Applied MMT Working Paper: Reforming the Broken Federal Budgeting Process

For a few months, I have been working on this paper about why the federal budgeting process is broken and destructive. I'd like to get some input from the MMT community. 

Link Here

The audience I have in mind for this paper is people in/around government who already have some policy background. Ideally this would reach people on Capitol Hill and policy analysts in Washington. 

The first part is standard MMT economics, and it should be familiar to most. The second part is the discussion about the current budgeting process, and how it should be reformed/eliminated. It has gotten a little long over time, but please feel free to comment. 

In the next few days I will also share a powerpoint deck on how the Fed sets rates. 

Bill Mitchell eviscerates critics of MMT who don't bother to acquaint themselves with the literature

Bill is clearly annoyed, as he should be, that people like Thomas Palley criticize "MMT" without being aware of what MMT economists have published.

Paul Krugman did the same thing on UP with Chris Hayes with respect to the MMT assertion that deficits are sustainable. He interpreted it as "deficits never matter," which MMT economists have never claimed. MMT economists have carefully explained exactly what they means, asserted that inflation is a constraint, and that the size of the deficit at full employment should not exceed demand leakage to saving at that point. Indeed, the point of the deficit from the perspective of a full employment budget according to the sectoral balance approach is to offset demand leakage to saving without resulting in price instability and that fiscal policy is better fitted to this task in that it can be tightly targeted, whereas monetary policy is blunt instrument.

This kind of behavior is more than tacky and annoying. It is unprofessional.

Bill Mitchell — billy blog
I wonder what the hell I have been writing all these years
Bill Mitchell

Bill Mitchell — Exploring pro-cyclical budget positions

Sometimes one agrees with a conclusion but realises the logic that was used to derive the conclusion was false. Which means that the person will get things wrong when applying the logic to other situations. This is almost always the case when we encounter the reasoning offered by so-called deficit doves. These are economists who do not out-rightly reject the use of deficits but typically below them to be cyclical phenomenon only and should thus be offset at other points in the economic cycle by surpluses – the so-called balanced budget over the cycle rule. While many progressives think that is a sensible strategy – the reality is that it is an unsustainable fiscal rule to try to follow. The same economists talk about the dangers of pro-cyclical fiscal positions but fail to appreciate that such positions are desirable in certain cases and there is a fundamental asymmetry that applies to evaluation the desirability of a “cyclical” position. Fiscal austerity (pursuing surpluses when the economy is contracting) is never appropriate whereas expanding the deficit when the economy is growing might be. It all depends. This blog aims to clear up some of these misconceptions.


One such article (August 7, 2012) was written by Harvard economist – Jeffrey Frankel – The Procyclicalists: Fiscal austerity vs. stimulus.

This article demonstrates some of the classic mistakes that economists make when considering the relationship between the government and the non-government sector.....

Bill Mitchell — billy blog
Exploring pro-cyclical budget positions
Bill Mitchell

Simon Wren-Lewis — Some Thoughts on Fiscal Rules

..the surviving UK fiscal rule (or ‘mandate’) ... says the government should achieve structural (cyclically adjusted) balance, excluding investment spending, within five years - where that five year period rolls forward.

mainly macro
Some Thoughts on Fiscal Rules
Simon Wren-Lewis | Professor of Economics, Oxford University

The MMT fiscal rule is that the size of the fiscal deficit is determined by a full employment budget, arrived at by offsetting consolidated non-government sector saving desire in the period. This is accomplished using the principles of functional finance, relying as much as possible on automatic stabilization and variable tax rates in light of the fiscal balance being endogenously determined relative to changing economic conditions.