A few weeks ago I mentioned on the blog that Warren Mosler had agreed to answer some questions on Modern Monetary Theory (MMT), of which school of thought he is one of the founders. Well over 200 questions came in as a result.
I tried to summarise these and have sent some to Warren now (the delay is all down to me: work has been rather more pressing this year than I anticipated when launching the invitation). This first Q & A is meant to be an overview of MMT. I am playing the role of sceptical enquirer: the questions I ask have to be viewed in that light. Warren has given short answers but has suggested he is open to answering responses.
R: What is MMT?
W: A description of monetary systems.
R: What does MMT say money is?
W: Today's currencies like the $, yen, euro, etc. are simply tax credits- the thing needed to pay taxes.
R: But it's now widely though that banks make our money?
W: Bank loans create bank deposits, under charter, regulation, and supervision of the govt.
R: Can we trust them to do that?
W: Only to the extent you trust govt. regulation and supervision.
R: What, then is the role of central bankers?
W: Setting the policy rates.
R: And what is the role government come to that? And how do we stop there being too much money?
W: Depends on the definition of 'money'. I suspect it's more about too much spending? That can be addressed by cutting govt. spending or cutting private sector spending by various means including govt. spending cuts, tax increases, increased lending standards, etc. etc.
R: If tax is to stop inflation why do we get so worked up about it and what it does?
W: Tax increases will reduce aggregate demand and inflation to the extent the inflation is being caused by excess demand. If that's not the cause- and it generally isn't- there are other tools for addressing price increases from those other sources. And it seems people dislike inflation more than they dislike unemployment?
R: It's widely thought that interest rates are meant to be used stop inflation? What does interest do if tax stops inflation? Is there a good rate of inflation?
W: Not that I know of. There can be a good economy in the context of both low and high rates of inflation.
R: What does full employment really mean?
W: For me the best we can do is offer a transition job to anyone willing and able to work to both promote the transition from unemployment to private sector employment, and to act as a more effective buffer stock for the price level than unemployment. At that point we are continuously at a form of full employment.
R: What is the Jobs Guarantee?
W: Another name for the above described transition job.
R: Isn't that the same as `Universal Basic Income?
W: No, with the transition job you have to at least 'sell your time' to get paid.
R: But isn't that just a money hand out?
W: As above. The value of the currency is a function of what you have to do to get it from the govt. It's a simple case of monopoly pricing.
R: Surely what you're really saying is we're just going to pile debt on debt at cost to future generations?
W: The public debt is the amount spent by the government .that has not yet been used to pay taxes, and remains outstanding until used to pay taxes in the form of cash, reserves, and securities. Treasury securities are nothing more than time deposits of the currency at the central bank.
R: If we don't need debt do we need money markets?
W: Not for public debt or interbank lending.
R: But aren't you ignoring the international dimension here?
W: No.
R: You say we don't need debt but we need the rest of the world. Won't they just trash our currency instead?
W: What does that mean? Exports are real costs, imports real benefits. Real wealth is about optimizing real terms of trade. Currency fluctuations per se don't alter real wealth.
R: I'm still not convinced. What about the Weimar Republic, Zimbabwe and even Venezuela. Money printing didn't work so well there, did it?
W: There problems varied. Weimar was about deficit spending for war reparations of approximately 5% of GDP per month and a massive loss of productive capacity. Zimbabwe lost it's productive capacity, kept govt. spending as before, and the banking system was an open channel for corruption.
R: And what happens to countries that don't have their own currencies? What does MMT say about them?
W: They are disadvantaged.
R: what about countries who cannot borrow in their own currencies, as many cannot?
W: Example?
R: Given all this, is MMT just some special case with no real use or does it really change the way we should think about the world of economics?
W: It's the general case and will change how you think only if you don't already understand MMT.
R: Convince me: what would a world where the economy was managed as MMT suggests look like? Could I spot the difference, and how?
W: A form of continuous full employment is the likely outcome of understanding the monetary system.
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In view of the usual “tax to control inflation” point, it would be good if he expanded on his assertion that – “inflation is being caused by excess demand” is generally not the case.
Demand could be defined as infinite. The limit is production aka full employment. It’s not demand that causes inflation.
Would also be informative to have some specificity on the kinds of taxes that would be used to control inflation.
That I can answer
You already know them
They are the taxes we have
Hyperinflation remedy: Income, Sales/VAT, Asset Value taxes. Across the board. As aggressive as necessary to pull currency out of the economy to extinguish inflation.
Hi,
The currency is a simple public monopoly, as the funds needed to pay taxes (ultimately) come only from the state. Therefore the state is ‘price setter’. Therefore the ‘price level’ is necessarily a function of prices paid by the state when it spends, or collateral demanded when it lends.
What call ‘inflation’ has come from a variety of sources, such as a foreign monopolist hiking the price of oil, which then gets passed through to most other prices, or currency depreciation- which itself can been due to a variety of factors, including corruption via the banking system- resulting in higher costs of imports and higher prices paid for exports which get passed through to most other prices, etc.
In the old days the headline distinction was between those types of ‘cost push inflation’ vs ‘demand pull inflation’. And currently there seems to be a fear that wages are a source of cost push inflation driving the Fed towards higher rates.
As a point of logic, however, if the state doesn’t pay the higher prices and doesn’t thereby redefine the value of its currency downward by paying more of it for the same thing, forces come to bear that in general ‘deflate prices’ back what the state is willing to pay.
