A new school of thought is currently establishing itself in economics: modern monetary theory (MMT). What is new about it is the empirical view of the financial system and macroeconomics. A key insight: the modern state – consisting of government and central bank – can spend indefinitely. What follows?
Ecologypolitics: mr. Dr. Ehnts, what do common good and ecology have to do with our monetary system?
Dr. Dirk ehnts: money is the basis of our economic activity and thus also of our handling of limited resources. We can do business for profit – or for the common good. The state is primarily responsible for the common good: from administration to the school system and health care system to environmental protection. It needs to spend money on these tasks: labor, goods and services, land, machinery, raw materials, and energy. Wishes to expand government spending are often dismissed with the argument that there is not enough money to do so. But this is not true. The state has a monopoly on its currency. Only it may generate money. And that means he can spend as much money as he needs. Only its own political laws, such as the debt brake or the deficit rules of the stability and growth pact, prevent it from doing so. In our monetary system, however, we could tend to align the economy much more closely with the common good than many people think. There is enough money. Decisive is the political will! A green new deal could also be implemented in germany immediately. We don't need to wait for the rich to finally pay their fair share of taxes. We do not have that much time. We have to save our planet now, not sometime in the distant future!
Then why should the state tax at all?
The state should levy taxes primarily to keep the inflation rate low. If he wants to expand his activities to strengthen the common good, then he will have to buy many resources. If the private sector also wants these resources, prices will rise. It is smarter to use taxes to take purchasing power away from households and businesses. From a macroeconomic point of view, taxes serve to fight inflation, not to finance the state budget. But taxes are also useful for redistributing income when the distribution of income or wealth is unfair. Or to make unhealthy consumption more expensive – as in the case of alcohol and tobacco.
What happens if the state incurs too little debt?
Then it can spend less. And in economics, full employment cannot be achieved. We experience that in the euro zone since beginning. The unemployment rate here has never been less than 7%, which is a very high rate. Employment depends directly on the total spending of households, businesses, government and abroad. Companies produce as much as they can sell. Against the backdrop of environmental and climate issues, this is regrettable, but must not be ignored. If total spending is not high enough, then it is like "musical chairs": chairs: jobs are missing! And some have to stand: in front of the unemployment office! The solution to the unemployment problem is for the state to increase its spending until everyone has a job. Everything else is window dressing. If there is not enough meaningful work or if the use of resources is to be reduced for environmental and climate protection reasons, then consideration can be given to reducing working hours with full wage compensation. In the short run, however, too little government spending will lead to increased unemployment, lower inflation and more inequality. And then the national debt rises anyway, because tax revenues depend on economic activity – and fall when the economy weakens.
What happens if the government incurs too much debt?
Then its expenditures will lead the economy to the limit of its production potential. Then prices rise. Inflation, however, is somewhat cushioned by our tax system, because more sales means more sales tax, d. H. More money flows to the state. Japan has a national debt of well over 200% of GDP, but it has not incurred too much debt. Inflation is low there. Currently, there is even deflation. The price level falls across the board. With unemployment at about 3%, it would be irresponsible to cut government spending by pointing to the supposedly high national debt, further fueling deflation. The unemployment rate would skyrocket. Why? Because a statistic has caused an "uneasy feeling" among economic policymakers? In no other part of our social systems is there such superstition as in the area of government debt.
Why is our money and financial system so difficult to understand? Why there are so many misunderstandings?
Our monetary and financial system is not difficult to understand. It's really quite simple: the state forces its citizens to pay taxes in local currency. This generates the acceptance of the currency. Modern money, then, is nothing more than a tax credit. We can use it to get rid of our tax debts. The state central bank gets a monopoly on the currency. Government money must first be spent before people can pay taxes with it. Therefore, people will give to the state goods, services, labor, land, machines, etc. Offer. The state has money and wants resources. Banks then have their own money cycle, promising that the bank deposits they generate can be exchanged one-for-one for cash. The central bank is not only the house bank of the state, but also the bank of the banks. The latter can borrow money from it against collateral. But they only need to do this if we want to hold cash. Otherwise, it is enough for them to redistribute their central bank balances accordingly when they make remittances. All this was already known at the beginning of the 20th century. The central bank of the twentieth century is known. Economists like knut wicksell, john maynard keynes, joseph schumpeter and georg friedrich knapp would be very surprised today about the currently prevailing viewpoint. Many economists are still mentally stuck in the gold standard era and think it is legitimate to present a supposedly simplified theory: no money, all transactions with goods as real exchange. In fact, the state would first need revenue in the form of taxes in kind before it could spend anything itself. But this view of things was never correct and is far from reality, especially today. The state owes money – and not goods. And it can and must generate this money itself. Modern monetary theory (MMT) causes a copernican turn here. And there are some losers who have done very well with the myths of the "swabian housewife", the "black zero", the "trickle-down economy" and "globalization. All of these myths are now losing their potency. However, people who came up with them are still sitting at the levers everywhere. Since they cannot fight MMT with arguments, they misrepresent it and spread many misconceptions.
