Great Leap Forward

FDL Book Salon: Bill Black’s Introduction

FDL Book Salon Welcomes L. Randall Wray, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

Saturday, January 5, 2013 1:55 pm Pacific time

Welcome L. Randall Wray (Modern Money and Public Purpose) ( and Host William K. Black, UMKC Economics, Law  (New Economic Perspectives)

Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

Money as a means to Fix Problems rather than an excuse for Causing Problems

I am hosting the Firedoglake discussion of my colleague Randy Wray’s new “Primer” on macroeconomics. Macroeconomics is the study of the overall economy – economic growth, recessions, depressions, inflation, unemployment, and employment are big issues that macroeconomics studies. The key policies it addresses are usually divided into fiscal (tax and spending) and monetary policies (the growth of the money supply and setting interest rates). The concept of monetary tools has broadened as we have seen the Federal Reserve change what had been a severely constrained “lender of last resort” function of the central bank into the most massive bailout program in history. Similarly, the central bank’s interest rate setting function that was long focused on short-term rates has expanded into large experiments that attempt to lower long-term interest rates (“quantitative easing”).

The part of the book title most likely to cause the reader to ask: “what does that mean” is the phrase “Sovereign Monetary Systems.” It is the Primer’s key concept. The Primer explains to the general reader something that an enormous number of people with doctorates in economics fail to understand – sovereign monetary systems are enormously different than non-sovereign systems. Those differences have profound implications for our real-world economies. The failure of so many policy makers and economists to understand sovereign monetary systems causes massive, gratuitous suffering. The failure to understand how sovereign monetary systems work causes economists to inflict policies that are not simply ineffective, but immensely self-destructive.

The euro provides a good example of the difference between sovereign and non-sovereign monetary systems. The Nations that joined the euro had to give up their sovereign currencies. The euro is not a sovereign currency because it is not issued or backed by a sovereign nation. We can observe the tragic consequences of the twin policy failure – abandoning their national sovereign currencies and adopting an international currency that lacked sovereignty. Eurozone citizens are being told that because they adopted the euro they must give up essential attributes of sovereignty. The situation is not parallel to the sovereign States joining the United States of America and agreeing to a system of dual sovereignty. There is no “United States of the Eurozone” and no political entity is taking over the lost attributes of sovereignty.

The central economic task of a nation state is to provide full employment and economic growth without ruining the world and without producing damaging inflation. The Primer explains how automatic stabilizers work and how they, not the bank bailouts, saved us from falling into a Great Depression. It explains why, particularly in response to the Great Recession, it was normal and vital for the United States and the Eurozone to run very large budget deficits. The Primer explains the paradoxical nature of many aspects of economics. It is economically rational for individual consumers to respond to a recession by cutting their spending, but the cumulative effect is to make the recession more severe and lengthy (the “paradox of thrift”). The Primer shows why it is essential for the government to increase its spending and reduce taxes in response to the Great Recession. These “counter-cyclical” policies reduce the recession’s severity and length, decreases unemployment, reduces the misery that the recession inflicts. By spurring growth, the counter-cyclical policy also reduces the budget deficit. That makes it a win-win-win-win-win policy.

The Primer explains why austerity (cuts in spending and tax increases) in response to the Great Recession has the opposite effects. Austerity makes the recession more severe and longer-lasting, increases unemployment, adds to misery by cutting spending that aids the recession’s worst victims, and can increase the budget deficit. Inflicting austerity in response to the Great Recession is a lose-lose-lose-lose-lose strategy.

The Primer makes clear that Berlin is telling the Eurozone’s citizens that because they abandoned their sovereign systems they must adopt austerity – that there is “no alternative” to the quintuple losing strategy. It is not a matter of some other government providing the necessary increase in spending and tax reductions that Eurozone desperately needs. Berlin insists that there must be no entity created that it is capable of implementing the quintuple win strategy.

