David Smith has, apparently, been leave economics editor of the Sunday Times since 1989. Today he addressed the issue of modern monetary theory, and you would have hoped, given that experience, that he might have offered some intelligent insight or comment since he claimed to have read Stephanie Kelton's 'The Deficit Myth'. This, however, is the Murdoch press in action, and what he offered was anything but that. For an alternative way to read his comments, see here.
I discussed his article this morning with someone who knows more than I do about modern monetary theory, and suggested that it was not worth responding because the article was so poor, but, since then I have noticed that some who also offer deeply unintelligent comment upon modern monetary theory on Twitter and elsewhere, like Ann Pettifor, were latching onto the article with glee, despite its origins, and so feel it necessary to do so.
He started with a common trope, saying:
My reluctance to write about it has been in part because its true believers can get very exercised when faced with criticism, even if it is constructive.
But that's not true. What we do get really bored with is people making claims as to what MMT is that are not true. And why not?
Having started in this way little got better thereafter. For example, he claimed this of Stephanie Kelton's book:
It is arranged as a series of myth-busting chapters, although people who are aware of conventional economics do not believe many of these myths. The first “myth” is that the government's budget is not the same as a household budget; something I thought had been buried many years ago. The same goes for most of the other myths.
Frankly, that's absurd. He knows that throughout the last decade Cameron, Osborne, Clegg, May, Miliband and McDonnell n(to refer to the UK alone, and Obama, Clinton, and almost all Republicans barring Trump in the US) have all been talking about the country 'maxing out its credit card', so he is being disingenuous in saying what he has. It's either that or he is otherwise ignorant of economics or has been absent since 2010.
Then he claimed:
The central idea of MMT is simple. It distinguishes between currency issuers and currency users. The only currency issuer in America is the US Treasury, with the Federal Reserve acting as its agent. Everybody else is a currency user.
As a currency issuer, the government has the ability to print as much money as it needs. The budget deficit itself is not a constraint, and neither is government debt.
This is true, in as far as it goes. But what he actually fails to note is that MMT says that a currency issuer cannot have debt denominated in the currency it issues because that is a tautological impossibility. The evidence of this comes from this:
Some claim – wrongly, I think – that MMT has already been adopted in response to the Covid-19 crisis in the form of quantitative easing (QE).
I am well aware that there are issues surrounding MMT and QE, but if there is a point - and it's the one he misses - it is that so-called government debt only exists because the governments wishes that it does so, and not because it needs it.
Thereafter Smith, rather surprisingly, correctly notes:
The only tests of whether a budget deficit is too large or too small [in MMT] are inflation and unemployment. If inflation is low, the budget deficit cannot be too high, and if there is unemployment, the budget deficit must be too low.
This is true. If money and so-called debt are not a constraint - and they aren't - then these two issues certainly are. Smith proves as a result that he has understood a core MMT argument, from which it follows that unemployment must always, in that case, be a choice. But of these claims he says:
Many people will catch their breath at this point, not least because Kelton claims that this is not just a theory but an explanation of how the world works. However, that requires us to be taken down a rabbit hole of implausibility.
In respoonse he offers this:
If deficits can be costlessly funded and managed by the simple device of issuing currency, why do governments need to levy taxes? In perhaps the least plausible explanation of how incentives work, people apparently need to work to meet their tax obligations. If they did not have to pay tax, they would not need to work. I rather think they would, to satisfy their wants. Another reason for taxing – to redistribute wealth and income – does not wash either: you can redistribute wealth and income within the tax system without raising any net revenues by taking from the rich and giving it to the poor in tax credits. Taxation exists in the real world to raise revenue. And borrowing by governments also plainly exists.
Let's ignore that he says tax does not need to exist to offer tax credits, which is an interesting idea. And let's also ignore that MMT does not say that people need to work to pay their taxes when it actually says people need to work to achieve the things that they and society want. Let's instead note that in saying this he ignores the key argument on tax that MMT makes, which is that at any time, and most especially in the current era, tax is the only effective weapon a government has to control inflation. That is, of course, because we have net effective zero government interest rates bow, and because of the combination of large central bank reserves and the use of QE are very like to continue to do so for a very long time to come. It's also because tax is the only way that we have to cancel the impact of government spending without it being inflationary - which point Smith appears to have wholly missed.
