Bank of Japan shifts ground – just a little but there is no sign of a major adjustment any time soon
It's Wednesday and I use this space to write about any number of issues or…
Regular readers will know I was doing some speaking engagements in New Zealand a few weeks ago. Please read my blogs – Travelling all day today but here is something to watch and listen to and Reflections on a visit to New Zealand – for more coverage of that visit. New Zealand is in the midst of a national election campaign and it seems that one of the aspiring parties – The Opportunities Party (TOP) – which is trying to carve out a niche for itself as an ‘anti-establishment’ party in opposition to neo-liberalism – obviously determined that the Modern Monetary Theory (MMT) message that I introduced many progressive New Zealanders to during my visit threatened their own credibility (which is a reasonable perception). So, to kill off the threat TOP went on the attack, although as you will read they found it impossible producing a credible critique of MMT and still maintain their alleged anti-neoliberal stance. Whatever, I would hope not too many New Zealand voters get lulled into believing that TOP is somehow a progressive force. Their macroeconomic narrative is strewn with neo-liberal falsehoods that are like neon-signs advertising their roots!
TOP is minority political force in New Zealand, a sort of plaything of the very rich, Wellington-based Gareth Morgan, who made a significant fortune in the financial and share markets.
TOP claims it “does not seek to be the government” but rather seeks “to substantially influence the policies the government of the day implements”.
A sort of rump, in other words.
In this NZ Herald article (June 15, 2017) – Political Roundup: Is Gareth Morgan’s TOP really an anti-Establishment party of outsiders? – we read that TOP:
… needs to be clear what it stands for.
Is Gareth Morgan’s TOP really an anti-Establishment party of outsiders? Or is it a party of Wellington insiders and technocratic policy wonks? It’s not really clear and that’s possibly inhibiting the party’s growth. In the end, TOP probably can’t be both, and needs to communicate more clearly what it stands for, other than Morgan’s personality and policy focus.
For readers not familiar with the NZ scene, Wellington is the seat of government in NZ and is dominated by the bureaucracy, central bank officials and the lobbyists.
As the NZ Herald story relates, it is usually very difficult for “new parties trying to break into the monopolised market that is parliamentary politics” in NZ but:
OP has one mitigating factor – Gareth Morgan’s millions.
In a related article (June 15, 2017) – Money in politics: Morgan prepares to spend $5m – the TOP founder Morgan told the reporter that:
The sad reality of politics is you have to have money to play.
Which is a statement that should support publicly-funded elections in every jurisdiction to avoid the problem where the rich can buy their way into elections and skew the policy outcomes to advance their own interests.
NZ is not unique in that respect.
But with all that noted, apparently, my visit to NZ stirred TOP into action – to eliminate any threat on their electoral fortunes that exposing NZ voters to Modern Monetary Theory (MMT) might have. I don’t think they succeeded as you will see below.
By way of background, I was privy to the contents of this article in an earlier draft – Modern Monetary Theory – Will it Work? – the day after I returned from New Zealand.
TOP had sent it to the sponsor of my visit, asking him to elicit my comments. I provided comments, respecting the privacy etc and declined to make the contents of that correspondence public.
That is, until now.
Clearly, TOP didn’t quite understand my response and in their public (edited) statement – (cited above) they continue to make the same mistakes, which prevents them from fully representing the capacities of the New Zealand government to the people in the upcoming election campaign.
So here is what they said and what I said in response.
The concept of Modern Monetary Theory (MMT) is gaining traction around the world, and the visit of Bill Mitchell last week has given a boost to these ideas locally. There are a bunch of things where MMT has a similar view of the world to conventional economists. It also debunks a few of the popular narratives about government surpluses and deficits, particularly challenging the idea that the government’s books are the same as running a household. Whether or not the ideas will work depend a lot on the circumstances, and while MMT has a lot to offer we don’t think New Zealand is ready to apply it – yet.
At the outset of my public presentation in NZ – Thinking in a Modern Monetary Theory Way – and in subsequent meetings I emphasised that Modern Monetary Theory (MMT) is not a regime that you ‘apply’ or ‘switch to’ or ‘introduce’.
