As I noted yesterday, last evening I accepted an invitation to speak on a panel…
MMT critiques need to get more inventive – it’s getting boring
It is getting to the stage that one gets bored reading critiques of Modern Monetary Theory (MMT) by leading mainstream economists. As the critiques have escalated over the last few years, I can safely say that not one has really said anything: (a) that the core body of work we have developed hasn’t already considered and dealt with – about 20 years ago!; (b) which means, none of the long line of the would be demolition team has achieved their aim. And when they write Op Ed articles that basically just say – oh, MMT economists ignore “the demand for money” and “MMT falls flat on its face” when inflation emerges as part of the emergence out of this crisis, I get bored. Really, is that the best they can come up with. The latest entreaty in the boring stakes comes from Willem Buiter, who seems to have left the commercial banking sector and gone back into academic life. His latest Op Ed – The Problem With MMT (May 4, 2020) – is not his best work. Boring is the best descriptor. Why did he bother? Did he think he had to establish his relevance. He would have been better concentrating on the archaic mess that his mainstream framework is in. Anyway, sorry to end the week like this.
Let me state clearly, at the outset, there may be an inflationary spike coming out of this diabolical mess.
If so, it will be accompanied by hideous unemployment rates.
So we will have what economists call ‘stagflation’ – the combination of accelerating prices and mass unemployment.
And it may come when fiscal deficits remain at elevated levels as governments provide in various ways and to various degrees to support income growth and stop the world sinking into a deep Depression and who knows what.
But be careful of causality and to be sure you put the pieces together properly.
When I provided by criteria for assessing various fiscal policy options recently, regular readers will recall I included an option – Supply Chain.
See my blog posts:
1. The European Commission non-stimulus is a waiting game before new austerity is imposed (April 27, 2020).
2. The advanced nations should take the lead of Pakistan in job creation (May 4, 2020).
I explicitly emphasised that this particular crisis was rather special in several ways. One way was that it was not just a ‘demand phenomenon’ – a lack of spending causing output and employment to fall.
Clearly, there was a significant ‘supply-side’ aspect to the crisis – factories being forced to shut, production constrained by lockdowns, global supply chains being interrupted.
We don’t know yet how disrupted the supply-side of the world economy has been and what the implications for delivery of goods and services into various markets will be.
But inasmuch as there are significant disruptions occurring, while at the same time governments are stabilising (to some extent) income levels, there will be a break in the expenditure-income-output cycle, which may trigger inflationary impulses.
Remember the basic rule of macroeconomics – Spending equals income equals output, which drives employment growth.
In this crisis, fiscal intervention is aiming to reduce the fall in income arising from the enforced lockdown.
But if the income from one period is cycled into the system next period but output has fallen in that next period then where does the spending go?
Into accelerating prices is where!
If that was to happen, then it says nothing about MMT’s relevance or validity. My face will be intact (not having fallen flat on it!).
But Willem Buiter thinks otherwise.
He starts with an error by referring to the “policy agenda implied by Modern Monetary Theory has become all the more appealing”.
He hasn’t read much I suspect to construct his opening salvo in this way.
What is the “policy agenda implied by Modern Monetary Theory”?
Here we get two tensions.
1. There is no policy agenda implied by MMT – there are principles established, causalities that deliver consequence, descriptive components – but what MMT delivers is an understanding of these things. To operationalise that understanding you have to impose a set of values (an ideology).
A person who has a deep understanding of MMT but who has a Right-wing type ideology will apply that understanding to come up with a totally different policy set than I would come up with.
What is implied there? Nothing.
2. In their haste to trip over themselves to make the point, many mainstream macroeconomists have written Op Eds about MMT saying there is nothing new and that they knew it all along.
They write things like ‘everyone knows that you have to increase fiscal deficits when there is a serious shortfall of private spending’.
What is implied there? Well, that they have only said that when it became obvious to all that their beloved monetary policy bias hasn’t done the trick and the only way to save economies has been through fiscal policy – GFC and now!
But, moreover, if all these characters are jumping on the fiscal deficit train as they are then Buiter is really having a go at all them as well.
He talks about MMT offering “a dangerous half-truth” – and refers to an MMT economist writing in the FT recently, whom he quotes:
They’re going to have massive deficits. And it’s fine.
Apparently, that is a “half-truth” because “while this assessment is correct for now, it won’t necessarily be correct in the future”.
So it is fully true now and if circumstances change then what? Our assessment might change based on our understanding of the role of fiscal deficits – which means it would be fully true then.
Two fully trues struggles to make one half-truth!
Here is a little interview I did with myself just now.
Question: Does the core body of MMT work care about fiscal deficits?
Answer: Definitely – they are central to our thinking.
Question: Does the core body of MMT work say that deficits are ‘fine’?
Answer: Sometimes. It all depends on context. How many times have I written that over the last 16 years of writing blog posts and articles and books, and, before that, in academic publications?
I posed a question within my answer, which has the answer: lots!
Question: Does the core body of MMT work say that deficits can always be large relative to GDP and be that way forever?
Answer: Definitely not.
Please read this blog post – The full employment fiscal deficit condition (April 11, 2011) – which specifies the exact condition that fiscal policy has to match.
And the inference to be drawn is if non-government spending accelerates after a lull, then the larger than normal fiscal deficit will have to be lower and will fall somewhat anyway via the automatical stabilisers.
So when you go through that routine it is hard to know what the ‘half-truth’ is.
Yes, at present, fiscal deficits have to be much larger than in more usual times.
Should they remain that way if things settle down again?
Definitely not – then they would risk driving inflationary pressures from the demand-side.
But Willem Buiter clearly hasn’t taken any of that nuance into account and thinks that:
… we should anticipate that the year following the end of the COVID-19 lockdown could be when MMT falls flat on its face – starting, perhaps, with a burst of inflation in the UK.
As above.