You cannot read Stephanie Kelton's book and not know these things. It makes it abundantly clear that this cancellation process to control inflation is what the primary purpose of tax in MMT is. Nor can you miss the fact that tax is, when it comes to social, economic and even fiscal policy, about more than redistribution (although it can be used for that purpose). But Smith completely ignores all the arguments in question. The result is that his rejection of MMT - because he clearly thinks the above paragraph his killer argument, offered before moving on to abuse - is based on a deliberate misrepresentation of what MMT says.
This is typical, and even normal now. It was, for example, what Ann Pettifor also did in her book on funding the Green New Deal last year, which was so wrong about MMT it was almost laughable in its claims. But that does not stop Smith ladling out the abuse, most of it also misinformed. for example, he says:
MMT is misnamed because it is not monetary at all but almost entirely fiscal. As Kelton puts it: “MMT requires us to demote monetary policy and elevate fiscal policy as the primary tool for macroeconomic stabilisation.”
That's firstly because it's necessary, and secondly it's because in a very real sense MMT eliminates the boundary between the two, and by making clear that interest rates should be zero in perpetuity, if at all possible, inevitably puts what has been called fiscal policy (but which in MMT's case is quite different from that which neo-Keynesians offer) at the forefront of attention.
But what's really bizarre is that after rolling out all the usual names (Rogoff, summers, Krugman) who do not like MMT he says:
Not even Jeremy Corbyn and John McDonnell embraced MMT, despite being urged to by some supporters.
I'll happily take the sideswipe. At least it shows he was paying attention to the last decade after all, and you can read into that what you will about his claim on the First Myth.
To this he adds:
They were wise not to do so, because there are fundamental problems with MMT. It would take another book to address them fully.
I'd politely add, that would have required him to have understood 'The Deficit Myth', but he continues, quite bizarrely, saying:
Kelton has fun with Margaret Thatcher's “backward dictum” because Thatcher described a government's finances in the way you would describe a household's finances. However, Kelton has more in common with Thatcher than she thinks. In the early 1980s, when the Tories launched their monetarist experiment, Thatcher thought the key driver of inflation was the budget deficit. The deficit had to be cut to reduce money supply growth and inflation. It is why people associated monetarism with “cuts”. Kelton looks at it from the other end of the telescope but applying the same principle.
Apparently this quite amazing association is because:
[It is a quite] “preposterous” idea that getting the Congressional Budget Office in America, or equivalents elsewhere, to predict inflation will take care of the inflation risk from large budget deficits. Given the forecasting record on inflation, it plainly will not.
And so he claims
[W]hile advocates of MMT see it as a two-way street in which spending would be reined in if inflation took off, politicians may see it differently. Would it be a recipe for huge instability in the provision of public services, with public spending cut in response to rising inflation in a way that would make George Osborne's austerity look like a tea party? Or would the government decide it could live with a lot more inflation? Either way, it would not be pretty.
So we go back to the point he deliberately missed, which is that it is not spending cuts that MMT says would be required if there was inflation at full employment (which is the only sort of inflation which is within the control of a government, come what may) but tax that would need to be increased.
By deliberately missing the fact that MMT has already answered the point he has made - by suggesting the use of tax as the only tool we now have which is capable of managing inflation if it were ever to rear its head again (which seems very unlikely for a long time to come) Smith has deliberately constructed a 'straw man' argument to dismiss MMT. His argument is, then, meaningless.
Or rather as an economic argument it is, but politically it is very revealing If the only way you can argue against MMT is by ignoring what it actually says then there is something important to note. And that is that people like David Smith are in reality profoundly worried by MMT and actually know that they have nothing in their own armoury with which to launch a counter-argument, because it describes the world that we live in with greater accuracy than any other economic model now available, whilst making clear that the mechanisms of economic control used by governments over the last forty years (i,e spending cuts and interest rates) now have no further part to play in the management of the macroeconomy in the world we now live in. That must be deeply disconcerting for neoliberals like Smith, and neo-Keynesians like Pettifor, who was tweeting this article for all she was worth today, but the simple fact is that all they reveal is that they are very frightened that their whole worldview has been overturned and have no clue what to do about it.
I would suggest that they should think again. I suspect that will take a while though. They have vested interests in maintaining their current positions, however wrong they are.
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I often wonder if otherwise smart people like Anne Pettifor deep down have a feeling that MMT is correct but doubt it’s prospects at winning over the public and thus reach out at insane arguments against it.
