British House of Lords inquiry into the Bank of England’s performance is a confusing array of contrary notions
On November 27, 2023, the Economic Affairs Committee of the British House of Lords completed…
Over the last few years, it is clear that Modern Monetary Theory (MMT) is achieving a higher profile and the attacks are starting to come thick and fast. I see these attacks as being a positive development because it demonstrates that recognition has been achieved and a threat to mainstream ideas is now perceived by those who desire to hang on to the status quo. Hostility and attack is a stage in the process of a new set of ideas becoming accepted, ultimately. Clearly, some new interventions never receive acceptance because they are proven to be flawed in one way or another. But I doubt the body of work that is now known as MMT will be discarded quite so easily given my assessment that is is coherent, logically consistent and grounded in a strong evidence base. As part of this evolution there are now lots of what I call ‘sort of’ contributions coming from mainstream commentators. One of the ways in which mainstreamers save face is to claim they ‘knew it all along’ and that the existing body of practice can easily accommodate what might be considered ‘nuances’ or ‘special cases’. We are seeing that more now, with the more progressive mainstream economists claiming there is nothing ‘new’ about MMT that it is just what they knew anyway. Even though that approach is disingenuous it is part of the evolution towards acceptance. People have positions to protect. These ‘sort of’ contributions demonstrate a sort of half-way mentality – a growing awareness of MMT but with a deep resistance to its implications. A good example is the UK Guardian’s editorial (April 15, 2018) – The Guardian view on QE: the economy needs more than a magic money tree.
As a little historical aside – about stages in acceptance of new ‘things’ (ideas) – at the Third Biennial Convention of the Amalgamated Clothing Workers of America in 1919, held in Baltimore, Nicholas Klein, a delegate from Cincinnati was given the floor to “say some few words of encouragement to the Schloss Brothers strikers of Baltimore, who had been on “strike for five consecutive weeks”.
He spoke to the delegates about the strength of worker organisation and the importance of the Union.
His contribution is recorded in the Proceedings of the Third Biennial Convention of the Amalgamated Clothing Workers of America (Baltimore, Maryland, May 13-18, 1919).
To illustrate his point, he finished with a excellent example of how social perceptions and opinions change when new ideas emerge that challenge the cognitive dissonance of the mainstream.
Here is what he said (pages 51-53):
I close by telling you the story, because I think it explains better than anything else, at this time, the great possibilities which can come to labor. There is a story told about the making of the first railway. There was an old man, it is said, whose name was Stevenson, who made the first locomotive. You know, just like in the labor movement they said locomotives were impossible. You had to have horses or cattle to pull a train; that nothing would go without something being attached to it. There would be no locomotion.
And when old man Stevenson proposed a train – something to be run without the aid of horses or oxen, he was ridiculed. One day a test was made, and they laid two pieces of wood and upon these two pieces of wood they placed some thin sheets of metal, and upon that crude arrangement was placed the first locomotive.
And it is said in the story that thousands of people were out to see the first test of that locomotive, and of course the people all shouted, and pointed to their heads, and said the man was crazy, and they said the locomotive was out of the question; it was impossible, and the crowd yelled out: “you old foggy fool! You can’t do it! You can’t do it” and the same everywhere. The old man was in the cab, and somebody fired a pistol and the signal was given. He pulled the throttle open and the engine shot out, and in their amazement the crowd, not knowing how to answer to that argument, yelled out: you old fool! You can’t stop it! You can’t stop it! You can’t stop it!” (Applause.)
And my friends, in this story you have a history of this entire movement. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to.
And that is what is going to happen to the Amalgamated Clothing Workers of America.
Relatedly, the idea of locomotives replacing horses was the subject of vigorous debate in the coal mining districts of Britain in the early part of the C19th.
This historical account from a book published in 1857 by Samuel Smiles – The Life of George Stephenson and of his son Robert Stephenson (Harper Brothers, New York) is interesting.
In Chapter VII George Stephenson’s Farther Improvement in the Locomotive – Robert Stephenson as Viewer’s Apprentice and Student – Smiles discusses the resistance in local communities to George Stephenson’s locomotives.
We read that:
… the voice of the press as well as of the public was decidedly against the “new-fangled roads.” … [the idea that] … steam-carriages … were to supersede the use of horses entirely, and travel at a rate almost equal to the speed of the fleetest horse!” … was too chimerical to be entertained, and the suggested railway was accordingly rejected as impracticable.
The “Tyne Mercury” was equally decided against railways. “What person,” asked the editor (November 16th, 1824), “would ever think of paying any thing to be conveyed from Hexham to Newcastle in something like a coal-wagon, upon a dreary wagon-way, and to be dragged for the greater part of the distance by a ROARING STEAM-ENGINE!” The very notion of such a thing was preposterous, ridiculous, and utterly absurd.
