Debts are not a problem

Monetary theory from the USA

by Ulrike Herrmann

[This article published in Nov 2020 is translated from the German on the Internet, https://taz.de/Geldtheorie-aus-den-USA/!5722161/.]

A new monetary theory is popular among the US Democrats: Modern Money Theory. If Biden becomes president, MMT will probably play an important role.

Many people stand in line and wait with their unemployment benefit applications in their hands

More than ten million US citizens lost their jobs during the Corona crisis

What next? The Democrat Joe Biden may have won the US elections, but the Corona crisis is not over. The deficit in the US federal budget is a sensational 3.3 trillion dollars, and more than ten million US citizens have lost their jobs. It is likely to get even worse: The infection figures continue to skyrocket, and many states are threatened with a lockdown.

The USA is accumulating deficits on a scale not seen since the Second World War. So is bankruptcy coming? No, of course not. Instead, it shows that rich states can easily get into debt - and the financial markets expect this.

The USA is the best example: when it became clear in February that the corona virus would also spread rapidly in North America, the Dow Jones stock index plummeted by around 37 percent. However, as soon as the US government promised debt-financed aid programs, the stock markets quickly began to pick up again. Deficits were not the problem - but the solution.

The Corona crisis thus confirms a monetary theory that is currently causing a furor in the USA: the "Modern Money Theory", often abbreviated to MMT. In essence, this theory states that our economic system cannot function at all without national debt. Deficits are good, not bad.

This concept is advocated by various economists, but the star is Stephanie Kelton. The 51-year-old teaches at Stony Brook University on Long Island and is a consultant to left-wing Democrats; she has worked with Bernie Sanders, Elizabeth Warren and Alexandria Ocasio-Cortez. In June her bestseller "The Deficit Myth" was published, which explains Modern Money Theory in a way that is easy for laypeople to understand.

The pros and cons of the MMT will play a political role in the USA if only because the Republicans will from now on continuously scandalize the national debt. They will tirelessly talk about the bankruptcy of the USA. The topic has two unbeatable advantages for the opposition: the deficits will certainly continue to rise, if only because the Corona crisis is not over, and at the same time surveys show that almost half of all US citizens are firmly convinced that the national debt is an enormous problem.

As president, Obama did not run up enough debt - and the Democrats are still taking their revenge today

Trump also ran up permanent deficits, even before Corona, because he was determined to please the mega-rich with tax cuts. But facts are irrelevant for the Republicans and "alternative facts" have long been their trademark. Nobel laureate Paul Krugman therefore gloomily predicted even before the election: "If Trump loses, it will only take the Republicans about 30 seconds to return to the claim that budget deficits are an existential threat.

The Democrats are thus caught in the same trap that Barack Obama found himself in from 2008. Like Biden, Obama faced a severe economic crisis. Back then, banks had collapsed because they had traded in junk mortgages - this time the corona virus is partially paralyzing the economy. In both cases, economic stimulus packages were and are necessary.

But there was one difference: Obama had a majority in the Senate for the first two years. So he was omnipotent. Nevertheless, he did not push himself to come up with an economic stimulus package that would have been big enough. At that time, at least 1.3 trillion dollars would have been necessary, as Obama's economic advisor Christina Romer calculated. Even better would have been 1.8 trillion dollars. But Obama finally only approved 787 billion dollars because he feared the debt phobia of many voters. As a result, it took more than six years to re-create the jobs that had been lost in the financial crisis. Trump also won the 2016 elections because many non-academics felt that they had been betrayed by the Democrats. This mistrust has not completely disappeared to this day, as evidenced by the fact that Biden Wisconsin and Michigan barely won.

The Democrats have learned from their mistakes. This time they want a big stimulus package to invest in infrastructure and climate protection. This change in sentiment is partly thanks to Keynesians like Paul Krugman, who have always called for government investment when the economy is paralyzed.

Money from nowhere

The Modern Money Theory was important because the concept clearly explains why government debt is usually not a problem under capitalism, but an absolute necessity. The starting point is that money arises from nothing when a loan is granted. So the state does not have to collect taxes in order to make expenditures - the government simply creates the money it needs by getting into debt. The state can act autonomously.

There is only one limit: The state must not create inflation by happily creating money. But as long as unemployment is high, rising prices are unlikely - because many people do not even have the money to buy goods.

MMT is not a perfect theory, but it also has weaknesses. But it would go too far to list the mistakes here. What is important is that the democratic party has understood that government deficits are not "evil".

Only one problem remains: the Republicans are likely to continue to be the majority in the Senate - and can block the US budget there. However, even the Republicans do not operate in a vacuum. Many of their voters own shares, but stock prices will only remain stable if the state intervenes. This is the lesson from Corona.

ULRIKE HERRMANN Economic Editor

She is a trained banker and studied history and philosophy at the FU Berlin. Her latest book has just been published: "Deutschland, ein Wirtschaftsmärchen. Why it is no wonder that we have become rich" (Westendverlag). She is also the author of the books "Hurra, wir dürfen zahlen. Der Selbstbetrug der Mittelschicht" (Piper 2012) and "Der Sieg des Kapital. How wealth came into the world: The History of Growth, Money and Crises" (Piper 2015) and "No Capitalism is Not a Solution. The crisis of today's economy - or what we can learn from Smith, Marx and Keynes" (Piper 2018).