I’ve read that many of the most vicious fights in relationships have nothing to do with the immediate subject. Instead, deep-seated but unrecognized disagreements are often the real source of conflict: that row over how the bed was made was really about the fact that he’s unwilling to spend Christmas at her parents! I think there’s something similar going on with the current MMT/nonMMT debate in that there is a core inconsistency that not only places the two views on very different planes, but it is largely unspoken. It’s the elephant in the room.
That elephant is the full-employment assumption. It is such a mainstay of the various nonMMT views that it is second nature to them. In fact, even orthodox economists who lean towards interventionist policies believe the economy automatically seeks full employment. Take, for example, this statement by former Obama advisor, Christine Romer:
Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy could stay forever.
I’ll call this the FEA, or full employment assumption, position.
By contrast, the Keynes/Post Keynesian view within which MMT exists argues specifically that the market system is prone to systematic breakdown and extended slumps brought on by insufficient demand. That the economy regularly languishes at less than maximum capacity is absolutely critical to a whole range of Post Keynesian analyses and recommendations. It is always in the back of our minds and represents the single most important driving force behind policy. Call this the IAD, or insufficient aggregate demand, position.
Now consider the debate as it emerges from these two largely-unstated positions with respect to the overall level of economic activity. For IAD+MMTers, it’s not simply that we are arguing that deficit spending is sustainable because it is financed in currency we are permitted to print. That makes it sound as if it’s just a matter of convenience. But, there is a much greater urgency to it. In the absence of government injections of income and wealth into the economy, we experience poverty in the midst of the capacity for plenty. The IAD view argues that government spending doesn’t crowd out private spending, it expands it. Deficit spending is necessary to the very success of capitalism because it represents the supplement to demand needed to take us to full employment. While the severity of this problem may vary over time, it never goes away. It is systemic, potentially offset via deficit spending (the specific form of which would be the subject of a different discussion).
But in the FEA vision, deficit spending is discretionary, largely unnecessary except for short-term fixes. After all, the economy is eventually going to correct itself, anyway. To some extent, demand management is merely a political expedient made necessary by the fact that unemployed workers are unwilling to wait for the natural processes to reassert themselves. And so, like money borrowed for a vacation abroad, deficits are a burden (and ultimately an unnecessary one).
It is my opinion that this is responsible for a critical underlying current in the debate between MMTers and nonMMTers. While on the surface we focus on the operation of modern financial systems and central banks, the split between FEA vs. IAD means that each side is placing this discussion into a radically different framework. And because this isn’t consciously recognized, we each feel exasperation over the fact that our opponents can’t see the obvious logic of our position.
I wonder if we should be making this more explicit? Obviously, the central argument is still with respect to the financing of government spending. And I don’t deny that MMTers do, in fact, make frequent mention of the need to bring the economy to full employment. What is less in evidence, however, is a conscious recognition of the fact that this (and not just the operation of the monetary system) is an absolutely critical point of departure. Because of IAD, we don’t see deficit spending as a quick fix. Rather, it is a permanent, and completely affordable, feature of a healthy capitalist economy. We can’t afford not to do it.
[For those more familiar with MMT than Post Keynesian economics, here is an explanation of the IAD position:
Or, if you want a less technical piece, here is one I wrote for my online gaming friends: