There are some people who like to suggest that modern monetary theory (MMT) suggests that a government can create money without limit. They go on to say that this has always resulted in economic disaster. The words Zimbabwe and Weimar Republic are never far from their lips. The reality is, however, that MMT does not say that governments can create any amount of money they like without limit. What it does say are two things.
The first is that as a matter of fact all government spending is paid for out of money newly created for the purpose and that this is then cancelled by taxation. I would argue that this is simple fact.
And the second is that this money creation process can be undertaken until such time as real physical constraints are met in the economy, after which if it continues then inflation will follow.
Far from being a prescription for inflation creation then, MMT does in fact provide both a very precise description of when demand-pull inflation might be created in the economy by suggesting that money creation should be curtailed when there is no excess capacity in the economy (this constraint being applicable to both government and private bank created money) and it provides two mechanisms for addressing that inflation. One is to stop the money creation, either by limiting government spending in that situation, or by limiting bank lending. The other is to tax that inflation out of the system.
MMT is then the friend of those who would like to control inflation. Professor Stephanie Kelton explains this very succinctly here, making clear in the process that it is not the availability of money that constrains a government from fulfilling its plan: its whether or not they can actually be delivered on the ground that does that. But what is never true is that MMT is a prescription for inflation: indeed, it could be entirely reasonably argued that it provides the best mechanism for controlling inflation that we now know of given that monetary policy is now almost wholly ineffective given that real rates are at or close to zero.
https://youtu.be/ja_qHRvZNRU
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[…] In 2015 Jeremy Corbyn adopted the policy of People's Quantitative Easing when seeking to be leader of the Labour Party. He borrowed the idea from me. Since being elected he and John McDonnell have little used the idea. This is hard to understand since it was probably the most distinctive part of his whole economic appeal in 2015, letting him suggest that the funding to build the new infrastructure this country required would always be available if the physical resources to deliver it on the ground existed. […]
Could it possibly be that public discourse has been so poisoned by the household budget nonsense that to talk about People’s QE would create an unnecessary furore in the right wing press and media, which we could do without? This is a purely political consideration.
On the other hand, perhaps, at some point political courage demands a willingness to enter battle over this.
I should have said ” do without at this particular time”.
possibly some donors have threatened to withdraw support. The belief that money is limited gives power to those who have most of it.
Whilst completely accepting the functioning of a fiat currency and accepting that ultimately there is no credit risk of a nation with a fiat currency there are massive constraints. Not least that it gives too much control to the state. People vote and elect but do not trust. Certainly with a Labour Government too many promises would lead to much higher taxes (when taxes are high already). The biggest constraint is FX and our inelastic demand for energy in particular. As unwieldy and inappropriate as they may seem the present system presents checks and balances to constrain Governmental power. It has been said you have to trust democracy and we do but only up to a point and certainly sufficiently to allow the power you suggest.
But the state has this control
Who else do you want to use it if not the state?
And why would this lead to higher taxes? They would only happen if there was a) growth or b) inflation
The former would be good, surely?
And what’s the FX issue? If we have a stronger economy with higher per capita income you say we will have an FC crisis? Why, exactly?
There is no logic to what you are saying – but a mighty lot of prejudice
Jason says: “(when taxes are high already).”
Income? Corporate? VAT/Sales? Compared to whom? https://en.wikipedia.org/wiki/List_of_countries_by_tax_rates.
Have MMT proponents ever set out which taxes would be used for controlling inflation, and how to deal with the time lag between a tax being introduced and money being taken out of the economy?
What taxes would you like to be used?
VAT is quick
Others have delays
So too do interest rates – they are also heavily lagged
And inflation rarely creeps up on us
This seems quite important to me. VAT would certainly be effective at controlling inflation, but is regressive. On the other hand, given that the wealthy have a marginal propensity to save, not consume, taxes on the wealthy are unlikely to be effectively deflationary.
Have MMT proponents written on this or, better still, done any modelling? I haven’t seen anything in the literature.
You might read The Joy of Tax….
