Myth
Modern monetary theory is just a bunch of lefty economists saying that we can borrow without limit and that tax does not matter because we can spend what we like.
Replies
Reply 1
Modern monetary theory (MMT) describes how money works in the modern economy. There's nothing inherently left-wing about it. And as a matter of fact., every economy that is spending to beat the coronavirus crisis right now is working in the way modern monetary theory describes.
Reply 2
Modern monetary theory is lefty only if you think wanting full employment is a left-wing goal. Does that mean the right-wing does not want full-employment? If they don't you should ask them why not.
Reply 3
Modern monetary theory says governments with their own central banks can and do, as a matter of fact, create their own money. If you doubt that open your wallet and take a look at the notes in it. Were they created by a government? If so, what has modern monetary theory got wrong?
Reply 4
Modern monetary theory says all money is just a promise to pay, and that's it. It says that there is nothing more to money than that. And if you don't agree look at banknotes from countries like the UK, where written on the face of the note is the phrase 'I promise to pay the bearer on demand the sum of twenty pounds' (or whatever). Are you saying that is not a promise to pay? What else is it, if not?
Reply 5
Modern monetary theory says that governments do deliver on their promise to pay. What they actually promise is to accept the money that only they can create to settle the tax liabilities that only they can impose. And that is precisely what they do: you have to pay your taxes in their money and nothing else. And that is enormously important - because that is how your money does, in practical terms, get its value. If it's good for paying the government it's good for paying everyone else.
Reply 6
It's absolutely not true that modern monetary theory says you can borrow without limit. Or that you can create money without limit. Or that tax does not matter. What it actually says is that you can create money until you reach full employment or the limit of sustainable resources - and then you must stop or you get inflation. Its message is simple - and is that the real limit in society is not the amount of money we have - because we can have as much of that as we like. There are instead two real limits to what we can do. One is the physical limit of having people who want to work. In other words, full employment is a limit. And the other is the sustainability of the planet that very obviously constrains what we should do.
The evidence
There is now a great deal of discussion of modern monetary theory going on, precisely because it appears that the UK government (and others around the world) are now behaving in the way that MMT suggests is possible. What MMT says is as follows.
First, in a country with a fiat currency, which means that there is no asset backing (like gold) to the money in circulation, which means that the country's money does as a result only get its value solely as a consequence of its government's promise to pay, there is, at least in theory, no limit to the amount of money that a government can create. It's important to note that every major currency in the world has been a fiat currency since 1971.
Second, a government creates money every time it spends because whenever it decides to do so it instructs its central bank to extend it the credit that makes this possible. It is not constrained by the availability of taxation funds when doing so: money can always be created by a bank on demand and at will, and central banks, like the Bank of England, will always do this when instructed to do so by the governments that own them.
Third, to prevent this new money creating excess inflation a government has to tax to withdraw currency from circulation. This is the primary fiscal purpose of taxation, although tax also has other, also significant, social purposes as well, as noted below. To be clear, when interest rates cannot be used to control inflation, as is the case in almost every developed country now (and many others as well) because official interest rates are at, or near zero, tax is the only tool available for this task. MMT is the only current school of economic thought that properly recognises this fact.
Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, as has now been agreed by the UK government and the Bank of England, simply run an overdraft at its central bank on which no interest may be charged. This negates the need for borrowing, whilst, second, government borrowing actually makes little economic sense in an economy using the fiat money of the national government because the money that is supposedly borrowed by the government has already been created by the very same government when injecting cash into the economy through its spending. The term borrowing is, then, a misnomer in that case. What instead a government does by supposedly borrowing is to provide a social and economic service as the depositor of last resort for the savings of its population and financial system, offering a form of security for funds that no one else can. That is the real function of government borrowing, and that savings facility is vital to the efficient operation of any fiat currency using economy.
Fifth, a government that recognises the significance of MMT is not indifferent to the way in which tax is levied, or to the non-payment of tax, even if sufficient tax is collected to secure the fiscal balance that it desires to control inflation. Tax might have that primary goal of controlling inflation, with the secondary advantage that the tax charged for this reason provides the currency with value, but tax also has the other deeply significant social purposes of correcting income and wealth inequality; repricing market failure; delivering fiscal policy by incentivising or penalising certain activities and by reinforcing the social contract that exists between a government and its electorate. Tax is a reflection of the values of the society we live in and is the primary mechanism any government has for reinforcing them. MMT cannot then be indifferent to tax and to claim that it might be is, therefore, completely incorrect. To be so would also mean that MMT was indifferent to the distributional impact of taxation, both nationally and internationally, and that is clearly not its intention.
