Last night Gary Gibbon of Channel 4 News reported that the Coronavirus Emergency Bill included an increase in the UK government contingency fund for unexpected expenditure from just over £10 billion a year to more than £260 billion in the coming year. This morning I admit that I can find no reference to this in the media, or in the draft Bill itself, but I have a very strong suspicion that the figure was reported with good reason.
Whether precisely correct or not, what this additional provision demonstrates is three things.
The first is that additional government expenditure happens because the government decrees that it should.
Second, the government can decree this without first having raised tax revenue to ensure that the expenditure is funded.
And, third, the government can also do this without the prior consent of bond markets: there was no guarantee or underwriting from them for this action.
This is possible for reasons I explained in an academic article here. In that piece I explain the formula for funding government spending, which is:
G = T + ∆B + ∆M
where G is government spending, T is cash tax revenues, ∆B is the net change in government borrowing in a period and ∆M is the net change in government-created money in a period.
On this occasion the government has announced (rather quietly) an additional spend of £250 billion or so. I am quite sure that it will be required. That is because tax revenue is likely to fall in the coming year: people's incomes are collapsing, very fast. It is not at all clear whether bonds of that amount can be sold. But what we do know is that the Bank of England has now announced it will buy up to £200 billion of government bonds to support coronavirus measures, and that these need not come from the market itself but can be bonds directly issued by the government itself for this purpose.
In effect, cutting out the middle man of the market means that this funding will not now be quantitative easing. The pretence that it will be has gone. This is direct deficit funding of the government by the Bank of England: in effect the government will be running an overdraft with its own bank. And what we can be sure of is that if it wants the overdraft limit increased it will be.
You will not find the formula noted above in many textbooks: I've searched and not found it. The ∆M bit is missing. That's because the mainstream of economics has not recognised that such funding can take place in this way. But that's because dogmatically they have refused to believe it possible and have insisted that government is solely dependent on funds provided by third parties to fund its activities — so perpetuating the myth of ‘taxpayer's money' and the ‘burden of debt'. But neither of those myths is true. The government can create money whenever it wishes, simply by deciding to spend it into existence and by instructing its own bank to create the money to make settlement of the liabilities owing. ∆M changes everything.
This is, of course, what modern monetary theory has always said.
Now this will be happening quite overtly in the UK rather than surreptitiously, as has been the case to date.
The myths about government funding should, then, be shattered forever: the simple fact is that a government with its own currency and its own central bank that wants or needs (as in the current circumstance) to spend can always do so if it wishes by simply extending the funding provided to it by that central bank. The myth of taxpayer's funding the government is, then, blown apart. And so too is the idea that governments are beholden to bond markets: they are not, because what is apparent is that the supply of bonds to the market is now wholly under the government's control. The bond markets now sign to the government's tune, which is why interest rates are under control and very, very low.
This is not to say that tax is unimportant. Far from it. In another recent academic paper my co-author Prof Andrew Baker and I argue that by freeing our understanding and by shattering these myths modern monetary theory ‘creates possibilities for using tax to achieve social objectives such as mitigating income and wealth inequality, increasing access to housing, or funding a Green New Deal'. In other words, when tax is not primarily seen as a tool for funding (which it is not) but is instead seen as a mechanism for government control of the economy, from regulating inflation onwards, then tax actually assumes a more important social goal than it has at present and this provides even stronger reason for tax justice campaigning than can exist if it is simply all about funding government. That's because the funding argument permits those who oppose the social arguments to say that they can be dismissed because pragmatic funding requirements are more important.
And have no doubt about one further thing: this new deficit funding and the matching action of the Bank of England kills forever the argument that there is no government that does not believe in or use modern monetary theory: we're going to beat coronavirus using it and let's be thankful for that.
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Thank you very much for the link to the paper Richard.
Otherwise I agree in principle with your blog.