We have inflation as it stands and we have high taxes. Your / the states pursuit of “full employment” would cause both to rise further
We have quite low overall tax rates
And we have very low inflation
Why make things up?
With respect, Richard, I mean a formal analysis (ideally with modelling) – not a popular treatment. Is there anything out there?
And what do you think such an analysis might show?
Your request is illogical
You clearly do not understand the reason for choosing taxes at a point of time are largely social
Any tax does for MMT purposes so secondary factors will always what actually decides it and that will depend on other priorities
As I explain in The Joy of Tax, rather clearly
I think your definition of precise leaves a lot to be desired. How EXACTLY are you going to measure the “real physical constraints are met in the economy”. What parameters are you going to use and how are you going to measure them.
Then of course, there is the small detail that inflation can be independent of “physical constraints in the economy” such as in stagflation, and more importantly inflation is likely to start picking up well before an economy is at full capacity. It’s not an on/off swtich as MMTers like to claim.
Then you need to tell us precisely how you are going to control inflation with MMT. The measures and the exact mechanism. MMTers need to tell us exactly how much the government will need to cut spending or raise taxes to control a given level of inflation. This is something MMTers seem rather unwilling to discuss – because they don’t have a real model to describe inflation and therefore no model when it comes to controlling it.
MMters have always relied on the “inflation won’t happen till he economy is at full capacity” argument, followed quickly by implicitly accepting the economy will never be at full capacity. So inflation will never happen and the lack of MMTs ability to control it will never become a problem.
Stephanie Kelton just goes over the same old tropes as well. She doesn’t explain anything in any detail other than saying, once again, that inflation won’t happen if the economy isn’t at full capacity. You saying:
“But what is never true is that MMT is a prescription for inflation: indeed, it could be entirely reasonably argued that it provides the best mechanism for controlling inflation that we now know of given that monetary policy is now almost wholly ineffective given that real rates are at or close to zero.”
is pure unadulterated nonsense. MMTs big risk is inflation, as government prints too much money and overheats the economy. Nor has MMT evre given us any indication that it could control inflation, other than unworked claims. Nor has MMT ever been tested in the real world, so the claims made are claims alone. Unless you count the government who have tried to print M0 money as MMT suggests (hint: always a failure). And claiming that monetary policy is ineffective is also a wild claim, given the FED, ECB and BoE have all said monetary policy is still effective. I’d go with them over you, thanks.
MMT is a “theory” for a minority of left-wing economists who just use it as a base for unlimited public spending. Which of course appeals to the big government left. What they fail to mention, or try and obscure, are the massive holes in the theory and the very large, very real downsides of doing what the are saying.
Try full productive employment as a measure of capacity
And now tell me how you are going to tackle inflation
And also explain how you think money works
Oh, and how monetary policy works at the zero bound
Because all you are writing is economic gibberish without foundation
Paul, Your’e asking for precision from MMTheorists when none is required from classical economists. “MMTers need to tell us exactly how much the government will need to cut spending or raise taxes to control a given level of inflation.”
But currently nobody complains that the private banks create as much money as they wish without ever even thinking about inflation. So what is alright for private banks, accountable to noone except possibly their shareholders is fine, but is an absolute nono for an elected government accountable to us all.
Why the double standards?
Quite so Peter
Richard
Please define “Full productive employment” and tell me exactly how you are going to measure it. Then please tell me at what level you would stop and then reverse MMT printed money spending.
This is exactly the problem MMTers have – they are reluctant, unwilling or unable to define the terms of MMT based money printing. They just let people think it can go on and one with no negative consequences – so hey presto people get everything they want for free, without ever having to pay for it.
Monetary policy is currently being used to control inflation – the FED is busy raising rates to head off higher inflation in the longer term.
The zero bound of monetary policy isn’t as zero as you make out. Rates can go negative (like they have in Switzerland, Denmark, Sweden on, and Europe). There is also QE, which lowers long term interest rates – though I am sure you are now going to say QE and MMT spending are exactly the same thing (hint: they’re not).
I think it is pretty desperate to call what I have written as “without foundation” when MMT itself is very much a fringe “theory” and you and other MMTers are unable to provide any clarity on the quantitative relationships a theory needs to actually give it some basis in reality.
