I had an email conversation with Prof Stephanie Kelton in the USA yesterday. She is a leading modern monetary theorist and currently Chief Economist on the U.S. Senate Budget Committee whilst on leave from her position as Associate Professor in the Department of Economics at the University of Missouri-Kansas City.
During the email exchange Stephanie, when discussing the problem of explaining who pays for government investment, offered a quip I thought worth sharing:
The problem ... is that they all think money grows on rich people
That was, I admit, a laugh out loud moment. But that's because it is so true. The whole logic of our current economic debate is the, usually unstated but always present, assumption implicit within it that unless, for example, we have bankers out there trashing the finance system and making vast profits doing so then we can't have nurses or teachers.
But that's not true. Any government with a sovereign currency can spend without taxing in theory: it has the right to create the money. In fact, to state the glaringly obvious, there can never be tax paid until a government creates (or permits the creation of) the money needed to make settlement.
So, just as we once thought we needed bank deposits before loans could take place, and now we know that actually deposits happen as a result of loans that banks create, so too is it the case that not a single penny of government spending is dependent upon the existence of the rich to pay for it because the spend always comes first out of money that the government can, and as a mater of fact does, create. But, since a government that kept on spending without taxing would rapidly create hyper-inflation we must tax to make sure that this does not happen and that the money in circulation is fit for purpose.
Once you do that you do, of course, ask for most tax from the rich for three very good reasons. The first is that they have most of it. To put it another way, they have benefitted most, whether directly or indirectly, from government spending. Second, this ensures social justice. Third, if you didn't you could never recover enough to achieve the goal of monetary stability.
But what is clear is that not once, not ever, are the taxes paid by the rich a pre-condition of government spending. That could happen with or without them because the cash to pay for it is always available to any government that has its own currency. It's just someone else would be paying the tax if the rich did not exist. That's all. But please don't worry for those who'd be paying the extra tax if the rich disappeared: they'd have received more of the benefit of the state spending if this was the case. They would, quite simply, have more money. In fact, they'd be the new rich. That's the way it works.
And there is a footnote: if you can have zero inflation with a deficit then you don't need to worry about the deficit: the money you have is credible. That's the surest sign there is that you have got the balancing of the economy right. It's not some book-keeping equation that says income equals expenditure that matters when you're running an economy that can print its own money: it's getting the money right that matters. By chance we pretty much have right now. Don't rock the boat is the message in that case. Just in case anyone is listening.
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Richard,
Am delighted to hear of your direct contact with Stephanie and even more so that the focus of the discussion is on ‘framing’. Imagine Corbyn repeatedly using the powerful imagery of Stephanie’s little ‘quip’ that undermines the false “unstated but always present, assumptions implicit” in the debate.
By the way Bernie Sanders made an incredibly smart choice when he appointed Stephanie to her current role. I sincerely hope he went one step further and also takes her economic advice to inform his presidential campaign.
I agree with you on Bernie Sanders’ wise choice
Gandhi once remarked, “First they ignore you, then they make fun of you, then they
fight you, then you win.”
Extracts from the Foreword of:
Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System
September 21, 2009 (Chaired by Joseph Stiglitz)
by Miguel d’Escoto Brockmann
President of the 63rd Session of the United Nations General Assembly
…..
“The crisis is not just a once in a century accident, something that just happened to the economy, something that could not be anticipated, let alone avoided. We believe that, to the contrary, the crisis is man-made: It was the result of mistakes by the private sector and misguided and failed policies of the public.”
Our global economy is broken. This much is widely accepted. But what it is precisely that is broken and needs to be fixed has become a subject of enormous controversy.
…the crisis we confront is systemic in the deepest sense and has many facets….connected in important ways by an imperious economic perspective that has been implemented, often under duress, across the globe during the last 35 years.
In this perspective, market logic solves nearly all social, economic and political problems. The well-known staples of economic policy complexity such as the need to address economic and non-economic sources of economic instability (“market failure”), the need to account for costs imposed on others and to redress the unfair appropriation of social benefits (“externalities”), the need for public intervention to provide for the conditions and values of sustainable life (“public goods” and “social equity”) are all regarded as incidental rather than fundamental issues of economic management.