The issue remains though one of distribution: who will the Tories leave out? How effectively will the money be fed into the economy? The risk of the rich grabbing most of the fiat cash as it makes it way to the population? The Tories may have started to print the cash, but are they any good as managers given their predilection for destruction?
Will the NHS cope? Can HMRC cope? Will Universal Credit become better as a system? What ‘Osbournian’ chickens will come home to roost? Can the damage be unmade so quickly?
And what of Labour? Their clothes have been stolen. I think the 3 potential leaders they are courting us with now had better have something new up their sleeves. I fear that they will not. The better candidates have already been pushed aside I fear.
I also feel people are picking up on this cash generating Government – people now seem to realise that it can be done. So they are asking why were they told that it couldn’t by people like Theresa May.
And my worry remains that after this is over, we will be told that we have to pay for it again, so austerity and higher taxes will come back (the media is full of Cassandras talking of this crap already). And what will Labour’s response be if that happens?
Interesting and frightful times.
As if you have not got enough on your plate already, I am finding that as I type into the text box on your blog, the field for the name and email address pops up and will not go away. If I accidently click on auto display, it over-writes my contribution and I lose it. It is very frustrating.
But we can then hold them to account for their distributional decisions
There’s an unprecedented amount of Internet content right now re. MMT and how conservative governments, wedded to the prevailing economic orthodoxies, can fund fiscal stimuli. The debate will rumble on for years to come — reacting to how economies evolve once the current crisis has abated sufficiently in order to make any rational analysis.
In the meantime, I think it’s important to stress the point you made in your earlier piece that MMT is apolitical in that it is simply the most accurate description we currently have as to how a sovereign fiat economy functions. Whether they admit it or not, all economies of such states perform according to the underlying principles of MMT. The fact that many (most) governments do not use the full potential of what’s available to them, is a political decision. It’s a bit like having a Mercedes-AMG GT 63 S and driving it as though it’s a Renault Twingo 1.0 SCE Play (rubbish analogy — but you know what I mean!).
So the issue is why don’t governments use all the economic levers at their disposal to maximise a sustainable & fair quality of life for all their citizens both qualitatively and quantitatively? The answer is pure and simply ‘ideology’. Which answers PSR’s fears about a return to austerity once the viral dust has settled. If the Tories are in power of course it will if they can get away with it. To expect otherwise would be unwise. The Conservative Party is founded on a principle of prioritising the protection of private asset values. According to their economic premise, this necessitates — among other things — a continually expanding private economy, a stable (controlled) civil society and minimal state regulation of markets and individual freedoms.
Hence, this current authorisation of fiscal policies that would otherwise be considered unacceptable, even unthinkable, is driven by political necessity (viz. re-electability) and will be reversed as soon as the roof has been repaired and the sun is shining again. Should, in the process, they (the Tories) have a Pauline conversion then they will have to rewrite the constitution of their party — or defect to the Greens (in my dreams).
So don’t anyone hold their breath. This existential threat has put the country on a war footing and, as previously in history, any ruling party has no choice but to take whatever survival steps are necessary, albeit grudgingly. And then only the minimum considered necessary to survive. Once the crisis is considered to be ‘under control’, Conservatives do what it says on the tin. They will want to revert to ‘business as usual’ – except this time around that’s not going to be an option for the country and the wider global community. The PLP has been on life-support for decades. The Tories have just been an ‘unconscionable time a-dying’. Hopefully COVID-19 will deliver the coup de grâce. And we’ll witness an emergent progressive alliance embracing a new form of politics that will fully embrace the potential offered by a thorough understanding of MMT.
Apologies for this longer than intended post. Self-isolating frees up time! Thanks for your patience. I do hope you’re continuing to make progress health-wise. I’ll just end with Oscar Wilde’s quote in full: “A map of the world that does not include Utopia is not worth even glancing at, for it leaves out the one country at which Humanity is always landing. And when Humanity lands there, it looks out, and, seeing a better country, sets sail. Progress is the realisation of Utopias.”