You have provided no description how MMT would control inflation other than saying it somehow would and at the same time it would also be the best way of doing it – according to the title of the article. Kelton, Mitchell, Wray et al also haven’t done so. If the biggest proponents of the theory can’t give us at least a basic quantitative model for inflation than why should anyone take it’s claims seriously?
Peter
Classical economics as you call it has various quantitative treatments of inflation. It is wholly wrong to say that no precision is required from them. They are not perfect, but at least there are models which can be tested and back-tested against the real world.
MMT provides no such thing. It relies on the idea that inflation simply won’t happen until the economy is at full capacity.
Which is nonsense.
Your statement about private banks is also not true, I’m afraid.
Apart from private banks creating credit, not money, there are heavy restrictions placed on them in terms of reserve requirements and other financial ratio requirements, liquidity buffers etc. All spelled out under Basel 2/3 which limit how much credit a bank can create. So they are accountable to regulators and central banks.
Central banks also take careful consideration of the broad money supply. Too much growth tends to lead to inflation and an overheating economy, for example. it is one on the main indicators interest rate decisions are based on.
I think though you don’t see the difference between the base and broad money supplies.
Would you say that private banks creating credit make “us” richer, by the amount of credit created? My guess is probably not – because that credit has associated debit against it.
But then in the very next breath you agree with Murphy that the government can print money, and like magic we WILL all be richer, by the amount the government prints.
It honestly defies logic. Both the theory and the idea that people can believe in it. It’s a fantasy.
You want a number?
Let’s say 4%
That’s as good as 2% inflation for monetary policy – although it may generate 3%
There you are: done
As for the rest – it’s not worth commenting on: the central bankers know they have run out of road so why pretend otherwise?
And on banking – that’s the evidence that MMT works, not that it does not: that regulation exists because MMT describes what happens
And no one says money creation makes us richer – we say full employment does
But that’s not what you want and you call it left wing to do so
I don’t
Now stop wasting my time – because you are not presenting arguments
Picking a number out of the air is not a quantitative description of inflation. It is a target.
I would hope you understand the difference. I asked you to provide a description of what would happen to inflation given increased MMT spending, but you seem only capable of picking your favourite number, and incapable of understanding the basic problem I and others have asked of MMT.
The important bit is how you manage inflation to remain roughly at that target. MMT has no such model to do so. It’s argument is that there will be little or no inflation before the economy is at full capacity, and then an unknown amount after as a step-change. Treating inflation like a Heaviside function by definition will also lead to massive instability in inflation, and most likely the underlying economy because of it.
Central banks spend huge amounts of time and resources working out what effect different inputs have on inflation, and have highly defined models for it. Their models might not be perfect but on the whole they are sound enough. it certainly doesn’t look from where anyone in the real world is standing that central banks have run out of road either.
You and the rest of the MMT crowd have failed to provide any evidence for MMT, other than unbacked, untested claims. There are no quantitative models. None. So how can you claim that it works? it literally has never been tested. I’m not sure where your claim that MMT works in banking comes from, but I would love for you to give me a source which doesn’t come from one of the MMT set.
I can agree that full employment makes us richer. But you are saying the only way to get there is near unlimited money creation. Because MMT.
What really takes the cake though is that you are categorically denying that there might be any risks associated with what is an untested, untried theory, with no quantitative model behind it, and then are trying to sell it to the less informed (which I am starting to think you might well be one of, given your lack of ability to respond to serious questions with anything but bluster and arrogance) as a cure-all for unlimited public services, unlimited government spending with no risks or downsides.
MMT is a fraudulent panacea, and it’s peddlers should be ashamed of the deception they are trying to make.
MMT is simply Keynesianism for the fiat money era
What offends you is it says markets fail
The reality is Keynes was right: they do
Now we need to address that failure. An£ what you have to justify is why you don’t want that to happen.
That’s The big myth you are hiding. We know it can be done and 3xolain how. You say no even though it’s possible.
Please say why?
An£ don’t say it won’t work they said that of Keynes too until we got to fiat money. Now we have solved that.