Whenever there have been substantial supply-side constraints in history we see inflationary pressures rising.
As I noted above, we don’t know yet how deep the supply constraints will impact. But if they do, there might be some price spikes. Whether they shift into an inflationary spiral is also uncertain.
There is no reason they should if factories restore the supply chain relatively quickly.
And while we are not spending in cafes and restaurants at present we are redirecting that demand to supermarkets, and apart from the irrational run on toilet paper and flour at the outset of the crisis, my local supermarket seems to be getting back to normal and I haven’t observed any flagrant inflationary pressures.
Yesterday, the Australian Bureau of Statistics published the latest – Retail Trade, Australia, Mar 2020 – and it showed that turnover:
1. Cafes, restaurants and takeaway food services fell 22.9 per cent in March 2020 with “Cafes, restaurants and catering services (-30.3%), and Takeaway food services (-13.0%)”.
2. Food retailing rose 24.1 per cent in March 2020.
Substitution in action.
And further households that have maintained their incomes and not travelling as much or buying this or that are diverting that income into saving and reducing their debt.
Remember that households around the world have variously built up massive debt levels and a period of constrained spending is allowing them to restore some safety into their balance sheets. While the source of this motivation is bad, the outcome, in this particular instance is good.
But, Willem Buiter then thinks he is on a roll and tries to get pithy:
… policymakers are flirting with disaster if they accept MMT’s main message, which can be paraphrased as: “Deficit, schmeficit. Just boost public spending or cut taxes, then monetize the resulting imbalance.”
Depending on which style manual one uses “” infer a quotation.
In this instance, Buiter is not quoting from anything that has ever been written by any credible MMT writer.
MMT’s main message is nothing like that.
Refer to my discussion above about CONTEXT!
But let’s focus a little on the ‘monetisation’ angle.
I wrote about these issues in this blog post (among many others) – Building bank reserves is not inflationary (December 14, 2009).
First, central banks are crediting bank accounts on behalf of treasuries every day. That is how government spending occurs – some central bank official types some numbers into relevant accounts – and zap! – government spending occurs.
Second, the mainstream narrative (within which Willem Buiter’s story line site) create a fictional account of this process.
The mainstream macroeconomic textbooks all have a chapter on fiscal policy, where the so-called ‘Government Budget Constraint’ (GBC), begins with the construction that governments have to ‘finance’ all spending either through taxation; debt-issuance; or central bank money creation.
But, as noted above government spending is performed in the same way irrespective of the accompanying monetary operations.
The textbook argument claims that money creation or in Buiter’s words “monetisation” (borrowing from central bank) is inflationary while the latter (private bond sales) is less so.
These conclusions are based on their erroneous claim that ‘monetisation’ adds more to aggregate demand than bond sales, because the latter forces up interest rates which crowd out some private spending.
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.
What would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a fiscal deficit without issuing debt to the non-government sector?
Like all government spending, the Treasury would instruct its central bank to credit relevant commercial bank accounts.
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.
What happens next depends on how the central bank manages the extra reserves in the system.
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 has three options:
1. Do nothing and allow the overnight interest rate to fall Japan-style to zero – that is, leave the excess reserves in the banking system.
2. Conduct open-market-operations (OMO) by exchanging government debt for bank reserves – thereby draining the reserves. It will do this if the central bank desires a non-zero (positive) target short-term policy interest rate to be the expression of its monetary policy.
Note that if this option is pursued, the public debt sold to the non-government has no correspondence with any need to fund government spending.
The debt serves an interest-maintenance strategy by the central bank when used for this purpose.
And note further that as long as the central bank has a mandate to maintain a target short-term interest rate, the size of its purchases and sales of government debt are not discretionary if only open market operations are relied on to manage liquidity.
Once the central bank sets a short-term interest rate target, its portfolio of government securities changes only because of the transactions that are required to support the target interest rate.
The central bank’s lack of control over the quantity of reserves underscores the impossibility of debt monetisation when only OMO are deployed.
The central bank would be unable to monetise the federal debt by purchasing government securities at will because to do so would cause the short-term target rate to fall to zero or to the support rate.
However, if the central bank purchased securities directly from the treasury and the treasury then spent the money, its expenditures would show up as excess reserves in the banking system.
Under the exclusive OMO option, the central bank would be forced to sell an equal amount of securities to support the target interest rate.
In that case, the central bank would act only as an intermediary. The central bank would be buying securities from the treasury and selling them to the public. No monetisation would occur.
3. The central bank, as is the norm these days, may agree to pay the short-term interest rate to banks who hold excess overnight reserves.
This eliminates the need by the commercial banks to access the interbank market to get rid of any excess reserves and would allow the central bank to maintain its target interest rate without issuing debt.
With that background (core MMT) it is then hard to make sense of Buiter’s argument about monetisation.
The point is that 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 it debt is not issued to match the fiscal 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 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:
1. Building bank reserves will not expand credit (December 13, 2009).
2. Building bank reserves is not inflationary (December 14, 2009).
3. The money multiplier process so loved by the mainstream does not describe the way in which banks make loans.
4. 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 carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and productive capacity.
It is totally fallacious to think that private placement of debt reduces the inflation risk. It does not.
Willem Buiter then allows some faint praise enters the picture.
He writes:
To be sure, some parts of MMT make sense. The theory views the treasury (or finance ministry) and the central bank as components of a single unit called the state. The treasury is the beneficial owner of the central bank (or, put another way, the central bank is the treasury’s liquidity window), which implies that central-bank independence is an illusion, especially when it comes to its fiscal and quasi-fiscal operations. MMT holds, correctly, that because the state can print currency or create commercial bank deposits with the central bank, it can issue base money at will.
All this is obvious.
And if we accept that then significant aspects of mainstream macroeconomics is then to be dispensed with.
His language suggests he has not really read much of the MMT literature because we never use the term “print currency” and actively disabuse that connotation.
