On a Sunday evening in late March, after a week of suddenly rising pandemic fears and falling U.S. stock markets, a banker went on national television and uttered a plain truth about the financial system of the United States: it can never run short of money. The banker was Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. He was introduced by Scott Pelley on the CBS News show 60 Minutes as a son of Indian immigrants, forty-six, and “literally a rocket scientist.” He had left his career as an engineer, studied business at the Wharton School, and then worked for Goldman Sachs.
Kashkari had also run the government’s Troubled Asset Relief Program (TARP) after the near-meltdown of the economy in 2008. He was telling Pelley of the lessons learned back then. This time, he said, the leaders of the Federal Reserve system would act quickly to make sure banks had all the money they needed so that loans could go to businesses that were sure to be starved for revenue over the coming months.
“Is the Fed just going to print money?” Pelley asked.
“That’s literally what Congress has told us to do,” Kashkari said. “That’s the authority that they’ve given us, to print money and provide liquidity into the financial system.”
Then came one of those clarifying moments when an essential but seldom-stated truth about money—and the political economy of the United States—emerged:
Pelley: Can you characterize everything that the Fed has done this past week as essentially flooding the system with money?
Kashkari: Yes, exactly.
Pelley: And there’s no end to your ability to do that?
Kashkari: There is no end to our ability to do that.
Kashkari had come prepared with a message that was clearly meant to calm the jitters of the Wall Street investing class—even though it might sound perplexing or unnerving to the ordinary viewer. The endless printing of money? (Actually, Kashkari said, “We create it electronically.”) Flooding the system? With no limits? It sounded dangerous, unrealistic, hyperbolic.
On Monday, March 23, the day after the interview aired, the Fed announced “extensive new measures to support the economy.” Among these were two new lending programs “to support credit to large employers”—that is, to issue new bonds and loans to corporations and to buy up existing corporate bonds. On Wednesday of that week, the U.S. Senate passed—on a 96-0 vote—the largest economic rescue bill in American history, making at least $2.2 trillion available to large and small businesses, to unemployed workers, and to most taxpayers in the form of $1,200 checks. On Friday, the House approved the package on a voice vote and it was signed into law by the president that afternoon. He seemed impressed with the size of the plan, boasting “it’s twice as large as any relief ever signed.”
It was more than twice as large. In the aftermath of the 2008 crisis, the Obama administration pushed for a stimulus bill that came in at a mere $787 billion—key advisers on the Obama team were worried about “sticker shock” in Congress if they requested anything over one trillion. Now Congress blasted well past that barrier with hardly a note of dissent. In fact, the president was happy to inflate the number at the signing ceremony, claiming that “it actually goes up to” $6.2 trillion. As a few astute reporters explained that week, the Congressional package called for $454 billion to back up the Fed’s new lending programs; this was meant to insure against any losses the Fed might incur in extending all that credit. But the actual amount of lending could be ten times that “insurance” amount. That’s how the Fed’s “Magic Money Machine,” as the New York Times put it, could take $10 billion from the Treasury and use it to support $100 billion in Fed lending. That’s how the Fed could leverage that $454 billion into as much as $4 trillion injected into the economy.
It wasn’t just the astronomical amounts of money that set new precedents. Normally the Fed worked only through banks, leaving it to them to make loans. But now, as the Washington Post explained it, “The Fed’s latest actions go even further than what the central bank did during the Great Recession. The Fed is directly buying debt from large corporations and states, a level of support it hasn’t tried before.”