What is the biggest misunderstanding?
The biggest misunderstanding concerns what MMT actually is. According to the duden dictionary, a theory is a "system of scientifically founded statements for explaining certain facts or phenomena and the laws on which they are based". Unfortunately, many colleagues seem to believe that a theory must be an equilibrium model. This is harebrained nonsense. If I want to understand whether a central bank or a government can become insolvent, I can't study that using an equilibrium model. Since many colleagues do not recognize us as theorists, they think MMT is a policy recommendation that can be "applied". This is false, but has been claimed for years. What is correct: MMT is an empirically verifiable theory of our monetary and financial system. It is politically neutral – and not an ideology. This does not mean that nothing follows from a political point of view. Of course, MMT also asks: how do we achieve full employment and price stability with sustainable resource use?? But then the answers are different. MMT can be expected to shift the entire policy discourse on the axis, much as it did when the welfare state was introduced in west germany after the end of world war II.
Who "invented" MMT?
Almost exactly 25 years ago, U.S. Investor and automobile designer warren mosler was looking for economists who were concerned with money and with the state and who, like him, recognized that the state, because it has a monopoly on currency, substantially determines the price level and employment. He found randall wray and bill mitchell, and over time they were joined by pavlina tcherneva, fadhel kaboub, scott fullwiler, and last but not least stephanie kelton, whose book "the deficit myth" became a bestseller. She most recently advised bernie sanders on the campaign trail, who wanted a green new deal. Aides to rep. Alexandria ocasio-cortez had drafted this one. Mosler was originally interested in whether the governments of turkey and italy could go bankrupt. The bottom line was that he realized that this is not the case, because as long as there is no fixed exchange rate or government debt in foreign currency, a government supported by its central bank cannot become insolvent. If the central bank does not support it, the government can change the laws and force the central bank to support it. The democratically legitimized government is more powerful than the non-democratically legitimized central bank. This is an important insight, especially in light of the austerity policies that have driven europe in particular to the abyss.
How did you come across MMT?? And why did you become its proponent?
I became aware of MMT in 2011. At the time, I was working as a research assistant at the university of oldenburg, germany, trying to understand the great financial crisis of 2008/2009. I wanted to write a book that explained money and credit creation in a way that we could really understand it. After reading up, I realized that almost nothing I had been taught in college about macroeconomics and money was true: banks are not intermediaries, but create money themselves. Government spending increases savings and does not create "crowding out," as textbooks claim it does. Increasing government spending leads to lower interest rates in the process, not higher ones. States normally cannot go bankrupt. "Fiscal space" does not exist at all. The "natural interest rate" is a myth. As is the assumption that central banks control inflation. First, they cannot. And second, lower interest rates lead to less, not more, inflation. When I checked MMT against empirical facts at that time, I realized that I had to make a serious decision: either push MMT away and just pretend that I didn't notice anything about it. Or advocating for them and making them known to a wider audience. I decided for the latter. In 2014, I founded the non-profit pufendorf society with attorney erik jochem and investment banker alex hoffmann to educate the public about how the money and credit system works and to transfer scientific knowledge.
Who is pufendorf?
Samuel von pufendorf was one of the great philosophers of the state in the 17th century. A pioneer of the twentieth century and a pioneer of human rights. He held that the state is the central authority for producing and guaranteeing public goods. And that every human being is entitled to certain rights by birth, which he can only realize by joining with others to form an organized community, the state. The central task of the state is therefore to ensure the freedom of its citizens and the appropriate distribution of goods. We stand on its shoulders when we say that money is the core of our polity and that we should all agree on the political rules of how to manage our resources carefully. Our association now has over 20 members, hosted the first european MMT conference in february 2019 and will host the second in september 2021.
Who would benefit from an economic policy based on MMT? And who will not?
