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…
I am travelling across Europe today and so am just writing this in between various commitments. I will soon be back home in Australia and have received a lot of E-mails about the way the Australian media has been treating the recent upsurge in attention about Modern Monetary Theory (MMT). The short description is appalling – one-sided, no balance and hardly about MMT at all, despite dismissing our work as garbage. So par for the course really. While most of the articles have just been syndicated hashes of the foreign criticisms that have been published elsewhere from Krugman, Rogoff, Summers and others. But there was one article by a local journalist who tried to predict which side of history would end up looking good in all this and chose, wrongly I think, to throw his cap in with the New Keynesians. More alarmingly though is that this local effort clearly followed the international trend by setting out a fiction and then tearing into that fiction claiming to his readers that this was about MMT. He missed the mark and ended up totally confusing himself. So par for the course.
Remember back to August 2008, when the world was going into financial collapse that none of the New Keynesian macroeconmists saw coming – nor could have seen, given they didn’t even have a financial sector in their theoretical framework – Blanchard wrote his smug article – The State of Macro – which attempted to summarise the consensus that mainstream macroeconomists had reached on how to do economics.
The article would have been written before the worst of the GFC was revealing itself and tells you how removed the mainstream profession had become from reality.
The mainstream has evolved into following a standardised approach to the discipline. All those who sought to publish in the discipline had to follow that approach in order to engage and be successful. Variation was discouraged.
Blanchard wrote glowingly, that macroeconomic analysis had become an exercise in following:
… strict, haiku-like, rules … [the economics papers] … look very similar to each other in structure, and very different from the way they did thirty years ago …
Graduate students are trained to follow these ‘haiku-like’ rules, that govern an economics paper’s chance of publication success.
So if an article submission does not conform to this haiku-like structure it has a significantly diminished chance of publication.
You just have to see the calls by the current critics for a ‘formal model of MMT’ within the Aggregate Demand/Supply, IS-LM framework to see how cloistered (claustrophobic) their approach has become.
The reality is that the mainstream follow a formulaic approach to publications in macroeconomics that goes something like this:
And, on the side, they write ridiculous attacks claiming to be about MMT, when people start questioning the relevance and validity of their work.
And, they have an army of graduate student trolls who Tweet their heads off attacking MMT so they will look good in the face of the ‘high priests’.
It is highly unlikely any of them have read much of the primary MMT academic literature at all.
That is where the struggle of the competing paradigms is at.
The ‘haiku’ stuff was back in 2008.
Then go forward to October 2012, when Blanchard was forced to admit that the IMF had grossly erred in its modelling that was used to construct the Troika’s Greek bailout austerity package.
The policies that were imposed were disastrous, as any MMT economist (including myself) who offered predictions at the time, said they would be.
And then we learned of the mistake.
I wrote about that pathetic back down – which cost hundreds of thousands of Greek workers their jobs in Greece – in these blog posts:
1. So who is going to answer for their culpability? (October 12, 2012).
2. Governments that deliberately undermine their economies (November 19, 2012).
3. The culpability lies elsewhere … always! (January 7, 2013).
And now Blanchard is Tweeting that like Paul, Ken, Larry and all the rest of the buffoons, he has something deep and meaningful to say about MMT but that we will have to wait with baited breath before he deigns to write it.
For now we should be consoled with these insights – crowding out, hyperinflation. Same old. Been there done that.
The longer piece will just elaborate on that. Nothing new. No engagement. Ignore.
What these guys (and they are all men so far) don’t seem to realise is that we have been working on this stuff for 25 years now and have PhDs just like them and know their stuff like the backs of our hands.
I also liked the pithy analysis of the hypocrisy of the “high priests” of mainstream macroeconomics by Lars Syll (March 10, 2019) – Summers shameless assault on MMT.
These assaults on MMT reflect the circling of the wagons – they will attempt to protect their own place in history by whatever means they can.
But I think, ultimately, they will be found on the wrong side of history, where they have been for decades but no one really directly and comprehensively challenged them about that until MMT came along.
The Australian media has been giving air to all these criticisms via syndication. So in the last few weeks, Australian readers of the major dailies have awoke to headlines about MMT being rubbish, garbage, dangerous etc.
No balance. No attempt to seek critical input.
The media owners clearly just want to push the US line.
And it was only a matter of time before some wannabee local financial journalist would seek to make his/her own mark and summarise the arguments under his own byline.
Last week (March 5, 2019), Fairfax press ran the story – Memo to Bernie and AOC: Debt and deficits still matter – from local journalist Stephen Bartholomeusz.