🙂
I’m thinking that now would be a good time to pick a fight with some of those most hostile to MMT. It’s going to be pretty hard for them to defend their traditional position.
Take no prisoners…
I am not
They are already fighting back from the most unlikely of corners
Do tell – your own ‘troll army’ can perhaps take them on
I see CapX are trying to construct a defence for profiteering…
OK – so you are setting up future battle lines. But you/we may already out numbered. Martin Kettle seems to see this in his latest article in the Guardian. It is a worry.
And whom pray tell are these unlikely sources of dissent on MMT you speak of?
There are battle lines….
The opponents know who they are…
“The myths about government funding should, then, be shattered forever:”……good to see something happening in the UK – over in the Eurozone – farce reigns. The ECB is busy buying gov’ bonds (Euro850bn) whilst member states want to do the following (quote extract from Euractiv report): “We need to work on a common debt instrument issued by a European institution to raise funds on the market,” the nine leaders said”……..so ECB pulls gov bonds with one hand – gives money to banks and then issues bonds (why) which the banks then buy. If it was any less pathetic it would not be funny.
article here: https://www.euractiv.com/section/economy-jobs/news/germans-and-dutch-set-to-block-eu-corona-bonds-at-video-summit/
Agreed
I have just nearly finished reading Week’s ‘The Debt Delusion’ and I did not know that the ECB insists on Euro members selling Government bonds to private banks and not between elected Governments and their Treasuries/Banks to raise funds. The story Weeks tells of Spain for example is just awful.
The fact that the ECB – ran by ex-financial sector alumni – does stuff like this made my blood boil.
The ECB has got to go. I call on all EU member nations to turn your backs on it NOW and print your own currency and get those fund raising bonds sorted out.
What a stitch up for Europe!!? Disgraceful.
This is not the ECB
It is Maastricht
They just have to agree to waive it now
In addition, I think that the lack of testing is a disaster – for the country now, and for the Tories later – I will not let people forget that. As everyone heard that Prince Charles had been tested and MPs had been tested this is not going down well out here at all. It may not be the right thing to focus on now, but we need to be noting every mistake this misbegotten Government makes and capitalise on it later. They have to go.
It’s a bitter-sweet victory for MMT given the number who have died and who will die because governments in the advanced economies delayed implementing the three things that will beat this virus: (1) lock-down, (2) test, trace and contain, and (3) spend, and spend without limit, to compensate for the economic and social impacts of the lock-down.
This seems to be a gamechanger.
Am I correct in saying then that public funding is now a political decision?
Take education for example ;
The government can produce as much money as it wants to keep the education system operating fluidly, resources permitting?
Thanks
Yes
It could do that
SO LONG AS THERE ARE PEOPLE TO EMPLOY
Real physical constraints are what matters now
Is this what is called “monetising the debt” ?
Is it forbidden by EU rules? If so, will the EU do the same or not?
Yes it is
No one is going to care about the illegality or otherwise right now
Theory no longer 🙂
Even now, the Tories cannot relinquish their love of their friends in the banks, willingly underwriting their lending at 80% to companies who are being asked to put up their houses as collateral, and who aren’t being offered favourable interest rates at all. It’s astonishing that the government are so happy to underwrite institutions who “make the money out of thin air” to lend to folk, then receive actual money back in repayment; but are entirely unwilling to lend that money directly to companies and people in trouble – cutting out the superfluous and avaricious middleman. So the game continues – the banks get richer; ordinary folk get dragged further into the mire of debt and poverty – if anyone doesn’t see this whole Coronavirus pandemic as a fire sale and cash-grab by the rich under the guise of taking affirmative action, then I truly despair.
“an increase in the UK government contingency fund for unexpected expenditure from just over £10 billion a year to more than £260 billion in the coming year.” I saw this on Twitter, earlier this morning, where I must admit it raised an eyebrow.