Job seekers would benefit, because full employment is a goal that is easy to achieve. The current strategy is to make job seekers more skilled. But this does not solve the problem if there are too few jobs in the companies. But the state could simply generate additional jobs under a job guarantee, financed at the federal level and managed at the local level. Whoever is looking for work and cannot find it, receives a local job offer from a database. A basic wage is paid, which is sufficient to live on. There is enough to do. We have crises in many areas of society and could use helping hands almost anywhere. So in addition to those seeking work, those who are helped by the work would also benefit. Companies that pay their workers poorly would lose out, because they would run out of workers.
How much should the government increase its spending??
Ultimately, the state should align this with the goals it wants to achieve. This includes – in addition to the full employment just mentioned – above all the enforcement of rights. There is a right to education, a right to health, a right to physical integrity, and other rights as well. To achieve this, the state needs to fund schools, universities, hospitals, police, judiciary and other institutions.
Is an economic policy according to the MMT ecologically alignable?
An economic policy based on MMT is geared to the common good. Exactly what the common good is must be determined through a democratic process. Ecology is of course of central importance today. In this respect, MMT is a good basis for a green new deal. Anything that can be produced can be financed. Resources are finite, money is not. If there is a shortage of money, it is only because that is what is politically wanted. MMT allows for an undogmatic economic policy. The state can both involve the private sector through guarantees, grants and purchases, and strengthen the public sector, z. B. In transport infrastructure or in the social sector, to make the ecological transformation socially acceptable. In a green new deal, the entire population must be taken along to avoid social hardship, social unrest and political upheaval.
Could MMT be misused for economic policy to increase corporate profits?
Theoretically, it would be quite possible, but it is unlikely. MMT, with its emphasis on the common good and the democratically legitimized state, has always been a counter-design to the understanding of economics and politics that has prevailed for decades.
Is an economic policy according to MMT even feasible in the eurozone?
In 2014, I wrote in 1. Edition of my book that eurozone institutions should be rebuilt to reduce the risk of sovereign default to zero. And that this could be done by approving the purchase program of the european central bank (ECB). In march 2020, the ECB did just that by launching a pandemic emergency purchase programme (PEPP). It promised to buy hundreds of billions of euros in government bonds – as much and for as long as necessary. Now investors know they can always sell to the ECB. Government bonds are risk-free. National governments can always sell them to banks because they can make money on them. Also, the deficit rules of the stability and growth pact are now out of force, at least this year, probably in 2022 as well. This means that the deficits of nation states can be as high as they like. The EU commission and the ECB have thus restored the sovereignty of nation states with regard to fiscal matters, even if there are power plays going on behind the scenes. National governments are not currently constrained in their spending. Only when the stability and growth pact is reinstated and the PEPP is unwound will spending be constrained again. But it is foreseeable that the euro crisis of 2010 will then repeat itself. Since italy and greece still did not reach 2007 GDP levels in 2019, a further downturn would probably lead to these countries leaving the euro. And also from the EU. So there is much to be said for spreading the MMT findings further and fixing today's situation with the ECB's PEPP and without the stability and growth pact. Ultimately, many of MMT's findings have already been implemented, but the world is still struggling to accept the "new normal" as such. And to explain why all this is good. MMT is the only theory that can explain why high deficits and high government debt are compatible with low inflation, why inflation targeting monetary policy is at an end, and why fiscal policy will stabilize the economy in the future. Whether people like it or not, we are already living in a new world. The only thing missing is the copernican turn in monetary theory to be able to understand the empirically observable also theoretically.
How does the german government actually spend money??
When the federal government spends, the bundesbank acts on its behalf and increases the account balance of the recipient's bank. The state central bank – bundesbank and ECB – is, after all, the creator of money and has a monopoly on the euro. Contrary to popular belief, all spending by the federal government is done by the bundesbank, always on behalf of the federal finance ministry. Government debt arises because of the political rule that government spending reduces the federal government's central account, which must be balanced at the end of the day. This is where tax revenues end up, among other things. If these are not sufficient, the federal government can sell government bonds to banks that pay with central bank credit balances. These government bonds represent the "debt" of the state. Ultimately, however, it is merely a matter of – currently negative – interest-bearing tax credits. As long as the federal government is not hindered by political rules, this does not cause a problem. There are no plans to reduce the national debt in the future. This could only be done by raising taxes or cutting public spending while keeping the economy stable. Austerity policies since 2010 have shown that this doesn't add up. Government spending cuts collapse economy and tax revenues. And in the end, public debt is higher, not lower. Our economic policy should be based on reality and no longer on an obviously wrong theory or. Ideology. MMT is much closer to reality.