Prof Steve Keen, whose work will be familiar to many readers of this blog, posted this on Twitter last night:
In essence, #MMT is simply the accurate accounting description of the current mixed fiat-credit economy in which we actually live. @RichardJMurphy set this out nicely here: https://t.co/SBe9hWL5Gy. Job guarantee etc are policies based on understanding that accounting.
— Steve Keen (@ProfSteveKeen) January 11, 2022
The original post on this blog to which Steve refers (it was reposted to Brave New Europe) is here.
I am pleased to note that Steve is in agreement. Modern monetary theory is important, but just because an exponent of it says something - like the job guarantee - is important does not make it a key part of the explanation it has to offer. It does instead make it something that it shows to be possible. It's a very basic error to think what is possible is part of the explanation of what makes it possible.
I sincerely hope many in MMT who are making this mistake get their heads around this soon. We need MMT to be understood.
We also need what MMT suggests possible to be subject to a separate debate. I am not sure why some find that differentiation so hard.
This warmed my heart this morning. It’s excellent that two public intellectuals whose work I admire seem to agree.
MMT to me is a system-think thing. It’s complex. It’s broad. The vulnerability is that is can be easily picked off by reductionist thinkers who want to over simplify things as is all too often these days.
I anticipate (for example) that any inflationary effects of an MMT approach actually caused by limitations on economic capacity would be blamed on MMT be detractors – not the capacity issue (as we see idiots blaming supply side problems exclusively on Covid lock downs alone, but not BREXIT or austerity).
That’s why the ‘call and response’ method of explaining/unpicking MMT (MMT actions linked to economic effects) is so essential.
It’s all well and good making the claim that “MMT is simply the accurate accounting description etc etc” but it is running up against the hard test of reality.
The theory states (from the panel above) that “We are only limited by the real resources available” and “Taxation just removes money from the economy to control inflation”
UK inflation is running high, as is inflation almost everywhere in the developed world. Euro area inflation is 5% – a historic high and US inflation almost 7%.
Unless you are saying that the US, UK and Euro area are all running at full capacity, doesn’t this inflation prove MMT wrong? You can get plenty of inflation without full capacity thanks to printing and spending too much money?
And if MMT is right, shouldn’t taxes be raised to reduce inflation, and if so, which ones and by how much should they be raised to reduce inflation back towards a more manageable long term level? MMT never tells us how this would be achieved in practice.
After all, inflation is the biggest driver of increases in poverty and inequality. Shouldn’t something be done?
Inflation can be caused for four reasons.
First, if a government tries to spend more within an economy already at productive full employment it will create inflation because the resources required to meet the demand that it is stimulating will not be available. Price increases would, then, be the inevitable consequence. This is an incredibly rare phenomenon because full employment at a living wage, indicating that all labour is used productively, is almost unknown.
Second, inflation can be caused by a shortage of supply. This is particularly relevant when there is a shortage of alternatives to the product in short supply. For example, if all foodstuffs are in short supply then prices for food will, inevitably, rise. If, however, a particular consumer item is in short supply it is more than likely that consumers will substitute alternative expenditure or wait for prices to fall, meaning that the impact of this type of inflation is almost invariably limited.
Third, there are externally imposed shortages of supply. These are most common with regard to energy where producers know that they can, if they wish to for political purposes, create considerable disruption in markets by creating shortages compared to demand. There is almost nothing that a government can do to react to this if they are not themselves a producer of the product in short supply meaning that they have little choice but sit out such situations in the hope that they will correct themselves relatively quickly.
Fourthly, inflation can be imposed by domestic political choice. For example, a government may decide to undertake a politically motivated course of action that has consequences for its exchange rate. Brexit is an example of this. The consequences of the impediments to trade that this created are, inevitably, inflationary.
MMT addresses the first of these issues.
The second is about failed supply chains. The answer is market reform.
The third is about foreign policy. MMT is not a theory on foreign policy. But what it does imply is that dependence is dangerous. So, like the second category, the suggestion that MMT makes is that diversification in supply is critical and in this case significantly more renewable energy is required.
The fourth is about government incompetence and the answer is do not elect incompetent governments.
Inflation is not, then, arising for any reason that MMT can address any more than physical policy can address it in the conventional sense, or that monetary policy can address it in any normal sense. We are looking at political phenomena or problems within the real economy that no theory of money can correct, alert might suggest that diversification and competent government are very useful things.
