framing mmt — modern money network

8/11/2019 Framing MMT — Modern Money Network

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FramingMMT

L.Randal Wray



Framing MM able of Contents

Table of Contents

1 Introduction

2 Te Conservative Framing

3 Framing the Alternative Approach

4 Te Alternative ax Meme

5 Te Spending Meme

6 Alternative Framing on Inflation

7 Framing Deficits

8 Conclusion

9 Coda

4

8

12

18

23

28

31

34

36



4 5

1Introduction

Istudied with Hyman Minsky in the

early 1980s when he was writing his

1986 book (Stabilizing an Unstable

Economy). Tere are two phrases in that

book that I remember him saying in class:

“Anyone can create money, the problem

lies in getting it accepted”.

“Te need to pay taxes means that people

work and produce in order to get that in

which taxes can be paid”.

Most of my work on money for the first

decade after my PhD studies concerned

the first statement—I was one of those who developed the Endogenous Money

approach most closely associated with Post

Keynesians however it also drew heavily on

the Franco-Italian circuit approach.

Tat is all about the private money system;

government enters through its Central

Bank as the provider of bank reserves. My

first book, “Money and Credit in Capitalist

Economies” went through all of that in

1990, and I’ve continued work in that

area as I examined the causes of the 1980s

Trift Crisis and later the collapse of what

Minsky called Money Manager Capitalism

in 2007.

However, I never forgot the other

point he made: we work hard to get the

government’s money because we have

to pay taxes. Tat led me to Keynes of

the reatise and to Knapp’s Te State

Teory of Money when I was writing my

dissertation in Bologna in 1986.

I included a section on Chartalism or the

State Money Approach in the 1990 book

but it was very brief since I was focusingon the role of money in the private sector.

So in the mid-1990s I returned to the role

of the state, and discovered what I believe

to be the best two articles ever written on

money, by A. Mitchell Innes in 1913 and

1914. Keynes reviewed the first one and

aside from some quibbles he declared it to

be correct.

What struck me is that Innes was able to

integrate both a State Money approach

and a Credit Money approach. o

understand our money, what Keynes called

Modern Money, you must have both.

Otherwise, to borrow a metaphor, you’ve

got Hamlet without the Prince.

A group of us first at the Levy Institute in

NY and then at UMKC, but also including

others, especially Warren Mosler and

Bill Mitchell and Charles Goodhart, dug

deeper into this and gradually developed

what is now called MM.

Many think we claim to have invented

some stand-alone entirely new approach

to money. Tat is false. We stand on the

shoulders of giants (the third phrase I

recall from Minsky)—there is no new

theory in Modern Money Teory; the

theory is an integration, one that integrates

those two phrases f rom Minsky.

What is somewhat novel is an updating

of the description of the way the modern

monetary system works in a country that

issues its own currency. While I ’m sure

there were economists in both the Fed

and the reasury who understood all

the operational details, these were not

understood in academia or policy circles.

Tey mostly still are not.

In any case, I first tried to lay out MM

in my 1998 book, Understanding Modern

Money, and tried again in my most recent

primer, Modern Money Teory.

I sent the manuscript of the first book to

Robert Heilbroner to see if he would write

a blurb. He called me on the phone—I

have no idea how he got my home phone.

In his soothing voice he told me he could

not write the blurb, and that money is the

scariest topic there is. My book would

scare the hell out of readers.

And here we are a decade and a half later.

In the past 2-3 years MM has taken off,

indeed, it has taken on a life of its own in

the blogosphere. It is loved by many and

hated by more. And as Heilbroner warned,it scares the hell out of even more.

Tat is why I’m shifting gears. I don’t think

I can say anything more about MM. It is

as correct as a theory can be, and as good a

description as we can have about real world

monetary operations. At least at this point

in time.

Where we continue to fail is in our

explanation. We have to stop scaring

people. I’ve become ever more convinced

that George Lakoff is correct. Te problem

is not with the theory–it is with the

framing.

Te reaction against MM is largely

moral.

Tat is not a back-handed slap at critics.

Everything you understand is through

framing, as Lakoff argues. You cannot

understand without metaphors; you cannot

think without stories; you cannot do policy

analysis without morality.

Let me give you an example. Outside

1 Introduction



6 7

of the crazies, everyone knows the US

government cannot run out of money.

From Greenspan to Bernanke they all

understand there is zero risk of involuntary

default by the sovereign issuer of a

currency.

And so the way that an MMer

approaches the current deficit hysteria

is by pointing out that as the Federal

government spends through keystrokes

that credit bank accounts, it can affordanything for sale in dollars.

Te reaction typically goes through four

stages:

1. Incredulity: Tat’s Crazy!

2. Fear: Zimbabwe! Weimar!

3. Moral Indignation: You’d destroy our

economy!

4. Anger: You’re a Dirty Pinko Commie

Fascist!

And those are our Post Keynesian/Heterodox friends. Te reaction of others

is far more hostile.

Rather than winning the debate about

unsustainability of debt and deficits, MM

loses the argument. How can that be?

Because it’s immoral for the government to

spend through the stroke of a key.

It makes no difference how accurately

MM explains the monetary operations

that allow government to spend—

operations that begin with budgeting by

Congress, and then that involve complex

procedures adopted by the reasury, the

Fed, and special private banks to ensure

the reasury has sufficient deposits in its

account at the Fed so that finally some

firm or household gets a credit to its bank

account.

MM will lose the argument by preciselypresenting the facts. Because one can see

facts only through framing. Without the

proper framing, MM cannot win policy

debates.

Tis series will explore alternative framing.

We cannot adopt the conservative,

textbook framing that automatically

invokes a particular market metaphor,

one based on “fair exchange”. From

that vantage point, there’s nothing fair

about government getting something for

nothing—for mere keystrokes.

Instincts prefer the “taxes pay for things”

metaphor: I paid into the Social Security

rust Fund, so now I get to draw down

my balance there in my retirement. It

makes no difference that this description

is completely wrong no matter what angle

of approach you take. It trumps. And so

we get self-identified progressives fighting

tooth and nail against payroll tax holidays

even though they completely understand

the tax is regressive and that maintaining

the myth means tax rates must be raised to

become ever more regressive in the future–

which makes money’s worth calculations

ever worse. Progressives will destroy the

program rather than abandon the myth.

We need a new meme for money. Te

meme cannot begin from markets, from

free exchange, from individual choice.

We need a social metaphor, a public

interest alternative to the private

maximization calculus. We need to focus

on the positive role played by government,

and its use of money to serve us well.

1 Introduction1 Introduction



8 9

2The Conservative Frame

2 Te Conservative Frame

W e all know the usual approach

to money, that begins with a

fantasized story about bar ter, the search for

an efficient medium of exchange, the role

of the goldsmith, and then on to the gold

standard, the deposit multiplier, fiat money,

and monetary neutrality—at least in the

long run.[1] It provides a perspective

on the nature of money, on the primary

functions of money, and on rules for

proper monetary management. It frames

all mainstream discussions of money—

whether by economists, by policymakers

and by the population at la rge. Tat

framing is also largely consistent with the

conventional view of the economy and

of society more generally. o put it the

way that economists usually do, money

“lubricates” the market mechanism—a

good thing because the conventional view

of the market, itself, is overwhelmingly

positive. Te market “meme” frames our

view of the economy and society, too—

the market is the place we go to exercise

choice, to assert our individuality, to

catch and bring home prey to the adoring

family. Te king of the market, of course

is the highly vaunted, entrepreneurial

small businessman (gender specific) who

provisions society with useful work as

well as consumption goods and services.

Each productive member of society is

appropriately rewarded with money which

preserves the freedom to choose how to

apportion his claim on output in a manner

consistent with preferences. Te biggest

potential threat to efficient allocation

of scarce resources among competing

unlimited wants comes from government’s

exercise of control over money—first by

replacing natural, intrinsically valuable,

commodity money with fiat money,

second by taking away people’s hard-

earned money through taxes, and third

by profligate government’s uncontrollable

urge to inflate away money’s value.

It is a beautiful meme, entirely consistent

with the individualistic sentiment that

has dominated public discussion since

Margaret Tatcher asserted that there is

no such thing as society. Government’s

destructive impulses must be constrained

by strict rules—balanced budgets, debt

limits, and especially an independent

father-figure central banker who keeps

tight control over the purse strings. Voters

must insist on frugality, and can enforce

it through tax cuts to “starve the beast”.

Wasteful spending—which includes

almost all government spending—must be

reigned-in to allow the market to allocate

scarce resources to more productive,

private, use.

