I have not had time to read all the evidence submitted to the House of Lords Economic Affairs Committee on the sustainability of the UK's national debt. I have a feeling that doing so would be worthwhile. Even a simple summary of the evidence and weighting of it so that a summary of sentiment expressed was available would be useful. My own is here.
That said I have read the unedited transcript of the Committee's aural hearing with Prof Joe Stiglitz, who I rather get the impression was chosen by the committee as the proponent of the “relaxed about debt” position.
The whole thing was bizarre on all sides. Stiglitz had clearly done little preparation, not knowing what the current UK fiscal was. The committee was keen to dismiss him as talking about the US than the UK. Quite what Stiglitz was really trying to achieve is often rather hard to discern, excepting one thing, which came in his opening exchange, which I share here:
The Chair: Welcome to this session of the Economic Affairs Committee. I am delighted to welcome Professor JosephStiglitz, who is joining us from New York. Professor Stiglitz, good afternoon to you.
Professor Joseph Stiglitz: Good morning.
The Chair: Good morning, rather. Thank you very much for joining us here in London on a wet and miserable afternoon.Can I start by asking you to set the scene with a very simple but big question: does debt matter? We have had evidencefrom certain quarters giving the impression that debt may not matter. What is your view?
Professor Joseph Stiglitz: Debt does matter, both economically, and, perhaps even more, politically. Let me first try toexplain MMT, the modern monetary theory, which has argued that it does not matter at all. I also want to make it clearthat the view held by many people, that it is the most important thing, is wrong. I am not at all worried about the level ofdebt in the United States. So the view that we face an existential crisis because of the debt is wrong, but the other view, that we do not have to think about it, is also wrong.
The origin of the view that it does not matter at all goes back to the 2008 financial crisis, where we expanded the basemoney supply enormously—by fivefold in the US and Europe—and there was no inflation. That led people to believe that you could increase the money supply enormously without any inflationary consequences. There was no inflation, because the money went from the Government into the banks' coffers and they did not lend it, so it did not have any inflationaryeffect, but it did not have any benefit either.
If that money had gone into the banks, the banks had lent it, and the people to whom it had been lent had spent it, wewould have had enormous inflation, but we would not have needed to increase the money supply that much. We kept doing it, because we hoped that increasing the money supply would stimulate the economy, but it had a very weak effect.That is the fallacy in MMT: if you increase the money supply and nobody spends the money, it does not cause a problem, but it does not solve a problem, either.
What is clear, in that case, and given his own chosen priority afforded to the issue, is that Stiglitz apparently gave evidence with the primary intention of rubbishing modern monetary theory. The problem for Stiglitz, is that far from doing so, he made himself look stupid.
MMT has never said debt does not matter.
It has said, as I do, that it is misnamed. Stiglitz shows no sign of understanding this.
Nor is he apparently aware of this so-called debt's role in private wealth holding, or its fundamental importance to banking, trade, pension funds and other institutions requiring government backed opportunities to save. I think MMT does all that. He does not.
Nor does he recognise the role government deposit taking (which some describe as national debt) has in withdrawing money from use in the economy to control inflation, which is a shame, because MMT does most certainly understand this.
He also talks hints very strongly that he thinks banking is an intermediary , or a conduit for the use of savers' funds, even if the saver is the government through its money creation programmes. That's a shame, because banks do not lend other people's money: it is a widely acknowledged fact that they only lend the money that they create. How can he be so unaware of this?
He even suggests money supply can be created without being spent, which is to deny the essential debt basis of all modern money.
And he suggests by implication that MMT says you can spend without limit when that is the exact opposite of what it actually says, partly because MMT is obsessed with inflation and because it makes clear in a way that Stiglitz clearly does not underhand, presumably because he has never read anything anyone actually talking about MMT has ever said, that unless you spend within the physical capacity of the economy to absorb spending then of course money creation is inflationary.
So we have to conclude that Stiglitz did this deliberately. I stress, that I really would not mind if Joe Stiglitz had offered an honest critique of MMT to this committee. He is, of course, entitled to do so. Economics is full of disagreements. But he did nothing of the sort. He did three things.
First he revealed his ignorance, not just of MMT, but also of banking, the role of the national debt, and the fact that there is such a thing as double entry so that when discussing that issue we also have to consider the preferences of those who own wealth and their desire for safe places to save.
Second, he misrepresented the truth, and I am really not sure that this is what anyone should do before a parliamentary committee.
Third, as a consequence, he might have served his purpose but he made himself look stupid in the process. He might, like many economists, think that a worthwhile thing to do, but I would have thought that he had by now reached a sufficient stage of maturity to get over playing such silly games. It appears that he has not.
As a result he will, no doubt, enable those who wish to present an argument that what he clearly thinks to be debt, but which is not, must be repaid with the result that the UK economy will be pushed further into recession and further away from delivering what the people of this country need . Well done, Joe is all that I can say in response to that.
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Academics seem to go to great lengths to protect their turf. Maybe he just wanted to throw a bit of mud at MMT: I have seen another submission based on MMT although I haven’t read it, it is very long. Mud sticks.
The GIMMS submission comes to conclusions quite like mine.
I like your comment denying Stiglitz’ suggestion that the money supply can be created without being spent.
i still struggle with “money is debt” because of double entry transactions. I think but what about the other entry?
but that’s my problem
Incidentally, Stiglitz must surely know of Stephanie Kelton? Book-writing Economists in academia can’t be that exclusive or ignorant- even in USA
Thank you for your glossary and the hyperlinks to it.
At least I now have some idea of why ‘double entry’ (https://www.taxresearch.org.uk/Blog/glossary/D/#double-entry) matters.
Thank you also for challenging the words of the famous – including Joe Stiglitz. Yes, such people are usually renowned for good reasons. Their views are almost always worth considering carefully. At the same time, they do – always – get some things wrong.
I wonder if Jo Stiglitz launches personal attacks on you? I will answer that he hasn’t and doesn’t to anyone. He is above that and lets his thinking represent him and funnily enough he is one of the most renowned thinkers of recent generations. You on the hand come across as a bitter irrelevant old man who launches incessant nasty personal attacks. It really is unpleasant.
How very weird.
I argued based on facts and respected his right to disagree on the same basis
It’s you who looks rather bitter and twisted
What he said & your critique reminds me of discussions on electricity markets and elec market reform: it is almost as if people are in a pick n mix sweet shop – they take what they want (i.e. what bolsters their argument/prejudice) and ignore the rest &/or distort reality to suit their argument. Bit sad really, because failing to discuss something honestly means that policy and policy outcomes will be distorted/ if not just plumb wrong. (there is also the possibility of a closed mind – even more sad).
“Joe Stiglitz really should not talk about modern monetary theory when he so obviously has no clue about what it actually says”
If the House of Lords was serious about understanding whether the National Debt matters they should now organise a public discussion between you and Stilglitz because MMT is the main theoretical camp that debunks the concept of such a thing as a National Debt existing. Either the Earth is round or it’s flat the issue is that polarised!
Pensions funds and insurance have no regulatory requirement to hold government bonds.
You’ve made this claim before and it is fundamentally wrong.
They may choose to do so for a variety of reasons, but they are not forced to. This is important, so you should not pretend they are, deliberately or otherwise.
I did not say anything about compulsion
Why did you make that up?
You claimed that these institutions ‘ require government backed opportunities to save’.
They don’t.
If you meant something different, what did you actually mean?
They require them like I require air and food
No one mandates I have those things but I need them
These institutions require gilts to function
My guess is that if you can’t work that out you really should nit be commenting here. You have also succeeded in making yourself look very stupid.
For the help of Mr Franks: what was said was pension funds and other institutions requiring government backed opportunities to save
There was nothing in that about pensions being required to take up those opportunities.
Precisely
Richard,
In fairness, you mentioned that these institutions REQUIRED government backed saving.
What did you mean by this?
Surely they can choose to invest in government bonds, but they don’t require them?
I did not say they were required to save in this way
I said they required – by choice, that is – gilts to meet their obligations as investment institutions , which is factually true .
Is that really so hard to work out? Maybe GCSE English is what you need?
I also read the transcript of the session with Dieter Helm and others. They made some good points, but came across as clueless on National Debt. Helm seemed to think it represented our accumulated backlog of investment.
I will be reading more
Oh dear they had Dieter as well. He is quite good in parts (on energy) but often gets it quite wrong. He also gets it quite right sometimes – I almost wet myself with laughter reading his take down of the EU’s emission trading scheme (Brussels was not amused by the way).
I pointed Noble Laureate Joe Siglitz to this thread.
His response – “Richard who…?”
Speaks volumes.
Except you didn’t, so it proves precisely nothing
Is that the famous Carl Burger, that we are to believe Stiglitz instantly follows; or could it be a Joe Siglitz (sic), who, for all we know, may have been looking for a fast food outlet?
Noble Laureate? What title does he hold? Isn’t he American? Do they have nobles in the US?