He continues making the most obvious point that he assumes we haven’t thought about. To make that assumption he would have had to also consider that we were deeply incompetent as professional economists, and, more pertinent, not very bright.
Why?
Apparently, a currency-issuing government can get itself in a bad situation that goes like this:
1. The government services its outstanding debt (pays interest) by the central bank crediting bank accounts, which Buiter calls “monetization”.
2. Then it gets confusing because we shift from “debt servicing” to the overall “deficit” and back again.
3. But his point is that if the central bank is crediting reserve accounts on behalf of the treasury, it is possible that it creates inflation.
4. Why? Just assertion.
5. But this leads to his conclusion that the government may default on the debt if it requires public ‘spending’ that might provoke inflationary pressures.
So all we learn from that interchange is nothing more than if spending from any source (household consumption, business investment, export revenue, and/or government spending) might drive total nominal expenditure ahead of the real capacity of the economy to absorb it via increased output.
And he knows that because he says “To get to the heart of the matter, forget about issues such as bond financing” – that is, let’s move on because there was nothing to gain from going down that path anyway but I did because it sounded erudite!
The point he wants to make is this:
Assume that public spending and tax revenues are fixed in real (inflation-adjusted) terms. The resulting real deficit will be equal to the increment in the real stock of base money that the private sector must be willing to absorb each period.
In English, he is trying to get to a point where he concludes that spending will be so strong relative to the productive capacity of the economy to absorb it that the only result will be “upward pressure on inflation”.
Yes, this is his “Problem with MMT”.
After some jargon-ridden gymnastics about “real-money balances”, “monetized increases in public spending”, etc and a claim that we might “quickly” shift from low interest rates to “a normal monetary regime”, although the fact that with “Japan stuck at or near the ELB for the past 20 years, the concept of “normal” may require some rethinking”, Willem Buiter writes, after inferring MMT is “reckless” for assuming large deficits are no problem ever (we do not assume that):
… there still would be no inflationary threat so long as the economy has excess capacity (idle resources). But when … the unbridled monetization of state deficits eventually would eventually exhaust what slack there is, putting upward pressure on the rate of inflation.
That’s really the article.
That if spending growth is excessive, nations achieve full employment and then inflation.
MMT 101 really.
MMT doesn’t ‘ignore’ this “at its peril”.
It is core MMT.
I don’t know why Project Syndicate continues to publish this sort of misinformation.
Conclusion
In the blog post I cited above – Building bank reserves is not inflationary (December 14, 2009), I wrote the following.
It is clear, however, that if interest rate changes do impact on spending such that low interest rates are more expansionary than higher interest rates, then a fiscal expansion and a zero interest rate policy will be stimulatory. The issue is not that this will be intrinsically inflationary as is asserted by the mainstream.
It just means that the extent of the fiscal injection that is required to achieve full capacity utilisation is reduced. The government always has the capacity to balance aggregate spending to match the capacity of the economy to absorb it.
11 years ago approximately.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
The recent flurry of poorly informed MMT commentary & critiques has been dubbed
“MMT = ManyMacroeconomistsTalking”
“I don’t know why Project Syndicate continues to publish this sort of misinformation.”
The elephant in the room. Why the myths were started the first place by the Chicago School. Why the EU was set up the way it was. Why there was massive expansion in New York, London and Frankfurt.
Geopolitics. The Ministry of Truth.
Do we not just need to hit them where it hurts?
Mainstream believe that every resource conflict is resolved by a price auction. In which case how can they explain the “only 2 items per customer” notices that spontaneously sprang up in the supermarkets over this crisis. Market forces brought them about.
Almost like there is a social reputation control acting on the macro distribution. Price gougers holding hand sanitiser were rapidly chased off Ebay. Where’s that in their text book?
We have extant evidence that the supply side is rationing itself spontaneously. It doesn’t matter how much money you have, you got 2 packs of toilet rolls and no more so there was enough to go around.
For supposed supply side experts, they don’t seem to know too much about the supply side.
The deficit hawks are begininning to squawk in the US senate. It’s as if nothing has changed.
@Neil
Had to laugh and reply with a snarky comment on twitter. A mainstream economist (supposedly a lefty!) actually claimed that with price controls (and this was about the toilet roll shortage) that if price controls are put in place ‘entrepreneurs’ would quickly move to manufacture something else. As it happens Kimberly Clarks nice big factory is local to me and they spent fortunes on the machinery to make the rolls. My reply was along the lines of Star Trek replicators haven’t been invented yet so they cant just switch that specialist machinery to making sugar puffs.
Even the flour manufacturers are having issues due to their machinery is designed for industrial use in big bags and haven’t been able to scale down to what supermarket packaging needs. There is no flour shortage.
Its not as if JK Galbraith didn’t write books on the subject which the mainstream seem to have missed.
Dear Bill,
The main argument used by prof Buiter is based on the existence of so-called “neutral rate of interest” that is he resurrects the neo-Wicksellian version of LFT which is supposed to operate outside of the New-Keynesian “liquidity trap”.
“Yet one must remember that domestic or foreign developments affecting financial markets or the real economy can quickly eject a country from its ELB perch, landing it in what economists would call a normal monetary regime, where the policy rate is above the ELB. With Japan stuck at or near the ELB for the past 20 years, the concept of “normal” may require some rethinking. Nonetheless, it would be reckless to design policies on the assumption that the neutral interest rate (the interest rate that would prevail with the economy at full employment and inflation on target) will hover near zero for the foreseeable future.”
This is not a trivial argument, it is based on the work of Woodford and other New-Keynesians and it needs to be thoroughly debunked. I may have a go at it later today or tomorrow.
Hi Bill
I find it really helpful you can do the ‘In English, he is trying to get to a point’ translation for those not in the economics field.
I know each field has its own lexicon, which works for those already in the field.