And all student debt could be written off at a stroke
Furthermore all future student education should be free as it benefits every one in society to have a well educated population
It could be
It should be
There are plans from Danny Dorling on how to do that
Well, whether the ECB or Maastricht, the private bond markets cannot be trusted to do the right the thing if John Weeks is to be believed in his account of Spain in 2008. That waiver needs to be done and then made permanent as far as I am concerned.
Sorry to burst your bubble, but the government isn’t about to use MMT and just print money. No government is.
For starters, QE and MMT money printing are different things. MMT creates new high powered M0 money whilst QE affects only the broad money supply directly, and those bonds purchased through QE still need to be redeemed at maturity. Which cancels the QE, unlike MMT which essentially thinks that tax will do the job of removing the extra money supply from the system. Though it never tells people what the government prints with one hand it will have to tax back with the other.
You are also making exaggerated claims about the Bank of England. They will not be buying bonds directly from treasury. I quote (from the link you gave):
“The MPC will keep under review the case for participating in the primary market.”
They have the ability to do so, but won’t be. They have made this statement before, yet never implemented such a policy.
As for your academic papers, they really don’t tell us anything. The first is just re-iterating the work done back in the 60s and 70s by Keynesians on sectoral balances. They fully understood that a government could print money. So other than re-inventing the wheel, what have you achieved here? Certainly nothing new.
Your second paper, with Andrew Baker, you make a lot of claims, but again you don’t give us anything new. Of course tax can be used to “achieve social objectives” but what has that got to do with MMT?
What you don’t do is show us how tax will be used to control inflation. You even say it yourself:
“Among the most relevant is that using taxes for macroeconomic stabilisation purposes is difficult in practice: taxes are hard to change at short notice”
So once again MMTers go on about how wonderful MMT is without actually giving us any detail.
You might want to have a look at the following:
http://www.thomaspalley.com/docs/articles/macro_theory/mmt.pdf
http://www.thomaspalley.com/docs/articles/macro_theory/mmt_response_to_wray.pdf
These papers spell out the many problems with MMT, which the MMT crowd never seem able to answer.
Except Palley has been answered time and again…
And if the BoE does buy bonds straight from the government that is not QE
That is going to happen
So what do you call it if not MMT?
And for the record, of course bonds on maturity are redeemed under QE
You ignore the fact that they are immediately replaced
This is monetisation then
Respectfully, you are the person who has said nothing and added nothing except to reveal your discomfort that your world view is wrong
Maybe that is why you seem to use so many identities here
Palley has been answered, but only with the same rhetoric as before, and as he points out in his papers, MMTers refuse to give any model basis to their arguments, whilst ignoring the serious problems raised with MMT.
It seems clear to me though that you don’t fully understand QE. Bonds redeemed under QE can be paid for by issuing new bonds, for sure. However, by doing so you keep the amount of QE constant, and have issued new debt to do so. The money supply hasn’t changed, but you have issued new debt. Nothing is written off, debt or QE doesn’t disappear and there is no free lunch.
This is an incredibly important distinction to make between QE and MMT, which simply proposes issuing new money. QE is most definitely not monetization of debt. QE inevitably has to be paid for by new debt, or the reversal of that QE.
You should also know that QE doesn’t increase the base, high powered money supply, which MMT would do. Currently M0 in the UK is about £82.5bn. Far lower than the amount of QE. QE works by lowering interest rates, which enables the broad money supply to grow. It’s effect on the money supply is directly analagous to the effect of lowering interest rates. MMT proposes simply increasing the base M0 money supply ad infinitum, which is much harder to control, much harder to reverse and would have much greater effects on the money supply and the value of the currency.
I highly doubt that the BoE is about to start monetizing debt. They have made very clear before that whilst it is an option, it is a bad one. The FED, under Powell have clearly stated it will never happen, and Powell himself has stated exactly what he thinks of MMT. Put it this way, he wasn’t exactly singing it’s praises.
