Post‐Keynesian Public Budgeting & Finance: Assessing Contributions From Modern Monetary Theory

Abstract

While Modern Monetary Theory (MMT) offers contributions that are worthy of serious consideration, some additional theory‐building and synthesis with existing theory may be in order to tie MMT into the established budgeting literature. MMT focuses primarily on monetarily sovereign governments. These are governments that face extremely “soft” budget constraints insofar as they: issue and regulate the value of their own currencies, possess central banks that function as the fiscal agents of their government treasuries, are able to issue sovereign debt denominated in their domestic currency, and operate in a system of freely‐floating currency exchange rates, with a minimum of currency and capital controls. National governments that are sovereign according to these criteria are able to make all debt service payments as they come due, virtually without regard to their level of outstanding debt; they cannot be forced to default against their will. They are also macroeconomically‐autonomous. It is the collective position of the symposium papers that these conditions describe, in precise terms, the fiscal position of the U.S. federal government. As such, the existence of an ultra‐soft U.S. government budget constraint is grounded in the extremely favorable conditions of money and credit that the federal government is subject to, and which in fact it has created and nurtured for itself since the Second World War. An important implication is that the federal level budgeting literature cannot ignore the macroeconomics and the administration of a sovereign currency regime, nor the monetary economics that ungirds it, without sustaining charges of unrealism.

Public Debt – Balloon or Anchor? A Macroeconomic Case Study of Canada’s Fiscal and Monetary Policy Response to COVID-19

“…MMT advocates for currency-issuing governments to take advantage of idle resources by printing the necessary money, and to focus on undertaking projects that would produce substantial net public benefit rather than being concerned with public debt figures (Dillow, 2020;Kravchuk, 2020;Mitchell, 2020;Rose, 2020). Proponents argue that debt is only one side of the balance sheet, and the net outcomes in growth and opportunity will outweigh the increases to debt, as the rate of interest on debt is less than GDP growth, and has historically been so, meaning there is no financial cost to holding debt and debt as a share of the economy will shrink over time without any need for surplus (Dillow, 2020;Kravchuk, 2020). The only limiting factor to growth is the availability of real material and labour (Kravchuk, 2020).…”

“…Proponents argue that debt is only one side of the balance sheet, and the net outcomes in growth and opportunity will outweigh the increases to debt, as the rate of interest on debt is less than GDP growth, and has historically been so, meaning there is no financial cost to holding debt and debt as a share of the economy will shrink over time without any need for surplus (Dillow, 2020;Kravchuk, 2020). The only limiting factor to growth is the availability of real material and labour (Kravchuk, 2020). Also on this basis, any argument about the generational transfer of debt responsibility is less factual when considering the productive investments the debt funds, of which the future generations will benefit proportionally more (Connors & Mitchell, 2017).…”

“…This approach would also require a substantial effort to reframe public understanding of government finance, as financial language has been used by conservative political commentators and economists to reinforce myths linking government and household budgets, which is a fallacy as demonstrated in Table 1 (Connors & Mitchell, 2017;Kelton, 2020;Kravchuk, 2020;Mitchell, 2020). Connors and Mitchell (2017).…”

“…These growing issues could be comprehensively addressed by re-framing the relationship between government and debt, which would no longer act as a constricting factor on public activity. Where an ideologically desirable outcome can feasibly be achieved with available real resources it should be done, financing aside (Kravchuk, 2020). The government should take active steps to educate the public about the realities that underpin public finance as contrasted with household budgets, in order to build popular support for a progressive approach (Connors & Mitchell, 2017).…”