by Nicholas Diaz
Can a fringe, unorthodox economic theory be the answer to Gen Z’s problems?
Gen Z, the generation born in the late 1990s and early 2000s, is a generation unlike any other. In some respects, it shifts from the traditions of previous generations, but in others, it continues down the path of the millennial generation.
Today, Gen Z faces a myriad of diverse challenges ranging from the economic issues of inflation and national debt to social issues of education and climate change.
Although Gen Z and millennials both express more concern about these issues than previous generations, Gen Z differs from all previous generations in that it is more likely to look toward the role of the government to solve problems. This is true on both sides of the Gen Z political spectrum, as the majority of both Gen Z Republicans and Democrats desire an increased government role in solving problems.
A new economic theory gaining popularity among some Gen Zers might provide a political and economic framework for this generation to solve the problems it believes the government should be fixing. The theory is called Modern Monetary Theory (MMT).
Born around the same time as Gen Z, MMT was first conceived by economist Warren Mosler in the 90s, but it did not gain its popularity until the publication of The Deficit Myth by economist Stephanie Kelton. In The Deficit Myth, Kelton explains,
“MMT takes as its starting point a simple and incontrovertible fact: our national currency, the US dollar, comes from the US government, and it can’t come from anywhere else — at least not legally. Both the US Treasury and its fiscal agent, the Federal Reserve, have the authority to issue the US dollar… the US Constitution grants the federal government the exclusive right to issue the currency. As the Federal Reserve Bank of St. Louis puts it, the US government is ‘the sole manufacturer of dollars’.”
The implication of this is that the federal government is a currency-issuer with monetary sovereignty as it issues its own fiat currency. It has an independency that households and businesses do not as they are currency-users. Whereas households and businesses depend upon earning dollars to spend, the government is the currency-issuer and thus manufactures dollars to spend.
The government, therefore, is not subject to the traditional budget constraints of currency-users. Although this is a simple descriptive observation of the federal government, it is the source of MMT’s critiques of orthodox economic theories and prescriptions for alternative policies.
The MMT conception of the federal government reverses what Kelton refers to as the S(TAB) model of government economics or the earn-before-you-spend model. The common conception of government today is that the government, like a household or business, must earn funds through taxation and borrowing to spend, but the opposite is true.
MMT points out the flaw in this conventional wisdom as it clarifies the role of government as a currency-issuer. It is not that households and businesses fund the currency-issuer but that the currency-issuer funds businesses and households. And since the federal government is monetarily sovereign – not dependent upon a gold standard or external currency – it never faces a problem doing so.
For the federal government to spend, a very simple process occurs that Mosler describes in his book The 7 Deadly Innocent Frauds of Economic Policy.
“Imagine you are expecting your $2,000 Social Security payment to hit your bank account, which already has $3,000 in it. If you are watching your account on the computer screen, you can see how government spends without having anything to spend. Presto! Suddenly your account statement that read $3,000 now reads $5,000. What did the government do to give you that money? It simply changed the number in your bank account from 3,000 to 5,000. It didn’t take a gold coin and hammer it into a computer. All it did was change a number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system. Government spending is all done by data entry on its own spreadsheet called ‘The U.S. dollar monetary system.’
The government does not have to go find money before it spends because it is the creator of currency. Taxation is therefore not a means of funding a strapped-for-cash government, it is just a reduction of the amount of money in the economy after the government has already spent. It is the destruction of money after its creation. As Mosler writes,
“When the U.S. government gets your check, and it’s deposited and ‘clears’, all the government does is change the number in your checking account ‘downward’ as they subtract the amount of your check from your bank balance… The government didn’t actually ‘get’ anything to give to someone else. No gold coin dropped into a bucket at the Fed. They just changed numbers in bank accounts – nothing ‘went’ anywhere.”
This was even recognized by the Former Chair of the Federal Reserve Ben Bernanke. When asked “Is that tax money that the Fed is spending?,” Bernanke replied, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.”
Like taxation, borrowing is not a revenue practice either. When the government spends without taxing, it does not ‘borrow money’ to cover its deficit. As Mosler explains, “When the U.S. government does what’s called ‘borrowing money’, all it does is move funds from checking accounts at the Fed to savings accounts (Treasury securities) at the Fed.” Nothing is gained to be spent by the government as treasury securities are nothing more than savings accounts for currency-users.
