Modern Monetary Theory Meets Greece and Chicago.

• Author: Tavlas, George S.

The issue is not where to find the money.... The money is there.

--George Papandreou (2009)

Coming up with money is the easy part.

[T]he money will be there.

--Stephanie Kelton (2020)

During the hill of 2009, George Papandreou headed the ticket of the Panhellenic Socialist Movement, known by its acronym PASOK, against the then-governing conservative party, New Democracy, in the Greek national elections. Papandreou ran on a platform that featured highly expansive fiscal spending. During a press conference on September 13, 2009, he was asked where he would find the money to fund his party's spending proposals. His answer was that given in the above quotation, by which he meant that Greece had abundant fiscal space to increase government spending; he believed that tax revenues could be sharply raised through stricter enforcement of laws against tax evasion. On October 4, PASOK won a landslide electoral victory, gamering 43.9 percent of the popular vote, compared with 33.5 percent for the second-place, incumbent New Democracy party, with the result that Papandreou became Greece's prime minister. In the following months, a sovereign-debt crisis erupted in Greece that, within a year, engulfed much of the euro area through contagion. In November 2011, Papandreou resigned the premiership, becoming the first Greek prime minister in almost 50 years to be forced out of office by his own cabinet. An article in the Financial Times, reporting on his ouster, stated: "George Papandreou will be remembered by Greeks with more than a trace of bitterness as the man who smilingly declared 'the money's there'" (Hope 2011). In the next Greek elections, held in June 2012, PASOK won only 12.3 percent of the vote.

In her influential book The Deficit Myth, Stephanie Kelton advances the view that the money could have been there for Greece if the country had not been part of the euro area. In particular, Kelton provides a diagnosis of what went wrong in Greece and a roadmap to the economic promised land for countries that follow her advice. Greece, it turns out, is Kelton's poster child for the way not to enter the promised land. "We all know what happened in Greece," she writes (Kelton 2020: 81). Greece, according to Kelton, began its journey into turbulent economic waters when it abandoned its national currency, the drachma, in 2001 and adopted the euro. By doing so, the country gave up its monetary sovereignty. It no longer was able to print its own currency to pay its debts, with the result that--well, "we all know what happened." Or do we? The problem is that Kelton does not know what happened.

If Greece is Kelton's poster child for the way not to run an economy, Kelton has become the poster child of the group of economists who advocate Modern Monetary Theory, or MMT. Kelton's The Deficit Myth made the New York Times bestseller list (for hardcover nonfiction) and has been the object of numerous reviews--including in this journal. (1) MMT itself has been embraced by several high-profile politicians.

This article is an assessment of what went wrong in Greece through the lens of Kelton's exposition of MMT. To set the stage, I first describe the central characteristics of MMT. As I will document, Kelton asserts that MMT builds on the idea of functional finance, developed in the 1940s by Abba Lerner. Functional finance views the issue of a balanced budget as of secondary importance; the primary purpose of functional finance is to ensure noninflationary full employment. Next, I provide a narrative of what went wrong in Greece. As I show, the origins of the Greek crisis had nothing to do with the loss of monetary sovereignty. Greece had monetary' sovereignty in the 1980s but nevertheless found itself ensnared in financial crises because it engaged in fiscal profligacy. The fiscal profligacy led to high inflation, something that, as we shall see, Kelton says will not happen to a country that has monetary sovereignty. After Greece entered the euro area in 2001, the country acted as though it had unlimited fiscal space, resulting in the outbreak of the financial crisis in 2009. The common denominator of the crises of the 1980s and the 2009 crisis was the absence of fiscal discipline.

I then show that MMT is, in fact, a combination of two ideas developed in the 1940s: Lerner s idea of functional finance and a proposal developed at the University' of Chicago by Henry Simons, Lloyd Mints, and Milton Friedman. Like Kelton, the Chicago economists believed that fiscal deficits should be entirely backed by money creation. The Chicago proposal, however, was formulated with the objectives of disciplining fiscal policy and limiting the amount of money that could be created. The proposal aimed to attain price stability at full employment. In contrast, MMT provides no fiscal discipline and no limit on money creation, despite Kelton's claims to the contrary. Moreover, the Chicagoans were concerned that discretionary policies can be destabilizing in light of long and variable lags. Consequently, their policy framework was rules based. As I document, functional finance's failure to take account of the destabilizing properties of discretionary policies provided the basis of a highly critical assessment of Lerner's functional finance proposal by Friedman.

