It would appear that the anti-modern monetary theory brigade are keen to appear in the comments section of this blog at present. In that case I think I need to be clear what MMT says, as I understand it. What follows is an interpretation, in a nutshell.
First it says governments can make money out of thin air, at will. This is now an acknowledged fact. The Bank of England agrees now. QE proves it.
MMT then says all government spending is in fact funded by money created in this way, created by central banks on the government's behalf. As MMT, correctly in my opinion, points out, if this was not the case then government created money required to make payment of tax could not exist.
MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.
What this also means is that the capacity to tax, and indeed to borrow, cannot constrain government spending. Tautologically this has to be true: since neither payment of tax or lending to the government would be possible unless government created money was put into circulation as a result of government spending that spending cannot be constrained by either of them.
But what this means is that there is no requirement per se to balance the government's books. Indeed it is not just illogical but completely economically perverse to seek to do. A government with a balanced budget necessarily denies an economy the funds it needs to function. That is hardly a measure of economic responsibility.
In that case more responsible measures have to be adopted as the goals for economic policy. MMT suggests that full employment is the alternative goal.
As a result it is seen that MMT is located firmly within the constraints of the real economy, and not those of the finance sector. What is possible in the MMT view of the world depends upon available resources, and most especially on labour and its productivity. Since the goal is to maximise use of available labour at the highest level of productivity possible this is a policy that inevitably, and unavoidably, seeks to increase median pay.
There are, of course, constraints on available labour and the supply of investment capacity to consider. However it is important to note that given that MMT will always seek to increase labour productivity it must at the same time seek to minimise the cost of capital i.e. the real interest rate. Low rates are not an accident within MMT. They are there by design. That goal is achieved by balancing the mix of government deficit funding covered by bonds (which are issued as a favour to financial markets and depositors) and money creation, currently mainly through QE. We know that this process can now deliver the desired outcome.
But of course low real interest rates are vulnerable to inflation so MMT has a quite clear interest in constraining (but not eliminating) inflation. Elimination would constrain investment unnecessarily by encouraging its deferral so a low and moderate interest rate is required, which is achieved by taxing sufficient government created money out of existence in a period to secure this goal.
How much tax does this require? Broadly speaking experience in recent years has suggested that total tax revenues should be less than total government spending or additional money supplies required to ensure the liquidity to permit growth is not present in the economy. The differential expressed as a percentage of GDP might well be close to the desired inflation rate but overshoots and undershorts (and both will inevitably happen) might alter this.
The differential is not the same as the total tax bill though. The total tax bill is determined by the amount that must be spent to deliver full employment. This will permit ample capacity for the private sector, to the limit of its animal spirits.
The capital expenditure to deliver growth in earnings resulting from increasing capacity can be funded either by borrowing or money creation. The goal of low real interest rates will determine the mix.
The only tool not available for the purpose of economic management in MMT is the interest rate. This cannot be used because to do so might result in less than full employment, lower than optimal investment, a loss of international competitiveness and a long term loss of median wages growth due to an above optimal rate of interest being used to constrain inflation in an economy where it is presumed that all government deficits must be funded by borrowing, which we now know to not be true.
This in a nutshell is what MMT is, says and does. It is a complete, coherent economic logic that ensures liquidity, employment, growth that benefits the majority, financial stability, modest inflation, always affordable tax because the money to pay it has always been created by government in advance of settlement, and the availability of sufficient government debt to meet market needs at the low rates of interest the economy requires to prosper.
What is there not to like?
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I totally agree. Yet, I would like to read about what the theory has to say in the case of non reserve issuing economies (i.e. reserve earning economies) which are forced to accummulate FX reserves, as their local currencies do not circulate abroad (those economies cannot have a purely flexible FX rate regime against reserve currencies).
If that is the case then RIEs like the US, the UK, the EU and Japan should achieve full employment by means of a flexible fiscal policy which one would expect would converge towards a 2% of GDP deficit in line with an inflation target of 2% as well, while REEs like Argentina, China or any other different from the four mentioned above should achieve full employment through a mix of a less flexible FX rate policy and a competitive FX rate (i.e. accummulating FX reserves issued by the US, the UK, the EU and Japan at a long run rate of 2% aprox per year).
What do you think?
MMT is not really available in countries without their own currency or where debt is in another currency or where there are dual currencies in use
How anyone can continue to advocate the current system we have now without trying MMT can only be because (1) such people know what the current system benefits them or (2) such people are bound to it by ignorance and ideology.
The whole thing sounds sane to me. Bring it on.
I would add my usual rider however by saying the introduction of MMT must be supported by systematic reforms and restructuring of the legal systems governing banking, the financial sector, corporations and pensions, otherwise I can see MMT being strangled at birth.
Such reforms would once again make these sectors socially useful – as they were originally set up to be before they were captured by North American capitalist thinking.
Thank you Richard.
Thank you
‘the introduction of MMT must be supported by systematic reforms’
Worth pointing out that we DO have MMT now it’s just that we’re not explicit about it. MMT is a description of the monetary system and its operations. So what we have now is ideology ( in some case probably lies) which cover up the operational realities. MMT awareness would force Governments to be open about their ideology ( every position being ideological). So when the ghastly Rees-Mogg comes out with garbage about deficit reduction-MMT would oblige him to come clean about ideology, which would force him to cough and splutter out something like the following:
1) I want to reduce public services because I believe that monetary wealth is a sign of human value
2) I believe that hardship (which I’ve never experienced myself) and struggle underscored by fear makes people into more productive citizens
3) People that don’t play the financialisation game will be trodden underfoot and suffer debt slavery. It’s good for their development.
4) making money from rentier activity will spread wealth as you all know from the last 40 years.
5) Most of you will fail at this rat race because people like me hold all the cards.
You can make up your own. Once the operational realities as described by MMT are better known, politicians will not be able to talk crap about the monetary system. Many, in the Tory Party have worked for big banks and investment bank. They KNOW that money comes from computer keystrokes at the Central Bank. People like John Redwood know this. They also know that there will be little or no inflation with even massively increased spending because of the level of private debt. They also know that the Government can control the interest rate and the concomitant price of bonds and yields and is NOT at the mercy of bond vigilantes. But they keep wheeling out Venezuela/Zimbabwe/Weimar and even Argentina/Brazil.
As PSR points out pretending there are metaphysical qualities to money that limit spending is merely a way of preserving vested interests.
Getting this across to the broader public is going to be a long-term issue.
We do not have a long time.
Following the description (which for me is analogous to saying – “the sun risies in the morning” – it is a fine description – & like the sun – it illuminates) what is left is discussions on the dynamics of the system, i.e. appropriate levels of government money creation, taxation and debt consistent with delivering better social outcomes for the population. One element mentioned in the description is “MMT will always seek to increase labour productivity”. Historically, the UK has been extremely poor at doing that through, I’d suggest, a combo of very poor levels of investment by “industry” and heroically poor efforts to equip the population with an education fit-for-purpose. The recent attack on GKN by an asset stripper is a continuation of a “tradition” going all the way back to John “Pretty thing” Bentley – & the focus on a fast buck – which is one element that has led the Uk to where it is now. The education fiasco is so complex I will (like Wittgenstein) “pass over it in silence”. That said, MMT should be the foundation on which national economic decision are made. Those that argue against this foundation tend not to argue about the whole – but about details (no the sun ain’t shaining – it’s covered by a cloud, or – it’s raining today etc etc).
In their 2010 budget report, the OBR expected the Tory reduction in corporation tax from 28% to 20% to increase business investment (and presumably productivity) by 65% over the following 5 years. The OBR review in 2016 showed that business investment had risen by just 23% over those 5 years and productivity had flat-lined. During the same period the government had been preaching austerity — i.e. it was going to be pumping less money into the economy.
Talk about mixed messaging.
If you want to encourage business to invest and become more productive, especially just after a recession you need to provide an environment of government led growth (infrastructure investment, housing, etc) to ensure that there is a ready made market for businesses to sell their products into. That was missing and influenced many businesses investment decisions. If the government had continued spending at the 2009 levels as the Labour party had suggested then it might have kick started the recovery. As it is we’ve had the best part of a lost decade of growth which has now been topped by the Brexit decision.
I mostly agree with the points you make… but. There is a cultural problem with swathes of UK industry. Everything is short term & there is little desire or inclination to invest in market development (markets take time to develop) in a time frame of say 5 to 10 years. There are exceptions, JCB and Dyson – & these exceptions are not listed companies & to a large extent prove the point – UK short termism. If government, through things like Richard’s Green QE, drive investment, we will need a sea-change in attitudes within UK companies. Or possibly a change in the way UK companies are structured – stripping out anything supports the “fast-buck” approach. Apologies if this a bit off-topic – if MMT is both descriptive and could be considered an enabler for investment – then the other side of the coin is having a UK industry capable of delivering. Right now – much of it ain’t. Carrion anyone?
This is really helpful thank you. Nothing not to like at all – but where does money created as private debt fit in here?
I admit that in the summary I chose not to mention that
There are three ways it fits in
First that is by recognising that this is just government money made under licence
Second it can fit in by saying this licence is granted without limit and the state will cooperate with the private sector by trying to smooth its excesses and failings
Or third it can be decided to assist that integration by regulation on credit availability. In practice the last is already commonplace – we have done it with loan schemes in the UK, for example
Thankyou for trying to put MMT in a nutshell.
