Regular readers will know that I have spent quite a lot of time reading the…
Keep the helicopters on their pads and just spend
I was looking back through snippets I save (like a magpie) today and remembered that I hadn’t written anything in response to this Financial Times article (October 12, 2012) – UK needs to talk about helicopters – which demonstrates that a good argument can be housed in a faulty analytical structure. The reference to helicopters comes from Milton Friedman and is popularly known as “printing money” and dropping it on the populace from high. The practice – is described as the ultimate heresy for central bankers. From an Modern Monetary Theory (MMT) perspective, there is clearly no need for a sovereign government to issue debt to the private sector. Given the political issues relating to debt buildup, it would be preferable if governments moved away from that practice altogether. Whatever accounting arrangements they put in place with the central bank to ensure that its spending desires were reflected in appropriate credits going into the banking system are largely irrelevant. The inflation risk is in the spending not the monetary operations that might accompany it.
On August 30, 2012, the Financial Times published an article by Samuel Brittain (August 30, 2012) – Come on Bernanke, fire up the helicopter engines – which carried his reaction to Ben Bernanke’s speech at the Jackson Hole Symposium – Monetary Policy since the Onset of the Crisis.
Samuel Brittain posed this question as a “thought experiment” designed to be “an essential part of the growth of human knowledge”:
… what would happen if, in the main industrial countries, currency notes were to drop from helicopters as a deliberate act of policy?
The helicopter references comes from Milton Friedman’s suggestion in the introduction (page 4) to his collection of essays – ‘The Optimum Quantity of Money and other Essays”, Chicago: Aldine Publishing Company, 1969 – that a chronic episode of price deflation could be resolved by “dropping money out of a helicopter”.
Brittain notes that quantitative easing, which Bernanke had described “as being the nearest equivalent to such a drop”, is quite different to what Friedman had in mind. He says that:
QE will work through the banking system. Helicopter money is available for those fit enough to pick it up.
He also cites John Maynard Keynes who:
… raised a similar possibility during the 1930s when he said that if there was no better way of getting out of a depression, pound notes should be buried in the ground, leaving it to the well-tried forces of self interest to dig them up again.
This is an oft-quoted example and is used by opponents of fiscal intervention to deride the productivity of direct job creation.
As I have noted previously, the idea goes back to Chapter 16 of the Keynes’ The General Theory of Employment, Interest, and Money.
Many mainstream economics characterise the Keynesian position on the use of public works as an expansionary employment measure as advocating useless work – digging holes and filling them up again. The critics focus on the seeming futility of that work to denigrate it and rarely examine the flow of funds and impacts on aggregate demand. They know that people will instinctively recoil from the idea if the nonsensical nature of the work is emphasised.
Brittain’s reference in the same breath as advocating helicopter drops doesn’t help discourage this negative interpretation.
However, the critics actually fail in their stylisations of what Keynes actually said. They also fail to understand the nature of the policy recommendations that Keynes was advocating.
What Keynes demonstrated was that when private demand fails during a recession and the private sector will not buy any more goods and services, then government spending interventions were necessary. He said that while hiring people to dig holes only to fill them up again would work to stimulate demand, there were much more creative and useful things that the government could do.
Keynes maintained that in a crisis caused by inadequate private willingness or ability to buy goods and services, it was the role of government to generate demand. But, he argued, merely hiring people to dig holes, while better than nothing, is not a reasonable way to do it.
In Chapter 16 of The General Theory of Employment, Interest, and Money, Keynes wrote:
If – for whatever reason – the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. “To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
So while the narrative style is typical Keynes the message is clear. Digging holes will stimulate aggregate demand when private investment has fallen but not increase “the real national dividend of useful goods and services”.
Keynes also noted that once the public realise how employment is determined and the role that government can play in times of crisis they would expect government to use their net spending wisely to create useful outcomes.
Earlier, in Chapter 10 of the General Theory you read the following:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
Again a similar theme. The government can stimulate demand in a number of ways when private spending collapses. But they should choose ways that will yield more “sensible” products such as housing. He notes too that politics might intervene in doing what is best. When that happens the sub-optimal but effective outcome would be suitable.
The point is that the workers who “dig the holes” will be paid (as opposed to receiving no paid when unemployed) and will then spend a proportion of their weekly incomes on other goods and services which, in turn, provides wages to workers providing those outputs. They spend a proportion of this income and the “induced consumption” (induced from the initial spending on the road) multiplies throughout the economy. That is, the expenditure multiplier will amplify the initial wage boost.
Back to Brittain who probes the thought experiment further.
The object of the helicopter drop would be to boost spending for those who pick up the money, who should feel wealthier and not become more indebted. They should have every reason to spend. The more worried they became about helicopter money, the faster they would spend it.
Would this be inflationary? In many situations, yes. But a drop, whether actual or metaphorical, would only occur when the danger is that of deficient demand. And we are dealing with a world in which there is not enough spending to keep resources reasonably well employed. So the main initial effect will be to boost output and employment. Should the danger become one of demand inflation, the normal instruments of higher central bank interest rates and budget surpluses would be available. There is no technical problem about how to reverse it if circumstances change.
So a very simple encapsulation of how introducing new spending capacity into the economy would stimulate demand and real output and, as long as their is excess productive capacity, there would be no inflation threat.
His reservations focused on whether a government, captured by various political lobbies, could put the brakes on when the economy approached the inflation threshold.
He thinks it would be better if the stimulus would focus on “infrastructure spending and temporary tax cuts”, which is uncontroversial. But then we read this statement:
It goes without saying that such expansionary measures should be financed by central banks and not by market borrowing that could push up interest rates in an unhelpful way.
The “goes without saying” is a ploy to alert the reader that they would be stupid to question the statement – that is it is a incontestable doctrine of economic theory. The only problem is that it is wrong.
I am not against “central bank financing” – indeed, I am clearly in favour of governments no longer issuing any debt and ending the practices that are legacies of the fixed-exchange rate, convertible currency world we (mostly) abandoned in 1972.
