German Bundestag body’s MMT overview exposes the hidden agenda – the population simply can’t be allowed to understand MMT

The Scientific Advisory Department of the Deutscher Bundestag recently (January 27, 2023) released a discussion paper – Modern Monetary Theory – An overview – which really exposes what all the opposition to our work is about. Initially, I was interested to learn from the discussion paper that I was a US economist after thinking all these years that I was Australian by birth and citizenship. Perhaps that error tells you something about the quality and depth of the research effort that the authors undertook. The paper recognises that Modern Monetary Theory (MMT) is “an economic school of thought that has existed for around 25 years” but is hazy on the provenance, ignoring that at the beginning there was Warren Mosler, Randy Wray and myself. Rather interestingly, the discussion paper claims that there is no disagreement among the mainstream as to the theoretical and conceptual elements of MMT. So the mainstream all agree with us now! That is quite an admission. But, as one gets further into the discussion, it becomes obvious that the authors miss the point when they start talking about MMT policies. What their critique of MMT illustrates is that the real antagonism to our ideas is that they might open up wider policy options to the public than the political process cares to admit. Or, in other words, the real problem is that an understanding of MMT exposes the TINA mantra – that allows governments to maintain policies that advance the interests of the few at the expense of the many – as wanton neglect of the responsibilities of government. That exposure, if sustained, would alter the whole policy terrain and challenge the hegemony of the elites. That is what the opposition to MMT is about.

The BDP rendering of MMT

The Bundestag discussion paper (BDP) is in German and I won’t quote the original and then give the translation.

So someone might quibble with my translation but I doubt there are any subtleties that I missed because I am not a native speaker.

The first part of the paper poses the question: “What is Modern Monetary Theory?”.

We learn that they think it is:

1. “MMT combines various theoretical elements” – “Keynes on effective demand”, “Knapp” on state money, Abba Lerner on “Functional Finance and the Federal Debt” – which is a very limited detailing of the shoulders we stand upon. I would have added other writers – Marx, Kalecki, and more – for example.

2. “MMT focuses on the fiscal policy of a sovereign state that provides its own currency” – which is not really accurate. MMT is a framework for understanding the intrinsic capacities that a fiat monetary system bestow on currency-issuing governments and the consequences of using those capacities.

But it also allows us to understand the consequences of not having currency sovereignty – which is the situation for the 20 Member States of the Economic and Monetary Union, of which Germany is one.

3. “The macroeconomic analysis of the economic cycle is based on the balance sheets of various economic sectors. Balance sheets are a description of reality, which is why the MMT should be viewed as a falsifiable empirical monetary theory.”

MMT is stock-flow consistent – which is not a property that mainstream macroeconomic theory possesses.

To be stock-flow consistent, we have to take into account the stock implications of the flow dynamics of the system, which means balance sheets become a topic of focus, rather than being the whole basis of the analysis, as implied by the Bundestag analysis.

4. The BDP attempts to explain MMT within the framing and terminology of the mainstream, which is the common mistake of critical analyses.

The mistake arises because the framing cannot make sense of what actually is going on in a modern monetary economy.

So the MMT departure from mainstream macroeconomics is characterised by the BDP as a difference between assuming “government spending is funded by taxes” (mainstream)” and the alleged MMT assumption that “government spending is funded by money printing”.

This framing takes us into the mainstream ‘government budget constraint’ framework where governments are financially constrained and they can: (a) raise tax revenue; (b) issue debt; or (c) print money – in order to get the resources necessary to allow them to spend.

Once the analysis starts there, an essential insight into fiat currency-issuing governments is lost.

That insight is that the causality is backwards because there is no financial constraint on such a government.

The capacity to pay taxes comes from the income generated by government spending.

If governments spend more than they take back out of the system in taxes (that is, run deficits), then there are net financial assets created in the non-government sector, which provides the wealth augmentation that allows portfolio decisions to be made that include the purchase of government debt instruments.

So government spending comes first in an intrinsic logic sequences in such an economy.

Further, all government spending is made operational in the same way – through digital credits to bank accounts.

There is no – ‘will we use tax revenue’ or ‘will we issue debt’ type thinking.

The central bank just credits bank accounts on instruction of the treasury of finance arms of government.

