-town zoning was very strict, no overhead doors on your garage, no aluminum siding. This was to preserve the Colonial nature of the town. There were no chain stores on the Green. Today, 60 years later, the town is mostly unchanged and “too cute”, looking a bit like a preserved Colonial Village; property values reflect it’s desirability as a place to live. Basically a local marriage of monetary and fiscal policy along with a vision, a plan to have a town with character and community; a place to raise kids. I was just there and the town fair was in full swing. I remember as a kid entering my hamsters in the livestock exhibit and winning a blue ribbon. There was no second place as there were no other hamsters. I think they added a new livestock category, money managers. We had a nearby geezer farmer that had a get rich scheme, he would ride around on a bicycle, fetch a crock from your refrigerator and grind horseradish, once a week or two. Powerful stuff. I was inspired to sell strawberries from my red wagon. No such thing as unearned income back then.

  15. While free markets in truest form could be an effective cooperative exercise, money has worked for and against our cooperative efforts and true free markets. To me, it seems it begins working against cooperative efforts when it allows too much planning and control by too few individuals whether in government or the private sector. Communism and poorly regulated capitalism are extreme examples.

    To make money work in favor of cooperative free markets and their associated magic, in my opinion several things need to happen to prevent the negative outcomes experienced at the extremes:
    All individuals receive from government a basic income. The amount would reflect the individuals share of currently available resources in each year. This is the only source of credit available; government is the bank.
    All factors in production need to belong to the state (the people) with an equal share of these factors belonging to all as their share of available “capital”.
    Individuals would be self employed whether they work in groups or not and entitled to an equal share in the use of the means of production for the purpose of producing goods or providing services in exchange for money in an open market.
    Government plays a role in pricing goods and services by tracking the value of real resources (including environmental costs) used and charging (taxing) producers for the use of those resources upfront.
    We can profit when we add sufficient value to resources through our creativity and effort by fetching a higher market price for the goods or services we provide much as we do today. Of course for the self sufficiency advocates we also have the option of forgoing profit altogether, using our basic income to purchase our own slice of the production capacity to satisfy personal needs independently.
    The price of the guaranteed basic income would be a certain amount of service to the maintenance of the state, so it, becomes something like the job guarantee.

  16. This is exactly what Gar Alperowitz is suggesting.


    He’s touting coops as the way to go (e.g. Mondragon in Spain). Financing coops as we do home mortgages would be very helpful.

  17. The big banks and the Fed understand fiat quite well. They know they create money with computer strokes. You can be sure they intend to keep the public at large and the politicians as ignorant as possible and bickering over illusory issues so that they can keep their monopoly on who gets the money. Intellectuals keep forgetting that fewer than 200 control most of the world’s wealth [See

    • “…the politicians as ignorant as possible and bickering over illusory issues.” One doesn’t want to believe in conspiracy theories, but how is it possible that the politicians are ignorant about how our system works? Is the problem really that we only need to find the right politicians who understand what fiat money is?

      • “how is it possible that the politicians are ignorant”

        They were trained by economics professors who were/are also mostly ignorant of MMT.

  18. Simples: legislate for wedge shaped budgetary restraint when median wage inflation goes over some limit, say 3%. People can argue over ways to reduce bottlenecks – education in certain sectors of high demand.

    The rest is all up to the politics of the country regarding the mix of taxes and spending. Most would probably agree on spending in areas of public benefit, and taxes in areas where activity is harmful eg pollution. But exactly what shape that takes is really what democracy is all about – but at least it would be within the constraints of the fiat system, rather than an imagined deficit ceiling.

  19. The author’s and commenters’ expressed belief that what we have in this country is a democratic system is indeed remarkable.
    At least Dan Kervick stands up for the concept of democracy, and I heartily agree with him when he says:
    “I believe fiscal and monetary policy both belong in the hands of legislatures.”
    But I must add that legislatures belong in the hands of the people, and that is not where they now reside.
    It seems to me that the agreed-upon points of MMT are descriptive, not prescriptive.
    For an elementary prescription:

  20. If I recall correctly, Keynes believed there would always be tendencies toward under-investment that private market structures couldn’t eliminate on their own. The state would ultimately have to step in to prevent stagnation. But Keynes didn’t live to see the wild expansion of the marketing/consumerist post-war world. So I dunno. Keynes thought we would be or become wise enough to live “agreeably and well” by working fewer hours. I wonder what our wired, caffiene-and-alcohol fueled lifestyles would look like to him if he could see us now.