I have discussed this at length with Ann
Her position is unfashionable
And not just to me
“The first “myth” is that (there) the government’s budget is not the same as a household budget, something that I thought had been buried many years ago.”
David Smith must be the laziest Murdoch “hatchet-man” economics journalist ever! Does he ever bother fact-checking anything?
Here are Thatcher’s, Cameron’s and May’s statements that government doesn’t have any money of its own:-
Margaret Thatcher speech 1983:-
“One of the great debates of our time is about how much of your money should be spent by the State and how much you should keep to spend on your family. Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay–that “someone else” is you. There is no such thing as public money; there is only taxpayers’ money.”
http://www.margaretthatcher.org/document/105454
David Cameron speech 2015:-
“Frankly, it is wrong for a Government to spend money like it is growing on trees because we all know that there is no such thing as public money – there is only taxpayers’ money and it should not be spent on bureaucracy or crackpot Government schemes but on you, your families and your futures.”
https://www.dailymail.co.uk/news/article-3026910/It-s-immoral-spending-taxes-high-says-Cameron-Millions-families-200-better-today.html
Theresa May Parliamentary Question Time exchange with Jeremy Corbyn 2017:-
“An exchange on public-sector pay followed, with Corbyn asking for specifics on a pay rise for NHS staff, which May did not provide. Instead there was a mini-lecture on public finances — “the government has no money of its own” — which allowed Corbyn the obvious retort that finding £1bn for the DUP’s support had not proved problematic.”
https://www.theguardian.com/politics/2017/oct/18/pmqs-verdict-corbyns-easy-win-on-the-economy-should-worry-tories
Thanks
Appreciated
Sadly, I do think a response is necessary when such nonsense appears in the media. I fail to see how even Ann Pettifor can approve of his statement that “MMT is misnamed because it is not monetary at all but almost entirely fiscal”, and it gets worse thereafter as you say.
You referred to his statement that one of the MMT tests is “If inflation is low, the budget deficit cannot be too high”. I think even that is wrong, as MMT would certainly not recommend an unbounded deficit, and may not even prescribe any specific value.
Instead, MMT would say spending should be targeted at implementing desirable policies, subject to evaluating future inflation risk, potential cuts in spending elsewhere and/or tax changes. The magnitude of the deficit may be estimated in advance, but the out-turn will often be different. Inflation risk may still be a concern even if the current value is low.
I accept your point: the quality of the deficit does matter
And actually the same is true of the quality of the tax as well
“if there was inflation at full employment (which is the only sort of inflation which is within the control of a government, come what may) but tax that would need to be increased.”
It’s at this point where there is an inextricable link between taxation and Govt spending and there is a choice to cut govt spending or increase tax or a mix of the two. To assert tax doesn’t pay for govt spending won’t wash with the electorate and it is disingenuous to say it doesn’t.. in all probability big tax rises in the face of inflation would lead to a change of Govt and a cut in spending. You can see why many just see this all as Keynesian boom bust economics .
What you’re asserting is that because a stopped clock is right twice a day it must be right always
And just to our this in context, where do you think this inflation is going to come from?
Frankly, you’re taking nonsense
And when people see what will happen to unemployment they won’t give a damn about whether G = T
I wonder what individuals like David Smith and Ann Pettifor actually think money is for.
Do they recognise one of its prime purposes is to inject “trust” into the obligations and reciprocity which individuals engage in everyday in a monetary economy? Like the unspoken one of “If you’d be obliged to manicure my nails I’ll give you ten pounds.” rather than “Thanks for doing my nails I’ll give you a chicken in a few weeks’ time when it’s fattened up.”
Do they not recognise that when asset bubbles burst like the Great Depression, or Great Recession, or the volume of transactions suddenly declines because of a pandemic and panic ensues some agency has to be able to maintain the circulation of money for reciprocity purposes by creating it from thin air and it’s not going to be private sector banks who’ve become most reluctant to lend?
I wish I could answer that question
Ann creased providing reasoned or consistent answers t9o questions some time ago
I go to one meeting with her where central bank independence is fundamental, for example, and the next it is a curse
I rather suspect David Smith is much the same
Both end up defending a world where full employment is far from the aim, and a Green New Deal is impossible
Yet she was a Labour Party adviser was she not? Is she still?