To characterise that as ‘money printing’ – and hence the third option in the mainstream ‘government budget constraint’ troika – is to completely misunderstand the reality of government spending.

It gets confusing for the reader I think, when the BDP admits that there are no financial constraints on a currency-issuing government and so spending:

… restrictions are real, not financial.

Once you understand that element of MMT and have firmly expunged the ‘financial constraint’ fiction then it is true that:

The representatives of the MMT thus come to the conclusion that a state with monetary sovereignty has a great deal of economic freedom.

Which is really what disturbs those antagonist to our ideas, but, who, couch that antagonism in fake arguments about the government running foul of the bond markets or creating unsustainable future tax burdens on our children and similar type arguments

5. The BDP also admit that realising that the “modern state can never run out of money”:

… does not mean that the state should “spend unlimited money” at all times … What the state’s room for maneuver is used for depends on political convictions and majorities.

In other words, operationalising the understanding of how the monetary system operates and what the capacities of currency-issuance bestows on government into policy requires the imposition of values and ideologies within the political realities of the day.

Which separates MMT as a lens from policies that might be proposed by those with an MMT understanding.

Which means the policy regime suggested by an MMT economist might range anywhere along the extreme-Right-Left continuum, which doesn’t lead to the conclusion that MMT itself is Left or Right in nature.

6. The BDP notes that in MMT – “The ‘correct’ deficit would be the one that achieves full employment.”

I would more accurately state this as saying that the responsible fiscal stance is one designed to achieve and sustain full employment and the resulting fiscal balance that is consistent with that stance is not a point of interest.

I explain that in this blog post – The full employment fiscal deficit condition (April 13, 2011).

7. The BDP conclude that “the job guarantee is a central element of the economic policy demands of the MMT economists”.

It is in fact the only specific ‘policy’ that is implied by the MMT understanding, which builds on observations that macroeconomic efficiency cannot be achieved if there is involuntary unemployment and an employer buffer stock is a superior option to using an unemployment buffer stock to discipline distributional conflict, which may create inflationary pressures in the economy.

The Job Guarantee is not just an employment creation program. Rather it is an essential aspect of the macroeconomic stability architecture that modern monetary economies should have in place.

So its place in MMT is intrinsic and is quite distinct from policy options that might arise from the expression of our ideological positions.

The BDP Critique of MMT

Interestingly, the BDP begins the critique with this:

The descriptive representation of the real money cycle by MMT and the statements derived from it, such as that money comes “out of nowhere”, is largely shared in the academic world and by central banks.

Okay, that is progress.

So the BDP must accept that all the causalities that flow from the MMT representation is “shared in the academic world and by central banks”.

Which I think is completely false.

If it was true, then central banks around the world would not be increasing interest rates right now, as an example.

The BDP claim that the main rejection of MMT is “directed at the policy recommendations” that MMT makes.

Which fails to understand that there are no policy recommendations emanating from MMT as a body of work.

There are policy recommendations that economists with an MMT understanding might make which reflect their value systems and ideological predilections but that is quite separate from MMT as a body of work – or in the BDP’s words – an “economic school of thought”.

The confusion is reinforced because most MMT economists hold progressive values and when they talk about policy they express those values.

The critics, who have missed the difference between the ‘body of work’ and the policy statements that economists who work within that ‘school of thought’ make, then infer, mistakenly, that the policies advanced are part of MMT.

They are not.

Some years ago I was duchessed, for example, by the Lega Nord in Italy, who had accepted the body of work as being legitimate.

However, the policies they were advancing were the anathema to those which I would accept as being reasonable and I did not communicate further with them.

So with confusion, the BDP then rehearses the usual suspects.

1. MMT is inflationary: “inflationary developments are to be expected with a permanent and continuous expansion of the money supply.”

Who advocates a “permanent and continuous expansion of the money supply” without regard to the development of the productive capacity of the economy and the spending and saving decisions of the non-government sector?

Not one MMT economist I know would advocate such a context-free expansion.

There can be a continuous fiscal deficit if the economy stays within the supply-capacities of the productive sector and the non-government sector as a whole does not spend all its income each period.

That will not generate inflationary forces.