The reason for this brings us back to the beginning- the economy needs the states funds to pay its taxes. If the state refuses to pay the higher prices state spending falls leaving the economy without the funds needed to pay taxes, a deflationary condition that can only be reconciled by lowering prices until the state makes its purchases. And I’m not saying this would be ‘good policy’ but only using this example to make the point about the source of the price level.
Also note that only MMT includes this understanding of the source of the price level.
This is also written up in my (very short) book- The 7 Deadly Innocent Frauds of Economic Policy which is free online.
Hope this helps!
Warren
I was struck by Warren’s answer to
R: what about countries who cannot borrow in their own currencies, as many cannot?
W: Example
I was thinking that I was being naive in thinking that pretty much any country can borrow in its own currency since Iceland does despite only having <400000 people and Botswana has started to despite being a third world country. Surely there must be a hitch though.
If Warren (and me I guess) are correct, then doesn't that imply that all countries that currently borrow in currencies that aren't their own could potentially reap the benefits of transitioning to borrowing only in their own local currency? That could be a permanent and dramatic solution to the problem that got Jubilee 2000 so much support a couple of decades ago. Just imagine if countries such as Haiti were not burdened by catastrophic USD-denominated government debts. Ann Pettifor was at the helm of Jubilee 2000. She is now an MMT economist (that is what Simon Wren-Lewis described her as anyway). Could there be a campaign a bit like Jubilee 2000 but with the aim of re-denominating the debts of poor countries into their own local currencies? If that were to create prosperous trading partners then doing that might even be the easiest way for rich countries to improve the rich countries' economies. Imagine if every country like Haiti had an economy like that of say Singapore (as an example of another small tropical island).
What does it mean to borrow your own currency?
US dollars (or any other sovereign currency) are already a liability to the issuer and only the issuer can create them. Bonds just exchange one liability (dollars that don’t pay interest) for another liability (dollars that pay interest). Typically borrowing operations involve receiving and asset in exchange for a liability, not swapping one liability for another.
Try (just for fun) creating the balance sheet transactions for borrowing your own IOU.
We do just that
Yes, dollar denominated debt is neocolonialism. https://www.sciencedirect.com/science/article/pii/S1057521915001477
“And it seems people dislike inflation more than they dislike unemployment?”
Or may be people that are employed do not suffer enough if others are unemployed?
Is there is a tyranny of the majority (or perhaps an elite minority) happening here?
Stone,
Yes, and not to forget close analysis shows states with their own currency necessarily spend first and then do what’s called borrowing. Again, the funds to pay taxes or buy state bonds come only from the state, all of which means that, operationally, there isn’t a borrowing imperative for spending.
Charles,
Yes, I tend to agree with the tyranny of the majority narrative.
best
warren
A socialist government would come under tremendous pressure to try and solve every inequality and provide public spending for every worthy cause. Trade union pressure would also force through continuous wage increases for their members. It is just too easy to turn on the printing press. It is fantasy to believe productivity could be maintained and so inflation is inevitable. Inflation is a cycle that is hard to counter with tax increases particularly from levels which are already high so inflation will ultimately will have to be countered with less printing / spending and after a dependency is created this will feel like “austerity on steroids”.
So you’re saying we should manage the economy on the basis of an economic fallacy to prevent socialism?
Why?
And to what end?
For whose benefit?
And what evidence do you have to support your view of socialism? Have you not heard of the power of the ballot box? Do you think it offers no constraint?
“A socialist government would…provide public spending for every worthy cause. Trade union pressure…continuous wage increases”
MMT doesn’t equate to ‘spend, spend, spend’. Quite the contrary. It tells us that the limit to spending is the available real resources priced in £s.
Please see this great little 6 minute ‘MMT Basics’ cartoon… https://www.youtube.com/watch?v=TDL4c8fMODk
PS One other thing to keep in mind. There is no ‘normal’ gov. spending vs ‘printing press’ spending. There is ONLY the latter, which is used for ALL gov. spending. Every single last penny.
Agreed
A few things.
1. Either you believe in representative government with an informed electorate or you don’t.
2. Studies have failed to show that inflation per se slows real growth. It does have (serious) distributional issues which can be addressed in ways apart from fighting inflation, which does slow real growth.
3. What we call inflation- a continuous increase in the price level- are better thought of as one time events that require continuous application of policy to sustain the inflation. That is, inflation isn’t something that, once begun, automatically spirals out of control as many narratives suggest.
Jim
We keep hearing this type of diatribe time and time again. ‘We cannot do this; we cannot do that….’.
Well what can we do then? Just keep going around and around in a destructive cycle of established and discredited orthodoxy? With the unelected calling the shots?
No one is saying that MMT would be printing money forever or at least at the same rate forever. And for MMT to be successful I still think that the financial sector still needs to be more regulated than it is currently. But I could be wrong.
But surely a democratic state printing some real money (even if some of it is in Government bonds which are a lot more stable than other forms of debt) is better than a democratic state standing back and letting the private banking sector create money through pure debt? Look where that gets us every time!
What’s your alternative Jim? Let’s hear it!
I don’t pretend to understand all that is MMT – even when Mr Mosler has given up his time to be here (thank you Mr M and you too Richard).
But I mean bloody hell Jim – we can’t keep going on like we have been doing. Can we? I have two children and they deserve better than this and I’m sure others here feel the same too.
It’s time for something new to be tried. In my view this ‘new’ approach is MMT.
PSR
“Surely a democratic state printing some real money (even if some of it is in Government bonds which are a lot more stable than other forms of debt) is better than a democratic state standing back and letting the private banking sector create money through pure debt? Look where that gets us every time!”