But the alternative of issuing debt to the private market does not push up interest rates. The central bank has all the capacity to control interest rates and bond yields at its leisure.
Please read my blog from yesterday – Government budgets bear no relation to household budgets – for more discussion on this point.
His last point is clearly true – that the rejection of deficits not being matched by bond issuance to the private markets (which is what he calls “central bank financing”) – is “ideological. The prevailing dogma is that anti-slump measures must be on the monetary side rather than the fiscal one.”
That is one of the main reasons the world remains in crisis. Governments have relied to much on monetary policy and when they have used the more powerful fiscal levers they have imposed austerity as an attempt to clear the decks.
Anyway, this was an interesting article because it squarely introduces the notion that a currency-issuing government can spend without having to match that spending with private debt-issuance. In other words, given the central bank and treasury are parts of the consolidated government sector – the government has no financial constraint (even though Brittain wouldn’t express it in that way).
Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.
Sometime later, on October 11, 2012 to be exact, the Chairman of the British Financial Services Authority, Adair Turner, delivered the Lord Mayor’s – Mansion House Speech – in London.
He was one of the hopefuls for the Bank of England job and given the – lurid details – \ emerging about the pay package for the successful applicant, Adair Turner probably wishes he had schmoozed the Chancellor a bit more.
The FSA boss (out-going) presented a wide-ranging speech. He noted that my profession had contributed to the crisis by seriously ignoring the links between their abstract models and the real world financial system.
Please read my recent blog – What have mainstream macroeconomists learn’t? Short answer: nothing – for more discussion on this point.
He quoted the out-going Bank of England boss Mervyn King who told an audience in London (in October) that:
the dominant school of modern monetary policy theory – the New Keynesian model as it is called – ‘lacks an account of financial intermediation, so money, credit and banking play no meaningful role’.
The section in the last quote in parentheses were quoted from King’s speech.
He also canned the IMF for having their head in the sand. As late as 2006, the IMF was praising the deregulated financial sector and its flexibility and resilience.
He believes the self-confidence of the economists and the agencies led the financial regulatory authorities to go to sleep at the wheel. In fact, it was more than a lulled sense that was going on. The links between Wall Street and the City and the legislators were close and there was massive pressure placed on the legislators to relax regulation and permit the self-regulating market to go for it.
Adair Turner said that the “dominant assumption was that monetary stability – low and stable inflation – was sufficient in itself to ensure financial and macroeconomic stability” and that:
That assumption turned out to be profoundly wrong and dangerous, a major intellectual failure.
Although barely anyone in the macroeconomics profession has blinked an eyelid and it is largely business as usual with a few new mathematical gymnastics being added to the models under the name of banks or financial sector. The models are still rotten to the core and useless for real policy development.
All this was leading up to his conclusion that the “deflationary impact on economic growth” of the “(p)ost-crisis deleveraging … could extend for many years ahead”.
So what can be done to stop this descent into extended stagnation?
He told the audience:
The policy response has to include, and has included, unconventional monetary policies – quantitative easing – which as best we can tell has produced a path of real output growth and inflation slightly higher than would otherwise have occurred.
But quantitative easing alone may be subject to declining marginal impact, the economy facing a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behaviour and thus on demand. So optimal policy also needs to include a willingness to employ still more innovative and unconventional policies, and to consider the combined impact of multiple policy levers – monetary policy, Bank of England liquidity insurance, prudential regulation and direct support to real economy lending – which we used either to consider quite separately, or else avoid entirely.
What was he getting at?
First, it is obvious that quantitative easing has not been the success the mainstream had hoped for. I explained why it would not work in this early blog – Quantitative easing 101.
Basically, it is just an asset swap – bank reserves for a government bond – and the only way it can impact positively on aggregate demand is if the lower interest rates it brings in the maturity range of the bond being bought stimulates borrowing and spending.
The problem is that borrowing is a function of aggregate demand itself (and expectations of where demand is heading) and with unemployment persisting at high levels, firms going broke all over the place and government imposing harsh net spending cuts, the sentiment that might lead to increased borrow has been absent – lower interest rates notwithstanding.
Second, the only monetary policy options that are available are what he calls “still more innovative and unconventional policies”, with the aim of supporting “lending and as a result, maintain nominal demand”.
It is interesting that he understands the damage that the credit binge had (his early comments in the Speech were about that) but still considers that more private indebtedness is the way forward.
He also admitted his previous support for the creation of the Eurozone (and “Britain’s eventual membership”) was wrong and that he failed to understand the basic limitations that the Euro design imposed on the capacity of the economies to respond to a large, asymmetrical aggregate demand shock.
He noted that his crucial mistake:
… was a failure to recognise that debt issued by a nation within a multinational currency zone is quite different from debt issued by a nation which also issues its own currency – it is inherently more susceptible to default risk, it is inherently less likely to be perceived as risk-free. As a result, in a multi national currency zone with significant debt issued at national level, bank solvency and national solvency can become linked in a potentially fatal embrace.
You can see he still doesn’t quite get the magnitude of the difference between a sovereign nation that issues its own currency and a Eurozone member-state. The former has no default risk” rather than is “inherently” less susceptible to default risk. The US, Japan etc are perceived as being risk-free – there is no qualification.
Some interpreted this Speech – especially the part about “still more innovative and unconventional policies” as being an endorsement of the idea that the Bank of England should cancel:
… the gilts bought by the Bank of England and telling the Treasury it need not repay the debt …
That quote came from a Financial Times article (October 12, 2012) – UK needs to talk about helicopters – which, presumably, was in response to Adair Turner’s speech the day before.
The FT article said that Adair Turner favoured “monetary policy’s nuclear option: “helicopter drops” of newly printed money”. So also back Samuel Brittain’s discussion above.
The FT article says that:
Printing money – not just temporarily for trading securities in the market, but permanently handing it over to be spent by someone – is the central banker’s ultimate heresy. Yet it would be irresponsible to rule the option out, no matter what the circumstances.