Rather, MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.
It helps us better understand the choices available to a currency-issuing government.
It is not a regime but a perspective on reality.
It lifts the veil imposed by neo-liberal ideology and forces the real questions and choices out in the open.
In that sense, MMT is neither right-wing nor left-wing. I meant by that, that while MMT provides a clear lens for viewing the system, to advance specific policy platforms, one has impose a value system (an ideology) onto that understanding.
So, while I advocate the state resuming its historical responsibility under the Post World War 2 social democratic consensus for sustaining full employment, because my values tell me that the ability to have a job is a key element of a sophisticated society and a starting point for social inclusion and equity, others might consider mass unemployment to be of use.
For example, they would mass unemployment as advancing the interests of capital by suppressing the capacity of workers to share in productivity growth and maintain real wages.
But they would not be able to say the ‘state has run out money and cannot provide work for all’. They would be forced to justify the state not taking responsibility to eliminate mass unemployment via direct public sector job creation in terms of more venal motives.
In that sense, the political debate would change dramatically.
The NZ monetary system already operates according to the principles of MMT. Government policy already is conducted within a modern monetary environment.
The New Zealand government uses a fiat currency, which it issues under monopoly conditions and floats it freely on international currency markets.
So the statement that “we don’t think New Zealand is ready to apply it – yet” is nonsensical.
What we can guess TOP is trying to say is that they don’t like some of the policies I was advocating, which is an entirely different position to start out from.
In their earlier draft of the article, TOP had added:
However to many conventional economists there is not a lot that is new here, and certainly no free lunch to be had for New Zealand.
They chose to delete that sentence from the second draft although the tenor of the article is that the so-called “conventional economists” knew all the MMT insights all along.
That is clearly false.
MMT proponents clearly agree that there is “no free lunch”.
But unlike the conventional economic framework that deploys the so-called ‘Government Budget Constraint’ framework, which invokes an a priori financial constraint on government deficits, MMT shows that the constraint on government spending is ultimately determined by the real resources that are available for purchase in the currency that the government issues.
So, ultimately a nation’s standard of living is limited by the real resource base it commands.
TOP asserts that mainstream economists concur with MMT that “the government’s books are not the same as running a household”.
If that was true, why do these mainstream economists continually use terms like ‘taxpayer funds’ and why do they suggest that deficits have to be funded by borrowing?
Why do they claim that there are financial limits on government spending?
And in that context, why do they then conduct elaborate analyses that purport to show the negative effects of the so-called deficit financing choices (taxation and borrowing).
Why do they often quote papers such as Reinhart and Rogoff, which claim that a national, currency issuing government will risk bankruptcy if the public debt ratio rises beyond 80%.
I could give countless examples how in both the teaching and publishing realm, conventional economists fail to understand the difference between a currency user (household) and the currency issuer (government).
MMT is, of course, much more than a narrative about government surpluses and deficits. It provides a detailed understanding of the way in which banks, central banks, and treasuries interact, which is unavailable in the standard textbooks and teaching programs.
It debunks the standard narratives from conventional economists about interest-rate effects arising from deficits (the so-called crowding out hypothesis).
In fact, the immediate impact of fiscal deficits on the monetary system (by adding to bank reserves and creating excesses that the commercial banks seek to reduce) promotes downward pressure on short-term interest rates, contrary to the view espoused by conventional economists.
It also debunks the view expressed by most conventional economists in their public statements and teaching programs that banks require reserves before they can make loans. In fact, loans create deposits and banks then worry about the reserve implications later. Why this matters is that the idea that governments compete for scarce funds in loanable funds markets and thus drive out private investors is false. Yet it remains a central part of conventional economics wisdom.
There are many other contributions made by MMT, which are not presented in the conventional economics narrative, and, indeed, contradict the dominant view.
