MMTed - Home Page of Public Education in Modern Monetary Theory

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OK, today I'm talking to Professor Randy Wray, who's a Professor of Economics at Bard College in the US and he's also a Senior Scholar at the Levy Institute, also in the US. So thanks for joining me, Randy. And Randy is one of the original team that started the development of what we now call Modern Monetary Theory.

So Randy, a lot of people have been saying that a lot of the mainstream economists have been saying, well, look, there's just nothing new in MMT. It's isn't -it's nothing to be seen here - sort of argument. What do you think MMT has to offer that we don't get out of the existing mainstream body of literature?

Yes, well, I think that we can find many of the ideas that we use in MMT, in the historical literature. I think if we go back through time, we can see the idea that the state issues the currency and imposes tax obligations in the work of Knapp and also in the work of Mitchell-Innes. We can find those ideas. We can find the - we can go back and look at writings on the history of money - John Maynard Keynes.

More recently, the great book by David Graeber, which also has very similar views to ours about the history of money - the notion that government should not worry so much about the deficit and where's the money going to come from? Of course, we can find that fairly recently in the post-war period, people like Abba Lerner, who argued that budgeting should be functional, that is, achieve a public purpose, not try to achieve a balance. And I think that that view actually was very common in the early post-war period because we had gone through World War Two and government learnt that finance is not the problem. The problem is - where will the resources come from? We use our monetary system to mobilise the resources to fight the war.

And so we can find that in a lot of the literature Beardsley Ruml, who was the the President sorry, the Chair, yeah that position was called Chair of the Federal Reserve of New York, which is the most important fed in the US who ran around the country saying taxes for revenue purposes are obsolete. We don't need no taxes to - in order to spend. Taxes serve other very useful purposes. So that was there.

And then the the notion that, you know, money comes out of thin air, that banks just create money through keystrokes that had been revived by post-Keynesians since the 1970s and my dissertation was actually on endogenous money and I found that the ideas go back at least to the Banking School of the early 19th century. They had a very sophisticated understanding of this and you can find those ideas hinted at even much earlier than that. So we call this the Endogenous Money Approach and MMT adopts this too. So many of those things were there in the literature.

What MMT has done is to integrate them in a coherent way. And our textbook, I think, is the final product that fully integrates all of these ideas into a coherent way to go about analysing the macroeconomy, including analysing how a sovereign currency works and what kinds of policy options that makes available to the sovereign currency issuer. So we are able to very effectively counter the analogy that a household budget is very much like the government's budget and the government could run out of money in the same way that a household could run out of money because we have a coherent response.

You have deficit hawks, you have deficit doves, and then you have the deficit owls. So the - a lot of liberals and progressives have been deficit doves and they're willing to use deficits in deep recessions or in wartime.

But they never had a good counter to the argument that, yeah, but eventually the government is going to become insolvent, the deficits are going to cause inflation and push up interest rates. They didn't really have a coherent response to that. We do. So we've been able to develop a much more powerful which calls deficit owl position because we understand how sovereign currencies work.

So if I had to identify what is truly new in MMT, I would say that it is an integration of the taxes drive money, which is the shorthand way of saying that that creates a demand for money with the notion of the buffer stocks. That is, you you you need to make sure your currency has value and you do that through a buffer stock regime. There are gold buffer stocks. There could be commodity buffer stocks, and then there's the reserve army of the unemployed.

So what MMT did was to revive the notion of the employer of last resort, which was talked about in the Great Depression, and make that the foundation of how we ensure that money maintains its value so that we can deal effectively with this great fear, practically hysteria about inflation and the relation of the deficit to inflation supposedly.

The final thing is that really understanding how the government spends. Until we began this exercise, I think it's fair to say I think this truly is fair - economists had no idea, literally no idea how the government really spends. They thought the government spent tax revenue. OK, they thought the government borrowed its own currency and when it sells bonds.

And Warren Mosler, when he first came on PKT back in 1996, exploded all of this. And that is all been incorporated in our approach to MMT too. So I think that that that also is truly new.

The final point is that now we have an effective counter to the question, how are you going to pay for it? Whenever progressives propose a progressive policy, it is always killed by this question because they did not have an answer. So we have the answer. So I'll conclude by saying that is why MMT is not only new, it's also very useful.

OK, that's great. Thanks very much and all the best.

End of Transcript

Study Notes:

MMT provides a framework for analysing sovereign currencies and largely focuses on the macroeconomic policy space available to currency-issuing countries.

By sovereign currency, we mean that the government chooses a money of account, imposes obligations in that money of account, and issues a currency denominated in its money of account that can be used to pay the obligations.

The constraints on a currency issuer differ from those faced by a currency user. The currency issuer faces no financial constraints, unlike currency users like households, firms, and sub-national governments.

Nearly all of the elements of MMT can be found in the historical literature. What we did was to integrate them into a coherent analysis to create a comprehensive approach to macroeconomics.

Our textbook codifies that.

