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Modern Monetary Theory, MMT, and The Full Employment Theory

Posted by politicalpartypooper on May 10, 2010

Modern Monetary Theory (MMT). Chartalism.

Garbage.

The theory is based on the idea that it is governments that create money instead of people’s  goods, skills, and services.

In such a system, fiat money is created by government spending and then taxation is employed to reclaim the money and control the total amount of fiat money in existence[2]. The reclamation of most of this money (via taxation) is essential to maintaining its value in exchange.

Modern chartalism theory states that under a fiat money system, money is created by government deficit spending. Because money is not tied to or backed by a commodity, money can only be created when the government spends money. Government may, or may not, ask for that money back in taxes. The demand to hold and acquire money is driven by taxes levied by the state, taxes that can only be paid in the state issued fiat currency. from wikipedia

The latest craze in MMT is called the full employment theory.  Stated simplistically, in times of economic distress, governments create jobs through deficit spending and hire the excess workers to keep them employed, rather than paying out unemployment benefits, and keep those government employees for as long as they are required.   While I agree in theory with getting work for unemployment benefits, I do not agree with this theory as a permanent part of monetary policy.

If you follow the theory to its conclusion, what you end up with is a permanent Great Depression Era economy. While that system is fine for emergencies, it had no effects whatsoever on lifting the US out of the depression. We had to wait for a World War to become the arms supplier to the world in order to renew our stagnant economy.

A guarantee of a job sounds nice, but not at the cost of opportunity for the average citizen. No one in America was getting rich working for the Feds in the 30’s. No one was earning enough to improve their personal circumstances. They were merely surviving. This is emergency monetary policy only.

MMT fails because it cannot allow volatility and the opportunity that goes with it. If you want to create a permanent system of minimum wage citizens who are reliant on government for a cost of living wage increase every year, you also want to create a system that removes opportunity from the hands of the average citizen and places it in the hands of a few government “experts”,  a recipe for disaster as certain as the failed economic policies of the old USSR.

MMT is not the answer. Besides the obvious fact that sooner or later the end result is always going to be that a government employs everyone (or nearly so), the other shortcoming I see is that deficit spending to achieve full employment is not workable or sustainable without an entirely socialist system of economics. Any attempt to introduce this sort of system in the US would result in rebellion.

The foundational thrust of MMT, though not spoken aloud, is of a system that purchases away the volatility of the free market. But it is that volatility which creates vast opportunities for even the average citizen, so long as regulation of those markets does not promote the perpetuation of an unfair advantage for its larger players. In simpler terms, proponents of MMT want to level the playing field while removing the risk that a free market economy can, at times, be forced to face. But what they refuse to face themselves is that by leveling the playing field to the extents that they propose, you also greatly reduce the opportunities that an average citizen has to improve his own circumstances.

It’s the ages – old argument; who can better provide  for the individual, government or the individual? If you like a system which creates and perpetuates a wage-controlled, and thus price controlled economy, but that does not offer the average citizen opportunity for personal wealth, then you like MMT.  It’s not a communistic system, but it is a system that heavily relies on a few government experts rather than on the hopes, dreams, visions, and hard work of the average citizen.  It is those dreams and visions which shape our world today, and our economy.  While I am also an opponent of our current plutocracy, going the almost complete opposite direction into MMT is a vital mistake that we cannot afford to make for even a little while.  I want everyone who wants a job to be able to get one at a decent living wage.  I’m just not for the government making it happen.

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13 Responses to “Modern Monetary Theory, MMT, and The Full Employment Theory”

  1. […] Modern Monetary Theory, MMT, and The Full Employment Theory « POLITICAL PARTY POOPER […]

  2. Liberty4ever4all said

    Is Cesca insane?

    Bob Cesca quotes:

    Amid complaints about high taxes and calls for a smaller government, Americans paid their lowest level of taxes last year since Harry Truman’s presidency, a USA TODAY analysis of federal data found.
    Some political conservatives such as “Tea Party” activists have criticized federal spending as being out of control. While spending is up, taxes have fallen to exceptionally low levels.

    Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis (BEA) reports. That rate is far below the historic average of 12% for the past half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010

  3. Liberty4ever4all said

    I only pay 9.2% of my income in taxes here in New York State?

    This guy’s a fraud, and his followers are dupes.

