1. It's What You Know for Sure
That Just Ain't So
Stephanie Kelton
Associate Professor, Economics
UMKC
Washington, D.C. 2012
2. A New Brand of Macro
• The Washington Post, The
Financial Times, The Economist,
CNBC and many more
• Discovering an emerging school
of economic theory
• Modern Money Theory (MMT)
• Exposes the fallacies embraced
by mainstream economists, the
media, and most of all, politicians
• Debunks myths by explaining the
actual workings of our monetary
system
3. What Factors Led to
the Financial Crisis?
• Driven by the combination of the powerfully perverse
incentives produced by modern executive and professional
compensation, combined with the three De's
• Produced the criminogenic environment that drove the
crisis (Black)
• Theoclassical Economics
• $11 Trillion is losses to the household sector (FCIC Report)
• Should have been far less (FBI warning)
4. What Caused the
Economic Crisis?
• The economic crisis could have been largely
contained with a more effective macro policy
response
• Did not have to become the GFC
• Belief that saving the banks was paramount
and would have positive spill-over effects
• Pump-priming and ZIRP would be enough
5. How Would MMT Have Helped?
• Called for a three-pronged policy response to
restore full full employment
• A full payroll tax holiday
• $500 per capita revenue sharing to the state
governments (no strings)
• Federally-funded $8/hr transition job for
anyone willing and able to work
6. But How Are You Going to Pay for It?
"We're Already Broke"
7. The Strength of MMT
• Returns the study of economics to the
operational realities of our monetary system
• It will sound counter-intuitive -- perhaps even
crazy -- but I ask you to follow the logic with an
open mind to where it leads
• A proper understanding of the monetary
system is the first step toward developing a
stronger economy
8. What is Money?
• All money exists as an
IOU
• The “I” is the debtor
• The “U” is the creditor
• IOUs are recorded in a
money of account
• The Australian dollar
• The US dollar
• Japanese Yen
• The British pound
• The Euro
9. The Money of Account
• The money of account is abstract
• Like an “inch,” a “meter” or a “mile”
• It cannot be seen or felt
• It is representational, a name assigned by
humans
• In any modern nation, the money of account is
chosen by the national government
10. A Sovereign Government
• Defines the money of account
• Imposes taxes, fees and other obligations
• Decides what it will accept in payment to itself
• Chooses how it will make its own payments
11. Sovereign Money
• Most governments choose their own unique
money of account and issue their own unique currency
• One Nation, One Money
• US dollar bills and coins
• Mexican peso bills and coins
• British pound notes and coins
• Most governments also require that taxes be paid in a
currency that the state has the exclusive power to issue
• These currencies are “sovereign money”
12. Taxes Drive Money
• As long as the state has the power to enforce its tax laws,
the people will need the government’s money
• The currency will have value, and people will sell things
(goods and services) to the government in order to get
government’s money
• Whatever the government accepts in payment to itself will
become the “definitive” money in the system
• It becomes the only final means of settlement
13. The Hierarchy of Money
• The private sector “leverages”