Unfortunately the specialist economics language leaves me in the dark, if not faithfully translated to plain language, and clear concepts.
“This is not a trivial argument”
It is a trivial argument. There is no such thing as a “neutral rate of interest”. It’s complete woo. Up there with homeopathy, crystal healing and alchemy.
Under their “expectations theory”, where everybody has the capacity to discount their future income flows to the present, if there was such a thing they would automatically know what it was.
It’s all self referential BS. Modern Ether Theory.
Buiter didn’t used to be such a pompous windbag. My response to this piece of his was, puhleeeze! We must note that he is only a part time visiting prof, as is his wife, Anne Sibert. Columbia took them as a double act, not unlike another econ-historian pair at another NY state university. Now, Sibert supposedly has a full time job at Birkbeck. As he can stay in NY since he has no other job, she will have to fly. How can she do this if flights are curtailed, due to, say, an outbreak of covid-19? Maybe he has taken on too much and thus has insufficient time to do the necessary reading? I find the degree of incompetence evinced in this article baffling.
Adam, resurrecting an old argument is one thing; misrepresenting the theory you are trying to debunk while dong so is another.
Let me express my views about the LFT. Yes it is as good as homeopathy but we need to demonstrate, why we think so.
The closest we can possibly get to a critique of “neutral” or “natural” rate of interest is an article written by Enrico Sergio Levrero for INET, “The Natural Rate of Interest Is Anything But”.
Basically the main idea behind the neo-Wicksellian version of Loanable Funds Theory is based on the misunderstanding of what Keynes wrote in “General Theory”, where it is assumed that the volume of investment depends on the relationship between the “own” rate of interest on the particular investment (expected rate of return on capital) and the prevailing monetary rate of interest. In simple words – New-Keynesiand believe that if the lending rate drops, entrepreneurs will invest like crazy because any new capital they add will return a higher rate of return than the rate of interest which needs to be paid on the loans or what they will get on deposits, if they have excess savings. But more careful reading of Keynes suggests that he never meant this to be a mechanical relationship. He emphasised fundamental uncertainty and heuristics employed by investors (so called “animal spirits”) because nobody can predict these rates of return in a few years time. A sane person will not build a rental apartment knowing that there are no people willing to live there. Keynes argued that people will choose liquid and riskless assets to store value unless they really believe that they can make profits. The most obvious asset belonging to this “liquid-riskless” category is money. The excess of income of 1% married with the lack of profitable investment opportunities simply creates the “demand for money”, mentioned by prof Buiter. It is enough simply not to spend what has been earned, it just stays in the banking system…
If we build a model where a 1% in reduction of interest rates corresponds to let’s say 2% increase in the GDP then we can mathematically demonstrate that a greater than zero natural rate of interest exists unless the economy is in a deep recession. But the key argument against the existence of the natural (neutral) rate of interest is that we cannot empirically demonstrate this relationship even outside of the mythical “liquidity trap”.
Reducing the mortgage interest rate in a country where a lot of workers have mortgages may slightly stimulate the economy due to higher marginal spending propensity of the workers comparing with the rentiers (these who have bank deposits). It may also reduce the number of bankruptcies. But these effects are weak and may not manifest themselves all the time.
It can only be econometrically demonstrated that if the real interest rates are above about 10%, then this dramatically slows down the economy due to the high costs of the revolving credit and negative impact on credit-financed investment. This idea was tried and tested in Poland in the late 1990s-early 2000s together with fiscal tightening. The well-known result was 20% unemployment rate.
The key explanation about why the changes in the interest rates within the “normal” range have very little impact on the volume of investment is that over-investment would lead to lower capacity utilisation (too much capital) and companies would simply not make profits high enough on this capital, they will start making losses. We can build a dynamic model showing this. In the medium-run, it is either almost constant capacity utilisation or capital growth dependant on the interest rates, we can’t have both rules, there is one degree of freedom in the system.
If a company has an existing machinery, the only reason to add another one is if they can anticipate demand for extra products. Even if there is a short-term “rush” which may encourage higher consumption due to the effects of the spending multiplier, in the medium-term nobody will keep investing when the aggregate demand has stabilised just because credit is cheap. Otherwise the Marx’s curse of falling rate of profit due to over-investment will eventually get the capitalists. But they are not that stupid nowadays.
This obviously does not prevent speculation on existing assets and land. Lower interest rates may stimulate the growth of speculative bubbles but this process itself is hardly helping to grow the economy in the long run. This relationship is also not stable in the long run.
The New Keynesian theory is based on certain “microfoundations” which are too absurd to even mention all of them here. Supposedly there is single representative rational agent maximising its utility function etc. They add a Cobb-Douglas production function on top of this. The more capital the better. Taxi drivers need to drive three or four cars at once, then their labour productivity is higher. I think this is enough.
There is no natural rate of interest, the level of real GDP compared with the maximum level which could be achieved with the current level of technology and available natural resources, depends on the distribution of disposable income between social classes, fiscal policy, external balance and the volume of credit-financed investment of the private sector (mainly in housing).
If there is no “natural” or “neutral” rate of interest, we should not worry that the governments will have to pay excessive interests on government debt. The zombie Loanable Funds Theory is actually dead for good. Having said this, I would steeply increase the taxes paid by the rich because they should not be allowed to hoard too much money. This affects the distribution of ownership of real assets and power in the society. But this is a completely different story and has very little to do with the government debt.
“resurrecting an old argument is one thing; misrepresenting the theory you are trying to debunk while dong so is another.”
That’s the whole point. Mainstream isn’t doing science or academia. They are doing politics.
It’s way past time we drop the “Queensbury Rules” and did the same. These people are religious quacks and should be called out as such. There is nothing to be gained by fighting on their turf.
I don’t have to explain why papal infallibility is BS. I just point out that they would say that so they can carry on with their hedonistic parties at your expense.