…the present crisis demonstrates failure at many levels — of theory and philosophy, of institutions, policies and practices, and, less overtly, of ethics and accountability.
…The essential insight of the report is that our multiple crises are not the result of a failure or failures of the system. Rather, the system itself — its organization and principles, and its distorted and flawed institutional mechanisms — is the cause of many these failures.
…..our global economy is but one of many possible economies, and, unlike the laws of physics, we have a political choice to determine when, where, and to what degree the so-called laws of economic behavior should be allowed to hold sway.
…our global economic system must be adjusted to the requirements of an era in which the risks engendered by centuries of neglect have reached a point of extreme danger and the costs of adjustment must be borne by the present and succeeding generations.
“The conjunction of huge unmet global needs, including responding to global warming and the eradication of poverty, in a world with excess capacity and mass unemployment, is unacceptable.”
As the greatest economic philosophers — whose number surely includes Aquinas, Smith, Marx, and Keynes — have all recognized, homo oeconomicus, the acquisitive, emotionally cardboard, and socially atomistic construct of academic economics is a ‘reductio ad absurdum’.
…………….
One of the most disappointing aspects of the global response to the present crisis has been the almost complete absence of political accountability. While failure has been broad and abundant, corrective action has been comparatively scarce.
In part, perhaps, this owes to the influence of the concept of the present global economy as natural and therefore subject to natural disasters. But under the circumstances that concept is no more than a rhetorical device, an insidious political strategy, of which there are many, to deflect attention and accountability away from the authors of the policies and designers of the institutions that have failed so miserably.
….I have also drawn inspiration from the life and teachings of Mahatma Gandhi, who once remarked, “First they ignore you, then they make fun of you, then they
fight you, then you win.”
In Gandhi’s vital vision, the fight for social and political change is not reducible to a fight between good and evil, but a struggle for Truth, in which each of us must take personal responsibility in a spirit of love and solidarity, even for those who oppose us and may seek to destroy us.
http://www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf
Thanks
Appreciated
Stephanie Kelton is brilliant at explaining the Monetary system, some of her lectures are on youtube – well worth watching.
But I read a comment from Randal Wray (also an MMT economist) who I thought gave a good explanation of the role of taxation. In so many words, it must be used to control inflation, but how it is used is political.
The most important point is that government uses taxes to control behaviour and outcomes. The simplest one is the high taxes on cigarettes and spirits – done for health outcomes (some people used to believe it paid for the NHS, but really, it decreased its problems).
Corporation tax can stop money being hoarded in tax havens, and destroying this wealth can allow government to spend more money on services and tax credits for the working population.
A large tax on rent above a certain level could keep rents under control. Land tax could keep houses cheaper by preventing land speculation and capital gains.
Hikes in VAT and the bedroom tax destroy the wealth of the poor and middle classes.
Bill Mitchell says that taxation carves a space for government to buy without causing inflation. It shapes the economy to allow the politician to spend high powered money on those he works for. So is crucial. It is only the mechanics of it that are different to what most people describe. It is not collected to spend, but money that is destroyed so that the government can spend where it likes without causing inflation.
But the worst idea is the neoliberal one, that it is taking money from rich people to spend. Totally wrong, it is all government money.
Hi Richard,
I’m a small (high tech) business owner, socially minded & fascinated by this debate. I have little material wealth other than that tied up in my startup.
If the electorate did permit the economic experiment you recommend, what levers would be available to JC to pull if events subsequently got out of hand (and in what circumstances would you advise him to pull them)?
Curious how a JC-led Labour Party will go about persuading average-wealth voters with a life’s work/investment at risk to roll the dice on a change of Government (the young & disenfranchised I can totally understand). Suspect they’ll want to see evidence that the wagon has brakes?
Robert
What does out of hand mean?
A boom? You tax more. You stop stimulus. You cut back spending
Inflation? You raise rates
A currency crisis: you raise rates. You consider capital controls (and I know the EU does not permit them), but they happen e.g. Cyprus and Greece
There is nothing so odd here
But by getting the analysis right first you limit the risk of this happening
“A currency crisis: you raise rates.”