Hear, hear
Richard
The solution is a Job Gty as part of a Full Employment Fiscal Policy – enshrined into law. It modulates spending to maintain full employment down to the dollar. The puppy spells it out for us: http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
[…] Why MMT? A discussion with Warren Mosler […]
The thing I always find hard to explain when trying to convince people of MMT goes back to money created by private banks. Yes they do so under licence, but in practice they do create a fair amount of money out of thin air in a way that is hard to reconcile with the notion that “only governments create money”.
This relates to the “self-made man/woman” trope: I have a brilliant idea for a unique product and start a business with a loan from the bank. I use that loan to invest in equipment, employees, marketing etc. and my innovative new product enjoys huge success. I pay back the loan but in the meantime have created employment for thousands of people in the company and down the supply chain, all of whom are having a multiplier effect on their local communities. The people buying the product are using money they have earned – maybe by working for other businesses funded by bank loans. That’s suddenly a lot of new money sloshing around that is outside government control. The self-made person says “what do you mean my tax is simply paying back money originally created by government? I created this by myself.”
Any neat rebuttals most welcome.
James, I thought it was the case that the private sector can use private sector credit to coordinate its activity just as you describe and on top of that the government can use the “outside money” system to pay for stuff with no revenue constraint for the government. The two things can go along in parallel and the government is not making the likes of your “self made man” pay except in the sense the government competes for labour and other real resources. The tax that your “self made man” is paying is just channeling money back to the government that came to his customers from some government spending at some point (assuming the government isn’t running a fiscal surplus).
-no doubt my take will be corrected by people more knowledgeable.
You have pretty much got it
Nothing in MMT says the private sector should not operate
I can see no way it requires that private banks stop creating money. It does require their regulation when doing so.
Stone: The problem with bank-created credit is that it’s invariable accompanied by a bank-created debit (loan). So in a low interest environment, banks may go ape-sh*t and overlend, substantially increasing Private Sector Debt/GDP. This leaves the economy vulnerable to a shock (see US in 2008 and China in late 2018).
Yes, commercial bank loans (any bank purchases in fact) create commercial bank deposits (liabilities), just as central bank purchases (think of loans as purchased assets) create central bank liabilities (actual cash and the various types of central bank deposits). And central bank deposits are the source of tax payment, while commercial bank deposits are the source of the private commercial bank loan repayments as you discussed.
So I suggest the now educated ‘self made person’ will understand this?
😉
Warren
Let also suggest that the so called private banking sector is a lot more private than, say, the military?
First, banks must be state chartered.
Second, for all practical purposes their deposits are state insured, so they are risking public funds when they lend, and are regulated and supervised accordingly.
Third, regulation in the US is known as CAMELS
C is capital- the state makes and enforces the capital rules.
A is asset quality- the state makes and enforces all the rules regarding required asset quality,
including which assets qualifying and which are not permitted.
M is management- the state has full control of bank management and can make changes at will
E is earnings- the state determines how banks account for earnings which add to capital and sets standards to ensure earning and capital are growing as required
L is liquidity- the state sets and enforces liquidity minimums
S is interest rate sensitivity- borrowing short and lending long, for example is not permitted as it creates exposure to changes in interest rates.
What’s left for management is ‘pricing risk’ which means interest rate determination, with banks competing with each other to both make loans and retain deposits. Yes, loans create deposits, but banks must then compete for those deposits.
Richard thank you for this post and for the opportunity to engage in the on-going discussion around MMT. I am definitely warming to MMT but the creation of money as debt by private banks is a bit of a thorny issue that I really don’t feel MMT addresses satisfactorily. Yes there are regulations – but do you think these are sufficient? are they fit for purpose? If we connect the dots between bank created money (private debt) and the growth of money in the economy (such as the evidence provided by Richard Werner and Steve Keen, among others, for example) – shouldn’t we be more concerned that bank regulation should be a top priority? Could we agree that bank lending should largely be for productive purposes (e.g. Richard Werner’s proposals for credit guidance) in order to avoid such things as asset bubbles? Would you agree that the housing boom and subsequent crash was a consequence of banks lending money for mortgages in order to profit from the interest? If any solutions are to be found through taxation – can’t the tax be applied to bank profits rather than general taxation? would that not curb the worst of the practices? (i.e. if banks were taxed on interest charged on private debt for consumption or asset purchases and not taxed on interest charged on private debt created for productive purposes – such as business loans?)
I entirely agree that we should regulate banks – and the credit that they provide – better
But it is a fact that the powers to do that already exist, and are not used for the right purpose. It is, for example, result of regulation that so large a proportion of all bank funding goes into mortgages: those are biased within the existing regulatory framework as the best use of bank funds because they, supposedly, carry the lowest risk.
As with so much else that is identified in the course of this discussion, what appears to be a fact here is something else: it is the result of a decision, and a bad one at that.
The reality is that we need better control of credit. I do not suggest for a moment that tax can do everything.
“R: And what is the role government come to that? And how do we stop there being too much money?
W: Depends on the definition of ‘money’. I suspect it’s more about too much spending? That can be addressed by cutting govt. spending or cutting private sector spending by various means including govt. spending cuts, tax increases, increased lending standards, etc. etc.”
“Too much money” doesn’t seem to be an issue at present. Quite the contrary in fact. We apparently (according to government) don’t have enough money…to finance the standard of living we have enjoyed and enhanced during the post war period.
People who have ‘all’ the money don’t seem to understand the concept of too much money. I certainly don’t, but I well understand the reality of too little money and I see its effects all around me in individual poverty (relative poverty) and axing of social provision.
“And it seems people dislike inflation more than they dislike unemployment?”
People with money dislike inflation considerably more than they dislike other people’s unemployment. Not much doubt about that.
