MMT ECONOMICS

MMT and full employment

So if MMT prescribes various regulations (and, where necessary, taxes) to control inflation, while keeping interest rates at zero, how does it plan to achieve full employment?

Simple: a job guarantee.

This is an idea that predates and transcends MMT as a school of thought, with advocates among non-MMT economists like William Darity Jr. and Darrick Hamilton, and a history of support from American labor unions and civil rights leaders. The basic concept is that the government would offer, as a right of citizenship, a job at minimum wage (usually $15 an hour for these purposes) with benefits, working for the government or a nonprofit, to any adult who wants one.

This is different from subsidized employment, which exists in limited forms now, and even from the massive public works programs of the New Deal like the Civilian Conservation Corps and the Works Progress Administration, which employed millions but did not guarantee jobs to all.

The idea behind such a sweeping and universal program, in the context of MMT, is to ensure full employment no matter what policies the government is adopting to fight inflation. Indeed, the job guarantee is in part a way to keep wages down, or at least keep them from continually rising, to prevent an inflationary spiral.

Absent a job guarantee, raising taxes excessively could slow economic activity and cost jobs, as could regulations that attempt to crack down on certain industries. A job guarantee would be able to enroll anyone hurt by those measures and make sure they’re still employed somewhere.

In the Mitchell/Wray/Watts textbook, the authors argue that both the MMT approach and the mainstream approach fight inflation in ways that generate “buffer stocks” of workers. In the mainstream approach, inflation is controlled by raising interest rates, which slows economic growth (sometimes to the point of recession) and puts people out of work, creating a buffer stock of unemployed people. That buffer stock, that increase in unemployment, is the cost of fighting inflation. This trade-off is often represented through a relationship known as the Phillips curve.

In MMT, people in the job guarantee serve as a similar buffer stock. When the government slows aggregate demand, through higher taxes or regulations or some other means, that forces people out of private sector work and onto the job guarantee — not the unemployment rolls.

“Instead of a person becoming unemployed when aggregate demand falls below the level required to maintain full employment, that person would enter the JG workforce,” the authors write.

By contrast, during downturns, a JG would work as an automatic stabilizer, putting spending money in the pockets of laid-off workers and helping mitigate recessions.

Setting the JG wage at the minimum wage is important for anchoring inflation. In tight labor markets, employers sometimes choose to increase wages and pay for the change with higher prices, setting off inflation. But if the JG wage is tethered to the minimum, then employers always have the option of hiring workers from the JG pool, who, under the theory, can be hired at the low fixed wage given to them in the JG program. That gives them a way to avoid raising wages and setting off price increases. “There can be no inflationary pressures arising directly from a policy where the government offers a fixed wage to any labor not wanted by other employers,” the textbook authors write.

It may be surprising to think of the job guarantee as a way to control, rather than bid up, wages, but this is the explicit intention described in the textbook. The authors write, “Would the incumbent workers use the decreased threat of unemployment to pursue higher wage demands? That is unlikely. … [T]here might be little perceived difference between unemployment and a JG job for a highly paid worker, which means that they will still be cautious in making wage demands.”

This vision of the job guarantee as a tool for controlling workers’ wages is somewhat at odds, at least rhetorically, with MMT’s messaging that a job guarantee is a humanitarian measure. JG jobs are probably better than involuntary unemployment, sure — but the macroeconomic role they’re playing here, in part, is in the interest of price stability, not worker well-being.

Matt Bruenig, a vocal MMT critic from the left, has argued that using a job guarantee to discipline worker wages bears an uncomfortable resemblance to the “workfare” efforts of the 1990s, a characterization that MMT advocates have vocally disputed. “The program is based on the principle of ‘fair work’ not ‘workfare,” Pavlina Tcherneva, a Bard economist and arguably the leading MMT researcher on job guarantee policy, writes. “It does not require people to work for their benefits. It is instead an alternative to existing workfare programs.” But there’s nonetheless a tension between using the job guarantee to provide good, desirable jobs and ensuring that it sets a low enough fixed wage that it’s not inflationary.
The political impact of MMT

That was a lot of theory, and frankly, a lot of it is much more nuanced than how MMT is likely to be employed in practice. Barring a radical shift in the culture of central banking, and the dominant views of both major political parties, I don’t see some of the key operational recommendations of MMT being adopted anytime soon.

Committing to a zero interest rate policy permanently, for instance, would be a dramatic move by the Fed, effectively a repudiation of its statutory commitments to ensure price stability and full employment. Indeed, it’s unimaginable to me that that could happen without an act of Congress repealing those statutory obligations and mandating a zero rate.

Similarly, a US decision to stop issuing Treasury bonds would disrupt a key part of the international financial system, where US government bonds are used as a go-to risk-free asset to which other bond interest rates are linked. That feels similarly inconceivable.