Of course, in time I might be proved wrong, but you are the one who has claimed repeatedly that this is what is happening, in the face of the fact that this is not. And indeed it has never happened.
MMT hasn’t changed my worldview, or anyone else’s really, bar a few on the hard left. It doesn’t tell us anything new, and certainly doesn’t stand up to any real scrutiny. it is very much a fringe theory for those on the fringes.
Put it this way, if MMT were so popular and gave governments a new tool to allow essentially unlimited spending with little in the way of downside, don’t you think it would be incredibly popular? Don’t you think it would be an instant vote winner? If that was the case, why hasn’t a government tried it? It’s been around for decades already, and plenty of governments have come and gone around the world, with plenty of global crisis where MMT could have shone through. Yet MMT has never moved beyond a niche for a few left wing academics. Why is that?
What you really do not appreciate is that MMT makes clear government is not constrained as to actions in the way neoliberals would like
That is why you protest so strongly, and with such little evidence here
Please stop wasting my time
“Put it this way, if MMT were so popular and gave governments a new tool to allow essentially unlimited spending with little in the way of downside, don’t you think it would be incredibly popular? Don’t you think it would be an instant vote winner? If that was the case, why hasn’t a government tried it? It’s been around for decades already, and plenty of governments have come and gone around the world, with plenty of global crisis where MMT could have shone through. Yet MMT has never moved beyond a niche for a few left wing academics. Why is that?”
If right wingers were to admit that money is not a scarce resource, the proles would soon question WHY THE F**K ARE PEOPLE LIVING IN POVERTY THEN?! They would organise strikes, demand more in wages, less work, a Green New Deal – you know, all those policies which would more equitably distribute wealth, end a great many of the destructive industries (fossil fuels for one) and slow down (or even stop) the capitalist gravy train from which you (presumably) and your ilk make so much money. That is why. Right wingers want people to be miserable and impoverished and worried about their next meal or bill because it keeps them suppressed and blind to the inherently exploitative capitalist system that has enslaved the 99% so that the greedy, immoral 1% can live lives of luxury and plenty. I think it even gives many of them the tickles and a sense of superiority to know that their class aren’t suffering that way. And of course because Stalin bad socialism never works Vuvuzela.
This was going well until the last sentence
Can I ask for a concerned relative – what is likely effect on the value of pensions, if MMT is adopted as a norm
It is the norm
Seems like the BBC is struggling with accepting MMT
https://www.bbc.co.uk/news/business-52044374 – title – Where is the cash going to come from?
As ever the argument is ‘let’s get back to 2007 as soon as we can’
We never will
God, I hope you are right. I really do.
And I hope that you are well – or much better a least!
The reason why delta M is missing in most equations is that M is part of B so it would be double-counting to include both M and B.
The Bank of England note is a promissory note to repay the amount borrowed.
Double-entry accounting is not the same as double-counting.
Wow…how wrong can you get?
You know that cash is a promissory note from the BoE?
Tell me how they are repaid?
Is it a coincidence that Modern Monetary Theory and Magic Money Tree have the same acronym?
Nice to see that MMTer’s have a sense of humour 🙂
I genuinely do not know the answer to that
I’m pretty sure this was the formula I was looking for but I’d left my hard copy of the book elsewhere.
This makes it appear that tax is revenue available to be spent rather than be destroyed to allow redistribution of wealth and minibuses inflation.
Is that true within MMT?
I am not at all sure I understand your question. Sorry
Is tax revenue available to the government to be spent?
I thought with MMT it was destroyed upon payment.
The money created on the instructions of parliament and the government pays for the services
I’m feeling a bit stupid but why does tax appear in the forumula for government spending then?
Because it pears that it plays a role
And to fit into the rest of existing macro, which does not know how to handle money at all
I accept the ambiguity