Sixth, the fact that the government spends first, and taxes second, means that the answer to the question 'how are you going to pay for it?' is always available to anybody who understands this process. A government decision can always be paid for, presuming the actual resources required to deliver it exist within the economy, simply by commanding the central bank to pay for it and then arranging, if necessary, for the additional tax due on the income that has been generated (because all government expenditure is, by definition, somebody else's income) to be collected.
Seventh, the realisation that a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled, is also of considerable advantage. Such a government should never be beholden to financial markets because they cannot hold a government that has the power to ignore them to ransom.
And that's it. That is modern monetary theory in a nutshell. In essence, government can and does create money. Government debt is just a means for saving private wealth. If you want government created money (and you do) the government has to run a deficit. There is nothing to worry about in this policy so as long as the economy is not overheated as a result. And the art is in not over-heating. Tax can stop that over-heating. And the risk of over-heating is, anyway, much smaller than the risk from putting the economy in the fridge to avoid the chance of it doing so.
Some other things do, however, need to be made clear.
The first is that modern monetary theory does not fully apply, and cannot be as a result usually be used in the way described, when a government does not have a fiat currency, or has to borrow in the currency of another country, or lets the currency of another country be used in common circulation within its economy; then the preconditions for modern monetary theory to work do not necessarily exist. There is no point pretending that they do when they do not. A failing tax system also prevents MMT functioning in practice because the means to control inflation does not exist.
Second, modern monetary theory does not eliminate exchange rate risk. It still exists. That is in large part because most exchange rate risk has nothing whatsoever to do with government economic action. It is created by political risk, as has been the case with the substantial down-rating of sterling since the Brexit referendum took place; or it is created by external price shocks, as for example are commonplace with regard to energy and other raw material prices; or it can arise because of short-term speculation, which is only sustainable if economic fundamentals of the type previously noted have changed. But if a government that thinks it believes in modern monetary theory then believes as a consequence that it can create money without limit, then it is fundamentally wrong. Likewise, if it thinks it can spend without taking into consideration the limit of available resources within the economy itself and ignores entirely the impact upon imports then this too is wrong as such a policy will have a downward impact upon the balance of payments and the long-term value of the currency. That is precisely why MMT does not prescribe spending without limit or money creation without limit: it has never done any such thing. It does instead pay a lot of attention to the control of inflation. That said, it also suggests that all exchange rates should float, because that manages the exchange risks that no government can control with monetary or fiscal policy.
Third, there is absolutely no necessary relationship between modern monetary theory and a jobs guarantee, or any other left of centre economic policy come to that. MMT describes how the economy works. But if it is assumed that the object of managing the economy is the creation of full employment then these issues are related in the sense that it is obvious that modern monetary theory does permit the government to pursue a policy of full employment at fair wages if that is its wish. In that sense the job guarantee and MMT are intimately related, and are logical partners in the process of managing the economy to fulfil the needs of society, but this does not, of course, prevent there being the provision of other aspects to a social safety net. Nor does this link prevent a government that does not want to deliver full employment using the ideas implicit in MMT; it will just simply need to be held to account for why it would wish to choose unemployment as a policy option rather than full employment.
In summary, MMT is the best currently available description of how to manage an economy to deliver full employment. That is its merit.
Note: suggestions for improvements to this Mythbuster are welcome: please suggest draft text in the comments or mail them to Richard Murphy using the information on the 'About' page.
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You might add that as history has shown a stable payment settlement system can only operate if government has the power both to create deposits (reserves) for clearing banks for temporary lending purposes plus the spending power to takeover those banks guarantee their deposits up to a set amount and inject money to put their balance sheets back in the black. This is precisely what they did in the Great Financial Crisis of 2008.
I will be doing this one soon….
Excellent and comprehensive! Borrowing is indeed a misnomer as you make very clear, but I think “that savings facility is vital to the efficient operation of any fiat currency using economy” may need further explanation. I’m aware that government bonds currently serve a purpose, for example as a safe place for private pension funds, or as what some call “corporate welfare”. Others might say that borrowing to “balance the books” was necessary to comply with EU rules. Hence why I think some expansion on this point would be helpful.
Now I have done this one a load more will follow…..
They are much easier with the benchmark one done
I will address this issue
Apologies for being greedy but, when the menu is so good, it’s hard to stop ordering courses.
🙂
[…] Cross-posted from Tax Research UK […]
Good (as usual).
Towards the end you mention Exchange Rates and I think that there is a lot more to look at here. The interplay between money creation (through government spending), draining that money (if appropriate) through borrowing and taxation, inflation and the exchange rate is very complex and interesting….. and probably not a good subject for “myth-busting”.
Perhaps Prof. Kelton’s book will help me!
It will
Pleased to see you acknowledge the importance of not forgetting a Balance of Payments deficit, over time. Some MMTists seem to discount this and yet to the electorate it is obvious that any economic unit, over time, has to balance it’s income/outgoings. It is also important for our National sense of self-regard that we have a full range of highly skilled jobs and retain a sense of self-sufficiency if needed in a crisis.
