I have already noted the bizarre evidence submitted by Joe Stiglitz to the House of Lords Economic Affairs Committee.
Now, I have been tipped off (by another economist) about the similarly absurd, anti-MMT evidence also supplied by Charles Goodhart and Olivier Blanchard to this committee. Both made their comments in their opening statements, like Stiglitiz did, and without any (apparent) prompting from the Chair.
Goodhart, whose work has become increasingly odd with age, said:
Yes, of course [government debt] matters. It has to be repaid with interest. The Government can always pay it by creating money to pay it off, but that causes inflation. One of the problems with MMT is that it assumes you can wait until inflation hits before doing anything, whereas the inflationary conditions can get worse and lead up to an inflation that is much more difficult to counter when it takes place.
Blanchard said two things that I want to draw attention to in his preamble. The first was:
Coming back to the question on debt, my answer is that debt is costly; I agree with the other two speakers. From an economic point of view, it decreases capital accumulation. Depending on what capital accumulation is decreased, it may be costly or not very costly, but it is an issue. From a fiscal point of view, as Charles said, it requires more taxes in future, although the answer there very much depends, again, on the valuable r-g. When r-g is zero, you can finance the interest for new debt and keep the debt ratio constant, so the cost in terms of future taxes may be quite limited. However, the notion that debt is costless is a non-starter.
The second was:
On MMT, I have never fully understood and, I think it is incoherent. One thing that has been said by some is that the central bank should basically cancel the debt it holds, which would decrease the debt. That is nonsense, but I will stop there.
Let me deal with these, in turn.
Goodhart is wrong: government debt is never paid off. It rolls forward and has increased steadily over time. There is not the slightest evidence that it is ever going to be paid off. In that sense it has no cost. That is hardly surprising: it represents cost-free money creation. We need that money in use. Why does he want to deny that?
Then there is the question of the cost of interest. As Blanchard said later in his opening comment, if r-g (the interest rate minus the growth rate) is zero, then there is no real interest cost either. And as Goodhart noted later in his evidence:
From having been negative, you are likely to get something like 3% to 4% inflation [now], 1% to 2% growth, and nominal interest rates at about 5% on average, so real interest rates on the order of zero.
So, there is no cost to capital repayment, and there is, in the case Goodhart outlines, no foreseeable real interest cost to borrowing. What, in that case, is the question of sustainability that they were pontificating about in a very narrow frame all about?
So, having demolished all they had to say with their own words, let me turn to their MMT comments.
Why did they raise this issue right at the start of their sessions? Could it be that they had been asked to do so?
No one defending MMT is being called, as far as I can see. What are their Lordships terrified of?
And as for the observations: Goodhart could not be more wrong about what MMT says. Its absolute suggestion is that money in excess of what is required to put all available resources to use must not be created if inflation is to be avoided. MMT says the exact opposite of what he claims.
Blanchard is no better. First he declares ignorance. Full marks for honesty and none for competence: why is he so scared of something he apparently knows nothing about. I simply do not believe his claim.
And what is nonsensical about saying a debt, when bought by the person who issued it is, for all practical purposes, cancelled and that if new debt is then issued, it is not in economic substance that which was repurchased? If he cannot comprehend that, then he really should not be giving evidence. This is, after all, what the UK Whole of Government Accounts show precisely because this is, when substance rather than form is considered, what really has occurred.
So let me explain what they clearly do not understand, which is that MMT is rooted in reality.
The question about whether debt is sustainable requires, first of all, the question to be asked, 'Is the government in debt?' The answer is it is not.
Second, the question then is, do people want to save with the government? The answer is undoubtedly that they do. It is savings that are credits on the government's balance sheet, not debt. Now you deal with the uneconomic reality of that. This is what MMT does.
Then, MMT looks more broadly at aggregate demand in the economy and the means of providing the liquidity required to maintain it at full employment levels. That is the question of concern, not the sustainability of debt. The debt is always sustainable if we have the aggregate means to pay for it - which we do at full employment.
The problem for these economists is that they were talking about microeconomic siloes of concern, not macroeconomic issues of reality. That's the difference between them and MMT.
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Clearly they made their comments as a debunking exercise, they had no intention of providing a critique. When Blanchard says “On MMT, I have never fully understood and, I think it is incoherent”, he’s saying that he really doesn’t understand it, but is going to comment on what he thinks it is.
The comments are made early on, as many people will only read the start of an article, and the media will be able to grab their headline quotes.
Imagine a physicist saying “I have never fully understood quantum mechanics, and I think it is incoherent”.