The Primer does more than explain why a Nation with a sovereign currency can and should employ the quintuple win strategy. It shows how and why to design a job guarantee program that will end the waste of leaving people willing and able to work unemployed and suffering. The jobs guarantee program would put the lie to the claim that the unemployed are lazy moochers. That is why those that demonize the poor will fight tenaciously to prevent a jobs guarantee program that will destroy their dogma. Berlin is forcing the opposite strategy on the Eurozone – fierce cuts to worker’s wages that are causing ever greater inequality and substantial emigration of university graduates.

The Primer can prepare you to explain why, for a Nation with a sovereign currency, a “balanced budget” (1) is not the norm historically, (2) would often be harmful, (3) is not essential to prevent the national debt from “spiraling out of control,” (4) does not increase economic growth, (5) has nothing to do with avoiding burdening our children and grandchildren, (6) has nothing to do with China “owning the U.S.”, and (7) is not necessary to avoid inflation, much less hyper-inflation. You will love reading Paul Samuelson’s admission of the pride he took in the role his famous textbooks played in helping to create a myth of the desirability of the balanced budget.

“I think there is an element of truth in … the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. [O]ne of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires [p. 200].

“Myth,” “superstition,” and “religion” – functioning to “scare people” – is it any wonder that neo-liberal economists could never take the equivalent of the Hippocratic Oath? They “do harm” as a matter of routine. Keynes explained why economists embraced brutal economic dogmas:

It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

What neo-liberal economists most fear is that we will come to learn how money actually operates and what a Nation with a sovereign currency can accomplish. Please make their worst fears come true – read the Primer.

3 Responses to “FDL Book Salon: Bill Black’s Introduction”

roger ericksonJanuary 7th, 2013 at 1:42 am

"Macroeconomics [is] usually divided into fiscal (tax and spending) and monetary policies (the growth of the money supply and setting interest rates)"

Yet in a fiat currency regime, how does one separate fluctuations in the currency supply from fiscal policy, i.e., taxes & spending? There either is a net Currency Issuer driving net changes in national liquidity, or there isn't.

Seems to me that under the transient convertible-currency regimes (aka, gold-std), currency supply was essentially separated from sovereign control – overtly or covertly – and subjugated to "purchase" from a separate, distinct "banking" class. That's essentially a rentier model, where a public pays a private cartel for access to an adequate currency supply.

Isn't it honest & direct to come right out and say that Public Purpose has always involved a battle, fought over – among other tactics – public vs private control of the currency supply, aka National Liquidity?

Once that paradigm is honestly stated, it's immediately obvious that a currency supply constrained by narrow pursposes cannot efficiently scale.

In contrast, public liquidity driven predominantly by Public Purpose can scale beyond the imagination of narrow interests. That follows from the simple logic that no subset of us can be as smart as all of us – otherwise known as the maxim that Central Planning can't compete with democracy.

Tom ChristoffelJanuary 7th, 2013 at 6:06 pm

This is almost becoming understandable. The franchise which a sovereign nation holds, one recognized in the modern system of nation states, does enable it to issue currency and spend it into existence with some relationship to the net value of that national territory based on human, physical and natural resource capital, which through wise investment and management over generations, should have a net increase. Natural resource exploitation without human and other capital development, will leave a nation's people worse off.

Whatever the realities of our current national economies, there is no reset button. The 196 countries in the world… are not playing 196 games of Monopoly that can all be stopped, funny money recalled and new MMT rules set in place.

While the Keynesian "paradox of thrift" is no doubt true and government buying beyond tax and revenue collection with currency creation would help, the fact is that debt based spending for stimulus was done continuously through "good times," and contraction from unsustainable rates of growth is required.

That growth was illusory, we now see. The promised lifting of all boats did not occur, while instead there was a concentration of wealth by those for whom, via financialization – money could be made with money; collecting existing assets primarily rather than the more difficult industrial capitalism of building new assets over time.

Speculators gamed the system and enough won with OPM (other peoples' money) that we are all now speculators. We bet on bonds, equities, commodities in speculative markets, trying to avoid debt write-offs, and nations engaged in currency wars.