Also, I like the idea of full employment being a goal that then switches off borrowing as that will trigger excessive inflation ( I know you didn’t explicitly say that but) it fits with another widely held voter perception that there are workers/tax payers and non-worker/benefit claimants and that the Labour Party emphasis is on the latter (I have detected this throughout my life as a lifelong Labour evangelist and never more emphatically than when canvassing at the last GE). I would like to see consideration given to replacing ‘Benefit’ payments with payments for Public Sector work, using the recipients full skills and experience and at the full hourly rate for the work, for as many hours as is necessary to earn the money they need. Using imagination, creativity, and caring values, I am sure a system can be devised which would attract voter support on the way to investing in export/replacing imports and full, full-time employment.
Also while I have your attention (if I have), Use QE a bit more creatively – invest at the roots of the economy, those at the top will suck it up, tax them progressively and reinvest at the roots. Money Tree! And: combine all above with more progressive Income Tax (including NI) – many more moveable thresholds at fixed %s. Treat all income the same – CG, gifts, inheritance, etc. with lifetime allowances to spread the effect.
The JG is not workfare, of which I am not a fan
‘workfare’ is a loaded, derogatory term. It implies some sort of draconian sanction – what I want is opportunity, inclusivity, valuing people for what they can contribute and recompensing them for it. The individual gets the money they need, Society gets some valuable work in return – which also counts for GDP, reducing the negative comparisons of % GDP. If the Labour Party can’t come up with a fair, caring, win-win system you leave a vacuum for the draconian right to fill.
In other words, a job guarantee
WOW. I’m delighted that the first taxresearch blog item I read for several months is such a fine and topical circumscription of one of the most important questions facing early C21. (It would be THE single most important had global consumerism and neoliberal capitalism not produced the climate emergency).
Thank you Richard Murphy. I’m glad to be back. Fantastic outline of MMT’s relevance and its necessity and contingency.
Thanks
I am pleased to note that both Stephanie Kelton and Warren Mosler have retweeted this post.
I am pretty sure that suggests that they think the arguments are credible.
Here is an article proving MMT is not exclusivley an left wing agenda,
” M.M.T., as it’s known, is attracting a conspicuous number of fans in an unexpected place: Wall Street. Money managers, chief executives and business analysts maintain that the approach offers several important and overlooked insights, and far from finding it fanciful or deranged, they are using M.M.T. to build economic forecasts and even trading strategies.”
https://www.nytimes.com/2019/04/05/business/economy/mmt-wall-street.html?fbclid=IwAR1qAqjOKDSGOECv9pOIzVGYYUHIRRE4VzhhKBZ68pfK7eIzyLtsN5gpgRM
I agree with others – very good.
So pleased to see the job guarantee rightly described as not necessarily related to MMT and really simply a basic aim and desire for full employment – rather than as so often, a stock of temporarily unemployed workers, kept sweeping the streets or painting them or whatever, just waiting to be snapped up as soon as private industry can afford them…
Also agree that foreign exchange is an interesting area – are forex traders the only speculators that are essential? Or maybe that’s another myth….
One to look at
As I say, there will be more on this theme
@Peter
a) You could recognise that MMT is correct without endorsing the idea of a JG, but you would not propose a JG unless you understand MMT.
b) MMT has shown that the JG is a superior buffer stock (of *employed* people), far better than the current “requirement” for unemployment.
c) Your description of JG jobs makes it sound like workfare, which it is not. I’ve read and listened to many of the JG proponents, and this is a very unfair characterisation – sometimes used by the strong UBI proponents, who don’t understand that the UBI on its own is economically unsound.
Also I’m not even clear what’s wrong with the jobs you mentioned.
Richard
Two questions:
1) Why do you keep saying ‘promise to pay’, when you have to go on to explain that it’s really the government’s ‘willingness to accept’ that gives money its value? It’s an unnecessary extra step if you’re trying to bust myths;
2) Why don’t you explain more clearly that in a modern economy, where the government spends say 40% of GDP, the ability to print money is essentially a sideshow – any attempt to print all or even most of this would result quickly in unacceptable inflation, so of necessity the great majority of what’s spent has to be funded from tax?
1) Because it is a promise to pay – all money is. This has to fit into that general explanation
2) That’s just not true: tax never funds spend. It is raised because of the spend so your claim is wrong
What actually happens to HMRC’s tax receipts? Do they make a record of them for accounting purposes and then press a big red delete button to take that money/those electronic blips out of circulation?
The liability that is due is cancelled
That’s it
Done
Double-entry complete
OK, if you prefer, tax is raised “because of the spend”.