But there’s still something I don’t quite understand. Surely, money created as private debt isn’t a relatively minor technicality than can be left out of a summary. It is huge & fundamental to any theory about how the economy works in real life. It’s the second M in MMT. If most informed estimates are anywhere near correct, it constitutes over 90% of the money in circulation at any one time.
If MMT is to be put into practice by a real (brave) government in a real world economy, then surely it has to reform how money is created, otherwise it (and MMT) will fail.
It is not true that private money is over 90% of money supply. This is one of the absurd arguments out forward by Positive Money that has caused a lot of harm in this area.
Government created money is not notes and coin. It might fairly be called the national debt. That is well over 50% of total money supply when last I looked (and I have not looked to check again to answer this, before someone quibbles).
So, private bank created money is less significant.
AND it only happens in government licenced banks that are heavily regulated and are subject to requirements on reserve holdings. Effectively the government can limit their capacity to create money whenever it wishes now, and to a large degree does.
Why not a debt jubilee, as recommended by Steve Keen? (https://www.ideaeconomics.org/a-modern-jubilee.)
What is the other side of the double entry?
I for one agree completely with your explanation Richard. The problem as I see it is that our politics as presently organised cannot adopt an economic and monetary policy that flies in the face of what common sense has taught us since we were very young – that money is always and everywhere scarce . Those of us who , although not professional economists, or financial experts have seen the light on MMT find it hard to imagine seeing money creation otherwise subsequently. But in my own case it’s taken eight years of reading, debating etc to bring me to the place where the logic is incontrovertible . I can’t even convince my own wife of nearly fifty years ! I’ve come perilously close to ruining any number of dinners with friends by starting on my ‘ how money is created in the 21st Century ‘ hobbyhorse. The overcoming of this common sense which is wrong is the difficulty in my humble opinion.
I agree with you!
I’ve tried a few times as well – it’s like arguing that the earth is flat!
I’d have thought that the City is overwhelmingly the chief beneficiary of the current model and they currently exert huge power both over government and over the behaviour of the rest of private sector. City pressures for ever-increasing dividends, share buy backs and various forms of financial engineering are directly linked to the failures to invest, be that in R&D, people or technology.
Chance of persuading any City institutions seems slim. No sign yet of any political parties showing any interest?
I like it!
Simon Wren-Lewis, economist, say MMT offers nothing much new from what he calls ‘Keynesian Fiscalism’. Is MMT just a different way of thinking what is possible for the state that is prepared to use the fiscal tools at its disposal? My feeling is that some economists might say MMT is of little significance, in the sense that it is nothing new, in terms of economic reasoning and theories. However, what is surely the case is that MMT enables one, even non-economists like myself to envisage, through the insights provided by MMT, that a whole new world is possible. The world, in short, of the Courageous State.
What Simon misses is that MMT looks at the world through a different lens with a different set of objectives
By inverting the ordering of thinking on the economy it is radically different
He looks at it through the wrong end of his telescope
“My feeling is that some economists might say MMT is of little significance, in the sense that it is nothing new, …”
“Some economists” would be wrong though, wouldn’t they ? It is something very radically different from the notion that money is a gold proxy. In turn a piece of nonsense because gold in itself is only a proxy for value. You can’t eat it. And despite protestations to the contrary it is not a valuable ‘commodity’ in real terms because it has relatively few practical uses.
The notion that you can (and indeed MUST) ‘print’ as much money as you need to operate a society in the manner which you collectively chose is anathema to ‘some economists’.
They are the economic equivalent of the religious zealots who would ban dancing, music with the ‘wrong’ rhythm, sex except for procreation (within an authorised married alliance), and even the reading of economic texts not first filtered and interpreted by their prejudices and rigid certainties.
Do I exaggerate ? Not by much. It’s a similar mindset. And it’s poisonous.
So when will the Labour Party start ridiculing the present Government Policy and start a paradigm shift in public thinking? This has to start soon or do the Labour Party still believe the neoliberal line? I find this worrying because they are missing some open goals.
@ Rod White
This may be of interest, Rod:
http://blogs.lse.ac.uk/politicsandpolicy/many-labour-mps-have-still-to-unequivocally-reject-roll-out-neoliberalism/
Andrew Dickie says:
This may be of interest, Rod:
http://blogs.lse.ac.uk/politicsandpolicy/many-labour-mps-have-still-to-unequivocally-reject-roll-out-neoliberalism/
I hope it is of interest to Rod. I certainly found it a persuasive summary of what was so deeply unsatisfactory about the Blairte experiment in controlling neo liberalism by allowing it free rein.
Thanks for the link.
Rod White asks:
“So when will the Labour Party start ridiculing the present Government Policy and start a paradigm shift in public thinking? ”
Don’t hold your breath.
“ It is a complete, coherent economic logic that ensures liquidity, employment, growth…”
We are in overshoot, and need radical change implemented now to have any chance of achieving a socially just and environmentally sustainable world.
The way you’ve described MMT suggests that it makes the assumption that infinite growth is achievable when arguably we need de-growth. So on that basis I’d suggest it’s neither complete nor coherent.
You mean we do not need to do more for each other? Isn’t that what growth is?
Did I say that had to involve more carbon usage?
Colin Boyle, choses to misunderstand, I think.
The pond water in his bucket is presumably still at an acceptable temperature 🙂
Colin – its about choices basically.
For example MMT with a core remit to say look at green issues and have polices to promote them (more recycling, investment in green power) might address the issue of the ‘wrong sort of growth’ for the planet.
Also think about growth and its relationship with say investment returns. As Will Hutton pointed in the 1990’s investment and return cycles have become more and more short with increased pressure to bring in higher returns on top. This leads to a ‘get it whilst you can’ mentality from investors and city institutions and short term thinking in terms of products and R&D.
Steve Keen and other economists advocate the locking in of investment (longer terms for returns) of say a minimum of 5 years which would help to think about growth more sustainably.
That is of course whether or not we want to keep growth as a marker of ‘progress’ or benefit to the economy and thus society .
There are other (and maybe even better) ways of measuring government policy and market effectiveness – such as happiness for example or levels of mental and physical well being. These could be made metrics of MMT.
It is all about how MMT is to be set up – if it is introduced. Which I hope to see in use before I die anyway as my children might be able to live in a better world.
Colin Boyle says:
“ It is a complete, coherent economic logic that ensures liquidity, employment, growth…” Which is a good thing if achievable… Surely ?
“The way you’ve described MMT suggests that it makes the assumption that infinite growth is achievable ….”
I don’t think that follows, but it is an option which is not currently open to us within the limits of current orthodox thinking and behaviour.
Richard (I think) doesn’t entirely agree, but I suggest that sustainable growth knows no bounds; and that has to be a good thing. It is only the path to armageddon if you assume that all employment and growth is extractive, abusive, exploitative and unsustainable. It really does NOT have to be.
“We are in overshoot,…..” what’s that ?
“… and need radical change implemented now to have any chance of achieving a socially just and environmentally sustainable world.” I think you’ll find most of the regular readers of this blog (except the trolls !) are in general agreement with that sentiment and that’s why they (we) come back. Because we are seeking a way of making that happen.
MMT offers a way of making that feasible by making available the ‘money’ which we are constantly told doesn’t exist and can’t be found for socially useful purposes, when we know fine well it can be rustled up in a trice to wage war and visit destruction, at home or abroad, or bail out favoured ‘too big to fail’ industries.
You are quite right to suspect that MMT is a not a cure-all for an ailing world, but it does very definitely open up new options for doing things differently. It needs a political will to harness it positively and it is not immune from abuse by overweening vested interests if they get exclusive control of the levers of power and are set on an agenda which is self serving and destructive.
Functional democracy is the only tool we have to resist that. And, as I’m sure you’ve noticed functional democracy is severely threatened at present.
MMT says we may work for each other to the limit of our abilities
Who said that must use carbon?
This may not be the place to ask this question so feel free to say so. How far does MMT overlap with what is called ‘new Keynesianism”? (of which I read there are several varieties which seem to be more progressive than much of economics)
Too big a question for now….sorry
If any others want to take it up, please do
Yes I thought it might be. no worries. I will keep reading.
Ian, these pieces from Bill Mitchell should help answer your question..
http://bilbo.economicoutlook.net/blog/?p=34200
http://bilbo.economicoutlook.net/blog/?p=34204
New Keynesianism is based on numerous incorrect assumption about the operation of the monetary system. (As the BoE partially pointed out in its 2014 statements about ‘some’ textbooks being wrong. They still are wrong.)
And the notion of building macro economics from such ridiculous micro foundations as ‘representative agents’ (etc.) is just intellectual fraud.
“(As the BoE partially pointed out in its 2014 statements about ‘some’ textbooks being wrong. They still are wrong.)”….
…..and I expect they are still regarded as the standard texts. Hey Ho.
Old academics never die…they just lose their faculties :-).. But not nearly soon enough in some cases.
I’m trying to understand whether in this system confidence or lack of confidence in the government constrains the amount of money that can be created also if a lack of confidence develops and is expressed as flight of private capital isn’t the government giving itself more and more to have to do.
Capital flight is an interesting concept
In the case of sterling (remain we are talking about sterling here, not capital in the UK denominated in other currencies) a) there has to be a buyer b) they can only use that sterling in the UK c) as a result they can’t as such leave the Uk economy d) this is why capital flight is pretty rare in economies with their own currencies, but is easy in those that denominate debt in other currencies and use multiple currencies in their local trading environment
In other words, so long as the currency is used for almost all local trade and all government debt is denominated in that currency the concept of capital flight is very hard to engineer because capital in the local currency has nowhere to go
Short term price may alter
Long term price depends on productivity (on which MMT has much to say)
But there is a reason why capital flight in the situation I describe is not a reality we need worry about, because it effectively does not happen
Hi Richard, I still need a few things ironing out in my head.