I provided a three part series Modern Monetary Theory – what is new about it? last year:
1. Part 1.
2. Part 2.
3. Part 3.
There is a very detailed discussion of how mainstream economists are now trying to claim there is “nothing new” about MMT and that conventional economists “knew it all along”.
Nothing could be further from the truth.
The TOP article then decided to catalogue “What we agree on” – that is, where it has not problem with the statements made by MMT proponents.
The same old “we knew it all along” is rehearsed again:
MMT is not particularly new, and is grounded in many of the same ideas as conventional economics.
MMT proponents point out that the school of neo-liberal economists have fallen into “group-think” and are blind to some aspects of their own theories, which is probably a fair point. The core MMT thesis is that the government can spend whatever it likes, there is no limit because it issues money, and by implication the whole notion of balancing budgets or running permanent surpluses is a conservatism that condemns our economy to underperformance.
The correct statement is that there is no financial limit – as per my comments on real resource constraints above.
Accordingly, TOP says:
MMT is right to point out that money is just a tool, and that governments that issue their own currency are ultimately not constrained in their spending; as long as that spending is in the same currency! Claims that we ‘can’t afford’ to do something are wrong; anything is possible if you make it a priority.
So we agree.
No mainstream macroeconomics textbook says anything remotely like that.
And, TOP agrees:
… there are still real limits … While money has no limits, the real economy does. Employment and output are constrained by the quantity and quality of inputs, and there are environmental limits too. Once you use money to push beyond those limits, you just get inflation.
Which means that:
… if there is unused capacity in the economy, then the government can conceivably stimulate the economy without causing inflation. That is the case regardless of the government’s debt levels, because the government can create money.
MMT clearly explains (as noted above) that you cannot do everything that you want.
MMT clearly states that while the government has no financial constraint on its spending capacity, it certainly has a real constraint on what it can spend its currency on.
It can only bring into productive use real resources that are available for sale.
It is also bound by the constraints posed by the natural environment.
A core notion of MMT is that attempting to go beyond those real constraints results in inflation.
So the idea that there are still limits to government interaction with the non-government sector in spending terms is 100% correct and 100% core MMT.
This means that we concur on the understanding that the currency-issuing government always chooses the unemployment rate in the economy at any point in time, once the non-government sector has made and implemented its spending and saving decisions.
Taken together these points of agreement mean that if there is mass unemployment, you know that the fiscal deficit is too small (or the surplus too large), and that the government has made a political choice to sustain the mass unemployment.
No mainstream macroeconomics textbook says anything remotely like that.
It is interesting that in their initial draft, TOP claimed that (in relation to MMT):
As with most new paradigms in economics this group has a point. The trouble is that in this game being half right can be as dangerous to our economy and society as being totally wrong.
Note the use of the terminology – “new paradigm” – which if we use that concept as it is in the literature means a break from the current dominant way of thinking.
That puts the claim that “we knew it all along” further into context.
Moreover, as I commented in my response to the draft document, the implication, in this context, is that MMT is only “half right”. That type of terminology is a loaded and biases the reader towards a view that MMT has significant shortcomings.
First, the contention “that the government can spend whatever it likes, there is no limit because it issues money” is 100% correct for currency-issuing nations such as New Zealand.
Second, the empirical evidence would suggest that the shift to fiscal austerity has delivered sub-standard outcomes across most major economic aggregates.
Third, it is 100% correct to say that if the government runs a fiscal surplus then it condemns the non-government sector to run a deficit (spending more than its income) as a matter of accounting, dollar for dollar.
It is 100% correct then to say that this strategy means that the non-government sector will be increasingly adding to its indebtedness.
In most situations, that process is finite and the need for balance sheet correction will force the government back into deficit through the operation of the automatic stabilisers and, in doing so, the nation would likely experience a financial and economic crisis.
It is also 100% correct to say that if the non-government sector desires to save overall, then the government sector has to run continuous deficits to fund the non-government sector aspiration.
If the government sector tries to run surpluses at a time the non-government sector is trying to save overall, then the result is recession.