Bill has repeatedly made the following point: “There is no policy agenda implied by MMT – there are principles established, causalities that deliver consequence, descriptive components…. A person who has a deep understanding of MMT but who has a Right-wing type ideology will apply that understanding to come up with a totally different policy set than I would come up with.” Because I was initially so caught up with the enlarged scope of currency-sovereign federal agency revealed by MMT (agency to implement policies and programs to rescue people and planet), I had trouble conceptualizing a right wing argument made through an MMT lens. Then one day it hit me. TAXES. Because it is a core principle of MMT that taxes are not necessary to fund the federal government but rather serve only to reduce the money supply, and that their primary purpose is only to valorize a currency by requiring its use to meet tax obligations, it suddenly struck me that MMT could be a right winger’s dream if and when their favorite deception, the household theory of federal budgeting and spending, ever began to dissipate. Could not MMT be the perfect justification of the greatest tax-cutting proposal ever made–the elimination of all but token taxes on income, wealth, property, and inheritance? The line of the rich to the rest of us would be: “You don’t need our money to fund the government–you’ve admitted it–so leave it almost entirely in our pockets and make your own money to save the world…if you’ve got the votes.” And the only counter I can see to that, one already put forward by MMT economists with left wing values, is: “But we can’t get enough votes because you, the rich, have bought the political process, and thus we must tax you heavily to reduce your perversion of democracy.” Does anyone else have another MMT-supported right wing position to put on the table? Just curious.
I have to say, this post and the attendant comments are really first rate stuff. Top shelf!
Mainstream economists: Hey, we KNEW that deficit is going to rise to support the economy if economy doesn’t have enough demand.
Also mainstream economists: Hey, we CANNOT spend more to improve people’s lives, it will lead to hyperinflation because any government spending leads to hyperinflation.
Try arguing that, MMTers.
“but rather serve only to reduce the money supply”
That is a misconception. The purpose of taxes from the MMT lens point of view is to stop people buying certain things so they will be available for the government to buy. They are a tool to release real resources.
Hence an MMT informed taxation policy ends up as “Targeted Taxation” as I like to call it. It’s job is to release specific resource rather than carpet bomb the economy and hope there’s sufficient fungibility in the system to sort it all out.
What you find, paradoxically, is that the most appropriate taxation scheme is one targeted at employing people and one targeted at goods, both of which are automatic stabiliser taxes. Plus a “hut tax” (likely on cubic volumes) which is the valorisation tax – and likely collected very locally since huts tend not to move.
They also tend to be relatively regressive in traditional terms because you do actually want to free up food and shelter to provide to your public servants. Rich people don’t consume a lot in relative terms, which is actually the main problem. If they spent all their savings we probably wouldn’t have much unemployment or much of a deficit.
“the most appropriate taxation scheme is one targeted at employing people ”
What you can do here is do this *business side*. So it is the business that pays the tax on the wage they pay the employee. That means under an MMT designed scheme employees would always take home the wage they earn. All of it.
Businesses don’t vote, so putting taxes up to target an inflating sector becomes relatively straightforward, and the Job Guarantee provides the answer to the “what about the jobs” trick.
Neil, every MMT economist I have read or heard has stated quite clearly that it’s spend and tax, not tax and spend, that taxes are used to take money out of the economy for various purposes; i.e., to control inflation when appropriate, to minimize negative behavior like pollution or cigarette smoking, to reduce the adverse social consequences of wealth disparity, to counteract the ability of the very rich to buy political influence, etc. I think your attempt to distinguish stopping the private sector from acquiring resources desired by the public sector is merely another example of reducing by simple cancellation, for various reasons and at various times, the supply of money available to the private sector. That would be the overall process involved in each such instance, whatever the specific problem being targeted by the particular tax levy or increase. Could you kindly point me to one respected MMT economist who says that taxation does not serve to reduce the money supply, as, for example, Stephanie Kelton not only says but diagrams in her “Angry Birds” video? Also, do you have another right-wing policy or program that could be supported by an MMT-based argument?
Re potential inflationary pulse……….
It will be interesting to see how this might affect Australia – if international supply chains were to re-wire themselves in a fashion that reflects nations desire for greater levels of self sufficiency after having experienced how vulnerable a too-great reliance on others can leave a country, how might a heavily import dependant nation like Australia fare?
Especially when our leaders – in the great wisdom – have spent so many years falling over themselves to sign Australia up to every free trade agreement under the sun, effectively signing treaties promising that Australian government will NOT legislate to support local production first.
The main purpose of taxes is to reduce the flow of purchasing power in the form of money towards a group of agents.
This flow of purchasing power can be spend or hoarded. If we just ignore the second point, we end up with extreme concentration of wealth in the hands of a very few people and a totally dysfunctional society even if the inflation rate is low. We cannot ignore the relationship between the total value of land and the total stock of monetary assets. Not to mention the stock market. (this reasoning is linked with the Tobin asset pricing model)
In developing countries extreme hoarding of money leads to bouts of so-called “capital flight” that is periodic instability of the exchange rate and depletion of foreign reserves often morphing into currency crises (defaults on foreign debt denominated in USD). A typical example, where it is all going on in front of us again right now, is Argentina. In the extreme case all the hoarding occurs in a foreign currency, usually the USD. The problem is that money supply is inelastic in the short run, the same applies to residential land, gold, foreign currencies and existing shares (equities). All what can happen is that relative prices of these assets can change. Capital flight in the strict sense is therefore impossible, Let’s imagine we are back to 1989. I cannot replace old Polish złotys with US dollars. People have a rising stock of złotys but a significant group want to hoard dollars or DM. How can an individual get dollars? By buying dollars for złotys from someone who has dollars and wants złotys. But these (such as returning seamen) are a few. What if the hoarding propensity (in liquid monetary assets) is greater than zero, for the current level of disposable income per capita? Let’s say people on average want to hoard 5% of their income. But the hoarding propensity in złotys is zero because of the already existing inflation and the lack of confidence in the currency. All the hoarding occurs in dollars. The end result is a positive feedback loop as the quantity of dollars available for hoarding is pretty much constant, but people want more of them. It is a negative bubble. The unofficial exchange rate of USD keeps going up at an ever increasing pace and directly impacts the level of prices of imported goods, feeding into the inflation. The central bank could not borrow USD because Poland had defaulted. (replace Poland with Argentina, Venezuela, Iran, Russia, etc). The end effect is hyperinflation. It is not the limitation of the availability of “any” products due to the collapse of the supply side like in Zimbabwe (this happened later as a consequence of extreme austerity introduced in 1990). It is having these imbalances I have mentioned. They used to call it in “Political Economy of Socialism” an “inflationary overhang” We could always buy vinegar and later there were no food shortages at all. But what if I didn’t want vinegar and wanted to preserve the value of my savings? It is the desire to hoard foreign-denominated assets what can spark hyperinflation.