We need an alternative meme, one that

provides a frame that is consistent with a

progressive social view.

o be sure, in my view the conventional

story is wrong—it is inconsistent with the

findings of historians, anthropologists,

legal scholars, sociologists, and political

scientists.[2] I’d prefer a meme that is

more consistent with these findings.

However, I also know from experience

that “truth” doesn’t automatically trump

myth. George Lakoff has brilliantly

explained how our minds work, using

metaphors—memes—to understand the

world.[3] Tis is especially true the more

abstract the concept under examination.

Economics uses highly abstract concepts

and reasoning: “economy”, “market”,

“equilibrium”, “productivity”, “supply and

demand”, and, especially, “money”. Simple

stories—Crusoe and Friday agreeing to

use seashells as a medium of exchange—

simplify difficult concepts and also draw

attention to the lesson the speaker wishes

to teach. Te “story of money” outlined

above provides the proper framing for the

conservative’s lesson. Money simplifies life

for Crusoe and Friday. More importantly,

the story diverts attention away from

inconvenient topics: Crusoe and Friday

come together as equals, of their own

free will to engage in mutually beneficial

exchanges, in a “free” market only

lubricated by money—not as conqueror

and subject. While the simplistic story

adopted by economists is inconsistent with

historical “facts”, it is not difficult to adapt

the story to bring it in line with many

of the findings of historians (who, after

all, generally do adopt the conservative

framing).

As Jack Balin argues, memes serve as

the basis of stories, networks of cultural

associations, metaphoric and metonymic

models, and other mental structures.[4]

Memes are self-replicating, sort of like a

virus. Since we think through metaphors,

according to Lakoff, as the virus spreads

through the population, the meme controlsthe way we think about a topic.

Conservative memes dominate all

discussion about the economic sphere.

Te market is “free”; the government

“intervenes”. Consumers “choose”;

government “regulates”. Trough judicious

framing, the conservatives have won all

the important economic debates of our

times. Deficits crowd out, cause inflation,

and bankrupt our nation. We’ve run out of



10 11

money. Government is the problem. axes

and regulations destroy initiative. Small

business creates jobs and government

destroys them. Yet, in every case the

conservative claims are demonstrably false.

But it does not matter. Tey’ve got the

better framing, the better money memes.

In most cases, the progressives adopt

the conservative framing and so have no

chance. For example, take the current

debate about government budget deficits which progressives propose to reduce

by raising taxes on the rich to “pay for”

government spending. Without knowing

anything about government or budgeting,

the listener knows a) deficits are bad—

somehow government is “deficient”;

and b) the progressive solution relies on

more taxes—and no one likes taxes. Te

conservative framing—government spends

too much–has a much more appealing

solution: reduce government waste. It

addresses the problem more directly, and in

a morally superior manner. Lakoff explains

why conservatives always win:

“Tey understand the importance of

morally-based framing, the importance

of language, the importance of repeating

language, the importance of not using the

opposition’s language, and the importance

of an extensive communication system

that operates daily everywhere…

Everything you understand is a

matter of framing. And what counts

as a fact depends on the frame used in

understanding.”

Hence, it is not so much the accuracy of

the conventional view of money that we

need to question, but rather the framing.

We need a new meme for money.

Tat meme would emphasize the social,

not the individual. It would focus on the

positive role played by the state not only

in the creation and evolution of money,

but also in ensuring social control over

money. It would explain how money helps

to promote a positive relation betweencitizens and the state, simultaneously

promoting shared values such as liberty,

democracy, and responsibility. It would

explain why social control over money

can promote nurturing (“parental bent ”

as Veblen called it) activities over the

destructive impulses of our “undertakers”

(Smith’s evocative term for capitalists).

According to Lakoff, there are two

competing views of the parent: the

strict father figure who constrains and

punishes versus the nurturing parents;

most individuals simultaneously hold

both views—but the conservative viewsabout the dominant father who needs

to discipline the kids is most prominent

in political discussion. Adults, of course,

want to escape the strict father represented

by government, and so want to limit its

power. Conservatives emphasize that we

need to “get government off our backs”. In

Lakoff ’s terminology, progressives need to

emphasize the nurturing characteristics of

the state—the mother and father working

together in the interest of the “family”,

rather than the stern, punishing, “strict

father model” with rules and constraints.

With respect to money, the conservatives

emphasize “fiscal discipline” and “inflation

targets” enforced by our Father Chairman

who art at the controls of the Central

Bank. Progressives can win this debate

only by taking a higher moral stance,

emphasizing the nurturing role that can be

played by our government working with

our monetary system to support us, to help

us to achieve more, and to make us better

people.

[1] See L. Randall Wray, Modern Money Theory: A primer on macroeconomics for sovereign monetary

systems, Palgrave Macmillan, Basingstoke, 2012 for a discussion of the orthodox approach and for the

alternative presented here.

[2] The best place to start for a sociological approach to money is with Geoffrey Ingham, The Nature of

Money, Cambridge: Polity Press, Ltd, 2004. See also Wray (editor), Credit a nd State Theories of Money: the

contributions of A. Mitchell I nnes, Cheltenham, Edward Elgar, 2004 for a number of contributions that

counter the story told by economists.

[3] George Lakoff, Don’t Think of an Elephant: Know Your Values and Frame the Debate, Chelsea Green

Publishing, 2004.

[4] See http://en.wikipedia.org/wiki/Meme, and Jack Balin, Cultural Software: A Theory of Ideology, Yale

University Press, 1998.

2 Te Conservative Frame 2 Te Conservative Frame



12 13

3Framing the Alternative Approach

3 Framing the Alternative Approach

In Chapter 2 we looked at the

mainstream framing of discussion

about money and about the economy and

society more generally. Following Lakoff,

my argument is that framing is important

and that so far orthodoxy is winning all

of the important policy debates because

it has the better f raming. Policy is always

and everywhere a moral issue—not merely

an economic issue and certainly not a

technical issue. o win policy debates, we

must—like orthodoxy—engage the moral

issues. We can take the higher moral

ground.

(Tanks for all the comments; I have just

returned from Finland. I’ll get around to

a few responses to comments tomorrow.

A bit shout-out to the 300 who attended

an MM-infused conference on full

employment policy in Helsinki to listen

to my presentation! Little did I know that

Finland is a bastion of MMers.)

Te approach that I take is the Modern

Money Teory (MM) approach. In the

discussion that follows, I will presume

that readers have a working understanding

of MM.[1] It goes without saying

that I believe MM provides a correct

description of the operation of modern

monetary systems, so it makes sense

to base our alternative meme on the

correct approach to money. However, this

particular post is not so much concerned

with a correct theory, but rather with

developing a progressive meme for

money—a story of money’s origins, nature,

functions, and operations that can serve as

an alternative to the orthodox story briefly

presented last time.

Tere are several approaches to the

history of money that are consistent with

the alternative meme. I prefer the one

I adapted from the great Cambridge

numismologist Philip Grierson, who

located money’s origins in the ancient

practice of Wergild.[2] I find that story to

be most consistent with what I understand

about tribal society—but, again, what is

important is the frame.

According to Grierson, money evolved

as unit of account used to measure

debts for the purpose of paying fines in

compensation. Tis is inherently a social

story, not an individualistic story. Te

purpose of the payment was social: to

prevent blood feuds and to maintain social

cohesion. Further, the fees were established

by agreement in social assemblies, socially

imposed, and payment was collectively

enforced. Tere was no “higgling and

haggling”, no “market exchange”, no

thought to individual “efficiency”.

Further, the story begins with a debt—

not a voluntary transaction between

equals to satisfy personal preferences,

but with a wronged party who demands

compensation or else retribution will

be taken. With the imposition of a fine,

the social assembly turns the tables:

the perpetrator becomes the debtor,

the victim is the creditor. Te debtor is

finally “redeemed” by the payment of the

fine. With that, the slate is wiped clean,

restoring equality and social cohesion.

With that framing, money is not

something that intermediates trade

between self-interested globules of desire,

but rather is part of an institutionalized

practice designed to further the interests of

the community—maintaining peace and

justice.

o be sure, we do not know exactly how

payment of fines “in-kind” (there was a

specific payment to be made depending

on infraction: a pig for this, a bushel of

wheat for that; note also that the practice

of paying “bride-price” to the family losing

a female to marriage is also an example of a

wergild “fine”) to harmed individuals were

transformed into payments of money to

the authorities (fines, fees, and later taxes).