🙂
It is a pity Richard and Stiglitz couldn’t have had a proper discussion. But the committee chairman setting the session up in such polarised terms – ‘debt is everything’ or ‘debt doesn’t matter’ doesn’t bode well for their final report.
Stiglitz saying that government money to bale out the banks in 2008 wasn’t lent out and ‘wasn’t spent ‘ and so didn’t cause inflation, seems to be characterising banks, as you say Richard, as intermediaries – lending out savers’ money. And that is still how most people see it.
But it is depressing that something as fundamental as ‘what is money’ can’t be discussed and agreed at least as far as it can be – between thinkers such as Stiglitz, Skelton, Murphy et al especially since they often agree on immediate practical policy – to invest in public services, infrastructure etc .
Skelton points out that many aspects of MMT is not new , and is to be found in Keynes, Adam Smith, Marx etc .
One critique of MMT https://www.tandfonline.com/doi/full/10.1080/09538259.2014.957473
says it is a mix of old and new, ‘the old is correct and well understood, while the new is substantially wrong…..it doesnt explain how full employment with price stability can be achieved, doesnt have a theory of inflation, and fails to justify how the natural rate of interest is zero’
But for all that, the basics of what money is and who creates it ought to be agreed surely?
I would think so, but apparently not.
The problem QE solved, that Stiglitz misses (for whatever strange reason) is that it saved the commercial banks; and only the commercial banks. It didn’t save anyone else and it didn’t protect ordinary people from the potential reckless stupidity of commercial banks in future: a point understood by Government well enough, because they bribed the banks with the Government the money that saved them, through the lavish payment of interest on central bank reserves the banks did nothing to earn; which the NEF estimates will cost £211Bn, 2021-2028. The Treasury still had to provide an £85,000 guarantee to depositors, because that is the only way depositors could be expected to trust the banks (a guarantee, please note the commercial baks do not pay a market rate for, but is there because of their own inadequacy). The risk of future wanton stupidity overtaking the banks again is merely being offset by the banks earning easy money on reserves, with higher interest rates. The Government is still in the same position; subsidising commercial banking, and taking all the risk and letting the banks profit at everyone’s expense. Furthermore, it is all unnecessary, as the BoE could introduce tiered reserves (as in other major economies), and end the profligacy.
Stiglitz also recognises that: “I am not at all worried about the level of debt in the United States. So the view that we face an existential crisis because of the debt is wrong”. The problem is that it was mainstream, neoliberal economists who peddled the “existential threat” view of debt, and still peddle it, constantly; not MMT economists. It is so mainstream it is driving both Conservative and Labour NOW; with a looming election, and no option offered. We have Hobson’s choice.
So what on earth is Stiglitz doing? How should I know? It is impenetrable. It defies explanation. If I was a cynic, I would say that it looks something like the classical economist Delphic Newspeak of the kind that is very, very tedious because it never seems to end, take us anywhere, or illuminate anything; pick the bones clean from what you can save from a ropy argument; present it in a nuanced, ambiguous way that allows sufficient wriggle room to face both ways, back both horses, have your cake and eat it; while denying anything of the sort is happening.
Cynical about economics? Me?! Surely not.
As I said….hard to work out what he trying to achieve here…
I may revisit this tomorrow
I am a fan of Stiglitz – I like him.
But I am perplexed by this.
I think that he is being bullied or maybe there is another pressure in his personal life. And we know what the economics ‘profession’ is like – it’s mercenary in nature.
Economics remains a rudimentary art in search of a viable scientific method it aspires to, but doesn’t possess or know how or where to find it. It suffers from Physics envy.
Reflecting on this discussion, I am reminded that economists are only rarely the best sources on monetary theory (this is true at least since the most perceptive of early monetary theorists, perhaps apart from the brilliant but dangerous John Law a century earlier, was a practitioner, Henry Thornton, 1760-1815). I say this because of a very telling observation by a leading 20th century economist, John Hicks:
“Monetary theory is less abstract than most economic theory; it cannot avoid a relation to reality, which in other economic theory is sometimes missing. It belongs to monetary history, in a way that economic theory does not always belong to economic history” (John Hicks, ‘‘Monetary Theory and History: An Attempt at Perspective’, 1967’).
Economists do theory, preferably limited to the reassuringly abstract form of variations on equations for the time value of money; they do not ‘do’ reality, or test their theories. As Hicks notices, they also prefer to avoid economic history; I may guess because the history carries the dangerous legacy and smell of reality within it, that is toxic for theory that is never, ever in search of the real world.
