The Bureau of Labor Statistics has just released detailed state and local job numbers for 2021, which allows us to calculate tech-ecommerce job growth by state. We analyzed the five-year period from 2016 to 2021.
Nationally, the tech-ecommerce sector, as defined by PPI, generated 2.045 million jobs from 2016 to 2021. That’s compared to private sector job growth of 2.188 million over the same period. Nationally, tech-ecommerce accounted for 93% of private sector job growth from 2016 to 2021.
For this blog item, we focus on the 12 states in the Census Midwest region: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. Overall, these states showed a gain of 26.6% for tech-ecommerce jobs from 2016 to 2021 (see table at the end of the item).
Ohio is the big Midwestern winner for tech-ecommerce jobs, with a 39.1% gain from 2016 to 2021, which translates into a mammoth employment increase of 73.2 thousand. Workers in Ohio’s tech-ecommerce sector were paid $69,000 on average in 2021, slightly higher than the average pay of $67,000 received by Ohio manufacturing workers (these figures include all workers in the sector, both managerial and production).
Among Midwest states, Kansas had the second highest growth rate for tech-ecommerce workers, with Illinois showing the second highest absolute gain of 59.5 thousand (both following Ohio). Workers in the tech-ecommerce sector in Illinois received an average of $95,000 in 2021, compared to average manufacturing pay of $79,000 in the state.
The biggest tech-ecommerce laggard in the Midwest is, surprisingly, Minnesota. Minnesota has a history as a mainframe computer manufacturing leader, but it has not been able to convert that legacy to tech-ecommerce jobs. From 2016 to 2021, the number of tech-ecommerce jobs in Minnesota rose by 8.4%, the second slowest in the country (after Vermont). The number of “tech industry” jobs (software publishing, data processing, internet publishing and other information services, and computer systems design) only rose by 4.4% in Minnesota, compared to a 25% gain nationally, and a 14% gain for all Midwest states overall.
In an April 2021 report, the Minnesota Chamber Foundation acknowledged the state’s weakness in tech.
…sluggish growth in Minnesota’s high-tech industries and tech occupations has been a source of underperformance in the state’s economy for almost a decade, and forecast data projects an underwhelming future if Minnesota does not change.
The chapter on Minnesota’s tech sector drives home the point:
…Our relative under-performance in some fast-growing high-tech subsectors, such a software publishing and data hosting/processing, also explains why Minnesota has lagged faster growing states in GDP and employment growth in the last decade. Our comparative lack of high-flying tech successes this decade may also act as a reputational drag on growth, as fast-growing companies and startups have tended to cluster in tech growth clusters, such as Silicon Valley, Seattle, Austin, or Boulder.
Finally, it is perhaps ironic that Minnesota, a state which has barely participated in the tech boom, is home to Senator Amy Klobuchar, the main sponsor of legislation designed to hobble the large tech companies that have created so many jobs nationally and in other Midwest states. Perhaps if Minnesota catches up and embraces investment from technology leaders, she would better understand the damage her poorly designed legislation would have.
Tech-Ecommerce Jobs in the Midwest: Leaders and Laggards
Change in tech-ecommerce jobs, 2016-2021
percent
thousands
Ohio
39.1%
73.2
Kansas
36.9%
17.0
Missouri
32.0%
30.8
Indiana
31.4%
34.9
South Dakota
28.6%
2.1
Michigan
28.0%
33.5
Illinois
26.6%
59.5
Wisconsin
18.6%
19.7
Iowa
18.2%
8.8
Nebraska
16.0%
5.4
North Dakota
10.3%
0.9
Minnesota
8.4%
10.5
Midwest
26.6%
296.4
Data: BLS, PPI. Based on NAICS 334, 4541,492, 493, 5112, 518, 519, 5415
Congress has the opportunity to increase chip manufacturing in the United States through the United States Innovation and Competition Act from the Senate, or the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology and Economic Strength (COMPETES) Act from the House. Unfortunately, a stalemate over semi-unrelated trade provisions in the bill are preventing its passage, delaying $52 billion in funding provisioned to increase production in the United States. Continued stalemate is bad news for the future of the American economy.
Computer chips, or semiconductors, live in almost every electronic device we use on a daily basis. They’re needed for cars, cellphones, medical equipment, and national security. The growing thirst for chips came to a head in 2021 and 2022, when a national shortage drove up the prices of cars and other essential electronics.