Paul,
You’re deliberately creating a straw-man.
MMT is not a set of policies that are untested in the real world. It’s just an accurate description of what is right now.
MMT observed that sovereign currency issuing governments create money out of thin air every time they spend and banks create money out of thin air every time they lend. Both do so by a process which is essentially the same as when I offer an IOU to a friend.
Adam,
Plenty of people realised that money can be created out of thin air well before the MMT crowd “discovered” it.
MMT also is not an accurate description of what goes on now. It just takes some accounting identities and rearranges them into vertical transactions. Nothing new to see here – not least because MMT itself is a rehash of older theories.
Of course, if MMT could tell us how the world really worked, and put some numbers behind it, then its proponents would have done so by now.
I guess, by the conspicuous absence of such mathematical models, data, backtests, studies, etc, that MMT night not be as solid as people like you make out.
Go and read Stephanie Kenton and stop talking nonsense
I have read many of Kelton, Wray, Mitchell, et al’s papers. I’m guessing you haven’t read many, otherwise you would probably be able to answer some questions about MMT rather than regurgitating lines from basic MMT blogs.
I am still to find a quantitative or empirical treatment of MMT.
Being an economic expert, I am sure you could provide one yourself, or a link to a paper, or something? Surely?
I mean something with equations, numbers and statistical tests on them, rather than just waffle.
I have told you where to look already
It’s boring to be trolled twice on the same issue
Which is why I will be deleting your other trolling comments
Thanks for this Richard.
Also worth mentioning that MMT economists propose a government jobs guarantee (JG). You don’t have to agree that a JG should be implemented to accept that it shows MMT economists presebt a more nuanced combination of descriptive theory and practical policy prescription than is commonly believed.
MMT economists believe JG has the potential to be a much more effective inflation anchor than the current system of structural unemployment combined with out-of-work benefits.
They believe JG would reduce the risk of a wage/price spiral developing over the existing system because JG workers will be much more employable than the current long-term unemployed and thus present a more credible threat to private/public sector workers who would otherwise be tempted to demand higher wages in boom times.
JG also reduces inflation risk because JG workers will add to total economic output while the currently unemployed do not.
[…] This is about modern monetary theory. Much of which is actually right in its basic ideas, it’s the application to the real world that doesn’t work. So, here’s Murphy: […]
The Continental Telegraph article doesn’t seem to have elicited a response from Richard Murphy. Why? Having read it it appears to say that MMT won’t work because the author thinks it won’t work. I’d like to see RM’s comments, however.
It’s all down to time
I have a day job and right now a lot of quite stressed students….
Income tax + NI+ council tax + vat and other misc taxes … you think taxes attributed to the individual are low?
I said we have inflation, it is 3% I have not made that up. I said it would go higher adopting more state spending from here which it would
Inflation is falling
It was Brexit driven
And yes, taxes are low: very low for the services supplied and especially so for the well off and companies
Inflation is falling
Except it isn’t. It has been rising since 2015.
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23
The expectation is a fall
Expectations are what matter on this issue
Not sure where you are getting evidence for your claim.
The expectation from the BoE is that CPI will be above the 2% level till the end of their forecast period (2021). Markets are pricing CPI even higher than that till the end of that period.
https://www.bankofengland.co.uk/-/media/boe/files/inflation-report/2018/february/inflation-report-february-2018.pdf
The above link is the Feb BoE inflation report. It is well worth a read for anyone here to see what kind of analysis central banks go through when looking at inflation and making interest rate decisions. The models behind the output data are even more vast – but at least they have data and models, when MMT seems to make do without.
It’s also worth pointing out this statement from the report:
“Unemployment remains at historically low levels and the MPC judges that very little slack remains in the economy. Notwithstanding a projected rise in structural productivity growth, potential supply growth is expected to be subdued. As a result, the pace at which output can grow without generating inflationary pressures is likely to remain modest.”
So if there is little slack in the economy, why do we need massive new MMT based spending, which will generate inflation and then need to be reversed through cuts or tax rises?
Is it because MMTers simply are people who shout for more government spending at every available opportunity, seeing it as a universal good?
