As Wray knows very well, the “dependency ratio” problem is not about running out of money to make Social Security payments. We can pay our seniors as much as we want to. But if we’re not producing enough goods and services to keep the seniors comfortable, the numbers we’re adding to their bank accounts will not be able to prevent a reduction in the quality of life of most Americans.
The challenge we face is whether the working population will produce enough that we do not have to reduce our standard of living to accommodate an aging population. And that has become dramatically more challenging because of the family- and investment-shrinking effects of the Social Security system.
Wray’s description of Social Security as a system of crediting bank accounts ignores the real-world effects of the system. This appears to be a pervasive problem with some of those who have discovered the benefits of the modern monetary system.
Wray, for instance, is convinced that the financial crisis was caused by “a virtually unregulated financial system.” But, of course, our financial system was far from “unregulated.”
Regulations created the cartel of credit ratings agencies, rewarded banks for owning highly rated mortgage securities, encouraged financial engineering through credit default swaps, damaged risk control efforts by encouraging moral hazard, and undermined underwriting standards. Regulators failed to recognize the housing bubble, the subsequent hyper-inflation and credit contraction within the financial system, or the way their own rules that were intended to limit risk were actually creating systemic risk and fragility.
This blindness to problems of the regulatory state is frustrating because Wray writes so brilliantly about the problems of complexity and fragility in our financial system. It’s almost as if he just assumes that regulations would work—and therefore the crisis is evidence that the system was “unregulated.”
Nowhere in Wray’s work have I been able to find a demonstration of either side of this “unregulated” thesis: that the system was unregulated or that regulation would have prevented collapse. Which isn’t surprising, I suppose, because such a demonstration would be impossible. The financial system was highly regulated in the years leading to the financial crisis.
The focus on the fact that the government can never run out of money seems to encourage a blindness to the myriad ways that government spending inflicts non-monetary harm, harm that diminishes real world wealth.
I do not think this undermines MMT. I think, rather, that MMT could be enhanced by additional attention to the problems created by government programs.
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