Modern monetary theory (MMT) is certainly getting it in the neck right now. Two articles I noticed this week were direct attacks in it. And bizarrely, they come from the left and right.
That said, they have things in common. First, they agree that MMT is right: neither can deny that what MMT says is an accurate description of how the economy works. Second, they do not like the implications of that truth. Third, to achieve their goal they do, of course, misrepresent what MMT is about.
The first of the articles is by Ian Stewart, Deloitte's Chief Economist in the UK. It is described as a personal view. The second is by James Meadway who was, for a while, economics adviser to John McDonnell but who has now left that job to write a book in Corbynomics.
Stewart provides a summary of his view of MMT in his piece and concludes:
[It's] worth noting that both MMT and QE involve the government creating money electronically — or, more graphically though incorrectly, printing it. But with QE a central bank creates money to buy assets, such as government bonds. This injection of new money into the system drives down interest rates and bolsters asset prices. Under MMT, by contrast, the government spends the money directly on public services.
In that one paragraph he does two things. He agrees QE works. Money can be created by governments at will. That means a government issuing debt in its own currency cannot go bankrupt. And since government debt is simply a by-product of government spending not funded by taxation, government created money can fund public services. Everything he seeks to portray as fantastic (in the sense of ridiculous) about MMT is then, in his own analysis, true.
James Meadway, writing for Tribune under the title ‘Against MMT' agrees with Stewart, albeit unwittingly. He says:
There is a sliver of truth here [i.e. in MMT]. As a technical detail, modern governments do not have to collect taxes before they can spend: they can also borrow the money, or create and spend that money directly. On a day-to-day basis, these three things can (and often do) all happen at once.
So, rather as Martin Wolf did about a week ago, here we have opponents of MMT agreeing it is a fully functioning description of how the world really works. For that, I offer them my thanks. But, like Wolf, they then suggest they do not like MMT because of what they claim it means for political policy, and not because it is not true. This moves the whole debate into political arenas.
For Stewart the objections are twofold. The first is that:
[There's] one crucial difference [between quantitative easing and MMT][, and from it a second follows. With QE, as practised in the US and Europe, central banks have promised to reverse money creation. They can do so because, unlike under MMT, the money that has been created has been swapped for assets which can be sold. The idea is that central banks will, in time, sell these assets, withdrawing money from the system and dampening asset prices and activity. This has so far convinced investors that the new money created will eventually be absorbed back into the system. The message from central banks is that QE does not represent a permanent expansion in the supply of dollars, euros and pounds. By contrast, the money created under MMT will be spent on public services and not in purchasing assets. And, since there are no assets to sell in future, the money creation is permanent.
It's as if Stewart is saying QE works because we still believe in fairies, but MMT does not work because we don't. Because let's be clear that around the world more than $6 trillion has now been injected into economies by QE, and in the UK it's £435 billion, and to pretend for a moment that most, or even very much at all, of this is going to be reversed is to live in fantasy land. It's true, a little has been in the US. But that was only possible to reverse the dire impact of Trump's tax cut that would otherwise have flooded money into markets, which has been mopped up by reselling back into the markets bonds previously owned by the QE programme. And that process is likely to be coming to an end. In the rest of the world nothing like that has happened, and nor is it going to do so. QE is not being reversed, and never will be so Stewart's claim is literally fantastical and has to be dismissed as such.
But he has another:
A related concern is that government, with its infinite spending power, could hoover up people and resources and crowd out the private sector. This would reduce the tax take and could tempt the government to print more money to fill the gap.
More fundamentally, the state could end up with a far greater role in allocating capital in the economy. The market has flaws and limitations. But it tends to be better at allocating capital and raising efficiency than the government. A worry, therefore, is that MMT could enfeeble the private sector.
I think this is what he really thinks: this is where the objection lies. And it is just wrong. First, we live in a world where most larger businesses have what is in effect a zero cost of capital right now: they can borrow for near enough nothing. If, given that, they do not drive the economy to full employment at a living wage by forcing up the price of labour - and they have spectacularly failed to do so - then there is no risk whatsoever that they will be crowded out of the economy by the state. The fact is that the state has to pick up the slack they have created. And as MMT makes clear, what a government must do must be chosen to make sure that activities by the state can be 'turned off' if full employment is reached - which is also the moment when the private sector may be crowded out. In other words, not only has MMT got no plans to sweep the private sector aside, it has a plan in place to make sure it does not.
But in the meantime it will, indeed, allocate capital. Because the evidence is - read The Entrepreneurial State by Mariana Mazzucato - that it is really good at doing so. And at last as good as the banks who crashed the economy in 2008. The state will not enfeeble the private sector. That's already feeble. What it will do is provide it with the contracts and work it needs to survive because it can't think of what to do for itself. Stewart does complain too much, and with deeply feeble arguments, including this classic:
For centuries governments have taxed, borrowed or created money to pay for public spending. All carry risks. Heavy taxes dampen growth and upset voters. Excessive public borrowing triggers financial crises. Printing money to pay for public spending can look tempting. But, as rulers from Henry VIII to Venezuela's Nicolás Maduro have discovered, creating money out of thin air and spending it tends to destroy confidence and send inflation rocketing.
There's just one problem: Henry VIII was not using a fiat currency and Venezuela was running a currency perpetually undermined by the dollar: it was nowhere near the scenario where MMT might work in that case. But telling tall stories is where the opponents of MMT now are.
Which brings me to James Meadway. James's argument is more considered, but is again about the politics he considers associated with MMT rather than MMT itself. If I might let me select just some of the arguments he uses and address them. The first is his argument with chartalism which is implicit in MMT. He says:
Chartalism holds that money receives its value fundamentally as a result of its use to pay taxes – that, in the words of leading chartalist Georg Knapp, ‘money is a creature of law'. This is dubious as a historical claim, since money has existed in many different forms throughout history, and only some of those forms have arrived with the stamp of the state – and dubious as a description of reality today, since most money is created by private banks when people take out loans, whose relationship to the state is (at most) indirect.