From what I understand QE is essentially an assent swap, it is buying back bonds from (mainly) banks by the BoE on behalf of the government as a loan, which is essentially money creation but adds to the national debt.
Bonds are borrowing, its when the Gov offers the public to invest money in the gov for a small return over a fixed period of time. How I see it is, in the eyes of the government, its taking idle money out of bank accounts and letting the government put it to good use.
Just so I understand, QE is entirely dependant on having sellers of bonds available; I think I read somewhere that actually the Gov wanted to QE more but couldn’t because there was a lack of sellers willing to part with their bonds. (This is what I understand is the key difference between QE and ‘Printing money’, – QE has the associated debt, but also its only creating liquidity of pre-existing non liquid assets). Also, borrowing is also entirely dependent on people willing to buy bonds. I guess my question is, if there is no demand to buy bonds, or sell assets, then an alternative way of funding would happen, or is the likely hood of this happening so remote that its not worth thinking about?
Apologies if this is a fairly obvious thing to be asking about.
1) QE does but back bonds
2) It reduces the national debt: the bonds are cancelled. The replacement is reserve funds held by banks with the BoE
3) Bonds are not borrowing: they are a way that the government provides a safe place for saving. You may say the difference is pedantic. I say it is fundamental. The difference is that the government does not need to borrow; those wanting a safe place to deposit badly need the government to take their money
4) The government has always been able to but all the gilts it has wanted to buy
5) QE does create new money – which you can euphemistically call printing money if you wish: there is no difference, that is what it does
6) Given all government deficits could be subject to QE the government does not need bond purchasers
7) In practice there is a bigger demand for bonds than supply
Does that help?
Yes to an extent, answers always lead to more questions! but thank you for taking the time to reply!
Again you have described MMT, but failed to acknowledge the problems with it. You have given us the claims MMT makes about how the government can print money to pay for everything, but have ignored or glossed over the problems with the theory, and ignored any rigorous treatment of the risks and consequences.
Again have a look at this paper, by Thomas Palley, but I encourage anyone who thinks they can take what Mr. Murphy is saying at face value to simply google MMT criticisms to find a wealth of economic papers available detailing and describing the various issues MMT has. Which is why it is not a respected or mainstream economic theory.
http://www.thomaspalley.com/docs/articles/macro_theory/mmt.pdf
“First it says governments can make money out of thin air, at will. This is now an acknowledged fact.”
So what? Governments have printing presses. This is not a new or revolutionary piece of knowledge. Everyone knows a government could print money to spend it, but the real question which MMT doesn’t answer is what are the consequences of doing so.
“Tautologically this has to be true: since neither payment of tax or lending to the government would be possible unless government created money was put into circulation as a result of. government spending”
This is not true, and one of the many major problems with MMT. With an open economy and floating exchange rates people don’t have to hold the currency created by government except at the point they pay the tax. MMT doesn’t deal with this problem, nor the resulting balance of payments problem.
If you were worried about the UK printing money, creating high inflation and devaluing the pound, it is simple enough to change your money into US Dollars or similar. Then when tax is due you can change the sum needed back. You aren’t forced to hold Pounds because of the government, which is a claim of MMT.
“MMT suggests that full employment is the alternative goal.”
A noble goal to be sure, but one MMT dramatically oversimplifies.
On one hand, the government becomes the employer of last resort, with the associated political risk. MMT assumes the government can print money without consequences – but this is simply not the case to inflation or macroeconomic policy.
Will a government really start firing people when necessary, or will it keep people on the payroll because politcally it is easier. It also brings problems of public vs private sector pay, and the minimum wage. Who is going to work in the private sector at a low level if the government guarantees jobs for everyone with higher pay? Which in itself is very inflationary.
Nor does MMT treat the consequences of full employment – inflation – with any rigour. Below full employment there are NO financial restraints placed on government, according to MMT. It can print as much money as it wants with no consequences.
The “reason” that there are no consequences is that MMT uses a very basic Philips curve to treat inflation – on ON?OFF L-shaped curve. Below full emplyoment it simply assumes that increases in aggregate demand have no effect on inflation. At full employment it assumes that increases in demand generate pure inflation outputs.
Of course this is a gross oversimplification and in the real world things are more complicated. Inflation is likely to be positive and increasing well before full employment is reached, which MMT ignores.
It also ignores that given the model they propose for inflation, policy response will be difficult or near impossible, and will have dramatic instability because of the difficulties of treating the economy as a simple aggregate.
Likewise it also totally ignores any external factors,or cost-push factors which drive inflation. Essentially it says that stagflation is impossible – which we know in the real world not to be the case
“However it is important to note that given that MMT will always seek to increase labour productivity it must at the same time seek to minimise the cost of capital i.e. the real interest rate. Low rates are not an accident within MMT. They are there by design. That goal is achieved by balancing the mix of government deficit funding covered by bonds (which are issued as a favour to financial markets and depositors) and money creation, currently mainly through QE.”
And here is yet another problem with MMT. It assumes interest rates can be kept near zero, because the government doesn’t need to pay interest if it can otherwise print money at no cost. The first consequence of this will be that it will become hard or impossible to issue bonds in this environment, if those bondholders will recieve low rates in a high inflation environment, and that this debt can be monetised away by more money printing. Again, in an open economy, why would you buy UK Gilts which offer no return and a falling currency when you can buy another governments bonds?
MMT also ignores the fact that at full employment inflation will be positive, and climbing. This implies negative real interest rates and can and will lead to asset even more asset price inflation, and potentially dangerous asset bubbles. Something Ruchard Murphy claims MMT will do away with.
MMT also assumes that government spending and taxation will be used to control inflation. The assumption being that government can accurately predict the inflation caused by MMT (which it can’t as it lacks an adequate theory of inflation) and that these changes of tax and spend by government happen instantly.
It also again raises the problem that when an economy is at full employment (the MMT goal) and thus inflation is being generated, the government would have to raise taxes or cut spending. Both of which are likely to be politically unpalatable.
“which is achieved by taxing sufficient government created money out of existence in a period to secure this goal.”
This is the point where MMTers fail to illustrate one of the large downsides to the theory. They will never tell you how much taxes will have to rise to control inflation. Partly because they are unable to, as the MMT treatment of inflation is so basic they are unable to tell you how much it will rise, and partly because they also know that to remove the excess money supply from the system taxes would have to rise by large, politcally unfeasible amounts.
Instead they simply say taxes might have to rise and taxes could control inflation if necessary. But notice they can’t and won’t tell you how large those tax rises have to be.
Using Mr. Murphy’s government spending accounting identity:
G = T + B + M
MMters say that they want G to increase, but don’t need to increase B, government borrowing to do so.
So now:
G = T + M, or when looking at the changes thereof ΔG = ΔT + ΔM.
Note that M, in MMT, can ONLY be positive without interaction fro one of the three other terms.
From this it is easy to see that if government needed to cut spending (which itself is politically difficult, as we have seen through austerity), when the economy was at full employment and creating inflation, this would fall on T – taxes. And it is also easy to see that the decrease in M would be equal and opposite to the increase in T.
So when Mr Murphy says that PQE should be 50bn, know full well that at some point taxes will have to rise by the same amount.
M could also be wiped out by issuing traditional interest bearing government debt, B. Assuming that MMT hasn’t already wiped out a functioning bond market. But of course, if they do this, they have moved back to regular debt finananced deficit spending, which negates the whole purpose of MMT other than to say “we want to run larger deficits and do so in perpetuity”.
“The differential expressed as a percentage of GDP might well be close to the desired inflation rate but overshoots and undershorts (and both will inevitably happen) might alter this.”
This is pure and simple, a guess. One with an answer low enough not to scare people, or make MMT look silly. Using MMTs logic above, we know that when the economy hits full employment, all that MMT money will have to be removed via taxes.
We also know, given at the best of times economic forecasting is difficult, that MMT can’t really forecast inflation, and that politics will inevitably get in the way, that there will more likely be overshoots – and plenty of them.
“The capital expenditure to deliver growth in earnings resulting from increasing capacity can be funded anther by borrowing or money creation.”
So more money creation then. Nobody is going to buy bonds set at near zero rates, with high inflation and an ever increasing money supply, unless forced to. So more money creation, more taxes to control the inflation.
“The only tool not available for the purpose of economic management in MMT is the interest rate. This cannot be used because to do so might result in less than full employment, lower than optimal investment, a loss of international competitiveness and a long term loss of median wages growth due to an above optimal rate of interest being used to constrain inflation in an economy where it is presumed that all government deficits must be funded by borrowing, which we now know to not be true.”
Which again is a gross simplification. You can have full employment, good growth etc with relatively high real interest rates. Zero interest rates don’t automatically create growth or employment either. This is simply Mr Murphy not understanding the issue, or even why MMT suggests zero interest rates (which is that if governments can print money they don’t need to borrow, so why bother with interest rates anyway. A gross, oversimplified assmption).
“This in a nutshell is what MMT is, says and does. It is a complete, coherent economic logic that ensures liquidity, employment, growth that benefits the majority, financial stability, modest inflation, always affordable tax because the money to pay it has always been created by government in advance of settlement, and the availability of sufficient government debt to meet market needs at the low rates of interest the economy requires to prosper.”