The United States is the main designer of semiconductor chips with almost 50% of global sales, according to the Department of Commerce. But designing the chip is not the same as actually building it. Despite the dominance of U.S. design, only one U.S.-owned semiconductor foundry, or factory, exists in the United States, run by Infineon in Minnesota. Surprisingly, the U.S. lost its once supreme position in semiconductors by not investing in semiconductor “fabs,” leading it to only produce 11% of global semiconductors in 2019. Instead, Taiwan is the global leader in semiconductor manufacturing with two of the largest semiconductor foundries in the world, UMC and TSMC.
Moreover, the U.S. has fallen behind in two distinct ways. U.S. companies have fallen behind in the cutting-edge technologies that are used to make the “advanced” chips that power smartphones and game consoles. TSMC and Samsung are the only general-use chip manufacturers that can produce the most advanced chips.
Meanwhile, the U.S. has also not invested in the facilities that make the “mainstream” chips that power, among other systems, speedometers or car brakes. Chips for cars, while easier to manufacture, are cheaper and have a lower profit compared to smartphone and computer chips, which are the state-of-the-art versions that drive innovation in computing capabilities.
Chipmaking requires a lot of investment, resources, and research and development to keep up with the needs of computing. The global chip shortage demonstrated the challenges for digital societies in keeping up with demand; the European Union passed The European Chips Act in February 2022 in response to the shortage.
Congressional leaders have been negotiating to discuss differences in the Senate and House bills, which are extensive. Provisions around issues, such as the denial of “de minimis” tariff waivers on small packages from China, eased filing of anti-dumping lawsuits such as those recently targeting solar panel imports, digital trade negotiating goals, energy and research, space, green energy, and more are the subjects of disagreement. In contrast, only one major provision separates the two chambers on chips: PAYGO, with the House in support and the Senate against the budget provision.
In light of the importance of chips for everyday life and for future innovations, resolving the single disagreement over chips is both more pragmatic and necessary to increase American competitiveness and security in this sector.
Today, the Progressive Policy Institute released a new report on the challenges United States policymakers and regulators face in establishing oversight for the rapidly growing — and increasingly volatile — cryptocurrency and digital asset market.
Cryptocurrency has faced fitful bursts of growth and decline since its inception in 2008, with a dramatic recent crash from $3 trillion in November 2021 to $1.3 trillion in mid-May 2022. According to the report author, on any given day, more than $90 billion in digital assets change hands.
The report is titled “The Cryptocurrency Conundrum: The uncertain road toward a coherent oversight structure,” and is authored by Rob Garver.
“The crypto ecosystem’s explosive growth might continue, bringing more and more people into the universe of digital assets, with real-world effects on the financial security of individuals and families,” writes Rob Garver in the report. “Should some of the more promising use cases of blockchain technology prove viable, the crypto ecosystem has the potential to significantly transform areas as diverse as cross-border payments, management of public assistance programs, and online commerce.”
As policymakers look to regulate and provide oversight to this market, they must weigh the benefits and costs of who regulates the market and how heavy of a hand is used in regulation. Garver’s report asks if the unique nature of cryptocurrency requires a new, regulating body, or if Senators Gillibrand and Lummis’ recently introduced legislation proposing regulation through the Commodity Futures Trading Commission (CFTC) is the path forward. Garver also explores security and consumer protection issues faced by the industry, and explores the tax treatment experienced by investors.
Rob Garver is a freelance writer based in Alexandria, Virginia. He has covered banking and financial services policy for more than 20 years, and currently edits the BankThink section for American Banker.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
The extraordinary growth of the market for cryptocurrencies and other digital assets is one of the most remarkable stories of the past decade. In the United States, an estimated 40 million people have bought and sold digital assets, suggesting that what was once a niche interest is finding its way into the financial mainstream.
In the years after the pseudonymous Satoshi Nakamoto introduced the world to Bitcoin in a 2008 white paper,1 the use of digital assets grew steadily, reaching a market capitalization of about $14 billion in 2016. Since then, however, the total value of cryptocurrencies and crypto tokens in circulation has skyrocketed, rising to nearly $3 trillion in November 2021, before crashing down to $1.3 trillion in mid-May 2022. On any given day, more than $90 billion in digital assets change hands.
This spring’s crypto market collapse is just the latest reminder for investors that crypto assets come with extra risk and volatility, especially in times of economic and political uncertainty. It has also led for calls to establish rules to protect investors and ensure the proper functioning of the markets.
The potential benefits of widespread adoption of cryptocurrencies are many. The ability to make transactions without the assistance of an intermediary, like a bank, could create opportunities for individuals who do not have easy access to traditional financial services. The ability to transfer value quickly and securely across borders could make international trade much more efficient and remittances cheaper and faster. The use of “programmable” money could make complex business arrangements, like revenue sharing, execute in real time with perfect transparency.