If you buy $2,000 worth of Treasury securities, “the Fed reduces the number of dollars that your bank has in its checking account at the Fed by $2,000 and adds $2,000 to your bank’s savings account at the Fed.” When Treasury securities come due, “the Fed merely shifts the dollar balances from the savings accounts (Treasury securities) at the Fed to the appropriate checking accounts at the Fed (reserve accounts).” To pay interest, the Fed simply credits reserve accounts.
Securities are savings accounts for currency-users not sources of revenue for the federal government. It is absurd to even think the government would have to borrow its own currency when it is a currency-issuer. In fact, it is impossible, as L. Randall Wray points out, stating, “If you look at the balance sheets, there is no way that the currency-issuer can borrow its own currency.
The purpose of bond sales is not to cover fiscal deficits but actually to drain excess reserves. This is done so the Fed can hit its overnight interest rate target, as Wray and Mostler concur.
When there are excess reserve positions from fiscal deficits, “overnight interest rates will be bid down by the member banks with excess reserves to the interest rate paid on reserves by the central bank. If the central bank has a positive target for the overnight lending rate, either the central bank must pay interest on reserves or otherwise provide an interest-bearing alternative to non-interest-bearing reserve accounts. This is typically done by offering securities for sale in the open market to drain the excess reserves.”
Because of this description of government borrowing, one of Gen Z’s largest problems has already been solved: the national debt. The $33 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed. This shift in perspective offers Gen Z new possibilities for engaging with the national debt.
The national debt is not a balance that Gen Z and future generations will carry the burden of “paying off” as taxpayers. As clarified earlier, taxpayer dollars and future generations are not involved in debt payment whatsoever. The Fed simply shifts dollar balances from checking accounts to savings accounts and then back to checking accounts. The only actual payment is interest which is credited to checking accounts (reserve accounts) when the Fed adds dollars to the appropriate accounts through the creation of currency via a keyboard at the Fed, not by going somewhere else to earn money.
In addition, the government will never default on this debt. As Former Chair of the Federal Reserve Alan Greenspan explained, investors face “zero probability of default.” As long as the government maintains its status of monetary sovereignty, it cannot default on its debt because the sovereign currency-issuer faces no budget constraint.
However, this excludes the possibility of the government defaulting due to self-imposed constraints. Although the government will never involuntarily default due to lack of funds, it can voluntarily default due to artificial limits such as the debt ceiling. A refusal to raise the debt ceiling limit could trigger a voluntary default, as Kelton explains, but that threat could be avoided if the ceiling was simply discarded. Gen Z has the unique opportunity to enact policies that would disabuse the government of the myths surrounding the national debt that cause ceilings to be imposed.
The MMT perspective shift on the national debt can also transform our view of the debt from an economic evil to an economic opportunity. Kelton writes, “There’s nothing inherently dangerous about offering a safe, interest-bearing way for people to hold dollars.” Gen Z could choose to live with the debt as an investment opportunity that guarantees a return.
Gen Z could also choose to eliminate the national debt and be the first generation to permanently do so. The Federal Reserve can conduct monetary policy and hit its short-term interest rate targets without the need for bond sales, so the national debt is essentially obsolete. There is no problem with leaving excess reserves in the system, so the government could simply phase out the issuance of Treasuries over time and put an end to the national debt. It could also simply decide to pay off the debt tomorrow by simply shifting dollars from checking accounts back to reserve accounts. That would be the most straightforward option and one that is absolutely guaranteed.
MMT also offers new ways of conceptualizing fiscal deficits. As one can detect from the aforementioned economic observations, MMT does not view government deficits as an inherent problem. As Mosler writes, “The federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.”
Since the government faces no budget constraints, deficits are not a fiscal problem. In fact, they are economic opportunities for the private sector. As Kelton explains in the chapter “Their Red Ink is Our Black Ink,” “For every deficit that exists in one part of the economy, there is an equal and opposite surplus in some other part.” Thus, a government deficit is equal to a nongovernment (private sector) surplus.
This lesson which stems from economist Wynne Godley’s sector balance framework also reverses conventional economic wisdom in favor of Gen Z. Generation Z looks to an increased government role in solving problems, but older generations continually promote the narrative that government intervention is a problem. MMT proposes a new narrative that sees deficits as the key to economic growth in the private sector.
The Clinton-era government surplus led to a deficit in the private sector, as the government spent or created fewer dollars than it took in or destroyed. This led to negative economic consequences for Gen Z which actually saw a reduction in savings during its infancy in the 90s. MMT offers Gen Z the opportunity to correct the misunderstandings that cost them economically when they did not have a voice in government.
