Jared Bernstein Shows the Costs of Not Understanding Sovereign Currencies

William K. Black
September 26, 2017      Kansas City, MO

UMKC has just hosted a well-attended conference on Modern Monetary Theory (MMT) and job guarantee (JG) programs in which the federal government would provide the funds for employer of last resort programs.  In conjunction, MMT and JG allow full employment to become the norm.  MMT is based on reality, it explains how the monetary system in a nation with a sovereign currency actually functions.  Most monetary theory taught in conventional economic classes is a fiction arising from carryovers from the era of the gold standard in which nations lacked a sovereign currency.

Jared Bernstein has just published an op ed in the New York Times entitled “Do Republicans Really Care About the Deficit.”  Republican elites, of course, have not really cared about federal budget deficits for decades.  That is a good thing that Democrats should embrace in a bipartisan spirit.  Bernstein, of course, is correct that the Republicans are hypocrites about federal budget deficits, pretending to care about them when the Democrats hold power and displaying their lack of any real care when Republicans hold power and the context is tax cuts for the wealthy.

Democrats display a similar hypocrisy.  Even Democrats like Bernstein who know that the Republicans proposed expansion of the federal budget deficit through tax cuts is not a real economic problem are primed to attack Republican hypocrisy by falsely asserting that the Republican deficits would harm the Nation.  Democrats should embrace honesty as the best policy and stop embracing the politically attractive pose of claiming to be the Party that “really cares” about the federal budget deficit.  That politically attractive pose is not simply dishonest and financially illiterate, it is also a trap.

The Republican and New Democrat deficit strategy is to force Democrats to make an endless series of “Sophie’s choices.”  Choose which excellent program to kill in order to save (temporarily) another from the chopping block because we supposedly cannot afford to provide both.  Then repeat the process.  The Republicans and New Democrats constantly, and falsely, claim that the federal government cannot afford to provide medical care availability that is routinely provided in most of Europe and Canada.  It is a pure myth that the United States cannot afford to provide the safety net of Social Security, Medicare, and Medicaid.

We need to start with first principles.  In a nation with a sovereign currency like the United States, federal tax revenues do not fund federal expenditures.  If that sentence, which is indisputably correct, strikes you as bizarre then it is a measure of the force of the propaganda you have been fed throughout your life.  Today would be an excellent day to free yourself from the hold of that destructive lie.  This web site, the Levy Institute, and Bill Mitchell’s sites all have excellent resources that will help you clear out the falsehoods about money that you were force fed.  Money cannot be “scarce” for a nation with a sovereign currency.  Real resources can be scarce, not a nation’s sovereign currency.

Bernstein knows that federal tax revenues do not fund federal expenditures.  His column shows that he is worried solely about realpolitik rather than real economics, conceding that “deficits don’t seem to hurt the economy.”

Do these forces mean deficits don’t matter? Not at all. The problem with structural deficits — ones that go up even in good times — is that they reveal that we’re unwilling to raise the necessary revenues to support the government we want and need. This enables those who whose goal is to shrink government to point to deficits and debt as their proof that we can’t afford it, whatever “it” is, except when “it” is tax cuts.

We need to parse that paragraph carefully, because doing so reveals that Bernstein makes no economic argument that deficits “matter.”  He makes only a political argument.  Republicans and New Democrats “whose goal is to shrink government” will “point to deficits and debt as their proof that we cannot afford” the safety net.  Of course they will.  They constantly promote that propaganda.  The answer to that cynical, dishonest tactic is not Bernstein’s proposed strategy of embracing it and agreeing with the lies that federal budget deficits harm the economy or our children and grandchildren.  Even if Democrats were to heed Bernstein’s advice to base their budget policies on partisan political advantage, it is bizarre that Bernstein thinks that it would be good politics for Democrats to be known as the Party dedicated to increasing federal taxes.

Bernstein’s paragraph expressly makes a claim he knows is false – that federal taxes provide the “necessary revenues to [fund] the government we want and need.”  Bernstein makes an analogous criticism of Republicans.

Back in 2015, I testified at a hearing on these issues before the House Budget Committee. One after another, Republican members on the committee denounced rising debt levels. Why then, I asked, do you want to cut taxes? Their answer: It’s spending, not tax cuts that increases the deficit.

That, of course, is crazy. I don’t mean it’s bad economics, or lousy fiscal policy. I mean it’s disconnected from reality, or more precisely, from arithmetic.

Bernstein’s “crazy” claim that federal taxes provide “necessary revenues” is even more “disconnected from reality” than the Republican statements he rightly denounces.  Worse, Bernstein doubles and then triples down on this claim.