Yes
I made the mistake of nominating her
I’ve read a bit about MMT and have been following some of the arguments and have a couple of questions which nobody has seemed to really give an answer to. I would appreciate it if you could or point me somewhere which does.
1. MMT says you can control inflation via taxes. This may be the case, but how does it work in practice? If the government increases spending and inflation increases by amount X, what is the amount Y that taxes have to be raised by to control it? Is this even possible or realistic as politicians would not want to do so for fear of losing votes.
2. What about stagflation? It is common that economies have high inflation at the same time as high unemployment. MMT claims that you will only get inflation when you have full employment. How do you square this?
I simply think (1) is a non-issue once it is understood, but it is not understood at present
I have written a blog dismissing the stagflation argument for the morning
A linked but slightly different point about the tax raising issue. How does MMT address the issue of fiscal drag?
Please explain the relevance of the question
In private discussions with David, he readily admits MMT has much to offer.
He does though have to put aside his sensibilities when writing for the Sunday Times.
Then he should quit his job
So anybody working for Rupert Murdoch should leave their moral compass at home? How sick is that?
Kieran T.
If your anecdote is correct, then David Smith has done a Faustina pact with the Sunday Times.
His soul is his own to do what he wishes with.
Just goes to show that there are people at the Sunday Times who are keen to discredit MMT. Perhaps this is because MMT is now “out there” and can no longer just be ignored.
All in all, things are looking good.
Do you worry that “controlling inflation” would be too technocratic a justification for tax in the eyes of the public, lacking the moral authority of funding public spending? And that this could undermine public consent for taxation? Just wondering if this is behind the reluctance of some on the left to accept MMT.
No
Why?
Do you think the public doesn’t care about inflation?
And could not understand this if the chance was given to explain it to them?
I think the public cares about inflation, for sure. I’m skeptical that MMT would be widely understood (especially as there are going to be lots of newspaper columnists trying to confuse people!) And I wonder whether, even when someone does understand the theory, she might resent the idea that her money will be taken to achieve such an abstract goal, because “experts” have calculated that it’s necessary. By contrast, paying tax to fund schools, NHS etc is both intuitive and fits neatly into our moral ideas about collective action and social solidarity.
Anyway this is obviously not a criticism of MMT itself, just a political problem that I’m not sure we have a solution for.
How many people understand any existing macro economic policy?
How many micro economists do?
Please give a reasoned argument
Now use that answer to explain your concern
James E Baldwin.
Doesn’t it all come down to educating the public?
Once they know the relationship between tax, public services and inflation, then let democracy take its course.
I think so
“What you’re asserting is that because a stopped clock is right twice a day it must be right always“
No I’m not I’m discussing how MMT deals with inflation!! Do you just want to believe inflation will never be a problem?
“And when people see what will happen to unemployment they won’t give a damn about whether G = T“
I absolutely guarantee they will. Politicians of all persuasion are held in low esteem and are not trusted by the vast majority of the electorate. That’s not my opinion btw I’m sure you have seen the same opinion polls as me. A government ramping up inflation and taxation will almost certainly be booted out of office.
Like I said boom bust economics. Your two counter arguments 1) inflation won’t happen so don’t worry about it.. and 2) the electorate will pay as much tax as is needed to stem inflation are very very implausible assumptions, and are very weak foundations to base an economic argument.. indeed using implausible assumptions is the reason why most economists disregard MMT.
I have written a blog ion inflation for the morning
Come back again on that one with reasons why I am wrong
And I mean reasons
“I have written a blog ion inflation for the morning
Come back again on that one with reasons why I am wrong”
This isn’t a discussion about whether inflation is or isn’t going to happen. It is the response if it does happen.
And I repeat the two fundamental assumptions you make as outlined in my previous post are absolutely implausible. For those reasons your theory doesn’t stand up for me and the vast majority of economists
Why run economic policy on the basis of ‘what ifs’?
As I note in that blog, the FT think inflation had not been a serious issue for 40 years – their claim, but mine
But you want to deny millions work despite that fact?
Now please explain that, rationally
“Why run economic policy on the basis of ‘what ifs’?
As I note in that blog, the FT think inflation had not been a serious issue for 40 years — their claim, but mine..But you want to deny millions work despite that fact? Now please explain that, rationally”
I REPEAT the discussion was not whether inflation is going to happen it is the policy response if it does!!!… you don’t want to engage and i am not surprised as your theory relies on unrealistic assumptions..