No, MMT claims to do a lot of things, when it is really a restatement of the obvious – that governments can print money. It is not coherent for various reasons I have set out above. It is snake oil. You set out a long list of things we would all like in our economy, and simply claim MMT can achieve this without looking at the consequences of it’s policies, failures of it’s own internal theories and risks surrounding the implementation of it.
It’s not complete. It is only barely internally coherent – managing to be so by ignoring all externalities and by simplifying problems away. It might ensure liquidity, but liquidity comes at a cost, in this case inflation of the money supply, which you ignore the risks thereto. It might create employment through a policy of government, but this again has huge implications – not east when the government needs to cut spending to tame inflation. Financial stability and modest inflation are just claims, with no backing in either the theory itself or experience. The chances are, given the lack of a coherent inflation model and the problems associated, both political and practical, with implementing the control method for inflation (cutting spending or raising taxes) the chances are we would have much higher, and potentially out of control inflation. Which is hardly a recipe for financial stability. Always affordable tax is also deliberately misleading. Any amount of money printed will have to be reclaimed through politically difficult higher taxes. It’s nothing to do with whether the money has been created by government or not (which by implication assumes M0 is all important, ignoring M4). Murphy fails to tell us, like all MMTers, that 50bn he creates through PQE would have to, inevitably to control inflation, lead to 50bn in tax rises.
MMT is a theory expounded by a very small number of hard-left economists. It is not mainstream, for good reason, even with the majority of left-leaning economists, because of its lack of coherency and obvious problems with how it deals with the consequences of its policies. There is no neoliberal conspiracy as to why it doesn’t happen. It is simply not a very good theory, which is why it is not taken seriously apart from those who are trying to argue for high spend, high deficit policy, and those who are trying to sell snake all by saying we can have everything we want without paying for it, and without any negative consequence. Routinely these people then claim it is only the rich who want to preserve their advantage, which is why MMT doesn’t happen, but if this were the case why has no left wing government (and there have been many around the world) done it, as surely the golden economic uplands it claims it would create would be a huge vote winner and keep that government in power forever. As we are always told, there are more poor people than rich people, but everyone still only has one vote. The following claim is that it hasn’t been done because economists don’t understand it. I’m sure left wing economists like Thomas Palley and Paul Krugman, amongst others, have the intellectual capacity to review MMT and decide if it has some merits.
Instead, they and so many others have reviewed it and found it to be desperately wanting.
I will not bother replying to most of this because your real game is exposed by your dogmatic diatribe
I do note you agree re money
Your argument on people holding alternative currencies is laughable: it doesn’t happen
Your point re the Philips curve is as absurd: maybe you haven;t noticed what is happening to wages, even when economies are growing? MMT has this one right
You are right that M and B can be equated, but it does not make sense to do so, although I am pleased you acknowledge government debt is money
£50bn of spend does create £50bn of new tax when the multiplier is well above 1 for investment: you seem not to know that. But you also ignore the growth. Maybe you don’t want that.
And as for your diatribe, what you show is that you are not interested in creating a balanced, mixed, economy in which all can prosper
Now we have established that I think we can dismiss all you say as rather nasty politics that is based on the fantasy that we are all currency dealers on the side when in practice it’s the job of government to provide a fair living for all, which you obviously do not agree
As got hard left….that’s a funny description of a practicing chartered accountant dedicated to the mixed economy, but there are none so blind as those who do not want to see
‘or does MMT treat the consequences of full employment — inflation — with any rigour. ‘
I didn’t read any further than this statement which shows that the writer has no real interest in researching the topic and the wealth of literature and research papers on these topics stretching back over 20 years.
MMT economists have responded to Palley at great length: here’s one which gives further links: http://archive.economonitor.com/lrwray/2012/07/26/on-the-supposed-weaknesses-of-mmt-response-to-palley/
“Who is going to work in the private sector at a low level if the government guarantees jobs for everyone with higher pay? ”
Nobody with any sense, but why should anybody have to work for shit wages so business owners can make profits from non viable businesses?
🙂
” As we are always told, there are more poor people than rich people, but everyone still only has one vote.”
No. You see that is simply not true.
Well, OK it’s kind of literally true at the ballot box once every five years, but vested interests vote daily with their cash in manipulating markets when government is working for vested interests. Democracy morphs gradually into plutocracy. The US is a highly developed plutocracy (as the founding fathers intended) and the UK is sliding into the same cesspit.
So there are two sorts of votes: the ones you get for free every five years, and the ones you pay for. They are emphatically not of similar value in terms of influence.
I appreciated this criticism; the best strategy for accumulating knowledge is to absorb criticism of the ideas one has accepted.
The most fundamental criticism here is on the use of a national currency to pay taxes, and how that need can easily be met by trading back into to the national currency on tax day. But if you ever got into that position, where the majority of transactions are in a foreign currency, the entire system has broken down, probably due to inflation. So this fundamental criticism really is subsidiary to the criticism on inflation.
First, no economic theory has a complete understanding of inflation. Second, the current tool used to staunch inflation, the target interest rate, works through reducing the amount of credit created by private banks. Taxation would work by destroying money in circulation. Sure, today the interest rate tool is a bit easier politically, since it is applied (in the US) by a government agency controlled largely by banks, and politicians can hide behind its quasi-independence from government during unpopular rate hikes. But taxation could be made to work in just as much a seemingly-independent manner – we aren’t talking about acts of god, but creatures of law. A law making tax increases automatic upon inflation – on sales, income, or even wealth – could be used to obviate the need for the legislature and executive to pass annual tax increases and cuts.
The rest of the criticism is speculative, as is every economic theory. The question isn’t which theory is problem-free in application, but which theory in application creates the better set of problems. The body of economic theory currently in application has created the problems of great economic suffering giving rise to rightwing nationalism, dangerously concentrated levels of wealth and income inequality, and an ecological crisis that threatens species suicide within a few generations. Give me the problems of controlling inflation using taxation and private sector low-wage employers being squeezed any day!
I have long made the point that a government that is not big enough to essentially require that its currency must be used in local trade to ensure that sufficient of its currency is available to pay tax is making a fundamental error and is forfeiting economic control of its country. Dual currency trading destroys that possibility and low government spending permits it
Re inflation, monetary policy is a) dead in the water b) has little chance of working c) Has not always worked d) is destructive e) is upwardly redistributive. Fiscal policy has to be the answer.
Thanks for your comment
The weakest criticism draws on the extent to which MMT has been accepted by economists. First, it presupposes a free marketplace of ideas, where everyone is equally exposed to all ideas and accepts or rejects them on their (de)merits. Second, it presupposes that economists are purely rational judges, swayed only by the force of argument and the weight of evidence. That isn’t how science works, unfortunately, or else the Planck Principle – science progresses one funeral at a time – would never have been formulated. If anything, the trajectory of MMT from total marginality to widespread attention would suggest the opposite: that it has a great deal of merit, allowing it to spread even in the face of opposition from an economics profession saturated with opposing ideas.
Lastly, having a vote isn’t what matters; what matters is who controls the information that informs the vote. That is why the US is, empirically, an oligarchy, even though the rich and poor alike have one vote.
Completely agree. The only point I might add is that, although MMT changes everything, in a way, it changes nothing, because what counts is power and control. Leading economists have understood MMT for many decades. Paul Samuelson understood, and still argued that politicians need to create the myth of sound finance as a means of control (PM – ‘there is no magic money tree, you know’, or Denis Healey and the big stick of the IMF) much like the myth of hell encouraged morality on earth.
Ultimately, it is all about power, in particular how power is distributed. Money can buy power, and so crucial to democracy is to ensure that money and power do not become too concentrated within the hands of any vested interest group (whether it is finance or the unions), and a part of that is about education, ensuring that people understand this so that they can prevent it. In this sense MMT is a very important step forward, as it helps people to understand that they have the power to do what they want with the money system, the constraints are not set by laws of Nature. MMT emphasises that money is only a tool whose purpose should be to serve the people, and that is important.
Thanks Charles
Indeed- vital point and links in with what I said above about MMT awareness forces ideology into the open.
To my understanding in a growing economy it will be normal for the total money supply to grow in line with increased productivity. More stuff to buy means we need more money to buy it with or we get deflation. Therefore a certain level of spending greater than taxation is a good thing under normal circumstances; especially as population growth and technological improvements mean productivity generally rises over time. Therefore, the job of a MMT understanding government would be to maximise productivity of real goods and services (i.e. real wealth) whilst maintaining stability with low but positive inflation. To achieve this they would typically want to grow the money supply by spending into the economy slightly more money than is taxed out of it (to ensure a low but positive level of inflation in a static situation) and an additional amount to match the increase in productivity (to ensure productivity increases don’t cause deflation). Spending beyond this point will cause inflation if it doesn’t ultimately result in increased productivity but if it does it is only restricted by the real physical limits of the economy such as labour, raw materials and time. Further, to prevent inflation in the lag time between investment and realising the productivity increases from that investment the government can issue bonds to temporarily remove money from the supply at very low cost. These bonds can then be later be cancelled or ‘paid back’ as part of the productivity increase portion of the spending.
Is that correct? Is that too simplistic or naive? I’ve never studied economics but I think I’m starting to get it.