The substantive point is that enough tax will have to be raised to cover the great preponderance of what a modern government spends.
So MMT is in essence a sideshow, and that is one of the things that you should explain.
No it isn’t: it’s absolutely fundamental
And as matter of fact, tax is not raised to cover the spend and has not been at almost any time since WW2 and so explaining why that’s OK is viotal
The sideshow is the ridiculous claim to the contrary
Please stop wasting my time
I really am not trying to waste your time.
I am making the simple point that modern government spends about 40% of GDP each year, and that (without unacceptable inflation) it might be able to print new money to the worth of say 4% of GDP each year.
That will leave the other 36% (nine-tenths of the total) to be absorbed by tax.
A sensible discussion of MMT recognises this.
The government creates 40% of GDP as money to spend
It has a choice about how much to claim back
It has claimed 36%
It need not have done so
That’s the point
When you understand this you can make better decisions
You are pretending there are none to make
You are wrong
I doubt MMT is universally accepted yet – famously, two economists in a room alone together have three opinions – so are there any credible (or seemingly-plausible) counter-arguments that need to be engaged with and demolished?
I will be trying to do that with shorter myth busters over the next week or more
Thanks for this excellent, succinct explanation which I hope will reach into minds not hitherto familiar with – or even hostile to – MMT.
As if you don’t have enough to do, just one question from an often struggling non-economist (i.e. me). In this article Willem Buiter (former chief economist at Citigroup & visiting professor at Columbia University) he concludes ‘MMT thus ignores the level of demand for base money at its peril.’ Is he making a valid point? ‘The Problem With MMT’ – https://www.project-syndicate.org/commentary/problem-with-modern-monetary-theory-overlooks-money-demand-by-willem-h-buiter-2020-05
Apologies if you’ve already answered it somewhere but I’ve failed to notice and get my head around it.
Without wishing to sound sycophantic, sincere thanks as always for the enormous effort you make day in, day out, to inform and educate. Your (plus all the other MMT protagonists) dogged persistence will be rewarded. While we are impatient for change, especially in times of crisis, it’s useful to remind ourselves that it takes 10-20 years for a sapling to become a mature tree. It’s starting to feel like we’re reaching the 20 year time span. For some inexplicable reason the glass is looking half full today 🙂
John
What a crass article
First, he has not bothered to find out what MMT is. He thinks it’s helicopter money. It most certainly is not.
Second, he thinks MMT gives the choice of sovereign debt default rather than forced deficit default. No it does another: it says there will never be default and debt can always be paid.
Third, he argues that interest costs on monetised debt could become unaffordable. But the whole point is that MMT says monetised debt need have no interest cost at all – and indeed QE debt has not, so the claims made are really quite absurd
For a supposedly informed commentator that is really very bad
Richard
Thanks Richard. I should’ve trusted my own judgement. That’s often a problem with us laypeople. The fact that someone with his ‘qualifications’ gets to have such an article published in Project Syndicate (a network of 459 media outlets in 155 countries) is quite shocking. It only appeared a month ago. Hopefully his inaccuracies have been pointed out, even though any damage has already been done. I guess we’ll be seeing many more of such rebuttals – probably with neo-liberal funding – greasing the path towards the inevitable programme of tax & social service cuts, ensuring political ideology continues to ‘trump’ economic reality. Anyhow, thanks again for your time & critique. That’s another Americano I owe you.
🙂
This is brilliant, thank you.
I have read a good amount about MMT and there’s a lot of stuff i don’t understand very well. I’m very glad you brought up the issue of exchange with other nations’ currencies and the fact that MMT doesn’t work if you don’t have full control of your money. So for Greece, for example, MMT des not describe their money system at all because the European bank controls their money supply, is that right? Also, if a state mismanges their money supply other economies may not want to accept their money as payment for stuff?
Which makes sense, if I understood that right.
Right re Greece
Right re other currencies – but that is generic and not an MMT issue
As a new reader, this touches on one thing I find confusing. I can see why MMT could be a coherent explanation of economics in a closed system, but struggle with making full sense of it in a real world of intersecting economies. In practice does a government have less control than the theory suggests?
And the Greece example is interesting. Personally I think the UK made a massive mistake in rejecting common cause with our European neighbours, but has the EU actually been fatally flawed since the introduction of the Euro even though it must have benefitted trade free of transaction costs?
I know you have another question outstanding and have reason for delaying it…
Why hasn’t the government got control? It has at least as much control here as under any other system
And no, the euro has not undermined the EU but it has not helped eurozone couintrie3s. They are not the same and we were never in the euro. Thank Gordon Brown for that
I look forward to reading your detailed proposals for a Job Guarantee scheme – be prepared to be ripped apart by people accusing you of proposing ‘forced labour’ or ‘workfare’ – good luck! Really – good luck.