Unemployment was infamously described as ‘a price worth paying’ in the Thatcher years.
The Tory mindset is very keen on somebody else picking up the tab.
Hello Warren/Richard,
Could you please explain the central bank setting of interest rates in an environment of double-entry book keeping? In other words, how does a central bank play a role in the price a commercial bank sets for the money it originates?
Thanks
I think Warren can better do that
Allow for time differences, please
If the state has a floating exchange rate policy and doesn’t take action to support rates at a higher than 0% level, the policy rate will be 0%.
The primary means of supporting rates today is either the sale of Treasury securities, which are nothing more than interest bearing time deposits at the central bank, or by creating excess reserves and then paying interest on those excess reserves. That is, it takes state initiative to sustain a positive policy rate
(which I happen to call basic income for those who already have money). And in that sense I say that with a floating exchange rate policy that natural rate of interest is 0%.
Thank you for your response. At first glance it would seem to square, but upon further reflection it’s still unclear to me.
Are not treasury securities and reserves a separate world from the real economy operations of a commercial bank? Can a bank create a debt for the state to buy the treasury security in the same sense as it can for a mortgage borrower?
Isn’t the consequence of double-entry book keeping that any bank is capable of lending to that borrower without regard for the finite position of its reserves? If so, shouldn’t competition for these loans drive commercial rates down to some risk premium?
Thanks again for your time.
Should the policy rates be set at zero?
If so, what is the next role of central bankers?
Your answer is?
Nyn:
Yes, I have proposed a permanent 0 rate policy. And I see no evidence that a 0 rate policy causes inflation or currency depreciation, but anecdotal evidence of the reverse- it promotes price stability and a strong currency.
And the role of central bankers is banking regulation and supervision.
John Dorge:
Are not treasury securities and reserves a separate world from the real economy operations of a commercial bank?
LET ME FIRST STATE THAT ALL BANKS- CENTRAL AND COMMERCIAL- ARE JUST T ACCOUNTS. THAT SAID,
TSY SECS AND RESERVES ARE BANK ACCOUNTS AT THE CENTRAL BANK, FUNCTIONALLY IDENTICAL TO CHECKING AND SAVINGS ACCOUNTS, FOR EXAMPLE, AT COMMERCIAL BANKS.
BALANCES IN RESERVE ACCOUNTS AND SECURITIES ACCOUNTS AT A CENTRAL BANK ONLY CHANGE WHEN THE CB CHANGES THEM,
WHICH IS CALLED DEBITING AND CREDITING ACCOUNTS- AGAIN FUNCTIONALLY IDENTICAL TO COMMERCIAL BANKS DEBITING AND CREDITING ACCOUNTS ON THEIR BOOKS.
Can a bank create a debt for the state to buy the treasury security in the same sense as it can for a mortgage borrower?
YES, A COMMERCIAL BANK COULD IN THEORY LEND DIRECTLY TO THE TREASURY AND BOOK A NEW LOAN AND A NEW BANK DEPOSIT ON ITS BOOKS.
Isn’t the consequence of double-entry book keeping that any bank is capable of lending to that borrower without regard for the finite position of its reserves?
YES, THOUGH STATE REGULATION CAN DISRUPT THAT CONDITION.
If so, shouldn’t competition for these loans drive commercial rates down to some risk premium?
IT DOES.
Thanks again for your time.
YOU’RE MOST WELCOME!
Francisco:
I disagree with Warren. No reason the Job Gty couldn’t be permanent. You can start with: Execute on national “To-Do List” (infrastructure; alternative energy; high speed rail; rehire every teacher, fire fighter, cop laid off in last 8 years; quintuple trade school and community college staff — free tuition. If folks don’t have skills, train them.
FOR ME, THOSE TYPES OF JOBS FALL UNDER ‘NORMAL PUBLIC EMPLOYMENT’ AND SHOULD BE HIRED AND PAID ACCORDINGLY, VS WHAT I’VE CALLED THE TRANSITION JOB, WHICH IS FOR THE ‘EXTRA’ PEOPLE THAT HAVE BECOME UNEMPLOYED DUE TO STATE POLICY WITH THE STATE NOT DESIRING TO HIRE THEM. THE POINT THEN IS TO RETURN THESE PEOPLE TO PRIVATE SECTOR EMPLOYMENT, A PROCESS FACILITATED BY A TRANSITION JOB AS I’VE DESCRIBED.
Thanks Warren
“For me the best we can do is offer a transition job”
What is a transition Job? What qualification is required? If none, then the job is worthless, other than in gaining pay.
You mean you have never done a transition job?
Amazing
I have
A transition job in this context is socially sueful work that would not otherwise be done
If you can’t think af any near you then you’re not thinking
That is not a job. It is unpaid and quite useless to an unemployed broke
person. It is thus not helpful as an answer to the question of what to
do about unemployment.
The only “work” that I have done which might come into that category was
sifting through an electoral register or several on behalf of the
LibDems. I was not unemployed – have never been; I am retired and on
pension – thanks be to the economy 56 years ago.
Thoughts Warren?
This is a common objection to the JG
Which reminds me, might we have a definition of ‘socially useful’ please? I ask as the Tories have usefully defined something similar as helping local profit-making businesses, thus people on benefits cheerily described by the DWP as engaged in work experience at something socially useful find themselves working at Poundland and the like.
Norman Willcox says:
“That is not a job. It is unpaid and quite useless to an unemployed broke
person.”
The whole point of what we are talking about here as that this socially useful work be paid for.
In which case it is exactly what an unemployed broke person needs. The current problem is that these jobs are not being done because the ‘market’ thinks them useless because they are not financially profitable.