However, growing public interest in a new and volatile marketplace is a prospect that has regulators in the U.S. deeply concerned. Fraud in the unregulated crypto marketplace is a significant problem, raising questions about the need for investor protections. Because it is possible to transact in digital assets without the use of an intermediary, like a regulated financial institution, and because those transactions can be made anonymously, such activity has been linked to billions of dollars’ worth of illegal activity.
The growing market for stablecoins, tokens with their value pegged to other assets, often a fiat currency, have raised questions about the possibility of systemically destabilizing runs on stablecoin issuers.
As more Americans become interested in investing and transacting in digital assets, there are real questions about whether and how they ought to be handled by existing financial institutions. Should banks be allowed to hold cryptocurrencies on their balance sheets? If so, how would they value the often-volatile assets?
Digital assets also raise important and complicated questions about tax policy. Current U.S. policy holds that every time a token changes hands, it reflects a taxable event, in which the person transferring the token incurs a capital gain or loss, and the person receiving it establishes the basis against which their eventual capital gain or loss will be measured.
The Biden administration, in March 2022, issued a sweeping executive order acknowledging the need for the federal government to adopt a coherent set of policies related to digital assets.7 While the announcement was welcomed by many in the crypto world,8 the executive order was light on specifics, effectively pointing out that the federal government has an enormous amount of work ahead of it as it tries to understand and oversee the market for digital assets.
The object of this paper is to identify some of the most significant areas in which regulators and/or the crypto community believe a policy response is required and the work currently being done to address those issues.
This week, Congressman Scott Peters (CA-52) sat down with the Progressive Policy Institute’s (PPI) Director of the Center for Funding America’s Future Ben Ritz and Policy Director for PPI’s Center for New Liberalism Jeremiah Johnson for a Twitter Spaces livestream to discuss the new Inflation Action Plan released by the New Democrat Coalition. During the event, Governor Jared Polis (D-CO) joined the conversation to applaud Congressman Peters and PPI for their work on the blueprint.
“Clearly people are struggling with inflation. It’s something that every elected is hearing about, and we know about… We’re New Dems, we actually want to take these challenges on and do something about it so I decided to help constitute an inflation working group. We first brought in some people to hear about what was causing this problem … you know, we’re not going to solve this problem tomorrow, but we got a lot of ideas about what to do to go forward and make some progress,” said Rep. Peters.
“I think part of the part of the challenge has been that because we didn’t take those suggestions [from the New Democrat Coalition during the drafting of the American Rescue Plan], and some of the policies we put in place weren’t quite calibrated to the moment, which helped contribute to the situation we’re in now. And so I think that it’s a lesson that we should have listened to the New Dems in the past when we could, but it’s not too late to take their recommendations now to get the problem under control and put us in a better place for the future.” said PPI’s Ben Ritz.
“I just really appreciate both PPI’s efforts and Congressman Scott Peters’ efforts on this and the New Dems as well, which I used to be a Vice Chair of when I was in Congress,” said Governor Polis.
With inflation continuing to rise at a historically rapid pace, the New Democrat Coalition released a 24-page action plan to tackle inflation and address supply chain issues that would provide much-needed relief for Americans. The plan would strengthen global supply chains and increase price competition by reducing tariffs and other barriers to trade, while also helping expand domestic supply by cutting onerous regulations that increase costs and making critical investments in scientific research and clean energy. In addition, the blueprint urges Congress to pass a reconciliation bill that reduces future budget deficits and presents ideas to make fiscal policy more responsive to macroeconomic needs.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
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Media Contact: Tommy Kaelin; tkaelin@ppionline.org
Democrats have been struggling to respond to the highest inflation America has seen in 40 years. Many on the left are pushing a bogus “greedflation” narrative that blames rising prices on corporations’ desire to maximize profits, as if that were some new phenomenon. Others have proposed to compensate consumers for higher prices with cash handouts that will likely only make the problem worse. And Republicans, who sharply criticize Democrats’ approach to inflation, have offered no constructive ideas of their own for tackling the problem. Thankfully, the moderate New Democrat Coalition (NDC) came forward today with a pragmatic 24-page Action Plan to Fight Inflation — and it’s the best inflation-fighting blueprint to come out of Congress yet.
Fighting inflation requires an understanding of what drives the problem. First, supply chain disruptions caused by the COVID pandemic reduced the availability of goods and services. Then demand for those goods and services, bolstered by excessive government stimulus, reached unprecedented levels as the world began returning to normal. The result: too many dollars chasing too few goods and services, thus driving up prices. The problem was only made worse when Russia’s unjustifiable invasion of Ukraine cut off food and fuel exports.