🙂
I have read this in detail and it is very good indeed. No one can say that an explanation of MMT that also talks of its limits as well as potential is biased or from la la land. Mind you, the usual suspects will.
The only thing I would suggest is over the issue of sovereignty – I have latched onto this concept because I think it is important these days for people to know that borders and laws are not the only means of expressing sovereignty – producing money is even more so an expression of sovereignty than your laws or borders given the potential benefits to voters. Knowing this might change the expectations of a people that have been eroded for gods knows how long.
However or what ever you choose to write about next, ensuring that certain themes (such as sovereignty) appear regularly across the myth busting might be a good idea. The sovereignty issue also portrays Government and the private sector more on a even footing whereas everything from the 1970’s IMF crisis taught us that Governments were weak and in hock to the markets who now ruled.
But I’ll say again – this is very good indeed and thank you.
Thanks
Thanks – nice clear explanations – I had a brief chat with an IT consultant today – he was on board with government ability to ‘borrow’ very cheaply. We usually talk about holidays! (ok, we did that and sourdough too)
Picking out one area above – I like the idea of a job guarantee and agree that workfare has something of the chain gang approach to it.
We know that there is already plenty of work available in NHS and care sector, provided you make the training for these posts much more accessible. Agriculture and environment likewise. Then in construction there can be the GND agenda which can lead to training opportunities.
All of this would appeal, I think, to the Left and the Right – we do want to see as many people in decent work as is possible.
Basically the current time calls for (fully funded) training, training, training. This could also invigorate universities, local colleges etc.
I think the downside we see all around us – and CV19 has truly exemplified this – Gov’t is completely unwilling to take a practical approach to anything. Ideologically driven to outsource contracts to private companies who happen to me run or have consultants linked to the Tory chums.
I hope that things change.
@ George
It does make it sound like workfare because effectively, that’s what it is. If you’re not forced to do it it’s only a Job Offer.
And why would you have somebody who would otherwise be on the dole be sweeping the streets when you know you can afford to have them sweep the streets anyway? If they are available to work in the job, we know that money is always available to pay them. We need full employment and we can have it. That is the inconsistency of the conventional job guarantee: http://www.progressivepulse.org/economics/modern-monetary-theory-is-logically-inconsistent-with-a-job-guarantee
@Peter Your proposal is aimed at achieving full employment. This means that a shortfall in private sector provision of jobs is funded by government spending on jobs that provide a useful service. If the private sector then tries to expand due to increased demand for its products, it will compete to attract people from those government funded jobs.
If that is the case, then you have a buffer stock, and I don’t see why it’s different from a Job Guarantee. In both cases, a job is offered to anyone who wants one, which is an accepted definition of full employment. Your proposal can only be different if you insist that some of the JG jobs are “less real” than the jobs you are proposing. I maintain that to be incorrect.
Are you two taking at cross purposes?
Just checking?
To counter some of Nick’s comments above;
Money supply increases as an economy grows. Invariably such growth either requires technological improvements or increases in the labour supply or both. This is why if a society is to prosper it is important that the government follows a policy of full employment not as happened in the 80’s one of monetary constraint. MMT aims to provide a framework to encourage full employment and so expand the economy. If it is successful then it is not necessary for all the increase money created to be removed in tax and will not inevitably lead to inflation. MMT does not deny that in a situation of full employment then increasing money supply will create inflation. The point is where there are unused resources then any economy should be able to use those resources and not leave them idle. Without the creation of additional money there is no way to bring those unused resources usefully into the economy.
The criticism of those who do not favour MMT hinges on the market belief that the private sector allocates resources efficiently and that there are no unused resources available at a price that will not create inflation or that any government use of resources simply takes those resources from the private sector and so there is no net gain. In fact if you are a neoliberal your belief that government by its nature is less efficient than private industry then inevitably government spending will result in a smaller economy and/or inflation. The problem for liberal/classical liberal/neo liberal economists is that they have no policy for improving the wellbeing of society beyond the view that the market will eventually correct things. The problem with that is the correction can only happen with the decimation of the economy and society.
This is a political choice and one that needs to be addressed.
Thanks
I like the argument
It’s hard to believe that it’s almost 50 years since Jimmy Reid, the other Glasgow shipyard worker, gave this address. Never more relevant.
https://senscot.net/speech-jimmy-reid/
He must have seen you coming.
Very good
Excellent speech. First time I have come across it and resonates with me as he made it at the same time as I started work in Local Government, age 18, two years before the Reorganisation he speaks of. Also, a month or two after the 1972 miners strike, a State of Emergency declared by the Heath Government, power outages and the 3 day week.
Excellent Richard. Suggestion : Evidence Section para 5. Is it necessary to use the phrase
” run an overdraft with the B of E”,. as this sounds perjorative and like the household analogy again.