Either you are completely missing the point or I’m not understanding your objection.
Norman – “For me the best we can do is offer a transition job”
What is a transition Job? What qualification is required? If none, then the job is worthless, other than in gaining pay.
You need to think more Norman. I read a report recently that in the United States much of the infra-structure of their National Parks was in a poor state of repair because of Federal Government cut-backs. Given that National Parks are a public amenity greatly enjoyed by many adequate infra-structure investment would ensure many low-skill jobs were available of a transition nature.
Usual aggressive reply without addressing the point. No one defined the term “transition employment”.
Who pays? How are you going to get government or local government to offer jobs even at below subsistence living wages?
The government pays
There is no aim to provide below subsistence wages
We have a minimum wage
Many people live on it
The money story begins with a state desiring to provision itself.
To do this it must move real resources from private to public domain.
It does this by levying a tax payable in its own currency for which it is the single supplier.
This functions to create sellers of goods and of services, such as labor, seeking the needed currency.
We define people looking for paid work who haven’t yet found it as unemployed.
Therefore it can be said that in the first instance taxes function to create unemployment,
for the further purpose of the state then hiring those its tax caused to become unemployed.
The state then hires those it caused to become unemployed, thereby provisioning itself.
If the tax created more unemployed than the state desired to hire, the evidence is the residual unemployment. (And note that there is no unemployment as we know and define it in non monetary societies.)
The state can then ‘correct it’s error’ by either hiring the remaining unemployed or lowering the tax liabilities until they return to the private sector.
However, private sector agents don’t like to hire unemployed workers, but instead prefer to hire those already working. It’s risky to hire unemployed as employers don’t know if they’ll be punctual, clean, or display confrontational and disruptive behavior on the job, etc.
That is, the state has damaged people by causing them to become unemployed and then not hiring them.
Therefore I propose the state offer a transition job for anyone willing and able to work, for the further purpose of facilitating the transition from unemployment to private sector employment.
For the US, I have proposed that first the Federal govt. notifies all Federal supervisors that they can hire anyone willing to work for them at the transition job wage, in full knowledge that these people will be susceptible to being hired away from them by private sector employers. After 90 days, the program will be extended to the state and local governments, and after another 90 days it will be extended to the non profit sector, which should be sufficient for all those willing and able to become transition workers to find employment.
I’ve also proposed that initially the transition job wage be fixed and ‘non disruptive’ as the purpose is not to attract workers who are already employed in the private sector by offering higher wages.
The transition job can also come with benefits such as paid vacation, etc. which introduces benefits ‘from the bottom up’ and works to cause private sector employers to offer similar benefits.
And let me add that an employed transition job buffer stock has every reason to function as a superior price anchor to today’s policy of unemployment as a buffer stock, again because transition workers are far more ‘liquid’ with regard to transitioning to private sector employment than unemployed workers.
That is, this is an anti inflationary policy vs today’s policies, and it also provides a form of full employment that’s been called ‘loose full employment’.
I’m not keen on the job guarantee. It seems to me it buys into the idea that sleeping all night so one can get up and go to paid work all day is somehow normal and natural when in reality it’s anything but. People want enabling, not exploiting. Can MMT really not offer any route to money more original than traditional exploitation? If people are to perform paid work to set hours, how is that to be designed so as to avoid the traditional exploitation?
I don’t think so far we’ve got near JG v UBI
BUT I think that’s a separate blog…
WAIT!
I disagree with Warren. No reason the Job Gty couldn’t be permanent. You can start with: Execute on national “To-Do List” (infrastructure; alternative energy; high speed rail; rehire every teacher, fire fighter, cop laid off in last 8 years; quintuple trade school and community college staff – free tuition. If folks don’t have skills, train them.
No one said “manage the country on economic fallacy to prevent socialism”..I inferred increased government spending will lead to inflation unless productivity will be maintained – do you agree or disagree? And with so many worthy causes – NHS, improved benefits, social care, tuition fees etc etc the list is endless – productivity will not be maintained and so inflation is inevitable – agree or disagree? And increased Govt spending creates a dependency and when this dependency is removed as Govt spending is cut to fight inflation this will feel like extreme austerity – agree or disagree? And govt spending would have to be cut as increasing tax from already high levels will be prove a difficult policy to implement in the face of rising prices – agree or disagree? .. and yes we have the power or the ballot box but a lot of economic mis managemnt can be achieved in a single term in office.
I completely understand the logic of a fiat currency and follow the MMT argument, that requires no explanation.
No one doubts that when there is too much money chasing too few resources then we have inflation
But first of all that’s not the only cause of inflation: some is created by other causes e.g. commodity price changes
And some is created by changed expectations e.g. the Brexit exchange rate change
Leaving those aside of course too much money chasing too few resources can cause inflation but only if it is permitted
First, if the governemnt wants to increase labour rates it can. It can push up the price by paying more.
And it can increase the proportion of resources dedicated to necessary social purposes e.g. the NHS and education by letting them bid for resources.
Does that necessarily lead to inflation? No. It need not if the excess demand is taken out of the economy by increased tax. The means to pay that tax will exist: the government has already created them by its spending. And it can choose to reinforce its social choices by deciding who, how and what to tax. So we could, for example, tax wealth and financial transactions, but we don’t.
Is an increase in productivity required to avoid inflation? No. It is not. Extra tax will be. And remember there are some jobs where productivity is very hard to increase. We know caring has gone beyond any limit where there are gains for example, but we need increasing amounts of it. Are you saying that is not possible when MMT clearly says it is? If so, why? And what does that say about your decision making priorities?