Some of us do not believe this data
The BoE has a poor record
A) Infltion is declining because the impact of Brexit is wholly predictably departing the system
B) Barring war there is no other inflationary pressure around
C) I think nominal employment is meaningless – as Danny Blanchflower there is vast under utilisation of capacity because of disguised unemployment which much of current self employment is.
Why do MMT? The market is not addressing chronic poor productivity in the U.K. or major social need. The government could. I want those issues addressed. I know they can be. You want to perpetuate inequality by maintaining the status quo. That’s what this is really about. I know which side will win in the end.
The problem with Hayekian types like Tim Worstall is that their only solution is there is no solution. The market has to be left to its own devices and if it goes wrong or only provides for a wealthy few then we all have to put up with it.
Whilst it is true that a state would find it difficult to allocate resources by a centrally planned system the state can set out what it wants to achieve and how it intends to set about doing it. So if the state chooses to provide a decent education for everyone rather than a market driven one which provides solely for those with wealth then that can be its ambition. Similarly with healthcare, food standards, employment rights, financial regulation etc etc. Like it or not there will be state intervention.
Now people are free to believe that unfettered capitalism and free markets have been the source of everyone’s increased well being if they like but two world wars (economy largely managed by the state) the rise in workers representation from the 1920’s on wards (now in decline) and Keynesian economic ideas did much to curb the excesses of unmanaged markets and ensure that more than a privileged few shared in the economic output to which they contributed.
People need to be less fixated on money as a thing and focus on what makes a nation productive. That is the amount of productive labour available, the technology available and to a lesser extent natural resources. If we as a nation need to import labour to run our health service then we should do it and government can provide the means to do this without causing large amounts of inflation. If we need to import labour to build houses or infra structure then government can provide the funds to do so. Unfortunately we have embarked on a policy to restrict immigration which if successful will push up wages and as a consequence produce inflation without gaining any increase in output. Now that is a dumb policy if ever there was one.
I largely agree with you Simon. The issue in a nutshell is that government isn’t creating enough money right now to do the things that we know as a society need doing whether that’s repairing our roads ( which are in a dreadful state ) , or proving more funding for the NHS, or anything else. And the ideology behind this is encapsulated in the trope ‘ tax and spend ‘ and, leaving all MMT arguments aside for one second, why this is ideological is because that is not what happens . If war broke out tomorrow could anyone imagine any politician coming out and saying ‘ we need to see if we can afford to fight first ‘ . Of course not , so why do we think that’s how it works for other government expenditure. I’ve thought long and hard about this because there are collective deep seated psychological forces at work here and as has been shown on this blog many times even with clear and precise explanations the message struggles to be heard. I have reached the provisional conclusion that it hinges on scarcity and the ( common sense ) notion that money is always and everywhere scarce. To upend ‘ tax and spend ‘ and replace it with ‘ spend and tax ‘ for the vast majority of people is like saying here’s a credit card without a limit. But again that is not how it works . How it works is a matter of policy . Austerity as a policy in a rich western country like the UK which is not at war has far reaching and damaging consequences reaching which the public have now realised from their own day to day experience of public services of one sort or another. ‘ Tax and spend ‘ let’s policymakers off the hook every time because the old response to the question to the politician ‘ what are you going to do about such and such ‘ is ‘ where’s the money going to come from ‘ . If we understand that government ‘ spends and taxes ‘ that response is not permissible because we know that any and every decision by government to spend is a matter of policy first and foremost . So for the sake of what is left of our democracy we need this radical change so that we can move beyond this stultifying climate of fear that there isn’t enough money .
Agreed
Yes, it is arguably the most important single message required at this time in order that any long-term structural socio-economic progress can be achieved. So it’s worth raising time and time again, as Richard and others do with inordinate patience.
I know it’s been referred to before (probably several times) but Neil Wilson’s Credit Card analogy may offer a platform for explaining how it works that some members of the public might understand easier – https://medium.com/modern-money-matters/how-the-governments-super-platinum-credit-card-works-45894046ef1c.
That is a good one from Neil