Should we also understand and recognize the basic accounting system of the federal government? The "books" are an annual statement of income and expenses, no recognition of investment or assets. How would corporations work in that accounting system?
I'm a big fan of your work; keep it up. That said, I don't think that you do justice to your perspective with your G-T analysis. Bond purchase removes money from the economy. In fact, it removes an amount closely correlated with G-T. Deficits are not necessarily inflationary; whether they are financed by borrowing or printing makes all the difference.
You want MMT to be acknowledged as true? Well then, shut the mouth of every deficit demagogue forever by macro-economically integrating beneficial price and asset DEFLATION into profit making economic systems with a 50% Discount/Rebate policy at the point of retail sale. Then, in addition to doubling everyone's purchasing power and supercharging the economy from the bottom up there will be no reason for fiscal austerity and we can begin to run the kind of deficits necessary to fund the mega projects to confront climate change. Change the monetary paradigm with a basic accounting function...and change the world.
Just a heads up that the link in the sentence "The reality is that government deficits play a vital role in supporting aggregate income, business profits, and employment" is broken.
In your quote from Randy Wray, he refers to the "debt ratio" and discusses the impact of deficit reduction on GDP growth. This appears to imply that there is some validity to the Debt to GDP ratio. There isn't, but maybe I misunderstand his position.
The ratio is stock/flow inconsistent, which is a basic premise of the MMT framework.
The "debt" is a stock and GDP is a flow. Comparing them is not even as valid as apples to oranges. Those are both round fruits, at least.
I am the person thinking, “Yeah, but they’re also the reason we have an inflation mess on our hands…”
I am under the belief that real resources are the constraint within the descriptive lens of MMT. If that is true, then it seems like a logical step to then make the claim: smaller deficits decrease the probability of hitting the real resource limit of an economy. And vice versa, large deficits will increase the probability of hitting the real resource limit of an economy. Is that over simplified assumption wrong?
I also think that MMT describes inflation as the byproduct of too much currency chasing not enough real resources. Am I right here?
So using my understanding of the descriptive framework of MMT I get, “the larger a government deficit becomes the larger probability there is to inflation?”
Genuinely would like to learn about the nuances I must be missing.
"If that is true, then it seems like a logical step to then make the claim: smaller deficits decrease the probability of hitting the real resource limit of an economy. And vice versa, large deficits will increase the probability of hitting the real resource limit of an economy. Is that over simplified assumption wrong?"
Oversimplified, therefore wrong. Suppose that a country's economy was deeply depressed but that it had few automatic stabilizers (e.g., unemployment compensation; federal Job Guarantee) to counter the business cycle. That country would have a small government sector deficit and yet be nowhere near hitting its real resource limit.
Now suppose that this same country instituted some extremely modest countercyclical spending programs (e.g., Texas-style unemployment compensation). Its government spending would increase and, without tax increases, its budget deficit would increase as well. But it would probably still be nowhere near hitting its real resource limit.
Suppose, in contrast, that a country's economy was going full blast due to war production but that its government efficiently collected taxes. That country could have a small government sector deficit (especially relative to GDP) even though it was at its real resource limit.
You are tending to confuse the volume of government spending (G) with the size of a government's surplus or deficit (T - G). The latter is simply the difference between spending and revenues. "T" and "G" are, within limits, what the government can target as policy variables, but their difference is not something that can be effectively targeted for policy purposes.
"I also think that MMT describes inflation as the byproduct of too much currency chasing not enough real resources. Am I right here?"
No, what you have done is simply to take the old nostrum which describes inflation as "too much money chasing too few goods" and replaced the nouns with some terminology frequently encountered in MMT discussions.
I see, I was missing that a government could be at the limit of real resources but still have a small deficit.
With the spending and revenue, I also see what you’re saying about each being variables that could be targeted, but I don’t understand why you can’t target the difference? Couldn’t a gov mandate that revenue must stay at some predetermined difference to spending?
Lastly, could you explain the correct way inflation fits into the descriptive MMT framework?
"With the spending and revenue, I also see what you’re saying about each being variables that could be targeted, but I don’t understand why you can’t target the difference?"