This, I am afraid is just wrong. Let's ignore history: the money to which James refers was not fiat currency, and that is what we have now. The comparison then is, to be candid, bogus. But James is also wrong about most money now being made by banks: this is the Positive Money argument that just 3% of money is government made - and is notes and coin - and the rest is bank made. This, again, is superficial at best. Firstly this assumes anyone can create a bank, and they cannot: all banking is under government licence. And second this assumes that central banks have no influence over what banks might do, which they have, albeit they exercised it very poorly for the first decade or so of central bank independence. The reality is that private banks create money - that is government backed money given its value by the promise that the government gives to accept it in payment of taxes - but do so solely because they are given a government licence to undertake this activity and take credit risk when doing so. In principle the Bank of England could take on that role, although I would not want it to do so. But to claim that the central bank has no role in money creation when it is very obvious that it does - as QE evidences - is just wrong.
I then move to James' claim that:
[I]t is worth keeping in mind … MMT's greatest theoretical failing – to provide any account of power and the state, or even (like neoclassical economics) to provide a reason why it doesn't need one.
This is interesting at a number of levels. Firstly, because neoliberalism quite clearly does not say we do not need a state: it is core to that idea that government has the essential task of preserving property rights. Second, you can argue what Keynesianism in its various guises has to say on this issue. I suspect there are about as many answers as there are Keynesians. And third, I think the claim is wrong. What MMT is effectively saying, as Weber might, is that the values projected onto the state (as Keynesians would do) are in effect what the state is: it is the tool for realising values and has value so long as it continues to secure support from the population at large for the values it believes appropriate to adopt based upon its understanding of the population it serves. The power of the state is, then, reflected in its ability to read the collective will and to seek participation in it, indicated by the willingness of the population to accept the obligation to pay tax. And since tax is at the core of MMT, despite all claims to the contrary, I believe James' claim is wrong, again.
So let's deal with another objection. It is this:
Unfortunately, what holds as a technical description of how governments pay for their daily operations does not apply over the longer term. The grave danger from issuing money, in particular, is that it will lead to a general rise in prices, known as inflation, something readily acknowledged by academic MMT supporters. They often argue that governments should use taxes to deal with this problem: taxes take money out of wider circulation, and by reducing the amount of money chasing goods and services, you reduce the pressure on prices.
In this scenario, far from the transformative claims made by its online fans, we have ended up in a place remarkably similar to the hated mainstream of economics. Mainstream economics also acknowledges that inflation is an issue, but instead of saying taxes should be used to control it, its adherents, known as neoclassical economists, propose interest rates as a remedy. When these go up, it becomes more expensive to borrow, people borrow less, and this in turn reduces the amount of money in circulation – so the theory goes. But as two left-wing economists sympathetic to MMT, Arjun Jayadev, and J. W. Mason, have recently argued, this means that the only meaningful difference in policy terms between MMT and the mainstream on the central issue of managing inflation is whether the government should use taxes or interest rates.
Except that is absurd. That assumes that the main object of all economics is to control inflation to maintain the value of money so that the value of the claims of the world's assets owners, to whom debt is owed, are upheld consistently. I sincerely hope left-wing economists do not think that. I hope James does not. But that is what he implies.
Let's be clear what the difference really is. Neoclassical economics does think that controlling inflation is what economics is about. This is why it promotes independent central banks. This is why it tolerates growing wealth inequality. This is why it has no employment target. And stagnant real wage growth is fine as far as it is concerned.
But to pretend that MMT shares these views is just wrong. I'd hope I could say that for all on the left, who I rather hope should think inflation is acceptable, to some degree, not least to erode the claims of the owners of debt precisely so that inequality is reduced, but also because the issue is secondary to the creation of long term, meaningful, productive well-paid employment which is the goal of MMT, hence the job guarantee. And it should (subject to other resource constraints which redefine these relationships but do not remove them) also be the goal of MMT when mixed with the Green New Deal. That does not mean MMT is indifferent to inflation. And rather usefully - when monetary policy is dead in the water because of zero-bound interest rates that are likely to last for the foreseeable future, where that is a very long time - it has an inflation control policy that can work when nothing else can or will. But let's not say that makes it the same as neoclassical economics. It is not. James is wrong to suggest that it is.
And it's absurd to suggest that MMT cannot work in an economy because governments wanting re-election cannot increase tax rates, as James also claims. If that's a measure of the left's commitment to a) democracy and b) honesty with the electorate and c) conviction based economic management, heaven help us, most especially when we have the bigger issue of climate change to also deal with, which is much harder to address.
And as for the claim that MMT only works for the US and the dollar, again, that's just James and the left saying that the bond vigilantes really do rule our economy and we'll never break them. What faith James has in the power of markets to break democracy! But he's wrong: that power exists for a few days at a time, but not beyond. That's largely because MMT removes bond vigilantes' power by simply saying that if they try to disrupt markets the central bank will buy all the bonds they wish to sell using QE funds created for the purpose - which on this occasion may be quite quickly reversed, I admit. That neuters the threat from the bond vigilantes then. And then that means that real exchange rates will only move on the basis of external shocks (like Brexit, or oil price variation, and MMT cannot control them come what may) or on the basis of real variations in productivity - which MMT seeks to address like no other theory does. Again, James is wrong.
So what is James Meadway really objecting to? What is all this really about? I'd suggest it's this:
Labour has adopted a strict set of rules for how a future government will manage its finances. The ‘Fiscal Credibility Rule' says, first, that Labour will commit to removing the deficit on day-to-day government spending at the end of a five-year period.
I hate to say it, but the objection is that Labour thinks it needs balanced budgets. It does not. We know the result is austerity. But Labour can't countenance anything else. As James says:
Leading MMT advocates like Richard Murphy ask why bother with a rule at all? There are three main reasons. First, a commitment to the Fiscal Credibility Rule allows Labour to put together a coalition of support for its programme from across the economics profession. The party can't expect every economist to agree with every dot and comma, but the impact of having well-respected experts onside for at least some of that programme is significant. If we want to not only form a government, but make a difference in government, these alliances are essential.