Currently this issue is very common in Latin American countries which usually have very high Gini indices (corresponding to extreme income and wealth concentration). If we confiscate the income and wealth of the rich, they won’t be able to attempt hoarding foreign currency. The only way to fix the monetary problems of Latin American countries is to reduce the income inequality, by the means of taxation and nationalisation of assets.
What will happen in 10 years time when the USD is no longer considered the global currency? Why does one hour of labour the the US buy 3 hours of labour in China?
What will happen in 10 years time when the USD is no longer considered the global currency? Why does one hour of labour the the US buy 3 hours of labour in China?
World peace.
Hi Newton,
My right-wing MMT policies:
1. End all unemployment benefits and get the lazy buggers to work for a living (JG reframed).
2. Bomb Iraq for 20 years because deficits don’t matter (with thanks to Dick Cheney).
3. Reduce income taxes on individuals and small businesses.
4. Bail out all my friends and donors.
5. Unlimited QE to support the stock market.
Re Newton Finn:
Right-wing MMT policies: the policies of US governments for the last 30 years: endless spending on the military and war, tax cuts for the wealthy, very little social spending.
It is spend and pay OBLIGATIONS, which are not just taxes, but fines, fees, tribute, stamp duties, and tithes etc. as well. Any of these forms of obligations could be used to support the value in a right-wing/libertarian setting.
What I wonder about, looking, say, at Hong Kong, is if one could add gambling spending/losses to (para) publicly-run institutions in the mix.
Newton,
Bill mentions it all the time. For example.
“If the economy is at full capacity then such a government has to divert resources from other uses into a specific service that it wishes to expand.
It would do that via taxation. But the taxation is freeing up real resources to be used in the desired way by depriving the non-government sector of their use.”
[The ‘tax the rich’ call bestows unwarranted importance on them – Feb 21, 2018]
“Taxing the Rich” reduces the money supply. It’s also largely pointless economically. Which is why MMT tells you to concentrate on the real stuff and let the numbers look after themselves.
The central lesson of MMT is that the process is at least 5000 years old, not modern, that it is about real stuff, not money, and it is accounting fact, not a theory.
“The unofficial exchange rate of USD keeps going up at an ever increasing pace and directly impacts the level of prices of imported goods, feeding into the inflation.”
That’s the mistake. It doesn’t, or shouldn’t. What feeds into inflation is a system that fails to respond to this allocation move by the market. There are two approach to that. One is to ban the import of “wanted” goods to prioritise “needed” goods (preferably commodities), and the other is to ban buyers from paying more in Zloty for the imports than they have in the past three months or so – pushing the loss onto the other side.
The reason for that is straightforward. In aggregate there is nowhere else to sell your stuff. The stuff that was going to be sold to Poland still has to be sold to Poland or dumped in a firesale – which will collapse the price of *all* items of that type. We’ve seen that recently with oil.
The final adjustment is to require that the “trading while insolvent” rules are currency aware. You must be solvent in every currency you deal in. That means that any operations selling in Zlotiy and borrowing in dollars would be forced through administration if their swaps dried up – which then writes out the loans in dollars.
And of course the central bank is banned from dealing in the foreign exchange market. The market must know there is liquidity risk and no possibility of conversion – only exchange.
What you want is a system set up so that the foreign currency takes all the losses based on defined trigger points. When you do that those exporting to your country will pressure their own financial system to stop those triggers being fired.
In pretty much every FX analysis I see from economists they always fail to look at a situation from the other side of the exchange.
For there to be inflation somebody has to agree to pay the higher price. So you require people refuse to do that.
“If we confiscate the income and wealth of the rich, they won’t be able to attempt hoarding foreign currency. ”
If they are in foreign currency, they are no longer rich in the national currency. Which means the national currency is circulating far more, which means there needs to be less of it. (You need more taxation to free up capacity for the public sector as savings in the national currency aren’t doing the job for you). Once you make sure there is less of it, the exchange rate follows.
The size of currency areas do not necessarily correspond to the size of the nations they represent. Dollarisation is just a currency area shrinking within its own borders.
If you have a bunch of people flying an aircraft who don’t know how to fly one they will crash. That’s no reason to stop using aircraft and go back to travelling by boat. Just learn how to fly the aircraft properly – preferably by putting in place systems that allow it to largely fly itself.
Bill wrote that Willem Buiter then allows some faint praise enters the picture. He writes: “To be sure, some parts of MMT make sense”.
I decided to stop reading Butler, here, while he was ahead – LOL
We are in great danger of not making a nearly radical enough response to the COVID-19 and ecological crises, including climate change. Indeed, the COVID-19 crisis is a dimension of the ecological and climate crises. The rise of zoonotic diseases is inextricably bound up with human overpopulation and over-connection plus habitat destruction, wildlife displacements and wildlif extinctions. MMT itself, in its prescriptive elements (and it does have some like the JG and fiscal stimulus advocacy), is not nearly radical enough. We need to consider the following incontrovertible points:
(1) We cannot go back to capitalist BAU. It was grossly inequitable and it is causing our sustaining environments to collapse rapidly right across the biosphere.