Spending and revenue themselves can at best only be approximately targeted. The volume of tax revenue rises in expansions and falls in recessions. The volume of unemployment compensation and welfare payments moves in reverse. But by how much will they move in the next fiscal year? The government can only make approximate estimates. It follows that the difference between T and G is just a residual and even more of an approximation.
Moreover, why, from the MMT perspective, would you want to target a particular federal deficit level. The whole point of functional finance perspective underlying MMT-informed policy is to balance the economy, not the budget. A government of a monetarily sovereign economy does not need to think of budgeting in the way a household, a company or even a non-currency-issuing level of government does. Aim for outcomes that are socially and politically desirable. Spend (in the process creating currency) to achieve those outcomes. Tax (in the process extinguishing that currency) as needed to create the space for government spending.
"Lastly, could you explain the correct way inflation fits into the descriptive MMT framework?"
You appear to be seeking a one-sentence explanation; I'm reluctant to try to satisfy your desire. Indeed, if you re-read what Kelton has been posting in this blog in recent weeks, you'll see that she's trying to steer the discussion away from sound bites and one-sentence explanations. Start formulating your own answer by reading Kelton's "The Deficit Myth."
Lots of good info, thank you for taking the time to write it.
I have been reading the inflation posts as well as the book, but I can’t wrap my head around how inflation fits into the framework. I do get the point you are making about avoiding a one sentence answer because it seems to be the culmination of many factors.
Through the MMT lens would inflation mainly be solved through taxation? I understand there’s no simple answer here. But if taxation is the answer there, won’t that be difficult politically?
Appreciate all the info you’ve provided, thanks again.
What does MMT framework reason and conclude regarding financialized predatory (disproductive) corporate "behaviors", adding to GDP calculations? I recall Greenspan's infamous apology for thinking that "free markets" could regulate themselves. Where do rules-of-the-road matter (to society) within the MMT framework? Does MMT advocate or even address tapping the brakes on calcified calamity? Seemingly, MMT has been captured or coopted for those sorts of purposes. It would also require getting off a neutral posture. After all, if we cannot acknowledge accelerating and corresponding crisis, how is it possible that any economic framework could be of assistance going forward?
At a recent webinar Professor Kelton commented on her efforts to reach a variety of audiences. I am a scientist trained in academia and have been learning MMT for 5 years now. In the sciences, communicating at the academic level through journal articles and conferences is part and parcel of communication. I have met very few scientists that are adept at explaining scientific studies to the general public. I see an analogous challenge for MMT. Thus, my personal effort has been to become aware and learn the MMT lens while at the same time evolving a distillation process so that it can be easily explained to others. IMHO Professor Kelton’s book “The Deficit Myth” made a huge step forward in this challenge. I believe the expansion of Zoom conferences is helping too and is more efficient than traveling to Kansas City for a convention as has been done prior to the pandemic. Pavlina Tcherneva gave an excellent presentation there on work and the job guarantee. We all need to share these resources as widely as possible via videos, transcripts, anyway we can. The challenge always remain of matching the resource we select to the audience we are trying to target and assuring it is apropos.
Have you ever been invited to lecture Congress on your views of deficits and MMT? I would think you could get your Representative or one of your Senators to invite you to speak with a small group, perhaps a Budget/Finance Committee? It’s pretty obvious they need educating about deficits.
Stephanie Kelton was Chief Economist for the Democrats on the U.S. Senate Budget Committee in 2015-16. She discusses this experience at several points in her 2020 book, The Deficit Myth.
PLEASE convince the Democrats to adopt the MMT understanding as the foundation of the DNC platform. It’s past time. What approach exists to make that happen?
Did exiting the war in Afghanistan directly impact deficit reduction? In the guns vs. butter model dollars are shifted from wars to domestic investments like infrastructure? Emphasis on a shift from wars to domestic rebuilding seems like a better couch for his rhetoric/argument? (instead of mentioning the deficit) Access to his speechwriters and/or White House staff could refine his approach possibly?