I’d disagree with that. A ‘currency crisis’ should be made to do what it is supposed to do – stop imports. So you make sure that exporters to your country feel the pain of the ‘currency crisis’. Physical import restriction and rationing to ensure needed goods are prioritised above some CEO’s latest Leah Jet.
Because for a currency to go down *all* the others have to go up. Yet any one of those currency areas can halt that increase *for all* by using their own central banks infinite executive powers to intervene to keep their own currency *down*.
As China just has.
Exporters need to export. Use that fact to your advantage.
Neil
Interesting
I’ll muse on that one
Thanks
Richard
Alternatively, seeing as what we are talking about here is the impact of imbalances of trade surpluses and deficits on local currencies, what is required is the sort of Global Surplus Recycling Mechanism originally proposed by Keynes at Breton Wood, which was vetoed by the Trueman team, as outlined in Varoufakis’s book The Global Minotaur.
And the Bancor?
There would, in such a system, certainly be the need for some form of global currency reserve unit of trading account with its own international clearing body outside of the control of any single country to manipulate the reserve to its own advantage and everyone’s else’s disadvantage.
Perhaps such a system is underpinning the thinking of the Chinese amongst others in the fledgling attempts of the BRIC’s block of States to create some form of alternative banking and fiscal bodies to the current Breton Woods legacy bodies like the WB & IMF?
“Inflation? You raise rates”
Not sure I agree with this. Doesn’t raising interest rates only cut inflation in the short term, storing up more inflation in the future as prices rise due to the extra cost of loans?
Yep. I’d agree with Neil on this. It’s pretty much a central tenet of MMT that exchange rates should be allowed to freely float. Loans should never be in a foreign currency would be another.
I like concept of people’s QE! Technically it might be argued that it is more than just QE and we could perhaps call it something else, but politically it’s brilliant!
Congratulations on your good work with Jeremy’s campaign.
Thank you
The levers to pull initially would be to give grants to small businesses and tax incentives to employ and train young people. To control inflation in shaping the economy for production, government could balance this by taxing the monopolies and global corporations more. Possibly more protectionism (import taxes to help home grown businesses from our excessive imports from China).
When you read Frances Coppola’s article on the United States Federal Reserve being the “world’s bank” (effectively despite the constraints being the world’s key creator of money from nothing) to drive the world’s economy you are reminded of Keynes insight that the world needs a means of balancing out trade imbalances so not merely do you need a People’s QE for individual countries you need a Global People’s QE. A very distant prospect given human beings inability to recognise and align itself with the fundamental “in-built” drive in Nature to seek balance through symbiosis or cooperation.
Meanwhile we must as Neil Wilson suggests seek to assert the UK’s global trade agreement right for the UK to balance its trade. (England did this with the worsted industry way back which helped kick off the Industrial Revolution.) We are likely to be must successful in this by working with other countries that run persistent trade deficits. However, it needs carefully thinking through whether you put a committee of government bureaucrats in place to filter the imports that should be allowed through into the UK albeit that an English king and Parliament acted as that committee all those years ago in regard to severely restricting textile imports particularly worsted. As Hayek argued the best knowledge in regards to people’s wants resides in the marketplace if you want to avoid distortions but obviously that view is up for some challenges especially political equality to determine income.
http://theweek.com/articles/455261/americas-greatest-export-debt
That’s the first time I’ve seen the Bancor mentioned outside of academic articles. The general idea is worth revisting.
Certainly is
I am a bit of a cross over, remember
I like what I read here. However a critic may point out that the vast majority of new money in the economy is not created by Government deficit spending, rather it comes new bank lending. Sure, as you point out, this is by Government consent, but it’s the control of finance that is crucial. We’ve seen in recent times the consensus for “monetary activism and fiscal conservatism” and the sanctity of central bank “independence”. Altering this consensus looks like an uphill battle. Coupled to this we need to acknowledge the limits of the macroeconomics measures we are using to make crucial decisions. For example, the CPI/RPI looked to be completely useless as a measure of (asset) inflation when we look back at the housing boom ~2000-2007.