(2) We should take advantage of COVID-19 shut-downs of highly resource wasteful and polluting consumer activities to keep them permanently shutdown or greatly minimized going forward or else find low pollution substitutes.
(3) We should avoid giving “intellectual oxygen” to the theories that money, finance and markets should be the prime organizing and decision making principles and systems for our socioeconomic system.
The first point is clear and unassailable if you (a) consider human rights and equality to be positive values and (b) accept the science on any of climate change, pollution dangers or limits to growth.
The second point follows from the first. Restarting unsustainable production activities and consumer activities is a “non-starter” idea from the environmental perspective. The challenge then is to find substitute supports for human living, activities, hopes and possibilities in order to generate healthy, happy and fulfilling living for formal the workers, informal workers, hobbyists, creators, consumers and so on, who are displaced from their accustomed, pre-COVID-19, work activities and other activities.
In relation to the third point, we need to “demote” the importance of money and markets themselves as methods of decision making and resource allocation in our political economy. How to do this? MMT is a good start. Implement the MMT program in its entirety. Nationalizing fiat and debt money (in essence) and implementing programs like the JG uses money in ways which are subversive of inequitable, neoliberal capitalism. So far, so good but this would only be a beginning.
The uses and reach of money, finance and markets themselves must be reduced, again by government fiat. Starting with the most complex and derivative of financial instruments, most financial instruments should be progressively de-legalized and regulated out of existence. In a phased transition to Democratic Socialism, each set of steps reducing the operations of money, finance, markets and increasing the ambit of nationalization, the public economy and statism would be followed by a pause to empirically assess the results of the measures.
Displaced workers would receive assistance, re-training and re-deployment. Capitalists large and petty, would receive no assistance until if and when they became as displaced workers; that is without income supports and needing assistance, re-training and re-deployment. Without applying this “Left Realism” across the board we cannot save the supporting biosphere from irreparable damage nor the human race from extinction.
Dear Neil,
1. The reason why I used Poland in 1988-89 as an example of inflationary processes related to exchange rate depreciation and so-called “capital flight” is because I remember this period very well, not because it was “typical” to what is going in for example Argentina or Iran. I should have probably chosen another country but I was lazy and I didn’t want to do too much research.
2. The economy of Poland was actually transitioning in 1989 from a centrally planned, with prices and wages set by the “Planning Committee” to market based. Saying that they could have controlled prices is at least out of context as the whole point was to free up the prices to create an equilibrium on the consumers goods market. Prior to the reforms, product shortages and food rationing were common.
3. Why price controls won’t work in most of the cases? Because firms apply a markup on costs. If imported commodities are becoming more expensive due to exchange rate depreciation, the price of final product must rise to preserve the markup. Firms may absorb some of the increase of costs by lowering the markup but nobody will keep producing goods with a negative markup. This has recently been tested in Venezuela, price controls applied to control inflation and enabling the poor to afford them, led to product shortages and stimulated the growth of black market. I would distinguish between one-off adjustments of the exchange rate and a process of continuous depreciation. In the case of one-off adjustments, certain categories of commodities have low pass-through rate while other may have almost full pass-through. In some Western countries, one-off changes in exchange rate do not lead to the development of inflationary processes.
3. The reason why central banks are involved in manipulating the exchange rates is very simple – higher volatility of exchange rate would cost exporters and importers too much, due to the costs of hedging. I am not defending this but I think that perhaps the lowest hanging fruit is re-imposing capital controls except for the cases when foreign direct investment is in the interest of the local population.
4. I still think that the excessive level of wealth of the ultra-rich (which includes the stock of hoarded monetary assets) is destabilising the global and national financial systems, promoting financialisation, destroying the real productive economy, corrupting and effectively disabling the democratic institutions and leading to wasteful overconsumption irreversibly damaging the environment. The only way to reverse these processes is by changing the distribution of disposable income and confiscating the wealth but I doubt this is going to happen because the so-called democratic institutions have been fully captured by the 1%. The future of the Western system looks bleak and the centre of human civilisation and progress has already moved from the place where money gives power to the place where power gives money.
I know the De havilland Comet fell out of the sky because it had square windows.
That’s no reason to persist with square windows, nor is it a reason to stop using aircraft.
Understand the root causes and change the approach taken.
The majority of what you have described are choices and symptoms of those choices – not systemic causes. It’s time to get beyond truth by repeated assertion.
The reason these criticisms of MMT are boring is because they repeat the same stuff. The reason they do that is that they are banking on Goebbels’ Law. If they are repeated enough times they become true – at least for some people, perhaps enough people.
Dear Neil,
Reforming the economy and the society is not a software engineering problem. “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” (A. Maslow)
The problem is not in the institutional details of the monetary system setup or designing sophisticated algorithms to apply fiscal rules. Running the society as an automation was actually tried and tested by Soviet scientists – and failed.
The problem is in who has the power in the society, this entirely determines the rules of the game and which choices are possible.
Hjalmar Schacht was perfectly capable of using the tools available in 1933/34 (Mefo bills) to reflate the economy in one year because mad Nazi ideology temporarily numbed the opposition of the “1%” to such a policy.
As to what powers the wheels of history in the long run, I had to admit that Marx mostly got it right, but he was an incurable optimist.
In defense of hammers. They get a bad reputation at economics blogs. I am a carpenter and even though I now have a variety of nail guns- a hammer is still an essential and quite versatile tool.
Just a bit of a personal peeve perhaps.
Adam,
Of course it isn’t a software problem.
But it is a systems problem. Correcting systems involving humans in organisational power structures is what people like me do.
Don’t for a minute think we have only one tool in our toolbox. We have the entire toolset of change management and systems engineering available. Actual applied science with hard outcomes.