Very interesting Richard, and you made some excellent economic points. However there is a bright side. Stiglitz is a progressive who shares some of your analysis on inflation
https://www.youtube.com/shorts/2GfK4pcBIvw
And this is the material of a progressive
https://static.scientificamerican.com/sciam/assets/Image/2018/saw1118Stig34_d.png
https://www.scientificamerican.com/video/a-nobel-laureate-explains-the-rigged-american-economy/
https://www.scientificamerican.com/article/the-american-economy-is-rigged/
“Bizarre” was my first impression of Stiglitz’s remarks as well — particularly given that he starts his testimony by launching a broadside against MMT before any of the lords have queried him about that.
I’d like to highlight one other area in which he appears to be ignorant of MMT. Many (though not all) MMT advocates try to assess the “monetary sovereignty” of a country. One of the factors in that assessment is: “Does your government take on debt (‘borrow’) denominated in foreign currencies?” When it does, it is diminishing its monetary sovereignty and its ability to manage its economy for the greater good of its citizenry. It becomes dependent on inflows of that foreign currency in order to re-pay the debt.
If, however, a sovereign, currency-issuing government only takes on debt denominated in the currency which it itself issues, it can always meet principal and interest payments on that debt as they come due.
But let’s consider this statement from Stiglitz:
“The US and the UK are in a somewhat different position. You are a relatively smaller, open economy. We are a huge economy. If you borrow large amounts from abroad, that means you will have to pay back that money in the future.”
Who is the “you” to which Stiglitz is referring there? Is it the British population as a whole? British industrial capitalists? The City? The U.K. government?
And in what currency is that borrowing being done? If the British government sells debt instruments denominated in dollars, it will have to pay interest and principal thereupon in dollars, which means it has to accumulate dollars one way or another. But if the government only sells debt instruments in sterling, which it itself issues, then it will never lack the ability to “pay back” its debt.
Stiglitz does appear appear to understand that obsession with the size of the national debt is a *political* problem much more than a financial problem. For example, he later says:
“Right now, the debt in the United States has become a political problem, because one of the parties has started worrying about it in a somewhat inconsistent way and using that as an excuse not to make investments we desperately need for the future, including in climate change, health, education, infrastructure and technology. If one becomes obsessed with the magnitude of the debt, that can impede making important investments.”
However, his decision to foreground his attack on MMT is gratuitous and, as Richard says, bizarre.
Thanks
James E Keenan,
Thank you. If a Nobel Prize-winning economist thinks that either the USA or UK “borrow large amounts from abroad” then that Prize looks rather worthless.
Had I been Chair of the Committee, I would have requested Mr Stiglitz to confine himself to his views on sustainability of debt, rather than patronising and ill-founded sniping at MMT.
An American can patronise the British on debt very easily; but what would he say about debt to a Japanese audience, on that vein?
Richard also on the bright side was Mazzucato’s presentation – also a progressive economist
https://committees.parliament.uk/writtenevidence/128586/html/
She references the Household fallacy, the sovereign money issuer etc.
Though I think this statement is not fully accurate given the practise of paying interest on reserves. ” Relatedly, there are no limits on the ability of the Bank of England to buy UK denominated debt in secondary markets by creating new sterling reserves and deposits in the UK banking system, after which the state effectively owes the debt to itself (interest payments to the Bank of England by HM Treasury are routinely transferred back to HMT).”
It’s ok
I wish she had done a summary as I did
Richard, yours was very very good and very useful, chock full of practical links
I wish you both did oral presentations 🙂
Mazzucato did a written submission with references as you know. Not sure what you meant by a summary
committees.parliament.uk/writtenevidence/128586/pdf/
I don’t think Stiglitz ever meant to critique MMT, he knows he can’t, but most readers will take what he says at face value. And if the media are interested, they’ll post his comments as if they are fact. Classic debunking technique.
Exactly….
Stiglitz’s comment is a good way of telling the UK government how bad their policy is, and it echoes your strategy of defusing the Conservative tax views – you fight fire with fire:
In the United States, there is a recognition on the part of the Democratic Party that more progressive and better-designed taxation could significantly increase tax revenue and improve the performance of the economy, that our tax structure overall is not very progressive—in fact, at the top, it is regressive—that we need a whole range of environmental taxes, that there are large loopholes and extensive tax avoidance, and that market power has increased enormously. Appropriating some of that monopoly profit or rent for public purposes would decrease rent-seeking and not have an adverse effect on investment or employment.
If the Democratic Party gets elected with a sufficient majority, there will be enough tax revenue to undertake the investments we need without the encumbrance of additional debt. On the other side, what worries me is that Republicans are likely to curtail not only debt finance but also investment, which will lead to a much weaker economy in the future.