    Food for much thought, J. D.


  21. Nice piece J.D.! Cooperative reserves is exactly what Minsky, Wray, and others have suggested, but why invent cooperative reserves when we already have dozens of existing non-profit community organizations in every small town and city. They are already in business and do great work without displacing private sector jobs, but they are massively underfunded (they rely on grants, charitable donations, and volunteer staff). This is a very decentralized system, so we don’t need to have a national MMT board to fund all the grants to these NGOs. We can take the existing fiscal system (checks and balances, accountability, transparency, result-oriented etc..) and simply inject it with a dose of MMT sanity.

    • Fadhel..I agree and (as I tried to explain in my comments above) I think it makes a lot of sense for the MMT community to mobilize a coordinated outreach to both the activists running these non-profit NGOs and the leading thinkers/advocates who are arguing for the kind of progressive polices embodied by these NGOs.

      Though it’s hard to be optimistic about any major positive change coming out of existing DC policy circles, my sense is that the current situation is ripe for a paradigm shift in policy thinking, and that MMT provide a key conceptual cornerstone for such a shift.

      Related to this, I think UMKC’s Buckaroo program and your DVD program at Denison can serve as helpful educational tools–not just for your students, but also for providing progressives with small but real-world examples of how potentially transformative an MMT-informed perspective can be in mobilizing underutilized resources to address unmet needs.

      By doing so, these real-world models have the potential to expedite the learning process necessary to recognize the practical and potentially immense benefits of MMT, especially for activists who tend to be overwhelmingly busy struggling with specific real-world issues, and at relatively high risk of being turned off by theoretical economic arguments, however well the latter are presented.

    • Not only that, but once again an MMTer uses language that would make the average American barf. Co-operatives sound extremely socialistic or communistic. Non-profit corporations do not have the stigma of cooperatives and have been extraordinarily successful in schools, hospitals and the like. Use a business entity that is in place already and well-liked. Even public utilities would work as an acceptable framework or concept.

      • You could add state banks and mutual insurance companies to the list.

      • Co-operatives sound extremely socialistic or communistic.

        And what is the government-backed credit cartel but a means by which the banks and so-called creditworthy steal from everyone else?

        So honest sharing is less desirable than government-enabled theft?

      • There are examples of ” non profit” corporations existing in the neo liberal world of public private partnerships today, were the possibility for profit is concealed, yet clearly exists for key individuals playing both sides. While the name may be more palatable for many, it’s better to be honest in sounding a bit socialistic in nature than to risk confusion with organizations were the demarcation for conflict of interest isn’t clear. That might be setting things up for future failure.

  22. davidgmills…Though I agree with your general point about the importance of language, I’m not sure I agree that the average American would be turned off by the term “co-operative,” since a healthy percentage of them (I can’t remember any specifics right now) belong to one (particularly credit unions, which are member-owned).

    And though I don’t know this for a fact, my sense is that cooperatives are fairly well accepted in conservative rural areas, where they have helped small farmers retain some control over their business via producer co-ops, vs. being controlled by large and generally abusive agribusiness giants. And a lot of very rural areas are served by electric and/or telephone cooperatives owned by customers.

    And while I like the idea of including and even emphasizing other types of non-profit entities, I think avoiding the word “cooperative” is going too far. In fact, I’d argue that some emphasis on J.D.’s distinction between competition and cooperation and the need to have a healthy balance/mix of the two is something that most people can relate to.

    And I especially think the idea of a cooperative or otherwise “community-controlled” enterprise is especially applicable to the “infrastructure” services I mentioned in my comments. For example, the large telecom/Internet service providers (e.g., Comcast, AT&T) tend to get the lowest customer satisfaction ratings among any industry sector, whereas rural electric and telephone co-ops tend to be highly ranked by their customers.

    But, again, I agree with your general point about the importance of language and that we need to be very careful about how we communicate the MMT message. So, to the extent you’re right and I’m wrong about how people will react to the word “cooperative,” I’d agree that we need to emphasize other language and tread lightly with how we use it.

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