All this in just one week in March. One week during which the federal government collectively—and suddenly—realized the economy was in danger of sinking like the Titanic and taking millions of people with it. So, in the sometimes contradictory but always hydraulic metaphors of the financial system, the emergency required keeping people afloat by “flooding the system with money.” That almost supernatural power of the federal government, and especially of the Federal Reserve, is an old one. Benjamin Strong, the president of the New York Fed who loomed large in the first two decades after the Federal Reserve Bank was created in 1913, declared in 1928 that financial catastrophe could always be averted by “flooding the street with money.” He died before the great crash of 1929, however, and the Fed moved cautiously in the actual event. The Great Depression followed. In the modern era, central bankers have become bolder and ever-more confident that they know how to prevent another Great Depression. The faith they assert is that the United States cannot go bankrupt, cannot run out of money—simply because “there is no end to our ability” to create the money that businesses and consumers need to make the economy hum.
Money Printer Go Brrr
This is all well understood on Wall Street, and investors responded in late March with a surge of renewed confidence. The Dow Jones index had bottomed out at 18,500, more than 10,000 points lower than its February high, but rebounded beyond 22,000 by the end of the month. The great unstated power of the Fed is to move markets; investors rely on professional “Fed watchers” who help interpret every action the Fed takes, or might take, that would affect key interest rates, which in turn affect the supply of money, either easing or tightening, which can potentially heat up or cool off the economy. Now the Fed had cut interest rates to nearly zero. Easy money, investors hoped, would help businesses get through a recession and enable a recovery—in the optimists’ view—by the end of 2020.
Yet it’s safe to say that the government’s “Magic Money Machine” is not so well understood outside of elite financial circles. Anyone who ever took an introductory economics course learned that if a government prints too much money the result will be rampant inflation. Most people understand the dangers of crushing debt; how would all these businesses dig their way out of debt when the economy began to chug forward again? For that matter, how would the federal government manage so much new indebtedness? Ordinary Americans live in a world of limits. They assume the government will eventually have to balance its budget just like they do. Over the years, they had been told as much by Democrats and Republicans alike. Even before the emergency economic-rescue bill racked up another $2.2 trillion in deficit spending, the usual scolds in Washington decried a federal government living beyond its means. In early 2009, after the economic stimulus plan was approved by Congress, President Barack Obama was asked in a C-SPAN interview “At what point do we run out of money?” Obama responded: “Well, we are out of money now.”
In the years between the 2008 economic emergency and the present one, though, something important changed. A small group of economists and activists who had been blasting away at the conventional wisdom reflected in statements such as Obama’s began to win new attention. Promoting what they call Modern Monetary Theory (MMT), they claimed vindication when the truth about government lending and spending slipped into public view as it did in 2008-2009 and again in March of 2020. The rules that apply in financial emergencies, they insist, are the same in normal times, too: the U.S. government always decides to spend money first and worries about “how to pay for it” later. And, no matter how large the budget deficit gets, the United States can not run out of money. It can always “print” the money it needs to fund what it wants.
Ordinary Americans live in a world of limits. They assume the government will eventually have to balance its budget just like they do.
Once thought of as a fringe movement, Modern Monetary Theory has gained force especially in the last two years, touted by advisers and activists in the Bernie Sanders presidential campaign, as well as by rising stars in the Democratic Party such as Alexandria Ocasio-Cortez, who suggests it may open the way to ambitious spending plans such as the Green New Deal. Now, with the release this summer of a well-timed book by Stephanie Kelton, the most prominent MMT evangelist, the monetary theories are about to get an airing just when the financial floodwaters are rising. Kelton is an economics professor at Stony Brook University. She’s boiled down the arguments of her countless interviews and lectures over the last several years into a taut and accessible book called The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.
Kelton describes her conversion experience early in the book: in the mid-1990s, she became aware of the work of a hedge fund investor named Warren Mosler. She recalls that someone gave her a copy of his odd little tract Soft Currency Economics. She noted that Mosler was not an economist and his paper (later expanded into a self-published book) “was about how the economics profession was getting almost everything wrong. I read it, and I wasn’t convinced.” The following year, she visited Mosler in his beachfront home in West Palm Beach, Florida. She listened to his theories for hours, she writes. “My head spun.” But she began to see his point: the government doesn’t need taxes to spend money; it spends first and then collects tax revenue or borrows by issuing bonds. Government spending creates jobs—and the conditions under which private enterprise can create jobs—allowing people to earn the money they then pay in taxes. “I had studied economics with world-renowned economists at Cambridge University, and none of my professors had ever said anything like this,” she writes.