And inflation hasn’t been an issue for 40yrs as policy makers made low and stable inflation an economic priority precisely because it was so damaging in the 70s and early 80s…and yes inflation came with unemployment..you seem to think it can’t return!!! Well it could depending on economic policy and who manages / mismanages the economy – and quite frankly the policy response via MMT in the face of inflation makes stagflation highly likely..
With respect there is a great deal that is simply wrong in your claims. For example, you suggest the Phillips Curve still holds true when it doesn’t. And you imply MMT is unconcerned with inflation when it is at the very core of what it is about. So, respectfully, you fall into the usual category of ‘let’s make stuff up to oppose MMT’.
But your stillest claim is that policy must be created for assumed scenarios that may well never happen. I see no sense in that. Of course I could do economics on the basis that we find a free, cost less, non-polluting, perpetual new energy source. I don’t because I really don’t think we will, but I could assume we would. It would however not make the economics useful. And that is how absurd your demands are.
You must be really frightened that MMT is right to go to such extremes
Why?
With respect there is a great deal that is simply wrong in your claims. For example, you suggest the Phillips Curve still holds true when it doesn’t. And you imply MMT is unconcerned with inflation when it is at the very core of what it is about. So, respectfully, you fall into the usual category of ‘let’s make stuff up to oppose MMT’.
But your stillest claim is that policy must be created for assumed scenarios that may well never happen. I see no sense in that. Of course I could do economics on the basis that we find a free, cost less, non-polluting, perpetual new energy source. I don’t because I really don’t think we will, but I could assume we would. It would however not make the economics useful. And that is how absurd your demands are.
You must be really frightened that MMT is right to go to such extremes
Why?
“You suggested the Phillips curve holds true”.
No i didn’t, you are now desperately making the straw man argument. I didn’t say there was a trade off between inflation & unemployment..I said in the 70s/early 80s inflation came with unemployment, yes the dreaded stagflation. Not opinion its fact. Why are you now making things up?
The centrepiece of your claim in this discussion:
1) Inflation can be controlled by taxation
2) The electorate will be happy for G=T regardless
Are both implausible. It then follows that an economic model based on implausible assumptions is hopelessly flawed !!!!
But since the Phillips Curve relationship no longer holds I am right and you are making things up
As for your two claims, 1 is true
I have no idea what 2 means
Your final para is gibberish
I think it’s time you stopped wasting my time
you have no idea what point 2 means i.e the electorate will be happy for G=T regardless..this was your reply just yesterday when i talked about the link between govt spending and inflation…
“And just to our this in context, where do you think this inflation is going to come from?.Frankly, you’re taking nonsense.And when people see what will happen to unemployment they won’t give a damn about whether G = T” (Richard Murphy)
I re iterate…The electorate will not accept higher taxes in the face of higher inflation..your go to argument in the face of this is to continuously say inflation will not happen again. That is not an answer
You just reveal that you do not understand what I am talking about
I think your time here is up
If you’d made the effort to understand Keynes Alfie you’d know that he believed in targetted demand stimulus to avoid triggering abnormal inflation in certain sectors of the economy where resource take-up was close to maximum. Since you don’t say anything to the contrary I presume you are in favour of having a quota (NAIRU) of unemployed individuals to dampen down inflation as long as it’s not you. Keynes rejected this selfish and callous approach after seeing it manifested in the 1920’s and 1930’s.
http://www.levyinstitute.org/pubs/wp_542.pdf
Yes, I have always thought such relationships, which are developed by safely cocooned economists sitting at a desk, presenting a theoretical formula as an economic ‘universal’ (like a law of physics), slightly odd. Allow me to take the example you discuss.
When it is proposed that there is a stable relationship between ‘inflation’ and ‘unemployment’ my first thought, typically is; all inflation? all unemployment? Or let me put it this way – whose inflation? whose unemployment? For example, if we found that we were running out of lithium (Chile is the major world producer, from brine salt flats), then we would expect inflation in prices, and knock-on consequences in lithium related battery industries; how the industry was affected (including the employment) adapted to a material change in supply, and to the dynamics of industrial change is a matter of conjecture. There are major consequences for the industry and perhaps related industries from such an outcome, possibly disruptive, but in what way this may be explained by referencing a general “stable relationship” between two common variables to the whole economy, eludes me. The ramifications my be very wide, or they may not. How does that abstact formula, applied typically at broad national levels, help – anyone?