Again, there are alternative stories. My

favorite is that with the transformation

from tribal society to a “civilized”

command society, the authorities wereable to first obtain a share of the fines paid

and later to transform transgressions into

“crimes against the crown” (later, against

society) rather than against identifiable

victims. It then made sense to establish

a measuring unit (the money unit) to

measure the fine and to value the things

delivered in payment, and later to actually

issue the means of paying the fine–a

money “thing”, currency, to be used in

paying fines.

Note that this reverses the orthodox

sequence: first liabilities, then a money

unit, then a money “thing”, and finallymoney prices and markets based on sales

for money. Why did markets develop? Not

to barter what you have but don’t want, but

rather to obtain the means of debt (tax)

settlement.

And while the “creation of money”

as a means to move resources to the

authority (in payment of fines, fees,

tithes, and then taxes) was not initially

a progressive development, with the rise



14 15

of the democratic state the monetary

system could be used to further the public

purpose—including promoting peace and

justice.

Of course, even the modern state also uses

the monetary system to pursue war and

conquest, and as well private interest that

runs counter to the public interest. But for

reasons we will discuss, use of money is—

on the whole—a progressive development

that supports economic activity in thepublic interest, in spite of the danger

(often a reality) that money can be used in

inimical ways.

In truth, the same can be said of the

development of democracy.

What is important for our argument here

is that we need to change the focus—

away from money as cost-minimizing

medium of exchange and to money as

an institution, as Geoff Ingham has long

argued (echoing the work of Dudley

Dillard[3]). And leaving to the side all the

ancient history and speculation on money ’s

origins and evolution, it is clear that our

modern monetary system arose with the

development of capitalism and the rise

of the modern state. Tat is to say, the

capitalist state.

In that respect, all the stories about

barter are irrelevant for two reasons. First,

production for “the market” bears no

resemblance to hypothesized production

for barter. Capitalist production begins

with money, to produce commodities for

sale, to realize “more money” (as Marx,

Veblen and Keynes all insisted). Capitalists

do not produce with a view to exchange for

other commodities—they want money and

if they do not get it, the production was a

failure. And hence, there must be a credit

system to supply the production process

with the money it needs to start and to

ensure that purchasers have the money

(indeed, the “more money”) that validates

capitalist production.

Second, in almost every case, the money

of account is a state money of account—

chosen by the state and sometimes backed

by legal tender laws, but always backed

by a tax system. Indeed, it could be said

that currency issued by the government

is “the means of tax settlement”. (oday,

we should include central bank supplied

reserves in the definition of currency—that

is, high powered money, HPM—since

taxes are paid for customers by banks

whose reserves are debited.) Previous to

the European Monetary Union, exceptions

to what Charles Goodhart called the

“one currency, one nation” rule were rare,usually limited to small states closely

connected to another, or to currency board

arrangements. And when a new nation was

formed (usually by breaking up a nation),

one of its first acts would be to create a

new currency.[4]

So, modern moneys are “state moneys”.

Te alternative frame must therefore

stress this dual link between money and

capitalism and between money and the

(capitalist) state—as Ingham insists. Te

Crusoe-Friday meme is not useful either

for understanding the way our system

works, or for framing our discussion about

how to use money to further the public

and private interests.

o that end, we need to begin with the

state and its money, that is, with the state

and its treasury and central bank at the

center of our monetary system.

On one level, that monetary system is a set

of credits and debits: I Owe You’s and You

Owe Me’s. One of our memes is: “money is

what we owe each other”; or: “money is the

tie that binds”.

Tese IOUs are recorded on balance

sheets, with banks handling much of the

record keeping. At the aggregate level, all

the IOUs must cancel—there are always

two entries, a debit on one account and a

credit on another—but that takes away all

the fun, all the action, all the power.

If I strike you, you are struck by me and

so the two cancel but that does not mean

there is no impact.

Te credits/debits necessarily represent a

social relation—the creditor and debtor

are related in a social bond. While we

normally think it is better to be a creditor

than a debtor, throughout history both

parties have always been thought to be

tainted by this rela tionship. In any case, it

is unavoidable in a society in which much

of the economy is organized through and

oriented toward the monetary system—

which itself consists of layer upon layer of

debits and credits.

While we can imagine a Crusoe-Friday

barter economy, it excludes by assumption

these credits and debits and the social

relationship of creditor to debtor. Even if

Crusoe and Friday decide to use seashells

as a “money” medium of exchange there

is no social relationship, no creditor, nodebtor—just an impersonal relation with

the commodity for which one traded. Te

seashell “money” is asocial—as befitting

a theory that denies the very existence of

society.

Note also that in the currently fashionable

economic models that use a “representative

agent” (ie: Real Business Cycle and

Dynamic Stochastic General Equilibrium

models) the debits and credits would be

silly—you owe yourself—which is precisely

why there’s no room for money, whether it

is social or not.

Our alternative approach needs the debts,

the power of creditor over debtor, and the

threat of bankruptcy. It also needs the state

in the center. We’ve already mentioned

the state’s choice of the monetary unit. It

is difficult to perceive how the haggling

of a number of self-interested individuals

bartering a reasonably large number

of items could ever settle on a single

measuring unit.

In any case, it is rather clear that today,

3 Framing the Alternative Approach3 Framing the Alternative Approach



16 17

at least, it really is the state that chooses

the unit, taxes in the unit, and issues the

currency denominated in that unit (again,

we recognize the caveat that there are

a few minor exceptions plus one major

exception in which EMU member states

chose to adopt a common unit and chose

to constrain currency issue through self-

imposed rules).

So while we can imagine a creditary

system without the state at the center,it wouldn’t be our capitalist system with

the “bourgeois” state (or democratic state,

depending on one’s ideological orientation)

pursuing the interests of the dominant

capitalist class (or the public purpose

depending on one’s political persuasion).

We could also imagine the capitalist state

functioning without money, with only

the private sectors keeping accounts in a

mutually approved unit of account on the

books of private banks. Rather than using

money to move resources to itself, the state

could use force to take what it wanted—

from workers and capitalists. Tis wouldbe a sort of command state economy

operating outside the capitalist monetary

system (perhaps a feudal system but with a

modern state).

As Warren Mosler always jokes, in the old

days you’d go to the pub for some drinks

and wake up in the crown’s navy with a

big bump on the head. From this view, the

use by the state of the monetary system

to exercise claims on resources is a big

improvement as one can choose to sell or

to withhold labor and other resources from

the state’s use. Join the navy if you want,

but drink freely in the pub tonight without

worry that you’ll be in uniform tomorrow.

o be sure, however, this development of

the monetary system to be used for both

production and allocation is not without

negative aspects. It is difficult to conceive

how organized prostitution as well as illicit

drug “markets” could have reached theircurrent level of development in the absence

of the monetary system. (While one could

imagine some one-off “sex for coke” barter,

sophisticated and violent long-distance

trade based on complex production chains

would be difficult to organize without

money.)

As much of the “trade” in sex and drugs

runs across national borders, it is unlikely

that it would have been possible without

well-organized currency exchanges

and especially the international reserve

currency in which illegal activities are

priced. I’m sure the drug cartels thankUncle Sam for providing the almighty

dollar to lubricate their trade.

Still, on balance, the development of

the monetary system must be beneficial.

Government purchases what it needs and

imposes liabilities (mostly taxes and fees

today, not fines) to ensure a demand for

its currency. In that sense we say “taxes

drive money”. While taxes are largely an

involuntary liability, sales to government

are largely voluntary. Exactly what one

does to obtain the means of paying taxes

(“money”, although technically taxes are

paid using HPM, with payment handled

by private banks) is at least in part

discretionary.

But, as they say, only death and taxes are

unavoidable. Most people have to sell

something to get the means of paying

taxes.

1] Those who do not can read my new book, Modern Money Theory, cited above. Unless otherwise noted,

references to support arguments made here, as well as citations to literature mentioned, can be found in

that book.)

[2] See Philip Grierson, The Origins of Money, London: The Athlone Press, 1977; also see L. Randall

Wray, Understanding Modern Money: The key to full employment and price stability, Edward Elgar,Cheltenham 1998.

[3] See for example Dudley Dillard, “A monetary theory of production: Keynes and the institutionalists”,

Journal of Economic Issues, 14:255-273, 1980.

[4] Charles Goodhart, “Two concepts of money: Implications for the analysis of optimal currency areas”,

European Journal of Political Economy, 14:407-432, 1998.

3 Framing the Alternative Approach3 Framing the Alternative Approach



18 19

4The Alternative Tax Meme


Let us continue to develop an

alternative frame for money. As you

know, MM says that “taxes drive money”.