Do these forces mean deficits don’t matter? Not at all. The problem with structural deficits — ones that go up even in good times — is that they reveal that we’re unwilling to raise the necessary revenues to support the government we want and need. This enables those who whose goal is to shrink government to point to deficits and debt as their proof that we can’t afford it, whatever “it” is, except when “it” is tax cuts.

Note Bernstein’s critical concession – federal elected officials are often “unwilling,” not ‘unable’ to provide “the government we want and need.”  Even Bernstein’s sentence that makes this critical concession, however, doubles down on the “crazy” notion “disconnected from reality” that tax “revenues” fund government expenditures.  Bernstein closes his column by tripling down on this falsehood.

We need a functional government that raises ample revenues to meet the challenges we face, including an aging population, climate change (and the intense disasters it increasingly causes), inequality, poverty and the winds of geopolitical upheaval.

No, we do not need high taxes to raise “ample revenues” to meet these challenges.  Bernstein’s taxation recommendations are bad politics and bad economics.  They are so “disconnected from reality [and] arithmetic” that they are “crazy.”

What Bernstein is right about is that the Trump tax and revenue cut plans will increase the federal budget deficit and, vastly more importantly, that they will cause inequality to surge, harm the poor, and intensify CEOs’ already perverse incentives.  Democrats have valid, powerful arguments against Trump’s tax cuts.  Those are the arguments they should make.

18 responses to “Jared Bernstein Shows the Costs of Not Understanding Sovereign Currencies

  1. I certainly believe the MMT explanation of how the monetary system works, but I have come to realize that there are a couple of important factors that MMT proponents tend to ignore or brush over.

    One factor is the belief that the money created in the private sector by lending is somehow always a less important economic force than money created by the sovereign power. The accounting balance of assets and liabilities (money lent and obligation to repay) is a static balancing. The economy is dynamic, however. Money lent can be spent immediately. The obligation to repay is in the future. In the time span between when the money is lent and when it must be repaid, there is a lot of economic activity going on. The effects of this cannot be ignored.

    The other factor is mark-to-market valuation of assets. I’ll defer discussion of that to a later comment.

    There is plenty of evidence in economic history, both recent and not so recent, to demonstrate the importance of the two factors mentioned above.

    I would love to see a discussion of both factors by the MMT theorists.

    Keynesian explanations of why monetary policy is not the only factor driving the economy still apply after all these years. After all, these too are just explanations of how things work whether you choose to act on that knowledge or not.

  2. Thanks, Bill

    One way to explain this that sometimes registers is to ask people if they have a checking account. That’s your asset, right? But what is it to the bank? (Hint: their liability). It’s an asset or liability, depending on your point of view. So when you write a check, you’re assigning a portion of your bank’s liability to the payee.

    The dollars in your wallet are simply checks made out to “cash” in fixed amounts. The U.S. Central bank (“the Fed”) carries currency on its books as a liability too, just like your bank does for checks you write on that account.

    Reducing the “debt,” then, is roughly like account holders at a bank getting together to conspire to reduce their own assets because the bank’s liabilities have grown too great. Of course this never happens, unless you bank at the Bank of Crazy.

    As for tax revenues provisioning government, this one is tough to crack too. I usually just ask people where they would get the dollars to pay taxes if government didn’t spend them out into the economy first. How many dollars does the government leave in the economy? Exactly, to the penny, the national “debt” (quotes because it’s so different from household debt). That’s not exotic economics, it’s double-entry bookkeeping.

    Finally, people generally panic, saying “B…but if you just print money, you’ll cause [gasp!] [hyper-] inflation!” According to the Fed’s own audit, it “printed” $16 – $29 trillion in 2007-8. Where was the inflation?

    Don’t get me wrong. If a woman has a wheelbarrow full of Deutchmarks to buy a loaf of bread, someone did some printing. The problem is that sometimes the printing ends up producing hyperinflation, and sometimes it doesn’t. The printing isn’t what causes the inflation. It’s typically a bidding war for goods (or services) that are in short supply, accompanied by a balance of payments problem. Never just printing.

    If we paid off the national “debt” wouldn’t that cause inflation? Nope. No bidding (debts spend the money at their initiation, not on payoff). In fact I’d argue deleveraging is “un-spending.”

    How about that job guarantee? By definition, no one else is bidding for the unemployed, so again, no inflation.

  3. ” In a nation with a sovereign currency like the United States, federal tax revenues do not fund federal expenditures. …Money cannot be “scarce” for a nation with a sovereign currency. Real resources can be scarce, not a nation’s sovereign currency.”