So, my question to you is why are you blaming MMT for something that is not within the control of any existing inflationary measure and which must be addressed by more fundamental reforms within the economy and political scenarios?
Wow – thank you Sarah for popping up and proving that reductionist or erroneous thinking will blame MMT for everything rather than the causal dynamics of policies and practices that surrounds it (basically the stupidity of Government pursuing austerity and BREXIT for example or not being able to take a pandemic seriously).
And do tell me Sarah – what are your thoughts on the interest rate rise recently?
Where the policy is to fight inflation with errrr…..let me see now…..INFLATION (inflating the price of credit). Yes that’s right. I’m all ears.
To answer your points in order:
First: If that is the case, why are we experiencing broad based inflation across almost every sector and every component of the inflation basket at the moment. This cannot simply be blamed on supply chain issues etc as you go on to do.
Moreover, vastly increased spending within developed economies combined with QE has in itself created significant inflation in certain prices – notably housing markets as well as other asset prices. This in itself suggests that the main claim of MMT – that increasing spending unless the economy is at full capacity does not increase inflation – is false.
The corollary to what you are saying, namely “This is an incredibly rare phenomenon because full employment at a living wage, indicating that all labour is used productively, is almost unknown” suggests that at the current time you do not consider economies to be at full capacity. In which case your policy description would be to increase MMT money printing and government spending, in the face of already high inflation.
Second: Inflation can be caused by a shortage of supply. That however does not account for the broad based rises in inflation we are currently seeing. Not everything is in short supply.
To use US numbers, for example, food prices have increased dramatically and food is not supply constrained. Nor housing or clothing. You could use the supply argument for semiconductors or gas, but that does not explain why almost every component of inflation baskets have risen in price, significantly.
Third: This is just a restatement of your second point, so I am not sure why you made it.
Fourth: Exchange rates and political choices can affect inflation. I am not sure what point you are making regarding Brexit, as since that time the £ has strengthened marginally against both the EUR and USD, but in the main has been remarkably stable, so that is unlikely to be a cause of any inflationary pressure. If anything, dis-inflationary.
But if we accept that political choice can affect inflation (which we can), isn’t MMT and printing increased amounts of money the very best way to devalue a currency by increasing it’s supply, therefore increasing import prices and thus inflation?
“MMT addresses the first of these issues.”
Not the case. MMT claims to address this issue, but does so simply by ignoring it. It simply states that inflation cannot occur in an economy not at full capacity. Yet time and time again, we see economies with large output gaps experience high inflation. If the main tenet of MMT is observably false, what left is there for MMT?
Nor does MMT tell us what to do about inflation when we do experience it. It simply says taxes should be raised. This in itself is much more complicated than such a simple statement, both in political and economic terms. Which ones, and by how much? As yet the proponents of MMT have been incredibly quiet about this point – there has been no academic treatment of this whatsover.
You also suggest that MMT is only responsible for controlling domestic supply side inflation (by saying points 2-4 are outside it’s remit). If MMT is to be used as combined fiscal and monetary policy, then this is a failing that simply makes it unusable.
For example, take an economy with spare capacity and inflationary pressures solely caused by external supply price pressure. MMT policy would be to keep increasing the money supply and government spending through printing. Yet this would devalue the local currency and increase the inflationary pressure as import prices increase. How does that make for sensible or stable economic policy?
Traditional interest rate driven monetary policy might have it’s flaws, but at least it is well understood and acts to reduce aggregate demand to control both domestic and external price increases, through affecting the money supply, cost of capital and FX rates.
MMT can’t even claim to manage domestic pressures, and would likely exacerbate external price shocks. The opposite of good governance.
Simply put, it’s claims are demonstrably false (just look at current inflation trends) and it’s solutions would either prove unworkable in practice (taxes to control inflation) or actively make problems worse (as described above). Turkey is the latest country to try a version of it and unsurprisingly it is turning into an economic disaster.
Let me answer this: “Why are we experiencing broad based inflation across almost every sector and every component of the inflation basket at the moment”
We aren’t. The inflation is very specific still. Oh, and around the world the IMF says food prices are falling now…the supply chains are clearing. You need to get your facts right.
And since MMT doe not propose QE – but something very different – you cannot blame its impact on MMT either.
But as for how to tackle inflation – MMT usually says the answer is to solve the problem causing the inflation – which very rarely requires tax increases or interest rate rises
So candidly, you did not pay attention to what I was saying or came here t troll with a closed mind
Neither is very attractive or useful so please don’t call again, not least because all you are proposing is interest rate rises which have never worked but which like tax cuts for the rich always make the rich richer
You are a bit transparent in that case
Does the second or fourth contain inflation by cartel?
As in OPEC in the 70’s or by every petrol station in the U.K. in concert Or every brewery putting up a pint by a quid last year?
Both these are not as far as I can see caused by higher demand or lower supply.
If they are profiteering by such cartel then I suggest a special directed tax against these companies and ‘fat cat’ executives could be easily cooked up to ‘discourage’ them and hence such inflation?
The message is beginning to cut through to the ordinary lifetime worker raised on Maggies lies of handbag Economics.
I am having some success with argument that the Government can cancel its own overdraft at the BoE daily if they wanted once they have filled their own boots with it by the same instruction system they use to tell the BoE to pay out all the wages and purchases daily – there is no account with tax payers money collected from which these payments are made! There never had been that’s why the National ‘Debt’ has always grown. The State can do this because it has Ultimate Power to do so, including Life and Death – just like Henry and Elizabeth and all these Kings we all worship and the Queen Mother who never paid – It’s strange how that inbred worship of Aristos has brought us in England to such drivelling idiots but can also be used in this argument. I am trying to refine it in conversations.
The only people, power group, in the country who are hiding that simple knowledge is the MSM and its ‘order follower’ stenographers – who have poisoned knowledge on just about every subject they cover.
I thought I was describing that in category 3
It may also be in category 2
I am not sure it is in 4
I just wonder how a traditional response to inflation (a hike in interest rates) will persuade Russia to increase gas exports to Europe?
🙂
I’ve already replied to Richard’s reply to my own post (though at time of writing yet to be posted), but I thought given what Clive and Pilgrim have have posted it would be worth another response.
Clive:
Interest rate rises would reduce aggregate demand and increase the exchange rate, reducing cost of imports.
Both of which would act to reduce inflation.
MMT on the other hand, you admit would be unable to do anything about imported inflation. If anything, by printing more money and devaluing the currency it would make the problem worse.
Pilgrim:
Increasing rates does increase the cost of credit.
That reduces the supply of credit and reduces the money supply. As well as reducing aggregate demand through displacement.
This is DIS-inlfationary.
Basic economics.
Unfortunately I think that comments like these, allied with a general lack of understanding are all to prevalent in proponents of MMT.
Does an interest rate increase reduce aggregate demand? Not all are borrowers, so it must cut specific demand – of those with the lowest means
Does it change exchange rates? No, because they move in line usually
And MMT does a to about imported inflation – it says invest to create domestic capacity
And your basic economics is that – basic. You obviously never got to the first year where they tell you all you heard in the first year was wrong. Or you read PPE. One of the two.
Please do not bother to reply
“Does an interest rate increase reduce aggregate demand? Not all are borrowers, so it must cut specific demand – of those with the lowest means”
This is literally nonsense. And the clue is in the name – aggregate.
“Does it change exchange rates? No, because they move in line usually”
Interest rate differentials are one of the key drivers of Forex rates. This is basic stuff.
“And MMT does a to about imported inflation – it says invest to create domestic capacity”
So print more money and spend it. Weakening the currency, increasing the money supply and increasing domestic demand all at the same time. Which will ALL be inflationary.
If MMT says that, then you are literally claiming the opposite of what you said originally.
“And your basic economics is that – basic. You obviously never got to the first year where they tell you all you heard in the first year was wrong. Or you read PPE. One of the two.”
I did read PPE. And do a masters, Doctorate and post-doc. As opposed to a man who did an undergrad degree in accounting, was a small time accountant and runs a blog. No other qualifications. No background or qualifications in economics whatsoever. I’m starting to think that you are essentially either a fraud or just plain old delusional.
I guess you know that Oxford PPE is the nearest thing to a degree in general studies that there is, don’t you?
As for the rest – you do also know that we w=target to have inflation, don’t you? You seem to be ignoring that.
And whilst it is kind of you to credit me with the whole of MMT, I really cannot accept that’s true, so you have rather more to argue about than my degree in economics and accountancy, training in the Big 4, and three professorships, which you do not seem to have.
I am sure that you have reasons for your grudge. I really;y do. not care what they are and you are now blocked
It is important that there is a broader understanding of MMT. Loading it with your favourite policy prescriptions does it no favours…. the longer the list of “things you must believe”, the shorter the list of “believers”. MMT should be a broad church – indeed, as I have said before, I hope that Rishi Sunak comes to embrace it one day.
“Neo-liberal” policy responses are just a subset of policy responses possible if you embrace MMT (Cue a Venn diagram, Richard?).
So, why are the neo-liberal right so opposed to MMT? Well, some of the possible policy responses that MMT permits mean a loss of wealth and power to those that currently have it. Much easier to say the policies are “impossible” than to argue against them in a rational/reasonable way.
Agreed…
I have said this many times on various MMT blogs and discussions. The statements that:
1. MMT is a description of what currently exists and
2. The Job Guarantee is a central part of MMT
contradict each other. It is just a matter of use of language, but enough to put some people off. As an amateur I just get ignored, except for those who (virtually) repeat it slowly and loudly with much waving of hands.
I no longer contribute to MMT blogs!
I am bored at being shouted at on some MMT blogs for pointing out things like this and for being told that I may not disagree with what those shouting say because Bill Mitchell says that they are right, which is not an argument.
MMT isn’t all about what Bill Mitchell thinks! There are others: Stephanie Kelton, Warren Mosler and L. Randall Wray are the most well known.
The latter does address the issue in question, MMT without the JG, here:
https://www.nakedcapitalism.com/2012/05/randy-wray-mmt-without-the-jg.html
He ends up asking a couple of rhetorical questions with supplied answers:
Can you separate the MMT explanation of the cause of unemployment from the policy to cure it?
Yes.
Should you?
Of course not.
His thesis is unemployment is inevitable unless we have a Job Guarantee and we will end up with high inflation if we try. The Job Guarantee acts to define the currency in the same way that gold once did. Instead of the pound or the dollar being defined as a fixed amount of gold it is defined as a fixed amount of labour of the lowest paid in society. I cannot fault the intellectual thinking but I am not comfortable with the idea that a number of workers will not have the same trades union and negotiating rights as everyone else, which presumably they will not if we are basing the entire currency on what they are being paid.
You might think that Neil
Steve Keen and I do not
And in the real world, job guarantees are just one of a range of answers, but not the only answer
@ Richard,
Maybe I didn’t explain my own view well enough. I’m agreeing with you and Steve Keen! I have nothing against Job Guarantees as such but, as you say, they are not the only answer.
Sorry if I misunderstood you!
Apologies
Sorry but I have to say something about Sarah.
Inflation is inflation and you talk of it as something undesirable. So how can you impose something so undesirable on people who have debt just to prevent debt? That is an extra cost to those in debt. All I see is crocodile tears about the poor and inflation.
They could it manage differently. The government could create a rule that protected those indebted already from the interest hike and apply it to new loans from a certain point only. But they don’t do they Sarah? I wonder why?
No one ever thinks about that – the Tories have a reputation for doing that and causing huge house repossessions in the early 90’s. Interest rates are a blunt instrument.
And tell me – did you ever hear of Wonga and the 500% -1000% pay day loans? High interest rates curb the money supply eh? Hmmmm………………..I think high interest rates can boost it – especially if the lender is cash rich.
As for ‘broad based inflation’ – well that’s just a swerve away from accountability for things like austerity which has suppressed demand and BREXIT which has really screwed supply chains and create scarcity. Nothing to do with MMT.
BTW – Who put VAT up to 20% in 2010 for everyone – rich and poor? And extended it deeper into the economy. The Tories that’s who. During austerity. From a ‘low tax party’ apparently. Was MMT responsible for that too?
Honestly……………..!!
In reply to Sarah’s reply to me. Not sure how you can slot it in…..
There are two separate points here. (1) Should we act to cut inflation? (2) If so, how should we cut inflation?
(1) Raising interest rates would reduce inflation. Higher rates would discourage investment and also suck money out of people’s pockets leaving them with a choice – where do I cut spending? That cut in spending will mean that other businesses will be forced to the wall. This would work and most economists think it works with at least a one year lag.