You’ve pretty much got it
Thanks. I am trying to learn and spread the light. The hard part is to not overwhelm people with detail so they switch off. I like the phrase “my spending is your income”. We need simple soundbites like this to create a new narrative. Narrative seems so much to be the fight we need to win. It’s very Orwellian. Maybe “spend and tax” should be another one.
Both are true
That’s their merit
To say ‘Spend and Tax’ may well work in the popular imagination, but my own feeling is that simply reversing the accepted ‘tax and spend’ doctrine doesn’t quite cut it.
There is an inherent fear that this just sounds ‘too good to be true’, and within the confines of our accepted thinking about money it really IS too good to be true. It gives great weight to the Theresa May logic that you can’t just print money and we all go and rescue the retail sector, and thus manufacturing demand , by buying trinkets and doodads.
This would be a recipe for rampant consumerism and we’ve been there. We’ve shopped ’til we dropped and it doesn’t go anywhere because we all end up with maxed-out credit cards. (and a garage full of crap ! )
The clarion call has to be ‘Invest and Tax’. The point of MMT is not that we can all spend spend spend, it is that we can have government ‘spending’ in the form of Investment in productive activities that make the country fit to live in and that we have an economy which is sustainable.
We also need to redefine ‘profit’. The legitimate profit of a railway network is transport of people and goods, not money. Ditto the profit of power generation is electricity to run the essential services of society and money-profit doesn’t come in to it. There is no profit: it’s a bloody overhead cost.
From early childhood we are indoctrinated with the idea that there are only two things we can do with our pocket money, we can save it or spend it. The implication being that spending is baad because you can only spend it once. On chocolate that’s true, but on a ….ball for example; you have invested in something which offers (potentially) hours of entertainment and a fitness regime which enhances hand eye co-ordination and can be the centre of beneficial social interaction.
As long as we allow the critics of MMT the privilege of determining the terms of our options as merely ‘spend’ or ‘save’ we are going to be fighting an uphill battle against hard wired preconceptions.
We have to invest to spend to tax.
And since all money issued other than by the government is counterfeit or fraudulent, the initial investment has to come from government. There is nowhere else for it to come from. And if we just spend (squander) it on fripperies we run out of it because it does not support the society we inhabit.
We don’t spend money on Health and Education, we invest in the future of society.
Language determines how we think and cripples us completely if we don’t use it to have the right thoughts.
Fair comments
The accent seems to be wholly on productivity as defined by what matches forth from factory gates, what does MMT offer for our Platos, our Michaelangelos, our Byrons, in fact, our creatives in general (not forgetting all of research science), who while not productive in the physical sense certainly add to our quality of life?
Isn’t that being productive ?
Keynesian economics got into trouble after decades of good service through loss of Breton Woods and Oil price rise
MMT reopens the full employment and progress Keynes envisaged through a claryrification and solves its weakness
I Think MMT can also be Green through complementary redefining of positive growth and appropriate regulations
MMT can also embrace socialism in the private sector as well as public, with more cooperatives, along with land and local energy, and banks in community ownership, plus unions and worker involvement in management
Only drawback typical older voter commonsense might be deaf to it at first
Neil Salter says:
“Keynesian economics got into trouble after decades of good service through loss of Bretton Woods and Oil price rise”
I’m not sure how true that is. Certainly we have had nigh-on five decades of denial that money behaves differently (indeed becomes a quite different commodity) when its not tied to gold. (I’ve never understood incidentally, why Nixon was persuaded to decouple from gold rather than simply increase the price of gold. Some one may wish to explain that, if it was indeed a rational decision.
My own conclusion as to why Keynes propositions fell out of favour is that although there was enthusiasm (or at least acceptance) of the need to inject cash into the economy to solve liquidity crises, there was nil appetite for reversing the process in times of plenty.
The common pretence is that in times of boom the government is doing a damn fine job and deserves to be re-elected because they’ve got the economy sussed. Yeah right. Nigel Lawson (to name but one) created the booms, but it was some-bugger else’s fault when it went to bagwash. (Probably Johnny foreigner. I can’t remember)
NB Gordon Brown was quite correct to call the end if ‘boom and bust’. We have ‘Boom and Bagwash’ in this new century. Or as I heard on the Navy lark the other evening, ‘Disastrophe’. A word coined before its time and which I recommend to all lovers of evolutionary language.
Rather as Donald Trump is content to claim credit for the rising stock market, I doubt he will be so keen to accept the blame for the crash. (Incidentally the latter will not be his fault – except in so far as he has so far done nothing in policy terms to defuse the damage which was heading our way – and still is)
The weakness in MMT is that the T stands for theory.
I’d prefer MMP where the P stands for Practice, or MMS where the S stands for system.
A theory does tend to reinforce Charles Adams’ point that money is a law of nature and that having looked at it you’ve come up with a theory as to how it works.
Practice suggests from the start that the money system is a manmade invention and this is the system that makes it work for the benefit of all society. We can then point out that we have so many of the problems that we do because we do not use Money properly.
I tend to agree with you
This is not a theory
It describes what happens
So there you go.
Instead of MMT being ‘academic’ we should call it ‘pracademic’! A fusion of the practical with the theoretical.
And that – by the way – is NOT neo-classical economics at all.
Peter May says:
“The weakness in MMT is that the T stands for theory.” Nah … It stands for ‘tree’.
MMS would be….. a ‘Magic Money Shrubbery’ (?)…. Too Pythonesque to be taken seriously by anyone.
MMP – Mercenary (or moronic) Member of Parliament…. ‘Tell him we’ve already got one’ … ‘I fart in your general direction’ and ‘Your father was a window dresser’… etc.
The naysayers created the ‘Magic Money Tree’ (Arbor Pecunia Magia) let them live with it and repent at leisure. It has immense, commonsense, popular appeal and is really easy to understand.
MMT ain’t broke. Do not even think of trying to ‘fix’ it. (Please…. Pretty please ?)
Hello Richard,
Could I ask about the q&a response on MMT you collected input from readers on a month or two back?
Still yet to find an answer on the question of the setting of interest rates in an environment of double-entry bookkeeping money creation.
Thanks
Due to my own work pressures this is running slowly
“It would appear that the anti-modern monetary theory brigade are keen to appear in the comments section of this blog at present.”
Which presumably means they are getting rattled. (?)
🙂
The fact that MMT was largely developed in a somewhat out-of-the-way university in the US ( Kansas – Missouri ), but is now being discussed on this blog ( at length ) is in itself a leap forward . Ideas , especially ones that imply big change , always start off like this and then if the idea has legs ( meaning it starts to make sense for more and more people ) it reaches the point where many, many more people see it and say ‘ ah yes that’s obvious ‘ . We are not there yet , but it is I think an idea whose time has come notwithstanding the fact that many so-called ‘ libertarians ‘ in the US like Peter Thiel and other Silicon Valley tech types continue to try and reinforce the concept of a society where we are all in competition with one another which is patently untrue. Our wonderful, little planet which sustains us all deserves something better.
We may think that neoliberalism has ruined our economy, and it has, but that pales beside what the World Bank and IMF have imposed on “Developing” countries – so called “structural reform”, or in other words, how to ensure the West continues to fleece the world’s poor.
Is there any sign that either of these two institutions have heard of MMT?
Both are showing signs of serious reform, in my opinion
That seems VERY debatable Richard. In a recent blog (Jan. 4th 2018) Bill Mitchell wrote an assessment of a recent IMF report (relating to Australia) which he saw as confirmation that all the usual ideological biases and banal assumptions are still in force and the ‘leopard isn’t changing its spots.
‘the IMF proved once again that leopards don’t change their spots. Thy released a Working Paper (No. 17/286) — Australia’s Fiscal Framework: Revisiting Options for a Fiscal Anchor — that demonstrated they hadn’t learned a thing from the last decade of crisis and fiscal interventions (stimulative and opposite). The paper demonstrates no understanding of context, history, or the role that fiscal policy should play in advancing general well-being. It is a technical exercise laden with the ideology of mainstream macroeconomics that fails badly.’
He goes on to say:
‘The IMF is an ugly, destructive institution that should be defunded and their buildings given over to the homeless.
The IMF authors are all ‘insiders’, by which I mean have had careers in the network of mainstream institutions (central banks, European Commission, World Bank, IMF etc). The reinforcing Groupthink that this sort of career path engenders is powerful.
It is no wonder they produce total garbage like this ( the report on Australia’s fiscal options) devoid of any critical scrutiny or self-awareness.
Rational expectations, no unemployment in long-run, real effective exchange rate (REER) balances the current account, and more — GIGO — garbage-in, garbage-out — sort of stuff.’
Worth reading that post: http://bilbo.economicoutlook.net/blog/?p=37735
Bill and I by no means always agree
Probably my lack of knowledge, but I suspect that in the struggle to show that money can be created out of thin air, there are three corollaries that do not get enough attention.
1) Money created out of thin air can just as easily disappear into thin air. Q. What happened to all the money we lost in 2008?
2) Money created out of thin air is Magic Money, it only becomes real when it moves. A simple example. I buy a house. Next year the house next door sells for a much higher price. Am i richer or is it Magic Money? A year later, the house on the other side sells for a much lower price. Am I poorer? I still have exactly the same house. The increase or decrease in wealth was Magic Money. But if I use the increase in value of my house to secure a loan, the Magic Money becomes real money and moves through the economy.
3) Since any amount of money can be created out of thin air, the question of where money comes from becomes trivial. The questions that matter are (a) The manner in which money moves through the economy and (b) Where the money ends up.