Where I could see MMT having an impact is in the realm of domestic policymaking. Already, multiple 2020 candidates, including Sens. Bernie Sanders, Cory Booker, and Kirsten Gillibrand, have embraced a job guarantee, in various forms.

And more generally, I think it’s likely that MMT will help give intellectual respectability to the notion that Democrats don’t have to pay for everything they want to do, be that a Green New Deal or Medicare-for-all or a big middle-class tax cut.

To be sure, it is not the only force pushing in that direction. Perhaps the most important influence is the behavior of the Republican Party. Ronald Reagan exploded the budget deficit by enacting massive tax cuts and defense spending increases, which his cuts to welfare spending couldn’t hope to match. George W. Bush blew up the first balanced budget in a generation with two rounds of tax cuts and two immensely expensive foreign wars — as well as a massive financial crisis at the end of his tenure. And in barely two years in office, Donald Trump has passed his trillion-plus-dollar tax cut package, with proposals for lower spending existing mostly as an annual pledge in his budget proposal, never to be actually enacted.

Game theorists have known for decades that one of the best ways to generate cooperative behavior in a prisoner’s dilemma-type game is a tit-for-tat strategy: If your opponent cooperated last time, you cooperate, and if they defected last time, you defect.

Democrats have effectively been offering to cooperate and pay for all their budget proposals, or even entertain (as under Obama) and enact (as under Clinton) big bipartisan balanced budget deals — even as Republicans repeatedly defect and show no interest in paying for anything. The rational move in such a game is to start defecting yourself, and declare that you’re not going to pay for anything either.

So even if you want to generate balanced budgets in the future, Democratic deficit spending might be a way to get Republicans more on board with that going forward. And MMT just strengthens Democrats’ bargaining position in this regard, as it lets them send a credible signal that they don’t even think it’s a good idea to pay for everything.

What’s more, many mainstream economists are starting to conclude, given the persistently low interest rates the US and other countries have experienced this decade, that deficits may not be particularly costly, even within a mainstream framework.

“The current US situation in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception,” Olivier Blanchard, the former IMF chief economist, said in his presidential lecture at the American Economics Association this year. “Put bluntly, public debt may have no fiscal cost.”

The speech sent shock waves through the economic profession. “To people who follow the IMF, it was as if a former pope came out with an endorsement of the devil,” the New York Times’s Neil Irwin quipped.

In an essay for Foreign Affairs, Larry Summers and former Obama chief economist Jason Furman made a similar point about the effect of low interest rates, though they cautioned that debt still has costs. “Although politicians shouldn’t make the debt their top priority, they also shouldn’t act as if it doesn’t matter at all,” they conclude. As Furman has said elsewhere, “MMT may have the wrong model, but it may get you the same thing as the right model if you have the right parameters.”

It’s not clear how far just how much deficit financing of new programs the Democratic Party is now willing to countenance. Something on the scale of the Republican tax cuts, like a $3,000 child allowance costing around $1 trillion over 10 years, can probably be financed exclusively with debt, without causing any problems. You could make a good argument for financing a Green New Deal, as a one-time transitional measure, mostly with deficit spending.

Single-payer health care, which probably costs in the realm of $32 trillion over 10 years, is a totally different story. Most mainstream economists would argue that transferring that spending to the federal government, without imposing any kinds of taxes or premiums to replace the premiums currently paid to the private health system, would create huge problems, crowding out investment and sparking large-scale inflation.

MMT rejects the idea of crowding out in general, but it’s not clear whether they think single-payer can be financed entirely through deficit spending.

In a podcast debate that Vox’s Ezra Klein hosted between Furman and MMTer Stephanie Kelton, Klein asked what Kelton would do if her former boss Bernie Sanders were elected president and how much of a single-payer plan he had to pay for with taxes. She replied, “I’d tell him, ‘Give me a team of economists and about six months and I’ll let you know.’ … I think that is an extremely important question that would require some very serious, time-consuming, patient analytical work to try to arrive at the right answer.”

Other MMTers are more optimistic. Warren Mosler, a hedge funder who’s helped popularize MMT especially within the finance world, has argued that the government doesn’t need to levy any taxes to pay for Medicare-for-all. Laying off the millions of people doing health care administration for private insurers and hospitals would be a major deflationary event, he argues, so if anything, the government should offer a tax cut or another spending increase to “pay for” Medicare-for-all in inflation terms:

Mosler’s view isn’t universal even among MMTers, so I don’t think MMT will single-handedly solve the problem of financing Democrats’ 2021 (or 2025, or 2029, depending on how the elections go) agenda. But it might help solve it by making Democrats comfortable with paying for a sizable portion of their program with debt.

Thanks to JW Mason for helpful comments on a draft of this piece.