Well of course that is exactly the sort of thing a lot of (mostly older, classically trained) scientists said in the 1920s and 1930s. (And QM is difficult to comprehend and counterintuitive. God does indeed play dice. Intuitions about the macroscopic world just don’t work well for atoms. Just as intuitions about households and firms don’t work well for states that issue their own currency.).
Forget about neat and tidy theory. How does it work in practice?
Plus of course, as the aphorism goes, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
We’ve gone through the “ignore” and “laugh at” phases for MMT and reached the “fight” stage I reckon, in that well known saying attributed to Mahatma Gandhi. These economists feel the need, or have been asked, to join the fight against the idea the “national debt” is a liability for the public purse but an asset for households and others, who certainly do not want it paid off.
I particularly like this from the Gower Institute, which I think is in full agreement with your perspective Richard, having read your summary:
“The national debt represents the cumulative net quantity of sterling issued by the Bank of England due to government fiscal operations, which both domestic and foreign entities have saved over time. This ‘net money supply’ constitutes a financial asset on the balance sheets of the non-government sector. It is recorded as a liability on the government’s balance sheet merely as a balancing item to that asset.”
I agree with them
We both call for the widening of access to national savings on a broader basis
What exactly are they afraid of? Is it purely the political justification for austerity that they are protecting? I don’t get it. Stiglitz is not a right wing market fundamentalist.
“What exactly are they afraid of?”
I think the question is, “who is afraid?”. And the answer must be, those that benefit from the status quo: bankers and financiers, executives of public companies, and executives of those private companies who are bunged a public contract.
For many what they are afraid of is that a major part of their world view and values are put into question. If they accept this fact then they have to accept that the decisions on spending is political and not monetarily constrained. Their libertarian values are wrong. It brings them into a state of cognitive dissonance ie. the discomfort a person feels when their behavior does not align with their values or beliefs.
For the others they are to be despised as a cynical manipulators for the sake of self interest.
Stiglitz isn’t a market fundamentalist, indeed – and way back (with his World Bank background and “Globalization and its Discontents” on the bookshelf) I thought he was one of the “good guys”; but nowadays, sadly, I wonder if he’s simply (even if almost innocently?) milking the publications, pundits and prognostications circuit, with lectures here there and everywhere, giving comments in the more erudite TV shows, INET events and the like?
It’s nice to be liked and called regularly; and not get much criticism, or feel one’s above that sort of dirty argumentative culture.
Richard, on the other hand.. !
Fight the fight, keep the faith!
Truth will out. One day, what is said inside will be shouted from the rooftops!
I wonder that too.
And thanks
When money, or the means to obtain it is scarce, money = power. Money hasn’t really been scarce (if it ever really was) since the introduction of fiat currencies, so ‘scarcity’ has to be created artificially, by lying about how money works. MMT exposes this lie. So it threatens the source of power. What power do Bezos, Musk, financial markets, beankers etc. have if nobody needs their money?
I found this to be an important insight. The corollary is that the fight for acceptance of MMT is not just a debate over economic theory, it is about implementing a whole new political environment, as revolutionary in its way as Marxism. No wonder those who are wedded to late-stage capitalism are so hostile to MMTs ideas.
I suspect that the object of the exercise is ultimately to come to the conclusion that the debt is not sustainable – at least at its current level – and the submissions that have been chosen for discussion are aimed at showing that to be the case.
I also suspect that the reason that their Lordships are so frieightened of MMT is that if government policy was based on an understanding of it, their accumulation of vast wealth might be reduced.
BTW I disagree that government debt “represents cost-free money creation”. If we are talking about the so-called National Debt it doesn’t. It simply provides a method of storing money that has already been created. The only reason it looks as if it does is that the government always issues new debt to match its current spending.
I would, however, caution that there might be a problem with the sustainability of the government’s savings facility where it is being used by foreign goverments and individuals seeking to shelter sterling assets aquired from the trade imbalance with the UK. It’s the one area where I think Mosler is wrong – except in the case of the US which has almost unlimited internal resources and enjoys being the issuer of the world’s reserve currency. Their Lordships need to look at the UK’s trade deficit.
But they are saved in sterling…not another currency
The UK’s trade imbalance itself may be or become an issue, but in that case it’s not the use of a government savings facility by the overseas sector who are acquiring UK assets as a necessary result of that imbalance that’s the issue, it’s the imbalance itself. For an overseas person acquiring UK assets, the government savings facility of course carries the advantages of being safe (minimal credit risk) and able to expand to whatever size is required.
Even if the overseas sector became reluctant to acquire more UK assets, the interest on the existing stock of gilts they hold would remain under the control of the UK (when they are rolled over).