If the Real Economy is the movement of Real Money, then cutting the pay of teachers and nurses is exactly the wrong policy, because it constricts the movement of money. Ordinary workers spend their money, creating work for more workers who spend their money in turn….
But if the volume of trade on the Stock Exchange goes up or down by a factor of 10, it makes no difference, because it is effectively a closed loop.
Politicians who can’t distinguish Magic Money from Real Money, who obsess about where money comes from and who pay no attention to where it goes are very unlikely to do good, and extremely likely to cause needless harm.
1) No money disappeared in 2008: value did
2) Again, your are discussing a change in value. There was no money involved in that change in the value of your house: you are wrong to suggest this has anything at all to do with MMT. But you are right; loans do create money.
3) MMT describes real money.
On point 3), cutting benefits is similarly wrong as people so poor they need to be supported by benefits are necessarily going to be spending them, speeding up the velocity of money in the system and encouraging commercial investment, getting still more money moving. I’ve seen it creditably suggested Otto von Bismarck devised and implemented what became known here as social security, not from generosity or compassion, but from hard-headed pragmatism, a view, incidentally, which seems beyond the intellectual capacity of whiners like Duncan Smith.
Michael Green says:
” But if I use the increase in value of my house to secure a loan, the Magic Money becomes real money and moves through the economy.”
Yes , but…. you no longer own that increase in value (which I would call price). And you have to pay for it in installments over time (with interest) to regain ownership if that is what you desire.
I persist in the belief that the value of a house is that it is a ‘machine for living in’. That value does not change one iota in relation to the price. The money may have some magical quality, but the house doesn’t. (Excepting that you may choose to make it a ‘home’. Now that IS magic.)
Good blog! But some comments still fail to take on board that MMT is a description, not a method of choice. Any sovereign fiat currency issuer does exactly what is described in the blog. All countries with such a currency are constrained only by the resources they have, not the money they need, (and by political choice of course).
What has to be addressed is the fact that this puts elected government squarely back in the frame as the decider of public and social policy and as the arbiter of balance between the public and private sectors of the economy.
It would also put politicians in the position of having to be truthful about their policies as they can’t hide behind ‘there’s no money’ arguments. Far more difficult for Labour to say ‘no you can’t have everything you want, because we don’t have the resources/it will cause inflation’ or the Conservatives to say ‘we are handing the NHS over to the private sector because it’s what we believe in’. But just think of the gains in democracy – we’d actually know what we were voting for!!!
It ends the dangerous falsehood which is putting global corporations – and super-rich individuals – into the position of being able to buy policy. That falsehood rests on the notion that the rich ‘create’ the money and that government is dependent on their money creation to survive.
As to those who ask about banks creating money – yes, they do, but part of government’s remit is to maintain the balance in the economy about where created money goes. Public services are clearly productive and add money to the economy. Banks over-inflating house prices are not, neither are high levels of unsecured private consumer debt as both of these drain spending power from the economy in the form of interest. Governments can use regulation, taxation and public spending policy to affect all of these. As they can to encourage or discourage private sector investment and development in deprived areas. ‘The economy’ after all, is all of this, and all of us, not Just a government deficit or surplus at the end of the financial year or the activities of Corporations.
Spot-on . The false notion that ‘ money creators ‘ ( a misnomer in itself ) are ‘ wealth creators ‘ runs deep and so deeply entrenched is it in the public mind, regardless of political persuasion, it allows every other falsehood about what is ‘ productive ‘ and what is ‘ wealth ‘ to become common sense whether you are rich or poor and – like any other infectious disease – to spread so completely that the very idea that this is an ideology , not an act of nature , is very hard to shift.
“First it says governments can make money out of thin air, at will. This is now an acknowledged fact. The Bank of England agrees now. QE proves it. MMT then says all government spending is in fact funded by money created in this way, created by central banks on the government’s behalf.” Can we assume then that this function was carried out till recently (2000 or maybe 2002) by the BofE’s Ways and Means Advances facility, and has since then been performed by the Debt Management Office? Some of the nitty-gritty is still obscure, for me, anyway.
Yes
Effectively so
I am not sure even they would agree though
But remember most bankers still think they lend savings
I wonder if the reality of this might not be that government, misunderstanding (albeit in some cases, wilfully) the nature of the IOUs they’ve collected through taxation, feel constrained by the number of IOUs collected when it comes to spending into the economy. In, they think, redistributing those IOUs, they don’t realise they’re actually creating and distributing a whole new set, which is why when they get to the amount taken in but know more are needed, they turned formerly to the BofE and its largely illusory overdraft facilities and more recently to the opaque Debt Management Office to make up the difference. One wonders if either facility are really necessary. More clues as to why this charade is played might lie within the walls of the DMO, which clearly bears further examination.
For once Bill you have lost me
Might you explain another way?
If money is destroyed through taxation, then the govt have to command the BofE to create new money every time there’s govt spending. So, all the money the govt distributes to each department is created as necessary by the BofE. That’s the theory as I understand it. Do the figures support that though? Wouldn’t the govt overdraft with the BofE have had to have been far larger than it was at the time of the introduction of the DMO? Shouldn’t the overdraft have been in the tens if not hundreds of billions as opposed to the paltry few hundred million it apparently was?
Hang on: tax comes in every day and gilt sales are every week. Treasury bills are a fact of life. As a result the overdraft is minimised. That doesn’t mean the theory is wrong: it just shows the work round is managed
So all income from taxation and the sale of gilts etc. goes towards paying off the govt’s overdraft at the BofE, yes? Changing tack a bit, if new money is created into the economy at the government’s behest, does that not make us at least in part a command economy?
a) Yes
b) More than we realise, we could be, yes
Leaving me wondering, how does the DMO, officially part of the Treasury, create the money into the economy we regard as government spending? They have a new site live now, by the way, but I’m still none the wiser after looking round it.
I have explained that the BoE does this for the Treasury
It’s a banking relationship
Do we know which part of the BofE does that these days, given we know that it’s no longer the Way & Means Advances?
No
I’m a lay person and much of this discussion is over my head. But if I understand the MMT concept the federal government can’t default by means of deficit spending. As long as the federal government spends money that ultimately leads to asset growth and keeps inflation under control, the federal deficit is irrelevant?
If this is true what happened in Greece to cause the economic meltdown? How was government spending not creating assets?
Greece did not have its own currency
It had / has the euro
MMT rules did not apply
If I may, I can summarise your summary of MMT as follows:
Governments don’t need to tax and spend. They can spend first and then tax later.
Unbelievably, in summarising a theory concerning money, you make no mention of the creation of it by the private sector, which I find somewhat odd, given it has for years been the dominant form of money creation. If you had covered this subject, I could probably have summarised it in a similar manner:
Companies don’t need to earn income first and only then spend on investment in productive capacity. They can spend first and earn later.
Similarly, a household doesn’t have to earn the price of a house before purchasing it. The household can purchase the house first and then earn later.
Governments, companies and households can all do this by having their liabilities accepted by an institution that makes up the banking system – either a commercial bank or the central bank. If they can get their liabilities accepted, the banking system will credit the bank account of anyone with an account held at a bank within the system, nominated by the entity wishing to spend, be it Govt, Corporate or Household. The method is basically the same, whoever is spending money into existence, although the quantity of liabilities that any entity will be able to persuade the banking system to accept will vary. Clearly, the amount of its own liabilities that the government will be able to have accepted is extremely high, but it is not infinite. I don’t think the government has come anywhere near finding out what its effective credit limit is at any time in recent history, but other governments have and the results are well documented.
Bizarrely, given it’s undoubtedly huge effective credit limit and contrary to what MMT asserts, the UK government has only asked the central bank to accept its liabilities on one occasion this century, for an amount of just over £19bn in the closing days of 2008. Clearly the government has had its liabilities in the form of Bills accepted by commercial banks over this period, but the government has appeared to be content to either tax money previously created by the private sector first and then spend, or borrow money previously created by the private sector, which it then spends – or a combination of the two.
I’m sure governments are aware that they can spend first and tax later. I’m also sure they’re aware that they don’t always need to tax back everything they spend – the fact that it is more common to run a deficit than a surplus demonstrates they are at ease with this. I guess that under a steady state, spending and taxing doesn’t look too different to taxing and spending. Maybe they they thought about changing the way they do things, but decided nobody would notice the difference.
Except all that is nonsense
Because you may not have noticed this, but you can’t make money and governments can
And actually, banks only can if they have a licence from the government, and it’s that licence that matters
So why did you waste your time?
thank you for that considered and detailed rebuttal of my posting.
I’m not sure why you are so enamoured of the ability of a government to create money and are so keen to shout down any suggestion that the ability of a government to create money is fundamentally no different to any other entity’s ability to do the same. Maybe you would care to explain why your piece on money made absolutely no mention of the private sector. I’m genuinely interested in what you are trying to suppress and why.
I’ll explain how I can create money, but I’m sure you already know really: I first need to convince a bank to grant me a credit limit. Let’s say they give me a £10k agreed overdraft and they also give me a debit card linked to the account they set up for me, with an initial balance of zero. I can then walk into a shop, select goods up to the value of £10k, place my card with my account details into a card reader loaded with the account details of the shop that I’m purchasing the items from and then enter my PIN. At this point the banking system credits the shop’s account with a balance of £10k and sets my account balance to -£10k. The £10k balance added to the shop’s account is newly created money. Sure, I used the banking system to create this money and the bank that I used and the bank the shop used is licensed by the Government and both rely on the stable legal system (particularly the ability to pursue me for my debts) that the Government puts in place. The two banks also need a central clearing function that is provided by the central bank, which is a public/private partnership institution. But this is how the bulk of the money in existence is created. I don’t know why you don’t want people to know this.
