Yes, We Can!
But should we tell the masses?
Yesterday, I listened to an interesting podcast ★ conversation between the New York Times' Ezra Klein and Columbia University's Adam Tooze. Tooze is an economic historian, whose new book ★★ challenges conventional economic thinking in ways that often closely parallel Modern Monetary Theory (MMT).
For the last quarter-century, MMT economists have emphasized that "finding the money" is never the challenge for governments that issue their own non-convertible—i.e. floating exchange rate—fiat currencies. It has long been our position that mainstream macro, which centers the limits of fiscal policy around the (erroneous) concept of a "government budget constraint," has led us astray.
Instead of treating governments like revenue-constrained households, MMT economists have pushed for a macro framework that replaces the artificial government budget constraint with a real resource (inflation) constraint.
A central tenet of MMT is captured in the recognition that a currency-issuing government can afford to purchase whatever is available and for sale in its own currency. Before COVID, it was harder to persuade people that the government could easily afford to spend trillions without raising a slew of taxes to "pay for" it.
I still remember the pushback I got from some economists back in 2018 for including this line in a co-authored piece called We Can Pay For A Green New Deal. I wrote:
"Anything that is technically feasible is financially affordable."
I was making the case that the federal government can afford to do big, transformative things, like tackling our climate crisis, without obsessing over the usual question of how to "pay for" it. Finding the money is the easy part—new money is created whenever the government spends. The challenge, I argued, lies in managing bottlenecks and other inflationary impulses along the way.
I suggested that if policymakers were serious about a mass mobilization of resources to transition our economy away from fossil fuels, they would be wise to draw inspiration from John Maynard Keynes.
There wasn't exactly a groundswell of support for these arguments several years ago, but as Tooze notes, COVID-19 has made it much harder to dismiss them today.
Here's Tooze in a recent essay for The New York Times.
"The world discovered that John Maynard Keynes was right when he declared during World War II that 'anything we can actually do, we can afford.' The sheer scale of the action was intoxicating. Among the left wing of the Democratic Party, it generated excitement: If money was a mere technicality, what else could be done? Action on social justice, climate change, the Green New Deal, all seemed within reach.
….
We can afford anything we can actually do. The problem is agreeing on what to do and how to do it. In giving us a glimpse of financial freedom, 2020 also robbed us of pretenses and excuses. If we are not doing a global vaccine plan, it is not for lack of funds. It is because indifference, or selfish calculation — vaccinate America first — or real technical obstacles prevent us from 'actually' doing it.
It turns out that budget constraints, in all their artificiality, had spared us from facing the all-too-limited willingness and capacity for collective action. Now if you hear someone arguing that we cannot afford to bring billions of people out of poverty or we cannot afford to transition the energy system away from fossil fuels, we know how to respond: Either you are invoking technological obstacles, in which case we need a suitably scaled, Warp Speed-style program to overcome them, or it is simply a matter of priorities. There are other things you would rather do."
Tooze explains that whether we're talking about rescuing Wall Street from its own excesses after the 2007/8 financial crisis or rescuing the American economy during the pandemic:
"[T]he digital money creation was the easy bit."
If the federal government is prepared to act boldly, there is no hard budget constraint to stop it.
Saying the Quiet Part Out Loud
The podcast unfolds against the backdrop that the federal government isn't revenue constrained and that the mainstream has either led everyone astray—especially when it comes to debt and deficits—or failed to articulate what many in the profession now claim to have understood all along.
Ezra Klein says this to Tooze:
"I want to bring up something…which is how the boundaries of acceptable thought are policed and defined within the economics profession. I want to go back to the line you began with that 'Whatever we can do, we can afford.' This is a line that I have talked about with some leading, center-left economists and they'll tell you that, of course they know that. They've always believed that. Modern Monetary Theorists love quoting this line, but they'll say the Modern Monetary Theorists have nothing new to say, that's just an old Keynes line.
But I will say, that having covered economics for a long time in Washington that was not a line that used to get quoted to me…
I think there's a lot of fear that if it becomes known. If it becomes believed…that whatever we can do we can afford that that will be used irresponsibly…and create a lot of real problems like runaway inflation…
The profession wants to say, 'No, we knew all this,' but in fact they haven't been saying it because they're a little bit afraid, in my view, of what people will do with these ideas if they get hold of them. If they're sort of not protected by the responsible economists placing boundaries on what is and isn't sober-minded policymaking."
In other words, MMT reveals something that is simultaneously obvious within the economics profession but too dangerous to share with anyone on the outside.
To police the boundaries on policymaking, mainstream economists brandish concepts like intertemporal government budget constraints, debt-to-GDP tipping points, non-accelerating inflationary rates of unemployment (NAIRU), neutral rates (r*), unanchored inflation expectations, etc. To the uninitiated, concepts like these become the "scientific" evidence that necessitates policy restraint.
I don't know whether Ezra has ever seen this clip of Nobel laureate Paul Samuelson, but it captures his sentiments perfectly.
It's as if the center-left economists Ezra is referring to—people like Larry Summers—see themselves sort of like Lloyd Blankfein saw Wall Street's biggest banks—i.e. merely doing God's work.
Whether he's policing the Biden agenda or closing ranks to marginalize MMT within the economics profession, Summers has a history of going the extra mile to define the boundaries of the possible. Fortunately, Congress and the White House turned a deaf ear to Summer's vocal critique and moved forward with the $1.9 trillion American Rescue Act in March 2021.