Kelton started looking deeper into taxes and government bonds while pursuing a PhD at the New School. While on a fellowship at the Levy Economics Institute in 1997, she met others who challenged conventional economic theories about government taxing and spending, and by the time she ended up at the University of Missouri-Kansas City a few years later, there were other MMT proponents there, including Randall Wray, who she calls “a present-day giant in the field of macroeconomics and leading MMT economist.”
Wray has been developing MMT theories in textbooks, working papers, and articles since the early 1990s. One of the starting points of the MMT rap is that not all governments have the particular privilege that the United States enjoys. Only national governments that issue their own “sovereign currency”—using “fiat money” that is not convertible to gold or silver—and borrow in their own currency can succeed with a modern monetary policy. That means that MMT applies to such powers as the United States, the United Kingdom, and Japan, but not, for example, to Venezuela or Greece. Crucially, it also does not speak to the budget requirements of states and localities, which cannot casually run up deficits—they don’t print their own currency. Plus, almost all states have either a statutory or a constitutional requirement to balance the budget.
“The majority of economists,” Kelton writes in The Deficit Myth, “remain wedded to a fifty-year-old doctrine that relies on human suffering to fight inflation.”
Another consistent theme in Wray’s work is that the United States has gone down the wrong economic path by giving too much power over the economy to the Federal Reserve. The thinking is that the Fed should play a smaller role in governing the economy through monetary policy—tightening or easing the money supply by setting interest rates—and instead such powers should be in the hands of elected officials in Congress. They would use fiscal policy—taxing and spending—to keep the economy at capacity, or to keep it from overheating and causing too much inflation. Wray’s critique here is a longstanding one: the Fed is not democratically accountable. Though the seven governors of the Federal Reserve Board are appointed by the president and confirmed by the Senate, the twelve regional banks that comprise the Federal Reserve System are led by presidents chosen by representatives of the commercial banks. The Fed is considered an “independent department” of government—yet it is always most attuned to private interests, especially the banks.
For his part, Wray credits Kelton with bringing MMT theories to a wider audience than just economics scholars. “It’s pretty obvious she has become the most visible face of M.M.T.,” Wray told The New Yorker last year. “She perfected the way to present these ideas to the public.”
Kelton has the advantage of having seen American budget politics from close range. She worked for the Senate Budget Committee in Washington in 2015 as a staffer selected by Senator Bernie Sanders. In Washington, the debates she heard seemed to consistently get everything backwards. She also saw how entrenched the thinking about deficits was in Congress. One of the least surprising revelations in her new book has to do with the ignorance of most members of Congress when it comes to basic economic principles. She tells of asking members to imagine they had a magic wand that could eliminate the entire national debt. “Would you wave the wand?” Inevitably, the answer was “yes!” But would you wave such a wand to also rid the world of the U.S. Treasuries market? After some puzzlement, most would say, no, that wouldn’t be good.
These people served on a committee that was literally created to deal with issues related to the federal budget, and not one of them seemed to catch on to the trick. They all had a love-hate relationship with the national debt. They loved US Treasuries, as long as they thought of them as financial assets held by the private sector. But they hated the very same securities when they considered them obligations of the federal government. Unfortunately, you can’t wave away the national debt without also eliminating the instrument that composes the national debt—US Treasuries. They are one in the same.
