MMT and Bernie Sanders

L. Randall Wray

Yesterday Senator Bernie Sanders gave an important speech in which he invoked President Roosevelt’s “second bill of rights” in defense of his platform. As Bernie rightly pointed out, all of Roosevelt’s New Deal social programs to which we have become accustomed, were tagged as “socialism”—just as pundits are branding Bernie’s proposals as dangerous socialist ideas. You can see Bernie’s prepared remarks here.

Just before Bernie’s speech, I was asked to do an interview with Alex Jensen, on TBS eFM’s “This Morning” English radio program in Seoul, Korea. I was sent a list of questions and jotted down very brief responses. Unfortunately, in our radio interview we were only able to get through a few of these. You can listen to the interview (uses iTunes) here. My interview is #8, Name: 1119 Issue Today with Professor L.R. Wray

As you will see, we mostly talked about the platform of Senator Sanders, and why his proposals have caught the imagination of the US population.

Here is the full set of questions and my brief (written) answers.

1. So what is so unique and special about the MMT? What are the advantages? – What are the most important value that is embedded in MMT?

We begin by recognizing there is a difference between a currency user and the currency issuer. This should be obvious, but it has been lost in economics discourse. Almost all economists, policy makers, and the popular media start from the presumption that a government’s budget is just like a household’s. That is obviously false.

What has been lost is an understanding of the operation of sovereign currency systems. That is what we’ve tried to bring back. And we’ve updated it and brought in a much more detailed analysis of monetary operations involved in fiscal policy.

2. How is it the response to the 2008 financial crisis? In what measure can economic policies based on the MMT prevent crisis of the similar kind?

There are two aspects to this. First there is the financial instability angle—understood by Hyman Minsky and ignored by almost all economists and policy-makers. It is not just that they “never saw it coming” but rather they helped bring on the crisis by deregulating and moving to self-supervision.

Then there is the chronically tight fiscal policy—so that economic growth occurs only with private borrowing—something Larry Summers and Paul Krugman sort of finally recognize. And when the crisis did hit and the private sector retrenched, the fiscal policy response was far too small.

3. There also are a lot of criticisms on MMT. Especially when it comes to its unconventional, rather alternative view on fiscal balance. 
– What is your response to the opponents of MMT?
– How would you answer to those who cast skepticism about the feasibility of applying MMT to actual financial polity. 

I haven’t seen any criticism that was based on sound reasoning. Some complain that what we say isn’t new. We never claimed to have invented all this—we are mostly recovering what was lost. Others either don’t understand what we’re saying or purposely throw up strawmen to attack. Most do not understand sovereign currency, central banking, or banks.

Most of MMT is descriptive. So this is not a matter of proposing something that is politically infeasible. It is a description when we say sovereign government cannot run out of its own currency.

When we do move to policy, our prescriptions are well grounded in the facts of experience—that is to say, in the way the economy really works. However, that does not mean that we believe it is politically easy.

4. How can this be designed into a sophisticated policy and successfully implemented? Are there any strategies that you have in mind?

Abba Lerner laid out the general design, calling it functional finance. The budget ought to be formed to achieve full employment with relative price stability—not in order to achieve some specific “balance” of the budget (ie a deficit-to-GDP or debt-to-GDP ratio). We ought to add to his goals policy to maintain financial stability.

A key component of any such strategy should be the ELR or JG program that Minsky advocated.

5. How can a country’s financial condition remain sound and stable when the state can issue money whenever needed? 
– Are there any limits or countermeasures to such problems?
– How can we deal with the inflation or stagflation stemming from excessive issuance of currency?

The danger of spending too much money is inflation; there might also be an impact on exchange rates. The solution to the first problem is to avoid spending more once full employment is reached; and to carefully target spending even before full employment to avoid bottlenecks. The solution to the second is to float the currency.

6. Why are people so enthusiastic about Bernie Sanders’ economic agenda? Why is it so appealing?

I think people are enthusiastic to finally have a candidate who is not the Wall Street candidate. Bernie’s spending priorities match those of the vast majority of the population—and are not supported by the top 1% on Wall Street. I think that if elected Bernie would give us an updated version of Roosevelt’s New Deal. The original New Deal is what brought America into the 20th century. We need a similar effort to bring us into the 21st.

7. Why is the austerity not effective in raising employment rate? 

Because austerity necessarily destroys jobs. The only way that can increase the employment rate is to chase people out of the labor force after they’ve given up all hope of finding a job.