Given that many bankers are rich and in issuing new debt (and collecting interest) they are driving the money supply, there may actually be a little truth to “money grows on rich people”…
So bank power needs to be curtailed
The notion that the majority of money is created by the private banking sector was challenged by a United States mechanical engineer Paul Meli who supports MMT. Unfortunately he has taken down (or privatised) the web site on which he challenged this conventional wisdom. He actually took the trouble to examine one year accumulative totals of money created in the United States in recent years and split that down into that created by government and that created by private banks before these were affected by tax. He found that in reality the US government created more than the private banks. What he also discovered was a sort of money creation law that says roughly if the private banks share of money creation exceeds more than 40% of the overall total a credit crash will occur as the private debt bubble bursts.
http://mikenormaneconomics.blogspot.com/2013/11/mark-buchanan-actually-economists-can.html
https://dl.dropboxusercontent.com/u/33741/FGEXPND.png
Note the argument in the comments column that it’s government creation of future income that enables private bank debt repayment.
Clearly what is critical to the argument which agency creates the larger amount of money in an economy with a sovereign government is subject to how you logically measure that money.
Sorry Schofield,
I’m not sure that I grasp the premise of that notion. The endogenous creation of (credit) money begins where banks lend and the borrower deposits the loan back into the banking system.
In normal times the central banks’ inflation/interest rate targeting regime recognises endogenous money creation and seeks to control it indirectly.
When you talk about “government creation of money” “in recent years”. I’m assuming that the USA’s massive QE might have something (a lot) to do with that. Although most of the QE is “sterilised” some of it has not been, and they have expanded their (actual underlying) monetary base considerably. I’m not sure if your Paul Meli is counting the sterilised component or not. If he is, he probably shouldn’t be.
In not so recent years – before the QE, before the GFC, things were considerably different. Recent years are quite unusual.
In any case this article:
http://www.slate.com/blogs/moneybox/2012/08/03/the_monetary_base_is_irrelevant.html
has a rare Federal Reserve chart that shows the proportions of US QE that have and have not been sterilised.
Paradoxically, the article and its headline proclaim the idea that its “all” been sterilised (or ‘sequestered’ in banks) but the chart shows that it hasn’t, Which is weird because the article’s author is normally quite good.
To conclude I will simply note that the chart’s red line reveals that the actual circulating monetary base increased by about $400 billion in the 14 years between 1994 & 2008. But it only took another 4 years (2008 to 2012)to increase by another $400 billion. That’s a significant rate of increase and it was reflected in the recent fall in value of the $US.
Bank debt is a liability to households and businesses. Bank money has to be repaid in full and is then destroyed, and also the interest is added on. Without government money, a crisis would occur because there would be no means to clear bank debt, except with other bank debt, or a ponzi scheme. Bank debt leverages government money, and I believe that the bailout proved that.
Deficit spending and quantitative easing is needed to provide savings for the people.
There is a terrible article in the Guardian right now by Polly Toynebee wherein Yvette Cooper is stating that as an economist she knows that government cannot create money year after year on things we cannot afford. Keynes would never agree to it, she says.
She must be a neoliberal with a very poor understanding of Keynes.
Re the last, she clearly is, I am afraid
Does Yvette Cooper suggest that Keynes would approve of austerity? Is that what she’s implying?
I would advise her to avoid the city of Cambridge or any place where real economists actually know what they are talking about.
Sandra,
Not sure if you meant this above, but there are few posts on this thread that fall into the trap of thinking private bank “debt can’t be paid”. This myth is a pet hate of Steve Keen’s and for good reason…
My empasise.
NB: His “hi” incudes MMTers Stephanie Kelton and Scott Fullwiler.
http://www.forbes.com/sites/stevekeen/2015/03/30/the-principal-and-interest-on-debt-myth-2/
This text is entirely BOLD!
There’s a big difference between Govt and private creation of new money. From the POV of the private domestic sector Govt money is liability free. The liability stays with Government. There’s no obligation for Govt to ever repay anyone else.
Not so with commercial bank issued money. The liability stays with the issuers and the borrowers of that money. There is a very real obligation. In the short term when banks are lending, customers are borrowing and spending the effect is very much like a Keynesian stimulus and if its overdone can even cause high inflation. That certainly happened under Nigel Lawson’s boom. But we all know what happens when those liabilities and debts accumulate. The spending stops and the boom…….