Kelton went on to become an adviser to Sanders in his presidential campaign of 2016, and then on his recent campaign for the 2020 nomination. Again, she saw the realities of how America’s finances are discussed in the political spotlight. Time after time, Sanders would be asked how he planned to finance ambitious reforms such as a Medicare for All system. He always noted that in the wealthiest nation on earth, such goals can be attained. Yet he never came out with a direct endorsement of MMT. He didn’t want to scare the public by seeming cavalier about deficit spending. As Kelton notes, Sanders at times “has echoed Reagan.” At a televised Fox News event in April of 2019, Sanders said, “I am concerned about the debt. That’s a legitimate concern. Every American should be concerned about it. That’s not something we should be leaving to our kids and our grandchildren.”
Though MMT has attracted many enthusiasts on the democratic socialist left, it isn’t inherently a left-wing school. Its theories can be marshaled to argue for lower taxes. If deficit spending isn’t so bad, why not decrease the tax burden? Indeed, if you look at the record of Republican leadership from the Reagan administration to the present moment, you’d have to conclude that Republicans are closet MMTers—they love running huge deficits. Former Treasury Secretary Paul O’Neill came to realize this when he complained to Vice President Dick Cheney about tax cuts in the George W. Bush years. O’Neill told journalist Ron Suskind that Cheney’s response was: “Reagan proved deficits don’t matter.”
At the same time, MMT draws fire from the right, left, and especially the center, which more than any other political segment venerates the idea of “fiscal responsibility.” There’s an influential network of groups in D.C., many funded by the late investment banker Pete Peterson, full of people who have built careers on warning the public about the “ticking time bomb” of government debt. In 1989, a New York real estate developer installed a “National Debt Clock” near Times Square in Manhattan in the hope that the long string of numbers would inform (and frighten) the public. You would expect the centrists to reject MMT out of hand. But most established economists do too. When The New Yorker profiled Kelton last year, writer Zach Helfand quoted liberal economist Paul Krugman dismissing MMT: “I’ll be damned if I can figure out what it is exactly that they think.” From the right, Glenn Hubbard, a former economic adviser to George W. Bush, charged that MMT “has no coherent framework at all,” and rests on the dream of a free lunch for everyone. “I think the country can have more debt than it has now. I view that as an open and interesting question that we can talk about,” Hubbard told Helfand. “But the free lunch is just silly. No serious person believes this.”
That’s more or less where leftist economics writer Doug Henwood comes down, as well. Henwood, who used to publish the Left Business Observer newsletter and is the author of the 1997 Verso book Wall Street: How It Works and for Whom, went long in Jacobin (more than eight thousand words) in February of 2019 with a critique that concluded by calling MMT “a phantasm, a late-imperial fever dream, not a serious economics policy.” Admitting he’s using “a bit of a caricature,” Henwood described the appeal of MMT: “A few computer keystrokes and everyone gets health insurance, student debt disappears, and we can save the climate too, without all that messy class conflict.”
Henwood argues that MMT does not take the risks of inflation seriously. People find inflation unsettling “and it feeds a hunger for order,” he writes. “The rise in inflation through the 1970s that climaxed in that 15 percent record helped grease the way for Reagan. The extreme inflation of Weimar Germany in the 1920s contributed to the rise of Hitler.” He also derides, as many critics do, the notion that Congress should be in charge of tamping down inflation with tax policy, rather than entrusting inflation-fighting to the Fed. “Anyone who’s watched Congress struggle with tax and spending policy,” he writes, “has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision.” In Henwood’s view, the better path is to let the professionals at the Fed worry about inflation (and unemployment) and then to be honest about the need to fund ambitious federal spending programs through higher taxes, especially on the rich.
Henwood’s reproof is aimed as much at Wray as at Kelton. But he is also irked by the avid supporters of MMT he’s encountered. “The mass of MMT rank-and-filers on social media are incredibly fervent,” he writes. “One acolyte emitted 220 tweets in response to a critique I’d offered.” Predictably, Henwood’s broadside provoked four MMT “acolytes”—all associated with the Modern Money Network—to publish a response in Monthly Review Online. Noting that there were rumors in left circles throughout 2018 that Henwood was working on a “takedown” of MMT, they wrote:
Suffice it to say, it was not worth the wait. The essay is little more than an inchoate mix of old MMT criticisms that have been responded to ad infinitum, plus some unique historical cherry-picking. Because unraveling every “Henwoodism” would require a book, we are not going to reply to each specific point.