It is almost comical to read these historical accounts now.
But Groupthink, vested interests and all the related sources of resistance has been a powerful force holding back the acceptance of new ideas that are superior to the old.
The media has long been an important vehicle in giving voice to these vested interests.
Which brings me to the Guardian Editorial cited in the Introduction.
The UK Guardian maintains the myth that:
Quantitative easing succeeded in staving off disaster …
I will come back to that.
Their latest tack is that Brexit will open up new possibilities for Britain once it escapes the provisions of the Lisbon Treaty that ban central bank bailouts.
The Editor notes that Jeremy Corbyn’s early suggestion (2015) for a ‘Peoples’ QE’ was forbidden under EU membership but would become possible once Britain leaves the EU.
They don’t endorse Brexit but just “observe that the quiver of the argument against printing money might lose an arrow or two if we leave the EU”.
I wrote about Peoples’ QE in this blog post – PQE is sound economics but is not in the QE family (August 15, 2015).
The Editor observes, however, that Lisbon Treaty notwithstanding:
In fact, the Bank of England, while the UK was in the EU, did print hundreds of billions of pounds to avoid economic disaster. At the push of a button, the Bank conjured up £435bn to buy up gilts – government bonds – and exchange them for bank deposits. On the national balance sheet this sum is listed as debt, but it is not in the strictest sense because it is not owed to anyone. Turns out there is a magic money tree.
Well, in fact, that is not a factual statement.
Even a simple excursion to the – Bank of England – demonstrates the propaganda element in the Guardian’s claim.
The Bank states clearly:
The Bank of England can purchase assets to stimulate the economy. This is known as quantitative easing …
Quantitative easing does not involve literally printing more money. Instead, we create new money digitally …
Quantitative easing is when a central bank like the Bank of England creates new money electronically to make large purchases of assets. We make these purchases from the private sector … The market for government bonds is large, so we can buy large quantities of them fairly quickly.
The purchases are of such a scale that they push up the price of assets, lowering the yields (the return) on them. This encourages those selling these assets to us to use the money they received from the sale to buy assets with a higher yield instead, like company shares and bonds.
As more of these other assets are bought, their prices rise because of the increased demand. This pushes down on yields in general. The companies that have issued these bonds or shares benefit from cheaper borrowing because of these lower yields, encouraging them to spend and invest more …
No printing presses involved.
And no direct spending effect.
Whether it was successful “in staving off disaster” as the Guardian claims is another matter.
The data suggests otherwise.
The recovery really didn’t come until George Osborne curtailed his obsessive austerity pursuit and allowed the deficit to grow in 2012.
If QE had have done anything significant for the real economy, then we would have expected business investment to have picked up.
The following graph shows it didn’t do anything remarkable between 2010 and 2017. In historical terms the Business Investment ratio was around 12.6 per cent in 1998. It is now at 9.3 per cent and showing no signs of returning to the previous higher levels.
And the Guardian even recognises why, even though it wanted readers to believe that QE had done a remarkable job of saving the UK from permanent recession.
Having sold their gilts back to the Bank, investors bought up company stocks and bonds or property – sending prices to record highs – instead of creating new activity in the real economy, higher growth and jobs … The result was that the injection of money caused a stock-market boom in the financial economy, but on the real economy – the target of the policy – it had little effect.
Which makes one wonder about the editorial process at the Guardian, particularly when it comes to the so-called Editorial Comment, given the sub-title of the Editorial was that QE “succeeded in staving off disaster”.
No it didn’t. It did very little in fact. It certainly bestowed massive capital gains on holders of the financial assets that the Bank of England purchased and, in that sense, increased inequality, given the skewed nature of ownership of those assets.
But in terms of the real economy – as the Guardian concedes, “it had little effect”.
Which then brings the Editorial to the ‘sort of’ MMT narrative.
1. “Government spending, however it is financed, needs to be the main agent of recovery” – that is, fiscal policy should be the primary macroeconomic policy tool to ensure the economy maintains growth and avoids recessions.
The ‘sort of’ tag relates here to the “however it is financed” qualifier. This is mainstream resistance to the reality constraining the full exposition of what the UK government can actually do, and which was hinted at in the opening paragraph of this Editorial (when it recognised that governments can simply spend its own currency without ‘financing’).
The Editorial notes that an effective use of fiscal policy was resisted because government “ministers were ideologically resistant to” deploying it.
The Guardian then suggests what Jeremy Corbyn should do if it wanted to be imaginative:
Its plans could have seen the central bank instructed to hand over funds to a state body so it could buy services and goods without issuing debt.
The MMT solution.