In other words, having neoliberals onside is important. And is achieved by being neoliberal.
The second argument is no better:
The second reason is that clarity and planning help cut through some of the more obvious challenges to Labour's programme – from journalists demanding to know Labour's plans for the debt and the deficit, and then, later on, as a guide for civil servants expected to implement its policies.
In other words, Labour cannot be bothered to do the hard work of re-education to deliver what the country needs. Which is deeply depressing. But not as desperate as this, from his conclusion:
The problem with MMT for a genuinely transformational government is not that it is too radical. Quite the opposite: it is nowhere near radical enough. It substitutes a belief in the unlimited capacity of a sovereign government to spend money for the hard reality of the political fight needed to rebuild and transform our society. It is the expression of a deeply conservative faith in the benign nature of our economic institutions. In an increasingly class-divided society, with institutions from the Treasury to the Bank of England to the City that have failed systematically to deal with crisis after crisis, we cannot simply flush away our social problems on a tide of government-printed money.
I am really struggling here. What MMT says is that there need not be a fight for the resources to deliver transformation: they exist. The need is not to have the struggle, but to deliver the outcome. That's what MMT permits. The demand then is not to campaign, but to do. But apparently that's too easy for James, for whom the struggle is everything.
And yes, I do have a belief in the benign nature of government. Shouldn't the left do so? I accept it can be corrupted but to think the government can be a force for good seems to me to be a left-wing basic. James denies it. And so I am lost as to what he is all about. And most certainly as to what his unspecified theory of government might be.
The simple fact is MMT delivers a government the chance to be free of the bogus constraints neoclassical thinking places on it. James would rather continue the 'struggle' to be free within the neoclassical model he believes in rather than deliver the reform we need. He makes the wrong choice whenever he's given the chance to do so. And I confess, why he wants to do so baffles me.
We need people who can think for a new paradigm. Ian Stewart and James Meadway are not it.
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Richard
You’re right, this is profoundly depressing. How restrained of the Deloitte guy not to mention the ghosts of Weimar and Zimbabwe while he was at it. The scaremongers usually do.
But as predictable as the attack was from the right, the attack from the left is much more depressing. Essentially he is saying that, to try to get elected, Labour will peddle the essence of neoliberal flat earth economic orthodoxy. But they will presumably do so in a more caring way than the Nasty Party. Seriously…
Jonathon Reynolds, Labour Shadow Economic Secretary to the Treasury has a piece on labourlist.org attacking MMT. Suggests it will lead to greater austerity than under the Coalition. Also describes it as popular only because it seems to offer a glib magical silver bullet.
https://labourlist.org/2019/06/why-labour-doesnt-support-modern-monetary-theory/
I will be replying sometime today – even though I am on holiday
“we cannot simply flush away our social problems on a tide of government-printed money.”
Saying as someone who opposes government spending and has right-wing libertarian views, what does this mean? All government spending works via crediting bank accounts (putting numbers in accounts up and down) and creates an amount of tax and savings. VAT and other government taxes as cashback, no saving get all the money back as tax regardless of who spends it. Net savings desires cause the deficit.
As this Bank of England paper from 2014 shows, loans create deposits and there is no hyperinflationary effect of ‘high powered money’ by giving banks reserves to lend:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
The reality of how money is created today differs from thedescription found in some economics textbooks:
– Rather than banks receiving deposits when householdssave and then lending them out, bank lending createsdeposits.
– In normal times, the central bank does not fix the amountof money in circulation, nor is central bank money‘multiplied up’ into more loans and deposits
I am very right wing and even support privatization of the NHS and the only government spending on police and courts. A minarchist. Fair taxation system. I support a 100% land/location value tax (LVT) is a levy on the unimproved value of land to replace all taxes. It disregards the value of buildings and other improvements to real estate, just “location, location, location” value. The remainder of the revenues, plus a deficit of so many %, is redistributed as basic income.
Well said.
The Labour Party needs to be rebranded as the ‘The Timid Party’.
And as for markets being a more efficient at allocating resources……………good grief!!!!! Who caused all those crashes? What about the perils of free enterprise? So no private sector company has ever made a mistake? Bollocks.
And isn’t the use of MMT about being optimal? In other words there is a point where you stop because you can see the gains (employment, economic output) and you have an economic cooling mechanism (tax)? MMT is not ‘infinite’ – never ending – because it has an objective – like all policy. Jesus wept!!
This smacks to me of the confusion we are seeing in wider society about the causal factors about a whole host of problems.
When organs of opinion give vent to poor writing like this, you know you are dealing with some deeply ingrained problems. James once again attacks the institutions in a way von Hayek would be proud but fails to see that it is the political creed (Neo-liberalism) that is the cause of the problem.
If you get the chance to write a reposte with your colleagues, please do so. James’ reasoning is just so weak and frankly gutless. Hell!! How do these people get on?
@ Pilgrim Slight Return
Here’s Peter May’s laudable riposte, from Progressive Pulse
http://www.progressivepulse.org/economics/a-reply-to-tribunes-against-mmt
And here’s another article that proves my contention that all would-be MP’s should have to pass an exam in how money and Government finances work.
https://labourlist.org/2019/06/why-labour-doesnt-support-modern-monetary-theory/
Thanks Andrew
I agree re Peter’s version, which he shared with me last night
I think we’re a good double act
“These people” get on by being terrified of the mass media such as being damned by the Daily Mail et al or roasted in interviews with Andrew Neil. Therefore they are forced to follow the neoliberal political line and cannot think outside the mainstream economic orthodoxy box. But as Richard points out their arguments are easily flawed and MMT and alternative economic ideas are being aired a bit more now (we hope!)
I don’t know if it’s amusing or depressing that MMT suffers from language in the way it does.
Firstly, by calling it a “theory”, it leaves the door wide open for critics to rubbish it. It isn’t a theory – it describes the Way Things Are.
Secondly, there’s a conflation between the mechanism of money creation (which is unambiguously functional) and the policy of application (i.e. Job Guarantee, UBI and so on). Whilst there is this link (which exists purely in the name MMT), people who oppose UBI or Job Guarantee or any other initiative proposed by “MMTers” can be used to dismiss the whole kit and caboodle.