They took issue with Henwood’s views on central banking, they felt he “painfully misinterprets” Michal Kalecki’s 1943 essay “Political Aspects of Full Employment,” and they dismissed his preference for “sound money” over inflationary deficit spending. For Henwood, they wrote, “the left’s role is merely to argue extra hard for corporations and the wealthy to pay their ‘fair share’ of taxes. This amounts to a more boisterous version of Hillary Clinton’s politics.” Their bottom line: if you call yourself a “sound-finance socialist” (as Henwood did), you are supporting the “foundational neoliberal myth” that justifies why new health care, anti-poverty, and environmental spending programs are always dismissed as unaffordable. “We argue that showing the system can obviously pay, but won’t pay, is infinitely more powerful in demonstrating why the status quo must go,” they wrote.
We’re in The Money
Listening to economists debate their theories is often like hearing rival religious sects argue over their sacred texts. There was a long-running orthodoxy in the years after the influential works of John Maynard Keynes guided U.S. policy through the New Deal: the federal government could easily run deficits to boost the productivity of the economy. Then Milton Friedman came along in the early 1960s to argue that inflation was the natural result of too much money sloshing around in the economy; his disciples called themselves “monetarists.” In the wake of Friedman’s challenge, the economic experts couldn’t seem to agree on what really caused inflation. Many assumed that if inflation went up unemployment would go down and vice-versa, but then in the 1970s, inflation and unemployment went up in tandem and they had to invent a new term: “stagflation.”
Until the pandemic hit the country in March, the United States had sustained ten years of both low inflation and falling unemployment. Yet the Fed and most economists still believe that if inflation did start to rise, the only way to tamp it down is to push toward recession—that is, deliberately cause people to lose jobs. Ideally, the Fed would move early, to prevent a wage-price spiral. The idea was famously described by former Fed chairman William McChesney Martin Jr., who said the Fed’s main role was “to take away the punch bowl just when the party gets going.” Yet sometimes if the “party” got out of hand, as it did when inflation persisted through the 1970s, a severe recession would be required. That, at least, seemed to be the lesson of the tenure of Fed chairman Paul Volcker, who triggered the economic hardships of the early 1980s.
“The majority of economists,” Kelton writes in The Deficit Myth, “remain wedded to a fifty-year-old doctrine that relies on human suffering to fight inflation.” But she also rejects the common critique that MMT economists are unconcerned about inflation: she says repeatedly that inflation is the one real constraint on government spending, a limiting factor that cannot be wished away or ignored. “However, we believe there are better ways to manage those kinds of inflationary pressures,” she writes, “and that it can be done without trapping millions of people in perpetual unemployment.”
The decisions we make as a nation about who prospers and who fails do not derive from some immutable economic law.
These “better ways,” unfortunately, depend in the MMT vision on electing members of Congress who are willing to use taxing and spending powers more intelligently. That’s a hope that is easily derided. And yet, there is also more than one obvious problem with leaving the overall management of the economy in the hands of the Federal Reserve governors. It’s not just the fact that the Fed has been for so many decades more attuned to fighting inflation (a goal especially dear to bondholders) than to reducing unemployment. It’s also a matter of powers: the Federal Reserve is only charged with lending; it is the role of Congress to spend money directly into the economy, as well as to tax it back out. There are times (such as in the present pandemic-driven recession) when, as Kelton writes, “monetary policy has limited potency. It works mainly by driving consumers and businesses into debt.” That point came through in April when current Fed chairman Jerome Powell urged Congress to “use the great fiscal power of the United States” to support the economy. His clear implication was that the Fed can’t do it with lending alone.