It is not clear to me what real value there is in the economist’s abstraction from the complexity of reality, when economists never, ever, appear inclined to go out into the world directly to inspect it. This may be simply because they do not know where to look, or how to look.
Alfie.
“indeed using implausible assumptions is the reason why most economists disregard MMT”
So Alfie, out of interest, do you:
1. Believe that taxes directly fund government spending?
2. Government bonds also directly fund government spending?
Well…. As Oscar Wilde said.
“There’s only one thing worse than being talked about…… And that’s not being talked about”
MMT is becoming part of the discourse. That’s a good thing. Even if, for now, it is getting a bad press.
[…] Cross-posted from Tax Research UK […]
Like It or Not, a Modern Monetary Theory Experiment Is Underway. Robert Hormats says the pandemic has forced the ‘involuntary utilization’ of MMT.
https://www.bloomberg.com/news/articles/2020-08-14/like-it-or-not-a-modern-monetary-theory-experiment-is-underway
Wotcha Ann Pettifor:-
“Well, now we have a particularly unusual set of circumstances whereby we’re in the midst of forced, or involuntary, utilization of modern monetary theory…This is not unheard of. And I’d say this was done during World War II, where the Fed guaranteed the Treasury that it would buy Treasury bonds at a very low rate to keep interest rates low to keep the debt servicing costs of the of the government low. So theoretically, this can last a very long time as long as the Treasury is making these big bond issues a regular occurrence as it appears.”
🙂
I find Randall Wray’s anecdote from Adam Smith’s Wealth of Nations still one of the easiest ways to explain MMT. I paraphrase. The state of North Virginia in its early history needed to raise an army to fight the native Americans but had no money. They printed £10,000 Virginia Pounds, and created £10,000 worth of state taxes payable in either scare local coin or Virginia Pounds. The army was established and “provisioned” using the fiat paper as the the taxpayer base sought to pay their tax liability in the currency. Over the course of the year, the fiat currency returned to the State coffers and was burned to prevent inflation.
What do MMT opponents have to lose from MMT?
Excellent question
Two things
One, their world view in which they have invested their careers
Two, their belief that labour must be succumbed through the threat of unemployment to maintain their own privilege in society and the power of capital which is now shown not to be the scarce resource, after all
Steve.
Maybe it’s also about who gets to create the money?
At the moment, I am guessing, that it is private banks (High Street Banks) that create most of the new money in the economy (when they create loans).
There is only so much new money that can be created into the economy at any one time without a rise in inflation.
If the government increases it’s share of the money creation “allowance” by spending into the economy on public services, the banks share would have to diminish.
By creating an environment whereby government spending is seen as bad and should be kept to a minimum at all costs, private banks get to create the majority of the new money that is needed to expand the economy.
After all, that’s how banks make a profit. By creating new money through loans and then charging interest in them.
I was re-reading Alfred Mitchell Innes 1913 article “What Is Money” and part of one sentence leapt out at me:-
“…debts, as they fall due, must be met by credits available, at the same moment.”
https://www.community-exchange.org/docs/what%20is%20money.htm
This is a brilliant illustration since it enables us to visual the process of using money as not being dissimilar to our use of electricity which is also flow. So positive is a credit and negative a debt. In a monetary economy money enables us to exchange goods and services with greater trust so obligations and reciprocity can occur with less conflict. The point though that Innes is making is that this credit to debt flow, which paradoxically also involves repeated and endless moments of cancellation, can’t be allowed to stop since human survival now depends on it. This is not unlike our dependency on the flow of electricity in this modern age.
Using the electricity analogy if there are sudden powerful gales that blow the power lines down (asset bubbles bursting Great Depression and Recession, or a pandemic where the daily transactions for many goods and services suddenly grind to a halt because a circuit breaker has kicked in) then there’ll be a need for the local electricity company to rush out to repair the power lines. However, if the gales are so powerful they also take out electricity power generating stations then the National Grid Agency will need to increase electricity generation from power stations still working or bring back into commission stand-by power stations. Finally, the electricity analogy also works in regard to savings (net financial assets) these can be regarded as batteries.