Energy and food inflation concerns loom large for voters heading into the second half of 2022 and the midterm elections. Meanwhile the odds of recession are rising and expected growth is falling, according to economic forecasters surveyed by the National Association of Business Economists.
With these bread-and-butter issues on the table, is this the right time for Senate Democrats to spend time debating and voting on Senator Amy Klobuchar’s tech antitrust bill? Voters are not going to feel inflation relief from the bill. Remember that the tech sector is not the source of surging inflation, no matter how you look at it. For example, e-commerce, like every other industry, has been affected by rising fuel prices and supply chain disruptions. But BLS data shows that ecommerce margins — the difference between the acquisition price of goods and the sale prices — narrowed by 3% over the past year, benefitting consumers. By comparison, margins for the entire retail sector widened by 12%, giving an extra jolt to inflation.
And Senate Democrats won’t be able to point to the tech antitrust bill as a source of new jobs in case of a recession. Indeed, the timing is precisely wrong. The big tech companies showed their willingness to keep investing and hiring during 2020 and 2021, helping keep the U.S. economy afloat. Moreover, real wages are rising in the tech/ecommerce sector. That job and investment performance is unlikely to be repeated even if the Klobuchar legislation works exactly as proponents expect, since the bill is intended to restrain growth by the big tech companies and smaller rivals are not going to expand during a recession.
Whether or not you think that tech antitrust is a good idea in theory, this is the wrong time.
A new report from the nonpartisan Congressional Budget Office shows that the amount of money spent by the federal government each year to service our national debt is on track to reach unprecedented highs within the next 10 years. These findings should give Congressional Democrats renewed urgency to pass a reconciliation bill that reduces federal budget deficits before the political window for action closes later this summer.
The good news is that the 2022 edition of the CBO’s annual Budget and Economic Outlook, published Wednesday, showed this year’s federal budget deficit falling dramatically from its $3.1 trillion peak in 2020. The decline was due almost entirely to the expiration of stimulus programs created to shepherd the economy through the COVID pandemic, and the rapid economic growth those programs helped facilitate. But these stimulus measures also came at a cost: They both increased our national debt and contributed to higher rates of inflation, which the Federal Reserve is now rapidly raising interest rates to combat.
Governed well, technological innovation can be a powerful force for good – connecting the world and providing tools to help address humanitarian, environmental, and health challenges while powering economic growth and recovery. But there is a growing international consensus for the need to adapt regulatory practices to realize the opportunities and mitigate the risks from innovation.
Enter “agile governance.”
Agile governance seeks to use dynamic, flexible, and iterative regulatory principles and techniques to achieve a more effective balance, one which helps us address societal challenges while also seizing the full promise of innovation. To support high-impact dialogue on these important topics Agile Governance for Our Future will feature leaders from government, business, academia, and civil society discussing their experiences with agile governance and offering new perspectives on how we can rethink regulation so that it is fit for purpose, now and into the future.
The program will include a keynote by Cass Sunstein (Harvard Law School), a fireside chat with Kent Walker (President of Global Affairs, Google), a panel of senior policymakers from the US, Europe, and Asia (invitations pending), and to bring a civil society perspective, remarks from Michael Mandel (Progressive Policy Institute).
President Joe Biden’s State of the Union address last week highlighted two of the greatest foreign and domestic challenges facing the United States. Russia’s invasion of Ukraine has undermined decades of peace in Europe, causing a humanitarian and geopolitical crisis while sending energy prices soaring. At home, inflation is rising at the fastest pace in 40 years and outstripping wage gains for many workers.
A new proposal offered by Sen. Joe Manchin (D-W. Va.) shortly after Biden’s address gives Democrats a strong approach for tackling both of these challenges — one that even has support from many progressives in the House with whom Manchin has often clashed. Manchin suggests Democrats pursue changes to the tax code and prescription drug pricing that would raise revenue without hurting our international competitiveness. He also recommends that this revenue be split evenly between deficit reduction and funding investments to expand domestic clean energy production, so America is less vulnerable to swings in energy costs.
A new report from the Progressive Policy Institute (PPI)’s Innovation Frontier Project, calls for United States policymakers to revamp our manufacturing sector to ensure the U.S. remains a leader in the global economy.
The report, authored by Keith Belton titled “Building a Stronger (More Complex) U.S. Manufacturing Sector,” provides policy recommendations, compares complexity in exports across several countries, and dives deep into theories behind manufacturing complexity, trade and competition.
