AND OFF WE GO

I am delighted to see that my MMT post has triggered a lively series of comments.  I have a good deal to say in response and in further elaboration, so let me get started.  By the way, Tom Hickey obviously understands all of this vastly better than I do, so I invite him to weigh in whenever he sees me going off the rails.

MMT is simple, easily stated, and absolutely counterintuitive.  That is true, I find, of many powerful ideas.  MMT turns upside down everything that we think we understand about the most familiar thing in the modern world:  money.  It is not complicated, it does not require a grasp of differential calculus to understand, and yet what it says strikes us as just plain wrongheaded.

Let me begin with LFC’s vigorous and utterly sensible comment.  Here it is:

“To simplify things, let's boil matters down to one dollar. The Treasury Department prints out one dollar. According to the post, the government has thereby incurred a debt; it has issued an IOU, a promise to pay. But a promise to pay *what*? What exactly has the government promised to pay and *to whom*? It's not as if someone with a dollar in his or her wallet can call the Treasury Dept. and say "I have a dollar, I have an IOU issued by you [the government]. So you owe me! Pay up!" If someone called the Treasury Dept and said that, the person at the other end of the line would presumably start wondering about the caller's mental health. So in what sense is a dollar bill a *promise to pay* by the government (as opposed to a piece of paper that, by accepted social convention, can be exchanged for something of value, though admittedly these days a single dollar bill can't be exchanged for much)?”

Strange as it may seem, LFC has it exactly right.  Let us assume that deep in the bowels of the Treasury Department is a bright, well-educated career official with a somewhat puckish sense of humor.  [Washington DC is full of such people, as David Palmeter and my sister, Barbara, discovered when they taught in the OLLI program there.]  When LFC calls the Treasury Department, he is routed to this career official, who says, “Yes sir, you are quite correct.  If you will come to the following address, the Treasury Department will be happy to pay the debt it has incurred to you.”  So off LFC goes, and when he knocks on the door, the Treasury official admits him and she says, “If you will present the IOU that we issued, I will be happy to redeem it.”  LFC, somewhat belligerently, we may imagine, takes out the dollar bill and presents it to her.  She examines it carefully and ascertains that it is indeed a genuine IOU issued by the United States government.   After having LFC sign some papers, she hands him … a dollar.  LFC splutters, and says, “But you have just given me back a dollar, which is another IOU.  How is that paying the debt you have incurred?’  And the Treasury official points to the place on the dollar where it says “This note is legal tender for all debts public and private.”  “That’s it? says LFC.  “You pay your debts with your own IOUs?”  And she replies, “Yes.  That is what it means to have a sovereign currency.”  As Wray wryly observes [I assume this is an old joke in MMT circles], if you go to the Queen of England to cash in a five pound note, she will hand you … a five pound note.

All of this is trivial, to be sure.  It took me only 1119 words to say in my post, and if I had had to, I could have gotten it down to a tweet.  But trivial though it is, it seems not to be understood these days by anyone in Washington [except AOC and her colleagues, but that is another matter.]  Even really smart people like Obama seem not to have grasped it.  Oddly enough, it used to be understood by economists as different in their policy preferences as Milton Friedman and Paul Samuelson, or so Wray writes.

So all right, it is a little weird, but suppose we agree that it is true.  Then what?  Well, as my son Patrick observed, MMT is not a theory, it is an analysis.  Absent considerations not part of the analysis, MMT does not imply any particular concrete policies.  But it does refute certain supposed constraints on possible policies.  In particular, it shows that it is literally never the case that the government does not “have enough money” to pay for something it wants to do.  And in Washington these days, that is a pretty big cudgel with which to beat off naysayers.

This is not the end of the matter, it is really just the beginning.  In my next post, I will try to say some useful things, drawing on some ideas I first encountered in a fine old book by an old friend, David Schweickart.