It was not always a heresy. But that is another topic.
It is interesting that they distinguish between quantitative easing (“trading securities”) and direct demand stimulus – a distinction that was certainly lost in the early days of the quantitative easing furore in 2009 and still lost on most financial commentators.
The FT article reiterates the obvious point:
Throwing enough cash at an economy cannot fail to have an impact. The question is whether a sustainable and significant effect on aggregate demand can be had for the price of only a moderate and manageable effect on inflation.
The fear – inflation – the reality lots of excess capacity (“when deflation and contraction threaten”).
They reject the “Adair Turner approach” – saying that there would be no change if the “BoE cancels its gilts rather than collects coupon payments, returning them to the Treasury as profit”.
The preferred option is to be targetted at “boosting aggregate demand” and “be directed to more rather than less useful spending” and the best way to achieve that would be to give “newly minted money away, not shifting large asset balances between the BoE and the Treasury with no new money creation”.
Underlying the previous discussion are inherently mainstream ideas that “central bank financing” is one of the ways in which governments can fund their spending. The key point is that it leaves the myth that they have to “fund” spending intact and then the descent into analogies between the government budget and the household budget follow as night follows day (or does it?).
The analysis comes straight out of the mainstream macroeconomic textbooks where the notion of the so-called Government Budget Constraint (GBC) is introduced – in one way or another depending on the level of the course being taught.
The GBC entered economic texts in the 1960s in a formal way as part of the claims that Keynesian macroeconomics had no firm microeconomic foundations, which reduced its credibility.
These microfoundations are notions such as rational, optimising agents driving resource allocation and seeing through nominal veils etc. That is another blog again. It was all hype and led to the destruction of some of the essential insights in macroeconomics and paved the way for the total mess that we have today (New Keynesian macro).
The point was that the argument went that we can supplant the idea of an individual consumer maximising utility in his/her spending decisions subject to the budget constraint to the government level analysis.
So the government is seen as being constrained by the need to fund its spending (the budget constraint). Accordingly, governments are construed as having three sources of “finance”: taxation; debt-issuance; and/or money creation.
The logical idea that students are presented in these courses is captured in the following sequence:
1. The government wants to spend some money to buy something.
2. It doesn’t have any money.
3. It can raise taxes using its legislative authority and get some money that way. But taxing is bad (creates disincentives to work and enterprise) and so there should be very little of it, which limits the volume of spending that the government should engage in (an absolute minimum to maintain law and order and defence is the usual scale conceived).
4. What happens if its wants to spend more than it taxes – that is, run a deficit?
5. It can sell debt to the private sector and draw on the savings available. This is bad because it competes for those scarce savings with private investment opportunities and this drives up interest rates. The replacement of private spending with public spending in this way is inefficient because the private sector is disciplined by share markets and optimal behaviour whereas the public sector is wasteful and not scrutinised by the market. Further eventually the private markets will worry that the debt is getting too large and the government will default and so the funding will dry up.
6. The alternative is that the treasury borrows from the central bank (so-called printing money) and spends up big. The problem here is that this method of financing is considered to result in more inflation than private bond sales, because the latter soaks up some purchasing power and replaces it with public spending. So “money creation” adds more to aggregate demand than bond sales, because the latter forces up interest rates which crowd out some private spending. Therefore it is very dangerous to print money to fund government spending.
That is the standard sequence that students learn in their undergraduate and post-graduate programs and, is unfortunately, wrong at its most elemental level.
All these claims are without foundation in a fiat monetary system and an understanding of the banking operations that occur when governments spend and issue debt helps to show why. Note I have considered these issues many times in many blogs.
For example, Why history matters – Building bank reserves will not expand credit – Building bank reserves is not inflationary – The complacent students sit and listen to some of that.
Lets just ask the question what would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a budget deficit without issuing debt? So this is the option discussed above in the FT articles.
First, governments spend in the same way irrespective of the monetary operations that might follow. There is no sense in the claim that the government gathers money from taxes or bond sales in order to spend it.
If they didn’t issue debt to match their deficit, then like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.
The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made. Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet).
Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.
This means that there are likely to be excess reserves in the “cash system” which then raises issues for the central bank about its liquidity management. The aim of the central bank is to “hit” a target interest rate and so it has to ensure that competitive forces in the interbank market do not compromise that target.
When there are excess reserves there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the target. Some central banks offer a return on overnight reserves which reduces the need to sell debt as a liquidity management operation.
There is no sense that these debt sales have anything to do with “financing” government net spending. The sales are a monetary operation aimed at interest-rate maintenance. So M1 (deposits in the non-government sector) rise as a result of the deficit without a corresponding increase in liabilities. It is this result that leads to the conclusion that that deficits increase net financial assets in the non-government sector.
What would happen if there were bond sales? All that happens is that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.
The only difference between the Treasury “borrowing from the central bank” and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If private debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the long-time Bank of Japan solution).
There is no difference to the impact of the deficits on net worth in the non-government sector.
Mainstream economists would say that by draining the reserves, the central bank has reduced the ability of banks to lend which then, via the money multiplier, expands the money supply.
However, the reality is that:
- Building bank reserves does not increase the ability of the banks to lend.
- The money multiplier process so loved by the mainstream does not describe the way in which banks make loans – Money multiplier and other myths
- Inflation is caused by aggregate demand growing faster than real output capacity. The reserve position of the banks is not functionally related with that process.
So the banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending.
This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand – government and non-government – carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and available productive capacity. The FT articles clearly recognise that point.
The “stock of money” can expand by some percent per month without there being any additional inflation risk if real productive capacity is also expanding at a rate sufficient to absorb the extra nominal aggregate demand.
The idea that debt-issuance to the private sector in some way is less inflationary (for a given injection of government spending) is totally fallacious.
From an Modern Monetary Theory (MMT) perspective, there is clearly no need for a sovereign government to issue debt to the private sector. Given the political issues relating to debt buildup, it would be preferable if governments moved away from that practice altogether.