He is touted by media masthead he works for now as “one of Australia’s most respected business journalists”. His article about MMT would not hold to those standards (even) if they are true.
It looks like he has only read KLOP (Ken, Larry, Olivier and Paul), which sounds like … you know what … and decided to represent them as his own deep analysis.
Not much new in other words and not much indication he has actually read the academic literature from the core MMT group.
His grasp on our work is so tangential that he ends up totally confusing himself as you will see.
He began by quoting from the testimony that the US Federal Reserve Board chairman provided recently to the US Congress:
The idea that deficits don’t matter for countries that can borrow in their own currency, I think, is just wrong …
Powell was answering a question about MMT. His statement indicated that he was not qualified to comment on MMT.
He admitted he hadn’t read any of the literature.
And he will not find it written in any of the core MMT literature that “deficits don’t matter”.
So he must have been talking about something other than MMT, a point that Stephen Bartholomeusz seems to have missed, which is no surprise because by quoting Powell’s ignorance, he disclosed he hadn’t read much either.
But why let you stop making out that you are an expert in these matters?
Stephen Bartholomeusz continued:
The “Green New Deal” and “Medicare for All” programs championed by young Democrats like Alexandria Ocasio-Cortez (AOC) and older ones like Bernie Sanders would see massive increases in US government spending to respond to climate change and economic inequality. The programs have been costed at more than $US90 trillion ($127 trillion).
First, the ‘costing’ at $US90 trillion, whether correct or not, does not lead to the conclusion that the GND would “see massive increases in US government spending”.
There would certainly be increased public spending on GND projects but overall the net spending injection would have to be determined by how much idle capacity was left to be brought into productive use.
At the point where no such idle capacity exists, then the process of trade-offs begins which means spending has to be diverted into GND projects and away from other current uses, whether they be government or non-government.
It might turn out that the so-called (scary) “massive increases” don’t turn out to be all that large at all in absolute terms.
A few paragraphs later, Bartholomeusz shifted, seamlessly, from “massive increases in US government spending” to “a massive increase in government debt and deficits”.
And reminded readers that the US “already has massive debt and deficits”.
What exactly is a massive deficit? According to Bartholomeusz it is one that “is closing in on $US1 trillion a year”.
That would be a large absolute deficit in terms of, say, the Australian economy, but in terms of the scale of the US economy it was recorded at 3.7 per cent of GDP in 2018.
In 2009, it was 9.7 per cent of GDP.
Since 1929, the US fiscal deficit has averaged 3.02 per cent of GDP and has been in deficit 84 per cent of the years to 2018.
Each time it has gone into surplus, a recession has followed soon afterwards.
So a deficit of 3.7 per cent of GDP doesn’t sound massive in that sense.
While a trillion dollars invokes ‘big’, and that is why Bartholomeusz used the absolute figure, no serious economist would make any conclusions based on such a number.
The point is that Bartholomeusz knows his readers will not be discerning enough to scale the deficit appropriately.
Further, even a number like 3.7 per cent of GDP makes no sense in itself.
What is it in relation to? What is the context?
To make sensible assessments about the appropriateness of a particular fiscal position, one has to understand the non-government sector spending and saving position, which includes the external sector.
If the 3.7 per cent deficit was “massive” (meaning in Bartholomeusz-speak inappropriate), and, out of kilter with the spending and saving decisions of the other sectors (private domestic and external), then we should be observing inflationary pressures rising quickly and wages growth escalating in the face of over-full employment.
Neither are happening and are no where near happening.
Mr Bartholomeusz wants to write about MMT but he clearly hasn’t understood the way MMT economists go about analysing a situation.
If he did, he would not have started scaring people with totally over-the-top words such as “massive” in relation to a 3.7 per cent deficit that is supporting a balance sheet restructuring in the non-government sector.
He then tells his readers that:
The core of the MMT concept is that, because the US borrows in its own currency – the world’s reserve currency – it can simply print more dollars to cover its expanding borrowing requirement.
Where exactly did he find that core proposition in the writings of the major MMT developers? He didn’t and should be honest enough to admit he hasn’t read any of it.
He would have found that sort of terminology and construction in the recent KLOP (Ken, Larry, Olivier and Paul) rants.
MMT does not privilege the US because it has a reserve currency.
While it is true that the existence of the US dollar as a desired reserve currency means that they do not have to worry about foreign reserves as much as other nations with less attractive currencies, this doesn’t undermine domestic sovereignty.