Now that the United States is suddenly facing an unemployment rate of at least 15 percent—with more than 40 million people filing unemployment claims by the end of May—perhaps the most important idea advanced by MMT economists is that of a federal jobs guarantee. Franklin Delano Roosevelt advanced the idea during the Great Depression that a job ought to be an economic right of all Americans. But, as Kelton observes, “most economists are content to allow the market to figure out how many jobs to provide.” For MMT thinkers, unemployment and recession mean the economy is operating way below its productive capacity. Why should that be accepted as some kind of natural disaster? Here’s how Kelton describes a humane federal response:
The federal government announces a wage (and benefit) package for anyone who is looking for work but unable to find suitable employment in the economy. Several MMT economists have recommended that the jobs be oriented around building a care economy. Very generally, that means the federal government would commit to funding jobs that are aimed at caring for our people, our communities, and our planet. This effectively establishes a public option in the labor market, with the government fixing an hourly wage and allowing the quantity of workers hired into the program to float.
This kind of thinking is compatible with Keynesian New Deal liberalism and with democratic socialism. It also carries, to my ear, a clear echo of old-time American economic populism. Modern Monetary Theory is not clearly any one or the other of these. But it could play a role in bringing liberals, socialists, and populists into a coalition—that is, if only the Democratic Party were not so afraid of its left flank and of conservative taunts. Any vision of what Kelton is describing as “the people’s economy” will inevitably be rejected by the full power of the right, and most of the center. We can’t afford it, they insist. And even if we could afford it, such government interventions would destroy the natural workings of the free market economy. As author William Greider once explained the underlying argument of Milton Friedman’s monetarism and inflation-phobia, “There were natural limits to what could be expected from life. If democratic ambitions tried to push the economy beyond those limits, chaos and disorder would follow.”
A Goldbug’s Life
There was a time when arguments about money were at the center of a powerful upheaval in the nation’s politics. During the populist revolt of the 1880s and 1890s, “the money question” was ardently debated, in ways that seem almost impossibly arcane to modern readers. Bankers were the ones insisting on sound money—or “honest money,” as they sometimes called it: the entire establishment believed that for money to have value it had to be backed up by a precious metal, preferably gold. Anything else was “fiat money,” that is, arbitrary and unstable, with no intrinsic value.
Through relentless organizing, farmers and debtors came to understand how the hard-money system worked against them. They pushed the idea of paper currency—“greenbacks”—elastic in value, regulated in ways to allow the money supply to expand as the nation expanded. As Lawrence Goodwyn explained in his classic work Democratic Promise: The Populist Moment in America (1976), it all came to a climax, and then a crushing defeat, in the presidential election of 1896, when William Jennings Bryan as the Democratic Party standard-bearer diverted the energies of the populist movement into a crusade for “silver coinage,” while the ardently sound-money powers (the “goldbugs”) united behind Republican William McKinley, who became the twenty-fifth president.
Over the years, I’ve returned to Goodwyn’s work many times, and it always takes an effort to understand the battle lines between the greenbackers, the silverites, and the goldbugs. The very meaning of money was in dispute in the decades before the Federal Reserve became the sole steward of the currency. But there is one part of Goodwyn’s history that hit me like a thunderbolt when I first read it many years ago—and I think about it whenever American politics presents us with a new twist on “the money question.”
When farmers organized in the 1880s, they banded together against the concentrated economic interests of their day, especially the banks and the railroads. They set up cooperatives and created a Farmers’ Alliance. The Alliance recruited speakers who understood the financial system—a populist army of traveling lecturers that eventually grew to be forty thousand strong. As Goodwyn writes:
The spectacle of earnest farmer-lecturers setting off on continent-spanning journeys in the late 1880’s to organize the folk, and, furthermore, doing it, appears now to have had a kind of rustic grandeur. It was, in fact, the most massive organizing drive by any citizen institution of nineteenth-century America. The broader outlines had a similar sweep: the Alliance’s five-year campaign carried lecturers into forty-three states and territories and touched two million American farm families; it brought a program and a sense of purpose to Southern farmers who had neither, and provided an organizational medium for Westerners who had radical goals but lacked a mass constituency.