“American manufacturing is on the decline, but we have a unique opportunity to kick this vital sector into high gear by making it more complex and diverse. We can strengthen it now with pragmatic legislation and look to our international competitors for a blueprint. With Keith Belton’s smart roadmap, our next generation of manufacturers could be working in a more secure, advanced and competitive manufacturing sector,” said Jack Karsten, Managing Director of the Innovation Frontier Project at PPI.
Belton argues that there are three public policy areas in which we can leverage complexity theory, including revising the national strategic plan for manufacturing at the White House Office of Science and Technology Policy, reviewing domestic supply chains, and establishing new statutory programs to strengthen the defense industrial base.
He also points to the need for the government to drive private sector investment in more complex manufacturing, which is being considered by Congressional leadership as the House and Senate reconcile the House-passed COMPETES Act with the Senate-passed United States Innovation and Competition Act (USICA). Global examples may be a launching point for the government as we look to replicate manufacturing competitiveness expansion in the next decade.
Read the report and expanded policy recommendations here:
Based in Washington, D.C., and housed in the Progressive Policy Institute, the Innovation Frontier Project explores the role of public policy in science, technology and innovation. The project is managed by Jack Karsten. Learn more by visiting innovationfrontier.org.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
When we look back on this period, a big inflation story will be the dog that didn’t bark. While prices for traditional goods like energy, food, and autos have skyrocketed, digital economy inflation has remained almost non-existent.
This relative lack of inflation in the tech, broadband and ecommerce worlds — including ecommerce margins — is a stunning phenomenon that deserves a lot more attention than it is getting. Why are these companies holding the line on inflation when old-line industries are bingeing on double-digit price increases?
One real possibility is that innovation and investment in the digital sector may have a dampening effect on inflation. Basic economics tells us that when tech and telecom companies spend tens of billions of dollars to create new capacity and deploy new technology, it’s going to be hard for anyone to raise prices, including themselves. PPI’s Investment Heroes report from last year showed that eight out of the top 10 companies in terms of domestic capital spending — Amazon, Verizon, AT&T, Alphabet, Intel, Facebook, Microsoft and Comcast — were in the tech, ecommerce, and broadband sectors. PPI has not yet done the most recent Investment Heroes report, but it’s clear that massive spending on information technology, 5G networks, and ecommerce fulfillment centers is holding down digital prices.
Let’s take a look at the data from the January 2022 Producer Price report, released February 15. Overall, this report show relatively high inflation, with final demand prices up 9.7% over the past year, and the prices of final demand less food and energy up 8.3% (the last line of the table below).
But in the middle of this price surge, tech and telecom prices showed relative small increases or even decreases. The table below compares pre-pandemic inflation (January 2019 to January 2020) with the most recent year (January 2021 to January 2022).
We see that in the latest year, the producer price of cable and other subscription programming, internet access services, and data processing and related services are all falling. The producer price of wireless communications is basically flat (we note that the consumer price of wireless is down by -0.5% over the past year, consistent with the picture painted by the producer price data).
Margins for electronic and mail order shopping services are rising at only a 1.1% rate (we’ll discuss these further below). Prices for advertising sales by internet publishers and web search portals are rising at a 3.5% pace, only slightly faster than the pre-pandemic inflation rate of 3.4%. Relative to January 2015, prices for advertising sales by internet publishers and web search portals are down by 16.9%.*
The one major exception to the low inflation story is the producer price of computer and electronic product manufacturing, which did take a substantial jump, probably in part because of supply chain disruptions.
Tech and Telecom Producer Prices Show Very Little Inflation
(change in producer prices)
Jan19-Jan20
Jan21-Jan22
Cable and other subscription programming
2.8%
-1.8%
Internet access services
0.5%
-1.3%
Data processing and related services
3.0%
-0.3%
Wireless telecommunications carriers
0.2%
0.1%
Information technology (IT) technical support and consulting services (partial)
1.4%
0.9%
Electronic and mail-order shopping services
1.4%
1.1%
Software publishers
-0.9%
1.1%
Wired telecommunications carriers
2.4%
2.6%
Internet publishing and web search portals – advertising sales
3.4%
3.5%
Computer & electronic product mfg
1.3%
4.1%
Comparison: Final demand for goods and services less foods and energy
1.6%
8.3%
For retail industries, the BLS collects “margin” prices, which is the selling price of a good minus the acquisition price of the good. A bigger margin indicates that the retailer is either getting a higher profit, or having to cover increased costs for labor, energy, and other inputs.
The chart below shows that in the year ending January 2022, overall retail margins rose by 11.3%, a big jump over their pre-pandemic rate of 1.7%. General merchandise store margins rose by 10.3%, while the margins of motor vehicle and parts dealers rose by almost 25%.