MMT also offers Gen Z the ability to enact more ambitious policies to address the various social issues it faces. One of these issues is the student debt crisis. One report by Kelton and others explains that student debt dampens household economic activity. Since the federal government does not face budget constraints, it has the ability to eliminate this student debt and thus stimulate the economy. The report finds that the stimulus would be significant, particularly in the first five years, characterized by “greater economic activity as measured by GDP and employment.”
Climate change is another issue that Gen Z must address and one that the generation has been particularly vocal about. “One of the main challenges facing policy makers in the US and around the world,” Kelton writes, “is the transition to sustainable and zero carbon energy production.” This transition must occur soon to avoid the damaging effects of climate change.
Although it is a costly transition, MMT clarifies that the federal government has the ability to finance it. The federal government can always finance more research and development and purchase and distribute more low-emission technologies. Budgets are not an issue stopping us from mitigating the effects of climate change.
However, although the government never faces a budget constraint, it does face a resource constraint. This is the most important insight that MMT has to offer yet also the one that goes most often ignored.
Most critics of MMT argue that MMT proposes a free lunch and does not consider how deficits can cause inflation. This is absolutely not true, as one of MMT’s main areas of concern is the problem of inflation. As Kelton explains,
“[MMT’s] about replacing our current approach, one obsessed with budget outcomes, with one that prioritizes human outcomes while at the same time recognizing and respecting our economy’s real resource constraints.”
Kelton uses the term “real resource constraints” because that’s all inflation is, a resource constraint. Conventional wisdom does not understand this, as, “According to the orthodox lens, when the government spends it is supposed to mechanistically drive inflationary pressures up,” explains Andrés Bernal.
GenZer Leyla Winston who wrote a critique of MMT’s alleged disregard of inflation in the Financial Times fell victim to this myth when she wrote “Regardless of its use, simply printing more and more cash will result in problems.”
Contrary to Winston’s statement, the use of the printed cash is of utmost importance when considering whether spending will result in inflationary problems or not. This is because inflation is an issue of resources.
If, for example, the government decides to use more money on clean energy research and development, it would face no problem paying for the R&D. However, it could face the problem of rising inflation if there are not sufficient resources – researchers, testing facilities, raw materials – available to accommodate that spending.
As Mosler explains, if the government spends when spare capacity exists at current prices, then there will not be inflation. However,
“if additional spending can only be carried out at higher prices, that spending is per se an increase in the price level. Inflation is the result of the government competing with the private sector via the payment of continuously higher prices. If the state can buy resources at the going level of prices, its purchases will be non- inflationary. However, at full employment, if the state wants to shift resources from the private sector to itself, it will need to raise its offer price, which redefines the currency downward."
This observation is crucial to understand because it means that government spending is not inherently inflationary. Spending becomes inflationary at the point of full employment, when the economy is at its maximum capacity and all resources are employed. “Once the economy hits the full employment wall,” Kelton explains, “any additional spending (not just government spending) will be inflationary.”
The main purpose of taxation, then, is to control inflation as taxation is a reduction of money in the economy. However, taxation is only necessary to prevent the economy from passing its internal speed limit of full employment. If government spending does not lead to the full employment of resources, then accompanying taxation is not necessary.
However, this does not provide a solution to the inflation problem Gen Z is currently experiencing. As Bernal explains in “Inflationary Pressures in the Time of COVID-19,”
“Inflationary price pressures did not begin spiking in 2021 due to a financial or accounting imbalance, too much demand or ‘too much money in the economy’, but an imbalance on the resources and infrastructure side of the equation. Mainly, we have seen primarily delays and backlogs in global shipping involving ships, ports, trucks, and trains.”
The inflation crisis Gen Z is facing is largely a result of infrastructural shocks on the supply side of the equation, not the demand side. In fact, “excess demand is rarely the cause of inflation,” as economists Scott Fullwiler, Nathan Tankus, and Rohan Grey explain in “An MMT Response on What Causes Inflation.”
Thus, the solution to inflation will likely involve more government spending, not less, as the federal government should spend more to improve the infrastructure that crumbled under the shock of a global pandemic. While the common understanding of economics prevalent among older generations believes that more spending will simply accelerate inflation, MMT is a theory of the new generation that uncovers new ways of dealing with the economy.
It is because of this reversal of old-generation beliefs that MMT has gained the popularity it has in younger social circles focused on politics and economics. It is a new, unorthodox economic theory that shifts our perspective on the government and the economy and opens the door to a myriad of opportunities to solve the pressing economic and social problems that Gen Z faces. As the title of Chapter 8 in The Deficit Myth suggests, MMT is the path toward “Building an Economy for the People.” This is the economy of the future.