1

THE JOURNEY BEGINS

Look after unemployment and the budget will look after itself

John Maynard Keynes (Keynes, 1978: 150)

There is no possible justification whether rooted in ‘efficiency’ concepts and/or morality concepts for the government to deliberately engineer and sustain mass unemployment when it has the policy tools to immediately reverse course and maintain full employment. Yet, that is what they do. Every day. They justify deliberately rendering workers jobless by claiming that they do not have the financial capacity, or that it would be inflationary, or that the bond markets will stop buying their debt, or that the value of the currency will crash, or that … A multitude of supporting fictions are trotted out each day in the media by the politicians, business leaders, and academics. The population see this conga line of ‘experts’ on the TV or in the newspaper predicting that the sky will fall if the unemployment rate falls below their presumed minimum, condemning millions to lives of involuntary unemployment, and the rest to a reduction in their economic well-being. But when the government outlays billions to buy military equipment or bail out private banks that have fallen over themselves as greed surpassed acumen, these economists say nothing. The only question is whether it’s out of ignorance or malice, with the former perhaps the more damning. It’s a sordid pantomime that plays out every day and there seems no way out of the nightmare.

But there is some hope. This is the story about Bill and Warren devoting the last several decades to breaking through the disinformation and promoting the correct way of understanding the monetary system and the broader macroeconomy. They have been supported by other academics who subsequently joined the struggle and adopted the Modern Monetary Theory (hereafter MMT) framework in their own work. Together they share the ‘MMT Money Story’ recognising government as the direct cause of unemployment, immediately responsible for its continuation, and immediately capable of shifting to full employment policy, which is the focus of this book. As Warren once said, the only thing preventing full employment and price stability is the space between our ears.

The book is about Bill and Warren’s journey down the MMT path. It is a bit different to other more conventional books in that the pedagogic material is interspersed with personal anecdotes or ‘Adventure Notes’ to provide context, and historical records to establish provenance, and more. The Adventure Notes are also there to give the reader a respite from the economics – a sort of light interregnum. After all, we want the reader to finish the book!

The book is written in a dialogical style, where at times, due to their different backgrounds and experiences, Bill and Warren emphasise different aspects of a topic being discussed. They never fundamentally disagree but, coming from differing backgrounds, have different approaches and different ways of talking about things meant to help the reader zero in on the matters under discussion. The book also at times draws on the past writing of both authors while also offering material that has never been made public before.

* * * * * * * * * * * *

First, here is a word from Warren (written in his own pen):

Bill and I go back to 1996, where we met in an online discussion of what has come to be known as MMT.

We differ in at least one distinct respect – Bill writes a lot more than I do, publishing thousands of extended blogs, and numerous and voluminous books. For me, it’s only been short posts on an online bulletin board, a blog with brief entries and question and answer exchanges, and one very short book in 2010.

Over the years I have also published a few academic papers, mainly with co-authors who did most of the writing, while I mostly edited. This book is no different. It was Bill’s idea, and he did most of the writing in his Australian accent, with me editing his drafts with my American accent, and doing very little writing of my own.

It was my suggestion to feature some of the parts I did write by identifying them as ‘From Warren’ and with the text set off from the majority of the text that Bill wrote, and I edited. My thoughts were that this format would give the reader a further insight as to how we’ve worked together on this excellent adventure!

* * * * * * * * * * * *

Well, that can’t be an introduction, can it? So, what is this book about? Modern Monetary Theory: Bill and Warren’s Excellent Adventure, embarks on a journey through the fundamentals, implications, and real-world applications of MMT, exploring how it reshapes our understanding of money, government spending, and economic policy. First, let’s talk about the path this quite unique adventure has taken and how we relate it in the book. It is hard to appreciate the whole picture without first coming to terms with how it began.

In Chapter 2 Two Paths, the different paths that Bill and Warren took prior to encountering each other in early 1996 are outlined. Here we have Bill, a young academic from a working-class background who grew up in a Post World War 2 state housing estate in very modest circumstances indeed, making his way up the academic ranks and burying his head in books, data, statistics, and logic. His educational path was smoothed by family assistance provided by the state, and his father, a minimum wage worker, benefitted from the fact that the government believed its responsibility was to sustain full employment. As a teenager he read a lot of literature from famous left-wing writers and melded the theory into a framework for understanding the rather harsh neighbourhood environment he grew up in. Bill was always meant for the academy and while he envied those who could build things or create engineering marvels, he preferred to pursue a path of ideas and books.

All of which defined the research agenda he pursued as a student at university, which he subsequently took into his academic career. In 1978, while still a student at the University of Melbourne, he was musing during one lecture and came up with an idea whereby the Australian government could deal with the high inflation at the time without the need to render workers jobless. At that time, unemployment had started to increase sharply as government used its fiscal policy to cut spending. Bill’s moral template was affronted by the way government were deliberately destroying the prosperity of the lowest wage workers in a mission to control the high inflation. His musing came up with the idea of a buffer stock employment scheme, whereby the government could offer jobs to any workers that were rendered jobless because of the policy attack on the inflationary spiral. By paying a fixed wage the plan would provide a path to price stability. The whole idea took less than one hour to devise but would prove to define, some years later, the career path that Bill took.

Significantly, in that hour of lateral thinking, Bill came to understand that the government could condition the price level in the economy by dint of the price it paid for labour. That idea becomes central to what we now call MMT.

By way of contrast, Warren grew up in, by American standards, very modest middle-class circumstances, then, as he notes, ‘muddled’ through his formal education years as a dreamer, as a sort of off-beat logician. He didn’t have academic aspirations and as soon as he could he began his journey through the hurly burly of the financial markets starting in a small savings bank, moving to the trading desk of Banker’s Trust, a leading primary dealer in US Treasury securities, and then into his own cutting-edge investment and funds management companies. The experience he gained on the ground, dealing with the major macroeconomic institutions such as central banks, national treasuries, and private financial companies contributed to his understandings of capital markets and monetary systems in general. He recognised from firsthand experience that the mainstream narratives about government financial constraints and the purpose of taxes and government debt issuance were at odds with the operational realities of the monetary system. And worse, everyone he met who was directly engaged in monetary operations of the Federal Reserve Bank agreed with him yet did nothing about it.

In response to the absurdity of the 1992 Presidential bid by Ross Perot, where the candidate made ‘balancing the budget’ a centrepiece of his campaign, Warren had had enough and penned his 1993 Soft Currency Economics paper, a tiny paper, with massive implications. He laid out a coherent account of the monetary operations that drive fiat currencies, and, in doing so, demonstrated that the mainstream economic theories relating to government finances and central banking were incorrect. Significantly, as almost an aside he laid out a plan for an Employer of Last Resort (ELR) program, where the government would make an unconditional job offer at a fixed wage to anyone who wanted to work and could not find the opportunity elsewhere. He showed that such a program would demonstrate that the government ultimately through the price it pays for labour, conditions the overall price level.

And from quite different backgrounds and pathways, Bill’s buffer stock employment plan and Warren’s ELR idea – which has become the Job Guarantee in MMT – provided the link – the promotion of full employment policies – which would bring them together in 1996 from either...