Joy Marie Mann’s recent interview with Texas Congressional candidate Linsey Fagan revealed a person with good intentions and a progressive disposition, who needs some education in monetary realities and in possible fiscal policies based on those realities. But hiring the nearest economist handy, or even one who is a progressive, won’t help her much.
However, I don’t think the right place to start in making what MMT says relevant to her and other progressive candidates is with MMT itself (though here is a good, brief beginning from Geoff Coventry), which by the way, is an approach to economics. It is not, in itself, a monetary system, even though as part of that approach many kinds of monetary systems including our own may be described.
But, back to the right place to start; I think that is with her campaign itself. She favors a number of policies involving heavy spending beyond what the Government spends on now.
For example, Medicare for All will require an expansion of federal health insurance spending. Stopping climate change will be very, very, expensive. Improving our educational system will cost money. Infrastructure spending will be hugely expensive. Social Security needs to be expanded. There needs to be debt relief, even a debt jubilee for students.
Unemployment is grossly underestimated. Some will tell you, only 6 million are involved. Others will say about 13 million. By my own estimate, using U-3 plus U-6, and also likely labor market dropouts based of high water mark labor participation rates of not so long ago, there are likely 24 million who would like to have and would work full time for a living wage if that were available. So, it will be expensive to provide a federally-funded, locally administered Job Guarantee (JG) to all those who would like a living wage job in a burgeoning social value sector of the economy.
For years and years Neoliberal governments have starved the public sector, and Neoliberal institutions have drained the income and wealth from working people; both poor people and the middle class. So, in short, there are numerous problems to handle and enormous amounts of federal spending needed to begin to address them.
So, let’s say Linsey Fagan gets into Congress and develops a broad legislative program addressing all of our current problems, and she starts working and campaigning for these reforms. One of the first questions she will be asked is “how are you going to pay for it?” and if the expense of her program, plus the expense of programs she will want to keep around exceeds current revenue from taxes, then she will probably think that we’re going to have to either increase taxes, or increase federal bond sales, to get the increased federal revenue in order to do the spending she wants to do. But, if she says that then her opposition will attack her for wanting to increase taxes, increase the federal debt, or both, and they will try to get her to admit that to weaken her support.
So, she can see that if she advocates for the spending needed to solve our problems, then she may be stepping into a mine field right off the bat. How should she cope with that situation, which she is sure to hit soon if she hasn’t already gotten there?
Well, here is where MMT can help her and other progressive candidates. First, as Joy Mann told her in the live stream, the MMT analysis of the federal funding system shows that taxes do not fund spending. In fact, what funds spending, is (1) Congressional appropriations, (2) the President signing appropriations and continuing resolution bills and (3) the Federal Reserve creating new high-powered reserves in the Treasury spending account.
Second, tax revenues are collected by the Treasury Department and Treasury sells bonds when it deficit spends, but the truth is that money from these sources never even gets to the Treasury spending account. What taxing and selling bonds actually accomplish is to drain money out of the private sector, so that federal spending doesn’t overheat the economy and create inflation. So, it is not the tax revenue and the bond revenue that fills the Treasury spending account, but the Federal Reserve using its delegated power from the Congress to fill its account.
So, third, “how are you gonna pay for it?” comes down to answering the question of how Congress can know that when it passes an appropriations bill it can ensure, beyond the shadow of a doubt, that the Fed will create the necessary money. Right now Congress can’t know that for sure because the Fed does so based on certain rules and procedures that were developed in gold standard days when federal tax and bond revenue did fund federal spending, because Fed authority to create money was limited by the nation’s gold reserves.
The rules for filling the Treasury spending account are well known. When the Treasury calls on the Fed to add to its spending account, the Fed complies to the extent Treasury has balances in its other accounts that can be marked down by the Fed (destroyed), before the Treasury spending account is marked up by the Fed (new additions of reserves to its spending account created). The other accounts involved are accounts Treasury uses to keep reserves it has acquired from taxing, selling debt instruments (what most like to call borrowing), from sales of goods and services including property, and from the US Mint’s Public Enterprise Fund (PEF) fund account, which contains the coin seigniorage earned by the Mint from its sales to the Fed.
So, fourth, the question is, are these rules sufficient for Congress to know for sure that the Fed will, in fact, create the necessary money in the Treasury? The answer is no!
The reason why is that Congress has tied its own shoe laces together by creating a Federal Reserve System independent of the Treasury, denying Treasury the authority to create reserves to spend appropriations, and also by passing a debt ceiling law prescribing a debt limit beyond which the Treasury cannot sell bonds, even when its purpose is to get the Fed to act to fill the Treasury spending account with the additional reserves necessary to spend the appropriations previously mandated by Congress.
This is what makes possible debt ceiling crises and with them the further possibility that the Government will, through human failure, violate the 14th amendment by failing to pay its debt obligations when they fall due. So now, the question becomes how can Congress fix this problem and make it certain that the funds needed to spend its appropriations will be available in the Treasury spending account when it becomes necessary to spend those appropriations?
The simple answer to this question is for Congress to both order the Treasury to spend its appropriations, which it does now, and also order the Fed to create the reserves in the Treasury spending account that Treasury will need to spend upon passage of Congress’s appropriation. This can be done through some short simple language that would be used in all appropriations and continuing resolution bills passed by Congress. That language is included in the graphic below.
Note that the language provides both for filling the Treasury spending account with the reserves needed, but also the reserves needed to pay down all the previous debt falling due within the period of an appropriation ” that is, the outstanding debt instruments that were previously sold to enable the Treasury to spend previous appropriations by Congress. So, the language covers providing reserves for both current appropriations and also for ending “the national debt” gradually, piece-by-piece, as it falls due, a great thing for progressive candidates to run on even if they believe, as they should, that “the debt” isn’t a fiscal sustainability or financial capability issue for the federal government, but only a political problem to be overcome most quickly and decisively by “ending the debt.”
Since the new language accomplishes both of these things, it also provides an answer to the problematic question “how you gonna pay for it?” that real progressives are bound to get while running and in serving later. If they give that language as an answer, then they won’t get the end of all their problems, but they will get an end to objections to what they want to do claiming that “we” don’t have the money, or the US will become insolvent, or other claims crying poverty.
Instead, their opponents will cry about coming inflation or hyper-inflation. That one is also easy to answer, but I’ll leave the question of how that argument goes for another day. I think I’ve written enough for now, other than to say that Real Progressives members can prevent progressive candidates from falling into the trap of the progressive give-up formula which is used in Washington to defeat progressive economic legislation continuously, as can MMT economists. Here, here, here, and here, are some links that can help avoid the give-up formula in Washington and also fight the network of austerity advocates entrenched there.
*This article was originally published at JosephMFirestone.com on 1/29/18