To my mind, MMT provides a fairly basic structure of how money is created and how the economy is fed and maintained. I like to think of the economy as a bathtub. Taps fill the tub, representing money being pumped into the economy by government spending. The drain empties the tub, representing tax and/or QE that will never be reversed and/or borrowing through bond issue. Everything sloshes along just fine in the bathtub of the economy… we can turn the taps on or off as needed, or we can increase/decrease the rate of drainage as needed… and by “as needed”, I mean we use those measures to stop the water spilling out over the top of the tub – because that represents inflation.
If we accept that analogy – and I make no apologies for its simplicity – then all that is left to argue about is the capacity of the bathtub. How much can it safely hold at any given time and how do we measure that? Bearing in mind that it can’t be filled right to the top… that leave no room for dealing with sloshing around caused by external factors (FOREX and whatever)… how much more can be poured into the tub before the risk of spillover becomes too great?
That’s what we need to be focussing on. Everyone (with varying levels of comfort) accepts that MMT describes where money comes from. That needs to be put to one side whilst we concentrate on what slack there is in the economy. Only once we’ve got a consensus on that can we begin to discuss which policy measures are most effective for a fairer distribution of resources in the world.
Of course, there’s another area where the mechanistic side of MMT does has massive political impact, even though neo-liberals argue that it’s just semantics. That is to put to bed once and for all the idea that governments have to go looking for taxes to fund spending. I agree there’s a link – taxes inform (and really rather profoundly inform) decisions on safe levels of government spending; tax is the drain to the economic bathtub after all. But a sovereign state with it’s own fiat currency that isn’t pegged to anything else doesn’t need to tax before it spends. Given the relationship between taxation and wise, safe spending decisions, is that purely semantics? The jury is out until we know what capacity there is in the economy. BUT… what cannot be denied is that this simple acceptance of the truth of government spending means that Austerity is laid bare as an ideological, political choice. NOT a necessity. We’ve been lied to, again. People need to know that.
Your point is sound
Let’s stop arguing about MMT as a description of what happens – it’s right
Now let’s discuss how to make it work
Ample room for discussion there
A very good analysis of two articles filled with assertions. (Foot must be rotating in his grave that they allowed such tripe into Tribune) For example:
“By contrast, the money created under MMT will be spent on public services and not in purchasing assets.”
Putting to one side that gov services (such as health) have an economic multiplier (2x – 5x) who is not to say that MMT money wil not be spent on assets such as renewables – which give a return. The criticims of both “Harry the half wits” falls into the class of policy-based evidenced making – they don’t like MMT and will manufacture “evidence” to suport this dislike. Intellectuall prostitues the pair of them.
Agreed entirely – but I felt I had already gone on long enough
As I predicted, the volume and intensity of attacks on MMT are increasing. (it’s unfortunate the analysis has the MMT tag; Economics for Universal Benefit might be less catchy, but more accurate.)
The piece in Aphaville in March by Fullwiller, Grey and Tankus (FGT) – to which you linked – really seems to have spooked the professional and academic flunkies servicing the global capitalist elite. FGT demolished the one source of inflation, one club (i.e. interest rate changes) policies of most central banks. They advanced a whole suite of pre-emptive inflation-restraining policies that address the wide variety and sources of inflation in a modern economy. These include effective sectoral regulation, competition and anti-trust policies, separate consumer protection policies, sectoral monitoring, targeted macroprudential enforcement, empowered fiscal councils and other tools in addition to interest rates and tax increases. That put the fear of god in to the capitalist rip-off merchants.
As for Mr. Meadway, despite his current apparent detachment, one may assume he is channelling John MacDonnell’s thinking. There appears to be an increasing separation between the antics of Mr. Corbyn and the clique around him and the cold calculations being conducted by Mr. McDonnell and those aligned with him. In a similar fashion to Labour in the 1990s, the McDonnell team are attempting to triangulate among a raft of progressive policies, the massed forces of the capitalist eites and their armies of professional flunkies and public opinion which may be too easily spooked and manipulated by the right-wing press.
It may have short-term tactical advantages, but inevitably it will prove a strategic failure.
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/
And agreed
All critics of MMT always doubt that a government will control inflation by raising taxes (or other anti-inflation measures). Therefore MMT will not work.
That is basically their only significant argument. (The crowding out argument is also one about inflation – resources getting too expensive for the private sector to make a profit)
If, on the other hand, inflation controls work, there should not be any problem. Not for exchange rates, not for “imaginary” bond vigilantes.
I do not understand why critics like Martin Wolf (FT) or Ian Stewart (Deloitte) doubt that government cannot tax? To raise taxes is one of the fundamental functions of government.
For James Meadway (the former advisor to LAbour’s John McDonnell) to say that a government cannot raise VAT and hope to get re-elected is even worse. Loads of conservative governments in the past raised VAT and were re-elected. Meadway is talking nonsense.
This criticism of MMT is just propaganda. In the case of Wolf and Stewart to avoid rocking the boat to much which allows people like them (and their readers and clients) to hold to vast asset appreciations and state rentier income (bond interest).
In the case of Meadway, and his Marxist comrades, to hold onto the belief that 150 year old Marxist ideas still have some relevance in the 21st century. Hence his obsession with giving workers 1% share in the means of production each year, by giving them shares in PLCs. And inventing “alternative” ownership structures. Because, so goes Marxist theory, unless the workers own the means of production, we do not have socialism. MMT, inconveniently for Meadway, ignores such outdated Marxist theories. That is why he is against them.
The FCR is a bit like the prawn cocktail offensive mark2. It is there to appease the city.
It is depressing and opens the door for the charlatans like Farage that are boldly full of empty promises.
I wonder how the FCR would accommodate a green new deal that we desperately need. Now is the time to be bold.