Run deficits to advance well-being and only reign them if with higher taxation if the economy hits full capacity and in is danger of accelerating inflation.
The Editor sees “two objections to this” proposal:
… one is the Bank would have to pay interest on excess reserves, which would inevitably build up; or let its target rate fall to zero. Both occur today and are managed. The second is hyperinflation. Yet all spending – government or private – carries an inflation risk.
Pure MMT being espoused there.
Note the language being used – “all spending – government or private – carries an inflation risk”.
If you do a string search of my writing you will find those exact words. Pure MMT. Mainstream macroeconomists never make that essential point when talking about fiscal deficits.
They leave the readers with the impression that government deficit spending is a special category of inflation risk. It is not and the Guardian editor clearly understands that.
And in relation to the inflation risk, we get some more pure MMT from the Guardian editor:
A future chancellor could commit to using fiscal policy to make sure nominal spending keeps pace with the real capacity of the economy to produce goods and services – and withdraw the stimulus if annualised GDP growth exceeded … [that capacity].
Again, if you do a string search of my writing you will find those exact words.
This is not the way a mainstream macroeconomists talks or writes.
This way of constructing the inflation problem is pure MMT.
And in conclusion, the Guardian recognises that the UK growth is languishing and in that vein:
The lack of demand in the economy needs urgent attention. Enlarging the economy may need bigger thoughts than politicians have so far entertained.
Exactly, what the MMT economists, such as yours truly, have been saying for years now, as advanced economies have been languishing in a state of excess capacity and elevated levels of unemployment.
The point is that now we have mainstream editorials using MMT language and constructs, which I think is progress.
There remains resistance for sure. But think about that speech made in 1918 to the delegates at the Third Biennial Convention of the Amalgamated Clothing Workers of America.
The arguments and criticisms are coming up with different points now.
We are debating inflation rather than insolvency.
We are recognising the central bank can control yields and only considering the impacts of that.
You won’t find those sorts of insights in a mainstream macroeconomics textbook yet, but time is ticking. Our next textbook is due out in November 2018 and I hope it will eventually form part of the mainstream teaching curriculum in world universities.
Part of the on-going resistance to MMT ideas is the rather odd claim that the population are not capable of absorbing its implications without engaging in destructive behaviour.
This came up again from our German-friends at Makroskop who appear intent on just repeating the same assertions about the political impractability of basing policy on the principles of MMT over and over again.
I dealt with the first entreaty in this three part series:
1. My response to a German critic of MMT – Part 1 (March 26, 2018).
2. My response to a German critic of MMT – Part 2 (March 28, 2018).
3. My response to a German critic of MMT – Part 3 (April 3, 2018).
Anyway, most recently (April 16, 2018), Martin Höpner published a further entreaty – Die Debatte um MMT: Eine Nachlese.
Remember Martin Höpner thinks that there is a case for keeping the public in the dark about what the government can and cannot do with respect to its currency – maintain the lie that it can run out of money and that spending is funded by taxes – because the citizens would not be able to handle it if they knew the truth.
They would go crazy and overspend or something and chaos would follow.
I don’t think this view is grounded in an understanding of human psychology.
The most recent article reasserted his view that (translating from German and summarising – Quotes are my translations. But I am mostly paraphrasing the argument.):
1. Humans are not robots. Good start although some days I feel like one.
2. Given that MMT exposes the truth about government spending capacity and its technical limitations (real rather than financial resource constraints), the “state could do more than it pretends to do” in the advanced world.
In other words, governments lie to people about running out of money and claim elevated levels of unemployment are inevitable because they cannot create jobs without risking insolvency.
3. If governments use their fiat-currency capacity – for example “state financing via the central bank or helicopter money” and avoid accessing “capital markets” then this would rely on “the behaviour of citizens” (spending, saving, etc) being consistent with a “stable, inflation-free growth path”.
And MMT advocates strengthening the automatic stabilisers which are ‘private market’ driven to allow fiscal policy to be highly responsive to changes in non-government spending and saving behaviour.
Elaborate forecasting is not required to know that there are people queuing up in the morning at a Job Guarantee agency wanting to register for a guaranteed job.
The government immediately knows its current degree of expansion is insufficient.
And vice versa, when the Job Guarantee pool is draining. The speed of that drain and the spatial distribution quickly informs government about shifts in non-government activity.
Almost on a minute-by-minute basis given our IT systems these days.
4. But Martin Höpner doesn’t think this will work because were are not robots. And his problem is that we are susceptible to confusion, scares and our “real life experiences of the functioning of the economy and thus of the money” are mainstream.
The public have no experience with the ideas espoused by MMT.
5. Which means that the idea that the state is still being responsible by “printing money” (there it is again) and spending without borrowing “is incompatible with everyday experience”.