    Right, but we don’t have sovereign currency, we have scarce Federal Reserve Notes and money issued as debt. We could have sovereign currency if we threw the bribed corrupt Congress out and elected truly public minded representatives. The current system systematically robs the nation’s people blind on a daily basis. If we had sovereign currency there would be no flap over the debt ceiling or deficits becasue there wound’t be any. Lets be honest, Federal Reserve Notes are not sovereign money. We need to change the system, the law, in order to have real sovereign currency.

    • You forget that the Federal Reserve has a rather large portfolio of USA government securities. That is truly one government entity lending money to another government entity. In this case, the lender, the fed, pays all of its profits to the borrower, the US Treasury. So all the interest on the US debt that the Fed owns goes back to the US treasury. Besides which, all the interest on the US debt is money created by the Fed.

      Also remember that most of the US money in our economy is not physical Fed Notes. Most of the money is in computer records the Fed uses to keep track of its “customer” accounts.

      • Isn’t the Fed a private institution? I’m pretty new to this stuff not American either so could be wrong.

        • Who owns the Federal Reserve?

          ===== quote =====
          The Federal Reserve System fulfills its public mission as an independent entity within government. It is not “owned” by anyone and is not a private, profit-making institution.

          As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

          However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”
          ===== /quote =====

  4. MMT makes a lot of sense, except for one thing: what happens when the interest on the debt increases? Do you just increase the deficit to fund it? Would that run the risk of inflation by leading too above-optimal deficits?

    • So much to address in your comments, Steve, you write:
      “You forget that the Federal Reserve has a rather large portfolio of USA government securities.”
      Why do you imagine I forget the public debt in advocating sovereign money?
      Steve writes:
      “That is truly one government entity lending money to another government entity”
      Which is illegal as I understand it. Do you have some documentation?
      I’m pretty sure the FRBS acquired those Treasury bonds through inter-bank acquisitions, designed solely to save the member-banks. The FED Banks did this, mostly, via swapping Central Bank reserves with the debt-holding banks. The Gov had no role and got zero benefit from that asset swap. So what is your point? That the Fed has a current Board policy that “refunds” its net-income ( not profits) to the same government that paid it in the first place? That is not exactly the public benefit that you make it out to be, is it?

      Our taxes go to Treasury, who then pays the Fed. Then the Fed takes it and pays ALL of its expenses for ALL of its employees and for ALL of its banks, for its Open Market Committee and its Board of Governors, plus losing some billions of dollars on monetary operations along the way, and then returned the leftovers to the government and its taxpayers, without so much as a thank-you, pretending it’s free money for the government.

      I am glad you know that most money is created electronically by private banks and that the FED keeps track. Still, even the tiny percentage (less than 3%) of actual Federal Reserve Notes printed by treasury which are then sold for cost of production to the private member banks of the FED, which means they get the seigniorage, which the government would be getting if we had a sovereign money system plus we would have the money.

      A sovereign money system, such as that proposed by the American Monetary Institute, plus a couple dozen other organizations world-around, would solve many of the problems we have today; the systematic concentration of wealth, i.e. the creation of poverty, end the so-called business cycle, i.e. the pump and dump scheme, and provide government with the means with which to fund the entire social and physical infrastructure while paying off the public debt as it comes due.

      A sovereign money system would shift the economic paradigm from greed to care which, if we continue to ignore this reality, and continue to allow money to be issued privately as debt for personal gain means the end of much of the life we hold dear on this earth. It is a system that has made us parasites on this earth instead of creating a symbiotic relationship with earth. You do know that the extinction rate is now 1000 times higher than it should be, right? It is what biologists are calling the 6th Great Extinction. So, we’ve got to change the system from private control to public control so we can do all that needs to be done.

      • Yes, it is illegal for the Fed to directly lend or give to the Treasury. So they use an indirect route. The results are close to the same though.

        Ah “the American Monetary Institute”. Say no more.

    • Interest on public debt is indeed a burden, but made manageable through calculated can-kicking on the part of the banks, and not the government.
      There’s like a $300 Billion burden annually – depending on how you count it – but the more painful metric would be the compounding interest on all of the debt that has been issued over time.
      Isn’t that ‘inflationary’ …. by definition ?
      Still a big question :
      Why do governments borrow?
      Who controls the money ?

  5. MMT makes a lot of sense, but I still have one question: what happens when the interest on the debt increases as a share of federal spending? Do you just pay for the debt by increasing the deficit? Would that run the risk of inflation?

  6. Bill your article makes a great point, but it is a point that will be understood *only* by people who *already* understand what you yourself understand – about sovereign debt and spending not being a problem.

    You need to explain for everyone who doesn’t understand these things *why* what you are saying is so. Explain what you mean when you say that taxes don’t fund spending, and that increased deficits do not harm the economy. Otherwise you are just preaching to the choir.

