We have all read fiction about how true names give us the power to control the named objects. The comment on my previous post (MMT Macro Final 1/3) by Gregg Hannsgen, regarding my use of orthodox terminology and frameworks, led to me to reflect on the tremendous real power exercised by false names. From this reflection, I realized that the power lies in the ability to name things, and to popularize the use of these names. The article on “Framing Modern Monetary Theory“ by Connors and Mitchell in JPKE states that one of the central obstacles to the widespread acceptance of MMT is “The deployment of key macroeconomic terms (incorrectly) in the context of pervasive cultural metaphors to support policy interventions that effectively benefit a privileged few at the expense of the majority.” Personally, I first learned about the power of false names from a discussion by Noam Chomsky. With reference to the Vietnam War, the public debate was between the Hawks and the Doves. The Hawks felt that it was the responsibility of the USA to defend freedom, wherever it was threatened, across the globe. The Doves felt that the USA did not have this global responsibility. Effectively, the truth that US was actually replacing the previous imperial power France, and establishing its own hegemony over the Far East, was buried deep under, and made almost impossible to think of, by the terms of this debate.
In a similar way, just the name “deficit” exercises a tremendous power over the minds of the public, and ensures that the terminology of “financing the deficit” makes perfect sense to everyone. It fits perfectly with everyone’s lifetime experience of balancing household budgets. This name is used to justify policies of austerity, raising taxes, cutting spending on social welfare, raising interest rates, and other types of interventions which favor the 1% against the interests of the 99%. Thus Gregg’s complaint about my use of orthodox terminology and framing for the “financing of deficits” (see Q2 of MMT Macro Final) is perfectly justified. Acceptance of orthodox terminology furthers the conventional agenda, even if it is used to debate against the merits of orthodox policy recommendations. Of course, this creates a real dilemma and difficulty for those who would make “Radical Paradigm Shifts“. We cannot introduce new frameworks and concepts, while simply ignoring dominant terminology, since everyone uses that framework. But engaging with the terminology by using it, even for debate, further strengthens that conceptual framework.
Anyway, I propose to make up for my sin by devoting this post to explaining why it should be a crime to use the terminology of “financing the deficit”, as I did in my last post. One of the strategies suggested in the paper “Framing MMT” is to re-introduce the true names which have been replaced by false names of power. As a prime example, we should re-name Government Deficits as Government Injections (which I did in a later question on the MMT Macro Final).
A central MMT insight is that the government creates money in the process of spending. It does not acquire money in order to spend it. A large portion of government expenditures is not discretionary. The government is legally obligated to pay salaries, pay for various kinds of legislated public works programs, etc. Payments are made by government in form of checks written on its account at the Central Bank. This account is just an electronic entry created by the Central Bank. There is no limitation on the ability of the Central Bank to modify this entry to any amount. That is, the amount of money held by the government in its account at the Central Bank is really a fiction — there is no such number. When the government writes a check, the Central Bank bank creates a corresponding entry in the government account to cover the check, effectively creating the high powered money which will end up as reserves with private banks. For deeper understanding of this process, see my posts on “The Origins of Central Banking“ and “Monetization, Maturity Transformation, and MMT“. In order to maintain the fiction that the government “should” try to balance the budget, when the Central Bank writes an entry into the Government account, it also creates a corresponding entry calling this deposit a loan from the Central Bank to the government. This is pure fiction, in the sense that the Central Bank is an integral part of the government. It is as if I give a loan to myself. It does not make any real sense. However, now that the Central bank has acquired an artificial number as a target for the government budget, it CAN proceed to seek financing for this number, and this is what is actually done.
The magic of false names is amazingly powerful. The whole nation is engaged in an intense battle, fighting the mythical monster of the Deficit Dragon, using the sword of taxation, and other weapons for revenue generation. Just recently, while in the midsts of a foreign exchange crisis, Pakistan agreed to pay USD 1 billion to improve taxation systems. The truth is that when the government spends, high powered money automatically comes into existence, by that very act of spending. The issue of where we will get money to finance this spending does not make any sense, even though this is where the maximum amount of policy discussion takes place. The real issue which must be discussed is going forward: what are the consequences to the economy of this new money which has been created by the government? This real question receives little or no attention in the literature. The answers which are available in the orthodox canon are shallow and nonsensical. One of these answers is given by the “Ricardian Equivalence“: government spending will drive out private spending on a dollar for dollar basis, so that total aggregate demand remains unchanged. Another answer is the hyperinflation will result.
Instead of these magical answers, designed to prevent us from looking at what really happens, we need to study step-by-step the consequences of government spending. Once we do that, it is almost immediately obvious that the consequences will depend on where this money goes. One of the immediate conclusions is that if government spending is targeted at the rich (reductions in taxes for the wealthy, or bailouts for billionaires), there will be very little effect on aggregate demand. The marginal propensity to consume of the rich is very low. The aggregate demand for super-luxury products will increase – for example genetically tailored personalized medical treatments for billionaires. Alternatively, if government spending, or injections, go to middle class or the poor, then aggregate demand will increase. Atif Mian and Amir Sufi in “House of Debt“ made the point that if government bailouts had been correctly targeted, the Great Recession which followed the Global Financial Crisis could have been prevented. Similarly, if government injections are targeted at sectors which have excess capacity for production, then they will create additional output, and hence not be inflationary. It is this insight which leads to Job Guarantee programs by the government, designed to produce “Employment for All“.
To close, I seek forgiveness from God for my sins in using wrong terminology, which provides power for policies which keep millions in misery, and hope that this present offering compensates by creating clarity. Below, I link a 90m video lecture on the paper “Framing Modern Monetary Theory” by Connors and Mitchell referenced above: