Seeking “some education” Jared Bernstein recently asked some questions about MMT (Modern Money Theory). This series is my effort at providing some answers.

Sorry, but no there’s no agreement on deficit spending

Jared begins by saying:

. . . . that, as I understand it, there’s no distance between my views and a core principle of MMT: the need for deficit spending when the economy is below full employment. . . .

The conclusion that there is agreement is misleading because it masks big differences in the size, targeting, and continuity of the deficit spending that Jared and MMT economists would likely provide. Jared would, most likely, recommend deficits perhaps double the size of current deficits, and while doing the deficit spending would be very aware of the need to reduce deficits as full U-3 unemployment approached 3.0% and perhaps even run surpluses as U-3 unemployment approached 3.0% to head off any impending demand-pull inflation. He would, based on his book with Dean Baker, likely target deficits on a transitional jobs program paying a prevailing minimum wage, and on infrastructure spending.

MMT economists however would look at deficit spending from a sectoral balances perspective. They would reason first that if the United States had a healthy true full employment economy producing at its full potential, the government would probably have to deficit spend to compensate for demand leakages of 12% of GDP per year: 6% due to a current account deficit and 6% due to savings desires of American citizens.

That required full employment budget deficit of 12% of GDP would grow in absolute nominal dollars each year as GDP increased, as long as savings desires and import desires among the citizenry remained at that 12% of GDP figure. Any reduction in size of the deficit relative to that 12% would result in a retreat from full production and a reduction in private sector employment.

So, from the MMT point of view, deficit spending could never be reduced below 12% unless fiscal policy was aimed at less than fully realizing the potential of the American economy, or the savings and/or import desires of the American people declined over time. Running that kind of deficit spending policy would probably bother Jared and stoke his fears about inflation, but for the MMT economist that kind of policy continuity would be necessary to maintain a full employment economy at its maximum potential.

In addition to these likely differences in size and continuity of deficit spending MMT economists, would also likely differ from Jared in targeting the deficit spending. Spending on the unemployed would focus on a government-funded Job Guarantee with a true living wage and a very strong fringe benefits package. This wage might well be 50% greater or more than the minimum wage paid in the kind of program Jared favored.

Further with the 12% of GDP policy space assumed by the MMT economist, the full employment budget would target deficit spending on all the areas specified in an expansive policy agenda like the one Bernie Sanders put forward, or even the one I outlined some time ago. It would cover Medicare for All, free education at all levels, a jubilee for student debts, infrastructure, aggressive measures to stop climate change and prevent further destruction of the environment, and a host of other measures.

In short, it would be a program for a Green New Deal. It would be a program to achieve public purpose as quickly as possible. It would not be incrementalist in nature, but would be one designed to reverse the effects of neoliberalism on American society, and to reconstruct our economy so that it supported democracy and other goals that are part of public purpose, going beyond just full employment and price stability.

Lastly, while the MMT economist’s job guarantee would produce true full employment in the sense that anyone wanting a job offer in the locally-administered federally-supported JG program could have one, it would not produce true full private sector full employment until the private economy had recovered enough to provide jobs for all of those who wanted one in the private sector. For that to happen, the deficit spending necessary to compensate for aggregate demand losses to trade and savings would have to be continued until all those wanting private sector jobs could be employed in the market value sector, and beyond that point to compensate for demand leakages until those grew smaller or disappeared; an outcome that might not ever occur.

While making his claim of agreement with MMT economists on deficit spending, Jared also let drop an important reason to believe that his version of deficit spending would be quite different from an MMT economist’s. He said:

The sad, underappreciated, fact is that for much of the last 35 years (about 70% of quarters, using unemployment minus CBO’s NAIRU; (u-u*)>0 70% of the time since 1980), the US economy has operated below its potential.

The reference to CBO’s NAIRU (the Non-Accelerating Inflation Rate of Unemployment estimate) suggests that Jared still believes there is such a thing, which, in turn, probably means that he thinks we are near full employment now, since U-3 unemployment was at 4.1% during December 2017. On the other hand, an MMT economist would certainly use the U-6 measure of unemployment of 8.1% and perhaps even a much higher disemployment rate representing the U-6 plus the BLS undercount excluding those who would have wanted and gotten a job in a healthy economy with a Labor Participation Rate of 67%.

Why? Because the MMT economist doesn’t believe that a NAIRU exists. Instead, she believes that true full employment along with price stability can be achieved, in part through using a Federal Job Guarantee at a true living wage. So, from the MMT economist’s perspective, in 100% of the quarters over the past 35 years the US economy operated at less than its full potential, creating a massive waste of products, services, jobs, careers, and enduring value that might have been.

End of Part I.