It’s hard to imagine such an effort today. Once in a while, a presidential candidate attempts to lead a national discussion on money-power—as Jesse Jackson did in 1988 and Bernie Sanders did in his two recent campaigns. But Goodwyn was describing something different—something that involved two-way communication. As Alliance lecturers went around the country, they were moved by the poverty they witnessed, and by the stories they heard from struggling farmers. They were developing their own internal communications, which was essential to movement-building. The local lecturers, Goodwyn writes, “came to form a nucleus of radicalism inside the movement.”
Most efforts to use modern communications technology to promote financial literacy now are one-way, passive, and individualistic. Suze Orman might explain to CNBC viewers why they should pay off their credit cards. Saturday afternoon broadcasts on AM radio might advise callers on whether a fifteen-year mortgage might be better for them than a thirty-year mortgage. A TED Talk might connect personal happiness with personal finance and reach a million listeners. But none of this is meant to shed light on the way one person’s financial difficulties are connected to millions of others’.
In his 1987 book Secrets of the Temple: How the Federal Reserve Runs the Country, William Greider looks back at the populist movement as a time when ordinary people understood that “money was, above all, a political question—a matter of deliberate choices made by the state.”
Citizens of the nineteenth century were routinely familiar with the political implications of monetary policy and debated the question fiercely among themselves. Unencumbered by the veil of modern economics, ordinary people formed their own opinions on complicated aspects of money and credit, subjects that in the twentieth century became reserved for experts only. In this one dimension, at least, modern Americans [are] more ignorant than their ancestors.
Greider’s book is one of the great exposés of hidden power in America. He documents how the creation of the Federal Reserve grew out of the progressive—but anti-populist—impulse to put the management of the nation’s economy in the hands of “experts,” and to insulate the Fed’s decisions from democratic pressure, “an uncomfortable contradiction with the civic mythology of self-government.”
Lick the Deficit
The essential money question today has nothing to do with silver or gold. The Fed ended the option of redeeming Federal Reserve Notes for gold in 1933; the United States finally abandoned the gold standard in foreign exchange in 1971. Yet the heart of the matter is the same now as it was during the populist revolt: those who control the money system have the power to determine, as Greider put it, “who shall prosper and who shall fail.”
This became visible in the aftermath of the 2008 meltdown, when the Fed stepped in to make sure that the very financial interests that almost destroyed the economy—Bank of America, Citi Group, AIG, Goldman Sachs, et al.—would be rescued, while vast numbers of homeowners in foreclosure would be left high and dry. It is visible again today, as the Fed and the U.S. Treasury team up to lend and spend—propping up big corporations and those small businesses that can jump through bureaucratic hoops to get “forgivable loans.” A general program of debt forgiveness to students and other individuals, or relief for those who can’t pay their rent or mortgage, well, those are trickier propositions.
There is, of course, no economic theory that can justify a federal response to rescue a banking behemoth, but not a group of rural hospitals.
This, for me, is what matters about Modern Monetary Theory: it presses the argument that this is how it works, in good times and bad. The decisions we make as a nation about who prospers and who fails do not derive from some immutable economic law. There is, of course, no economic theory that can justify a federal response to rescue a banking behemoth, but not a group of rural hospitals. There is no rational economic argument that spending a few billion dollars more on fighter jets or military-style gear for police departments is better than spending that same amount on public schools and teacher salaries. That is to say, the money question that matters now is not about the currency, and not even about taxation, it is about government spending and public debt. It is exactly the question Stephanie Kelton explores in The Deficit Myth: How have we allowed ourselves to be so bamboozled by “serious people” that we can’t even talk intelligently about the political economy of the United States as it actually functions?