Noted: good point
The terminology you use, the language you use, the points you emphasise in an argument to persuade, has to depend on the audience you are addressing. Academic economists is one thing, politically idealistic politicians from both sides (and everywhere in between) are another and lay voters another. Ultimately you have to persuade the lay voters or it is all academic – just shouting from the side lines of opposition.
“In summary, MMT is the best currently available description of how to manage an economy to deliver full employment. That is its merit.”
Congratulations. Well presented and finely balanced to deliver the message that MMT is descriptive of how money works, and delivers full employment. I always feel that the MMT message is strongest when it emphasises the descriptive; indeed it is more descriptive and less prescriptive than neoliberalism can claim, and therefore less ideological than neoliberalism. The irony here is that neoliberalism’s principal claim is that it is descriptive of how markets work (except when they don’t); but not really ideological (it is, almost to the point of religiosity).
The risk of MMT’s emphasis on description, however is that it also takes something of the ‘political’ out of ‘political economy’.
Only part way through so far, but one thing I noticed (which is a common phrasing, but I think it’s a little misleading as-is):
I would prefer to see that phrased along these lines:
Every time this aspect comes up for discussion the link between spending power, demand, supply, and inflation is glossed over; understandably, for reasons of simplicity – not introducing too many concepts at once. But that common phrasing is ambivalent – someone coming from a mainstream frame would read the common phrasing in quantity theory of money terms without blinking, which will leave them with mixed ideas about what MMT is claiming, which may then lead to them thinking that it’s internally inconsistent. A way of phrasing that explanation which forces them to stop and think would avoid that.
That is good
Another comment (still progressing through the whole piece):
Is this combining several points that should probably be separate? The idea that governments borrowing in their own currency is fundamentally ridiculous (because they’re the ones who created the money they’re “borrowing” in the first place) is distinct from the idea that owning their central bank allows them to completely bypass any apparent need to borrow; in addition, the actual function of debt issuance probably needs its own section – I’ve been asked many times “why do they borrow at all, then?” as a gotcha question, and I think it probably needs a carefully constructed rebuttal.
Maybe not, though – trying to reword it I find the first two ideas are more interlinked than I thought. Maybe it could be framed something like this:
Noted
I will be elaborating on this
I though the word “overdraft” was to be avoided?
I am not sure why – it’s a current account advance – and they’re called overdrafts
Mr Lucas wrote this in a comment earlier on this thread: “Is it necessary to use the phrase ” run an overdraft with the B of E”,. as this sounds perjorative and like the household analogy again.”
You replied with this comment: “Noted: good point”.
Touché
Yeah, I agree that it’s not a good choice of phrase – I was trying to rework what Richard had already said, which is why I used it. In my defence I /did/ shift from actively describing it as an overdraft to suggesting overdraft was an analogy 😉
Which it is…
What is the upshot on the use of the word “overdraft” in the context of the Government? After Mr Lucas, I thought I knew. Now, um eh, wink, umm – I don’t.
Fair question.
I think it’s fair in terms of the Ways and Means Account
That is, in effect an overdraft: an unsecured loan from a bank, albeit one the government owns
That makes it very different from such a loan from a bank the government does not own
Great. Understood. I think I understand the qualification, although an example does not come to mind, so slightly in the dark.
Now, what do we call the debit balance in the bank the Government owns?
A loan account
They net out on consolidation
So what you call them really doesn’t matter much
One final note, this time about the job guarantee being integral to MMT or not.
I think this has scope to be a little controversial, because Bill Mitchell argues quite strongly that it /is/ (and Bill Mitchell arguing strongly is a sight to behold). I haven’t seen him present a straighforward argument as to why, though – it may be worth reaching out to him to ask about this.
The way that I think about it (for what that’s worth) is that on one level it’s not integral – MMT is nothing more than a description, with no policy prescriptions, and so a job guarantee is an additional component on top of “basic MMT”. But on another level it’s actually fundamental to the whole idea of the Phillips curve (in multiple variations – the basic idea that there’s a tradeoff between a buffer stock of spare capacity and inflation), and within that it’s really just a question of framing.
The current alternative to a JG is unemployment, which in most countries includes unemployment benefits providing a basic income – the level of that income and the breadth of the population supported by it varies, but I don’t know of any monetary sovereign country that leaves its unemployed to literally starve as a matter of policy (I could be wrong, but certainly I don’t think any reasonably wealthy country does). What that means is that the unemployed are actually being paid a wage, to be unemployed (and play their part as the buffer stock of spare capacity) – effectively, it’s a job guarantee where the job is “help control inflation” (alternatively, “sit on your arse doing nothing except apply for jobs”).