MMT wins the economic argument. But it doesn't win the political argument because the deficit myth has been so thoroughly pounded into the collective American belief system it will take even more than a pandemic to dislodge it. That's why Biden & Co. need to resort to deficit-lowering projections to sell his economic proposals regardless of his own or his cabinet's belief in the wisdom of deficit spending. Bernie Sanders and Elizabeth Warren are stuck in the same political quandary, having to mouth assurances that their tax proposals will lower the deficit as a selling point. They are forced to stay in the MMT closet in order to win a political argument. (I assume that the two are in, if not a strictly MMT closet, then something very similar. As are of course many Republicans who are perfectly happy to inflate the deficit with huge tax cuts for the rich, then turn around and denounce Democrats' spending as irresponsible. They all know the deficit paradigm is a myth but they cannot say so out loud to the electorate.)
Truth! As we comment here Congress is appropriating $10billion for Ukraine and you and me have not even been asked to provide our credit card numbers to finance it. Our credit cards thus remain available to finance our household affairs while our “We The People” government finances our collective/common affairs.
Yesterday’s man has demonstrated to be willfully ignorant about MMT ideas regarding federal government deficits and more likely to continue depending on misguided economic advice from neoliberal circles eager to maintain the status quo. Politicians will be last on the list of those willing to learn the meaning of a balanced and healthy economy that works for all of us.
The last graph shown by Hutchins which shows the deficit percentage does not state what is being measured; is prior period, year over year, or some other basis?
My issue with MMT is what is the solution to the potential, and in my estimate probable, remedy to significantly higher interest rates coupled with devaluation of dollar. What is the current breakdown of our debt based on maturity. A graphical representation on a quarterly basis of maturing debt would be useful. BC
“we should accept any budget outcome that delivers broadly balanced conditions in our economy.”
-SK
Letting any markets fall into the hands of self-interested financial actors is debilitating. Non and disproductive GDP (represented by mal and misappropriated, fraudulent acquisition of G), from a societal or sustainable humanity perspective is where the "system" currently resides. Seemingly, the MMT framework has been commandeered by deep pocketed, powerful institutional influence, closest to central and money center banks.
They've weaponized credit and "markets" to represent national security and neglect the reality of sowing violence and economic ill-being far and wide. All in behalf of the fewer and fewer.
Should we also understand and recognize the basic accounting system of the federal government? The "books" are an annual statement of income and expenses, no recognition of investment or assets. How would corporations work in that accounting system?
I'm a big fan of your work; keep it up. That said, I don't think that you do justice to your perspective with your G-T analysis. Bond purchase removes money from the economy. In fact, it removes an amount closely correlated with G-T. Deficits are not necessarily inflationary; whether they are financed by borrowing or printing makes all the difference.
Keep up the great work, Art Williams
You want MMT to be acknowledged as true? Well then, shut the mouth of every deficit demagogue forever by macro-economically integrating beneficial price and asset DEFLATION into profit making economic systems with a 50% Discount/Rebate policy at the point of retail sale. Then, in addition to doubling everyone's purchasing power and supercharging the economy from the bottom up there will be no reason for fiscal austerity and we can begin to run the kind of deficits necessary to fund the mega projects to confront climate change. Change the monetary paradigm with a basic accounting function...and change the world.
Just a heads up that the link in the sentence "The reality is that government deficits play a vital role in supporting aggregate income, business profits, and employment" is broken.
Great piece, Prof. Kelton.
In your quote from Randy Wray, he refers to the "debt ratio" and discusses the impact of deficit reduction on GDP growth. This appears to imply that there is some validity to the Debt to GDP ratio. There isn't, but maybe I misunderstand his position.
The ratio is stock/flow inconsistent, which is a basic premise of the MMT framework.
The "debt" is a stock and GDP is a flow. Comparing them is not even as valid as apples to oranges. Those are both round fruits, at least.
Please correct me if I'm missing something.
I am the person thinking, “Yeah, but they’re also the reason we have an inflation mess on our hands…”
I am under the belief that real resources are the constraint within the descriptive lens of MMT. If that is true, then it seems like a logical step to then make the claim: smaller deficits decrease the probability of hitting the real resource limit of an economy. And vice versa, large deficits will increase the probability of hitting the real resource limit of an economy. Is that over simplified assumption wrong?
I also think that MMT describes inflation as the byproduct of too much currency chasing not enough real resources. Am I right here?
So using my understanding of the descriptive framework of MMT I get, “the larger a government deficit becomes the larger probability there is to inflation?”