Let’s develop that further.

According to the orthodox meme, taxes are

bad—the far right views them as outright

theft—so the lower they are, the better.

Most view taxes as necessary to “pay for”

government spending, but again since in

the conservative framing, government

does next to nothing that is useful this

represents a redistribution f rom productive,

private, use to public waste. Hence, again,

it is best to keep taxes as low as possible to

“starve the beast” and to keep the pr ivate

sector humming along.

Yet, from the state money view, the

monetary system that we’ve actually

inherited is a state money system. And

from that framing, the most important

purpose of taxes is to create a demand

for the state’s money (specifically, for its

currency). Further, as we’l l see, the state

really does not need tax revenue to spend

and in fact really cannot spend tax revenue.

Our meme: taxes create a demand for the

currency, ensuring willing sellers of goods

and services for money.

axes serve two other important purposes,

too. Tey can be used to regulate

demand—by increasing costs and reducing

net income. Tis is especially important

as the economy reaches full employment;

if the government continues to increase

its resource intake it will drive up prices

unless it reduces nongovernment use of

resources. And sin taxes are used to reduce

socially undesirable behavior (or tax credits

are used to reward good behavior).

Another use of taxes is to prevent

accumulation of wealth over generations—

the so-called “death tax”—although it

is doubtful that in practice inheritance

taxes are very effective (at least in the

US where tax rates have fallen and most

wealth is excluded thanks to exemptions,

evasion, and legally-sanctioned avoidance).

However, Jamie Galbraith has argued

that inheritance taxes do drive charitable

contributions—including university

endowments—which supports a large non-

profit sector serving the public interest

alongside government. So, to some degree,

inheritance taxes can be used to drive

resources to the charities.

So in addition to driving money, taxes can

be used to further the public purpose.

We can examine in some detail three

examples of use of taxes to further the

public purpose: favorable tax treatmentof mortgage interest, tax advantaged

saving, and payroll taxes to “finance” social

security.

All of these have unintended and perhaps

undesired consequences, and may not

actually be in the public interest. Te

mortgage interest deduction is widely

believed to increase house prices. By

lowering net after tax monthly payments,

it allows owners to take on more debt and

thereby pay higher prices. Te deduction

might also increase the demand for

housing, which if supply constrained

also pushes up prices. Home ownership

is also believed to be socially beneficial

(promoting stable communities and

providing a secure asset against which

families can borrow to finance education,

or expensive healthcare). However, once

home ownership is widely established as

a nearly universal goal of households in

a nation, it probably does not require a

tax advantage—which may be more than

offset by higher real estate prices, anyway.

Tere is also the question about equity

since homeownership and the benefits of

the deduction are skewed to higher income

families. For these reasons, it is not clear

that the deduction is in the public interest.

Favorable tax treatment of saving—

whether in individual retirement accounts

or in pension funds—increases individual

desire to save. However, as we know from

Keynes that leads to the paradox of thrift:

increased propensity to save reduces

aggregate demand and thus income so thatsaving actually does not increase. While

thrift is a private virtue, it is a public vice.

Nor is it even possible to provision for

future retirement through financial

means—as J. Fagg Foster (following

Keynes) put it so clearly.[1] Financial

saving cannot transfer aggregate

purchasing power from the present to the

future. Te financial “sinking fund” can

actually make it more difficult to provision

in the future, by depressing demand and

thus investment in capacity today. Only

investment, today, in productive capacity

can actually help to provision for thefuture.

And, as Keynes insisted, saving does not

“finance” investment—indeed it is better

to see investment as “financing” saving

in the sense that the income to be saved

is generated by the investment spending.

Again, Foster’s take on this is informative:

saving is the pecuniary accounting of the

investment. It looks like this is another

poorly designed feature of the tax system.



20 21

With that in mind, let us look at the third

example: imposing payroll taxes to “pay

for” social security retirement. While the

US Social Security program began as

“paygo” (revenues set to more or less match

benefit payments through time), after 1983

it became “advanced funded” with taxes set

high enough to accumulate a “trust fund”

(sinking fund) to be drawn down in the

future. We won’t go into all the problems

here, but let us focus on three topics: the

undesired consequences of taxing wages

and salaries, the accumulation of trust

funds, and the belief that taxes “pay for”

benefits.

Te US payroll tax as designed is flat up

to a base income after which it drops

to zero. Hence overall it is a regressive

tax. It is applied only to income derived

from work, and taxes both employees and

employers. Hence, as supply siders would

say, it drives a “wedge” between the cost of

labor and take home pay. It reduces both

the incentive to work and to hire labor. o

the degree that this actually does reduce

employment and output, the payroll taxmakes it harder to provision for retirees in

real terms—both today and into the future

if investment is thereby reduced.

In spite of what my teenage son thinks,

work is not a sin that we want to reduce,

so why tax it? Obviously, reduced

employment is counter-productive to the

purposes of the social security program—

supporting retirees with real goods

and services. For the reasons discussed

previously, a sinking fund makes this even

worse. So accumulation of a trust fund

not only cannot add to “national savings”

that can be drawn down in the future to

support aged persons, but it might even

reduce national saving through the paradox

of thrift’s effects on investment.

And finally we turn to the main

conventional “tax meme”, the notion that

taxes are needed to “pay for” government

provision of services and “entitlements” likeSocial Security. Tis meme is adopted by

both conservatives and liberals, but it suits

only the purposes of the conservatives. It is

a disaster for progressives. And it is wrong.

Conservatives have used this meme to

great advantage since the early 1970s, as

they successfully changed the framing

of taxes from “the price we pay for

civilization” to something closer to “fee for

service” payments to government made by

“stakeholders”. Tis was important in the

US for the “devolution of government”

in which primary responsibility for many

government services was moved from thefederal to state and local governments. (In

the US, since 1960 the federal government

has not grown relative to GDP, while state

and local governments grew rapidly until

around 1980, to become approximately

two-thirds the size of federal

government—reflecting the devolution

trend.)[2]

In many cases, these extra responsibilities

were imposed on state and local

governments without federal funding—

“unfunded mandates”. Tat necessitated

local tax increases that were sold on the

basis that they would pay for enhanced

services—which were typically targeted to

middle class homeowners.

And that promoted the view that taxes are

paid in exchange for government-provided

services, some of which are targeted to the

“stakeholders” (suburban homeowners)

who paid the taxes.

At the same time, social welfare

“entitlement” spending grew (some due

to “unfunded mandates”). Aided and

abetted by Daniel Patrick Moynihan’s

“culture of poverty” thesis, the taxpaying

stakeholders grew increasingly angry that

“their” taxes were being used to pay welfare

to the “undeserving”. Problems were

compounded by white flight from cities to

suburbs and from public to private school.

Parents of children in private schools

objected to “their” taxes going to support

public schools attended by the children

of “others” (often of other racial or ethnicbackgrounds).

Candidate Romney’s candid dismissal

of the “47% who don’t pay taxes” reflects

the orthodox tax meme: “those” people

are not worthy of our attention because

they are not stakeholders in our society.

[3] President Reagan successfully framed

the social safety net as supporting “welfare

moms driving Cadillacs”, while President

Clinton “ended welfare as we know it” by

setting lifetime limits on support for poor

families with children in order to wean

them from the public teats.

Te point is this: if taxes are seen to “pay

for” government, then the stakeholders

who pay more ought to get more from

government. Progressives cannot win

within this frame.

Everyone knows what “pay for” means—

we all go to the shopping mall, and we

pull out our wallets to “pay for” the Guccihandbag. You do not grab the bag and look

around for someone else to pay. “Hey bro’,

I’m a bit short today; can you spare a few

hundred to buy this for me?”

No, if you cannot afford the Gucci you buy

the Wal-Mart store brand made in China.

It does little good to argue that those who

can “afford” to pay taxes ought to do so for

the benefit of those who need welfare. Tat

is what the charity meme is for. Of course

we all ought to give to charity—from each

according to ability to each according to

need. If the tax system comes down to

charitable contributions, then it should

be based on voluntary contributions.

Good luck with that! Te mixing of these

memes will at best lead to confusion,

but more predictably it will lead to tax

revolt and social spending cuts. (Ex post

predictions are relatively easy to make—

that is precisely what happened a fter 1980.

Liberals are still struggling to come up

with a response.) We need new tax and

spending frames.

4 Te Alternative ax Meme 4 Te Alternative ax Meme



22 23


[1] J. Fagg Foster, “The Reality of the Present and the Challenge of the Future”, Journal of Economic Issues,

15(4), December p. 963, 1981

[2] See L. Randall Wray, “The Ownership Society: Social Security is only the Beginning”, Public Policy Brief 82,

August 2005 (www.levy.org).

