Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

David Brooks Does Modern Monetary Realism

Mike Kemp  | Getty Images

Randy Wray points out that David Brooks' latest column verges on a key insight.

Here's Brooks:

"You might say that a tax break isn’t the same as a spending program.

You would be wrong. David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion 'weapons supply tax credit.' The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!”

Here's Wray:

What is a sovereign currency? It is (mostly) a keystroke that results in an electronic entry on a bank’s balance sheet. (Yes it can also be shiny coins, paper notes, and watermarked checks—but those are increasingly less important.) To be more accurate, it is two entries:

an entry in the deposit account of the fighter plane’s producer and a reserve credit at the central bank for the producer’s bank.

In the case of a modern “fiat” sovereign currency, what does the government promise? To “redeem” its currency in tax payment. When the fighter plane producer pays taxes, the keystrokes are reversed: the deposit is debited and the bank’s reserves at the Fed are debited.

Presto-change-O the sovereign currency disappears in redemption.

The fighter plane ends up at the government. That, of course, was the whole purpose of the keystrokes.

Now let’s take Bradford’s example. Instead of keystroking a deposit, the government issues a “tax credit” to be used later in redemption of its tax liability. When tax time comes, the tax credit is sent on to the Treasury (presumably, it will be an electronic entry so little electrons pulse their way to Washington). Presto-change-O the tax credit is gone.

Yep, Brooks has that part right. It is exactly the same thing. The fighter plane is moved to the government.

After all, that’s what it is all about, right? From inception, the purpose of the monetary system is to move resources to the public sphere.

What Brooks gets and Wray misses, however, is that government spending priorities are economically damaging. When resources are moved "to the public sphere" they are utilized to realize political ends rather than "public" ends. That is, they are used to satisfy the demands of special interests who influence lawmakers and regulators.

"Like overgrown weeds, the tangle of tax breaks distorts behavior, clogs the economy and deprives the government of revenue," Brooks explains.

Forget about the revenue part. Otherwise, this is exactly right.

It's a shame that a guy as brilliant as Wray doesn't quite understand that the "public sphere" is nearly always code for private interests expressed through political power.

This gap in understanding is one of the things that has given rise to the post-Modern Monetary Theory movement of Modern Monetary Realism.

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