the government’s money
Govt
• Banks, business firms and
households all issue their
own money IOUs Bank
• Results in a debt pyramid
Businesse
• Where some IOUs are better
than others
• As the only means of final Households
payment, the Government’s
money sits at the top
14. The US Hierarchy
Operates with its
$
Collects taxes in
dollars Issues
the
Not a
convertible
United States Government
15. The Benefits of Sovereignty
• The government can never “go broke” or “run out” of money
• It can afford anything that is for sale in the domestic unit of
account
• It does not need to borrow its own currency in order to
spend
• It can set the policy interest rate at any level
• It has an expanded policy space
16. Under a Gold Standard
U.S. 1870-1914
Spending had to be
Promised to
convert US
dollars into US Dollar
$ was
gold at a fixed
United States Government
17. Fixed Exchange Rates
Vulnerable to speculative
Spending had to
Sacrificed
US$
control of Ruble or Peso
Could Could
Both heavily
dependent on
Russian and Argentina
18. What About the Euro?
• EMU is an exceptional case
• Where the currency is divorced from the nation
• The Euro is effectively a “foreign” currency from the
perspective of the individual nations
• The EUR-17 are users of the currency
• They lack the powers of a sovereign issuer
19. The Euro is NOT a Sovereign Currency
• EUR-17 must borrow
the currency
€
• Must pay market
interest rates Does not
• Can “run out” of Euros
• Lacks the policy space
of a sovereign issuer
Italy
20. Money Matters
• A sovereign government should be in control of the
currency that sits at the top of its pyramid
• Otherwise, it lacks the power to keep its domestic
economy on track
• “By virtue of its power to create or destroy money by
fiat and its power to take money away from people
by taxation, [the State] is in a position to keep the
rate of spending in the economy at the level
required to [maintain full employment]”
~Abba P. Lerner, 1947
21. Education and Employment
• The unemployment rate for 16-24 cohort is more than 18%
• 30% among African Americans and 20% among
Hispanics
• And while employment has become more difficult to find,
the costs post-secondary education are spiraling out of
reach
• Research shows that people with significant gaps in the
education-work sequence suffer a pay and employment
handicap later in life
22. Why the Goal of Full Employment?
• Direct Costs
• Loss of output/income
• Indirect Costs
• Social exclusion and the loss of freedom
• Skill degradation
• Psychological harm, including increased suicide rates
• Poor health and reduced life expectancy
• The loss of motivation
• The undermining of human relations and family life
• Loss of social values and responsibility
• Can be hard to quantify
• But there are estimates
26. The Daily Losses Due to
Unemployment
"[E]very day the US government is allowing $9.7 billion to go down the drain in lost income just
because it is too stupid it implement sensible job creation strategies." ~Bill Mitchell
28. ECON 101
• Sales Create Jobs
• Income Creates Sales
• Spending Creates
Income
• Cutting the Deficit
Will:
• Reduce Income
• Reduce Sales
• Destroy Jobs
29. Every Government Must
Choose Which One to Accept
• Pure Unemployment
• Labor Buffer Stock with zero wage and no tasks
• Unemployment Compensation
• Labor Buffer Stock with a wage and no tasks
• Transition Job/Employer of Last Resort
(ELR)
• Labor Buffer Stock with a wage and a task
30. MMT Favors the Transition Job
• ELR provides a transition job, something useful to do until
the private sector is ready to reemploy people
• Performs the job of a true automatic stabilizer
• Absorbs workers into the ELR pool when the economy turns
down
• Releases workers from the pool when the economy
improves
• Reduces losses borne by the private sector (indirect costs)
31. Other Benefits
• Maintains wages and benefits for those who
lose jobs in a downturn
• Helps support aggregate demand
• Prevents skills from degrading
• Makes workers more employable
• Gives people a sense of purpose
32. The New Deal
• Roosevelt’s WPA, CCC, NYA and other job
programs
• Built hospitals, schools, parks, bridges, roadways,
airports, stadiums, etc.
• Employed millions in productive and socially
useful jobs (roughly 4.3 million per month or
8-9% of the labor force)
• Hired builders, architects, engineers, painters,
poets, actors
33. A Deficit Hawk
• Opposes deficit spending on principle
• Often favors “sound money”
(e.g. Gold Standard or 100% reserve backing)
• Would legislate rules to mandate balanced budgets at
all times
• Believes that there is no such thing as a “good deficit”
• Supports immediate austerity to sharply reduce budget
deficits
34. A Deficit Dove
• Supports limited deficit spending in tough
economic times
• Wants government budget balanced over the
business cycle
• Supports rules to limit the size of the deficit
(e.g. Stability and Growth Pact)
• Prefers to wait until after the economy recovers
to impose austerity
35. Why Do They Worry?
• The hawks and the doves both worry about the
negative consequences of running a deficit
• They are convinced that at some point markets
will refuse to lend at reasonable rates (Greece!)
• They think governments will face a rising debt
burden
• And they believe that spending financed by
issuing money will lead to inflation
36. The Deficit Owl Knows Better
• If the government takes advantage of its status as the issuer of the
currency, the government can finance its deficit without borrowing at
all
• This means no discipline from bond markets
• No solvency problem to deal with
• Interest rates will be lower, not higher
• What about inflation?
• MMT advocates deficits only when there is slack in the economy
• As long as resources are available, demand-pull inflation should not
become a serious problem
37. The MMT Deficit Owl
• Would allow the deficit to
expand as needed to
maintain full employment
• Assigns no arbitrary limit
to the size or duration of
the deficit
• Accepts that it is the
government’s
responsibility (as
monopoly issuer of the
currency) to offset a fall in
aggregate demand
38.
39. Stadium Analogy
• Suppose you’re watching a football match
• Think of the government as the scorekeeper
• Question: Where does the scorekeeper get the
points he gives out when one team scores?
• Answer: The points don’t come from anywhere
• Spreadsheet entries created by fiat
40. How Does a Government with
a Sovereign Currency Spend?
• By directing its bank (usually the central bank) to credit
someone’s account
• This frequently happens without even a writing a check
• In the Modern Money era, government spending is
accomplished through keystrokes (Bernanke)
• It results in the creation of new government money (HPM)
• The monopoly issuer of the currency can never run out
of money (Greenspan)
41. What Happens When
We Pay Taxes?