The trade imbalance could be addressed by
(a) investment to enable import substitution
(b) targetted tariffs, or other trade barriers, on imports deemed less essential to the UK, to create space for those deemed more essential.
Coming back into this a bit late in the (next) day. Of course I understand that the asset is saved in Sterling. And, as Paul Lanch says, it is the trade balance, not the increase in the government issued debt, that is the problem – the debt is a symptom. It’s also worth noting, as Ben Chu said on a recent Newsnight, that the assets aquired by international trade are actually owned by the international clearing houses such as Euroclear, presumably by way of their holdings of exchange settlement reserves at the respective central banks, and some of which they may exchange for treasury bonds (but I don’t know).
Gilts are held for this purpose – undoubtedly.
I started looking at the paper submissions yesterday. My initial impression based on on the first 12 or so was that there was consensus that it WAS sustainable and a few seemed to be inspired by MMT. Don’t take my word for it: there is a lot to read.
Could it be that they are just trying to sway the committee before the papers are read and reinforce the orthodox view. I don’t see that such people benefit in any way from uncovering the truth: it’s not what they do, they just want to protect their positions.
As people always say: first impressions are critical.
I contend that all we were seeing at the Lords was an exercise in power.
The power of Neo-liberalism to create its own reality and insist that everyone else accepts it as people like Mirowski & Plehwe (and others ) have pointed out quite a few times.
The exercise of power remember is also about the denial of things. In a proper democracy this would entail making sure there was more fairness by regulation and intervention and the broad application of law into areas that are effectively lawless – such as finance.
But no, the power we have in power is that which will deny us useful ideas – like MMT.
It is wealth – power which has purchased our democracy and is calling the shots.
So here we go then – the unofficial war against MMT – the other front in the battle to support what Tim Snyder called the world of ‘no ideas’ (or TINA) he sets out in his book ‘The Road to Unfreedom’ (2018).
You know what. I’m going put forward this idea OK? Because it’s the only way I can deal with it.
Our government – this means the Treasury, the BoE and Chancery – all of it – has – because of political funding and behind the scenes machinations – been handed over – and repurposed – for a wealthy elite.
Our government is now owned by the wealthy elite, especially since the rules around party political funding have been rather too quietly relaxed. Although it looks the same, sounds the same – the government in OUR name has gone, OK?
It’s GONE. It’s owned by THEM. Accept it.
So this means that MMT only exists if you believe that government is really democratic and is there for us all. Which now, I contend, it is not.
I contend that this is not the case, and that this fact makes MMT deniable – even though in a government with a traditional and genuine remit of serving all I totally accept MMT is how it works. Please note that.
If you want evidence for my POV, then I suggest you look at the CBRA. Why an earth would you as government set aside a reserve account of that size for casino banks to stop them collapsing and then have the temerity to make it look as though it was private banking money and interest being given and levied on your government?
The only answer for this is to either to create an accounting lie making government look as though it has borrowed from private banks (there is no such thing as ‘government money’ etc.,) or/and that is simply how – since you are now in charge – you wish to work – and of course keep the funding coming in for your political party by ensuring huge profits are being made by your funders?
Add in increasing retrenchment in public services, creating more opportunity for exploitation and we have the makings of a Shangri-La for wealth. A utopia in their name. Not ours.
The state’s coffers are now in the hands of the rich to be re-purposed for the rich. Their very own hole in the wall. At scale.
There can be no other possible explanation in my view as to why MMT is being denied. It’s because the new owners of your democracy have said it must be so. And they will pay people like Blanchard and Goodhart and others who may be needy like Stiglitz with fealty and money to deny truth or at least what else is possible. It’s competition – and the people we are dealing with are natural monopolists.
Extreme? Well, no one believed just how badly the Nazis hated Jews until we all saw the death camps with our own eyes; no one knew just how repressive Islam can be until we saw the Taliban; no one really knew what the Zionists were prepared to do until we saw what goes on in Palestine.
What ‘s going on here is more subtle and cunning but no less extreme.
Even if you think that my thesis is sketchy – I invite you to dip your toe in it because accepting it – that our democracy has actually now GONE – even a little – might help us think about the steps needed to get it back.
But I tell you – this dystopian future we’ve all been worried about? It’s here – NOW.
As another contributor to this blog recently affirmed: it’s MMT for the rich, austerity for the rest.
Indeed, democracy’s been in the rear-view mirror for some time, that’s if it ever existed at all.
I think it’s better to think of the post-war, Keynesian years as something exceptional, not the norm. In those years, the benefits of Capitalism were relatively well distributed among the population of the UK. However, two things:
1) That was largely due to concessions made for the specific purpose of making the (at the time) very real threat of Communism go away. We have the USSR to thank not just for the defeat of the Nazis, but also for the NHS and the Welfare State.
