Don’t say its over until its over – MMT is not close to dominating the narrative

Don’t say its over until its over. There has been progress in the macroeconomics narrative since the GFC, which accelerated during the pandemic. Governments have certainly expanded fiscal deficits and taken on more debt and the usual hysteria, which many of those same governments helped to ferment in the public debate, has fallen away. Obviously, for political reasons, a government that has previously been terrorising the population about the dangers of deficits and rising debt as a cover for ideologically-driven austerity programs, has no incentive in continuing those narratives while they have been dragged into maintaining capitalism on life support. The question has been whether these narratives will return once the health emergency starts to fade a little. There is clear evidence emerging that the lessons that the pandemic has taught us are not being absorbed by the economics commentariat, who dominate the public space with their opinions. Two clear examples of this came out this week (already) in the Australian press, which replicates the sort of commentary I am increasingly seeing around the globe. Deeply sad.

Fundamental misperceptions about continuous fiscal deficits

The shift in narrative has seen economists and commentators suggest that this period of fiscal flexibility should only be temporary and then, at some time in the future, the usual ‘surplus’ is best narrative should resume.

The Economics Editor of the Melbourne Age and the Sydney Morning Herald, Ross Gittins published this article yesterday (May 24, 2021) – Why the government should ditch ‘stage 3’ tax cuts to repair the budget – which claimed that:

… most economists agree that at the right time, the government should take measures to hasten the budget’s return to balance, even – to use a newly unspeakable word – “surplus”.

As usual, I am in the minority of my profession.

Apparently, the difference now, as opposed to the GFC, when economists pressured governments to prematurely abandon fiscal support, which worsened the negative consequences of crisis, is that, according to Gittins:

… the right time will be when the economy has returned to full employment, with no spare production capacity.

So why is that the right time?

Because according to Gittins – inflation and wages growth will be on the cusp of accelerating outside safe parameters.

And, Gittins claims that:

Any further fiscal stimulus from a continuing budget deficit would risk pushing inflation above the target and could induce a “monetary policy reaction function” where the independent Reserve countered that risk by raising interest rates.

Note that a “continuing budget deficit” is characterised as “further fiscal stimulus”, which is really the problem with these narratives.

Gittins then reverts to the ‘forward looking’ mantra, which the US Federal Reserve has now abandoned, by claiming that it is:

… better for the government to act before the Reserve acts for it.

This approach has been dominant over the last three decades and always sees policy tighter than the circumstances in the real economy (employment, output, etc) would justify.

The problem is that the measure of full employment that has dominated this period is deeply flawed because it is biased towards equating elevated levels of unemployment with full capacity.

Gittins just channels the “econocrats’ best guess at the level of full employment – when unemployment is down to between 5 and 4.5 per cent” – without critical scrutiny.

This is the Non-Accelerating Inflation Rate of Unemployment or NAIRU mythology.

Please read these blog posts (among others) for background:

1. Never trust a NAIRU estimate (May 13, 2020).

2. The NAIRU/Output gap scam reprise (February 27, 2019).

3. The NAIRU/Output gap scam (February 26, 2019).

4. Why we have to learn about the NAIRU (and reject it) (November 19, 2013).

5. NAIRU mantra prevents good macroeconomic policy (November 19, 2010).

6. The dreaded NAIRU is still about! (April 16, 2009).

There is no robust evidence that the unemployment rate of 5 per cent is the threshold between inflation being stable and accelerating.

The statistical/econometric techniques that generate these NAIRU estimates produce very imprecise point estimates with typically large standard errors.

They also tend to be just filtered versions of the actual unemployment rate and go up and down accordingly with no shifts in ‘structural’ parameters, the latter of which are claimed to generate shifts.

We see NAIRU estimates rising and falling with the economic cycle with no perceived shift in economic structure.

When econometricians use ‘structural’ variables to ‘explain’ these shift, we also see these variables, themselves are highly cyclically sensitive, meaning they cannot provide structural (non-cyclical) information.

So why does Gittins privilege these ‘limits’, which have no foundation in reality?

Well, because it is a convenient ruse that appears to be one of those technical constructs that evade public scrutiny, which gives it a sense of authority, that only people like me who have the training and the technical know how but not the ideology can critique.

Gittins aim in the article is to argue against proposed tax cuts in July 2024.

I have no problem with the view that we should wait until closer to the date to assess whether the tax cuts (or any fiscal setting) is appropriate to the context we find ourselves in at that point.

But the relevant word is CONTEXT.

Which is why the conceptual argument Gittins makes in the lead up to his discussion on the proposed tax cuts is poor and misleading.

To explain, context does not relate to the monetary size of the fiscal deficit or the level of public debt.

In stand-alone terms, those financial numbers have no relative meaning. We cannot make any assessments on the basis of someone saying the fiscal deficit is 10 per cent of GDP or 2 per cent.

