Warren Mosler

INTRODUCTION: A SERIES OF CONVERSATION PIECES

WARREN MOSLER: INNOVATIVE THINKER

Early signs of Warren's unique abilities became apparent in his career in banking and finance. From the outset he was able to see opportunities for profitable trades that others missed. The fact that major Wall Street traders became aware of a young Warren's unique approach while he was still working at a small provincial savings bank in Manchester, Connecticut, is remarkable in itself.

After leaving his home state in 1976, Warren embarked upon a hugely successful career in finance and trading, first on Wall Street at Bankers Trust, a primary dealer, and then at William Blair and co. in Chicago. Following this he formed his own very successful financial businesses, alongside his associates, Cliff Viner and Justin Adams, Illinois Income Investors (KOIII) and Adams, Viner and Mosler (AVM).

Throughout his activities Warren proved himself to be the ultimate "ideas man", consistently coming up with unique ideas and combining this with a practical down-to-earth attitude and the willingness to connect with people from a wide range of backgrounds. Warren was prepared to back his ideas with his funds and set out to prove that his ideas worked. This practical approach was clearly manifest in his car and boat projects. He invested his time and money into designing and producing innovative vehicles, including world-beating race cars and electric vehicles with the potential to contribute to environmental protection. His ferry design was evidently too "out of the box" for the authorities but eventually it passed all the safety tests and its excellent track record since its introduction is a testament to Warren's abilities, confidence and tenacity.

Warren describes many of those employed in his various ventures as "improbables". His cars that performed outstandingly well in auto racing globally were built by local garage mechanics and young people doing fiberglass work in local boat yards, his staff at his financial firms were largely sourced from people doing mundane jobs entirely outside of finance, and none of what became the now world famous MMT economists - arguably the some of the most influential non-mainstream economists in the world - had been undergraduates at top tier schools or held academic positions at Ivy League universities. Warren has more than once quoted Don Rumsfeld's "you have to fight with the army you got" mantra, as all the while these "improbables" punched far above their weight and excelled in their arenas.

WARREN'S CHALLENGE TO THE UNSATISFACTORY NATURE OF CURRENT ECONOMIC UNDERSTANDING

While at least some professional economists do attempt to use real world assumptions to explain real world events, too often they spend their time on abstract mathematical modeling based on faulty underlying assumptions. Consequently, mainstream economists' practice has become both self-referential and inward looking, removing incentives to consider alternative approaches, even as their models - by their own admission - continuously fail. Their practice is self-sustaining, as working within their own paradigm brings the potential for great rewards and recognition from their peers. Unfortunately, although this activity, arguably at least, involves an impressive demonstration of purely technical ability, its relevance to the real world is at best limited, and leaves its practitioners ill-equipped to explain significant events, such as the global financial crisis of 2007-2008, or even to correctly forecast the recent strength of the US economy coincident with Federal Reserve rate increases.

When orthodox economists consider the nature of the government, it is typically treated like a large household; its spending is limited by its ability to obtain money through taxing or borrowing and that the government has to obtain revenue to be able to spend. Yes, as an afterthought, it can print money, but that's to be avoided at all costs, amidst chants of, "Zimbabwe", "Weimar" and "Venezuela". Thus, the government's spending capacity is "hemmed-in" by the need to raise tax revenues or to borrow prior to spending, and its ability to utilize what's called fiscal policy (its approach to spending and taxing) is thus limited by what Warren has called "the space between their ears!"

In contrast, Warren, alongside the advocates of Modern Monetary Theory who have learned from him, as well as the professional staff involved in the monetary operations of central banks, correctly identify the state as a currency-issuer. It is the source of the funds needed by the economy to pay taxes and buy government securities and the sequence is necessarily that the government must spend first and only after that can taxes be paid or government securities be purchased. Crucially, this seemingly trivial distinction makes all the difference with all regard to policy options.

Warren developed the "MMT money story", where the idea of sequence plays a critical role. The MMT money story begins with the state's desire to provision itself in order to serve the population. To do that, the government first levies a tax liability, a requirement which creates sellers of real goods and services looking for that currency in exchange. This gives value to the state's currency; it can then spend its otherwise worthless currency to buy what its tax liabilities caused to be offered for sale, including labor, so as to serve public purpose. The government pays people for the work they do and then, as the final step, taxes are paid and government securities are purchased with that money.

It may not be obvious, but it is the need to pay taxes that creates what we define as unemployment, i.e., people looking for paid work. Even Karl Marx and later Marxist economists missed this critical point, that at the deepest level, it is tax liabilities, not the extensive range of other factors pointed to by economists, that are the cause of unemployment. Unemployment in the economy is evidence that the state's spending is insufficient to allow the non-government sector to settle its tax bill and fulfill its net savings desire. The net savings desire of the public reflects the fact that they want more government money than is required to pay their tax bill in order to buy goods and services available for sale in the state's money. Private sector individuals are seeking paid work and desire to sell their labor to obtain it.

Once the sequence is understood, the issue of government solvency is rendered inapplicable as the government necessarily spends first and both taxes and borrowing logically, from inception, can only follow government spending. So, while the imposition of the tax liability is the critical driving factor, government spending of its own tax credits (the currency) precedes tax revenue and the government is therefore not revenue constrained; we could think of all government spending as the creation of "new money".

When we look at this another way, we can say that unemployment should be identified as a creation of the state and, by design, as the critical element of its provisioning process, and the state is fully and uniquely responsible for any residual unemployment that persists. Such unemployment is entirely a consequence of the state not spending enough to cover the need to pay taxes and desires to save its currency.

MMT's conceptualization of a government as a currency-issuer gives us the superior framework within which to analyze economic questions. Yes, there may be "hard choices" facing governments, but not in the way orthodox economics dictates. The advocates of MMT never argue that the government of a nation with its own currency under floating exchange rates faces no constraints, they argue that these constraints are real and political. Assessing the real cost of state purchases involves consideration of the alternative uses to which the resources drawn into a particular employment by government spending could have been employed. For example, if the state decides to employ twenty thousand more nurses, then the real cost to the nation is not the money required to do so but rather it is the loss of their potential output-generating work in the sectors within which the nurses might otherwise have been employed.

Many of Warren's ideas have garnered bipartisan support in the USA and MMT is now seen as a serious threat to the status quo.1 However, from inception, the radical approach which Warren originated has faced strong opposition. There has been a profound reluctance on the part of mainstream economists - perhaps because they are building reputations and doing well personally using the old methods and theories that continue to fail - to engage in good faith with MMT. In addition, many established politicians who are either unprepared to take political risks or fear the results of a progressive change in approach have attacked MMT, without taking the time to understand what Warren is actually saying.

REFRAMING MY THINKING

My own deep dissatisfaction with the approach taken by mainstream economists led me to search for alternative ways to study economics. I had always considered the work of John Maynard Keynes to be a good starting point and developed strong loyalty to a...