I’m not saying that Governments can’t or don’t also create money. Of course they do, but I genuinely don’t understand why you attempt to shout down anyone bringing up the subject of money creation by the private sector. Why is it?
My argument is that the private sector does create money using the denominator that the government supplies i.e. the government makes the money and the private sector uses it
When I’m looking at a theory of money creation do I like at the big issue or the secondary application which merely extends it under government licence?
What I would add is that the Positive Money claim that 97% of all money is bank created is deeply misleading: worse, it’s not true
I note Werner appears to agree with them https://www.youtube.com/watch?v=EC0G7pY4wRE at around 7.50. Just sayin’ 🙂
He’s wrong
The idea that 97% of my net is created by banks and only note and coin by government completely ignores the role of the BoE and deficits as money creation.
It is one of a number of things Richard gets wrong
It is a mistake to think of “money creation” as something physical. What is a created is only a credit-debt relationship which is nothing more than information. In some ways governments and banks are similar* but in other ways they are fundamentally different in the way their credit and debt entries are rebalanced.
* I wrote a piece on the government and banking money circuits sometime ago, most of which I still agree with:
http://www.progressivepulse.org/economics/the-duopoly-of-money-creation
Robert Pearson says:
“Companies don’t need to earn income first and only then spend on investment in productive capacity. They can spend first and earn later.
Similarly, a household doesn’t have to earn the price of a house before purchasing it. The household can purchase the house first and then earn later.”
Yet our government, which is in reality the only body which can do this trick for real, pretends it is unable to. So who is stupid ?
You make the case for MMT whilst attempting to demolish it.
Why ?
what makes you think I’m trying to demolish MMT?
I agree with more or less everything MMT says from a technical angle. What I’m uncomfortable with is what promoters of MMT frequently don’t say. How can you write a post about a theory of money and make no mention at all of the creation of money by households and companies, which is the main source of most of the money we use. I just don’t get what the agenda is here.
I’m frequently told that MMT isn’t a theory of how things could work, but an explanation of how things work right now. I can’t see how that claim can be made when such a large chunk of what actually happens right now is not even mentioned.
We all know that the government can spend by instructing the banking system to credit the accounts of the recipients of its spending, instructing its central bank to credit the reserve accounts of the banks of those recipients and writing a simple credit note to the central bank to balance its accounts. MMT claims this is the norm, but in the UK it has happened once in the past 18 years.
Just about everything I read from proponents of MMT recently seems to be headlined ‘deficits don’t matter’ and then in the small print, buried in the text is the explanation that of course deficits do matter, just not in the way most people think they do. I agree with the small print and what its saying. I disagree with the presentation.
Yet, when I point out these inconsistencies and omissions, rather than addressing the points I make, I tend to get shouted out and asked why I’m wasting my time. Now, I’ve met people before in other walks of life that don’t like being challenged and become aggressive when they are. I’ve never thought it a particularly pleasant trait and I still don’t.
I suggest you look at UK money supply
Increasingly it is dominated by government made money
See https://fred.stlouisfed.org/series/MSM4UKQ
Government debt is money is my argument. The amount made by the private sector is smaller in comparison. And it is all under government licence.
MMT describes the macro issues
You’re sweating the operational detail
When you recall that most bankers still think they lend deposits you realise why the operational detail does not matter as much as many think
Robert Pearson says:
“..what makes you think I’m trying to demolish MMT ?…” It probably has something to do with the words you are using 🙂
” How can you write a post about a theory of money and make no mention at all of the creation of money by households and companies,….”
I don’t understand what you mean when you say that households and companies ‘create money’.
Money in the sense of notes and coins, or figures in a ledger, bank account etc. are tokens representing (supposed) value. The tokens are issued exclusively by the government – but anything else is not ‘money’. (Doesn’t stop you trading with cigarette cards, but they ain’t money)
So in what sense are households or companies ‘creating money’ ?
One of us is being thick (or perhaps we both are !) or we’re using the word ‘money’ to describe two different ‘commodities’.
Andy
In the sense that they are promising to pay in the currency created by the government you are right
In the sense that they make a promise to pay they are active participants in the process though
But since they do not create their own money but rather promise in someone else’s money I think they are secondary participants
Richard
“In that case more responsible measures have to be adopted as the goals for economic policy. MMT suggests that full employment is the alternative goal.”
Here I think, we get to the nub of the issue. Assuming we are intent upon taking this forward.
Let us ignore what precise figure we will accept as ‘full employment’. The number is not arbitrary, but by for example, raising the pension age, or the school leaving age it can be shifted substantially at a stroke. Also there will always inevitably be a degree of churn at any given time and that is not only inevitable, but necessary.
In terms of developing policy it is pointless to speak of ‘full employment’ without considering what we are going to accept as ’employment’ and how its ‘fullness’ might be achieved.
There are important issues here. And policy choices to make. I’m going to take it as a given that pointless digging and filling of holes is off the agenda.
There are two, not necessarily mutually exclusive, routes to full employment. One is to allow the free market to get us there. (Stop laughing at the back ! )
We know how that works out. We’re still waiting to see how it might be achieved without going all out for war: the only strategy, so far proven, to get even close.
Or we can have government job creation schemes, and I’ve been there and it was a piss-poor show (unless you were one of the civil servants employed to set up and administer schemes and don’t mind being bored rigid and wasting your life.) The schemes I was involved with (forty years ago) assumed there was only one type of employment viz that which was ‘traditionally’ accepted as ‘work’. That model assumed that half the population (the female half) should be at home working for nothing whilst doing (often badly and with bad grace) the most important work of raising the next generation, managing the social infrastructure or skivvying.
Emasculation of heavy industry has produced an economy in which (still, iniquitously, underpaid) women have shite jobs which barely cover the expense of paying for, even worse paid, inadequately educated, but maybe well meaning, young women (girls) to look after their children. We have made no progress whatsoever in addressing this nonsensical policy. (Because it IS policy. It may be a default policy but it’s policy) We have, under this policy regime, created no role for ‘manly’ activity which is not criminal, and incidentally not actually manly. There is nowt ‘manly’ about criminality, be it in dealing drugs with menaces, or stealing money through fraudulent insurance and investment devices.
The alternatives which are obvious are to institute a Universal Basic Income, or a Job Guarantee.
If there are other options, I’d seriously like to know what they are. I do not regard the status quo as an option. It stinks.
Social and economic conservatives (with a small or large ‘c’) reject outright the need for change because we allow them to live in blissful ignorance of the condition of the lives of anything up to a third of their fellow citizens, and they have the effrontery to blame the very people whose lives they are sucking dry.
UBI requires for its success, education of people to the standard and mindset where they can become genuinely entrepreneurial and create opportunities which don’t currently exist, to employ themselves (much more difficult and time consuming than it sounds) and create opportunities for employment of others without that level of self determination and ‘drive’. (I’ve spent most of my working life in default self employment. I don’t do ‘business’. I can do all sorts of things, but making money doing it is not where I’m at. It’s a mystery to me.)
UBI has to be pitched at a level which provides a subsistence income, or it fails by definition and isn’t worthy of consideration. There is no point whatsoever in setting a UBI at a transitional level which does not support life unless it is in addition to existing social welfare benefits (many of which are already woefully inadequate and getting worse.) In effect UBI is a free market solution. It reprices labour. And not before time.
A Job Guarantee strategy is difficult to imagine and absolutely requires considerable state input. Once you get beyond the screamingly obvious need for hospital and other health care staff, and for more teachers and classroom assistants to make Eton-sized classes a reality in the state sector you rapidly run out of state sector employment opportunities because everything else has been sold off. (OK, I exaggerate, but not by much. I expect there are civil service vacancies by the tens of thousands to deal with Brexit, but I was considering useful work (!) and there a re probably a couple of extra bodies needed at HMRC)
Elderly care is a massive social requirement, but needs levels of training, supervision and administration that requires expertise which we don’t seem to have. (Though there’s plenty of individuals who have been forced to learn the hard way by looking after their kith and kinfolk) The private sector does this expensively and badly (with criminal brutality in some cases). That will not be rectified quickly. I see the Job Guarantee as a difficult strategy to transition into and one which cannot possibly be done without restructuring the local governance that would make it possible. (I think it would be worth it, but not easily achieved)
We need ‘conversations’ about this.
MMT looks after the money, but that really isn’t the core problem. The real challenge is how to structure a society that functions. And functions for everybody. Even the finance sector, because they do have a useful and important role to play.
“We know how that works out. We’re still waiting to see how it might be achieved without going all out for war: the only strategy, so far proven, to get even close.”
And anybody who thinks WW2 was a triumph of capitalism is deluded. All sides operated centralised command economies. Especially the US. And they learnt nothing from the experience apparently.
Now a post in its own right on the blog
[…] Crow has become a regular commentator on this blog over the last year or so. Overnight he offered this comment on my post on MMT. It is written in his style but because it raises some really quite fundamental […]
I wonder if it is worth differentiating between MMT and the application of MMT.
MMT is a macroeconomic model which provides an explanation of how currency sovereign countries, US, UK etc, and blocs, EZ, actually work. This model explains what is going on whether believers in austerity or deficit doves are in government and dictating policy.