    • ipaytaxes said

      I live in Massachusetts and between federal and local taxes I paid 34% of gross income in taxes. That does not include all the taxes I paid during the year in the form of sales taxes and fees.

      Is 34% too high, when I pay the bill it feels too high, but I guess whether it is too high or not depends on the question being asked, too high for what.

      I suggest, there are a good number of people paying significantly higher tax rates than 9.2% who are in effect subsidizing such a low tax rate for you. Therefore, you are indirectly receiving welfare.

  4. jazzbumpa said

    While that system is fine for emergencies, it had no effects whatsoever on lifting the US out of the depression. We had to wait for a World War to become the arms supplier to the world in order to renew our stagnant economy.

    Utter nonsense. The economy moved vigorously out of stagnation, starting in 1933. GDP growth from 1933 through ’41 averaged over 8%. Outside of WWII there is no period of comparable growth in U. S. History.

    Facts first, then post.

    Cheers!
    JzB

  5. Tax Lawyer said

    Jazzbumpa, remember the tax rate during the period you mentioned? Highest tax rate at 90%!

    And GDP grew, and grew further. The median wage started to fall, inflation adjusted median wage started falling in the mid-70’s with runaway inflation. Volker fixed this by throwing us into a recession, from which, based on median wages, we have never recovered, other than a brief period in Clinton’s later years, fueled by a boom in info-technology. Since then it has been steadily downhill for the middle class.

    Right now, given current conditions, and unemployment foreseeable as a long-term prospect, I welcome a second FDR, and a New New Deal. I don’t expect it to happen until people get really ticked off, and mass protests, with ensuing violence and threats to the status quo require it. I just hope it happens sooner rather than later.

  6. Nina said

    Government created jobs did not make people rich during the Great Depression, but at least they have stopped the economy from free fall and initiated the recovery. They also prevented people from starving.

    Everyone can not be rich, this is just impossible, but what was going on before the great depression and the great recession of 2008 is that a wealthy few were trying to get reach at the expense of the rest of the population, which was becoming increasingly indebted and poor. This is how it works in the free market economy – an opportunity for one to get rich is an opportunity to loose it all for many others.

    The reason Roosevelt reforms did not bring about the economic expension is because the wealthy few were opposed to his reformes and they were powerful enough to stop him. Quite naturally, they did not want wealth redistribution through government, they were more in favor of getting more rich through war, which killed millions of people. Now do you prefer that to USSR style socialism, which was a very healthy and powerful system, untill a bunch of profit-seeking gangsters decided to destroy it to allow themselves to get rich. And that culminate in 1998, by a Russian financial crisis, comparable only to US financial crisis of 2008.

  7. The above article contains dozens of mistakes. Take the second sentence: MMT is “based on the idea that it is governments that create money instead of people’s goods, skills, and services.”

    Well it’s not just MMT that makes the above claim. Any basic economics text book tells you that government (or more accurately the “government-central bank machine”) creates dollars. (In addition, commercial banks create it.)

    Or perhaps the claim is that government does not create “money” in the “wealth” sense of the word. So a private hospital which takes out an appendix does something useful, whereas a public sector hospital doing exactly the same thing is a total waste of time and money?

    Next comes the claim that “latest craze in MMT” is some form of Workfare or “work for unemployment benefits” system. This idea is quite separate from MMT, though numerous MMT advocates support the “work for benefits” idea. And if you want proof of the latter point, the author of the above article claims to oppose MMT while supporting “work for benefits”!

    Next comes the claim that “We had to wait for a World War to become the arms supplier to the world in order to renew our stagnant economy.” Quite right! And WHY did this lift the U.S. out of depression? It was because of massive government spending: more or less what MMT advocates! To be more accurate, MMT is indifferent as between increasing government spending and increasing private sector spending: what mix of the two we have is a political choice – a choice for voters at election time.

    I agree that work-for-benefit schemes can become too large: effectively becoming parasites on the market economy. That would happen if pay and conditions on workfare schemes are too generous, and certainly some MMT advocates are not sufficiently aware of this danger, in my view.

  8. Jobs help provide independence and dignity to people at all levels.To create more jobs you need to provide more opportunity to work. The value of the work performed will be expressed by the total production cost of the produce (that includes the 3 returns for the employment of land, labor and durable capital goods) and its sales price should not be much more. If the cost is too high the demand will not justify the production process and it is this situation we face today. Government policy should be aimed at reducing these costs and the most amenable one is that for land use.

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