Will you be meeting Bill Mitchell when he is in the UK this month Richard? I know that he is offering to add his international reputation to Jeremy Corbyn’s campaign. Like Stephanie Kelton, he has acquired huge experience in how to frame these macro-economic ideas which meet with such hostility. He also has hands on experience of advising South Africa, India, the EU etc about setting up a Job’s Guarantee programme.
It is all very heartening and every offer should be grabbed. I am still reeling from hearing the interviewer on the Today programme, squealing at Ken Livingstone that these ideas were hyper inflationary and would take us back to the Weimar republic. Of course, that was before Jack Straw was allowed to say more or less the same, in his ‘impromptu’ party political broadcast for Yvette Cooper.
Bill has not been in touch
I would definitely meet if I could
Word on the street is a public lecture on the 28th in London at Unite HQ organised by the NHA party. Not 100% confirmed at the moment.
Richard.
Bill Mitchell has, like Randy Wray and Stephanie Kelton, a wealth of experience on MMT issues including “framing.” I’m sure he would be only too happy to help you with the advice you provide to Jeremy Corbyn. You should take the initiative and contact him to find out when he next intends to visit the UK and any other information he can provide particularly his great ability to create analytical data for different economies including the UK.
Contact Information from his blog.
You can contact Bill at Bill.Mitchell_@_newcastle.edu.au (delete underscores)
Alternatively ring:
0419 422 410 if in Australia or +61-419-422-410 if calling from abroad.
We are in touch now
Thanks!
“A currency crisis: you raise rates.”
I’d disagree with that. A ‘currency crisis’ should be made to do what it is supposed to do — stop imports. So you make sure that exporters to your country feel the pain of the ‘currency crisis’. Physical import restriction and rationing to ensure needed goods are prioritised above some CEO’s latest Leah Jet.
But with this solution there’d be the small matter of getting out of Europe first!
“But with this solution there’d be the small matter of getting out of Europe first!”
Not really. Firstly there is no law without enforcement and secondly there are plenty of ‘national emergency’ clauses in the treaty to provide cover for pretty much anything a government needs to do.
I’m sure there are but import restrictions and rationing to ensure needed goods are prioritised pretty much goes to the heart of the EU. If every member started doing it the EU would, I think, have lost its core purpose and would collapse pretty quickly!
Getting out of Europe would be preferable, but not essential, providing no future UK Govt is stupid enough to sign up to the euro or be coerced into pegging the £ to the euro.
If the £ is allowed to freely float, that will provide the necessary rationing mechanism. The Government then just has to steer a sensible path, using both monetary and fiscal policy, between the perils of high inflation on the one hand and the perils of recession and high levels of unemployment on the other.
Once it has done that it can start to think of what to do about those small percentage of workers who are hard to place in the jobs market. Short term unemployment is fine. We can support those short term unemployed with benefits. The long term unemployed soon become the permanently unemployed. Rather than just ignore them as has been done previously, we need to think more in terms of the introducing a job guarantee and breaking the downward spiral of unemployment leading to unemployability.
Richard,
just a correction (according to Wiki) – Stephanie Kelton isn’t ‘Chief Economist on the Senate Budget Committee’, but ‘Chief Economist for the Democratic Minority Staff of the Committee’. (No, me neither!)
Alan M
I quoted her own web site
But it is true: these posts are duplicated on that committee and she is a Democrat
This Nick Hanauer piece is very relevant here.
http://www.politico.com/magazine/story/2014/06/the-pitchforks-are-coming-for-us-plutocrats-108014_full.html#.VE5iWSKsXbN
Indeed!
Richard
In my reply to Schofield (above) I meant, but somehow forgot to conclude that if the US can pump a relatively rapid $400 trillion of non-sterilised QE into their monetary base within 4 years, without undue inflation, then (all things considered) it might seem that your proposal is very modest by comparison.
Correction (sort of).
My previous references to the US QE were a little rough and loose. For the record I should be probably acknowledge that a proper estimate of the non-sterilised component of the US QE, and the expansion of the actual monetary base, is derived thusly:
1. Observe expansion of monetary base for relevant period using this Fed. Reserve data:
https://research.stlouisfed.org/fred2/series/BASE/downloaddata
2. Observe expansion of ‘excess reserves’ using this:
https://research.stlouisfed.org/fred2/series/EXCRESNS
Subtract the additional excess reserves from the total increase in monetary base for the QE period. This gives a numerical measure of growth in the actual (circulating) monetary base – the ‘red line’ data seen in the aforementioned chart.