That Martin Höpner asserts that MMT is a “highly simplified, pre-sociological (and therefore not ‘modern’) theory of action because we, allegedly, suppose that such radical departures can be introduced without the unintended effects on the citizens”.
And what are those “unintended effects”?
Well he “does not pretend to be able to predict in detail the effects” – although he thinks people will lose confidence in the currency.
This is a repeating argument
He just asserts, again that:
… inflation … would inevitably have to break out … once the myth that governemnt spending was not revenue-constrained.
Presumably, because either the government would overspend or the citizens would stop saving (having lost confidence in the currency) and went on a spending spree.
Martin Höpner thinks both would happen.
He also thinks that the MMT notion that governments do not need to fund its spending is “practically unable to be eradicated because it is a perfect fit of our everyday experiences”.
And so it is easy for politicians to use the ‘household budget analogy’ to gain political traction over its rivals.
So there is nothing new there.
We are basically stupid, habit-driven, and unable to be educated beyond our primitive daily experience of having to go out to work to get money in order to spend. We think the government is the same and if it says it is not then we go crazy and chaos results.
I disagree with all of that.
Humans have a great capacity to learn and be educated into adopting highly sophisticated understandings.
The media is highly influential. So how many people who read that Guardian editorial would go away and resist its simple (pro-MMT) narrative?
And in the last several years, the public has been confronted with major challenges from very senior monetary officials.
Remember, former US Federal Reserve Bank Governor Alan Greenspan’s famous admission on NBC’s Meet the Press (August 7, 2011) relating to a potential US debt downgrade:
The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.
Then the next governor, Ben Bernanke, a more modern man altogether because he knows the process doesn’t involve a printing press, was asked by the US 60 Minutes program by Scott Pelley (December 3, 2010) about QE and the growing fear that it would unleash an inflationary spiral.
The transcript included this Q&A (Source):
Pelley: Many people believe that could be highly inflationary. That it’s a dangerous thing to try.
Bernanke: Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that’s what we’re gonna do.
Okay, no printing presses.
QE lowers interest rates only.
Lower interest rates may or may not stimulate spending depending on a host of other things including the state of confidence, unemployment dynamics etc.
We also might recall an earlier interview between Scott Pelley and Ben Bernanke on the US 60 Minutes program (March 12, 2009) – Ben Bernanke’s Greatest Challenge .
The interview is largely a litany of mainstream statements but at one point Bernanke provided a very clear statement about how governments that issue their own currency actually spend.
At around the 8 minute mark of the segment, Bernanke starts talking about how the Federal Reserve Bank (the US central bank) conducts its ‘operations’ (in this case, how it conducts government spending).
Interviewer Pelley asks Bernanke (Source):
Is that tax money that the Fed is spending?
Bernanke replied, reflecting a good understanding of what we call central bank operations (the way the Federal Reserve interacts with the member banks):
It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.
That is, the US government spends by creating money out of ‘thin air’.
And we have now lived through nearly a decade of major shifts in government policy.
Large deficits to stimulate growth – working.
Massive expansions of central bank balance sheets (QE) in the UK, Japan, Europe, the US – all accompanied by the sort of claims that Martin Höpner is making (although he does it more politely) that hyperinflation would result and currencies would be trashed.
We have observed none of those things happening.
And has our behaviour changed dramatically? Not in any unpredictable (broadly) ways.
When unemployment started rising we increased our saving ratios – as you would expect.
When the fiscal stimulii started to work – we loosened our spending again – but modestly.
Investment has been slow to pick up because it is asymmetric due to the irreversibility of capital formation. All as expected.
Borrowing didn’t go through the roof at zero interest rates. Why not? Because credit worthy borrowers were cautious in the milieu of high unemployment and previous credit binges.
And, of course, the Japanese have been going through this process for a quarter of a century. They have seen credit rating agencies embarrassed as they downgrade Japanese government debt to junk status only for the public to observe nothing of consequence follows.
They have seen on-going deficits, low to zero interest rates, low inflation (bordering at times on disinflation), high gross public debt levels.
I haven’t seen major behavioural shifts in the economic behaviour of Japanese residents.
In fact, as I noted in my three-part response to Martin Höpner, destructive non-government behaviour accompanied the intensification of the myth narrative about fiscal deficits and the promotion of fiscal surpluses.
We had credit binges, criminal behaviour by our financial sector, and then crisis.
The UK Guardian Editorial is a sign of progress. One small step as they say.
But for years we were ignored – “you old foggy fool! You can’t do it! You can’t do it”.
Then we were ridiculed – “you old fool! You can’t stop it! You can’t stop it! You can’t stop it!”
and whenever, we might become mainstream.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.