For those who may not remember, Summers had previously tried (again unsuccessfully) to dissuade lawmakers from passing a major piece of legislation in 2017. Back then, he was certain that passage of the Tax Cuts and Jobs Act (TCJA) would mean:
"Our country will be living on a shoestring for decades because of the increases in the deficit that will result."
It was a bad call.
The tax cuts passed, adding nearly $2 trillion to deficits. And then, a few years later when COVID ravaged our shores, Congress began spinning out multi-trillion dollar spending packages without the slightest affordability problem, proving that whatever we have the political will to do, we can afford.
As Ezra put it:
"I would say the economics profession has just been devastatingly wrong about what effect different deficit levels would have over the past twenty years. I think you simply have to look at that, given the credentials of some of the people making these arguments, as—in aggregate—a record of a lot of failure…There were just a lot of warnings that just look completely ridiculous."
Next On Tap
This isn't the post I sat down to write, but I wanted to lay this foundation before tackling the next set of questions. Here's where we'll go next…
If MMT (and Keynes and Tooze) are correct that anything we can actually do, we can afford, then how do we operate in a world where that truth is revealed to the broader public? Are MMT economists too cavalier about the risks of inviting everyone in on the secret? Is honesty really the best policy, or do we need deficit myths and old-time budgetary religion to protect us in a world of uncertainty? Can we trust the MMT framework to guard against excesses?
As always, thank you for spending a bit of your time here with me.
★
https://www.nytimes.com/2021/09/17/opinion/ezra-klein-podcast-adam-tooze.html
★★
https://www.penguinrandomhouse.com/books/669575/shutdown-by-adam-tooze/
Shutdown
How Covid Shook the World's Economy
“This book’s great service is that it challenges us to consider the ways in which our institutions and systems, and the assumptions, positions and divisions that undergird them, leave us ill prepared for the next crisis. . . . Whether we can overcome that incoherence and meet the challenges ahead while protecting the values at the heart of the American idea — freedom, pluralism, democracy — is the essential question posed by Shutdown.”—The New York Times Book Review
“A seriously impressive book, both endlessly quotable and rigorously analytical. Tooze synthesises a huge volume of information to argue that we must prepare for a new wave of crises or risk being sunk by them. Hopefully, governments everywhere will heed his warning.”—The Guardian
“Offer insights and frameworks likely to be of enduring value… To read Shutdown feels like sitting alongside the great professor while he feverishly collates an array of data and anecdotes, attempts to chronicle what is going on, his head fizzing with ideas about what it might all mean and where it might be leading.”—Financial Times
“This is truly a picture of the global impact of the crisis; it covers the disruption in the financial markets, as well as the ins and outs of government policy. . . An impressively full account of the economic developments of the past 18 months.”—The Economist
“A primer on the mechanics of a global financial panic, the techniques that central bankers deployed to contain it, and the political events that ensued. Laced through these taut synopses is a meditation on a grand historical question: Did 2020 mark the end of the world economic order as we’d known it since 1980? And if so, what precisely is taking neoliberalism’s place?”—New York Magazine
“Tooze’s book offers readers a comprehensive and smartly written summary of the economic impact of the coronavirus…Tooze briskly and expertly recounts the tense weeks in March 2020 [and] routinely compares the coronavirus shutdown to the 2008-2009 financial crisis, [which] happens to make for apt comparisons, as few previous economic and health disasters can match the scale and global reach of this pandemic.” —Washington Post
“[Tooze’s] writing demystifies the world before us, dispelling the cloud created by the chaotic motivations and invidious narcissism of the market. Shutdown is one such cure, a book that answers so many questions about the state of the world that it will leave its readers feeling not just more learned but dizzy too. It is cliché at this point to remark that after COVID-19, everything changed; what Tooze illustrates masterfully in Shutdown is that the crisis the virus unleashed began much earlier, the world order’s fragility the product of a much longer process of mismanagement and selfishness.”—Vulture‘s “40 Books We Can’t Wait to Read This Fall”
“Fascinating, informative, and wise…Tooze brings us to the brutal reality of Covid: it was not about money…Shutdown concludes with a plea for ‘constant interplay of expertise and counter-expertise.’ It is a wake-up call for us to bridge that chasm.” —Paul Collier, Times Literary Supplement
“Adam Tooze makes a strong case for looking back, and beginning to draw some conclusions. . . . His focus is the period that started with Chinese President Xi Jinping’s public acknowledgement of the coronavirus outbreak on Jan. 20, 2020, and ended with U.S. President Joe Biden’s inauguration exactly a year later. The scale and variety of what unfolded in the intervening days remains dizzying. Tooze lucidly organises these events in the book’s 300 pages, while maintaining the sweeping perspective that will be familiar to readers of Crashed.“—Reuters
“A comprehensive history of an unprecedented year, Tooze’s account describes how the pandemic played out politically across the globe, the interplay between climate change and the pandemic, and the myriad effects of the world economy nearly shutting down in a brief period that, as Tooze puts it, made “History with a capital ‘H.’” Readers will find this deeply informed parsing of the pandemic to be illuminating and thought-provoking.”—Publishers Weekly
“Economic historian Tooze examines the unprecedented decision of governments around the world to shutter their economies in the face of pandemic . . . As the pandemic hopefully continues to fade, other crises remain. This book is a valuable forecast of future problems.”—Kirkus Reviews
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