It is claimed it would
Candidly, I doubt it. The GND is more than capital spend and Labour says the country cannot afford revenue spend even if there is the real capacity to supply it, which is deeply depressing
And yes, I have read all the defences of the FCR and all the caveats built in and say if the caveats are needed then the rule is farce in the first place
James Meadway provides a woefully unreliable summary of Modern Monetary Theory and concludes that Labour has no choice but to take seriously the size of the deficit and the size of the public debt. His argument is that Very Serious People worry about the deficit and the public debt, therefore Labour needs to pretend to be worried about them too. It doesn’t occur to James that the objects of public policy should be full employment, a growing wages share of national income, less inequality in the wealth and income distributions, properly resourced public infrastructure and public services.
I am afraid you are right
Another article for you to critique …
https://labourlist.org/2019/06/why-labour-doesnt-support-modern-monetary-theory/
I will be
Despite being on holiday
Thanks for this useful critique, Richard.
Not all of us would mind the private sector being crowded out – its huge lobbying power and frequent subversion of planning and regulation is far from universally benign.
You say “In other words, Labour cannot be bothered to do the hard work of re-education to deliver what the country needs” – sadly this applies to Brexit also. The talk is if unity across the factions but since their demands are completely incompatible no compromise is possible. Labour needs to plump with clarity and determination one way or the other (and only Remain makes it a viable alternative for many to the Tory lookalike LibDems). That removes the currency of the EU issue within the party, giving space to discuss NHS, peace, environment, austerity, TU rights and all the other aspects that should be at the forefront for the left.
I wish Labour could make up their minds
What else is leadership about?
This is a good response from Bill Mitchell and Thomas Fazi https://tribunemag.co.uk/2019/06/for-mmt
I think the word ‘ credibility ‘ is central to this debate about MMT. As the BofE said in that 2014 bulletin most Economics textbooks get the explanation of money creation wrong. These two economists Stewart and Meadway are no different . They seem to think that to accept the reality of money creation as described by MMT lacks ‘ credibility ‘ and so that’s enough to damn it in their minds. The old trope that ‘ Labour can’t be trusted with the money ‘ plays a big part in Meadway’s thinking no doubt. So no new thinking is permitted . Are we to believe, like them, that the world is flat and the gold standard still exists ? I think not. But at bottom I think there is a more basic explanation ; if the plebs get to know that money is created out of thin air they might just get above themselves, or like the judge asked of the jury in the Lady Chatterley’s Lover trial was this ‘ a book that you would even wish your wife or your servants to read ‘ . I hear the sound of a wall crumbling. Take note Messrs Stewart, Meadway et al.
🙂
I take these attacks on MMT in a very positive light.
They show that (a) the mainstream economic orthodoxy feels insecure and sees MMT as threat that needs to be killed off – so that’s progress; and (b) they sharpen the arguments of the proponents of MMT, not just in honing the theory but in how to explain it to a wider lay audience.
It’s only a matter of time before the theoretical argument is won and the debate then moves on to how best to use MMT to support the policies we so badly need in the face of rising global challenges.
I agree
Hello Richard- I am sorry but I feel I have to add my contribution as an OMP – ordinary member of the public-to these knowledgeable and informative posts. I spend ages grappling with your, and SimonW-L’s posts on economics. What seems obvious to you is not easy to understand. But I have grasped the essence of MMT, and that gvt budgets don’t have to be balanced on a day to day basis, and that gvts don’t tax and then spend. When Labour first introduced their fiscal rule, my first thought was that they were doing it to defend any spending plans against the knee-jerk MSM criticism of ‘Labour’s profligate spending’. And sadly, after best 10 years of ‘the mess Labour made of it’ mantra,Labour do need to anticipate and defend against this sort of criticism.
My point is that they can’t defend themselves by trying to educate all us economic plebs in the details of MMT. This just won’t work. I’m and educated person, with a keen interest In politics and therefore economics and I can’t really grasp that MMT can work and some how save us from goodness knows what. What hope is there of convincing the consumers of MSM who don’t think so much about these things? MMT is completely counterintuitive, and at odds with how most people experience organising their finances everyday life.
I accept what you say
MMT is counterintuitive
We have to win the intellectual argument
Then take it on from there, I think
I am trying….
Agreed that MMT appears a bit counterintuitive.
Agreed too, that there is a problem with educating both John McDonnell (too much time directing the ‘currency user’ that was the GLC?) and especially the public.
Even if the education problem is a step too far, surely any Labour Treasury person can just indicate that households never own their own bank.
And they certainly never own a Central Bank.
Yet collectively, we do all own a Central Bank.
Doesn’t that mean we can, as they say, think differently?
If we cannot, what is the point of a Central Bank?
I’m actually fast beginning to wonder if ‘proper’ economists and politicians shouldn’t be questioning the journalists rather than just trying to reply to their mostly inane questions…
MMT – ‘counter intuitive’? Why? Why?
I have never seen it as counter intuitive. It is only counter intuitive if you are ignorant of how money is created in society.
I see those on the Left desperate for answers but who seem not interested in these fundamental questions – not interested in digging deep enough. Those on the Left know something is wrong but then can go no further because they are not inclined to look. Result? No answers – just toying with orthodoxy.
Those on the Right benefit because the neo-lib lies are now deeply inculcated into academic institutions and business working practices and are also helped by the media.
Now austerity – that’s is a counter intuitive idea – what? – we withdraw money from the economy to make it better? What happens when we lose blood in the human body? Or if it does not get enough food or water? It weakens – just like the economy and human society weakens when we take money out of general circulation.
MMT – ‘counter intuitive’? Not to me. And I suggest not anyone else interested in it either.
I contend MMT is shackled by ignorance, laziness and economic dogma. And the blame also has to be put at the feet of modern consensus politics which just recycles perceived wisdom and nothing else.
Richard,
You have broken down Meadway’s criticisms of MMT rather well, but you freely wonder what his rationale really is. I have been struggling a little over his motivation here aswell, but I can only think of one reason why he is so rigidly against MMT. He helped to create John McDonnell’s fiscal rule.
