The Federal Government CAN Afford to Invest in Infrastructure

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April 16th, 2016

One argument against federal funding to support special access and community broadband networks—or potentially any infrastructure project—is that the federal government “can’t afford it,” especially given the widely held belief that it should prioritize balancing the federal budget and paying down the federal debt.[1]

My suggestion to those holding this view (or being confused and/or intimidated by it in public policy debates) is to begin examining the extensive literature related to Modern Monetary Theory (MMT), perhaps starting with the selection of material to which I provide links at the end of this post (some of which are scholarly in nature, others geared more toward the layperson).[2]

I certainly don’t expect this single blog post to convince skeptics of the validity of MMT, but will discuss it a bit more before moving on to other perspectives that inform the policy approaches I’m attempting to develop here.

One of the most central and policy-significant concepts of MMT is that what we consider to be the federal government’s “deficit” and “debt” are not the equivalent of the debts carried by private households and businesses (or, for that matter, individual states).  The key difference—and one with major policy implications—is that the federal government is the “issuer” of our nation’s currency (and thus cannot “run out of dollars”), whereas the rest of us are “users” of that currency (and definitely can run out of dollars). This doesn’t mean that the federal deficit and federal spending levels don’t matter at all, it just means that how they matter isn’t the same as how household and business debts matter.  As MMT economist Bill Mitchell put it in a long blog post that I excerpted in a much shorter one (bolding is mine):

[A] nation will have maximum fiscal space:

 1) If it operates with a sovereign currency; that is, a currency that is issued by the sovereign government and that is not pegged to foreign currencies; and

 2) If it avoids incurring debt in foreign currencies, and avoids guaranteeing the foreign currency debt of domestic entities (firms, households, or state, province, or city debts).

 Under these conditions, the national government can always afford to purchase anything that is available for sale in its own currency. This means that if there are unemployed resources, the government can always mobilize them – putting them to productive use – through the use of fiscal policy. Such a government is not revenue-constrained, which means it does not face the financing constraints that a private household or firm faces in framing their expenditure decision.

 To put it as simply as possible – this means that if there are unemployed workers who are willing to work, a sovereign government can afford to hire them to perform useful work in the public interest. From a macroeconomic efficiency argument, a primary aim of public policy is to fully utilize available resources.

Back in 2012 I discussed MMT in a number of posts on my personal blog.  Another post that strikes me as especially relevant to this discussion is entitled Understanding and Embracing the Sovereign Currency Opportunity.  It discusses a post by Dan Kervick on the New Economic Perspectives blog, which I thought did a good job of describing the nature of what I refer to as the “sovereign currency opportunity,” and its relevance to broadband and other infrastructure-related policies.

As Kervick explains:

MMT argues that [what we refer to as a federal budget deficit] should be recognized as the normal operating condition of an intelligent national government pursuing public purposes in an effective way, at least when that government is a sovereign currency issuer that lets its currency float freely on foreign exchange markets. If the government is running a deficit in its currency, then the non-governmental sectors of the economy are running a surplus in that currency and their net stock of financial assets in that currency is growing. If the government is running a surplus, on the other hand, then the net stock of financial assets in the non-governmental sectors is decreasing.  We expect a growing economy to be increasing its financial asset stocks, and so we should expect government deficits as a matter of course.

A related critique of public investment in infrastructure is that it will crowd-out private investment. But, as if often the case with special access and local broadband networks,  if the private sector entities best positioned to make that investment (mainly because they operated for decades as competitively and financially protected monopolies) require financial returns that lead to the economic harms suggested by both CFA’s and ASR’s analyses, then I’d argue that so-called crowding out of that investment is likely to be a good thing for the economy and society as a whole (I discuss factors related to the interaction between “shareholder value” and “social value” here and here).

[1]  I’ll briefly note here that several of Bernie Sanders’ key economic advisers (including Stephanie Kelton, who recently served as the Democrat’s Chief Economist on the Senate Budget Committee chaired by Sanders) appreciate the relevance of MMT to today’s policy debates, including the expanded fiscal space it opens up to federal governments that are issuers of sovereign currencies (which, btw, is sadly no longer the case for nations that use the Euro as their currency).  So, even though Sanders typically balances his ambitious infrastructure investment and other proposals with offsetting tax revenue, an understanding of MMT makes it clear that this is not necessary in the way that most politicians and voters (and still too many economists) appear to believe that it is.]

[2] For those interested in more information about MMT, I’d recommend the following, in rough descending order of sophistication and time required to digest them:  1) a recently published textbook entitled Modern Monetary Theory and Practice – an Introductory Textby economists Bill Mitchell and Randall Wray; 2) a Levy Institute working paper entitled Modern Money Theory 101, A Reply to Critics, authored by Wray and Eric Tymoigne; 3) Wray’s MMT Primer, including a link to the published version and the original blog-based discussions on which it was based; 4) my own first exposure to MMT, Seven Deadly Innocent Frauds of Economic Policy, by Warren Mosler; 5) a layperson-friendly graphics-rich e-book entitled Diagrams & Dollars, Modern Money Illustrated, by J.D. Alt (available as a Kindle e-book or a somewhat abridged two-part blog post) and, for those with only a few minutes of time; a very brief excerpt from early MMT textbook draft material that I cited in a 2012 blog post because I thought it succinctly summarized several key points)

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