Clearly central government’s ability to generate money from thin air is necessary not merely for day to day government spending as MMT argues but it’s also needed when private sector bank money creation from thin air (that continuous credit to debt flow) breaks down, or rather becomes severely incapacitated. Also as we know from MMT central government is the only viable agency which can provide the net financial assets flow for the battery saver device.
It’s the failure to understand or even be aware of Innes’s continuous flow requirement in a monetary economy and who can ensure this happens which underlies so much ignorant criticism of MMT. In other words there’s a failure to explore the necessary mechanics for living in a monetary economy.
I like it
“What do MMT opponents have to lose from MMT?”
Everything.
99% of the reasons why people vote Tory is because they do not know MMT. Some examples:
“I work my fingers raw to the bone, to bring home a wage only to have it taxed so some idle can sit on his arse and do nothing. ”
“The Taxpayer can’t afford the ever increasing burden of the ageing population – We need a more financially stable private pension, rather than really on hard up taxpayers”
” If those immigrants come over here, it will be UK tax payers footing the bill to house them”
etc etc etc. Think about it – almost every nasty “Difficult Choices need to be made” argument, comes down to the myth that taxpayers will end up poorer. So they push the myth all the time, to get the masses to vote Tory, against their best interest. It is so antidemocratic.
But, what is the real reason they want to implement these policies? To pull the economic ladder up – to make sure their wealth is forever their own, to increase inequality. They are Right Wing….that is what they have done, for centuries.
Sorry couldn’t get it to reply inline to your conversation with Alfie
A commenter on one of your previous blog posts (apologies, I can’t find the comment to link to it) noted that
1) People complain about tax rises and punish politicians for them because they see this as using taxpayers (i.e. their) money to fund government spending. Hence politicians hate raising taxes because it is politcally toxic
2) People reluctantly accept interest rate rises and the consequent effect on mortgage payments etc. because they understand and accept the need to control inflation
It occurs to me that if the public will reluctantly accept interest rate rises and if politicians want access to all the tools available to them (specifically raising taxes), it is surely in politicians interest to dispel the household analogy myth and the tax funds spending myth in favour of the tax controls inflation argument.
Once the public understand and accept the tax controls inflation argument then perhaps tax rises will be less politically toxic.
To some extent though I do share Alfie’s concerns about the practicality of controlling inflation through tax. Not because of the political toxicity — that just needs education as I suggest above — but in terms of which taxes (regressive vs progressive) and the time lag for such taxes to be implemented and to have an effect. Interest rate changes are applied overnight. I would be interested in your comments on such practicalities.
I agree
It is an issue I am working on
stabbing in the dark here! How much effect does a job guarantee have on inflation? If it is a stabilising influence in the economy does it also help flatten inflation?
I (mis)understand that when privatisation of the railways was being progressed, there was a plan that would have created a virtuous circle where operators had an interest in tracks and signalling. That plan would have self managed otherwise competing interests. I think that separating the infrastructure from the rolling stock exacerbated the problems.
In a like manner, if an MMT based policy (a la Stephanie Kelton) is rolled out without all the bits in place, then havoc could be wreaked? I accept that MMT only describes what actually happens with a currency issuing country, but hopefully you get the gist of my Q.
Thanks
I am not sure I do
But I may just be tired…
Anyone else?
@Prentii In case there is any confusion, MMT is not a policy – it is a description of how the monetary system works in a country with a fiat currency and a floating exchange rate. However, if such a country borrows largely in the currency of another country, MMT predicts that the economic consequences are likely to be bad. So avoiding such borrowing may be seen as another requirement for a country to meet the standard necessary for MMT to apply. Countries where MMT applies include the UK, US, Australia, Japan and others, but not the countries of the Eurozone.
The Job Guarantee is a policy proposal derived from the MMT understanding of how such economies work. Many see it as an essential policy feature because it acts to maintain full employment and helps to fight inflationary pressure. Clearly that is better than the current policy of maintaining a level of unemployment to avoid upward pressure on wages, and thereby control inflation.
Central banks have been attempting to control inflation via setting the interest rate. There is at best, conflicting evidence as to whether this works. Claims have been made that data shows the opposite relationship between interest rate and inflation than that assumed by central banks.
If you accept that MMT is correct, and do not employ the Job Guarantee proposal, there are still a number of ways to control inflation – if there are signs that it may occur. As pointed out by Richard, countries are finding it difficult/impossible to procure their (say) 2% inflation targets, so the task of preventing higher inflation may not be difficult.