The former is not better or worse than the latter.

A 2 per cent surplus is not better or worse than a 10 per cent deficit.

It all depends … on the context.

The government is just one spending source in the economy.

Taken together spending equals output equals income, which drives employment.

To have full employment, spending has to be sufficient to create output that, given productivity, can create sufficient employment to satisfy the desire for work from the labour supply.

If non-government spending (that is, the sum of household consumption, business investment and export revenue) is insufficient (which means that sector is saving a proportion of its income) to produce full employment, then the only way the economy can reach that desired employment level, is if the government meets the ‘spending gap’ by running a deficit.

This is not an opinion. It is basic national accounting.

So a continuous fiscal deficit is usually required to produce full employment, especially if the nation is running an external deficit.

A surplus in this context will drive the private domestic sector into continuing deficits, rising indebtedness, and ultimately, insolvency.

That is context.

A nation such as Norway, with very strong external revenue coming from its export sector can run a fiscal surplus and still ensure national income is sufficient to generate savings that satisfy the private domestic sector aspirations.

A different context.

So it is just plain ignorant for one to conclude that a fiscal surplus (in the Australian context) would be the appropriate position at full employment.

Such a fiscal stance would assuredly mean the economy could never sustain full employment – we have thirty years of evidence of that.

And as a matter of terminology, we usually think of a ‘fiscal stimulus’ as a temporary injection of net public spending to meet a sudden fall in non-government spending growth, that opens up the ‘spending gap’ I mentioned before.

The ‘stimulus’ is designed to redress that gap and stop unemployment from rising.

We would not think of a steady-state (continuous) fiscal deficit at a level that maintain full employment given the underlying steady-state non-government spending levels as a ‘stimulus’.

Gittins doesn’t understand that difference when he writes “further fiscal stimulus from a continuing budget deficit”.

We certainly do not want an expanding fiscal deficit when the combination of public and non-government spending is sufficient to maintain full employment.

But that is quite a different matter to claiming that any fiscal deficit is undesirable at full employment, which is what Gittins wants his readers to believe.

I discussed these issues in the introductory suite of blog posts:

1. Deficit spending 101 – Part 1 (February 21, 2009).

2. Deficit spending 101 – Part 2 (February 23, 2009)

3. Deficit spending 101 – Part 3 (March 2, 2009).

If that wasn’t bad enough …

The day before (May 23, 2021), the Sydney Morning Herald published this article – True cost of pandemic and policy failure to leave finances in the red – which also perpetuates the fictions that have dominated the macroeconomics commentary over the last three or so decades.

The article by journalist Shane Wright contains many of the frames that underpin these fictions:

1. “pandemic’s devastation of the nation’s finances” – implying that the government fiscal position can be ‘bad’ or ‘devastated’ if deficits rise.

2. “huge levels of debt over the next 40 years” – implying rising public debt is bad.

3. “a wake-up call for both sides of politics” – implying that politicians are living in a delusory state and will have to get real soon.

4. “gross debt hitting a record $1.2 trillion” – use of the term ‘record’ implies bad, when it is meaningless in the context.

5. “how the government would pay for the debt and deficit run up dealing with the pandemic” – they have already paid for the deficit, when they instructed the RBA to type numbers into bank accounts to facilitate the extra spending.

Further, the RBA has also bought a significant proportion of the increase in public debt via its quantitative easing program. Not mentioned by the journalist.

6. After noting claims by the Prime Minister that “a strong economy” would “pay for” the deficits, the journalist says “This month’s budget shows deficits every year for the next decade and a slowdown in economic growth from 2022-23.”

Implying that the deficits would not be paid for. Revert back to Point 5.

And if there is a slowdown in economic growth from 2022-23, then it means that, given projected non-government spending, the fiscal position at that point is not expansionary enough.

7. Some mainstream economist is then quoted as saying “how much damage had been done to the budget” would be revealed in an upcoming report.

His view is to be disregarded.

A fiscal position is not something that can be “damaged”. This sort of framing and language is totally inapplicable.

What has happened is that non-government spending has fallen, unemployment rose and to reduce that ‘damage’ (to real things that matter like jobs), the fiscal deficit rose.

That is not damage to the government policy position. It has not meaning to use terms like that.

The government response was to reduce real “damage”.

8. Further poor framing and language from this mainstream economist – “how much trouble the budget is in”.

A fiscal position cannot get into “trouble” like a naughty little boy or girl. Such language implies a rising deficit is bad and a falling deficit is good.

Revert back to my earlier discussion as to why that terminology and construction is a reflection of just plain ignorance.

9. Another mainstream economist is quoted (who I can tell you from personal discussions is not on top of these matters) is talked about “the whole budget to implode”.