I do not think you are in any way following the logic of MMT.
“I inferred increased government spending will lead to inflation unless productivity will be maintained”
Rapid money supply growth does not necessarily cause inflation. http://evonomics.com/moneysupply/
At full employment with a JG there is a risk of a wage price spiral.
“The real risk of a wage-price spiral is always and everywhere when exogenous factors increase prices. The two that come to mind are (i) substantial currency depreciations and (ii) increases in input costs, such as oil or other commodities. Wage-price spirals then tend to kick in as workers and capitalists try to use their market power to distribute the resulting inflation. Workers try to fob the price increases onto capitalists through wage hikes, while capitalists try to fob it onto workers and competing capitalists through price increases.”
And there are also ways to try and avoid it.
http://econintersect.com/a/blogs/blog1.php/the-job-guarantee-wage-price
http://econintersect.com/a/blogs/blog1.php/more-on-the-job-guarantee
Hello,
“Imagine it is the first day in a new world and there is a government and a population. No money exists.
Tthe government wants to build or do something and needs money to buy resources with. Where does it get it?”
The gut reaction of most people is that the government must tax.
It cannot get money from the population as they have none.
It then becomes obvious that the government first issues the money and only then can it collect it.
To empty the bathtub you have to fill it first.
This leads to the truism that government spending funds taxes and government bonds.
Another truism is that the government does not need to tax to spend. It can always issue currency.
It is like the chicken and egg argument except this one has a clear answer.
The only barrier to government currency creation is inflation and things to buy. The government need only set a target inflation rate, set a budget, and spend to that limit.
It really is that easy to understand.
I agree
“The gut reaction of most people is that the government must tax.”
I’m struggling with that. In a society where money does not exist the “gut reaction of most people” when something needs doing at a societal level is that a government needs to invent money, issue it to people who weren’t previously using it so they can then invent another concept and tax it back from them and use money to fund whatever it is that needs doing?
Is that really how money and tax got started?
It seems a very odd gut reaction to invent two things that clearly weren’t needed as things must have been going along ok without them.
How did societies exist before money and tax?
Haven’t you read about cavemen and how well off they were?
Before we had gold-backed (really fiat even then I suspect) currency here, to use for the majority of transactions, we had tally sticks and tax.
“Haven’t you read about cavemen and how well off they were?”
Ah, Richard, you say that, but look at those lovely cave paintings they did. They may not have had lots of money but they had time to decorate. Nowadays we struggle to find time to chuck some emulsion at the walls.
🙂
Alan spot on..the only barrier to money creation (and government spending )is inflation..nothing new there. And the current system is a convoluted way of controlling the money supply to control inflation…I go back to my original point that a socialist government adopting the economic wand of money creation through printing would have so much pressure to spend today that inflation further down the line could not be handled solely by tax increases..the government would also have to cut spending but only after acute dependency will have been created.
Once an international dimension is added too much printing (or the fear of) may lead lead to us importing inflation aka after the referendum.
Richard mentions taxing the rich through a wealth tax etc but this would not take sufficient money out of circulation. It would fall on the middle classes. The debate would eventually become quite philosophical about the state crowding out the private individual and trusting that the state knows best how to allocate resources.
I am currently formalising some new theory on this issue
Give me a little while…academia moves very slowly…
I think you are quite wrong in your final para
Jim,
“Socialist Government” is just words used to conjure up a bogeyman that will inevitably ruin the economy. It is BS.
Any government, whatever you want to call it, will face real resource constraints and real world opportunities. Any government will also face political constraints imposed by the electorate in general and special interest groups in particular. Any government will experience success and failure regardless of what people call it. Suggesting “socialism” is uniquely incapable of success and inevitably doomed to failure is pure propaganda.
The point of MMT is simply that the real world constraints/opportunities and political constraints are all that matter. Essentially “lack of money” is a political constraint and not a real resource constraint because, obviously, money isn’t a real thing.
Money is a very useful and very sophisticated social/legal construct but a construct is all it is. Money is a means of making collective choices and pretending there is no money is akin to pretending there is no choice.
If people want to argue for leaving things as they are with very large amounts of power concentrated in very few hands, gross inefficiency and corruption throughout the system, ecologically unsustainable (probably suicidally so) means of production/distribution/land-use and politically unsustainable inequality then fine but they can no longer pretend that we have to do it because of the lack of money.
TINA is dead and it’s MMT wot killed her (for me at least). It is now only a matter of time before the masses wake up to this fact. The only question is whether there is enough time left to choose a better path before planet-wide ecological collapse does us all in. I’m not optimistic…
Jim. It’s perfectly possible to be centre-right in your political beliefs and still support MMT. You can believe that where there’s effective competition it’s better to allow the private sector to deliver the goods and services a society wants. Where there’s a monopolistic or quasi-monopolistic situation it’s better to allow the state to supply the goods and services or not-for-profit organisations. Where private sector businesses act in the interests purely of its shareholders and management then its possible to use government created money to allow the workforce in those businesses to become shareholders on a group basis to exercise counter-vailing power to over-come contradictions in capitalism such as preventing out-sourcing of their jobs and thereby helping ensure that demand is maintained within their country’s economy:-
https://larspsyll.wordpress.com/2018/02/19/marx-and-keynes-on-the-contradictions-of-capitalism/
Finally, governments do have a role to play in ensuring hyper-inflation doesn’t take place but is by no means confined to left-wing governments. Indeed both Blue and Red Tory governments have allowed house prices and accommodation rent prices to hyper-inflate for nearly fifty years in the UK. Obviously corruption is the issue here and will continue if electorates don’t face up to the issue particularly in regard to their children’s future.