He did so, because at the time, he was more inclined to believe in the power of markets and the need to combat right wing journalists and economic writers, eager to break apart a (prospective) Labour Chancellor’s economic plans. He also knew that John McDonnell would not be intellectually equipped to argue any heterodox economic case on his own without resorting to the perceived political orthodoxy of sound finance and balancing the books. With a Shadow Chancellor, so poorly equipped and with advisors unfamiliar with MMT, Meadway must now defend his creation with all he’s got, despite its now apparent and somewhat glaring flaws. This is why Meadway has become more aggressive in his Tweets and Facebook comments (and more ready to attack us)..and possibly why he has left the Shadow Treasury team. There is another ludicrous idiot there called Jonathan Reynolds who has recently penned another inaccurate and laughable critique of MMT. You mind enjoy destroying him too.
Thanks
Well argued
I am on holiday …. Reynolds may be tomorrow
“what MMT says is an accurate description of how the economy works”
Except that it isn’t.
For some inexplicable reason, its founders got stuck on the meme that “government spends first” and taxes afterward as a warped way of explaining monetary operations. This is false. All modern monetary systems are characterized by government treasury account(s) held at the central bank and the commercial banks. The very objective of such accounts is to tax/borrow first and then spend. The dual bank account level arrangement allows Treasury to get out of the way of the central bank in its management of bank reserve supply. Its an off-market mechanism to facilitate neutralization of the bank reserve effects of Treasury, as opposed to the open market operations actively employed by the central bank. And the desperate last resort modification to convert “spend first” to “spend or lend first” is equally vacuous in concept. The central bank lends reserves (i.e. “lends first”) to facilitate tax payments no more than it lends first to facilitate household purchases of goods and services where interbank clearing is involved to complete the payment.
Anyway, that’s all technical, and MMT is just flat wrong in its explanation of same.
The irony is that MMT is right in merely attempting to frame the important monetary issues in terms of accounting, as opposed to mainstream that is ignorant on such matters.
The tragedy is that for some strange reason it sees the need to distort the depiction of actual monetary operations and accounting in doing so.
The chronic problem of MMT in that regard is that it can’t seem to distinguish between factual and counterfactual monetary architecture and operations. The state *would* spend first in a counterfactual architecture where Treasury bank accounts disappeared and an operationally consolidated state entity spent first – along the lines of an open market “easing” operations except with spending rather than lending.
The tragedy is that none of that distortion is necessary. Simple accounting illustrates why nominal “affordability” can’t be an issue, and this is most easily demonstrated with the use of actual Treasury accounts. Issue bonds, deposit money, spend money, put the same money back into the system. No affordability issue there. There’s always a sufficient stock of endogenously created bank money to cycle and recycle a relatively small portion of it through Treasury accounts flows.
A shame that MMT grabs the accounting bull by the horns and then mangles it. I’d say its where it loses its credibility out of the gate – except that mainstream is sufficiently uneducated not even to grasp such a point.
Apart from that, MMT is essentially just basic Keynes. It’s fine. The focus on real capacity and inflation is trivially obvious as the right way to approach things. The flow of funds though financial accounts does not cause inflation. Spending does.
With respect, the Bank of England does not agree with you
Lend always comes first in the loan / deposit cycle
Just as spend always comes first in the spend / tax cycle
You clearly do not understand that
“Lend always comes first in the loan / deposit cycle”
obviously true – because that’s how banks work in fact – intelligent and observant people know that immediately – but please don’t tell Paul Krugman
“just as spend always comes first in the spend / tax cycle”
false
and the Bank of England doesn’t say that – I know this because I read the famed Bank of England paper as soon as it came out. It was an excellent paper and you won’t be able to quote such a claim accurately and in full context from that paper.
the whole point is that actual state spending and taxing is conducted by Treasury as a bank depositor – not by the central bank or a bank of any type
invoking the favorite repetition meme of certain MMT principals doesn’t make something true
and you won’t be able to demonstrate otherwise by showing the accounting for it from first principles
btw – its not an important point at all in terms of the core message MMT delivers about affordability – its just that it says something about integrity of purpose when such nonsense is put forward about the “realities” of monetary operations – its a kind of insult to the intelligence of interested, knowledgeable observers – and it galvanizes the frequent perception of MMT as cult-like
the state “spends first” only in a strictly counterfactual monetary architecture
I wish MMT would come clean and admit that, because it has a fair bit to offer otherwise
unfortunately, that conceptual house cleaning would render MMT unrecognizable as MMT
So all spend but that by government is subject to the rule of lend and deposit
But the government is instead subject to the rule of deposit and spend?
Even though it owns the central bank
And licences all money creation
And its promise is all that makes fiat currency what it is
Oh, and the double entry is the same
With respect, you’re talking utter nonsense
with respect, your knowledge of actual monetary operations and architecture is far less than I anticipated
its more detailed in reality than the fog of counterfactual consolidation
but suit yourself
that’s all, thanks
This has been run through many times and the case made from first principles
But if you are so good at this, why not prove your case for the exceptional behaviour of government when as owner of the central bank it decides, as you claim, to act counter to the the behaviour of all other bank users. From first principles, please.
So do not tell me how the operation is disguised. Tell me what really happens. From first principles, in your view.
“behaviour of government when as owner of the central bank it decides, as you claim, to act counter to the behaviour of all other bank users”
Not sure I understand your meaning there …
But:
“From first principles, in your view.”
Fair enough.
Back tomorrow.
The question relates to MMT’s “description” of the monetary system. I noted their usual refrain along the lines of “the government first spends and then taxes”. This is conceptually and operationally wrong. And entirely unnecessary in reaching the objective of the analysis — demonstrating the constant affordability of nominal government spending. MMT squanders credibility in resorting to such false analytical devices – yet it is their central mantra.
Start with the facts of modern monetary system design. (I’m familiar directly with Canadian and US central bank operations. Their design differences are not material and I assume most modern central banking systems operate in an essentially similar fashion, including the Bank of England.)