The soviet system is the de havilland comet. We’ve learned what we can from it. Time to move on. Nobody is bringing back square windows.
And if the 1% determine what policies are available then any that involve taxing them more or redistributing wealth from them are dead ends – almost by definition.
Beefing up the autostabilisers is all there is available that gets people making bad decisions out of the operational loop. That’s the lesson from the soviet structures – and also the neoliberal ones. There are no Very Clever People.
Since there are no Very Clever People it is time to stop trying to create operational systems that rely upon them.
Interestingly something that Software Engineering discovered the hard way. Look up “Chief Programmer Concept” – in particular why it always fails.
Dear Neil,
I think that you have presented your views clearly enough for me to critique them.
“if the 1% determine what policies are available then any that involve taxing them more or
redistributing wealth from them are dead ends”
I agree. That’s why I say that this system in the current form (Western liberal democracy) has already reached its dead end. By the dead end I mean the state of stagnation interrupted by periodic crises. I don’t expect a spectacular collapse.
Since active fiscal policy would in the long run undermine the position occupied by the “1%”, this policy is always scuppered when it stops serving the oligarchy. Please read or re-read or re-re-read Michał Kalecki’s (1943): “Political Aspects of Full Employment”. I won’t repeat his arguments here.
But there is an alternative to the Western system in the form of “socialism with Chinese characteristics”, with different power, management and wealth distribution structures. I am not claiming that this system is always more “user-friendly” but that It is performing better and since the early 1980s has been able to adapt to changing conditions. I don’t know whether it will keep adapting and growing for the next 30 years. Maybe not. But I hope that it will and human civilisation will be able to overcome the environmental barriers, even if the new-old centre of the global civilisation is no longer in New York but in Beijing.
I think that where we differ is that I acknowledge the presence of objective conflicts of interests within the societies and between them at almost every level. To me Karl Marx was right and Adam Smith was wrong. Most often we are dealing with a zero-sum game. The rich will simply not give up and not give in on their own. It has never happened.
I am talking about the “first principles” and which social class is in total control (like a typical Eastern European), you are talking about “change management and systems engineering”. I believe that we cannot use a leaky bucket to carry water, even if we once fill it up with extra government spending.
I never advocated “very clever people” to be put in charge. They can help when the time is right. My observation is that it is too early or too late or both to attempt changing anything. “Very clever people” like David Graeber tried to seed “occupying Wall Street” and it didn’t work. Maybe again in 2021 or 2022… the objective will be to wrestle enough political power from the 1% so that a new social contract, a “new New deal” can be proposed. Only if this prerequisite is met then we can start thinking about “change management and systems engineering”. Otherwise it is just wishful thinking.
Michal Kalecki should always be repeated. That man was right.
It’s true that the biosphere and humankind (by this stage in our development) are incompatible. That hasn’t happened overnight: humans have been causing – or expediting – extinctions of other species – flora and fauna alike – for millennia. It’s just that the process has speeded-up exponentially since the industrial revolution began.
Solution? Simple:- get rid of humans.
Hang on – that’s *us*. A slight snag there …
OK, fall-back solution:- Institute world government and subject the entire human population to draconian regulation permitting of no departures whatsoever (ie lock-down Mark 2, expanded to universal global coverage and rigorously policed – eg delinquents shot on sight (?)). Economy to be reduced world-wide to pre-industrial subsistence, organised in kibbutzes. Capitalism expunged. Happiness compulsory.
Sounds good to me.
(I’ve just noticed that that solution was anticipated already in Ikonoclast’s comment above. Ah well, back to the drawing-board…)
@Adam
The neatest way to confiscate excess wealth is land value tax, because land is the original and greatest store of wealth. The most valuable land is residential land at the moment, because it’s largely untaxed. While we had John McDonnell here as potential Chancellor there was hope for a while. The Parliamentary Tory party, whilst they may be persuaded to tax commercial land, will never implement LVT on residential – not even the income generating rental sector, which is the most egregious abuse.
Having absorbed (to the best of my limited ability, not being a “very clever person”) both sides of the debate, Adam K’s critique is the one that chimes (100%) with my own outlook.
Personally I experience an instinctive revulsion against the notion of “the entire toolset of change management and systems engineering available. Actual applied science with hard outcomes” being introduced in the same breath as talking about human behaviour. To me even the language in which that is expressed seems mechanistic in the extreme, reminiscent of Dr. Strangelove.
That’s an entirely emotional, irrational, reaction of course – thus at one and the same time both a rebuttal and a reinforcement of my point.
As a PS to the foregoing I’ve been reminded of words attributed to Keynes which if I remember right were with reference to Hayek’s “The Road to Serfdom”, to the effect that it demonstrated “how an erroneous premise in the hands of a remorseless logician can end-up in the madhouse”.
“That’s an entirely emotional, irrational, reaction of course”
It is – because Change Management is about human behaviour. Almost entirely about that.
That’s what we do. Everything is a human system. The majority of the work is largely dealing with people who think they know how things work, but actually they don’t. Generally that is a result of varying degrees of prejudice.
Makes the job extra fun.
“I am talking about the “first principles” and which social class is in total control”
If they are in total control then you have no mechanism to change anything.
My critic of that position is that it sounds like the Irishman asked for directions: “Well I wouldn’t start from here”.
I’m starting from here and looking to find a path. Not spending my life wishing for a teleportation event to a promised land.
The promised land of macro economic equilibrium and effective automatic stabilisers
imho, the “german mmt branch” at makroskop.eu today (12.5.) totally failed to get to the point of mmt with 2 articles (häring and steinhardt).
what’s written there could also have come from any conservative german newspaper, yet they call themselves “progressives”.
i did subsribe there in the hope that many of bill’s articles would be published there and translated but sadly there were only very very few that covered real mmt views and agendas.