Modern Monetary Theory’s Big Weekend: The Problem with Surpluses

The Washington Post ran a long and well-wrought article on Modern Monetary Theory over the weekend.

The piece, by Dylan Matthews, starts with Jamie Galbraith’s experience trying to explain to a large audience of economists in the Clinton White House that the budget surpluses the federal government was running was immensely destructive. Or, rather, it starts with those economists laughing at Galbraith’s attempt to explain this.

It was obvious to me way back before I had ever heard of MMT that governments should probably never run a budget surplus—or should do so only in dire emergencies. When the government runs a surplus, that means it is taking more money out of the economy than it is spending back into the economy. It is making us poorer.

Anyone who worries about wasteful government spending should be all the more concerned about government surpluses. When corporations accumulate too much cash, investors rightly worry that management will lose discipline and engage in wasteful acquisitions or expansions. Better to pay it out in a dividend.

Likewise, excess cash flow for the government is an open invitation to waste. It tempts the would-be world improvers to devise new projects through which benevolence can be expressed. Almost always, these new projects will simply be a waste. If they were worth doing, they would have been worth doing without the surplus. Typically, a surplus just turns into an excuse to permanently expand the size of the government, which then adds to budget deficits when tax revenues fall due to economic slumps.

More importantly, even when it isn’t wasted on stupid government projects, the surplus itself is a waste. If it bothers you that the government spends tax money on bridges to nowhere, you should apoplectic when the government takes tax money and spends it on nothing at all. That, of course, is exactly what happens when our federal government taxes more than it spends. The financial assets of the people are simply confiscated.

The only people who I had encountered until recently who understood this last point were libertarians. In “The Mystery of Banking,” Murray Rothbard had written about the stock of money declining “if government retires money out of a budget surplus” and the possibility of a “a budget surplus where the government burned the paper money returning to it in taxes.”

Of course, at the time I assumed that I must be some sort of maniac. Everyone was celebrating the Clinton surpluses as a great economic and political triumph while I was in the stacks of my college library reading dusty books that were leading me to decide the surpluses were unjust and economically destructive. Fortunately, I was young and overconfident and perfectly comfortable with being a maniac.

Another oddity that grew up in my economic thinking at the time—late 1990s—was one that I’ve explored a few times here at NetNet: the bias against debt. For me, it made no sense that many people assumed it was better to fund government spending through taxes rather than debt issuance. Taxes were necessarily coercive; debt purchase was voluntary. It was obvious to me that debt financing was preferable to tax financing.

The idea that taxes counted as the government “living within its means” was as absurd to me as claiming that a burglar lived within his means when spending cash he got from fencing stolen goods. It seemed to me that money that could be borrowed was more “within our means” than money that had to be taken by threat of force and imprisonment.

What’s more, many of the arguments marshaled against government programs seemed wrong-headed to me. The so-called “budget hawks” or “deficit hawks” always built their critiques of government programs on the premise that we couldn’t “afford” them. But this was largely absurd. The real problem with most government programs is that they are socially destructive and diminish our happiness and prosperity. The problem with the government programs wasn't what they cost; it was what they did.

There was one other idea I encountered during that period. Reading the works of Ludwig von Mises, I discovered that when he used the phrase “deficit spending” he was not talking about spending financed by borrowing. He was typically talking about government spending more than it either taxed or borrowed—that is, spending financed by the creation of fiat money. This was the really problematic type of “deficit spending” because of the inflationary consequences it could bring.

Years later I encountered the work of Galbraith and other MMTers. Much of this was thanks to Cullen Roche’s excellent website, Pragmatic Capitalism. Most importantly, probably, I read Warren Mosler’s “Seven Deadly Innocent Frauds of Economic Policy.”

Mosler, who is a former hedge fund manager turned MMT guru and financial backer, argued in his book that we should not grow the size of the government during an economic downturn. We should just have the right size of government to begin with. Government spending might be able to end a recession but it would be preferable to reduce taxes and just run a budget deficit, Mosler argues.

“Even worse is increasing the size of government just because the government might find itself with a surplus. Again, government finances tell us nothing about how large the government should be,” Mosler writes.

This is the type of stuff I can work with, I thought.

Since my first encounters with MMT, I’ve discovered that its adherents tend to be much more optimistic than I am about government programs. In particular, they believe the government could guarantee a job to everyone willing to work without deleterious consequences. Where I suspect that most government spending is socially destructive and economically malfeasant, and nearly all discretionary government spending is thoroughly corrupt, this seems to bother them less. My “right size” of government is far smaller—almost vanishingly small—than theirs. (Here’s Randall Wray, on of the leading MMT academics, arguing that government should spend 30 percent of GDP! Saints preserve us!)

But at least they recognize the destruction wrought by a government that confiscates more money than it needs to spend.

I’ll likely have more to say about the Washington Post piece later today or tomorrow.

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