Overarching is that central banks exist to facilitate what is essentially a capitalist system of competing commercial banks. Central bank reserves enable clearing of transactions among commercial banks that have net effects on their balance sheets of so-called endogenous assets, liabilities, and equity. The clearing device accounts for the competition among banks for share of system balance sheet — assets, liabilities, and equity. The associated function is that the central bank targets a reference interest rate for the system — e.g. the Fed funds rate or the interest rate paid on reserves — i.e. the anchor interest rate that propagates out to all other rates as commercial banks compete for share of system balance sheet and reserves. The central bank targets the interest rate conditions by controlling the quantity of reserves and/or the rate paid on reserves (including the option to pay a rate of 0 per cent, as was the case in the old pre-QE US environment). This along with required capital supports commercial bank lending and endogenous money creation as a competitive function of commercial banks. The bulk of money creation for the economy is outsourced to the commercial banks under this enabling framework for competition.
It is obviously possible to propose alternative monetary architectures (account design and operations), including those that may lean the system to accommodate more progressive or socialist leaning ideas. But ideas such as helicopter money and overt monetary financing if seriously considered and undertaken would imply explicit changes to existing operational procedures. The design of the interaction between the central bank and the government Treasury function could change under such proposals. These are substantial counterfactual possibilities open to debate.
But what is nonsense is the MMT propensity to conflate existing design with such counterfactual descriptions of monetary operations, putting out logically flawed stories, memes, and interpretations that are the product of cherry picked, out of context stories about what they call “realities” of the monetary system. They aren’t realities. They’re false interpretations that occupy a twilight zone between the existing factual case and some vague counterfactual for another type of design and rationale. As a point of principle, intellectually honesty in describing the actual system in place should not be too much to ask, rather than the propagation of catchy memes that conflate fact with fiction.
MMT’s obsession with its “spends first” meme often appears upfront under the claim that the standard government spending and funding order is “backwards” from the “realities” of the monetary system as MMT sees its own reality. MMT then fuses government spending directly with a banking concept (without being explicit about that) to produce a fictitious (i.e. counterfactual) representation of some non-existent consolidated single state “entity”, and in doing so erroneously associates the “loans creates deposits” feature of banking directly with government spending operations.
First principles and facts:
Banking:
Loans create deposits
True for central banks and commercial banks at the level of money they create
Standard government spending architecture:
Treasury is separate from the central bank
Treasury has deposit accounts with both the central bank and the commercial banks
This dual account structure allows efficient tax collection across various banking areas, settlement of bond issues, along with the simplicity of spending operations. Treasury actively manages the distribution of balances between these two account categories in order to control in a very deliberate way and minimize the net reserve impact of its various transactions. This “getting out of the way” then allows the central bank to pursue monetary policy (e.g. the quantity of system reserves supplied) without inadvertent Treasury effects on aggregate reserve levels. For example, Treasury can transfer tax sourced money from its commercial bank accounts into its central bank account on the same day that it spends that same money, with no net effect on aggregate reserve levels or endogenous money levels, given the recycling of both types of flows back into the commercial system from whence it came.
Fact: Treasury ALWAYS has sufficient money in its Treasury accounts, sourced from taxes and bonds, BEFORE it spends the same money from those accounts. It is NOT the case that Treasury spends before it taxes. In fact, Treasury is not allowed to run overdraft positions. MMT often refers to such facts as “self-imposed constraints”, as if “realities” means the elimination of such self-imposed constraints. Unfortunately, the real world features self-imposed constraints more generally in most matters of life. It would be chaotic without them.
When pressed to explain itself further, MMT sometimes morphs its meme into the more luxurious “spends or lends first”. But this is a spurious spin that turns up equally empty logic when applied to the real world of taxing and spending. For example, the argument seems to be that the central bank makes bank reserves available (essentially created by central bank “lending”) to ensure the transfer of tax funds from commercial bank collection accounts to the central bank account from which spending takes place. MMT claims this is evidence of the state “spending or lending” first. But such a provision of reserves is standard operating procedure for ALL payments that flow to or from banks — including Treasury as a counterparty of a bank in such a transaction. The central bank provides reserves to clear payments for EVERY type of transaction, including all such private sector transactions. This is not a bespoke characteristic for the benefit of government alone, and it is devious to imply such a thing.
Similarly, the fact that the government spends by “keystroking” bank accounts is equally vacuous and downright silly as a point of observation about how the monetary system works. ALL private sector spending results in the central bank “keystroking” the recipient’s bank’s reserve account when the payment flows between two different payment institutions. Such a trivial observation on the nature of banking can’t possibly be the foundation for any substantive theory of government spending in the context of banking more generally. Yet it is central to MMT’s presentation of same.
As a matter of real world monetary operations, the Treasury account at the central bank is functionally no different than a bank reserve account. It is effectively a reserve account by another name. It is silly to focus on reserve provisioning in the case of tax payments when the same thing applies universally to all types of payments. And more relevant – it remains the case that at the level of endogenously sourced money, from which private sector payments originate (for taxes and everything else), that tax payments and bond purchases ALWAYS precede government spending of the corresponding quantity of money raised.
Finally, there is no net money creation from government spending — any more than there is net money creation from private sector spending when a recipient commercial bank credits a customer account with funds corresponding to a deposited cheque and the central bank credits that bank’s reserve account in recognition of that value transfer. That cheque gets cleared back quickly as a debit to the paying commercial bank’s reserve account, followed by corresponding debit to the payer’s bank account.
Treasury, through proactive money management, is a same-day money recycling machine — funding and spending and recycling the same money in the form of both bank reserves and commercial bank endogenous deposits. This real world characteristic is where the correct argument for government spending “affordability” should start, along with a macro level look at the equivalence of sector financial saving balances associated with government spending net of taxes. That is a doable explanation, and in that context it remains an indisputable fact that taxes and bond issuance precedes government spending in the real world as it works now.
Oh dear….is that it?