This is not a matter of opinion but the results derived from a correct understanding of the sectoral balances and the behavioural factors that drive the balances, which are derived from the national accounting framework.
These insights are also not to be found in a mainstream macroeconomics textbook.
Further, in the original draft, TOP claimed that “MMT is partly right”. I responded, that once again, the reader is led to believe that MMT is only a partial story.
Under this heading the TOP claim discusses the MMT observation that a currency-issuing government cannot run out of the currency it issues. That is 100% correct. It is not partly right.
In that context, it is also 100% correct to say that a government can afford, in financial terms, anything that is for sale in its own currency.
It is therefore 100% correct to say that there is no financial constraint on government spending, where that government issues its own currency.
In that context, is 100% correct to say that all policy choices are political rather than reflect any intrinsic financial constraint.
Clearly, as I explained in detail in the public presentation and the roundtable followed, these policy choices will reflect the value system preferences that the policymaker imposes on the choices available.
MMT is a lens not a value system.
The TOP article then moves on to ask “Would MMT Work?” by applying these principles “to the modern New Zealand economy?”
It thinks there are “two tricky issues that need to be dealt with before we even look at MMT”.
Which is again a nonsensical construction given that NZ already is operating according to MMT principles. The two tricky issues are about policy choices and ideology but the TOP article doesn’t make that clear to its readership because it has already fallen into the erroneous belief that MMT is a regime.
The first “Tricky Issue” TOP introduce is “Housing Speculation”:
The fact is that our property tax loophole already constrains monetary policy from doing more. Many economists agree that in recent years interest rates should have gone even lower here than they have. The Reserve Bank has been unable to lower interest rates further for fear of stoking the housing crisis.
The big risk of New Zealand running a MMT-style deficit right now would be that the extra money would simply push up house prices even further. We need to reform the tax system and close the tax loophole on property before we think about implementing any of these ideas. MMT experts like Bill Mitchell acknowledge this issue.
A correct understanding of MMT would not suggest that the NZ government should introduce a generalised fiscal expansion where it competes with the non-government sector for real resources at market prices.
Remember that currently there are around 13 per cent of available labour resources in NZ idle in some way or another and 1/3 of its children are living in poverty.
Further, there is a state housing crisis (shortage) as a result of years of neo-liberal policies which asserted that the ‘market’ would take care of housing needs if prices were allowed to move without regulation.
There is clearly scope for both spending and taxation changes in NZ to ensure that the idle resources in New Zealand are brought back into productive use but, that the government doesn’t contribute to creating resource shortages in areas where inflationary pressures are already high, for example, the property market.
A state housing program would both improve the well-being of disadvantaged New Zealanders and take pressure off the demand in the private housing market.
Further, counter-stabilisation policy should not rely on the monetary policy manipulation of interest rates to ensure spending is at levels sufficient to bring these idle resources into productive use.
Governments have the capacity to ensure house prices are stable if they are prepared to take on the tax rorts such as “negative gearing”, which biases the housing market to price speculation and prevent overseas capital speculating on real estate.
At present, there are many tax breaks that should be changed in NZ, which would put a brake on the housing market. Neo-liberal governments are reluctant to eliminate those breaks.
The next NZ government should eliminate negative gearing, stop foreigners from buying existing homes and/or speculating on apartment towers, and tighten the capital gains tax rules that allow hot profits to be made on so-called quick sales of ‘rental properties’.
The idle labour and poverty tells me that the fiscal deficit is too small relative to the non-government spending behaviour.
The fact that there is one segment of the economy that is experiencing excess demand (housing, particularly in Auckland) tells me the composition of fiscal policy is wrong.
That all sounds like an application of MMT to me.
TOP’s second “Tricky Issue” is about “Sorting our Long Term Risks”.
Accordingly, we read that:
MMT proponents point out that the Establishment Parties in New Zealand are overly obsessed with balancing the books. There is one good reason for this; because we have a whole lot of liabilities that aren’t on the government’s books. New Zealand Superannuation, a rising prison population and increasing health costs are the best examples. Meeting these costs will cause challenges for future generations in resource terms, regardless of what they do with money supply. The real economy is real, remember? We simply can’t make enough goods and services to meet the needs of the elderly.