Higher energy prices are already disinflationary for the rest of the economy as energy demand is quite price inelastic – adding higher rates into the mix would accelerate the process but the collateral damage would be immense. I would prefer no action because by the time higher rates do their work we will be seeing inflation undershoot targets again…… but I accept that other people might have a different view.
(2) IF (and that is not my view) we want to act to cut inflation now then there are a range of measures that could be used. In your (Sarah’s) world, interest rates are the only tool. In my world, interest rates are one tool among several. MMT is not saying what is the “right” policy but it offers other choices including tax, spending, credit controls and monetary financing AS WELL AS interest rates.
The whole point about Richard’s original piece here is that MMT does NOT prescribe a fixed set of policies… it is just a description of the way money works. We can disagree about whether current inflation is transitory; we can disagree about whether action is needed…. but hopefully we can agree that there is more than one way to act on inflation.
Clive
That’s very convincing and rather eloquent too. The ‘flat earthers’ in fiscal policy are always too quick to point the finger MMT even though in many ways it has not even been tried yet.
But I wholeheartedly agree that MMT is not just about the cash injection – its about how you take it out too and in a much fairer and humane way than punishing the poor who are most likely to resort to debt to live by crude interest rate rises. MMT challenges a Government to be more multi-faceted.
Perhaps another avenue is regulation as well – especially in areas of the economy known to overheat it or cause crashes.
I actually look forward one day to more varied and precise interest rate tactics /policies from a Government who wants the economy to work fairly for all – not just the usual suspects.
Completely agree. A single “policy interest rate” is such a blunt tool. We can do better.
We are in a bit of a bind in that there IS asset price inflation and that is a problem – mainly in the cost of housing. Higher rates would solve this…. but would damage other sectors of the economy. This leaves taxation and some sort of credit controls (differential lending rates?) as tools.
Now, I am not sure what exactly the correct policy mix is but it is a logical certainty that if you have more degrees of freedom then you MUST have a potential policy mix that will produce at least as good an outcome (and almost certainly better) as the “interest rates only” option.
@ Sarah
“Moreover, vastly increased spending within developed economies combined with QE has in itself created significant inflation in certain prices – notably housing markets as well as other asset prices. This in itself suggests that the main claim of MMT – that increasing spending unless the economy is at full capacity does not increase inflation – is false”
You are conflating bubble(s) driven by excess liquidity in the FIRE (Finance, Insurance, Real Estate) sector with profligate government spending in the real economy; two separate causations.
The FIRE sector is, and has been, using ZLB cheap lending to artificially boost share and asset prices, taking advantage of Finance’s privilege to create money from nothing. And most of these assets are only paper assets or locked into pre-existing property. This lending, then, is utterly unproductive. It is untethered from the real economy. Nothing gets done. Rich people get richer: on paper.
This is very different to what MMT describes as a monetarily-sovereign government unconstrained to purchase anything for sale in its own currency; resources or labour. This is spending which could be productive (not simply lining a fat cat’s pocket), and whose outlay could be taxed (drained) out of the economy as the new money flows through many hands as income, increasing aggregate demand.
You’ll notice that after the GFC in 2008, the UK quickly increased the national debt by roughly 30% as the BoE duly obliged to purchase a large tranche of gilts. So where was the inflation in the real economy at that point or thereafter? Did we see the price rises then that we see now? There wasn’t any inflation. Just miserable austerity. Because the Tories were and still are wedded to a failed and flawed ideology of monetarism and ‘balanced books’.
Inflation targets have been pathetically missed in the UK for over a decade. But now, all of a sudden, during the duel crises of Brexit (labour shortage) and the biggest public health challenge for a century, you are claiming that the knock-on supply issues have little to do with inflation and that it is because of deficit spending?!
Come on. Pull the other one.
These messages on inflation and interest rates have been great thank you all. My knowledge of economics is sparse but historically I seem to recall decimalsation early 70s led to inflation and Brexit seems to be similar in impact. I’m imagining account managers up and down the land have been explaining to their corporate customers that prices have to rise and Brexit no doubt is part of their explanations. Once our expectations of costs change it gets a lot easier to push price increases through. We are all now experiencing price increases. The worry as I see it is are these a one off kind of hit or will inflation start accelerating. Thoughts?
Decimilasiation did not lead to inflation
Coming off the gold standard in August 1971 and the resulting banking and oil crises did
Decimlaistaion had nothing whatsoever to do with ti