Whatever accounting arrangements they put in place with the central bank to ensure that its spending desires were reflected in appropriate credits going into the banking system are largely irrelevant.
Further, the inflation risk is in the spending not the monetary operations that might accompany it.
Lots of travel coming up today – so …
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.
This Post Has 32 Comments
What is the comprehensive MMT position on LTG (Limits To Growth) and biospheric homeostatic boundary problems? Are you going to give a substantive answer? I’ll not ask again as I will just be spamming. Without seeing a full, rigorous and empirically supportable answer, I cannot accept MMT as a valid theory.
PS Have a “zooper zummer” in any case.
Re the idea that the government / central bank machine should just issue cash (or monetary base) and not issue interest paying debt, I quite agree. As I’ve pointed out about five hundred times on my own blog, both Milton Friedman (a long time ago) and Warren Mosler advocate that policy.
For Friedman, see paragraph starting “Under the proposal…” (p.250) here:
For Mosler, see 2nd last paragraph here:
Second, and on the subject of Keynes’s illustrating the benefits of stimulus implemented via public works and his “hole digging” illustration, Bill is quite right to say that Keynes’s critics “focus on the seeming futility of that work to denigrate it”. It illustrates the sheer stupidity of Keynes’s critics (Austrians more often than not). I mean they’ve got to be truly dumb to think that Keynes was seriously advocating pointless hole digging.
Another and very similar illustration of Austrian stupidity was the occasion on which Krugman said that a fake invasion by Martians would boost the economy because everyone would spend vast sums on anti-Martian precautions. Those thicko Austrians thought Krugman meant it seriously.
Well, today Wayne Swan accepted that he can’t control the budget outcome and gave up his pursuit of a surplus. But sadly, he still thinks “restraint” in spending is a good thing for Australia.
What Mr Swan cannot grasp is that he could chuck the missing billions out of a helicopter, get our underused human resources into productive work and cause a boom that would give him some hope of still having his job next Christmas. Given the shocking state of infrastructure in our cities and the chronic housing shortages we are facing, it might be better to spend it on construction, but I’d settle for the sound of helicopters over suburban Brisbane.
As per the SMH: “I don’t care about political outcomes, I care about economic outcomes,” says Swan
Hysterical. ‘Political’ is all it ever was … on both sides of politics.
The really sad part about this announcement? It only happened because budget accounting gimmicks had hit the end of the road because, well, the economy has been in a weakening process for the last couple of years and the souffle is all puffed out. The next 2wks of political debate and media coverage will be equally hilarious.
Bill: Digging holes will stimulate aggregate demand when private investment has fallen but not increase “the real national dividend of useful goods and services”. The second clause is the opposite of what Keynes says just above, so I think the “not” is misplaced at least, and the sentence should probably be rewritten.
But couldn’t a form of quantitative easing from below have a stimulative effect equivalent to direct government spending? Consider this. What If the consolidated central banking system issued debt vouchers to workers now holding mortgage or credit card balances that could only be swapped against debt? Wouldn’t this debt relief immediately free up vast swathes of spending that would otherwise have been drained from the system? The advantage, at least in the American context, would be this. Because the Fed is a semi- autonomous agency, Bernanke would not require prior authorization from the disfunctional Congress to pusue this policy, any more than he required for the other 3 rounds of quantitative easing.
I posted the paragraph below, very late, on your query yesterday. I would add now:- You are mixing up MMT and its ideas as a way of explaining current economic reality with political decisions. In looking at the best way to understand the world’s economic situation, it is important to keep it politics free. Politics will dictate the decisions made about the allocation of resources etc in a country’s economy. LTG is, in my view, about politics far more than economics.
I am a real beginner on this subject and maybe I have it all wrong, but I suggest that MMT describes our economic system as it is now. It can make predictions within the boundaries of that system, but when the changes move outside those boundaries then logic requires that the theories alter to take account of those changes. As specific resources become scarce, their price will rise. I would expect investment in research to find alternatives, if at all possible. If there is no alternative, the current system, capitalism, would require that only the rich who can afford the price for the use of the resources would get access. However, there is a political dimension to consider; access may be altered by statute defining different access conditions other than wealth (granted, this is in general not our current system). I believe that MMT proponents recognise this. The future is determined by political choice, MMT could indicate the economic consequences. Your query, though valid, is more in the sphere of politics and choices rather than economics.
I therefore suggest your threat to reject MMT is spurious. Why reject the only consistent set of ideas that explains what is happening and does have useful predictive power (unlike many other theories in economics).
@Ikonoclast, and also regarding Richard’s reply;
I agree with Ikonoclast’s invocation of Limits-to-Growth thinking as essential to economics going forward. (I obviously do not agree that anyone should “reject” MMT, or any other body of useful knowledge, just because it is not yet integrated into some other body of useful knowledge or some other line of inquiry.) But mainstream MMT, as it is currently constituted (and as far as I know) does nothing to address the deficiency in traditional economics of assuming that compound growth can continue forever. A couple of close fellow-travellers – Michael Hudson and Steve Keen – treat this issue as important – even central – but in a different way, and without taking it to the point of saying what a sustainable, post-growth steady-state economy will look like.
My own view is that the complete and permanent defeat of the neo-classical paradigm, accompanied by a corresponding victory for MMT and post-Keynesian theory generally, is a necessary pre-condition for serious action to halt and reverse global warming. Only planned, sustained, targeted fiscal policy, on a scale even greater than that which prepared us for World War II, has any chance of getting this done. If, tomorrow, and by some miracle, every government in the world woke up to the realities MMT describes, they could work together to rapidly end unemployment and poverty, and also begin making the massive public investments that are needed in sustainable energy technologies, urban planning and transportation-related energy use. MMT focuses on getting growth and employment re-started, as it should, given the massive human suffering that austerity is inflicting. But MMT is agnostic (for now) on what the ultimate limits to that growth are going to be.
