Panel Discussion on Randy Wray's "Making Money Work for Us": Part 2
James Keenan
On March 21, Ryan Benincasa, Adam Rice and myself were part of a panel discussion held at the Henry George School of Social Science in New York City entitled "Modern Money & Public Policy - Should We Worry about the Federal Deficit?". The first part of our presentation, by Ryan Benincasa, can be found here. This is the second part, by Adam Rice. As with the first part, the discussion springs from L. Randall Wray's 2022 book, [Making Money Work for Us: How MMT Can Save America](https://www.wiley.com/en-us/Making+Money+Work+for+Us%3A+How+MMT+Can+Save+America-p-9781509554256)
Hello everyone. Before I get started, I’d like to thank you for coming tonight. I’d also like to thank the Henry George School for offering us an opportunity to speak.
One of the fundamental insights of Modern Monetary Theory is that all money is simply an IOU. For every monetary asset, there is an equal monetary liability. The $100 Amazon gift card in my wallet is my asset. It is Amazon’s IOU to me; it is a $100 claim on the goods and services that Amazon offers. Conversely, it is Amazon’s $100 liability to me, the holder of the gift card. Amazon owes me $100 worth of goods and services until I spend the gift card. When I eventually spend the gift card on Amazon, I will receive $100 worth of goods. My asset and Amazon’s liability balance. After receiving the goods, I no longer hold the gift card as an asset and Amazon no longer owes me anything. As a monetary instrument, my Amazon gift card has been extinguished.
Similarly, the $100 bill in my wallet is my asset and the US government’s liability. Instead of a claim on Amazon’s goods and services, however, my $100 bill is a $100 tax credit. The bill in my wallet allows me to cancel $100 worth of the tax liabilities imposed on me by the government. Until that tax liability is canceled via payment of taxes, the bill sits in my wallet as my asset and the government’s liability. Of course, I could also give my friend Jim the $100 bill, in which case it becomes his asset. In any event, the $100 remains the holder’s asset and the government’s liability until the bill is extinguished by canceling a tax liability.
I offer these two examples because it is important to recognize that monetary assets and liabilities must always balance. This is the nature of accounting. In both of the scenarios I just mentioned, I had a $100 monetary asset on my personal balance sheet. My counterparties, Amazon and the US government, correspondingly had $100 liabilities on their balance sheets. The US government and Amazon owed me $100 each. My $100 gift card and my $100 dollar bill were $100 claims on Amazon and the US government, respectively. Assets and liabilities always balance exactly.
Similarly, for every deficit, there is an equal surplus and vice versa. For simplicity’s sake, I want you all to imagine that there are two sectors in the US economy: the government sector and the private sector. All of us in this room are in the private sector. In a given time period, the US government decides to spend a certain amount of money on goods and services by way of the budgeting process. Maybe it wants to hire a few of us as police officers, a couple as soldiers, a few teachers, and it also wants us to build an airplane for it. In exchange for our time and effort, the government rewards us with US dollars.
For simplicity’s sake, let’s imagine the government pays us $1,000 for our hard work. It then collects $500 in taxes from all of us. The $500 difference between what the government has spent and what it has collected back in taxes is known as the government’s “budget deficit”. It’s called a deficit because the government has spent more than its income. However, that $500 now sits in our collective pockets as the non-government sector. The government’s $500 deficit is everyone in this room’s $500 surplus, down to the penny.
In order for the non-government sector, us, to accumulate surpluses of dollars, the government must spend more dollars than it collects in taxes – it must run deficits. Wray notes that federal government surpluses are often celebrated by the politicians and economic commentators as “adding to the nation’s savings” – but this ignores that, by definition, the non-government sector must go into deficit in order for the government to run a surplus.
Unfortunately, the notion that deficits and surpluses must balance is often ignored when it comes to commentary in the mainstream media and policymaking. We rarely ever hear about the government’s annual budget deficit contributing to the non-government sector’s savings. Instead, the government deficit often has a negative connotation. We’re told that the government is spending irresponsibly. We’re told that the government is running out of money. We’re told that the government’s spending is “reckless” and it’s running up a credit card bill that will eventually have to be paid back, maybe by our children or our grandchildren.
From Randall Wray’s point of view, it’s government surpluses that represent the real danger. By definition, when the government runs a surplus, it is removing more dollars from the non-government sector than it has spent. This causes the non-government sector, us, to go into deficit. And what happens when we spend more than our income? We borrow to make up for the shortfall. Unfortunately, we are not currency issuers. It is illegal for us to create dollars. We can’t issue currency like the US government does, so we must find other ways to meet our savings and spending desires.
Modern Monetary Theory recognizes that the real dangers of government surpluses often manifest as the widely imagined dangers of government deficits.
When the non-government sector is short of the US dollars it needs to thrive, we run into a whole host of problems. Households and businesses may be forced to borrow and accumulate debts that they are simply not able to pay back. With inadequate government deficits, we can expect an overreliance on private sources of credit, like bank lending, leading to imbalances of power within the economy. With less money circulating in the economy, consumers may pull back on spending, meaning less overall consumption and investment, leading to unemployment and poverty.
In order for us to have a thriving economy with low unemployment, high and rising incomes, adequate healthcare, retirement, and welfare benefits, and sustainable levels of private debt, the government must run deficits that are sufficiently large enough to meet the non-government sector’s desires to save.
Wray notes: “Most Americans know of the Great Depression of the 1930s, but they do not know that was our sixth depression. And they are not fully aware of the association of the growth of the federal government from 3% of GDP in 1929 to an average of about 25% after World War II with the complete absence of depressions since the ‘Great’ one … the rise of Big Government in the US has been called the “golden era” of US capitalism and made up most of the second half of the century” (101).
This period of rapid spending growth resulted in extended periods of economic stability, major productivity growth, full employment, and rising incomes. Government spending is ultimately what determines the non-government sector’s income. As the monopoly issuer of the US dollar, the government has a massive role to play in terms of fostering a rising tide that lifts all boats.
In the words of Wray, “Neither the US government budget deficit nor the US trade deficit represents a dangerous imbalance. They are balanced … to the penny. The government’s deficit allows the private sector to save – and saving is in the safest asset on planet earth: claims on the US government” (85).
It is no coincidence that we witnessed political uprisings around the world in the period after the global financial crisis. Movements like Occupy Wall Street, Make America Great Again, Brexit, and others were, at least in part, the result of the world’s governments not conducting fiscal policy for the public purpose. We saw major buildups in private debt leading up to the crisis and afterwards the government did not do enough to restore economic balance.
Instead of pursuing full employment, governments pursued spending cuts in the name of “fiscal responsibility”. The words “deficit” and “debt” became political swear words. Policy makers seemed to forget the definitional balance between assets and liabilities, deficits and surpluses. As a result, weak public policy responses led to a long and painful recovery for the world economy. We saw stagnant growth and prolonged periods of elevated unemployment. It is no surprise that people of all different stripes were outraged by the system.
As Stephanie Kelton says, we have to ensure the government balances the economy, not the budget. Equipped with an MMT lens, we need to democratically pursue public policy that achieves a balanced economy.
Thank you.