• The numbers in our account go down, and the
numbers in the government's account go up
• But the government doesn't get anything real from us
• Just retiring their own IOU
• Taxes are money "down the drain"
• Paying taxes destroys/eliminates government money
• Just another spreadsheet entry
42. Becoming an Owl
• You cannot examine the government’s budget in
isolation
• The government is only one sector
• It’s useless to focus on a single sector when the
economy is multi-sectoral
• We need to understand how the government’s
budget is related to the rest of the economy
• A basic understanding of sectoral balances is all
we need
43. What They Show
• In any given period, sectoral balances show
whether a particular part of the economy is:
• Spending more than its income
• Running a Deficit
• Spending less than its income
• Running a Surplus
• Spending just equal to its income
• Balancing its Budget
44. Three Sectors
• Internal Sectors
• Domestic Private
• households and businesses
• Domestic Public
• local, state or province, and national governments
• External Sector
• Foreign
• foreign governments, foreign households and foreign
businesses
45. Two Rules
• Three Sectors
• Domestic Private
• Domestic Public
• Foreign (Rest of the World)
• Two Rules
• They can’t all be in surplus
• They can’t all be in deficit
• Cannot have 3 “Heads” (Surpluses) or 3
“Tails” (Deficits)
46. The Laws of Accounting
• Instinctively, we probably tend to think it’s
“better” to be in surplus
• But there is no way to put all three sectors in
surplus at the same time
• It defies the laws of accounting!
• At least one of them must be in deficit
47. A Simple Rule
$$$$$$ Non-Government
Government Sector
(Public) Sector
$$$$$$ (Households, Firms,
International Trade)
Government Surplus = Non-government Deficit
Government Deficit = Non-government Surplus
48. Two Options
• Two Heads, One Tail
• Two Sectors in
Surplus, One in
Deficit
• Two Tails, One Head
• Two Sectors in Deficit,
One in Surplus
• Which is better?
49. The Private Sector
Needs to Be in Surplus
• As a general rule, the private sector needs to be in surplus
• Households and firms cannot continually borrow more
than their income
• At some point lenders will run out of creditworthy
borrowers who are willing to spend
• Private debt levels may become unsustainable (Minsky)
• When an expansion driven by private sector debt reaches
an end, sales soften, jobless claims trend higher, and
economic activity falters
• Government revenues soon fall short of expenditures and
the government's budget eases
50. The Private Sector Cannot
Put Itself in Surplus
• If we just take households and businesses – what
we call the ‘private sector’ -- it is clear that one
persons’ asset is another person’s liability
• Assets and liabilities cancel each other out
• For example, my bank loan is cancelled by a bank
asset
• The private sector cannot create its own net
financial assets
• Net financial wealth must come from outside the
private sector
51. Where do Surpluses
Come From?
• Private Sector = Public Sector + Current Account
Surplus
Deficit
Surplus
(S – I)
(G – T)
(X – M)
• If the Government (Public) sector is running a deficit, and
the current account is in surplus, the private sector will be
adding (net) financial assets to its balance sheet
• The private sector’s net holding of financial assets will
increase
52. Possible Outcomes
• We have three sectors
• Domestic Private, Domestic Public and Foreign
• We can look at the income flows and spending
flows of each sector
• No reason for any individual sector to balance its
income and spending flows each year
• Three Possible Outcomes
• Surplus: Income > Spending
• Deficit: Income < Spending
• Balanced Budget: Income = Spending
53. Deriving the Sectoral Balance
Identity
• Y = National Income
• Sources of Income
Y=C+I+G+X
• Uses of Income
Y=C+S+T+M
Sources = Uses
• C+S+T+M=Y=C+I+G+X
• S+T+M=I+G+X
• (S – I) = (G – T) + (X – M)
• Private Surplus = Gov’t Deficit + Current Account
Surplus
54. Compare Domestic Public
and
Domestic Private Balances
Notice how increases in the government’s deficit
Help the private sector accumulate a surplus
And notice what happens to the private sector’s surplus
When the government shrinks the size of its deficit
65. Implications for Higher Education
and Beyond
• Fixing the economy will go a long way toward improving access
and affordability
• State budgets will return to normal, and funding can be restored
• But more can be done at the federal level
• Over the full lifetime of a cohort of 6.7 million opportunity youth,
society loses to the tune of $6.31 trillion
• The question is not whether the federal government can afford to
reverse these dangerous trends
• The question is: Can We Afford Not To?
