It is Krugman who has shined the headlights on the difference between a currency issuer and a currency user

By L. Randall Wray

This post first appeared at "Great Leap Forward”, my EconoMonitor blog.

As Mae Moore says, “It’s a Funny World” (2002). Let’s try to make sense of two news reports. Help me if you can.

1. Republicans reject the payroll tax holiday because it does not go far enough. To complicate matters, the Senate has already gone on its Xmas holiday and is refusing to come back. That leaves the Republicans in a bit of a pickle—they are going to raise taxes on the average American by $1000 per year because they refuse to support a 2 month holiday extension.

Right. Congress wants its long holiday from work, but does not want to give Americans a holiday from paying a regressive tax—the payroll tax—that for the bottom 70% of American workers takes away more income than the Federal Income tax. It is a job killer, too—as it raises the cost of employing Americans over the cost of employing workers just about anywhere on earth (few other countries tax work and employment the way we do—our payroll tax makes American workers more than 12% more expensive). So Republicans want to take away the payroll tax holiday and kill jobs.

That is a rather nice election strategy. And it is bad enough that they’re mainly running clowns for President. With the exception of Ron Paul, is there any serious candidate in the running? No, I didn’t think so. What, they actually WANT President Obama for 4 more years? Why? To continue to bail-out Wall Street? To continue to look the other way while banksters trash the economy?

Apparently the Republicans are hold-outs because they want two noxious additions to the payroll tax holiday legislation. First, they want an environment-killing Keystone pipeline—so they want that linked to the extension of the payroll tax holiday. The wording they prefer forces the President to forego any reasoned analysis of the wisdom of the pipeline by rushing a decision within 60 days. Second, they want to end the extended unemployment compensation benefits—to kill any jobs that the payroll tax holiday created. Right. We’ve been too kind to the environment and to the workers who lost their jobs because of Wall Street’s excesses, so let’s take away the payroll tax holiday and kill as many jobs as we can.

The logic escapes me. Extending the payroll tax holiday while reducing the time unemployed workers can collect benefits is a zero sum game. Do Republicans really want to fiddle while the economy slips into Great Depression 2.0? Yes they do. They see that as a win-win. They’ll run some Bozo the Clown, lose the election, and then stick Obama with the coming depression. And they hope to also stick him with an environmental nightmare to hasten the end of life as we know it.

Oh, sure, there will be life after Keystone. You’ve seen some of the science fiction movies that attempt to divine it. I’d put my money on the dystopian Mad Max or A Boy and His Dog. I expect that is a future that many of the current Republican candidates would embrace: one with insignificant, ineffectual governmental constraint on unbridled pursuit of macho self-interest. Newt! It’s your party platform.

2. The World Discovers Modern Money Theory. Who wuddavthought? The problem with the Euro is that formerly sovereign nations gave up their currencies to adopt a foreign currency called the Euro. Now, MMT followers have been saying that since the Euro was proposed. It was a system designed to fail, and like all systems designed to fail the only question was when. We now know the “when” is January 2012—when the Euro banks fail and Italy leaves the union.

But we were ignored for a decade and a half, while economists and policymakers celebrated the glorious “Union”. Heck, the union was so great that the EMU invited every Tom, Dick, and Harry nation to join up. They added nations with wages and living standards that were barely above subsistence level—indeed, nations that were willing to reduce living standards below subsistence if only they could join and reap the supposed benefits of joining the most dysfunctional empire ever constructed.

And they let Germany add cheap workers within its eastern half and then extend its reach to those low cost new additions as it came to account for 75% to 80% of all European exports. There has never been any international arrangement, anywhere, at any time in human history, that so-favored a nation. And when things went predictably bad for all of Germany’s neighbors, Germany pointed its finger at its victims and insisted that they were at fault for Germany’s success. No more porridge for them!

As evidence that the world is coming around (finally) to the MMT view, take a look at Dean Baker’s excellent piece.

Now here’s the ironic thing. It seems to have been none other than Paul Krugman who made it safe for others to adopt MMT. He shined his headlights on the obvious: the reason why interest rates on government debt are not exploding in countries like Japan, the US, and the UK is because they issue their own currencies.

Japan is the champion nation in terms of budget deficits and government debt relative to GDP. Many have long argued (wrongly) that this is because holders happen to have addresses in Japan. Nonsense. A sovereign government that issues its own currency makes interest payments on its debt in exactly the same manner whether the holder has an address at the South Pole or on Mars: a keystroke to a savings deposit at the central bank. What matters is whether the country issues its own currency.

That is why the little spat between the UK and France—with France insisting that credit agencies ought to down-grade the UK before they downgrade France—is so silly. France can have a debt ratio under 15% of GDP and still be forced to default. The UK can have a debt ratio above Japan’s 200% and still face no chance of involuntary default. That is the beauty and utility of issuing your own currency. France is a currency user and its fate depends on Germany—which is busy sucking up every spare Euro it can lay its greedy hands on. France is no better off than the panhandler on the street corner begging for pocket change—a user of currency, not an issuer.

So, Krugman shined the headlights on the difference between a currency issuer and a currency user. It is now time for everyone to follow Dean Baker—to look for the car keys under those MMT headlights.

3. Olly Olly Oxen Free: it is safe to come out of the dark. A sovereign government faces no financial constraints. We can have payroll tax holiday extensions and unemployment benefit extension. Heck why don’t we go whole-hog and actually create jobs for the unemployed? We need 25 million of them. We can afford them. All we need to do is to find useful things for them to do. That ain’t hard.

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years… Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like – a bogy.” –John Maynard Keynes 1972, 90-92