Anyway MMT does not say that tax is the only other way to control inflation, and their are many sources you could consult on this – including of course The Deficit Myth book. The following may be useful – https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/
The authors say –
“we do not believe that any and all inflation that does result from excessive demand can and should be addressed by higher taxes. This is a distortion of our view, as years of publications can attest. When MMT says that a major role of taxes is to help offset demand rather than generate revenue, we are recognising that taxes are a critical part of a whole suite of potential demand offsets, which also includes things like tightening financial and credit regulations to reduce bank lending, market finance, speculation and fraud.”
One of the points being made there is that *all spending*, not just that by government, is the issue.
They also point out that “if inflation is rising because large corporations have decided to use their pricing power to increase profit margins at the expense of the public, reducing demand may not be the most appropriate tool. The recent controversies over rising housing rents and drug prices demonstrate that we need alternative tools in place to manage the power of big business and ensure their pricing policies are consistent with public purpose.”
Thanks George
Appreciated
@George – thank you for a very useful summary (I fully understand that MMT is not a policy, but a descriptor) and you have answered my Q.
@Prentii
My “MMT is not a policy” shtick was just in case – no offence intended.
@George – no offence taken 🙂
David Raughter.
I have started to wonder that, to use taxes effectively, the government needs to know how much new money is been created and by whom.
What percentage of new money is created by government spending or by banks when they create loans?
Tax destroys both but only tax can destroy government created money (I believe) whereas bank created money is destroyed by both tax and the repayment of loans.
The percentage of money destroyed through loan repayment would need to be known as well as the amount of new loans created by banks.
I’m guessing that it is much easier to account for government spending?
Thank you Richard for commenting. The article was poor and confusing as you have pointed out. I read it thinking ‘I’ll wait and see what Richard makes of this’.
The sadness is that education is the key to a proper understanding of economics and this article only obfuscates the discussion which does Smith and the ST no credit.
Let’s hope it encourages more readers of Stephanie’s book.
I’ve looked at three Deficit Myth reviews (including this one) in recent weeks and it is remarkable how little logic they contain.
I think it speaks volumes that they are mostly about sowing seeds of doubt and denigration – not cogent argument.
http://www.progressivepulse.org/economics/the-deficit-myth-criticsm-first-go
http://www.progressivepulse.org/economics/the-deficit-myth-criticsm-second-try
http://www.progressivepulse.org/economics/misunderstanding-mmt-again
Thanks Peter
Read them all
Good stuff
Can anyone recommend an adverse critique of Dr. Keltons book that contributes to the debate?
Surely MMTs opponents must have some intelligent, adult criticisms to make & drive the discourse forward ?
I have not seen one as yet
On the austerity point, it does seem highly ironic that Smith is using it to denounce MMT. When the real purpose of MMT(from my experience) is that it allows any government an option not to have austerity in a recession, which has hitherto, usually been touted as the best way out ….e.g we all have to tighten our belts. MMT says that it is the case that governments do not have to tighten their belts at all, so if they do it is for purely ideological reasons.
The big point for me is that MMT does not proscribe any action at all in “normal” economic times but crucially is a tool we can fall back on in either a recession or in a boom. Otherwise,all else equal, balanced budgets are probably sensible. MMT is just a description of what needs to be doen under various differing economic conditions.
I did see a recent webinar where Stephanie Kelton acually said that a right wing view of MMT would probably take the view that a budget deficit could be used to cut taxes for the rich,wereas a left wing(progressive) view would be to increase government spending. Both are viewing the situation through the same “spectacles”,but coming to different solutions as to how to use this “new” potential space in gov finances. To my amazement Warren Mosler actually conceded that the most likely outcome of MMT will indeed be tax cuts for the rich!Which is not what MMT was set up to do!
I know I don’t understand economics (which I guess, means I know more than people who don’t know they don’t understand it) so I read this article yesterday in the hope that I might learn something. I was left with two overriding impressions.
Firstly, it was not an attempt at meaningful analysis or explanation. It was clearly attempting to discredit an idea that is inconvenient for the constituency the writer represents. It was propaganda, plain and simple.
Secondly, it was really badly written, so badly that even someone who doesn’t understand economics could see that it made no sense. I felt insulted. Frankly, if someone so grand as the lead economics editor for the Sunday Times can’t mislead people more effectively than that, you have little fear.
Thanks