Put it this way: MMT shows how governments *could* adapt, creatively and humanely, to limits. Whether they do it or not is, as Richard says, mainly a political, rather than an economic, issue. And for the present, this issue is moot. We need to use and direct economic growth in order to make the world prosperous enough, equal enough and well-enough informed to see that humanity is at a cross-roads – regardless of what anyone says, and whether or not anyone talks about it at all.
James Galbraith – another MMT-orbit economist who mainly writes about other things – has written a little bit about these issues in “The Predator State”. He assigns to his profession the task of displacing current, high-polluting consumption to some future, lower-pollution time frame. I assume he is thinking about something like a war bond or savings bond, which governments used to temporarily cut civilian consumption in order to free up real resources to fight the war. An Eco-bond, if its future value was trustworthy enough, might do the same thing in the fight against climate change. But this entire subject is under-developed, and will, ultimately be vitally important.
Surely the Job Guarantee employing the un/der-employed to do environmental and care work is a resource lean/light way of running a real resource limited as opposed to financially limited economy?
Essentially you are advocating a debt jubilee, which I’m not too keen on. First do we wipe out the debts of those who have got three million dollar mortgages to help them buy five million dollar houses? I think not. Same goes for well off middle class families with say quarter million dollar mortgages.
And then take two people on average or slightly below average wages. One decides to rent their accommodation and the other to buy. If you wipe out the debt of the latter, they are effectively being given a house paid for in part by people who rent. And that doesn’t sound like fairness to me.
My point was conceptual. The immediate impediment to real employment gains is the suppression of aggregate spending due to outsized private debt service. This includes student debt, credit card debt and mortgage debt. And the mainstream political parties and the political process they engender are utterly ignorant of the consequences that public austerity is about to impose on the country; an austerity clearly crueler and vastly more unfair than the objections that you raise to a debt jubilee.
The Fed’s scope stands above the political fray. That means that it is not subject to the will of these dysfunctional parties. But quantitative easing, as it has been carried out, crucially depends on creating a speculative boom in commodities and in the stock market. It center its hopes on creating a wealth effect that would induce a resumption of spending as portfolios nominally expand. And the last round of QE, which removes toxic mortgage backed securities from banks, is simply a gift to financial institutions whose irresponsible behavior contributed massively to the size and scope of the current crises. Let’s compare their privileged plight to those who are drowning in debt, especially student debt which cannot legally be discharged.
Again, what is more objectionable: the Fed’s life jacket to the best off most culpable actors or a bottom up debt jubilee?
Is it really beyond the Fed’s capacity, if it were so inclined, to minimize the eligibility of the wealthy to access these debt vouchers?
@ Ralph and Barry;
I highly recommend Michael Hudson and Steve Keen on this subject. Dr. Keen solves the fairness problem by giving the same cash injection to every citizen, with the proviso that indebted persons must apply it, first, to their debt. The underwater home-owner gets above water, or at least closer to it. Tapped-out consumers get to pay off their credit cards. The un-indebted renter gets to spend the money. All experience an increase in their marginal propensity to consume, which translates to increased aggregate demand, stronger growth and more jobs. I think the case is airtight.
Too bad it’s about as probable as an asteroid impact.
To me, student debt is an even more obvious issue. We all stood by and let our kids, collectively, get swindled out of their right to *ever* get out of debt. We let overtly predatory private-education low-lifes set up shop online and all around the country, selling kids worthless degrees and piling them up with mountains of government-guaranteed debt – which, just as Barry points out, they can never, under current U.S. law, discharge in bankruptcy. Ditto all the penalties and interest. The stories these kids posted during Occupy Wall Street were heart-breaking and unbearable.
And the Federal government could erase every cent of it with a subroutine and the “Any” key.
I’ve read that one reason to provide government debt is to give a low-yield, risk-free investment to those who want it. This seems like a reasonable ‘public purpose’ as Warren Mosler would call it.
Limits to Growth: What do we mean by ‘growth’? Talking about it in terms of some increase in the nominal output, measured in a currency unit, seems like a less than perfect concept. It’s not as easy to measure, but something related to standard of living would be more useful … amount of leisure time, living space, quality of food, … yes, kind of difficult. There are proposals out there I think.
As far as limits to progress in improvement of living standards, I don’t think there are any. How we get where we are going, and when, depends as stated above on political decisions, and as importantly (or more) on technological developments. As a Scientist, I don’t find it credible that we will run out of ________, and have to go back to a world population of _________, living in grass huts and eating bananas, unless world civilization collapses (not impossible).
We have the ability to deal with any of the issues the doomsayers like to trot out. That is, I don’t believe there are physical limits we can’t overcome. We could choose to destroy ourselves or revert to barbarism, etc., but nature will not force it on us.
I think MMT offers an optimal approach to utilizing the monetary system in our current political economies, to promote positive public policies … whatever we (nations?) decide they should be. I think that’s very important, but I don’t believe we should look to it as the essential determining factor in human development.
Quote, “one reason to provide government debt is to give a low-yield, risk-free investment to those who want it. This seems like a reasonable ‘public purpose’…” Unquote.
This might conjure up images of “mom and pop” investors being able to have a safe little nest egg. Or, more realistically, it might conjure up images of predatory banks, bulging with cash, parking some in government bonds for a bit more free money from the government. It’s just another case of government subsidies to the richest echelons of capitalism.
Since we seem to have this twin model of money creation (creation by fiat and creation of debt money) I would argue this. Even creation of debt money should be wholly a government monopoly. It would work like this. A consumer looking for a home mortgage goes to a state bank, like the Commonwealth Bank before it was privatised. The government sets the lowest interest rate commensurate with the activity the govt requires in domestic construction without creating a housing bubble (asset inflation).
A person looking for a business loan goes to a private commercial bank. The commercial bank(s) borrow debt money from the State Bank at a rate commensurate with the activity the govt requires in the general economy. The commercial banks then charge an interest premium which is their profit margin. Commercial banks compete with each other over these interest rates.