[3] In fact, Romney was actually overly generous—it is pretty easy to make the case that a much higher

percent of Americans are “deadbeats” when it comes to paying federal income taxes—their incomes are

too low–although payroll taxes hit virtually all who work. The bottom 90% of the population contributes

an insignificant proportion of federal income tax revenue.

http://neweconomicperspectives.org/2012/09/romney-the-little-people-dont-pay-taxes.

html#more-3356

5A Spending Meme

Let me repeat and clarify my purpose in

this series. I am attempting to initiate

a discussion among progressives on how to

frame discussions about money and related

issues. My perspective is MM. o be

sure, on one level MM is a description.

It provides a correct description of the

operation of a sovereign currency system.

Some commentators have objected to my

progressive framing; they assert that one

can accept MM without the progressive

bias. Sure they can. One can understand

how money “works” but prefer NO to use

money in the public interest.

Science is necessarily a progressive

endeavor. Or, as Stephen Colbert puts

it, reality has a well-known liberal b ias.

Of course it does. From global warming

to the problems of unemployment, the

liberal perspective is based in reality, while

the conservative view necessarily denies

science.

But one can accept the MM description

and still pursue a reactionary policy

agenda. Te conservative is willing to

take the “technology” of a modern money

system to use it against the public purpose.

echnology can be used in highly anti-

progressive ways. ear gas to put down civil

rights demonstrators. Nuclear weapons to

vaporize humans. Concentration camps

and gas chambers.

Science, however, is progressive.

Paul Samuelson said that we need

the “old time religion”, the magic, the

mysticism, the outright lies about the

way money works in order to dupe the

population. Tis is a fundamentally anti-

progressive position. It is based on a fearthat democracy might lead down the

wrong road, and so our anointed “leaders”

need to obfuscate the truth in order to

confuse the population. As I discussed, the

belief that payroll taxes “pay for” Social

Security benefits, and that paying taxes

justifies one’s receipt of benefits, is a good

example of the fear of democracy to which

Samuelson was referring.



24 25

Policy must go beyond description. It

must deal with “ought”. As Lakoff says,

that necessarily brings up moralit y. All

policy and all politics involve morals.

Progressives can take the moral high

ground—they are on the right side of

science. Unfortunately, they have (mostly)

adopted the conservative framing—which

is morally inferior, and is not consistent

with the progressivepolicy agenda.

Te purpose of this series is to develop aprogressive meme for money. I have no

desire to provide advice to conservatives.

First, they’ve already got the meme—the

dominant framing of money. As I said,

they tie money to “free markets” and all

the other hot-button conservative f rames.

Second, I’ve got no desire to help them.

Tey are winning, without my help.

Progressives need a new meme for money.

Tis series is addressed to them.

Alternative Spending Meme

At the level of the national government,

taxes don’t pay for nothing. As discussed,they serve three purposes: they drive

money, they prevent excess demand, and

they influence choice. All of these are

within the proper purview of public policy;

all have substantial social benefits. We need

to stress these, and discard the conservative

tax meme that taxes pay for government.

Now, at the local and state (or provincial)

level, government is a “user” of the

currency, not an issuer. It needs an income,

including tax revenue, bond sales, and

federal government “transfers” (or “block

grants”). Tat is true.

As discussed, promotion of the stakeholder

view is a slippery slope, but for some

government services it may not be too

dangerous: police and fire services, garbage

collection, toll highways, and so on, where

benefits are fairly easy to see and are widely

shared. But the conservatives brilliantly

took advantage of the devolution ofgovernment in the area of social services.

As the federal government underfunded

social services in the face of growing

inequality and an aging population, the

burden on state and local government

increased. Te “welfare queen” framing of

the social safety net pitted stake-holding

taxpayers against undeserving loafers

demanding “entitlements”. Hence, welfare

was ended by Clinton—just as it took a

Republican to initiate détente with China,

it took a Democrat to end a half century of

safety nets for the poor.

Te biggest loser, however, was SocialSecurity. It had long been sold as an

insurance scheme: workers “pay in” to a

fund that they draw down on retirement,

with benefits linked (somewhat loosely)

to earnings. Tat made it easy to produce

“money’s worth” calculations and as well

to estimate the program’s “solvency” over

periods up to 75 years!

For the first half century of the program’s

existence, money’s worth was good for

most workers as the payroll tax rate

was low due to the relatively young

demographics of the American workforce.

Over time, tax rates rose in part due to

slower economic growth and in part due

to changing demographics. At the same

time, the program’s long-run “solvency”

came into question—leading to the

transformation mentioned earlier from

“paygo” to “advanced funding”.

In truth, Social Security was never aninsurance plan, but rather an “assurance”:

you work today to support yourself as well

as seniors, and when you retire the workers

of the future wil l take care of you. Really,

there is no other way, since as we discussed

above there is no way to financially

provision for the future at the aggregate

level. omorrow’s consumption will come

out of tomorrow’s production.

But here’s the problem: liberals and

progressives bought the conservative

meme. Tey believe that the conservative

tax framing protects Social Security: “I

paid into the rust Fund through my taxes,so I deserve retirement benefits”. With that

framing, Social Security is doomed. On

narrow “money’s worth” calculations, Social

Security is already a bad deal for many

middle class workers, and it has always

been a bad deal for high income workers

(who don’t want the insurance, anyway).

And it means that those whose work

lives and pay for work were substandard

do not “deserve” decent lives in old age.

Tey’ve got to dumpster dive and eat tins

of dog food because they do not measure

up, in terms of their own tax payments.

Tey didn’t “pay in” so they do not deserve

benefits. As long term unemployment rises,

as labor force participation of men falls,

as wages stagnate for most workers, as the

wage share of national income continues

to fall, the problems with this conservative

meme are compounded. Te elderly of the

future will not “deserve” decent retirements.

Te program will go broke.

All the conservative scare tactics work

and are at least grounded in some truth if

one accepts the meme that taxes pay for

benefits: tax rates will have to rise, benefits

will have to be cut, and retirement ages

increased to maintain program solvency;

Social Security won’t be “there” for today’s

young workers, who would be better off

taking their money elsewhere.

Te best that “progressives” can do is to

say that the future tax revenue shortfall is

“only” 25% of promised benefits—which

only whips up fear in the listener whoimagines a future retirement at three-

quarters pay.

I watched in horror as some of the most

prominent progressives fought tooth-and-

nail against President Obama’s payroll tax

holiday on the argument that payroll taxes

protect Social Security’s future! As if what

Americans love about the program is the

tax they have to pay.

5 A Spending Meme 5 A Spending Meme



26 27

Bruce Springsteen knows something about

framing.

“We take care of our own,

We take care of our own,

Wherever this flag’s flown,

We take care of our own”

Here’s the alternative meme on the social

safety net. We don’t let old folks sleep on

the street. We take care of our own. Wedon’t let children go hungry. We take care

of our own. We don’t exclude the 47%. We

take care of our own.

We’re all stakeholders in this great nation.

We take care of our own. White, black,

brown, yellow and red, we take care of our

own. Young or old, healthy or sick, we take

care of our own.

Here’s the alternative meme about taxes

and government spending. We pay taxes

to keep our currency strong. A strong

currency keeps our country strong. A

strong currency and a strong country

ensure that we can take care of our own.

We need a good government to help us

take care of our own. We need good public

services and infrastructure to keep our

country strong so that we can take care of

our own. Our government spends to keep

our country strong so that we can take care

of our own.

If government doesn’t spend tax revenue,

how does it finance its spending? I t spends

its currency into existence. In modern

economies this is accomplished through

keystrokes that credit bank reserves, with

banks crediting accounts of recipients. A

government that issues its own currency

can never run out of keystrokes.

Sovereign government cannot be forced

into involuntary insolvency. It can always

afford to make all payments as they come

due. It can always afford to buy anything

that is for sale for its own currency. It canalways financially afford any spending

that is in the public interest. It can always

afford to take care of its own.

Anything that is technologically feasible

is financially affordable for the sovereign

issuer of the currency. It comes down to

technology, resources, and political will .

We’ve got the technology to take care of

our own. We’ve got the resources to take

care of our own. All that is missing is the

political will. We need the right meme to

quicken the will.