Once I got over the hyperbole and ad hominems (they really aren’t necessary) I discovered a description of how a central bank and Treasury system that has not understood MMT works. That’s a description of economic managerialism. That it has not really changed since we got fiat money is what is deeply depressing. But what it is not is a description of what actually happens. MMT provides that. I refer you to its standard texts. Try Stephanie Kelton in particular. But you really have missed the point. In fact, it seems you have not even understood the question. Describing what is believed to happen is nothing like explaining how it happens.
just as I expected
supercilious
and forever irrelevant
it suits you
I am happy for you to have another go
But try dropping the ad hominems
And try saying what happens in reality – the substance in other words, and not the form
I merely pointed out that you did not do that
I am sorry if you do not like it, but if all you can do is insult the problem is all yours on this one
Well done! Bernanke supports your view in this 60 minutes interview – https://www.youtube.com/watch?reload=9&time_continue=8&v=U_bjDAZazWU
As does Steve Keen – https://www.youtube.com/watch?time_continue=1&v=287Cu5me0Og
The key difference between neoclassical and MMT ideas is in my mind the slope of the Phillips curve.
Neoclassical economics uses the vertical long run Phillips curve, and a direct result of this is that a central bank should only focus on inflation as a sufficient objective. This comes from rational expectations such that policy is ineffective and markets will always re-equilibriate.
MMT and Keynesian economics argues for an upwards sloping Phillips curve, or possibly one flat until full employment and then upwards sloping afterwards. This implies the government ought act to restore full employment when market mechanisms leave unemployed resources.
Many economists–and certainly all journalists writing on the divide–fail to see that this is the key difference, but a few simple diagrams would explain a lot.
You are right
Vicky Chick saw this many years ago
Liked what you have written a lot. And it amazes me how hard you work at this. Well done.
I really liked this:
“That assumes that the main object of all economics is to control inflation to maintain the value of money so that the value of the claims of the world’s assets owners, to whom debt is owed, are upheld consistently.”
Very succinctly put. And that surely is the view of ‘the haves’: those people who already have more money than they could possibly spend in a lifetime and do not therefore contribute to or care about how the economy might perform for the rest of us.
Maintaining (or increasing) their ‘store of value’ is everything to them. As long as the economy does that nothing else matters. But that should certainly not be the view taken by the rest of us or our government. The economy has to be run to serve the public – all of us. That public purpose needs to be precisely stated. And if there are disagreements about what that public purpose should be they need to be exposed and addressed. Ordinary people who do not understand politics or economic assume that there is a settled view of what macroeconomics is that governments or civil servants understand that is designed to serve their interests. They think Osborne or Hammond aiming at a ‘fiscal surplus’ is based on that ‘settled science.’
When you follow that with “long term, meaningful, productive well-paid employment which is the goal of MMT, hence the job guarantee.” I agree but I think the link between the two needs spelling out.
The argument put simply is: Governments can create whatever money they need so their purpose cannot be to ‘make money’ from the economy. What then is the purpose of the government in respect of the economy? The answer must be a ‘public purpose’ it cannot be just to provide a means for rich people to become richer. Many other things might contribute to fulfilling that public purpose but an obvious and very large component is to provide employment. Unemployment is a function only of the availability of work to do and wages – both of which the country has an inexhaustible supply.
Neoliberalism denies that public purpose – the public good can be different to what is good for markets. If you accept MMT then the purpose of the government has to be different to the profit motive which drives the private sector because there is no meaning to a government making a ‘profit.’ That incorrect assumption needs spelling out and addressing. And ‘public purpose’ in contradistinction to ‘profit’ needs to be explicated.
Thanks
[…] Cross-posted from Tax Research UK […]
[…] is very worried about the threat that modern monetary theory (MMT) poses to it. No sooner has James Meadway popped up in Tribune to attack a policy that could deliver full employment at a living wage for all, plus the investment […]
MMT sounds good, but there are three things about it that I don’t understand in a British context. These aren’t criticisms but genuine questions. First, your point about the bond vigilantes and currency fluctuations. I can see how your bond point works for some British buyers of bonds, but what about overseas buyers, or British buyers who count on strong sterling vis-a-vis other currencies? Isn’t the fundamental reason bond rates go up and down that buyers have not just inflation expectations but currency exchange expectations? It’s easy to see how you can create pounds to buy bonds; less easy to see how you can create more pounds and expect to buy more euros.
Second, a related point – if the implementation of some form of MMT in the UK were to lead to a radical devaluation of the pound in respect of the euro, dollar etc, how severely would that impact on inflation – regardless of what was happening to the labour market, demand and supply etc – just because of the high level of our imports? It’s certainly interesting to see how despite the drop in the value of the pound since Brexit inflation hasn’t rocketed upwards, but I’d slightly turn the question around – what does inflation since Brexit tell us about how a further, deeper devaluation might affect inflation in future?
The third kind of follows on from the first two, which is that a fair degree of distancing from the as-is global economy seems to be baked in to MMT implemented by Britain alone – not just devaluation, with a consequent fall in imports and perhaps rise in exports, but perhaps currency controls as well. That’s all fine, and would be absolutely fine in an essentially self-sufficient economy like the US or the EU. But my question relates to the capacity of the British economy specifically – not capacity in an abstract, theoretical economics sense, ‘the economy is at full capacity’ and so on, but in a concrete sense of the British economy having become so specialised and globally interlinked that it just isn’t capable of producing all that is required without a consequent increase in imports, from roadbuilding equipment to specialised engineers. Isn’t MMT an argument, in a specifically British context, for a much higher degree of industrial and educational self-sufficiency than we – thanks to 40 years of Thatcherism – currently possess, and isn’t the restoration of that self-sufficiency a project requiring 20 years of political consensus, rather than five years of a radical reforming government? If one possible MMT answer to the devaluation question is ‘our trading partners would see that we were using extra ‘debt’ to build real assets and create real jobs in the real economy’, that question remains – currencies respond to their traders’ (not normally left-wing sympathetic) scepticism about an agenda before they respond to their grudging admission of its success many years down the road.
See a blog post in the morning
Remember if you are getting flak, it means you are over the target!
🙂
Yep – brilliant!!
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
[…] correspondent called James Meek asked a number of what I might call quite normal intelligent questions about MMT yesterday. Let me address them. First he […]