What we say would not be all that surprising to economists and policy makers in 1950 who had learned the lessons of financing WWII. It was widely recognised that while tax revenues serve some purposes, they are not needed for national government spending.

Keynesian economics also understood that injections logically come before leakages. For example, government spending creates the income that can be used to pay taxes.

Government spends first, then receives taxes.

This understanding was lost by 1970 as economists erroneously applied the observation that consumer spending is constrained by income plus borrowing to the national government, which they claimed faces a similar choice of using tax revenue, borrowing, or printing money.

In normal times, it should limit its spending to tax revenue. Tax first, then spend.

In a recession, or perhaps for war, some borrowing is OK. But perpetual fiscal deficits financed by borrowing would drive up interest rates, crowd-out private borrowing, cause inflation, slow growth, and eventually lead to default and insolvency.

And, just as a household has to pay back its debts, they claimed the grandkids would be burdened because they would have to pay the government debt back through higher taxes.

So-called ‘money printing’ was declared taboo because they claimed it would cause hyperinflation. Spurious historical analysis was used to buttress these assertions. Our politicians, apparently, cannot resist the temptation to print money to win votes.

The solution was to create independent central banks to take away the punch bowl.

It is a fundamentally anti-democratic view, based on the false analogy between government and household finances. The truth is that a currency issuer does not face a ‘budget’ constraint like households do.

MMT incorporates the State Money approach of Knapp (1905) and Mitchell-Innes (1914); the endogenous money views of the C19th Banking School; the origins and history of money from Keynes, Phillip Grierson, Michael Hudson; the sociology of money from Dudley Dillard and Geoff Ingham; and the functional finance approach of Abba Lerner from the 1940s.

We also incorporated the employer of last resort discussed in the 1930s, surrounding the creation of the New Deal jobs programs, and we related that to use of buffer stocks to stabilise prices in response to the Great Depression.

Accordingly, MMT adopted the ‘taxes drive money’ view and integrated it with the buffer stock proposal - something that had not been done before. Both Knapp and Innes had recognised that it is the tax that creates a demand for currency but their discussion of the value of money was lacking.

Adding the buffer stock idea to the taxes drive money view, allows MMT to explain what determines money’s value. As Warren Mosler says, you must choose a buffer stock - it can be gold or some other commodity, it can be a reserve army of the unemployed, but we choose an employment buffer stock.

Minsky’s writings from the 1960s has some notion like that, but it was Warren and Bill Mitchell that fleshed it all out for MMT.

When we started the MMT project, we realised that no academic economist seemed to have any idea how the government really spends. It was clear that government doesn’t spend tax revenue and doesn’t spend borrowed funds.

Government spends through keystrokes. Taxes and bond sales result in debits to balance sheets. They don’t create something government can spend.

Another original idea attributable to MMT is that bond sales by the Treasury are functionally part of monetary policy. Warren brought this to MMT in 1996 when he joined with Mitchell and Wray to begin the MMT project.

Bond sales are not a borrowing operation but help central banks drain reserves. That was obvious to me in the late 1970s studying Money and Banking with John Ranlett, but no-one had understood the implication. Government spending puts reserves into the banks. Bond sales take them out. Like the magician, you have to put the rabbit in the hat before you can pull it out. So, you have to put reserve rabbits into the banks before bond sales can pull them out,

The investigation of how the government really spends turned into an investigation of how government puts the rabbits into the hat, then, like the magician pulls them out when it taxes or sells bonds.

Once you understand this, the world looks entirely different. Government keystrokes rabbit reserves when it spends. It debits rabbit reserves when it taxes or sells bonds.

It all comes down to keystrokes. You cannot run out of keystrokes. Government sells bonds so that banks and other holders can earn interest. Government doesn’t have to sell them. And when it does sell them, it can choose the interest rate it pays. This is a policy choice.

The sovereign government cannot run out of money. Insolvency is impossible. Government can pay all bills as they come due. Bond vigilantes have no power. Finance is not an issue for the national government.

No change of current procedures is required to pay for a pandemic response, a green new deal, a Job Guarantee program, or to pay for adequate food, clothing, shelter, and medical care for all.

The only constraints are resources and know-how. The question is: Do you have the know-how, and do you have the real resources? Finance is not the constraint. We understood all that in WWII. It was just a matter of mobilising resources and creating new ones. Then spending to put them to work.

We face a much bigger challenge than WWII - multiple pandemics - COVID, climate catastrophe, mass extinctions, inequality, forever wars, racism. Human survival is at stake. We already have most of the know-how required to tackle these, and we have massive quantities of idle or under-used resources. Sovereign currency nations have the finance. What we are lacking is the political will.

Understanding MMT removes the “how do you pay for it” barrier that stops most progressive policy dead in its tracks.

In answer to the question, what does MMT offer that is different? I would say that only MMT can do that. It is the only approach that can stand up to the deficit warriors.

2.15 Interview with Professor Randy Wray

Study Notes: