It has been suggested to me that my support for the issue of savings bonds to the public to fund socially useful investment, with government guarantees attached, does in some way conflict with my understanding of MMT. I have to say that I disagree. But then, I have always applied my own twist to MMT and have never apologised for doing so. That is because I have long felt that its focus on a limited part of the fiscal cycle has meant that it has underestimated the important role the government has as borrower of last resort and the vital role of tax. To this I would now add a third omission, which is the absence of concern for the inequality that government deficits, including those created by MMT, can create in society.
As a result I have revisited the summary of MMT I wrote in November 2018. This was a time when I was quite disenchanted with what the likes of Bill Mitchell were claiming for MMT. Many of the views that he, and others of the more fundamentalist MMT inclination, promote seem to me to undermine MMT's credibility. I have never shied from saying so, and quite fairly those who have disagreed with me have done likewise in response. But if MMT cannot survive debate as to its meaning its not worth having.
This, then is my revised summary. I have highlighted more significant changes in italics.
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The first thing that modern monetary theory (MMT) suggests is that in a country with a fiat currency (which means that there is no asset backing to the money that its government puts into circulation, which money does as a result only get value as a consequence of a government's promise to pay) there is, at least in theory, no limit to the amount of money that a government can create.
Second, a government in such a country creates money every time that it spends because when it does so it instructs its central bank to extend to it the credit required to make the payment. It is not constrained by the availability of tax revenues or borrowed funds when doing so: money can always be created by a bank on demand and a central bank will always create money when instructed to do so by the government that owns it.
The necessary conclusion from these first two observations is that because money spent by the government and the revenue it raises are not directly related to each other then there is no reason why a government should not run a deficit if that deficit suits its policy objectives and there are resources available for it to buy or to put to use within that economy.
Third, to prevent this new money creating excess inflation it is very likely that a government will have to tax to withdraw at least some of the currency that it has created from circulation. This is the primary fiscal purpose of taxation in such an economy, although tax also has other, as significant, purposes as noted below.
Fourth, this need to tax may increase as the economy approaches full employment. That is because at that point labour, and maybe other resources, will become scarce and will as a consequence be subject to upwards price pressure. In that case MMT suggests that increased tax charges might be required for two potential reasons. One is simply to control inflation. The other is that if a government still wishes to pursue what it thinks socially desirable activity in that situation then tax can be used to reduce private sector demand in the economy so that economic capacity is made available to ensure that delivery of the government's own objectives is possible without over-inflation of the economy resulting.
Fifth, social obligation to the population it serves means that a government should not be indifferent to the way in which such taxation is levied. Nor should it be indifferent to the non-payment of tax, even if sufficient tax is collected to secure the fiscal balance required to control inflation within the macroeconomy that it desires. Tax might have a primary goal of controlling inflation, with the secondary advantage that the tax charged for this reason provides the government created currency with its value because the ‘promise to pay' that the government makes is fulfilled by only accepting that currency in settlement of tax liabilities, but tax also has the other deeply significant social purposes to play within society. One of these is its use in addressing income and wealth inequality within a society. It can also be used to reprice market failure, which means that it has a key role in addressing the externalities that market economies create. In addition, its function in delivering fiscal policy by incentivising or penalising certain activities and by reinforcing the social contract that exists between a government and its electorate is well known. As a result tax is a reflection of the values of a society and is a primary mechanism for reinforcing many of them. MMT has, in that case, to actively promote the positive role of tax within society. It has also promote a tax system that actively tackles tax abuse. That is partly to tackle the inequality tax abuse creates within society. It is also essential to ensure that the delivery of government policies that depend upon tax as their delivery mechanism is effective. MMT and tax justice are necessarily related in that case.
Sixth, a government does not need to borrow if it runs a deficit. Partly that is because it can, at least in theory, always run an overdraft at its central bank, on which no interest need be charged. As a matter of fact this appears to negate the need for borrowing. In addition, government borrowing appears to make little apparent economic sense in an economy that uses the fiat money created by the national government because the money that the government supposedly borrows has already been created by it when injecting cash into the economy through its spending. However, that does not mean that a government should not appear to borrow. A government has a social duty to be the borrower of last resort to its population and financial system. That is the true function of government borrowing, and it is vital to the efficient operation of any fiat currency using economy. Savers want a secure place to save for a great many reasons, and for the sake of financial stability the government must supply it. All that is implied is that the government must manage its cost of borrowing so that there is an overall acceptable price to society at large for supplying this borrower of last resort facility to deliver financial stability.
Seventh, the fact that a government spends first and taxes second, as the second point makes clear is what happens in a fiat economy, 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.
Eighth, if the government does run a deficit then MMT makes clear that private wealth is created as a result. That is the necessary consequence of a government deficit: such deficits necessarily transfer resources from the government to the private sector. MMT does as a result require a mechanism to address the resulting potential for growing inequality in the economy as that arises as a consequence. Tax is one of those mechanisms, but others are possible, requiring the regulation and direction of saving within an MMT directed economy.
Ninth, a government that only borrows in its own currency cannot, as a result of the understanding in MMT, 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. Such a government cannot ever in that case be beholden to financial markets.
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There are issues in this list that some within MMT would not prioritise. And there is one omission they may note, which is the job guarantee. I think I this covered by the full employment and fiscal policy objectives and so I do not disagree with it, I just think it covered elsewhere.
I am, of course, happy to receive comments for changes and improvements.
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I think you should add a section regarding the role of “borrowing” as an expression of social values. Taxation is a reflection of social values as you have said but borrowing in the form of hypothecated bonds (which are ultimately backed by central bank money) also reflects social values. Tax and borrowing can be thought of through an analogy – the levees of a river are designed to constrain and define its flow…..taxation and borrowing define and constrain the flow of money. The river needs a levee on either bank – so does money.
Ok
Noted
Overall I think these 9 points make a very good basic summary of the state of play an should immediately be nailed to the door of No 11 Downing St.
I must admit I a puzzled as to why these should be of any great bone of contention with other MMT advocates. Unless they want to maintain the status quo? But most data I have seen shows increasing inequality across the board over recent decades.
I am as yet not sure about the Job Guarantee idea myself. Full employment is rather vague economic target. We probably know when we are near it or have gone past it since we will see inflation.(excluding possible other external factors). But we can get near it and strive to stay close to it as is feasibly possible.
But paying the unemployed to carry out govt issued jobs does seem rather dated as an idea,but I suppose it would depend on the conditions. Making people work 9 till 5 doing “pointless work” does seem rather unappealing , though I may be doing the idea a mis service. I can’t see it being a popular sell to the public in general. Far better that the govt creates genuine jobs via spending and decent support for those unable to find work so they are not pressured to take low paid work. The green sector is a great opportunity for the govt to create sufficient real jobs in a vitally needed area which would help everyone.
.
Indirectly.
Have a read of this twitter thread: https://twitter.com/michaeljburry/status/1363226460979228673
https://en.wikipedia.org/wiki/Michael_Burry
A good summary.
What is important to me is that you are including interest rates and bond issuance into the mix.
Feel free to ignore/disagree but in the third paragraph/point I, personally would make it more explicit
“Third, to prevent this new money creating excess inflation it is very likely that a government will have to withdraw from circulation at least some of the currency that it has created. This is done through taxation and bond issuance. The primary purpose of both is inflation control although they have significant other purposes, as noted below.”
This then suggests some changes in the second part of the sixth point.
“However, that does not mean that a government should not issue bonds. A government has a social duty to be the borrower of last resort to its population and financial system to issue bonds at an interest rate that reflects a balance between savers and borrowers as well as asset prices. This is the true function of government borrowing, and it is vital to the efficient operation of any fiat currency using economy. Savers want a secure place to save for a great many reasons and the government must supply it. Interest paid on government bonds is the cost of delivering this facility but that interest rate is decided by government so deliver an overall acceptable price to society at large for supplying this borrower of last resort facility to deliver financial stability.”
Two other thoughts.
“Such a government cannot ever in that case be beholden to financial markets.” This a very bold statement — it does assume (dangerously?) that the government is running a sensible policy!
I am glad you don’t mention the job guarantee. I am sympathetic to the ideas behind it — a safety net for individuals and a way to fully use resources. However, I worry that it smacks of “workfare” and that it ends up being unrewarding work etc. Perhaps this can be avoided but care is needed.
Thanks Clive
Carefully noted
Thanks Clive
Carefully noted
I agree with Jim but would put it differently.
The borrowing angle should be more thoroughly tied to social investment that benefits all. When I see ‘borrowing’ it just seems all wrong to me. It has negative connotations.
For example I’m damn sure that the private sector borrows to build those new ugly high rise carbuncles in London with borrowing.
Well, we need affordable housing based on the same borrowing principle; better roads and bridges and more light rail etc.
Why should the private sector get an easy ride because it borrows to create things with either little or very narrow social utility?
Maybe some sort of list of outcomes needs to be stated too – the outcomes being ‘social resources’ – for all?
Again, I will muse on that
This is a work in progress
Why of course.
Two further ideas I would throw into the mix for discussion.
1. Enhanced Credit Unions – As can be seen Credit Unions in ROI have mushroomed and are now competing with the established banks by providing the full range of banking services including DD, debit cards etc.
I really cannot see any downside to this but am open to being corrected.
https://www.moneyguideireland.com/credit-union-current-accounts.htm
2. Subsidised holidays for pensioners – And I await the howls of derision
Imserso is the holiday scheme for pensioners sponsored by the Spanish Government. During the off-peak season, from October to June, cheaper holidays are made available to resident pensioners in Spain, whatever their nationality. There are many different destinations available from mainland Spain to the Balearics, Canary Islands and Portugal.
Now I know a week in Blackpool or Bournemouth doesn’t have the same appeal nowadays as a week in Tenerife or Majorca. For an ever growing number of OAP’s, however, they who have seen their savings diminish rapidly or in a hell of a lot of cases vanish completely and struggle pitifully each winter, a weeks full board at a posh hotel might make all the difference regardless of the weather.
This would have the added bonus of providing much needed revenue (albeit at discounted rates) for the Hospitality Industry.
I rather like that…..
I might qualify soon
Send me to Porthmadog please
Or Tywyn
Reflects what was going through my mind; I can choose to ‘invest’ in the private sector buy buying shares. Alternatively I could choose to ‘invest’ in services or infrastructure provided by the state (though conceivably delivered by private companies).
Good analogy! @ Jim Osborne
With regard to the Job Guarantee it always seems to me there is inherent inconsistency within MMT revolving around the fact that if you want to be able to spend money to give people jobs then why do you have a ‘buffer stock’ of jobs in the first place? – that must by definition mean that you are actually not running the economy with the consequence of full employment… additionally it would be extremely difficult to work in practice.
Explored this further a while ago now:
http://www.progressivepulse.org/economics/modern-monetary-theory-is-logically-inconsistent-with-a-job-guarantee
The Job Guarantee for me is really better described as ‘government needs to get things done and its people need to be wanted’.
Thanks — like all your posts on MMT it got me thinking and asking questions (not having otherwise thought through all the implications, after all I had never really heard of MMT until an acquaintance I was discussing fairer tax possibilities with directed me to your website).
This time the question is about the implication for wealth, your point 8. That may just be due to ambiguity in what you mean by “wealth”. Clearly at a simplistic level creating money in MMT means an increased balance of net assets (wealth) . But your point, explicitly stated, is that MMT therefore increases inequality, i.e. puts more assets in the hands of the better-off (wealthy). Is that necessarily the case?
It obviously is in the case of conventional QE which functions by money creation (MMT) within the asset markets which thus benefits preferentially those who hold such assets, at least in the short to medium term. But it doesn’t seem inevitable to me that money has to be created in that way, why can’t for example a government create money to fund — say — a nationwide council house building project? While some of that new money might have the effect of increasing share prices and thus the wealth of those whose assets include shares in builders and associated manufacturers, a lot will go into the income of those who plan, build or supply those houses. That will spread the new money pretty widely, and I can’t see there is necessarily inequality in the resultant wealth increase. (There might be, but is it inevitable?)
Apologies if I have missed a subtlety which makes my question stupid, but at the least I hope that by commenting I help you refine your description of MMT to one that improves yet more.
In effect the argument is this
If the government runs a deficit it transfers resources from it to the private sector
In the private sector those resources are spent until they are not – that’s the multiplier effect
Alternatively, they are spent until they are taxed out of existence – but by definition,m in a deficit running situation they are not taxed out of existence
So they are spent until they are not
When are they not spent? When they are saved
That’s it….
And who saves? The wealthiest
So a deficit always ends up enriching the wealthiest in the end
Unless we do something about that
Recovery bonds do not stop that
They address the additional twist added by QE that there is no saving in the state sector and the private sector is not gainfully using the savings
Thank you Richard, that is a subtlety I hadn’t appreciated. And thanks for the justification in those terms for recovery bonds, I can see that if money creation inevitably leads eventually to increased savings wealth it is politically desirable to find ways to encourage those savings to be used in socially useful ways.
However it raises another question in my mind. It seems to me that when money is created in a way that boosts employment and generates beneficial infrastructure, that money (or the untaxed part) will only slowly trickle down to a new home in savings. It will be true when equilibrium is reached, but in the real world there is no economic equilibrium.
Perhaps it is my scientific background, but I see equilibrium economics as unhelpful when national money flows are by definition in a dynamic state not at equilibrium. I see the value of MMT as a helpful (and more to the point, useful) description of the non-equilibrium consequences of government fiscal measures. Cynically, I wonder whether in the hypothetical equilibrium state there would be no distinction between MMT and the “household budget” model of economics: eventually money injected into the economy would with MMT just as much as with any other model probably need increased taxation or inflation would increase. MMT doesn’t numerically predict the 1:1 relationship between government expenditure and tax revenue that a balanced budget would, but since equilibrium is never reached how would one measure the ratio?
Your response and my rationalisation of it does create — for me — another insight though. MMT says inflation generated by money creation is what needs correction through taxation. However “inflation” is usually narrowly defined in terms of household expenditure, whereas if inevitably money creation also increases savings assets the consequence should really be assessed against a more global definition of inflation including assets such as property and shares. Or to turn that on its head, it predicts an economic requirement for governments to control inflation through wealth taxation as well as income taxation.
As usual, apologies if I have simply realised a well known truth of bread-and-butter economics that you take for granted in your readers, but if so my thanks for stimulating me to think about it.
Equilibrium is an absurd idea that has been the curse of economics and has no place in MMT in my opinion
Does the flow of savings happen quickly though? Yes, and remarkably so: it is happening right now
Of course we can and should tackle this though tax – and I say so, often
But there is a legacy of more than £5 trillion of private wealth increase fuelled by QE since 2011
That’s the issue the Recovery Bond can tackle.
No one can tax that sum away so let’s use saving instead for social gains, and direct tax relief for that purpose
I am doing real world economics here, not the black board version
And there is no equilibrium and nothing perfect – just real mess that we have to deal with
That’s what I am seeking to do
It’s frustrating to know that many in MMT are as willing as neoliberals to work on the basis of make believe as to what the real world is, sweeping awkward realities out of view and presuming an optimal outcome is possible by starting from a fantasy startpoint
I too have issues with a Job Guarantee scheme. It seems to me that such a policy is more to do with a Protestant need to make people work rather than genuine requirement for the economy to function optimally. Leaving aside the social and psychological benefits to work, important though they are, the primary function of work in relation to the money system is to act as a mechanism to transfer the money tokens to individuals to enable transactions to take place. There are situations where the poorest in our society either work in jobs which pay insufficiently for them to live reasonable lives or they are unable to find employment and have to rely on benefits. The fact that they have insufficient resources to spend in the system actually makes the whole system poorer. The economy is not utilising the latent demand in the system that those with few resources have and leaving that demand unspent. It is inefficient to have the savings of the wealthiest exit the system unspent and have the poorest go without. Provisioning more for the poor in our society would create greater economic activity and be beneficial for society as a whole and that doesn’t necessarily mean there is a requirement for work to take place for those without sufficient income. That is more to do with in my view a misplaced idea of social justice. The hugely wealthy don’t necessarily work harder than the rest of us and neither do we as a society insist that the rewards of the wealthy match some measure of computed effort. Yet a Job Guarantee implies just that.
I’m an interested novice in economic affairs but MMT makes more sense than anything else I’ve read.
Re gov borrowing, please clear up one point for me: if the gov are borrowing to fund our present multiple national crises, why have they reduced the interest on their NSandI savings? This is in effect telling savers to take their money elsewhere because it’s not needed by the gov. It seems contradictory.
The government is not borrowing right now
It is using QE instead
Don’t see how with the implications day by day of climate change and oval warming that a ‘Job Guarantee’ can be considered a problem. If there is essential ‘Green’ work to do them guaranteeing it’s done is hardly ‘Workfare’
Hi , I’m new to all this and I am extremely interested in a new currency post independence, I have been self employed for over 40 years and realise how to generate work if I need some, with by creating a product similar to something that is fashionable and promote it through contacts that already know me and my track record and that inspires confidence in my product, this creates new customers from my previous customers, where am I going with this ? , my question is buy reducing the working week to four days surely this will create jobs , hopefully better paid jobs and stimulate the economy along with better social wellbeing and a happier nation . Would reduction in the working week be an incentive to the populace to vote for independence and could it be built into the economic argument with a positive spin/ outcome.
Hope this isn’t too off topic .
Thanks for educating, I’ll try to keep up . N
Norman
Sorry – a bit off-topic and I have tried to find time for it, but have not succeeded
I am not completely convinced by the idea, although I know there is evidence for it
I throw the floor open for comments
Richard