In this model, it would be a moot point where to place consumer debt other than home mortgages. Such debt could be with the commercial banks but with government regulated rates to the consumer and harsh penalties for commerical banks who oversell consumer debt compared to government guidelines.
“Limits to Growth: What do we mean by ‘growth’?” – SteveK9.
This is a very good and valid question. In the first instance, we mean physical growth. Limits to Growth must be seen as limits to physical growth. In the economy, this will mean limits to quantitative growth. It is clear that the earth is of a finite physical size. More importantly for our purposes, the biosphere is of a finite size, being a relatively thin shell around our planet comprising the atmosphere, the hydrosphere and the lithosphere in the basic physical sense. The biosphere consists of these physical “spheres” or rather spherical shells” plus all life plus all the systems of material and energetic transfer and movement.
Since the biosphere is of finite size, it is clear that growth of any sub-system or sub-set in the biosphere (like total human biomass) cannot continue indefinitely. If this were possible, first the sub-system would occupy the entire system and then the sub-system would exceed the system in volume and mass. Clearly this is impossible.
The human economy, properly considered, is a sub-system of the biosphere. It can come to occupy some fraction of the biosphere. It can come to commandeer, utilise and incorporate in both infrastructure and human biomass some fraction of the biosphere’s mass. It can come to commandeer some fraction of stored sources of useful work (like fossil fuels) or some fraction of energy flows like incoming solar radiation. But in purely physical terms growth of the human economy system must come to an end at some point. Depending on events and the state of the earth’s systems at this point, the “end”, viewed in graphical terms, will be somewhere in the range from a precipitous disastrous collapse (worst case) to a gently undulating plateau (best case) extending into an indeterminate future.
It seems to be a common perception, in the modern West at least, that humans, human society, civilization and the economy stand somehow over and above and “outside” the natural world. We can speculate on the causes of this view and all of Judeo-Christian theology, Humanist Empiricism, Scientific Instrumentalism and general anthropocentrism and hubris play a role in this fallacy. It is often thought that human ingenuity and utilisation of technology place us outside nature, meaning outside of and not subject to the Laws of Nature (most specifically the Laws of Thermodynamics) but this also is a fallacy.
Intelligence is a natural phenomenon as are language and tool making. These are emergent phenomena arising wholly out of of natural laws and ipso facto natural themselves. They are not unique to humans. Some of the higher mammals clearly show both individual and social intelligence and can be trained to use rudiments of a human language like english in ways compatible with their physiology. Insects show a form of social or swarm “intelligence” in the sense that they can for example make complexly engineered structures. This claim might stretch the formal definition of “intelligence”. Many animals, and even plants, communicate by their own signals (sounds, visual displays, pheremones etc.) and communication by signals is by definition language no matter how rudimentary. Primitive tool use (without human prompting) has been observed amongst some primates, some birds and dolphins. Many animals build structures, some of which are well engineered from passive air-conditioning of termite mounds to beaver dams and lodges.
Human qualities and abilities in nowise place us above and outside nature. We are still fully enmeshed in, dependent upon and subject to the laws of nature; meaning in turn the laws of physics, the laws of chemistry, the laws of biochemistry, the laws of ecology and so on up the chain of emergent phenomena. This is not to imply simplistic determinism – but discussing indeterminism would make this post far too long – but it is to imply enmeshed dependency, inter-dependency and contingency, for want of a better phrase. (I am writing quickly.)
Specifically our physical limits to growth will relate to limits imposed by the finite stocks and flows of energy and materials available to us and also the limits imposed by the absorptive and recycling capacity of natural systems. Thermodynamically, earth is essentially a “closed system” in technical parlance.
1. An “open system” allows materials and energy to pass in and out of the system.
2. A “closed system” allows energy but not materials to pass in and out of the system.
3. An “isolated system” allows neither materials nor energy to pass in and out of the system
Technically, no perfectly isolated system exists in the universe unless it be the entire universe itself. The earth is not quite a closed system as meteors, bolides etc can collide with earth and gases in the upper atmosphere can slowly escape to space. But for the purposes of discussing limits to growth, earth is a closed system on any time scale relevant to humans.
What am I arguing for here? I need to bring myself back to the point! 🙂 The real point is that the economy is a sub-system of the closed system of the biosphere. The problem with most economists, especially when they are concentrating on their metier (true business or field of activity at which one excels) is they do not know (some of them) or temporarily forget (many of them) that “The economy is a sub-system of the closed system of the biosphere.” I would expand it to “political economy”.
In fact I would propose that the following statement should be the First Axiom of Political Economy;
“The Political Economy is a sub-system of the closed system of the biosphere.”
Economics students should practically have it branded on their foreheads in year 1. Indeed, Year 1 and maybe year 2 economics should first study history, science, mathematics, philosophy, ethics and sociology, each with a bias to integrating with Political Economics. This would eventually lead to a Master of Political Economy, a profoundly more important profession that narrow Business Economics. Some such degrees do exist but do they entail all that I outlined? I don’t know.
And note the difference between offering paid work as Keynes suggested and helicopter drops as Friedman suggested. By requiring the donation of ones time for the currency the value of the currency, at the margin, is the value of the time it takes to earn it, and so the job offer can be without limit without devaluation risk. However unlimited helicopter drops where one does next to nothing to get that currency would result in the value of the currency becoming next to nothing, hence said drops must be limited.
Nor do I recall this being considered by either or anyone else?
do you include mineral resources as part of this “biosphere”? ‘Cos it sound like you are talking about biomass or something.
Anyway, by splitting the atom we are not constrained to the energy flows of this biospehere. Millions of years worth of energy in thorium alone. With energy we can desalinate sea water. Farm the sahara perhaps, and all other dry places. We can create more biomass and expand this “biospehere” of yours.
So I don’t see whats the problem, and I would not worry about possible problems that might arise thousand years from now. They are problems for future generations to solve.
