Monetary Realism

Understanding The Modern Monetary System…

(MMT – JG) + Medicare = MMT

As you’ll recall from the Dylan Matthews piece in the Washington Post, James K. Galbraith was described as, “part of a small group of economists who have concluded that everyone — members of Congress, think tank denizens, the entire mainstream of the economics profession — has misunderstood how the government interacts with the economy. If their theory — dubbed “Modern Monetary Theory” or MMT — is right, then everything we thought we knew about the budget, taxes and the Federal Reserve is wrong”.

Anywho, Galbraith was at FireDogLake today plugging his new book and the question was asked:
How do you feel about the MMT policy of government as employer of last resort — a job guarantee (JG) — when the private sector is not hiring?…

Galbraith responded:
To come back to the job-guarantee approach, I think asking the government to create jobs directly is not a robust solution. The problem is that the program goes right into the budget firing line, where it will get chopped up. That was the experience with CETA, the Comprehensive Employment and Training Act, back in the 1970s.
So I prefer to think in terms of how to get decentralized institutions doing useful things, with their own funding streams, so that you can create jobs that endure. Education, health care, social services, home care, neighborhood conservation… [and in response to a related question] But I think there are ways to get jobs funded — you just have to put a few degrees of separation between the program and the budget-cutters.

I chimed in to ask Galbraith what he meant with his “degrees of separation” line.
He responded:
Well, I like the non-profit sector in this country a lot. Health care, education — these are useful things. Paul Samuelson once said to me “Health care is 15 percent of GDP, and it’s the best 15 percent of GDP.”The thing about these sectors is, they have multiple funding streams. Higher ed has state money, federal money, tuition, philanthropy… This buffers the institution from cuts. If you go to (say) France, and look at what happens when you rely entirely on state funding for universities, you’ll see what I mean. That said, the federal government handles *insurance* extremely well. Social Security and Medicare are functional, efficient programs. That is why they are so hated by some people – and prized by others.

I rather agree with his last point. As I’ve suggested before, Congress should dump universal healthcare funding onto the Fed’s lap. This would have the side benefit of providing the Fed with a fiscal policy tool; they could periodically adjust the rebate’s ratio of segniorage vs transaction fee revenue depending on economic conditions.

To take a few minutes to unpack my last paragraph (you can punch out if you don’t want to go into the weeds)… While Obamacare was being debated in 2009, Anthony Weiner went on the Morning Joe show to make a ridiculously strong case for a single payer system (Part I, Part II). Congressman Weiner was promised a floor vote on a Medicare for All bill he drafted but Pelosi and/or the White House pressured him to drop it so people would pay less attention to how flawed Obamacare really was (but I digress). Unlike the HR 676 Medicare for All bill that you often see touted, Weiner’s bill was actually vetted by the CBO so its additional expenditures were matched by additional taxes… A LOT of new taxes (approx $1 trillion a year, that’s over and above current govt health spending that’d roll over into the new system). Raising taxes seems rather unnecessary since Congress could accrue this revenue without taxes or inflation simply by mandating the Fed deposit an equivalent amount in TGA every year.

The Federal Reserve Act was amended in 1980 to give the Fed governors (and NOT the FOMC) the authority to levy and adjust bank transaction fees. Of course this is completely different from bank transaction taxes, after all, only Congress can levy taxes! In 2005, UW-Madison Econ professor Edgar Feige proposed to President Bush’s tax reform panel a bank transaction tax (of approx. half of one percent) that would generate $1.8T in revenue (in 2002 dollars). My reading of the FRA is that the Fed could enact Feige’s plan on its own (though Congress can always push them if they won’t jump). In perhaps the most wonderful example ever of “its a feature, not a bug”, economist Bruce Barlett complained of Feige’s plan, “Since GDP equals the money supply times the turnover of money—what economists call velocity—a fully effective transactions tax will presumably reduce velocity. Consequently, it would be severely deflationary unless the Federal Reserve​ substantially increased the money supply to compensate. It also means that the tax base will shrink as soon as the tax is imposed.”

So this is the plan, the unstoppable force of $1 trillion in inflationary Medicare spending would meet the immovable object of $1 trillion in deflationary transaction fees. Of course we only need spending and revenue to match at full employment (and even that assumes no trade deficit demand leakage). At other times, The Fed could use this as an adjustable fiscal policy tool (the Board of Governors can amend their fee schedule at any time). When the economy falls short of full employment with balanced trade, the Fed could fund Medicare by cutting transaction fees and filling the deficit by way of the Mint with coin seigniorage (I’ll just note in passing that ordering, say, a $1 billion platinum coin seems less wasteful than a billion $1 coins, reasonable minds can differ). :o)



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54 Responses

  1. Cullen Roche says

    They’re not just working under the tradition of Minsky. But I’m really not interested in another MMT flame war here so save your breath.

  2. studentee says

    “As you know, the state theory renders the horizontal’s existence totally unnecessary and even conflicts with MMT’s perspective…”

    These guys are working in the tradition of Minksy. Have you read any Minksy, Cullen?

  3. Cullen Roche says

    I’m sorry that you think your comments aren’t trolling, but they fall under a similar pattern that I see in MMTers. You didn’t show up around Pragcap until the JG debates started. It’s clear that you’re here for one reason and one reason only – to aggravate MMR proponents when they say anything bad about MMT. ALL of your comments here and at Pragcap revolve around defensive comments in response to MMT criticisms. EVERY SINGLE ONE. That’s fine, but don’t claim you’re here trying to be productive because there are dozens of comments proving otherwise. You’re here on a MMT mission to aggravate anyone who criticizes MMT. You’ve done it since day one and you do it still (more respectfully than some others at least). But please don’t come around here pretending to take the high road from your anonymous perch. You’re here for one reason and one reason only and I am sorry if you don’t think that’s trolling, but it is. Maybe try being more productive and less defensive and you’ll get a different style of response????

  4. AK says

    Beowulf: I agree entirely with your post, and moreover, I don’t think it’s at all incompatible with MMT. Personally, I have not and will never express offence at someone offering alternatives. Nor do I view any theory as the one shining path. I do believe (and will continue to argue) that theoretically, a JG is the best way of dealing with the residual buffer stock of unemployed. That is why I agree with MMT’s aspirations rather than MMR’s aspirations. But, this certainly does not mean that I ignore the practical and political difficulties inherent in implementing a JG, and the need to look for alternatives given that a JG may/probably will never happen. Nor does it mean that I ignore the ‘low-hanging fruit’ of fiscal adjustments, which should unequivocally be the priority at the moment. All other aspirations, including JG, remain as intellectual debates at this point in time, which is exactly why I frequent this site and comment. Not because I like ‘trolling’, but because it’s boring when everyone agrees and we all learn nothing. I enjoy reading your posts. It is encouraging that you are able to engage in debate about them. I look forward to reading more of them in the future.

    Cullen: I’m rather disappointed at your ‘troll’ comments (and your comments generally which have changed from their once-professional tenor, and now seem to become more and more heated every time I comment on this site). I didn’t offer ‘vague quotes'; I offered specific quotes from your own recommended readings showing how impossible it is to remove policy aspirations from any theory. They arise naturally from the underlying theory. It has amused me, for example, that you regard it as problematic and ‘political’ that the JG is embedded in the heart of MMT, but then have gone and specifically embedded opposition to the JG in the heart of MMR, and then claimed that MMR is apolitical.