Apparently, we need to restore “fiscal discipline” – again using morality terminology.

10. The article quotes the Treasury secretary who last week claim that at some future point, the government would have to:

… accelerate the rebuilding of our fiscal buffers.

This is the myth that a fiscal surplus provides the government with more capacity to meet a crisis than if the nation goes into a crisis with a fiscal deficit.

It is a plain lie.

The currency-issuing government can always expand its deficit to meet a sudden shortfall in non-government spending (relative to the level necessary to maintain full employment), irrespective of its current fiscal position.

Those who think otherwise, claim that if the public debt is too high, the bond markets will not fund the increase in deficits at reasonable bond yields.

Of course, this implies the bond markets dominate the government.

That is another myth.

The last 20 years in Japan, the period since the GFC in many other nations, and the pandemic in all countries, has shown pretty clearly that the central bank calls all the shots in this regard.

There can never be a situation where the bond markets can render a currency-issuing government insolvent or force up bond yields, if the government chooses otherwise.

Further, the idea that a fiscal surplus represents savings that can be used to expand future spending possibilities, which the “fiscal buffers” terminology implies, is false.

Governments do not ‘save’ when they run surpluses.

They actually destroy non-government saving.

Saving is the act of a financially-constrained spending agent (household, firm, etc) who retain a proportion of their current available income in order to expand their future spending capacity (via the interest on the financial assets created by the ‘non-spending’ now).

Such a constraint is not binding on the Australian government and so its future spending possibilities are only limited by what is for sale in the Australian dollar, irrespective of what is has been doing in the past.


These narratives that are increasingly appearing in our public commentaries are dangerous and emphasise that there has not been a fundamental shift in the macroeconomic discussion as a result of the pandemic.

The policy practice has been relaxed given the scale of the health disaster and the evidence is clear that these narratives have always been false.

But those who have the ‘platform’ – the journalists, the economists that get most of the airspace on TV and radio etc – are stuck in the mainstream paradigm and don’t appear to have learned much at all from the evidence.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 14 Comments

  1. It’s no better here in Canada where the press all have their hair on fire with inflation fears associated with burgeoning sovereign debt and the usual finger wagging about government waste and the need for all to tighten our belts to restore fiscal discipline in the wake of the Covid-19 crisis (as if were even over yet).

    It’s depressing.

  2. As long as the banks keep running the narrative there will be no change.
    A few bank failures would help….

  3. I’m told that Krugman was once again misinterpreting the MMT view on the ‘money supply’ again.

    Note how they never bother asking any MMT person directly for clarification to make sure they have the understanding correct. You get the same from inflationistas and Laffer Curve fans. It’s all “how dare you question my religion”.

  4. Wash, rinse, repeat.
    It’s becoming tiresome.

    The same story is repeated amongst progressive groups (the paid executive of alleged representatives of workers) Discussion of underutilisation as acting as a suppression on wages and thus a framework is needed for eliminating involuntary unemployment is shut down because it challenges exisiting power structures and their (false) understanding of the world. We’re stuck in a market framework that all workers can do is ‘bargain’ with capital for everything. Very very frustrating.

  5. Meadway tweet: “We’ve electronically printed £895bn via QE since 2009. Inflation has been at record lows since. If there are inflationary risks in the future (and there are!) they’re not coming because of the money supply.” Meadway represents UK neo-Keynesian thinking. Is this progress? Probably not…
    On BBC Radio 4 this morning they announced UK record public debt, with final note that most of that borrowed is owed TO BoE. How do they get away with it?

  6. As long as “the left” remains trapped in the neo-liberal paradigm it will lose. Even The Greens (disclosure: I’m a member) fear that we must explain how we will “pay for” our policies or we won’t be able to sell them.

    Policy development is one thing, and I know that can be a very long game, but more importantly the language we use needs to change. We cannot seek to argue within a neoliberal frame – we must talk around it not through it. I would suggest to begin:
    – Never utter the words “government debt”. It does not exist.
    – Never speak of “the taxpayers”. Or even worse “working families” (vomit!). Always speak of and to The People
    – Never speak of “consumers”. Nothing is consumed, only transformed into something else. Even the food we eat is not consumed, it is transformed into shit. Turning people into consumers is one of the awful dehumanising language games of neoliberalism, and it implies a linear economy – not a circular one.
    – Always talk about the need to build our future productive capacity. All our savings will be worthless if we aren’t making anything to spend it on.
    – Start a conversation about value creation and extraction. Neoliberalism supports value extraction through rents, profits and market power. In fact we could argue that neoliberalism was designed as a justification for value extraction (there’s some future research for me…). Just like money must be spent by the government before it can be taxed, value must be created before it can be extracted.

    That’s just a bit of random thought bashed out while I watch Pose in the background. But the basic idea is to tell a new story, and not argue about the old one. In the public realm at least – in the academic realm there is a *lot* more arguing to do!