MMT: Core Characteristics

At the "heart of MMT," writes Kelton (2020), is the "distinction between currency users and the currency issuer" (original italics, p. 18). A currency issuer is a country that has monetary sovereignty". Four conditions, she contends, are needed to attain monetary sovereignty: (1) a country must issue its own currency (p. 19); (2) it must borrow in that currency (p. 145); (3) it must let its currency float against other currencies (p. 145); and (4) the currency in question must be inconvertible--that is, it is "also important that [countries] don't promise to convert their currency into something of which they could run out (e.g., gold or some other country's currency)" (pp. 18-19). Countries like the United States, Japan, the United Kingdom, Australia, Canada, and "many more," Kelton asserts, are currency issuers. These countries "never [have] to worry about running out of money." The United States, for example, "can always pay the bills, even the big ones" (p. 19) because it can always print enough dollars to pay those bills. (2) Kelton writes: "Congress has the power of the purse, if it really wants to accomplish something, the money can always be made available ... spending should never be constrained by arbitrary budget targets or a blind allegiance to so-called sound finance" (p. 4). Fiscal deficits, she argues, are not a problem so long as the deficits do not lead to inflation (more about that shortly). "This book," Kelton audaciously asserts, "aims to drive the number of people who believe the deficit is a problem closer to zero" (p. 8).

The situation for currency users is very different. The countries that fall into this category have either (1) fixed their exchange rates, "like Argentina did until 2001," or (2) "taken on debt denominated in a foreign currency, like Venezuela has done," or (3) abandoned their national currency, as "Italy, Greece and other eurozone countries," have done (p. 19). Those countries do not have access to the printing press to backstop their debts. Thus, we are told: "The US can't end up like Greece, which gave up its monetary sovereignty when it stopped issuing the drachma in order to use the euro" (p. 19).

As mentioned, Kelton (pp. 60-63) acknowledges that MMT is guided by the idea of functional finance, developed by Lenier. Let's take a look at what Lerner had to say about functional finance. In his 1944 book, The Economics of Control, Lerner argued that the government should not hesitate to incur fiscal deficits required to achieve full employment. If the attainment of this objective entails persistent fiscal deficits (or surpluses), so be it. The size of the national debt, Lerner argued, is not important: "The [size of the] debt is not a burden on posterity because if posterity pays the debt it will be paying the same posterity that will be alive at the time when the payment is made. The national debt is not a burden on the nation because every cent in interest or repayment that is collected from the citizens as taxpayers to meet the debt service is received by the citizens as government bondholders" (Lerner 1944: 303). (3) Likewise, argued Lerner, "the interest on the debt is not a burden on the nation" because those payments "are merely transferred to the recipient from taxpayer or from new lenders, and if it should be difficult or undesirable to raise taxes the interest payment can be met, without imposing any burden on the nation as a whole, by borrowing the money or printing it" (Lerner 1944: 303).

Kelton believes that Lerner "turned conventional wisdom on its head," since Lerner showed that the size of a nation's debt and its fiscal position are unimportant. Kelton states: "Instead of trying to force the economy to generate enough taxes to match federal spending, Lerner urged policy makers to think in reverse. Taxes and spending should be manipulated to bring the overall economy into balance" (p. 61). Such a policy might require "sustained fiscal deficits over many years or even decades" (p. 61). So long as inflation remains under control, "Lerner saw this as a perfectly responsible way to manage the government budget" (p. 61). Kelton's depiction of Lerner's argument that fiscal deficits and the size of a nation's debt do not matter is accurate so long as a very important qualification made by Lerner is taken into account. In particular, Lerner made it clear that a necessary condition had to be in place for a nation's fiscal position, including its debt level, not to matter. This condition, which I discuss below, is not taken into account by Kelton.

After describing Lerner's concept of functional finance, Kelton expresses...