Even the institutional home to Milton

Friedman’s version of monetarism, the

St. Louis Fed understands these points

about sovereign “affordability”. wo of its

economists wrote:

“As the sole manufacturer of dollars, whose

debt is denominated in dollars, the U.S.

government can never become insolvent,

i.e., unable to pay its bills. In this sense,

the government is not dependent on credit

markets to remain operational. Moreover,

there will always be a market for U.S.

government debt at home because the U.S.

government has the only means of creating

risk-free dollar-denominated assets.“

http://www.stlouisfed.org/publications/re/

articles/?id=2157

Sovereign government spends the currency

into existence. It cannot run out of money.

It cannot be forced to default. It never

needs to either tax or borrow its currency

in order to spend. It is never subject to the

whims of bond vigilantes. It can affordanything that is for sale in dollars.

Tat’s our state money meme: Te

currency-issuing sovereign can afford to

buy anything for sale in its own currency.

Duh!

Government can no more run out of

money than can the scorekeeper at Fenway

Park run out of runs to award the Boston

Red Sox.

In our modern economy, government

spends by “keystrokes” that mark-up the

deposit accounts of sellers. In practice

because banks handle the records of

debits and credits for us, bank reserves are

increased, and banks increase our deposits

whenever we receive a payment fromgovernment.

Government cannot run out of keystrokes.

5 A Spending Meme 5 A Spending Meme



28 29

6Alternative Framing on Inflation

As we have discussed, sovereign

government cannot run out of the

keystrokes it uses to mark-up balance

sheets as it spends. Does our argument rely

on modern technology, that sends electrons

or photons (I’m not sure which) pulsing

through copper or fiber-optic lines? No, of

course not.

Government always spent by notching

hazelwood, imprinting clay, stamping

coins, chalk on slate, or “running the

printing press”. Tere has never been

another alternative. Tese marks or

electronic entries represent government

IOUs.

No matter what time period we are talking

about, I would have received government

payments as “Government Owes Me’s”.

Obviously, government cannot run out

of these. Government can “afford” to buy

what’s for sale in its own currency.

Te question is not about affordability but

rather concerns effects on the value of the

currency and impacts on the pursuit of

private interest.

As Stephanie Kelton says, cash registers do

not discriminate: they do not care whether

that dollar comes from government

spending or private spending. If something

is in scarce supply, more purchases of it by

either government or private buyers might

push up the price. A government purchase

of something that is scarce can “crowd

out” a private purchase. Government

purchases need to be, and can be, planned

to avoid undesired crowding out and price

pressures.

Where the public purpose trumps the

private purpose (say, use of rubber in

WWII), government has at its disposal a

number of options to reduce price pressure,

including patriotic propaganda and

rationing. It also has the big gun: taxes. An

excise tax raises the cost to private buyers;

an income tax reduces disposable income

to free up production for the public

purpose.

In those cases, the tax hike keeps the

currency strong. It is not needed to “pay

for” the government spending, but to avoid

the crippling effects of high inflation.

Progressive taxes can be justified on the

basis that higher income people pose a

much greater inflation threat than do

low income people. Cash registers don’t

discriminate. Rich folk take more dollars

to market, and their spending cannot be

planned, budgeted, coordinated in the waythat government spending is done.

And their spending is largely discretionary,

not essential to daily lif e. Indeed, as one

group of rich folk ramps up conspicuous

consumption, other rich folk take up the

challenge. Keeping up with the Jones’s it is

called.

When resources are scarce, taxes on the

rich need to be raised to protect the

currency.

We don’t tax the rich to “pay for”

government spending. Government is not

in the position of Robin Hood. We never

need rich folks’ money in order to provide

for the poor. We can keystroke the bank

accounts of the poor so that they won’t be

poor.

We increase taxes on the rich only when

their spending threatens our currency with

inflation. If there’s no inflation danger,

there is no point in taxing the rich before

keystroking the poor. Linking the two

operations only reduces public support for

helping the poor. And it’s confusing. And

it’s operationally wrong. Except in the

unlikely event that all resources are already

fully utilized.

Progressives must stop linking the two—

that only plays into the hands of the

conservatives.

Te rich also are much more likely to

endanger the currency’s value by pulling

out of the domestic currency and runningto safe havens at the first sign of inflation

(as they are doing in Argentina now,

creating pressures on the currency that

raise inflation fears and fuel a cascading

run out of pesos and into dollars). We need

progressive taxes and inheritance taxes

to protect our currency from antisocial

behavior by the rich. (And we might need

capital controls, too, to prevent their runs

to tax havens.)

Tere is also a strong argument to be made

for using taxes on the rich—especially

capital gains taxes—to discourage sins of

various kinds. Te sin of speculative excess.

Te sin of usury. Te sin of conspicuous

consumption of prestige goods and

services. And the sin of excess inequality.

Most important: the goal of taxing the

rich has nothing to do with raising

government revenue. axes are used to

keep the currency strong and to punish sin.

An ideal sin tax raises no revenue because

it eliminates sin. While we cannot achieve

that ideal, we can make sin less enjoyable.




30 31

It is fitting that those who already enjoy

all the benefits of life at the top ought to

suffer more when they are sinful. Don’t

tax the sin of the worker who enjoys the

occasional six-pack of brew. Go after the

real sinners—those with the wherewithal

to engage in truly anti-social sinning—

speculative and consumption excess.

To conclude:

1. When inflation threatens, in some

circumstances it makes sense to raise

taxes. Since the rich pose a greater

inflation threat, put the taxes on them.

Cash registers don’t discriminate, so tax

those with greater purchasing power.

2. Tere are additional measures that

can be taken when inflation pressures

arise; depending on circumstances, they

are probably more effective: rationing,

targeted wage and price controls,

patriotic saving.

3. At full employment it makes sense to

tax the rich while providing income to

the poor. At less than full employment,this is not necessary (government is not

Robin Hood who must steal from the

rich to give to the poor). However, to

reduce inequality it may make sense to

tax the rich to reduce their richness.

4. Government spending and taxing need

not be closely l inked; however, as the

economy nears full employment taxes

need to be raised if there are strong

public purpose interests in continuing to

increase government spending. Te goal

is not to increase government revenue,

but to reduce competition for relatively

scarce resources in order to direct them

to the public interest.

5. Not only does the high income and thus

potential spending by the rich threaten

domestic value of the currency, there

is a danger that the rich will speculate

against the currency. Tis provides an

additional justification for removingexcessive income from them through

taxes, and perhaps also for taxing their

speculation. Again, the goal here is not

to raise government revenue, but rather

to punish the sin of anti-social excess.

6. Explaining that government cannot

run out of its own keystrokes (or other

records of its IOUs) does not mean that

one is promoting run-away government

spending. Rather, it means that one must

confront the inflation danger directly,

ensuring that government spending

and tax policy take account of inflation

pressures.

Memes:

We use taxes to keep our currency strong.

We raise taxes when speculative excess

threatens the value of our currency. Unless

there is a strong reason to move resources

to the public sector, once full employment

is approached, either taxes need to be

raised or government spending needs to be

reduced to avoid inflationary pressures.


7Framing Deficits

Deficits and Debt are probably the

most terrifying topic that MM

addresses. We need to be careful. We are

treading on moral (or religious) grounds.

We know that one should not be a debtor

(or, a creditor)—most religions tell us

so. One who proclaims that deficits and

debts are OK is automatically engaged in

blasphemy of various sorts, not least of

which is a crime against morality. Let’s try

to frame the discussion.

When government spends more than it

taxes, we not only get the services and

infrastructure that we need but we also

get to accumulate net financial wealth. Weare richer in both real terms and financial

terms. Government also offers to pay us

interest on that financial wealth if we

prefer to hold treasuries rather than HPM.

Government spending greater than taxing

should not be called a “deficit”, rather, it is

government’s contribution to our saving;

government bonds are not “debt”, they are

our net financial wealth.

Deficits and debts are bad framing; saving

and wealth are good framing.

Te clock that used to sit in imes Square

doesn’t record our national government’s

debt, rather, it shows our net financial

wealth. President Obama has added

trillions and trillions to our financial

wealth, making up for some of the losses

Wall Street imposed on us. Tanks Uncle

Sam!

Of course, as discussed earlier, government

can spend too much—even if it balances

its budget. It might not leave sufficient

resources to promote the private purpose.It might cause inflation and currency

depreciation.

But there is no automatic causal sequence

running directly from a budget deficit

to inflation. Indeed, to a large extent the

government’s ex post budgetary outcome

is not discretionary as it depends on the

nongovernment sector’s actions.



32 33

7 Framing Deficits 7 Framing Deficits

At the aggregate level, a government deficit

is offset by (and identically equal to) a

nongovernment surplus; and a government

surplus is offset by a nongovernment

deficit. Te government’s budget can

“balance” (spending equals taxes) only

if the nongovernment sector’s budget

“balances” (spending equals income).