Further, MMT economists never talk about ‘printing money’ – because that process doesn’t remotely describe how governments spend their currency into existence.
And, of course, it invokes the scenarios that the conservatives love to invoke of crazed government officials in basements of central banks running printing presses at breakneck speeds to keep up with the hyperinflation.
What MMT tells us is that any currency-issuing government can purchase anything that is for sale in that currency including all idle labour.
It would simply credit relevant bank accounts to make those purchases operational.
What other monetary operations that might accompany that process would depend on institutional arrangements (for example, the government might voluntarily impose a rule on itself to match any spending beyond the numbers it records against a taxation account with some numbers in a debt account and create liabilities accordingly) and political choice.
The operations would not depend on any intrinsic financial constraint.
Mr Bartholomeusz then writes:
Provided the Fed kept US rates below the rate of growth in GDP and the growth in the debt, the US could always service its debts.
This is factually incorrect.
The currency issuer can always service its liabilities as long as they are denominated in the currency that the government issues.
It doesn’t depend on what is happening with the public debt ratio.
He then further demonstrates an unfamiliarity with the core MMT concepts, despite holding himself out as a person qualified to write articles on the topic:
Instead of targeting inflation the goal would be full employment.
MMT is explicit – we propose a macroeconomic framework that allows for full employment and price stability.
And, then, it was bound to happen, the ‘socialist’ scare enters.
Mr Bartholomeusz writes that:
To the extent that inflation did emerge, government policies – targeted taxes and industry policies – would be used to stamp it out, implying a degree of central planning and intervention in the economy that one suspects wouldn’t be easily accepted in the US and which could, by crowding out private sector investment, change the very nature of the US economy.
Well the GND if implemented will “change the very nature of the US economy” and reposition it for a sustainable future.
That much is correct.
But in what way does the normal management of economic policy – tax adjustments, sectoral policies etc – define “central planning”?
Since when has counter-cyclical fiscal policy management become “central planning”?
We lose all meaning in our language if we stretch words and concepts too far.
Further, in what way will the GND lead to the “crowding out private sector investment”?
One would suspect it would crowd in private investment in the new GND sectors.
Where in any GND charter does it say that the non-government sector is prohibited from investing, producing and employing?
And, with the central planning reference as a segue, it doesn’t take long for Mr Bartholomeusz to wheel out the Weimar/Zimbabwe stories, except he hasn’t a clue about what happened in those nations that caused the hyperinflation.
History hasn’t been kind to the theory. Germany in the 1920s, Argentina almost routinely and Venezuela more recently are examples of what can happen when governments overdose on debt and lose control of inflation.
Exactly wrong and a violation of the historical record.
Please read my blog post – Zimbabwe for hyperventilators 101 (July 29, 2009) – for more discussion on this point.
A currency-issuing government that increases its spending may increase the risk of inflation, just as any growth in nominal non-government spending might.
If the growth in nominal spending maintains proportionality with the growth in productive capacity then it is unlikely to trigger any demand-pull inflation.
That is irrespective of the monetary operations that might accompany any increase in public spending.
Mr Bartholomeusz clearly doesn’t understand inflationary processes.
Nations can run continuous fiscal deficits forever without “debasing” their currency.
He also becomes very confused.
On the one hand, he claims that the US government will be ‘printing money’ to fund the GND but then writes that MMT “appears to pre-suppose that the rest of the world would keep lending the US money, investing in US Treasuries even as the value of the investments was being devalued by the government printing presses.”
At this point, you realise he hasn’t understood anything.
In his mythical world, with the printing presses running flat chat, why would the government be issuing debt?
And finally, the old hoary “MMT can’t work” story, which suggests that MMT is a regime.
Mr Bartholomeusz claims that “without the co-operation of the Fed – MMT can’t work”. Of course, MMT already is working – on a daily basis – in our monetary economies.
It is not a regime we shift to but a framework for understanding how modern monetary systems function – whether the central bank officials know that or not.
Here are some questions for Stephen which the management of the Fairfax media group which pays his salary should force him to answer:
How much of the MMT literature from the core MMT developers have you read Stephen?
How far does your reading go back?
Which peer-reviewed articles and books have you read from the core MMT developers that you can cite as indicating that your representation is ground in the MMT literature?
What qualifications and experience have you got to write such an article?
Australian readers: bug Fairfax and tell them to stop publishing this fake knowledge and deceiving their readers.
They have become nothing better than a snake oil sales company.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.