    Lay it out for people that government sovereign spending is done through the creation of new money directly into bank accounts out of thin air – and that taxes, Treasury sales, The Fed’s creation or absorption of private money, etc, are only subsequently used as levers to adjust the economy and money supply later down the road, depending on how the economy and inflation/deflation is behaving in response to government and private spending, saving, investment, production, returns and losses on speculation, etc.

  7. Lynnette Allen

    This is so confusing to me. Especially considering the comments which seem good by Switzer and Greenberg. So what IS going on. What IS the truth??

  8. The American Monetary Institute is just wrong. The US does have “sovereign currency” for all intents and purposes. Any appearances to the contrary are just that, appearances. Bill Mitchell’s billy blog, third on the blog roll above, for instance just had some posts on the history of one of these stupid human tricks – the pretense of disallowing “direct” purchase of Treasury debt by the Fed (that Switzer errs about above). Essentially meaningless in the world of government finance – but quite meaningful in executing the real intent – confusing people like you, me and other commenters here. Better to trust those making posts here than commenters, who often sound convincing, are often half-right or more, but who ultimately make things more complicated than they really are.

  9. We do have sovereign money in circulation. It is called coins. To understand how citizens benefit from coins, take the example of quarters produced by the mints. In 2016 2,356,030,000 were produced with a face value of approximately 589 million dollars. However, the cost of minting the coins, just under 9 cents per coin, was only 212 million dollars. The seigniorage was 377 million dollars or the government was able to spend 377 million dollars for goods and services for the American people without borrowing the money or balancing it with tax collections. Another kind is that which is generated by computers such as my social security up-check in my bank account each month. Another subject: I hear so often about banks putting money into the economy however, if a bank is successful and loans are repaid at interest, every loan results in some amount of money being taken out of the economy and placed in the bank’s reserve account. If you pursue this reasoning you can show mathematically why bank loans increase exponentially as historical records show.

  10. Being an historian and not a theoretical economist, I find much of the above confusing. However, I also find the rush to balanced budget amendments getting many states in deep trouble. I see the economy’s ups and downs as being the opposite of the required spending of government, at least in peace time. In times of a high economy , taxes rise and the need for government spending falls due to closer to full employment and reduced need for welfare and subsidy or stimulus payments.

    When the economy takes a major downturn, and tax revenues fall, the need for government spending increases in the form of various aid and business stimulus programs. These two alternative but opposite waves can not complement each other if one has a mid range ceiling.

    During good times, “surplus” tax income should be set aside for bad times, not “returned to the owners” via tax cuts, particularly if slanted upwardly to those who already have more than they can reasonably expect to spend during their lifetimes. Another use for “surplus” government money in good times would be to buy back the outstanding debts with the highest interest rates.

    During bad times, government should be spending these accumulated surpluses not only on aid to the poor, but on public works to gain a step up on deferred maintenance and improvements on things like infrastructure when you can get more miles of pavement for a dollar than you can get in good times.

    I refer to the financial industry as the “Money Changers.” Many aspects of this industry operate like a casino. Fortunes are made and lost on luck and emotion except by the professional insiders and manipulators. Many of these “services” have no real bearing on reality or the common good and usually produce little, if any, real common benefit. They do not produce more tangible goods or needed services. They just line the overstuffed pockets of those in positions of control. or knowledge. And interest upon interest dilutes the value of otherwise expendable capital. (I know this flies in the face of some of the economic theory noted above, but makes sense in my poor understanding of economics.)

    As for tax cuts to pump the economy, many say it has never been proved to work as claimed. It may only raise the number of openings for yacht captains. To the contrary, I like to say the trickle-down economics can be proved to work. If you feed a horse enough grain, some of it is bound to eventually fall onto the pavement for the pigeons to pick over.

  11. The economy is about 22,000 times larger than the amount of money minted in quarters if the numbers you quoted are accurate. Do you really think $600 Million is really that significant in a $13 Trillion economy? If the government minted a number of trillion dollar platinum coins, then we might be talking big impact.

  12. Bank loans increase exponentially because the economy increase expponentially along with population growth and productivity growth. At least it has done so before 1980. Banks put money into the economy as soon as they make the loan. The money is taken back out of the economy over the lifetime of the loan. For mortgages, the take back periods could be as much as 30 years. In between the giving of the loan and getting tbe money back, that money has a sizeable impact on the economy. As lkong as there is demand for loans, the banks keep rolling the money coming into them into new loans. Of course with Fed rates so low, they can get the money to loan from the Fed as easily as getting it from deposits.