Jim, this paragraph….
“.. Richard mentions taxing the rich through a wealth tax etc but this would not take sufficient money out of circulation. It would fall on the middle classes. The debate would eventually become quite philosophical about the state crowding out the private individual and trusting that the state knows best how to allocate resources… ”
…. reveals your underlying objection, and it has nothing to do with MMT, but boils down to whether we regard all citizens as deserving a minimum living standard and life opportunities, or not.
Firstly, only Gov has the power to provide this. MMT explains how Gov can do it, if it chooses to. But it appears you would rather continue with the present situation where politicians, media etc. all pretend that Gov cannot do things, for lack of ‘fiat’ money?
And you take this position on the simple basis that inflation and/or the ‘middle classes’ (whoever they are, but I think you mean *you*) will somehow suffer should we even try to improve on the present ‘TINA’.
Well, to simply discard some 10%+ (likely far more) of our present population, in unemployed poverty, deprivation, crime, low life expectancy etc., as happens now, I find rather disgusting just from a humanitarian point of view. (Tho’ I accept it is the mindset that mainstream media universally propagandises – near always has done – as somehow ‘TINA’)
But is ‘TINA’ anyway more ‘efficient’, or indeed utility maximising, for the lucky remainder of the labour class who can find adequate work, income and life opportunity? (We need not worry about the welfare of the Capital owner class, by defn.) We are led to believe it is. Which is another underlying false mainstream axiom, and failure to even acknowledge that ‘macro’ economics is profoundly not ‘household’ thinking’.
What I’m talking about here is the notion that if society were to look after ALL citizens to a level of minimum functionality, then other citizens would themselves be deprived to some balancing extent of disposable income, life choices etc. But is that true? I say, no, it certainly isn’t.
We actually do have already the concept of production forgone (forever) as a result of failure to use our available real resources, including labour, in economics. But the media never mention it, and most people are probably not even aware of it. The waste is vast. The BoE’s Andrew Haldane (no great luminary of ‘socialism’) wrote a paper on it, a few years after the GFC of 2008. We’re talking 10s of percent in GDP terms. £100 billions in the UK, every year. And this waste is not happening under ‘socialism’.
Yes, you are right (in meaning), that the ‘rich’ don’t comprise sufficient aggregate demand to meet the burden of reducing overheating overall agg demand in the economy, should that happen. So, yes, the burden of regulating agg demand will fall mostly on the labour class, including its rather self serving ‘middle class’ tiny minority.
But that labour class also therefore clearly bear the brunt of all the 10s of percent of foregone production lost thru’ this practice of ruining the lives of millions of citizens thru’ mass unemployment. And also thru’ an increasingly large chunk of the population struggling by, but employed in damaging low pay exploitation.
The Job Guarantee is an *automatic* feedback mechanism that aims to prevent BOTH this appalling waste of resources (labour), AND the human deprivation and misery, that in reality the labour class pay for anyway in forgone aggregate production. (The rich will still buy what they want.)
It does this with two quite minimum levels of active (political) management by local and national authorities.
By requiring the active engagement of LOCAL communities, in determining the uses to which JG labour is applied. (I defy anyone to credibly deny they can’t find something of local value to be done with JG labour.)
And by requiring two simple ‘parameter’ choices by central Gov, concerning the level of JG wage, and the level of a more basic income for those who choose not to do JG (or work at all, in order to g’tee JG is strictly voluntary). Getting the balance of those two right is really only what central Gov need do to ensure the macro output and stability maximising functions of JG work optimally. (The application of other ‘Universal Basic Services’, such as healthcare, education etc. also greatly simplifies the working of JG + BI, by removing volatile and/or profit gouging ‘market’ providers.)
Now, if you have a better feedback mechanism (or automatic stabiliser) than JG to try and avoid the huge (present) waste of unemployed and poorly used labour, I’m all ears.
But not only do I not see that, I don’t even see people care about it, even from an ‘efficiency’ perspective.
But this is also what is so paradigm changing (and threatening) about MMT, isn’t it?
MMT obliges us to view the ‘real resources’ issues, which are our real constraint, not ‘money’, as the mainstream ‘TINA’ would have us all focus on.
Thanks
You hit Jim’s nail firmly on its head
Nicely put, Mike.
Warren,
Thanks so much for doing this. Your background and communication style give extra credibility to the MMT message. Your book was my first convincing contact with MMT and it is through you that my friends in the world of finance have become convinced too.
You, Bill Mitchell, Stephanie Kelton, Randal Wray and all the others are heroes. While I think it may be too late for humanity to change I believe it’s better to go down fighting and MMT has given me the will to do so and, dare I say it out loud? it has given me a glimmer of hope too.
Keep up the good work dude!
[…] February 24 2018 at 8:21 pm […]
@Jim “I go back to my original point that a socialist government adopting the economic wand of money creation through printing would have so much pressure to spend today that inflation further down the line could not be handled solely by tax increases..”
I believe this is a straw man. If more government spending creates a vibrant economy with more money changing hands more frequently then the government gets its spending back in tax more quickly – it must do because they are more transactions.
Just look at the minimal number of transactions required when you spend £1million and you tax at 35% ( I believe the current average is around 34%) 99.9% has gone in 20 transactions and it’s disappeared in 54. Figures here http://www.progressivepulse.org/wp-content/uploads/2018/01/Million35percent2.jpg .
If there’s a bit of inflation the amount spent will necessarily come back even more quickly because the effective transaction amount will have increased too.