Which is another nonsensical juxtaposition. Pure neo-liberalism.
Here we have the internal inconsistency in the position being presented by TOP.
Earlier, we read that government has no financial constraint. Now TOP is trying to say that, in fact, there are financial liabilities that will present governments with problems over time.
It is not clear whether these “challenges for future generations in resource terms” are financial or real from the narrative presented.
MMT authors have written extensively about ageing societies, the intergenerational challenges due to rising dependency ratios, and the real resource challenges faced by governments in dealing with these issues.
The essential insight, that is core MMT, is that there are no financial constraints on governments being able to fund pensions, health care and other services that may arise as the population ages and the workforce shrinks.
The real challenges of a rising dependency ratio will be the real resources that the society can command in the future.
Clearly, future generations will have to be more productive than past generations to support a broader group of citizens who are no longer working and require more intensive service support.
In that context, it is imperative that we improve our public education and health systems and ensure that all our young people are engaged in skill development to prepare them for the future productive challenge that we will place on them
In that context, fiscal austerity, which leaves a significant proportion of human resources idle, runs down public education capacity, delivers sub- standard health outcomes, is the opposite to what is required to prepare for the future.
The question you have to always ask is how does “balancing the books”, now, provide any extra financial resources in the future to pay NZ pensions (superannuation)?
A fiscal surplus today provides no more or no less financial capacity to a currency-issuing government tomorrow than running a fiscal deficit.
If as TOP agreed above, “that governments that issue their own currency are ultimately not constrained in their spending; as long as that spending is in the same currency” then their claim here about having to “balance the books” to pay for future pension entitlements, or running prisons or health costs is clearly inconsistent and impacts on how well they understand anything.
What the NZ government is not able to guarantee is that the real resources available to pensioners, or to the prison authorities or to the health system will be sufficient in the future given increasing demand for them.
That is not a ‘financial’ problem.
What this implies is that real resources will have to be diverted from other uses in the future to satisfy the real resource demands in the areas noted.
That is, once again a compositional shift in government spending and taxation. Pure MMT thinking.
Yes, “(t)he real economy is real”. That is the point. Running fiscal surpluses doesn’t change that at all, except in one important way.
If the fiscal surpluses create idle labour, run down the educational system, increase stress on disadvantaged communities, undermining the technical and vocational training systems, etc then they are likely to exacerbate the real resource conflicts in the future.
There is ample research to show that fiscal austerity does exacerbate the future prosperity.
Unemployment leads to poverty and increased crime rates and higher incidence of physical and mental illness.
Cutting public spending in education and training undermines future productivity and makes a rising dependency ratio (ageing society) bite into real standards of living.
Finally, it might be the case that NZ will not have sufficient real resources in the future to maintain the current real standard of living for all. But running fiscal surpluses or “balancing the books” will not improve that situation.
The TOP article then finishes by asking: “Does MMT offer anything for New Zealand?”
Things go from bad to worse here and, in my view, disqualify TOP from representing themselves as an anti-establishment political party – where the establishment is taken to mean the prevailing neo-liberal economic narrative.
TOP argues that:
The key point of MMT is that we shouldn’t allow capacity to sit unused, regardless of the fiscal situation. Mitchell favours a Job Guarantee Scheme that gives everyone who wants it, a minimum wage job.
This idea makes sense in the USA and UK context, where during the Global Financial Crisis there were high levels of unemployment. When interest rates got to zero they lent money to banks at zero interest (so-called quantitative easing). In an economy with low interest rates and spare capacity why would you give money to the banks? On the face of it, it would have been much better to use the money to provide jobs for the unemployed.
In the original draft of the article, TOP had added to this section “MMT has a good point to make about the USA and UK who during the Global Financial Crisis printed money and gave it to the banks (so-called quantitative easing).”
The USA in the UK did not ‘print money’ in their quantitative easing exercises. Nor did the Bank of Japan before them during the 1990s.