8. How can the MMT influence the international finance? Are there any chance that US can become an entity like OPEC which decides the price of oil? In other words, if the US can decide the amount of money they want to print, can’t it also decide the price of US currency, disturbing international monetary system?

As a major oil producer the US can of course influence the price of oil. We can expand our oil buffer stock program. But I’m not sure that is a good idea at all. We need to reduce oil consumption.

We could do that with other commodities, but again I’m not sure why that would be a good idea. I’d just operate a bufferstock program for labor—through the ELR/JG program—to set the base wage. I’d let most other prices float. And I’d let the dollar float. Of course, the value of the dollar is mostly determined by the rest of the world, not by US policy.

As the issuer of the main international reserve currency it is important for the US to provide it. We do that by running current account deficits, or by lending dollars. If the world’s demand for dollars remains high, the US will continue to lend dollars and to run trade deficits.

7 Responses to MMT and Bernie Sanders

  1. It’s wonderful to read this. It would be a nice miracle to see MMT implemented. One fear though comes to mind. The fear of human emotions, such as the terror fear of extreme ideology such as ISIS. The current debate has ignited fires of hatred, and I can envision the false thought of ‘unlimited money….the Govt can’t go broke; being used as a protection racket, that is actually an offensive war machine.
    A question.
    Did Germany, in the 1930’s, use a form of MMT to finance it’s military expansion?
    This reminds me of Cheney’s quip:
    “….O’Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. “You know, Paul, Reagan proved deficits don’t matter,” he said, according to excerpts. Cheney continued: “We won the midterms (congressional elections). This is our due.” A month later, Cheney told the Treasury secretary he was fired. “

  2. Letter in Canada’s newspaper The Globe & Mail, Nov 12, 2015

    Deficit spending allows the federal government to build infrastructure, provide services, and most significantly, put to work those job seekers that the private sector doesn’t use.

    Many respected economists believe governments aren’t going deeply enough into debt to properly stimulate their economies.

    In olden days, we sacrificed animals to propitiate the gods.

    Today, we bow down before balanced budgets, and cruelly sacrifice the health and welfare of the unemployed.


    Modern Monetary Theory in Canada

  3. “5. How can a country’s financial condition remain sound and stable when the state can issue money whenever needed?”

    I’ve been trying to promote an idea called Modern Legal Theory. It describes how sovereign governments can enact any laws they want. They don’t have to, for instance, get draft legislation from think tanks or lobbyists; they can come up with some rule to meet some need, and make it law. Of course it’s physically possible to make bad laws, and the good health or ill health of society will depend on the particular actions the laws support or require.

    Ditto Monetary Theory. Money spent on useful things will do good, on dangerous things will do harm, on useless things will do nothing. Money not spent can do harm, and in that case when it’s not spent because of some abstract rules in an artificial game, then we have to change the rules. Note that the good health of society is not primarily a financial condition, even though finance has an effect. The rules are doing harm. They have to be changed. We need a responsible and effective government to change them.

  4. …So glad to be reading Wray again, after I just checked the site intending to suggest that y ‘all either shut it down or let the students take it over.

  5. MEL: “Money spent on useful things will do good, on dangerous things will do harm, on useless things will do nothing. Money not spent can do harm.,”

    Succinct, clear, powerful. Perfect. Use this often. It can be the subtitle for every paper written on MMT.

    (We might want to tweak the final sentence as money not spent doesn’t really exist. I suppose it is like words not spoken–which still does make sense, and they can be harmful, too.)

  6. “Money not spent” really means “things not done”, I guess.

    I see what you mean. I guess I was aiming at sins of omission. I blame political failures for things people often blame on MMT.

  7. Great to see you back Prof Wray.
    Good stuff as always.

    Been so great to see the rise of Bernie, which I think has been a natural (and historically proven) reaction to our rightward shift since the 80s, I’ll address it in my blog sometime but it should be pretty obvious to those with common sense.
    Anyway, I have held these fringe, crazy views for 10 years now and never thought I’d see a time in my life they would become acceptable. We are certainly not there yet, but perhaps can head there….Ron Paul and his ilk was obscure and ridiculed in 2008 and 7 years later we see what has become of that movement.

    Keep up the good work NEP and let’s hope the Bernie movement doesn’t fizzle out, it may be the best way to get these ideas more out there, and provide a political conduit for the JG idea.