Has any country tried this and been successful at it? Just seems that so many politicians want to be popular and here is this fool-proof method of creating economic heaven and yet no politician has used it.
Makes one wonder.
It’s only recently been appreciated
That’s why
Richard – this hasn’t just been appreciated. If people think you have found the holy grail then so be it but you haven’t. Your discussion never really answers the constraints and there are so many theoretical and practical economic minds out there do you really think you have usurped them all?
If you really believe you have then surely you need to take the discussion to a different platform. After all you have been pushing this for a good while now. Why not get a paper published, guest lecture on the university circuit and invite discussion / criticism not on here but from heavyweight economic entities and see what progress you make?
The Bank of England only recognised this in 2014. It took it 320 years to do so. I call that ‘just’.
And the issue is being discussed by academics who are open-minded. Simon Wren-Lewis, for example, discusses it. And Galbratih, and many others.
Jim,
if you think this is R Murphy a lone voice barking at the Moon, you need to get out more.
Can we also recognise that some of the principles of MMT (such as ‘the state deciding to provision itself’ as Warren has said above) have actually been used at least in part? It seems like it to me.
MMT is not from planet Mars: it is from Planet Earth.
I like this blog because Warren’s involvement has added some intellectual vigour and rigour to Richard’s notion of a Courageous State.
For example, Britain was essentially very short of cash at the end of WWII but still managed to create the NHS which from day one has been undermined by certain political and economic doctrines. But it is still here. And there is a vestigial safety net of sorts left too. These were ‘courageous creations’ of the State.
The NHS was created because the State at the time decided to do it. And a wider ranged MMT could exist IF the State decided to do that as well.
What I find really interesting about the NHS is that it is widely appreciated by the public (although Tory moves to undermine it by underfunding it are having an effect on how it is perceived).
Despite the fact that it is appreciated, the public still does not really understand how it was created. We are still told NI pays for it (but there is debate there too and quite rightly) and that WE (NI and Tax payers) can’t afford it and the Government cannot print money to afford it.
It is these false and anti-statist narratives that are the equivalent of intellectual castration of the arguments for a courageous government and MMT.
This is why people don’t get it. I suppose that we just have to keep banging on and wait our chance – just like von Hayek, Freidman and Buchanan did.
You identify the key issue – the state deciding to use its power
We have lived for decades with politicians who will not do that
“You identify the key issue — the state deciding to use its power
We have lived for decades with politicians who will not do that”
Oh, but they are doing, Richard. They are using their power and understanding of the magic money tree to further their own rather limited agenda.
[…] February 25 2018 at 8:52 pm […]
@Charles
The New Deal of the 30’s was a form of job guarantee, and Argentina had a similar policy for a while a few years ago. Different circumstances to how it would be implemented in the UK in 2018 of course and every country would have its own nuances.
The UK issues its own currency, it spends money into existence, so by default its already doing the thing you’re asking, i.e. has it been done before ? Yes it has. The government however chooses to behave as if it’s not a world where money is keystroked into existence because it suits their narrative and policy agenda. They skew policy away from reality to suit their ideology. Whether you’re left or right, would it not make more sense to skew your ideology to suit reality ? And the reality is that MMT describes how a monetarily sovereign government operates in 2018.
There is no mystery at all.
“And the reality is that MMT describes how a monetarily sovereign government operates in 2018.
There is no mystery at all.”
Indeed anyone who thinks it can’t be done might take a moment to wonder where all the bank bailout money came from after the 2008 debacle.
It sure as hell wasn’t a bit of loose change down the back of the sofa.
Why it was possible to create magic money for the banks, financial sector and wealthy asset holders but not to do the things which wider society needs is a matter of political will masquerading as financial prudence and fraudulent ‘good stewardship’. And they are still getting away with it.
They might wonder too where the BofE got the money to buy all those First World War War bonds, the ones which enabled the war. In fact, it’s recently come to light the War bonds created from nothing by the government were paid for by money created from nothing by the BofE, enabling the ensuing massacre of the uneducated. There’s your real game of soldiers, eh!
Very true
Different aspects of policy proposals suggested by MMT analysis have certainly been tried. But it is imperative that all aspects of the model are taken into account. The Job Gty as part of a Full Employment Fiscal Policy takes a holistic view and presents a policy proposal which can be implemented in months not decades, given the right political leadership. The Hound bullet-points it for us: http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
[…] February 26 2018 at 5:09 am […]
Andy Crow. OK So Transition work should be paid – Fine. In an earlier reply I believe that Richard suggested that he had done what was effectively “charity” transition work, which I assumed to be unpaid.
But the difficulty may be that to be useful, the work has to give the worker satisfaction; he/she has to feel the value, has to have some dignity and to receive respect. Yes, of course all that may come below the need to put bread on the table.
I did no such thing!
I was referring to a year, a long time ago, in my career when I effectively had to tread water
You made the interpretation up
What role does offshoring of unpaid taxes play in MMT?
By avoiding repaying taxes to the government is money removed from the economy which will never reappear, thus the government’s debt will never be cancelled?
Let’s be clear
A) The government does not need tax to spend
B) Money does nit go offshore and disappear – if sterling is paid into a Channel Islands bank in the morning it is in London by the evening in thecsense that it is (to the extent it has an existence) in the head office Treasury acco7nt by night fall
C) the money does not leave the system then
D) there is no MMT issue as such
E) but the wrong person might have to pay tax if Tax is required to control inflation
F) social and economic injustice follow
But the money is not ‘lost’ because money is not a th8ng that sits in vaults, it is a r3cord in a ledger and it moves to a ledger where it is useable and that is never in a tax haven