Note that this increases could reflect the higher cost of running brick-and-mortar establishments during a pandemic, or they could reflect higher profits. But what is clear is that ecommerce margins have barely rose in the year ending January 2022.
*I looked at long-term trends in internet and print advertising prices in a 2019 paper, “The Declining Cost of Advertising: Policy Implications.”
In recent years, politicians on the far left have leaned on Modern Monetary Theory (MMT) to justify offering increasingly exorbitant spending proposals without plans to pay for them. Then roughly $6 trillion in deficit-financed stimulus approved by Congress in 2020 and 2021 provided policymakers a natural experiment to evaluate the claims proponents of MMT made. The results exposed the critical flaws in their approach, and rather than being able to take a victory lap, MMT is now on its last legs.
The idea that government should use deficit spending to support an economy in crisis is not unique to MMT – economists across the political spectrum supported an aggressive fiscal response in 2020. The core tenet of MMT is that a monetarily sovereign nation, like the United States, can always simply print however much currency it needs to buy whatever goods and services programs require. This is the lens through which proponents of MMT have argued that the only constraint on deficit spending should be inflation that materializes when the economy is utilizing all available resources.
The Surface Transportation Board (STB) has resurrected a 2016 regulation on “reciprocal switching” that would require railroads to “unbundle” their transportation services and provide competitors with access to their infrastructure, at regulator-determined prices and service requirements. There are plenty of problems with this proposed regulation, including discouraging private sector investment and increasing operational problems. In this note, however, we will focus on the broader question of why forced unbundling of railroad transportation services is precisely the wrong regulatory strategy for today’s “Supply Chain Economy,” leading to the potential worsening of supply chain disruptions and an increase in inflation.
To understand why a 2016-vintage regulatory approach is totally wrong for the 2022 economy, we must first consider the underlying economics of supply chains. A supply chain consists of a flow of goods, of course, from producers to buyers and consumers, via transportation links such as railroads, container ships, airlines and truckers, and intermediaries such as importers and wholesalers. But equally important is the flow of data which allows all of this production and movement to be coordinated.
As I note in a forthcoming article in the Winter 2022 issue of The International Economy, it is better to think of a supply chain as a “supply-and-data chain.” In that spirit, supply-chain management has been defined by the Association of Supply Chain Management as the “design, planning, execution, control, and monitoring of supply-chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.”
Today’s domestic and global economies are built around these “supply-and-data chains.” A retailer like Walmart uses its knowledge of expected U.S. consumer demand to place orders with factories around the world months ahead of when the goods are needed, and then coordinates the movements of these goods to its far-flung stores. At every point along the way, the goal is to use data to reduce costs and ensure a smooth flow of goods.
This “Supply Chain Economy” is very different than the classic picture of an economy consisting of a series of unbundled arms-length transactions. In an economy with forced unbundling, factories would have to commit themselves to production runs without knowing if the demand existed, and without knowing if the transportation capacity was available.
In a supply chain economy, companies compete on the basis of who can best use data to organize production and logistics across the global economy, lowering costs and increasing reliability. The key is to take a big picture view across a wide range of markets, rather than focusing on competition in individual markets.
From this perspective, forced “reciprocal switching” would divert resources away from the optimization of supply chains. Railroads would have to give a high priority to moving goods in a way that met the reciprocal switching requirements, rather than lowering costs and speeding goods to their ultimate customers. The result would be more supply chain disruptions, and higher inflation. That’s not an outcome that anyone wants right now.
“Dynamic democracies should periodically reconsider existing policy norms to evaluate if they continue to serve policy goals well. If MMT seeks to change long-standing policy norms, the onus is on its advocates to persuade us that old norms do not serve us well and to communicate precisely what new norms will prevail and how they will affect the economy’s performance,” writes Eric Leeper in the report. “Until MMTers are ready to take these steps, their ideas must remain in the realm of guess and conjecture. In the meantime, we should apply to economic policy the basic principle we apply to health policy: follow the science. Economic science, such as it is, provides no support for MMT’s central claims.”
“For years, advocates of MMT have argued that policymakers should only care about budget deficits when the economy is facing inflation,” said Ben Ritz, Director of PPI’s Center for Funding America’s Future. “Now that inflation has finally materialized, they’ve moved the goalposts and left policymakers seeking answers about what to do in response. Dr. Leeper’s thorough deconstruction of MMT makes clear that they have none to offer. Democrats should reject this ‘supply-side economics’ of the left that is nothing more than a recipe for economic misery.”