Genuinely would like to learn about the nuances I must be missing.
"If that is true, then it seems like a logical step to then make the claim: smaller deficits decrease the probability of hitting the real resource limit of an economy. And vice versa, large deficits will increase the probability of hitting the real resource limit of an economy. Is that over simplified assumption wrong?"
Oversimplified, therefore wrong. Suppose that a country's economy was deeply depressed but that it had few automatic stabilizers (e.g., unemployment compensation; federal Job Guarantee) to counter the business cycle. That country would have a small government sector deficit and yet be nowhere near hitting its real resource limit.
Now suppose that this same country instituted some extremely modest countercyclical spending programs (e.g., Texas-style unemployment compensation). Its government spending would increase and, without tax increases, its budget deficit would increase as well. But it would probably still be nowhere near hitting its real resource limit.
Suppose, in contrast, that a country's economy was going full blast due to war production but that its government efficiently collected taxes. That country could have a small government sector deficit (especially relative to GDP) even though it was at its real resource limit.
You are tending to confuse the volume of government spending (G) with the size of a government's surplus or deficit (T - G). The latter is simply the difference between spending and revenues. "T" and "G" are, within limits, what the government can target as policy variables, but their difference is not something that can be effectively targeted for policy purposes.
"I also think that MMT describes inflation as the byproduct of too much currency chasing not enough real resources. Am I right here?"
No, what you have done is simply to take the old nostrum which describes inflation as "too much money chasing too few goods" and replaced the nouns with some terminology frequently encountered in MMT discussions.
Appreciate the reply!
I see, I was missing that a government could be at the limit of real resources but still have a small deficit.
With the spending and revenue, I also see what you’re saying about each being variables that could be targeted, but I don’t understand why you can’t target the difference? Couldn’t a gov mandate that revenue must stay at some predetermined difference to spending?
Lastly, could you explain the correct way inflation fits into the descriptive MMT framework?
"With the spending and revenue, I also see what you’re saying about each being variables that could be targeted, but I don’t understand why you can’t target the difference?"
Spending and revenue themselves can at best only be approximately targeted. The volume of tax revenue rises in expansions and falls in recessions. The volume of unemployment compensation and welfare payments moves in reverse. But by how much will they move in the next fiscal year? The government can only make approximate estimates. It follows that the difference between T and G is just a residual and even more of an approximation.
Moreover, why, from the MMT perspective, would you want to target a particular federal deficit level. The whole point of functional finance perspective underlying MMT-informed policy is to balance the economy, not the budget. A government of a monetarily sovereign economy does not need to think of budgeting in the way a household, a company or even a non-currency-issuing level of government does. Aim for outcomes that are socially and politically desirable. Spend (in the process creating currency) to achieve those outcomes. Tax (in the process extinguishing that currency) as needed to create the space for government spending.
"Lastly, could you explain the correct way inflation fits into the descriptive MMT framework?"
You appear to be seeking a one-sentence explanation; I'm reluctant to try to satisfy your desire. Indeed, if you re-read what Kelton has been posting in this blog in recent weeks, you'll see that she's trying to steer the discussion away from sound bites and one-sentence explanations. Start formulating your own answer by reading Kelton's "The Deficit Myth."
Lots of good info, thank you for taking the time to write it.
I have been reading the inflation posts as well as the book, but I can’t wrap my head around how inflation fits into the framework. I do get the point you are making about avoiding a one sentence answer because it seems to be the culmination of many factors.
Through the MMT lens would inflation mainly be solved through taxation? I understand there’s no simple answer here. But if taxation is the answer there, won’t that be difficult politically?
Appreciate all the info you’ve provided, thanks again.
Arliss Bunny here.
What does MMT framework reason and conclude regarding financialized predatory (disproductive) corporate "behaviors", adding to GDP calculations? I recall Greenspan's infamous apology for thinking that "free markets" could regulate themselves. Where do rules-of-the-road matter (to society) within the MMT framework? Does MMT advocate or even address tapping the brakes on calcified calamity? Seemingly, MMT has been captured or coopted for those sorts of purposes. It would also require getting off a neutral posture. After all, if we cannot acknowledge accelerating and corresponding crisis, how is it possible that any economic framework could be of assistance going forward?
