Why You Should Look Beyond Modern Monetary Theory (MMT)
After reading an article about information that was presented to the Lavender Caucus recently by a proponent of the Modern Monetary Theory (MMT), I recognized the need to provide an explanation to the members of the Green Party of the United States of the difference between the “teachings” of MMT and the real need for monetary reform as contained in the Green Party platform. This need for an explanation was further illustrated by a press release published recently on the Green Party website wherein the Green Party of Pennsylvania espoused “reformation of our economic model” in accordance with MMT. Obviously, Green Party members are eager to have information about the best way of funding the Green New Deal, and the best reforms needed for that funding. I have also had a couple of Green Party members tell me that they thought that MMT was part of the Green Party platform. It is not.
The Banking and Monetary Reform Committee is developing a number of teaching tools for use by GP-US members and candidates that explain the need for monetary reform. Until those teaching tools are developed and distributed, we at least need to publicize the need for caution in adopting a minority economic model like MMT. The proponents of MMT have been attacking the GP-US platform on monetary reform – probably because they do not want to have attention drawn to the immediate need for monetary reform, and their own omission of dealing with it in their model of economic reform. It is common practice for most economists to ignore the monetary system. The elite in power do not want the knowledge about the system widely known.
In the article mentioned above, Giovanna Laine, who presented MMT information to the Lavender Caucus, claims that the U.S. government “does not need to tax or borrow money to fund spending.” However, under our present monetary system, the U.S. government would not be able to spend at all without taxing or borrowing. The MMT talking points deliberately omit the fact that the government does not directly create new money, but delegated that function to the commercial banks when it passed the Federal Reserve Act of 1913. An explanation of this process is beyond the scope of this article, but many resources are available for further information. The U.S. has a debt-based monetary system.
The government funds its spending by issuing and selling bonds when it does not have sufficient funds to make payments as they come due, thus creating debts along with the obligation of paying interest on the debts (interest that compounds in perpetuity, unless it is paid off). MMT proponents attempt to obscure this reality by preceding statements with a phrase like “In a country that controls its own currency . . .”, and pretending that the statements that follow presently pertain to the U.S. when they do not. Dr Stephanie Kelton uses this tactic. This confuses those followers of MMT like Giovanna Laine, who stated to the Lavender Caucus that our government “literally creates its own currency out of nothing.” This statement is false. Giovanna Laine either does not understand or does not want others to believe that the US handed over its authority for creation of nearly all new money to commercial banks.
Dr. Kelton defines the national debt as “nothing more than a historical record of all of the dollars that were spent into the economy and not taxed back, and are currently being saved in the form of Treasury securities.” Dr. Kelton attempts through this statement to minimize a present state of crisis caused by the ever-increasing US government debt. MMT omits any discussion of the negative effects of increasing government debt.
The main thrust of MMT is an attempt to show that deficits don’t matter – that governments can spend as much as they want on whatever they want without adverse effects. Although MMT does acknowledge the possibility of increased inflation, it overlooks the effects of cumulative interest paid out annually on government debts. And it also overlooks who actually benefits from savings in the form of Treasury securities.
Interest on the outstanding public federal debt is the fastest-growing part of the federal budget, and is projected to reach $479 billion in fiscal year 2020 (Oct. 1, 2019 through Sept. 30, 2020). As of December 31, 2018, seventy-four percent of the public national debt was held by foreign investors and governments, mutual funds, banks, the Federal Reserve, and insurance companies. Ten percent was held by pension funds and local government, leaving only sixteen percent for other investors. It is obvious that the added debt to the government is of little benefit to the general population, as it is held primarily by the financial sector. It adds to the extreme wealth inequality in the US, which in turn adds to the rise in poverty. Obviously, the 42 million Americans living in poverty do not benefit from any saving of Treasury securities.
In our present monetary system, 97% of new money is created by commercial banks when they make loans. Besides this power to create money, banks also decide to whom the loans should be made. This in effect also adds power to create wealth inequality. Banks collect interest on all the loans that are made with the new money they create. And recessions are created when banks cut back on lending, thereby limiting the amount of new money in circulation. This power of private banks resulted in the economic crash in 2008, which shifted much wealth to the already wealthy segment of the population.
The Green Party platform presents a well-thought out plan that through legislation both removes from the commercial banks the power to create new money, and gives back to the government its Constitutional right to create debt-free money. Proponents of this reform support the idea that the government should be able to spend on programs necessary to promote the general welfare by spending new money directly into the economy. But until legislation is passed to implement reforms it is not possible for the government to do this without creating deficits that add to the already out-of-control national debt. While MMT acknowledges a need for some reforms, which it characterizes as “long term solutions,” it is obvious to advocates of monetary reform that MMT is using misleading tactics in an effort to retain our present monetary system indefinitely as the status quo. This is evident through the use of obfuscating methods and terminology in presenting its “theory.” And the effectiveness of this method is evident when its followers show little or no understanding of the present monetary system, and present information about the current monetary system that is patently false. This is not surprising as MMT has the financial backing of those who would benefit from the status quo. Professors of economics tend to favor the economic theory preferred by donors to their institutions.
We can continue in monetary system that causes the continual growth of national debt and wealth inequality, or we can urge Congress to take back its Constitutional power to create money, which would be real monetary reform. The Green Party platform proposes reforms to replace our detrimental debt-based monetary system
The problems with our monetary system and the solutions in the Green Party platform are explained in more detail at: www.GreensForMonetaryReform.org
Rita Jacobs is a member of the Green Party of Michigan, Delegate to the National Committee, Interim Co-chair of the GP-US Banking and Monetary Reform Committee, and Co-chair of the GP-US Peace Action Committee. She is a retired lawyer from Lansing, Michigan.
The author acknowledges the assistance of Joe Bongiovanni and Sue Peters in producing this article.