For several years, politicians and leaders on the Far Left argued that a monetarily sovereign nation, like the United States, can simply print more currency needed to purchase goods and services for its constituents. As more exorbitant expensive spending programs were introduced and pitched to the American public, politicians often leaned on MMT to ensure voters that the economy could remain strong, even with deficit-financed spending. The only constraint on deficit spending, these advocates argued, was inflation.
This report breaks down several flaws in the economic thought behind MMT, including the constraints that ultimately finite resources place on governments, the inability of MMT to explain the relationship between inflation and demand when an economy is operating below its resource constraint, how it would overcome the structural and political challenges that prevent elected lawmakers from responsively managing inflation, and the indiscriminate approach it takes to the impact of different tax and spending policies, among others.
Mr. Leeper calls for the advocates of MMT to persuade the economic community that the standing norms of economic theory no longer serve us well, and to thoroughly evaluate the effects of the new economic theory with an eye on the practical and political implications of the proposal. He calls for the economic community, economic journalists, and policymakers to pause on active or passive exaltation of MMT until this evaluation is made, and continue to follow the science on economic theory and history – which unwaveringly points away from MMT’s fiscal financing plans.
Eric Leeper a contributing scholar for the Progressive Policy Institute. He is also the Paul Goodloe McIntire Professor in Economics at the University of Virginia, a research associate at the National Bureau of Economic Research, director of the Virginia Center for Economic Policy at the University of Virginia, and a visiting scholar and member of the Advisory Council of the Center for Quantitative Economic Research at the Federal Reserve Bank of Atlanta.
The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.
Launched in 2018, PPI’s Center for Funding America’s Future works to promote a fiscally responsible public investment agenda that fosters robust and inclusive economic growth. We tackle issues of public finance in the United States and offer innovative proposals to strengthen public investments in the foundation of our economy, modernize health and retirement programs to reflect an aging society, and transform our tax code to reward work over wealth.
By Eric Leeper
Contributing Author for the Progressive Policy Institute
EXECUTIVE SUMMARY
Modern Monetary Theory (MMT) gained popularity at a time when U.S. inflation was benign, income and wealth inequality was on the rise, and progressive politicians saw a political opportunity to pass big-ticket spending programs. To the nagging perennial question, “How do we pay for it?,” MMT serves up a tasty answer. You don’t need to raise taxes or reduce other spending. You don’t need to secure low-cost borrowing. A monetarily sovereign nation, like the United States, can create more currency to buy the goods and services that the programs require.
Large new spending programs often invoke in U.S. voters fears of persistent budget deficits and rising inflation. MMT delivers the reassuring message that those fears are grounded in defunct “orthodox” economic reasoning that limits the federal government’s capabilities: we have nothing to lose but our outmoded fiscal bromides and much to gain by replacing historic policy norms with fresh ideas. MMT explicitly ties itself to populist policies, self-labeling their plans “the birth of the people’s economy” [subtitle of Kelton (2021)]. Any sensible elected leader, whose vision is not impaired by conventional economic thought, would happily gobble up such a fiscal banquet.
MMT is the progressive counterpoint to supply-side economics. It supplants the claim that tax cuts pay for themselves with the claim that “…[federal] spending is self-financing” [Kelton (2021, p. 87), emphasis in original]. Both claims contain a germ of economic substance. Both claims are carefully crafted to provide elected officials seemingly plausible economic grounds to support their preferred fiscal policies (though at opposite ends of the political spectrum). Both offer policy makers an ideology freed of trade offs.
Because economic policy is too important to be reduced to catchy phrases and clever marketing, this essay analyzes MMT economics dispassionately. It does not assess the worthiness of MMT’s goals. Instead, it asks if MMT can achieve its goals without doing grave damage to America’s fiscal standing and, quite possibly, its economy. The answer: probably not.
MMT suffers from several flaws:
1. It denies a fundamental concept in economics: in a society with finite resources but unlimited wants, market prices adjust to induce individuals and policy makers to make trade offs that ultimately align supply and demand. Economics quantifies the costs and benefits of those trade offs to inform policy makers.
2. That denial leads MMT to see no need to offer a comprehensive theory of inflation. It maintains that inflation gets triggered when economy-wide demand for resources exceeds the economy’s resource limit, but has little to say about inflation and its determinants when, as it usually does, the economy operates below that limit.
3. MMT’s solution to inflation from high resource utilization is to raise “taxes,” without specifying which taxes. Governments have many tax instruments at their disposal—labor, sales, capital, wealth, and inflation—and each tax affects individuals and the macro economy differently. Generic advice to control inflation with higher taxes is vacuous until MMTers provide far more detail.