Loading the debt on to public balance sheets hides losses. I do not see how MMT can resolve the debt issue, since so much of the debt was fraudulently induced. Interest charges mount on debts where there are inadequate (home or industry value decline) or no assets (consumed – vacations or trinkets with yard sale value).

William K. Black does a good job of presenting the concepts of the MMT economists, but they've not solved the big role of fraud. Mr. Black did a good job of prosecuting that when in government and now explains its operation, though there's no courage to prosecute.

It is a moral problem and we have all benefited. We've all had our moments of personal power thanks to the use of credit, and maybe that became a bit addictive. We thought we could cash out and move to a low cost paradise, an illusion of the service economy fraud.

Credit enables us to spend the future. We have severely over-spent, due in part to cheap energy that made us feel like we were good, when in fact we were just lucky. People did work hard, but they did not appreciate the "5 Decade Energy" drink we were consuming.

While the economic science told us our activities were healthy, as tobacco science told us smoking was healthy(it reduced stress), quantitative economic growth has hit a plateau, recognizable when data is corrected for inflation, or, as a few have called it, and end to growth. Qualitative growth is the likely future – in a year one might learn a new Mozart concerto, but have no measurable increase in net wealth, but more likely a decline.

Full employment? Is that 3%, 5% or 7% unemployment? In a "profit motive" driven society, everyone must have a paycheck; every household breadwinners.

In a "community motive" driven society, every individual contributes based on their meaning, purpose and direction in life, and in families and social groupings, food, clothing and shelter needs are met. Life has always been an unfunded mandate. Newborns appear and needs must be met for the community to perpetuate for generations beyond count. How communities organize, gather wisdom and put it to use, determines how many generations that will be.

A nice, clean, intellectual reboot is what we'd prefer, where we are saved and all sins are forgiven. No harm, no foul. That does not seem possible.

"Community Motive," establishment of a long term stable community enables emergence of the "profit motive." The profit motive can operate to the extent that it does not become destructive to the home "community," or predatory to other communities. Since financialization enabled the taking of profits in advance, our futures will, necessarily be less. For the rich, austerity will be relative, for the poor it is already real.

By what steps do we get from what exists now, to the promised beautiful world of MMT? How is honesty to be restored as a foundation for trust and the blindness to fraud corrected?

Another M is needed: Modern Moral Money Theory – or maybe it should be just Moral Money Theory.

benleetJanuary 7th, 2013 at 7:33 pm

Over 650,000 talented policemen, firemen, teachers, etc. have been laid off in recent years because "we don't have the money". The putative "recovery" would be stronger if they were still employed. State and local governments do not have sovereign currencies. And the federal government has a "debt crisis" as we all know. If the Treasury sold bonds to the Fed to finance the employment of public workers, not only the 650,000 laid off but of millions who have been displaced permanently from private sector employment, this would be "counter-cyclical" (anti-recessionary) and the damage would be to whom? It would be inflationary? The problem would be that debtors would pay back their debts with compensation paid from newly created money, fiat money. Paying off these debts would shift the balance of wealth, workers would accumulate savings over time. And it would also be inflationary if taken too far. It sounds like Abba Lerner's Functional Finance redux, there's an article at Wikipedia. And as a policy it would democratize the money supply, which I think Chairman Bernanke characterizes as "politicize" not "democratize". He claims it would be very dangerous and politically misused. Perhaps. The latest Survey of Consumer Finances shows that the lower-saving 50% of U.S. households own 1.1% of the total U.S. household net worth, which I calculate comes to an average of $11,000 per household, when the stated average net worth for all households is $498,000. If the lower-half has next to nothing (1.1%) then the upper-half has almost all (98.9%) which raises the average for the upper half to around $1 million per household. I think this relationship distorts the labor market wage rates, but I can't prove it. But I think it is socially inefficient, in obvious need of improvement. We should explore MMT. We live in one of the most crime ridden and homicide ridden nations on earth, maybe creating jobs, raising wages, and creating IDAs (subsidized savings vehicles for low-earning households) would be a method of improving our collective lot.