To get a fair estimate of the non-sterilised QE, we should recognise that the monetary base was slowly expanding before 2008 and an adjustment should be made to distinguish the QE rate of increase from the previous rate. Simply calculate an average annual rate of increase for the period before, and after, QE and observe the difference now that the excess reserves are taken out of the calculation.
Unfortunately, the Fed discontinued the Excess Reserves data in 2013 (this attracted some suspicion at the time). They have also seen the overall monetary base expand by an additional 34% since 2012.
Assuming that the non-sterilised proportion of the QE was much the same, it would appear that the US economy has absorbed several hundred trillion dollars of non-sterilised QE without experiencing an unwarranted jump in inflation. I think that puts Richard Murphy’s modest proposals into perspective.
Richard,
The one question I have, of course I may be over looking the obvious, what happens when the tenants are put into place by many countries at the same time. If we increase the value of our currency (raising rates) whilst others are devaluing (hello China), will our industry not be swamped?
It seems confusing as to the many moving parts and how they work in terms of synchronicity. Up is down, down is up, oh who knows?!
The answer is floating eventually works best
And tackling the fundamentals
Kelton’s humorous ‘aside’ is one of the most succinct statements about MMt and what Corbyn REALLY needs to get accross-those few words annihilate in one go a whole trance of Neo-liberal myths – it should be in lights in Picadilly Circus!
Absolutely!
David Cameron etc. get a totally free ride when they come out with common sense-sounding jibes like “There is no Magic Money Tree”.
PS Very much doubt if DC realises, but that jibe was originally aimed at denigrating MMT. I do wonder if it bubbled up from the web to his level precisely because neoliberals in the know very much fear the implications of MMT.
“to state the glaringly obvious, there can never be tax paid until a government creates (or permits the creation of) the money needed to make settlement.”
I can’t resist commenting on this, Richard, even though I said I’d leave you in peace.
My view is that we need to understand the whole process at a deeper level than this. Fundamentally, every real activity the government engages in is a process of people applying their labour to some socially-desirable task and, for the most part, the only real resource the government has at its disposal is the aggregate labour that its people are obliged to supply, directly or indirectly. Money is part of the mechanism which matches the available labour to the required tasks but it’s not central to it.
Which isn’t the same as saying that taxation is not central to money (in its modern form). Taxation could indeed provide a foundation for a stable monetary system but that can only happen if we design the tax system itself without reference to ‘money’. In other words, we need to start by asking ourselves what the best way is to connect that supply of labour to the demand for government services and we should not hamstring ourselves by assuming it must be denominated in an arbitrary unit with centuries of cultural baggage or mediated through a medium of exchange which doubles as a store of wealth.
One of the arguments I’ve been making in recent years (coming from the roots-of-inequality angle) is that requiring people to pay taxes in money locks them into a subservient relationship with the rich; in essence, it obliges the poor to obtain money on terms the rich can dictate (because there’s no obligation on them to spend). A healthy society should not require people to contribute in a form which they have no natural capacity to supply; that means that everyone should have the right to choose to pay their taxes in labour rather than money. I advocate denominating everybody’s tax liabilities in hours of passive labour per year and using that as the basis of government accounting.
So, ‘glaringly obvious’ within the confines of today’s system perhaps but I don’t agree that it is inherently so.
“there can never be tax paid until a government creates (or permits the creation of) the money needed to make settlement.”
What about when tithes were paid in produce?
The clue is in the name
Tithes were not taxes, they were tithes, paid in kind
Do you want us to live in a feudal era?
Sorry Richard,
If you wouldn’t mind, when you are moderating can you please change my “trillions” to billions (as they obviously should be)
I was clearly typing too fast, drinking too much coffee and not paying enough attention to detail.
Sorry: this will have to do!
So cruel,
Oh well, the record’s corrected so I’ll just have to learn from my mistake.
Actually, I think I found them and corrected them …. So you were in luck