Reading Kelton’s book, I found myself thinking back to an unfortunate time in my life when, as a reporter in Texas, I had to pay attention to a Texas senator named Phil Gramm. He imagined himself the next Ronald Reagan, spending more than $21 million on a bid for the Republican nomination for president in 1996, ultimately placing fifth in the Iowa caucuses and dropping out. Gramm was notorious among reporters for endlessly recycling a parable, in his slow drawl, about a constituent in the Texas town of Mexia named Dickey Flatt. A reporter once asked him, he would say, how he decides what is worth funding in the federal budget. “Well, I use the Dickey Flatt Test,” Gramm explained. Flatt was a printer who “works hard for a living.” (It always sounded like Gramm was saying “hoard for a livin.”) This line never seemed to vary: “Try as he may, he never quite gets the blue ink off the end of his fingers.” Here’s how Gramm told the story in his address to the Republican National Convention in Houston in 1992:
I looked at every program of the federal government and then I thought about Dickey Flatt. And I asked one simple question. “Will the benefits to be derived by spending money on this program be worth taking that money away from Dickey Flatt to pay for it?” Let me tell you something. There’s not a hell of a lot of programs that’ll stand up to that test.
The crowd cheered. Gramm capped it off by declaring, “When Congress starts using that test, we’re gonna lick the deficit problem once and for all.”
Could there be a more asinine—and deliberately dishonest—way of talking about government spending? This is the level of discussion we’ve been mired in for decades; it plays on widespread ignorance. Gramm was often described in the press as “an economist by training.” In his career in Washington, he pushed for the Gramm-Rudman-Hollings Act in the 1980s, which attempted to put binding constraints on the federal budget as part of the right’s ideological drive to eventually require a balanced budget. What the conservatives found out, of course, was that they didn’t really want to raise taxes or cut overall spending. So they opted for a strategy of rhetorical high ground—blaming their opponents for government taxing and spending, while making sure they didn’t actually have to enact unpopular policies.
The well-funded apparatus in Washington, D.C., that consists of such groups as Fix the Debt, and the Committee for a Responsible Federal Budget (CRFB), however, retains a strong hold over most Congressional Democrats. To much of the political establishment in Washington, the analysis in Kelton’s book will be as subversive as The Communist Manifesto. The pandemic-driven spending has muted them only temporarily. Sometime soon they will begin making arguments for austerity. Because of the money devoted to rescuing the economy, they’ll say, there will be even less funding available for human needs. One of the nation’s leading deficit scolds, Maya MacGuineas, the president of CRFB, has already sounded the warning: “Seeing the Treasury confirm that the country will borrow $3 trillion in just a matter of months should serve as a warning against wasteful spending in future rounds of aid and remind us that the debt will have to be addressed once the economy has fully recovered.”
Answering this kind of debt phobia, and the kind of willful ignorance promoted by con men like Phil Gramm, is only the starting point in a battle for a humane society. Modern Monetary Theory doesn’t tell us how to get there—only that we could get there someday. It would take a massive organizing effort on the scale of what the populists attempted in the late 1800s. I try to imagine—in a post-pandemic future, if belief in democracy survives the events of 2020—a traveling band of lecturers fanning out across the country to explode the deficit myths, as Kelton explodes them. The agitation would take place in union halls, and among the young and indebted. It would rally the people who responded to the Sanders campaign’s plea for universal health care, and those who understand we have the capacity to transform the economy around clean energy. It would meld with the growing fury against lavishly funded police and military by insisting that there are hundreds of better uses for that public funding. We would know it was beginning to succeed when citizens and members of Congress would answer the timeworn arguments that the United States cannot afford to spend its “limited resources” to build a sane and decent society. “Well, we are out of money now,” the old establishment would say. The answer would be “no serious person believes this.”