The real question is this. Is the economy about to move into an extended and perhaps interminable period of supply shocks caused by resource shortages and compounded by accidents and disasters related to climate change, species extinctions and disruptions to natural systems and cycles (nitrogen cycles, phosphorous cycles etc.)?
Only the scientifically illiterate deny that there are limits to phsyical growth in a finite system. Others accept that limits exist but contend that the limits are not near. However, a characteristic of exponential growth is the rapidity with which limits are reached. It may take many interations or generations to reach 50% of a system’s carrying capacity. It then takes only one more interation or generation to reach 100% of capacity.
Considerable evidence exists that we have reached full capacity; indeed evidence is we that have exceeded it and are now living on borrowed natural capital as we destroy the earth’s endowments faster than they regenerate.
Still others argue that substitutions (solar power for fossil fuels, ubiquitous resources for localized recources) can at the very least support a stabilised population of 7 billion to 10 billion. I find it doubtful but it may yet be possible. However, in this event we need to adopt and implement, as a matter of urgency, a series of “transition protocols” as they are sometimes known. In the event of the adoption of transition protocols, a broadly MMT approach to economics coupled with a globally organised cooperative and dirigist approach to the entire program might suffice to prevent civilizational collapse and the extinction of “homo sapiens” as we inaccurately term ourselves.
By requiring the donation of ones time for the currency the value of the currency, at the margin, is the value of the time it takes to earn it, and so the job offer can be without limit without devaluation risk. Warren Mosler [emphasis added]
What?! Paying some people to waste their time does not devalue or potentially devalue a currency?!
I think you have it backwards. Simply giving people money would allow them, by definition, to engage in personally meaningful activity, and some of that personally meaningful activity would add to the value of the currency by adding goods and services that the currency could buy or, in the case of volunteer work, by decreasing the amount of currrency that others would need to spend.
F. Beard: No, it is you who have it backwards. A JG, the WPA, employing people to do good stuff is NOT wasting their time. Unlimited helicopter drops or burying bottles of banknotes will just cause inflation, as Warren Mosler says above. (Though I am not sure what he means by “Nor do I recall this being considered by either or anyone else?” Keynes certainly understood the inflationary potential, and that such jobs should be targetted at the poor and jobless, and not just used to bid up wages.)
Your mistake is that you consider that only private, profit-oriented work can be “GOOD”. People can’t just decide what would be a good thing to do. And do it. Which they can, if there is someone to foot the bill. Which boils down to the people themselves considered as a whole, the sovereign. So in turn it boils down to just understanding what you can do, and doing it. Frankly, the idea that only the sector which we are wont to call “private” can perform constructive work is insane, and essentially self-contradictory besides.
Yes, a JG could be worse than helicopter drops, worse than a depression. If the JG jobs are bad enough, are designed to create bads, like breeding and spreading smallpox, blowing up buildings etc. But, this is not what MMT or Keynes etc. proposes. All this says is that “doing something can be worse than doing nothing”.
But a sanely run JG – directed with the intelligence and experience say of a 12 year old child – is MORE libertarian, more individualistic than a helicopter drop. Allows more scope for “personally meaningful activity”. Whatever the “giving people money” is, it is fixed and set from above. It is paternalism. It pretends to omniscience. A good JG allows people to DECIDE how much money they want to have, within limits set by politics and the productive capacity of the economy and the number of hours they can work.
The point is that a BIG alone cannot really work in the long run. It is politically and intrinsically unstable because it is “something for nothing” at least on the face of it. It could work, and I would support it, in the context of having a JG – which is infinitely more important – because a JG is “something for something”. And so can work, forever. BIG supporters should support the JG yet more, because a BIG without a JG is doomed.
Most people that are against a JG assumes that the jobs provided will be “make work” or “wasteful” because it will be done by employees paid by the government. But isn’t a JG just an extension of all current government employees? The police force, public health workers, park rangers etc etc, all are paid for by the government. If you are against the JG, are you against all government employees as well?
” But isn’t a JG just an extension of all current government employees?”
No I don’t think so. It is much more than that.
It is the guarantee of a permanent alternative job offer for everyone in society, where the wages are paid for by the currency issuer. Which sector provides the work and how that work is organised is very much up for debate.
The permanent alternative job offer part of it is very important. Because that means you can *choose* to leave your current job and take up a Job Guarantee job instead. So it’s not something you can only access if you are made redundant, or your ‘private sector’ employer fails. It is a permanently available option that competitors for labour – public *and* private – constantly have to outbid if they want any labour.
So I would see Job Guarantee competing with existing public sector jobs as well – ensuring that managers of local ‘income constrained’ government agencies cannot use the usual trick of slashing budgets and putting extra load on already overloaded public servants in fear of their jobs.
I’m with the MMT economists in that in that it is best for the private sector if it has a strong ‘fixed price’ competitor for labour outside that sector. That ensures that there are no perverse incentives and that it is better for the private sector overall – since competition then keeps it lean, mean and efficient in its use of labour power.
While Government is the issuer of the currency it comes down to the question of whose currency is it anyway? In an authentic Democracy the answer is that it is the people’s currency. So rather than paternalistically determining that currency issued should be deployed on this or that public works, some corporate or personal welfare programs, and an elastic money-for-jobs program, why not distribute it directly to the people on an annual basis. The welfare, pension and job guarantees go away immediately. The public works are agreed on by the people on a year-by-year (or appropriate planning horizon) basis, and financed by a holdback from the monetary right. The annual payout is calculated as some proportion of the (goods, services, capabilities) value in the economy. This should not account for every individual’s labour component as that would lead to an inflexible and communistic system.
Every individual is then entitled to spend the income they have as they see fit, and augment it by deploying their labour in personal enterprise, public works, or some corporate enterprise. This takes the coercive element out of the labour market, and rebalances the relative contributions and rewards of, say sewer workers and investment bankers, or shop assistants and rock stars. Those who desire to live simply and frugally can add the necessary 2 or 3 days labour to realize such a lifestyle. Those who wish to accumulate big time add 6 or 7 16 hour days. The bulk of the people will probably put in 4 or 5 normal days, fund their lives and their families, and ‘save’ enough to augment their retirements at the age they choose to slow down and switch from accumulative activities to vocational activities.