  7. Last week’s Q&A starkly shows that the battle for rational economic understanding is far from over. (Q&A is an Australian weekly TV show with a panel discussing topical issues)

    With the panel including politicians from both main parties, an economist, and a comedian, the discussion turned to how the govt pays for things. (Search “Barnaby Meets Lukenomics” and watch from 45:20 – 52:00)

    Comedian Luke McGregor explained clearly how the govt, being currency issuer, is not financially constrained. To prove it, he explained that he spoke to an economist at the RBA who confirmed the bank would never not fulfil a govt payment. The reaction of the other panelists was revealing.

    The govt politician – a classroom buffoon – rolled his eyes and shook his head. The economist delivered self-assured advice that stability depends on govt debt being paid back. And the Labor politician contributed nothing but mute amusement. None of them listened.

    My 83 y.o. mum mostly gets MMT. We have great discussions. She is not blinkered and simply wants to understand the truth (she’s a champion). While there is a long way to go, progress is being made.

    I’m certain this battle will be won.

  8. It is definitely not over but it would be nice to get beyond “MMT is a thing” and move onto “this is what is possible when policy is informed by MMT”
    Job Guarantee V unemployed buffer is a great discussion made possible through an MMT lens.
    Others might be,
    What would have been possible if the Australian Government funded mRNA production and development 12 months ago?
    How much money does the Commonwealth have to give the states to make hospitals ready for when the international boarders are opened?
    What resources have to be mobilised by Commonwealth spending address climate change?

  9. I won’t be supporting any of our current parties in future elections until someone starts messaging that they can see the economy more clearly through their newfound MMT lens and will use that to guide their future fiscal policy development.
    The MMT narrative needs to have a louder voice behind it than the one mainstream media makes available to the orthodox. In future elections I’ll be posting lawn signs that ask which party recognizes this instead of the usual silly party support stuff the neighbors put up election after election.

  10. I would add to Bradley Schott’s on the money comments on framing issues by the language that is used in getting an accurate message across to change the way people look at MMT or any other idea.

    Better to make your point by not parroting back your opponent’s terminology, because that is what they have decided to use at you to set their agenda (in your minds eye), but employ more meaningful terms that better explain what you intend. See how regularly politicians set the language when talking to MSM and the public who then take it up thereafter. When did a “plan” become a “roadmap”? Don’t say “climate change” but say “global warming”.

    I would also add, better to talk about “society” and not “the economy” wherever possible. Is the purpose of society to serve the economy or vice versa? What is government for – to serve society as a whole and improve the wellbeing of all citizens or serve a minor segment of society at the expense of the majority? Pretty simple ideas as to the choices to be made.

  11. Of course MMT isn’t dominating the narrative….It’s just in the strongest position its ever been.
    This became clear as soon as cental banks started hoovering up bonds that governments who must remain steadfastly at arms length from said banks will never be able to repay. Or perhaps after the GFC, when the US Fed coined the wacky euphemism ‘quantitative easing’ to try to hide the fact they were conjuring up money to keep their government and Wall St afloat. Whatever, the governmments-don’t-have-to-borrow-every-deficit-dollar genie is ot of the bottle and ain’t going back in anytime soon. All future turns toward austerity can and must be framed as uneccesary, sadistic and in service of a false and failed ideology.

  12. The Q&A spot was interesting.
    A heroic effort to talk sense using nonsense terminology.
    Nevertheless, I note the only real come back was that he was monopolising the conversation.
    The poor economist looking dumbfounded at being asked “why” we need to repeat the “debt”, priceless.

  13. Another Excellent article by Bill! Thank so much for providing so many insights! in one post.

    Here in Thailand, the government has just passed half a trillion baht package to further deal with the third wave of the infection surges. The government claimed that this will boost the GDP by 1.5% despite the semi lockdown.

    The question I have is – maybe this estimate is wrong?

    My logic is that, according to the number, our GDP is roughly 16 trillion, so, according two my two cents, that should represent (if everything remains the same) a GDP boost of about 3.1% (at least).

    Have I got this right? (From what I feel, our external sector and government spending should remain the same or improve slightly and so is the domestic consumption, as they have contracted quite a lot already in the last year).

  14. The Fed under Jerome Powell chairmanship (himself not an economist) has recently changed it’s stance regarding inflation policy from proactive to wait and see position, and essentially committed to allowing inflation to exceed its traditional 2% target as it pursues full employment (of NAIRU type).
    Goldman Sachs’ latest forecast is for inflation to remain around the Fed’s target at least through 2024.
    While this shift in thinking is still far away from seeing monetary operations through the MMT lenses, nevertheless I consider them to be in the right direction towards disentangling policy from the monetarist orthodoxy that has prevailed during the past half century.

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