I think you could argue that even a policy of providing /no/ unemployment benefits still imposes a cost on the individual, which is effectively a negative wage – a guaranteed job being fucked over by the world until you manage to find work, or you die.
So although MMT at one level doesn’t prescribe a job guarantee, the broader idea of using a buffer stock of spare capacity to control inflation /does/ very strongly /imply/ something that resembles one (though generally a really dysfunctional one, and sometimes effectively a /negative/ job guarantee).
Given the potential for controversy over this, it may be worth giving careful thought to exactly how this argument is phrased.
I tried to be succinct
I hope I made it clear that I think the idea is inherently linked to the idea that MNT explains how to deliver full employment, but that this is a choice.
I agree that the other choice is to leave people unemployed
I will admit I will not be reaching out to Bill Mitchell. I think there are other, considerably better, sources.
Mr Fowler,
I think you articulated what I was ruminating on in my comment, above; only much, much better, and more acutely. There is a delicate limiting factor, where MMT balances between description and prescription; it functions a little like Hume’s ‘is’ and ‘ought’ distinction, there is a ‘portamento’ from one to the other.
Thank you very much Richard – excellent summary of MMT, intelligible to the non-economist, and, let’s hope, politicians and journalists.
I recently led an online discussion of MMT for our local Labour Party Reading Group.
One issue that came up was that MMT was a luxury for advanced nations that had control of their currency and tax systems, but that it did not speak to developing nations with various restrictions on both of these fundamental tenets of MMT.
My, on the hoof, argument was that empowering developed nations not to be slaves to the markets through,for example abolition of tax havens, improving worker, societal and environmental conditions, would export such benefits across the globe and create examples that all nations could follow.
What would you have said?
Well worth reading Stephanie Kelton on this
She discusses degrees of monetary sovereignty that states have – and that this is not a black and white issue but a greyscale
Some states have very little such sovereignty – the US has total sovereignty
Everyone else is somewhere between
So the point of MMT is that it helps agencies (WB, IMF) understand the significance of local monetary sovereignty and how to establish it
It then becomes a developmental tool by changing policy on lending, especially from them
It also then becomes a tax too as well, because sound tax systems are critical to MMT
So I am not saying that these countries can use you’re MMT: they can’t, but it indicates how reform is required, and that’s pretty powerful
I notice the Guardian is still peddling the same gibberish today.
https://www.theguardian.com/business/2020/jun/09/uk-jobs-outlook-covid-19-pandemic-manpower-furlough-scheme
“The furlough scheme, which began in March, is costing taxpayers about £14bn a month, and is being used by about 1m firms.”
Weirdly, what they are saying in that sentence is: taxpayers are costing themselves £14bn a month, which is bizarre. They don’t even see it. So much for journalism.
Thank you for all the work you do on this absolutely crucial issue.
George Osborne and Co were either ignorant or lying when they imposed austerity as a consequence of the 2007-8 crash. But the fact that they subsequently sanctioned HS2 on the basis of creating wealth and employment (MMT) shows that they were not ignorant – and were therefore lying, with appalling consequences. MMT aims for full employment because full employment means full use of human resources: unemployment is wasting human resources.
You (MMT) say: “a government creates money every time it spends because whenever it decides to do so it instructs its central bank to extend it the credit that makes this possible.” That would be true only if ALL of government spending was via overdraft. If you look at BoE Ways and Means advances to government from 2007-2020 you will see that at the height of the Credit Crunch it only reached £20bn (~10% of UK government funding) quickly dropping to near zero. (Series RPWB72A, https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1963&TD=31&TM=Dec&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=RPWB72A&UsingCodes=Y&Filter=N&title=RPWB72A&VPD=Y)
So MMT is fundamentally mistaken.
The balances are stated after the offset of transactions that clear the overdraft, as managed by the Debt Management Office
You claim is really rather absurd – like saying that the balance on a bank statement explains all the transactions that go through it
You really do need to understand the difference between stocks and flows
In which case your statement “a government creates money every time it spends because whenever it decides to do so it instructs its central bank to extend it the credit that makes this possible.” should be more like this:
“a government creates money every time it spends because whenever it decides to do so it instructs its central bank to extend it the credit that makes this possible. Within a week or less in normal times it destroys that money by repaying its overdraft, so the net money created by government spending is zero.”
This is endemic to the discussion of money creation: it never includes money destruction.
On that account, there is destruction, of course
All tax paid is m money destruction, I agree
But I am glad you now agree that, because overall there is not
Richard
You have spoken of a ‘counter party’ element in all of this.
If it is the private sector or private money, what happens if there is not a counter party as such of this nature?
I’m just trying to get from underneath the shadow of the private sector calling all the shots so to speak – like in the New York City budget crisis where the banks decided that they were not going to be buying NYC bonds and essentially used that as leverage to take a more pro-active role in the NYC service provision which led to job and service cuts.