At a recent webinar Professor Kelton commented on her efforts to reach a variety of audiences. I am a scientist trained in academia and have been learning MMT for 5 years now. In the sciences, communicating at the academic level through journal articles and conferences is part and parcel of communication. I have met very few scientists that are adept at explaining scientific studies to the general public. I see an analogous challenge for MMT. Thus, my personal effort has been to become aware and learn the MMT lens while at the same time evolving a distillation process so that it can be easily explained to others. IMHO Professor Kelton’s book “The Deficit Myth” made a huge step forward in this challenge. I believe the expansion of Zoom conferences is helping too and is more efficient than traveling to Kansas City for a convention as has been done prior to the pandemic. Pavlina Tcherneva gave an excellent presentation there on work and the job guarantee. We all need to share these resources as widely as possible via videos, transcripts, anyway we can. The challenge always remain of matching the resource we select to the audience we are trying to target and assuring it is apropos.
Have you ever been invited to lecture Congress on your views of deficits and MMT? I would think you could get your Representative or one of your Senators to invite you to speak with a small group, perhaps a Budget/Finance Committee? It’s pretty obvious they need educating about deficits.
Stephanie Kelton was Chief Economist for the Democrats on the U.S. Senate Budget Committee in 2015-16. She discusses this experience at several points in her 2020 book, The Deficit Myth.
We need to call deficits investments.
PLEASE convince the Democrats to adopt the MMT understanding as the foundation of the DNC platform. It’s past time. What approach exists to make that happen?
Good luck with that one. Wow.
Did exiting the war in Afghanistan directly impact deficit reduction? In the guns vs. butter model dollars are shifted from wars to domestic investments like infrastructure? Emphasis on a shift from wars to domestic rebuilding seems like a better couch for his rhetoric/argument? (instead of mentioning the deficit) Access to his speechwriters and/or White House staff could refine his approach possibly?
MMT wins the economic argument. But it doesn't win the political argument because the deficit myth has been so thoroughly pounded into the collective American belief system it will take even more than a pandemic to dislodge it. That's why Biden & Co. need to resort to deficit-lowering projections to sell his economic proposals regardless of his own or his cabinet's belief in the wisdom of deficit spending. Bernie Sanders and Elizabeth Warren are stuck in the same political quandary, having to mouth assurances that their tax proposals will lower the deficit as a selling point. They are forced to stay in the MMT closet in order to win a political argument. (I assume that the two are in, if not a strictly MMT closet, then something very similar. As are of course many Republicans who are perfectly happy to inflate the deficit with huge tax cuts for the rich, then turn around and denounce Democrats' spending as irresponsible. They all know the deficit paradigm is a myth but they cannot say so out loud to the electorate.)
Truth! As we comment here Congress is appropriating $10billion for Ukraine and you and me have not even been asked to provide our credit card numbers to finance it. Our credit cards thus remain available to finance our household affairs while our “We The People” government finances our collective/common affairs.
Yesterday’s man has demonstrated to be willfully ignorant about MMT ideas regarding federal government deficits and more likely to continue depending on misguided economic advice from neoliberal circles eager to maintain the status quo. Politicians will be last on the list of those willing to learn the meaning of a balanced and healthy economy that works for all of us.
The last graph shown by Hutchins which shows the deficit percentage does not state what is being measured; is prior period, year over year, or some other basis?
My issue with MMT is what is the solution to the potential, and in my estimate probable, remedy to significantly higher interest rates coupled with devaluation of dollar. What is the current breakdown of our debt based on maturity. A graphical representation on a quarterly basis of maturing debt would be useful. BC
“we should accept any budget outcome that delivers broadly balanced conditions in our economy.”
-SK
Letting any markets fall into the hands of self-interested financial actors is debilitating. Non and disproductive GDP (represented by mal and misappropriated, fraudulent acquisition of G), from a societal or sustainable humanity perspective is where the "system" currently resides. Seemingly, the MMT framework has been commandeered by deep pocketed, powerful institutional influence, closest to central and money center banks.
They've weaponized credit and "markets" to represent national security and neglect the reality of sowing violence and economic ill-being far and wide. All in behalf of the fewer and fewer.
Therefore should we accept these budget outcomes?