Te nongovernment sector’s balance

is complexly determined (and indeed

depends partly on the government’sactions) but we can take it as at least

somewhat discretionary. o the extent that

the nongovernment sector (which includes

the domestic private sector plus the “rest

of world” that includes both foreign

governments and private sectors) exercises

discretion over its budget it means the

government’s budgetary outcome is not

discretionary.

Let me repeat that: if we believe that the

nongovernment sector has discretion over

its budgetary outcome, then we believe the

government does not have discretion over

its deficit.

Te government and nongovernment are

thus inextricably bound in an inescapable

balance. It makes no sense to talk about a

government deficit as either imbalanced or

unsustainable.

A government deficit will result if the

nongovernment sector has a surplus—a

perfect balance—and can persist as long

as the nongovernment sector wills it to

be so—a perfectly sustainable balance.

Balances balance! Of course they do.

Balances balance. A meme that bears

repeating.

Calls to cut the government’s debt are,

equivalently by identity, calls to cut our net

financial wealth.

Fiscal Austerians are, by definition, wealth

destroyers. And they are not just any

wealth destroyers: they destroy the safestand most liquid kind of wealth we can

hold—government IOUs.

We like it when the government owes us.

Why on earth do the Austerians want to

turn the tables, reducing the number of

“Government-Owes-Me’s”?; would they

be happier if we all owed the government?

Holding a Government-Owes-Me is like

holding a “Get out of Jail Free” card—if

worse comes to worst, I can pay my taxes

or other bills and stay out of jail.

Deficit cutters are profit destroyers, too.

As we know, government deficits mean

nongovernment surpluses. For Householdsand for Firms. In the case of firms, that is

gross profits (receipts less spending). (We

could get into the Kalecki profits equation,

but we shall hold off on technical details.)

Cutting deficits means cutting profits.

Deficit hawks are profit destroyers. Tey

are the worst enemies to the capitalist

system. Tey would destroy it but have

nothing with which to replace it.

At least the Bolsheviks had an alternative!

MM recognizes the important role that

government plays in protecting profits.

Budget deficits mean private profits.

What’s wrong with that?



34 35

he monetary system is a wonderful

creation. It allows for individual

choice while giving government access to

resources needed to allow it work for us to

achieve a just society.

Te monetary system spurs entrepreneurial

initiative. It finances, organizes, and

distributes much of the nation’s output.

It is one of the primary mechanisms used

by government to accomplish the public

purpose.

Tere could be a better way to organize

production and distribution. Tere could be

a better way to allocate resources betweenpublic and private. Tere could be a better

way to induce the private to serve not only

its own interest but also the public interest.

But if so, we have not yet seen it—at least

not since the end of triba l society, and I’m

not sure I want to go back there.

Until that better system comes along, we

need a progressive meme for the monetary

system we’ve got. Progressives have been in

retreat for the past three or four decades.

Yes, they’ve won some battles—mostly in

the social sphere. Tey’ve lost almost all

economic battles, however. At least some

of those losses are due to adoption of the

wrong meme for money.

We need to recognize that the monetary

system is important. It is not merely—or

even mainly—used to lubricate exchange

of goods and services. From its origins, the

monetary system has played an important

role in pursuit of the public interest. It also

is used in pursuit of the private interest.

And it is—especially in recent years—used

by a rapacious elite of Wall Street insiders

in their own selfish interests.

o be sure, the monetary system cannot

and should not do everything. While

capitalism tends to extend the monetary

sphere into an ever larger proportion of

our social provisioning processes (“the

economy”) that can be carried much too

far. Tere are areas that need to be kept off-

limits, including many functions within the

purview of government.

We pay our judges and lawyers but we do

not want them to sell judgments to the

highest bidder.

We let our candidates for higher office

accept campaign funds but we do not want

them to sell themselves to contributors.

As we push this progressive meme we

acknowledge that we deserve a better

government than what we’ve got—and

what we’ve had even when at its best.Many of those in government serve private

interests, not the public interest. Tey’ve

been bought and paid for.

Te monetary system provides the power

to do good, and the power to do bad is the

other side of the coin. Still, even a largely

bought and incompetent government

(remember “Heckuva Job, Brownie”—in

charge of President Bush’s rescue of New

Orleans after Katrina?) is better than no

government.

Even the highly suspect bail-out of Wall

Street in the aftermath of the Global

Financial Crisis was better than no policy

response at all.

A better government can serve us better

(compare the Obama administration’s

handling of Sandy to Bush’s handling of

Katrina). Perfection is hard to achieve, but

not necessary to attain some success.

Good is not the enemy of perfection.

We have a better chance of getting a better

government if we choose a better framing.

We need better memes for our economics.

As Robert Heilbroner told me (while

declining to write a blurb for my 1998

book): money is the scariest topic there is,

and your book is going to scare the hell out

of the reader. He was right. We need to

stop scaring their readers.

I know from nearly a quarter century of

experience that the framing and memes

used by those of us who have developed

MM on the shoulders of giants (mostly,

Post Keynesians and Institutionalists) that

we need better framing.

It isn’t enough to be right.

More generally, progressives need to

drop the conservative framing; they need

immunization against the conservative

meme viruses.

Tey need a new meme for money. I don’t

pretend to have found the right one(s). ButI hope to have contributed to the initiation

of a discussion.

8 Conclusion

8Conclusion



36 37

9Coda

George Lakoff had a new piece on

Michigan’s “right to work” law. I

won’t go into that issue, but obviously the

framing involved in the naming of a law

that is diametrically opposed to “right to

work” is worth examining. Instead I just

want to quote a couple of particularly

insightful (incite-ful?) paragraphs.

“Progressives and conservatives have

opposing views of democracy. For

progressives, democracy is based on

citizens caring about each other and

acting responsibly on that care, with

both individual and social responsibility,

to provide through the government

protection and empowerment for all.

Government thus becomes a means by

which citizens pay for public provisions

to benefit all: public infrastructure (roads,

bridges, hospitals, public buildings),

public education, public health and safety

(clean air, clean water, safe food, disease

protection), a patent office to protection

innovations, a justice system, and

networks for energy, communication, and

transportation. Without all these public

provisions, we are not free: Business

cannot thrive (if it can operate at all)

and we cannot live decent, civilized

private lives. It is a deep truth about our

democracy: our freedom depends on such

public provisions and the private depends

on the public. Unions both defend these

freedoms and add to them the worker

rights unions have created.”

Conservatives don’t accept this truth, if

they perceive it at all. Tey tend to see

democracy as providing “liberty ” — the

liberty to pursue one’s own interests and

well-being through personal responsibility,

without being responsible for the interestsor well-being of others and without others

being responsible for them.

From this conservative perspective,

businessmen should have the liberty to run

their businesses as they please to maximize

their profit, and workers should rely on

only their personal responsibility to get

and keep a job. Unions, for conservatives,

thus violate (1) the liberty of business

owners to offer workers what is most

profitable for the business, (2) the personal

responsibility of workers, and (3) the

liberty conservatives think workers should

have to work without paying union dues.

From the progressive perspective, the new

Michigan law is a corporate servitude law,

while from the conservative perspective,

the law is a “right to work” law.

Again, I do not want to debate the new

law or the role of unions (full disclosure, I

agree with Lakoff). Instead, what I want

to do is to emphasize Lakoff ’s take on

the progressive view of democracy and

government. As I said in the closing blog

on the alternative meme for money, all of

us, everywhere, deserve better government.

But I cannot see a better alternative to

democracy. And the conservative view

that we’d all be better with less—or no—

government is, as Keynes would put it,

“crazily improbable”. It has no evidence to

support it. It is ideology—or morality—

with nothing to support it.

Conservatives, including so far as Ican determine most commentators in

the blog-o-sphere, take the view that

government reduces freedom, defined

as the ability to do whatever one wants.

Progressives emphasize the positive role

for government: government helps us to

care for ourselves and others, which vastly

increases our freedom. Note I said “role for

government”; we are not naïve—we do not

imagine that government is only positive,

it is government’s role but government

doesn’t necessarily perform its role.

Democracy is the best way we know to try

to encourage government to do good. We

are not always successful. It is not “natural”

it results only from our will.