Accepting MMT the model does not require you to object to poverty, lack of social mobility, or other aspects of the status quo. The application of MMT requires the use a set of values and priorities, Bill Mitchell refers to ‘value systems’ (Brighton last year). Prioritizing the minimisation of a governments deficit over the provision of full employment or world class health care and education for all is a choice based on the value systems and constraints such as the need to win elections.
With the distinction between MMT and the application of MMT I have found it easier to explain MMT. And once that is done the superficial smokescreen that is neo-liberal economics is revealed as the political project it is rather than a macroeconomic model.
I think that’s a totally valid point
Althohgh, let’s also be honest, MMT makes clear aiming foe a balanced budget is pretty crass
Richard,
Would it be fair to say that you sometimes seem to be more enthusiastic about MMT and at other times you seem to want to put some distance between it and yourself?
You are slightly unusual in that you support the UK’s membership of the EU but all the leading proponents of MMT are very scathing in their condemnation of the EU’s neoliberal/ordoliberal economic policies. Their advice to the UK is “get out now! ! Their advice to all euro using countries is to go back to their own currencies sooner rather than later. In effect they are saying that the EU is an unworkable model which needs to be abandoned.
I differentiate the euro and EU
I see advantages to much of what the EU does
I utterly disapprove of a single currency
I also think the EU will gave to move in many areas e.g. state aid
I see MMT as a description, but not a policy prescription
I also happen to live in Europe: most leaders in MMT don’t
It sounds like you are in favour of the old EEC rather than the EU. I’d choose that as an option too. But it doesn’t exist now.
The EU and the euro can’t be separated. We made our choice to not really be a part of the EU when we chose not to be a part of the EZ.
Given that we ar not part of the EZ but are in the EU that comment makes no sense
I’m sure you know what I mean. If we are going to be in the EU we need to be in to the same extent as France, Germany and Italy. No half measures. That means adopting the euro and Schengen. Otherwise we won’t be seen as full members and we won’t have any real influence.
I challenge anyone who is in favour of the EU to have the courage of their convictions and go the whole way. I think we both know where the EU needs to be to survive and that is to become a USE
We arent going to be much help to them in that. It is better for them that we go now.
Why do something as stupid as join the Euro when we don’t need to do so?
I am a pragmatist. You are asking for silly gesture politics. I think I grew out of that in my teens
Mr Martin,
The problem seems to me that you approach “Europe” as solely an economic entity. It isn’t. We are Europeans (that is a matter of culture and political geography), and the EU is the gift we have been given by posterity as the only wise legacy for Europe after two world wars, and a long history of division and conflict.
The EU we have was supposed to be built slowly, and deeply from its origins in the Coal and Steel Community, and Treaty of Rome (1957); expanding gently and consolidating from the original “six” toward “ever closer political union”. This process was taken over by events; most importantly the fall of the Berlin Wall, but also the over-eager encouragement for rapid expansion promoted by those with different or cynical political purposes; not least the British, unfortunately I have always suspected with the deliberate purpose of undermining the closer political unification that was fundamental to the EU and European vision through over-rapid growth. In fact the EU managed remarkable well, but not without serious problems, and in a difficult and complex environment the effects of disruptive irresponsibility (deliberate or not) succeeded. In fact, having successfully disrupted the old EU vision, it is striking that the British have now decided to leave; no doubt feeling their work of destruction is done, or at least as effective as is to be expected. I think the British have been surprised at the resilience of the EU.
The EU is too important to all our futures, and is now faced with recalibrating its prospects. I believe it will probably require to adjust to a more ‘confederal’ environment than was envisaged by the founding fathers; but that compromise is always inevitable in Europe. We are therefore going through a phase of rapid EU adaptation; it should not be a matter of giving up on the EU, and for European states not surrounded by sea, they understand only too well the real importance of the EU idea – to all of them. Rather than focusing on the Euro, I suspect the EU will have to move a little more quickly toward developing a more flexible economics and monetary pragmatism, and a more sophisticated confederal politics in its institutions and expectations; but should establish a more robust EU foreign and defence policy. That will depend on France and Germany working through it together, and the general attitude of the member states. The EU cannot be allowed to fail and I believe that the British should have been committed members. Sadly, it seems they just can’t do it; but that is not yet the end of the matter, either for ‘Britain’, or Scotland.
@John S Warren,
You are right that the EU is about more than just economics. From my own experience of those who are in favour of remaining, the idea of European Unity is an enticing one. The English middle classes do tend to have a love of all things European. For many that’s as far as their analysis goes. They like their weekends in Paris, or their Tuscan villa if they can afford one, and are therefore pro the EU.
The idea of that we need an EU to keep us from killing each other seems somewhat curious. Most countries in the world seem to get along reasonably well with their neighbours, but at the same time they want to keep their own currencies and don’t want to share Parliaments. So why can’t we do that too? In any case, the part of Europe that saw the most bloodshed in WW2 is outside the EU. Do we need to include Russia in the EU, or at least the European part of it, to prevent a repeat occurrence?
But whatever the reasoning behind the creation of the EU, it will succeed or fail on its economic performance. This thread is about MMT, but many economists who are well distanced from MMT, share the same analysis that the structure of the EU is fundamentally flawed. It needs to become a transfer union to survive. This means taxes are imposed on the EU as whole and there is spending on the EU as whole. It needs a Federal government with the political power to control the Nation states in the EU, in the same way as the US Federal government has the power to control the individual States there.
It means that richer states will be appearing to subsidise the poorer states. I may be wrong but I just can’t see that happening. I can’t see the German Federal Govt ever putting itself into a subordinate position to a European Federal Govt. But that’s what has to happen. To give the EU the best chance of achieving this I’m a reluctant leaver. The UK will never adopt the euro or become full members in the way we would need to be to help the process along. We are better off going our separate ways for the next few years. If the EU manage to pull off what I’m saying they won’t, we can think about rejoining. If the EU falls apart we are better off out in any case.
You can’t see tat happening…
I can
Mr Martin,
Tuscan villas and holidays in Paris; that is it? You really think that is what drives the desire to Remain?
I will pass over your naivety about “neighbourliness” without further comment. Most of the bloodshed in WWII was outside the EU? The Soviet Union population loss (the only way to quantify the total losses) in WWII was circa 50m, so arithmetically your point may be sound; but as a description of the wholesale, industrialised destruction of millions of lives, culture and civilisation (to say nothing of treasure) in the EU area, that observation is, in all candour, poorly judged, extraordinarily crass and frankly repellent. Try telling that to Poland, or Czechoslovakia (I will not provide a long list of countries, or the catalogue of barbarity, destruction and suffering). You also neatly discount the whole of WWI (no doubt a mere bagatelle in your accountancy), and a thousand years of European history before.
It seems to me your remarks are redolent of a certain smooth, facile British indifference to Europe that Europeans cannot afford: a vague reminder of the shallow values that underpinned the ghastly remark of Chamberlain’s on the Sudetenland in 1938 that rather ‘gave the game away’ about the nature of isolationist Conservatism: about “a quarrel in a far away country of which we know nothing”.
Perhaps that alarming and cold British indifference, that is never quite well enough hidden entirely to escape detection (not least by Europeans, but only too easily from ourselves), is not so far from the deeper motivations for Brexit in Britain; although I still hope that Britain is much better than that. If you were to prove completely right about Britain, then I can only trust that Scotland will, in its wisdom, choose a different path.
Peter Martin says:
“You are right that the EU is about more than just economics. …..” You follow with comment on the europhile middle classes and their love of Tuscany etc. and it was from that quarter that most of the enthusiasm for joining the Euro came (IMO) and their thinking stretched little further than the convenience afforded by not having to change currency (which with plastic cards is a non-issue really) or fret about exchange rate fluctuations.
At the time we were seriously considering joining a single currency it was apparent (to me) that we didn’t even have a single currency in the UK in practical terms, because of huge inequity of distribution. At one end of the scale wages paid in pounds and at the other some newfangled millionpounds with a spectrum of values in between, reflecting to a considerable extent geographical location and the extent of industrial decline and regeneration.
I don’t rate Gordon Brown highly, but I have to give him credit for over-ruling Tony Blair on that issue. I assumed at the time that we would probably eventually make the transition to the Euro and that it would become sensible to do so.
“The idea of that we need an EU to keep us from killing each other seems somewhat curious.” Sad I agree, but we have long track record of disharmony and extreme violence.
” Most countries in the world seem to get along reasonably well with their neighbours…. the part of Europe that saw the most bloodshed in WW2 is outside the EU. Do we need to include Russia in the EU, or at least the European part of it, to prevent a repeat occurrence?”
Well yes, it would be ‘nice’ to have rather more civil relations with Russia again, and as for the European part of the former USSR – well much of it has indeed already joined the EU. Ukraine was a step too far and I blame the Americans for wreaking havoc in that quarter. The US has a big stake in keeping the Cold War on ice. Quite how they have the effrontery to complain about Russian influence in their domestic politics is a mystery to me.
“Greece did not have its own currency. It had / has the euro. MMT rules did not apply”
I’d put it that MMT rules always apply. The sectoral balances still balance etc etc. We can see, using the ideas of MMT, why any euro using government isn’t able to control its deficit by spending cuts and tax rises.
But a currency issuing government, with a freely floating currency, always has more fiscal space, or room for fiscal manoeuvre, than a country which uses another currency or pegs its currency to gold or another currency. So the rules just need to be selected to suit existing circumstances.
[…] Cross posted from Tax Research UK […]