The counterparty risk exists when bo9nds have to be relied on
At government level they do not
NYC was vulnerable
You say: “Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, as has now been agreed by the UK government and the Bank of England, simply run an overdraft at its central bank on which no interest may be charged.”
A permanent growing government overdraft with the central bank creates permanent growing reserves, which are assets of the private banks. In order for the private banks not to swap them for interest-bearing assets the central bank has to pay interest to the private banks on reserves. The central bank has to charge the government that interest. Therefore it is impossible for the central bank to lend government money without charging interest.
Here we go again…
Why not go and read about reserves?
They are not voluntary in all cases
There is more than one type of reserve
And the interest payment is optional
And the BoE agree
But why not say something that is untrue instead
1. If paying interest on (excess) reserves is optional why do central banks do it? (BoE has since 2009.)
2. If the BoE lent, say £200bn a year to government via Direct Money Finance as permanent loans, then in 10 years the private banks would have £2trn in reserves and £2trn in matching deposits. If they pay interest on these deposits but were paid no interest by the BoE on reserves, they would go bust. Do you agree?
a) To control short term interest rates – which are effectively sweet by the mechanism – meaning that the rate is entirely under BoE control, as has been apparent for a decade
b) This would only be true if HMT had created £2trn of cash for the banks to hold, and all was on reserves. Have you noticed how little they pay on deposits and how marginal this is to their profitability?
Okay, I think we have agreed two things.
First, that without QE,central bank overdraft, or Direct Money Financing, government spending creates no new money.
Second, that while the central bank pays interest on reserves, QE,central bank overdraft overdraft, and Direct Money Financing are all equivalent to borrowing from the private sector.
Don’t be ridiculous
The BoE says QE creates new money
So you got that wrong
As you have everything else
Please do not waste my time again
“In summary, MMT is the best currently available description of how to manage an economy to deliver full employment. That is its merit.”
I agree. Just floating some thoughts that you may have to deal with.
Full employment and guaranteed jobs is, I think, a good idea/value to have currently, but aren’t we going to have to rethink that in the light of growing, mechanisation, automation and AI? I think the end game is for everyone to have good standard of living/quality of life (however we define that) and whether we think poverty/affluence is absolute or relative.
Eventually most, if not all, work could be done by robots and we will have to find a way of paying people to amuse themselves? Or is there an underlying instinct that drives us to be productive (or drive others) in order to survive? In the interim, will ‘working taxpayers’ be happy to pay for ‘non-workers’ to have a standard of living which is the same as theirs? Is this where JG gets replaced by a Universal Guaranteed Income, where the UGI is enough to provide a good standard of living and any earnings are on top of that?
How would this impact on Freedom of Movement agreements with other States which don’t have a similar UGI and standard of living?
Also, with reference to “downward impact upon the balance of payments and the long-term value of the currency”; some MMTheorists seem to discount this impact or the need to do anything about it even over generations. What are the implications for Free Trade Agreements with States or blocks of States with whom we have a consistently large, negative balance of trade?
If MMT needs a somewhat closed economic system to stop money from leaking out it has a difficult Political balance to achieve between those who want FoM as an Internationalist ideal or as a cheap source of labour; and those who want Free Trade as an ideal or because they selfishly profit personally, and those who tend to protectionism to protect jobs.
Paradoxically, it might be easier to convince this Conservative Government, while it is in shock, to adopt MMT, than the Labour Party!
I had hoped to get to the AI issue earlier but have failed
So let me post this and say I have it on my list of myths to address
And please accept muy apologies
Thanks for the acknowledgement 🙂 Thought you were a bit harsh with Mike King – looked at his website, his heart seems to be in the right place.
I remember his book
I was not impressed
Perhaps we need another myth-busting blog to address points raised in today’s twitter storm.
I’m not entirely serious, but there were some rather odd issues raised.
The Keynesian Myth perhaps?
Or the economics education myth? A few years ago, I went to a university open day with one of my grandsons and one of the options we explored was economics. There was nothing in any of the presentations to support claims made today on twitter. Having become familiar with the idea that macro is somewhat missing from syllabuses, I spoke to one of the presenters privately to ask about macroeconomics – and basically got a blank look.
Today’s exchanges with John Weeks – who I am supposedly writing a chapter for right now, although heaven knows why – and Jo Michell, whose specialism is semantic wriggling rather than economics – is pretty depressing
Very depressing, it’s like they’ve been saving it up for publication day. Some of the comments are beyond the pale.
The semantic wiggling is a bit like some of the arguments we get in the Scottish independence debate, a prime example being the “pensions expert” who could go on for days. Thanks for liking a couple of my own wiggles btw.
I fear some if it is misogynistic as well…
Much appreciated your engagement