For the conservative, however, this is all

silly. Government is run by individuals,

each of whom is out to protect his own

interest and screw everyone else. Tere is

no such thing as “citizens caring about

each other and acting responsibly on

that care, with both individual and social

responsibility, to provide through the

government protection and empowerment

for all”. For the conservative that is not

only impossible, but also undesirable. Te

Hobbesian ideal is dog eat dog, dog eat

man, man eat dog, and ultimately man eat

man.

Tere were several hundred comments to

this series on the meme for money. A large

proportion pushed the conservative meme.

Not surprising. Across every blog site I’ve

written for, conservative commentary tends

to dominate. For these readers, the entirepurpose of this series was anathema. As

I made clear, I was providing advice to

progressives: how to frame discussion of

money to further the progressive agenda.

Obviously, conservatives would oppose

that. Many simply register their objections

openly, others try the “why can’t we all

just get along” defence. Well, because if

progressives adopt conservative framing

they will lose policy debates.

9 Coda



38 39

Yes, I understand (and agree with) the

claim that MM has something for

everyone (remember, I wrote that MM

is for Austrians, too!). No matter how

conservative you are, you need to touch

base with reality now and then, and so

a truthful description of the monetary

system can be useful. If you’ve only got

“angels on pinheads” you don’t have much

for policymakers. So conservatives can

learn a lot f rom MM, and can use their

conservative framing to ensure their

own policy implications from MM are

consistent with conservative morality. Tat

is fine. You don’t need my advice. And you

won’t get it.

Tere were also various objections

to modern money theory, itself, as a

description. Tese comments were just

dredging up dead issues, things covered

many times by advocates of MM.

Others disagreed with progressive policy

recommendations. But neither of these

topics were the subject of the series. As

I said, I was taking MM as well as a

progressive policy stance for granted, witha view to discussing the proper framing for

progressives (and especially for those who

know and accept MM but who have not

been successful in framing the issues).

Tere were also a number of comments

complaining that this particular series

was not aimed at the “man in the street”

level. Of course it was not—it was aimed

at progressives who understand the theory

and the issues. We’ve been trying to aim

the theory at the general audience for

years, not always successfully. In my view

that is in part due to framing. We need to

back up and get the framing right.

So, again, most of these comments were

off-topic.

Tere were, however, a few relevant and

good comments. I think we all need to

step back and take some time to digest

some of the proposed memes contained inthose comments. In case you missed it, I

think this par ticular comment, by “AJ” was

particularly insightful:

“I too struggled for a while wondering

if MM is just a load of bullocks. You

would think something this important

would be subscribed to by more people. At

that point I tried to find as many articles

and posts I could find on why MM was

not true, and I could not find one article

or post that could logically point out any

faults. Te argument against MM

usually starts off by someone just flat out

saying something like, “you can’t just

create money out of thin air.” Tis point

MM easily proves false, and you can

get most people to concede this point fairly

easily. Te next hurdle is inflation, which

usually gets expressed as the argument,

“but, but but, ZOMG inflations!!111!,

Zimbabwe, Weimer Germany!1!1!!”

Tis argument can be countered by

explaining how increasing demand when

an economy is under capacity increases

supply. Tat price only goes up (inflation)

when supply can’t keep up with demand.

Tis explanation is more difficult to

get across, because the person must be

somewhat familiar with econ 101 supply

and demand. Most people who value

intellectual honesty will now concede

both of these points to you. Now you are

up against ideology: “We have to impose

all these rules to limit federal spending,

because if we didn’t the Congresscritters

will just spend money all willy-nilly on

whatever projects they want.” It is this

conservative mistrust of giving congress

too much power that prevents us from

giving them enough power to do what

should be done. Tis is why Randy is

looking for an alternative framework: to

help win the moral argument.”

Tere are several reasons this is not more

mainstream. First and foremost it requires

a lot more economics knowledge than

most people have. Your average Joe could

care less about reading Randy’s MM

Primer or understanding exactly how

the Fed and reasury conduct monetary

operations. Te reason that you don’t seemore academics jump on the bandwagon

is that mainstream economics has a vested

interest in maintaining its status quo.

As Steve Keen frequently points out,

mainstream economics completely ignores

the private banking sector. As incredulous

as that sounds to a non-academic, it is

completely true. For example take Paul

Krugman’s comment “Now, I’m all for

including the banking sector in stories

where it’s relevant; but why is it so crucial

to a story about debt and leverage?” If

you don’t know why Krugman is wrong,

go to Keen’s website and watch a few of

his lectures. Economics is still a relatively

young discipline, it is hard to set up

experiments to confirm or hypotheses and

real world scenarios play out over decades

or centuries, not days or months. Tere

is really only 1 other depression with

which to compare the current one, and an

experiment with 2 observations doesn’t

really lend itself to developing hard and

fast theories. What Randy and the rest of

the MMers at UMKC and elsewhere

have done is resurrect theories that were

discarded during the “great moderation”

and update and expand on them.

Expect to see more people accept MM

over the course of the next few years.

Especially if we start double-dipping in

2013.

Yep. Tat’s all on the right track, so far as

I see it. Let’s take a long vacation from

the theory and even from the policy. Let’s

come back in 2013 with better framing. While it would be nice if we could distil

MM down to a single nice catchphrase,

I do not think that is possible. Money is

hard stuff. It is contentious. It is layered

under tons of misunderstanding and

misinformation. We have to peel back

those layers. We need to get to the core, or

rather cores (there are certainly many).

And we need to refine the progressive

memes. Indeed, we probably need to

9 Coda 9 Coda



40 41

identify what is progressive. Tis is

tough—far more difficult than uncovering

how money actually works.

Getting the right framing requires

understanding how the mind works—

likely more complex than how our

monetary system works. I can accurately

and (relatively) simply explain how

the government spends. But I cannot

understand, much less explain, how

individuals react to that explanation. Iam perplexed beyond comprehension

how a simple description of “monetary

operations” triggers the “ Weimar” response

in a large part of the population—

importantly a population so young that

even their grandparents and great-

grandparents could have had no significant

personal experience with hyperinflation.

How is the virulent Weimar virus

propagated from brain to brain over so

many generations? I do not know. Are

there anti-bodies to the virus? I do not

know. Why are a few immune to the

deadly disease? Is it education? I doubt it.

Upbringing? Perhaps. Genes? I hope not. And so on for all the other conservative

viruses afflicting thought.

Lakoff argues that language has a lot

to do with the propagation of the virus.

Once infected, the brain thinks through

the metaphor. He’s identified many of the

metaphors often invoked:

“Te simplest, is the metaphor named

MoreIsUp, which is a neural circuit

linking two distinct brain regions, one for

verticality and one for quantity. It is a

high-level general metaphor widespread

throughout the world, and occurs in a vast

number of sentences like “turn the radio

up,” “the temperature fell,” and so on…

Why is economic activity conceptualized

as motion? Because a common conceptual

metaphor is being used: ActivityIsMotion,

as in sentences like “Te project is moving

along smoothly,”…Te common metaphor

TeFutureIsAhead accounts for why the

motion is “forward.”…In a diagram of

changes over time in a stock market or the

GDP, the metaphor used is TePastIsLeft

and TeFutureIsRight…”

I realize this goes against the grain. We

all like to think of ourselves as “rational”,

“logical”. But we’ve known at least since

the time of Sigmund Freud that that is

not true at all. Te mind takes on a life

of its own, so to speak. It is mostly out of

control. Our control, that is. Te viruses

got it.

In discussing the fiscal cliff metaphor and

all the discussion about the need to get the

nation’s “fiscal house in order”, Lakoff goes

on:

“Te Austerity Frame is about

self-denial. As used in Europe, it

assumes two conceptual metaphors,

TeNationalBudgetIsAFamilyBudget and

TeNationsWealthIsTeGovernmentscash

Both are terribly misleading. Great

Britain is richer than it has ever been,

just as America is, if you count the total

wealth of their corporations and citizens.

Te nations are far from broke, but the

requisite money is not in the government’s

coffers. A family budget is nothing like a

national budget, because the nation has

vastly more resources and possibilities

than any typical family. Tese are the

austerity metaphors….Austerity implies a

long-term responsible form of self-denial

that makes your s ituation better….”

Can you kill the austerity virus with cold,hard facts? Of course not. You see facts

through the fog of viruses that infected

your brain. Keystrokes? Zimbabwe!

You need a better meme. And we’ve got to

start from the ground up. Focusing on the

description of money will fail. Even if we

focus on the desired policy outcome, we

will fail. We have to start with morals. I

still think Springsteen has got the starting

point: We take care of our own. We is al l of

us. Our own is all of us. We are all of us in

this together.

We take care of our own.

9 Coda 9 Coda

framing mmt — modern money network

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