2. The Job Guarantee is “unconvincing” – why?

All the usual furphies are rehearsed by the BDP:

(a) What jobs would these workers perform? The answer is hundreds and thousands which add to the well-being of society and the restoration of our natural environment, and which will never be done if ‘private profit calculus’ was the determining factor rather than social benefit.

I have written extensively about this over several decades – if you want detail go to the category – Job Guarantee – and follow links.

(b) a buffer stock cannot provide jobs that are necessary for the “production of important public goods”.

That is true, which is why there has to be forward thinking and projects designed to be turned on and off to meet the cyclical variability of the non-government sector.

It doesn’t mean that the jobs are not ‘important’.

(c) Job Guarantee jobs will compete against private jobs – so the “state may put additional pressure on private companies through its additional competition.”

See above.

The jobs that do not compete with the private companies but are productive and add social value are only limited by one’s imagination.

Having said that, depending on what nation we are talking about, it may be useful for the Job Guarantee to be introduced with an ‘industry policy’ element included, which drives inefficient, low-wage sweat shops in the private sector out of business by where the Job Guarantee wage is set – which effectively would become the minimum wage.

When I did work in South Africa on the minimum wage framework I argued that private jobs that could not meet acceptable minimum wage levels were undesirable and would either have to restructure to become more productive and therefore be able to pay higher wages or just disappear altogether.

(d) The BDP alleges that “it is unclear whether the employees will remain in the state sector instead of switching to the private sector.”

There is no lack of clarity.

The Job Guarantee workforce would be within the public sector. It is not a scheme to provide a sort of ‘wage subsidy’ capacity to the private sector.

(e) The BDP write there is “also a question the question of whether the employees actually have the ability to transfer to the primary labor market”.

There is no compunction on Job Guarantee workers to return back to the private labour market.

Most will when the economy improves because the private employers will bid them back through higher wages and better conditions.

If the private employers don’t offer superior terms to the Job Guarantee then the workers might stay within the Job Guarantee pool.

And there would be no problem with that if they are happy to do so.

The point is that the Job Guarantee offers a permanent job with stable income and other non-wage benefits (holidays, sick leave, training, pension entitlements, etc).

If the private employers cannot do better than that then they will not attract staff.

(f) The BDP claim that private agents will undermine any government that tries to run on-going fiscal deficits and “circumvent the restrictions and the measures” that the government might put in place to avoid such retaliation.

Sure enough.

But at the end of the day, if the regulative and legislative framework is properly designed, implemented and enforced, then it is hard for the private sector to circumvent it.

Even if they do that has nothing to do with MMT as a body of work.

It might be that the policies that are advanced at any point in time do not have political credence.

(g) BDP finish with the usual nonsense – that “the thesis of unlimited debt capacity only applies to the USA”.

Well perhaps that is why they wrongly claimed I was a US economist!

As an economist who lives in a small open economy, with only primary commodity exports, and whose exchange rate is at the mercy of the world terms of trade for such commodities, I can tell you that the MMT understanding is applicable to all fiat monetary using economies.

Different strengths in world currency and trade markets render different implications for sure.

But that doesn’t get us very far.

What is completely false is the BDP claim that the arguments about reserve currencies etc “do not contradict their policy recommendations” – that is, the MMT policy recommendations.

Apropos of the discussion above – this statement confuses the framework with the policies that might emerge from apply values to that framework.

Conclusion

The real point that the BDP exposes is that policy is a political act and arises from the conflict of ideologies and values.

The struggle to implement specific policies depends on the balance of power that these competing ideological camps hold.

That struggle is conducted within an environment of ideas and fictions.

The mainstream macroeconomics creates a world of fiction that gives weight to a particular value system and ideological predisposition.

It favour an unequal distribution of income and wealth and using policy to discipline the aspirations of the many so they remain compatible with the maintenance of that system of inequality and power imbalance.

MMT demonstrates the nature of those fictions and once people jettison them they realise more clearly the underlying flaws in the policy regimes that are implemented under the cover of TINA.

They realise that there can be a better world for the many and if that ever becomes universal then the power balances within capitalist societies will change quite dramatically.

The elites simply cannot let that happen, which means they promote all sorts of scams about MMT to avoid people gaining an understanding of it.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.