QE is just an asset swap. The central bank adds reserves in return for the banks surrendering other financial assets such as high-quality corporate debt and risk-free government bonds.
MMT does not support QE as a counter stabilising macroeconomic policy strategy as is implied by the above statement.
Clearly, the fiscal capacity of the government (which includes the consolidated central-bank and treasury functions), should be used to bring idle resources into productive use.
How that occurs is another question.
MMT considers the minimum intervention in this regard should be the introduction of a Job Guarantee program, which is an unconditional job offer at a socially inclusive minimum wage to anybody that desires to work.
TOP surely agrees that the NZ government has the financial capacity to introduce a Job Guarantee because it has previously agreed “that governments that issue their own currency are ultimately not constrained in their spending; as long as that spending is in the same currency”.
But then it chooses to say that:
1. “In the modern economy we prefer the simple approach of paying everyone an Unconditional Basic Income and trust that they will get on with pursuing an industrious and fulfilling life” – in other words, imposing a value system over the financial capacity of the NZ government, which has nothing to do with the insights of MMT but rather a preference for treating NZ people as consumption units rather than social people with a right to work.
2. And, there is no real need for a job creation program because “at the moment New Zealand’s economy is near full employment and still has positive interest rates”.
What? 13 per cent idle labour is full employment. That is NAIRU thinking gone mad.
3. “However, unless public investments can increase the real capacity of the economy as a whole, then more government spending would have an impact on the private sector – it would crowd it out – if only through pushing up interest rates faced by the rest of the economy (businesses and households).”
And there you have it. We have taken all that time to finally put the ‘colours on the line’ – the old furphy – crowding out.
First, how exactly does increased government spending push up interest rates? What mechanism leads to that outcome.
Yes, it might be with an inflation-targetting central bank, any spending that pushes nominal demand ahead of the real capacity of the economy to produce would stimulate inflation and hence a monetary policy response.
So, how will paying a fixed wage (at the bottom of the current wage structure) for a resource (idle labour) that has zero bid in the market – that is why it is idle – going to be inflationary?
Especially, when the idle labour is already in the public sector being supported by income support payments. The extra demand impulse from the higher incomes that the Job Guarantee workers would receive would be positive but hardly inflationary and if it was then the Government could use taxation and spending choices to reduce purchasing power elsewhere in the economy.
Second, if TOP think the crowding out comes from so-called loanable funds market impacts – government borrowing squeezing the finite savings in the economy and pushing up rates – then it fails to understand how the banking system operates.
Banks create deposits out of thin air from loans they make to credit-worthy borrowers – which means there are no finite funds to loan out.
Further, government spending stimulates national income, especially when it is bringing idle resources into productive use, which, in turn, stimulates more saving.
Spending (government or non-government) brings forth its own savings. Basic macroeconomics.
So what the hell is TOP talking about?
Finally, after all that, the TOP article seems to go back to square one:
So really MMT is saying to Bill English that the social investment approach is the right one to take. In fact, if we find good investments to make, we shouldn’t be constrained by affordability. And fundamentally, TOP agrees with that.
In short, MMT provides a useful alternative way of thinking about our economy and society. It shows that government should make good investments, regardless of affordability.
MMT does not advocate unfettered spending.
MMT does not advocate wasteful spending.
What MMT does say is that the only constraints are the available real resources and that as a first step the responsibility of the currency-issuing government is to make sure they are all being used productively.
TOP seems to agree with that. And so you have to wonder why they bothered to write the article and disclose their latent neo-liberal tendencies.
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Professor Bill Mitchell, a leading proponent of Modern Monetary Theory, has agreed to be our speaker at a fringe meeting to be held during Labour Conference Week in Brighton in September 2017.
The meeting is being organised independently by a small group of Labour members whose goal is to start a conversation about reframing our understanding of economics to match a progressive political agenda. Our funds are limited and so we are seeking to raise money to cover the travel and other costs associated with the event. Your donations and support would be really appreciated.
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