4. MMT does not acknowledge that even well-intentioned policy makers face incentives to use inflation to achieve employment or fiscal financing goals. Because those incentives to inflate are especially powerful for elected officials, many countries, including the United States, have adopted the norms of (i) independent central banks tasked with inflation control and macroeconomic stabilization and (ii) fiscal policies that largely pay for government spending with current and future taxes. Those policy norms have improved inflation performance and social welfare. MMT overthrows those norms to move inflation control and countercyclical policies from the Federal Reserve to Congress, to finance federal spending by creating new currency, and to subjugate monetary policy to fiscal needs.
5. It does not appreciate the central role that safe and liquid U.S. Treasurys perform in the global financial system. Neither does it apprehend the extent to which its policy proposals may destabilize financial markets and undermine the special status of Treasurys and the dollar in the world economy, a status that strengthens the U.S. economy.
The problems begin with the basic assumptions that underpin MMT. Its advocates attribute all unemployment to insufficient demand for workers and believe unemployment should be alleviated through a federal guaranteed jobs program. Weak demand frequently underlies unemployment, particularly during economic downturns. But workers themselves have a say in their employment status. During the COVID-19 pandemic, a broad cross section of workers left the labor market and voluntarily have not re-entered. From March 2020 to October 2021, labor force participation rates were depressed relative to the previous year: 2.5% for men, 2.6% for women, and 3.8% for workers 55 and older. Employers across the country have positions that remain unfilled. COVID is surely an unusual situation, but it serves to illustrate that employment outcomes are not always driven by insufficient demand.
MMT is at its weakest when addressing inflation, how it gets determined and how policies can control it. Its most common argument reduces to: inflation control is not a problem until it is. Problems arise when resource utilization reaches some limit, at which point higher taxes can keep inflation in check. But resource utilization is not the only factor that affects inflation. In late 2021, consumer price inflation hit a 40-year high of over 6%, yet compared to their pre-COVID levels, employment, capacity utilization, and industrial production are lower, while the unemployment rate is higher. Inflation is not rising because the overall economy has hit its resource limit. To be sure, supply-chain issues have driven up some prices relative to others, but these issues are not what anyone means by economy-wide resource limits. MMT’s weak theory of inflation is stunning because the potential of the MMT agenda to trigger inflation is the most frequently voiced criticism of the theory [Summers (2019), Cochrane (2020), Hartley (2020), Mankiw (2020)].
The guaranteed jobs program points to a more general theme of MMT: the federal government can solve big problems once policy makers grasp the key tenets of MMT. Kelton (2021) identifies seven “deficits,” defined in terms of both quantity and quality, that MMT can help to close: good jobs, saving, health care, education, infrastructure, climate, and democracy. MMT promises to address each of these deficiencies by first altering policy makers’ understandings of fiscal financing matters.
MMT abandons two long-standing policy norms. The first came from Alexander Hamilton in 1790 and can be summarized as “federal budget deficits beget budget surpluses,” meaning that debt-financed spending is backed by future taxes. This norm has contributed to less costly financing and bestowed on U.S. treasurys status as the world’s go-to safe and liquid assets, enabling their critical role in global financial markets. The second norm evolved from the 1951 Treasury-Fed Accord to make monetary policy operationally independent. Legislation houses countercyclical policy primarily in the Federal Reserve with the mandate that the Fed achieve price stability, maximum sustainable employment, and low long-term interest rates, and facilitate financial stability.
MMT instead posits that a dollar of new government debt need not carry any assurance of tax backing. It regards treasury securities solely as a means for the central bank to achieve its interest rate target. MMT shifts responsibility for achieving full employment and controlling inflation from monetary policy to fiscal policy. The central bank’s primary tasks are to serve as the Treasury’s bank and to maintain zero interest rates. Despite MMT claims to the contrary, monetary policy is completely subservient to fiscal policy, tossing aside Federal Reserve independence and the social benefits that accrue from it.
Full embrace of MMT’s policy proposals and new norms—whatever they may be—carries significant risks. Those risks include higher and more volatile inflation and interest rates and financial market instability, which would disrupt and depress real economic activity and harm most the people MMT aims to benefit.
Eric Leeper is a contributing scholar for the Progressive Policy Institute. He is also the Paul Goodloe McIntire Professor in Economics at the University of Virginia, a research associate at the National Bureau of Economic Research, director of the Virginia Center for Economic Policy at the University of Virginia, and a visiting scholar and member of the Advisory Council of the Center for Quantitative Economic Research at the Federal Reserve Bank of Atlanta.*
* The author thanks Joe Anderson for many helpful discussions and insights and Campbell Leith, Jim Nason, and PPI staff for detailed comments.