No helicopter-dumping ridiculous metaphors required.
“That assumption (that economists know what they are doing) turned out to be profoundly wrong and dangerous, a major intellectual failure.”
Delving into economics is like going into the cockpit and finding the pilot and co-pilot arguing about how to fly the plane. It is both fascinating and scary – so much so that we are all desperately trying to help.
I believe the problem of prosperity needs a new approach. I suspect the problem is too complicated when the focus is on money and the approach is to establish laws (nomics) that model the behaviour of money. Perhaps the major intellectual failure can be overcome if we simplify the problem and think more about people instead of money, or better, think of money as being people.
If money is a means of exchange it is a means of organising the activity of people. If money is a promise it is a means of organising the activity of people. If money is debt it is a means of organising the activity of people. Earth is a human ecosystem and I see the problem of sustaining prosperity more likely to be solved by considering it an eco-logistic problem rather than an eco-law problem.
The major intellectual failure is our inability to recognise that MOST western human resource is wasted. Most of what people do is unrelated to survival. As we approach an age that presents serious barriers to population growth the intellectual deficit needs to be turned into a surplus. We can begin by considering the policy of allowing the long term unemployed to remain unemployed as throwing money down the drain.
>If money is a means of exchange it is a means of organising the activity of people.
>If money is a promise it is a means of organising the activity of people.
>If money is debt it is a means of organising the activity of people.
Money is a catalyst. It has no value in and of itself. ‘Reactions’ can happen with resources and labour alone, but not very efficiently. Add money and the rate of ‘reactions’ can be increased, and controlled. The resources and labour are changed after the reaction, while the money is unchanged. Except that, to the extent the value of the resources and labour has increased (or reduced), the stock of money needs to be increased (or reduced). Calculating the correct amount of catalyst for the rate of reactions and the increase in value: that part is not so well defined as is catalysis in chemistry.
okay lets assume some mineral is running out, what happens?
First we exhaust most rich deposits, then we move on to medium rich deposits, then we tackle the least rich deposits. At every step of the way we have to do more labour to achieve same amount of minerals. So it works in exactly the same way as drop in productivity. As cost of production would raise, inflation is the natural result. So that would tend to push prices up faster than wages. Any such effect would have to fight it out against increased productivity due to automatisation & technical progress.
For this and other reasons, growth is not exponential in real life. It’s more like a S-curve, accelerating at first and decelerating once economies mature.
And even if we would have to give away some of our purchasing power, we can easily afford it. We in western countries have more than enough money for food, shelter and clothes. Drop in purchasing power would hardly be a catastrophe.
I’m not going to give the long-winded answer you asked for but the answer is simple.
MMT says the economy is limited by real resources and capacity not by dollars.
MMT is a description of of how monetary mechanics actually work.
The following is as stated by Tom Hickey:
MMT is a “theory” not because it is “hypothetical”. It is because it draws causal implications from generalized data constructed as model that is explanatory and predictive. That is what “scientific theory” means in philosophy of science.
In other words we know how exchanges with monetary items work, now we know that, what can we do with that knowledge – and from there we get into suggestions of policy ideas of what we can do and how that will work in theory.
It’s beginning to drive me batty that the well-read on MMT whether they accept it or not still struggle to distinguish between the description of monetary operations and the possibilities raised of what we can do with monetary operations that is not currently being done – the prescription side.
MMT is a monetary theory not an environmental theory, though with an understanding of MMT it can be applied to environmental outcomes. I believe that is something ecological economist Phil Lawn of Flinders University covers.
“Money is a catalyst” is a fine analogy too. A question is what reactions do we want?
“It’s beginning to drive me batty that the well-read on MMT whether they accept it or not still struggle to distinguish between the description of monetary operations and the possibilities raised of what we can do with monetary operations that is not currently being done – the prescription side.”
It drives me batty too. We are living in an age of plenty. We have the physical resources and the technology to make the bare necessities of life affordable for everybody – yet the dominant message is the opposite.
However I feel excited because having only this week come to hear about MMT, it is clear to me, that this is a movement headed in the right direction. I think the prescription is simple – drive down the prices of food, energy, water, housing and transport. The way to do this is supply expansion and the government has the power and the responsibility to lead the way. In my book ‘The Populist Manifesto’ I give several prescriptive ideas.
The key resource is energy. Nuclear fusion can save humanity by giving us unlimited power forever. Water can be desalinated and pumped and the desert turned green. The current world population growth rate is 1.5% increase per year. At this rate it will take only 307 years to fully populate the Earth assuming the Earth can support 1 trillion human beings. If the population is prevented from growing there will be big trouble.
There is a clear distinction between the New Keynsian approach to money and the Post Keynesian and that, as I understand it is that the former believe money (bank and Govt) is exogenous whle the latter maintain both types are endogenous.. Doesn’t talking aout ‘Helicopters’ merely blur that distinction ?
economic growth is measured in money not the amount of the biosphere used
the majority of consumers make do with poor quality goods and services
economically less can be more
the west has discovered how to reduce population growth
give contraceptive, educational and career opportunities to woman
it really is that simple
the job guarantee
so much better than what is currently on offer but surely not required if sufficient stimulus is
introduced into the economy
and government can focus on providing the health and educational services required
as well as the carbon neutral energy and green as possible mass transportation
hope fully directly to avoid hand outs to the rich but here spending money can be
deflationary as government spending can be targeted with the goal of reducing green energy mass
job guarantees or what I would prefer direct non bond accounted for broad and deep welfare
still have to overcome one problem increased spending ending up in the hoards or speculative
asset bets of the rich
only minimum and maximum incomes can insure what goes around comes around
the only sustainable source of economic growth in a mass consumer society
aimed towards sustainable sources(human labour) and increasing quality and usefulness