2) That relative prosperity in the UK continued to be based on sucking wealth away from colonized (and later, neo-colonized) countries. And it is to a large extent the damage the UK has done to many other countries that has left them in the state where many had no better option than moving to the UK to work, where they also provided labour the UK needed, e.g. to staff the NHS.
Getting back to democracy: it’s not something that’s just there, it has to be permanently fought for.
‘Is the government in debt?’ The answer is it is not.
It appears you are struggling with basic economic definitions here:
“A country’s gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector”.
There’s no dispute that the government has borrowed money from (various sources) and has a liability to repay that amount borrowed. To pretend otherwise just makes you look a tad foolish.
Your glossary doesn’t even include the word ‘debt’ or government debt’ – I’m intrigued as to how you are going to define it in such a way that you won’t concede that the government is in debt.
With respect, this supposed liability is never repaid
And it is not borrowing
It is a savings facility
As an accountant I can say these things for sure
We look for the substance of things
I’m pretty sure the ICAEW would not agree with you that ‘government debt is not borrowing’!
I am more than qualified to make up my own mind on these issues.
And given the amount by which their members have been fined it might have been good if more could have done.
“of course [government debt] matters. It has to be repaid with interest.”
First, when has the nominal amount of government debt ever fallen and why? Commentators often speak about debt as a percentage of GDP, but gilts are denominated in pounds sterling not “real” pounds.
Second, how does the government pay back principal or interest? With money of course. The government makes that money. And what is money, but another form of debt. We are just exchanging symbols for other symbols. They could be Flanian Pobble Beads. What matters is that (a) you can pay taxes with them and (b) other people will give you goods and services in return for them.
At base, “debt” is just a way of mobilising, allocating and distributing different sorts of resources, human, intellectual and physical.
We all agree that government debt “matters”. But we have a fundamental disagreement about *why* it matters.
Thanks
Who are these eminent Lordships? One is a former Chancellor, another a British labour economist, a former head of the civil service, a former permanent secretary to the Treasury.
How do they approach this enquiry – with the hypothetical open mind, or seeking confirmation of existing biases? The absurd attacks on MMT by several academics suggests open minds are in short supply.
“Closed minds” is the true British disease. It didn’t used to be as the Industrial Revolution testifies!
This is air-head stuff on the part of Goodhart and Blanchard! If the government hadn’t created copious amounts of money during the GFC and Covid crisis because of fear of inflation accelerating many global economies would be absolutely stuffed! Alan Greenspan spelled it out very succinctly 18 years ago inflation relates to real assets or resources availability and that in turn depends on several variables investment and productivity levels in different parts of the economy being but two.
https://www.youtube.com/watch?v=DNCZHAQnfGU
The reason MMT is hated is because it unmasks and destroys the ‘money making fantasy’ of the City of London and the banks. Their continued good fortune depends on being able to use the UK’s #newmoney to create private profit in very undemocratic ways.
Have never liked the bits of Dieter Helm that I have been aware of – it appears he got his knighthood for the “public money for public goods” agricultural programme which is now being implemented.
Both he and the others in the oral evidence session
https://committees.parliament.uk/oralevidence/14313/pdf/
dont see much scope for raising tax income from richer households or from phasing out fossil fuel and other industrial subsidies .
Helm doesnt make any direct criticism of MMT , but suggests that the true costs of transition to renewables have been vastly underestimated – mainly because of intermittancy of wind, and the need to reconfigure the grid to cope with the geographically dispersed renewables . (He doesnt consider another revewable version – community owned local wind and solar which might not require such a massive national grid reconfiguration) .
he says ‘debt matters’ ……’if it is to pay for current consumption, which it
increasingly is, it is a problem in itself: the interest has to be paid and it
constrains other public choices. In particular, it allows us to live beyond
our means and pass the cost to the next generation, which will have to
pay for it.’
He is in favour of a ‘balance sheet approach’ which should include the true cost of maintaining assets into the future which he says have been wrongly cast as ‘investment ‘ and seems to suggest UK’s position is ‘unsustainable’.
….’We are unsustainable in our external trade. We are unsustainable in that our consumption is consuming capital, and we are unsustainable because we are not dealing with the pollution we are causing. In intergenerational terms, we are living beyond our means and we will have to live within our means.’
…..’ There is a world of difference between debt owed to foreigners and debt owed domestically. Much of Japan’s debt is internal. So is Italy’s, actually. We now have almost everything at the margin being external’…………
Is that really true?
It is all owed in sterling. He appears wholly unaware of this.
And? So what if it’s owed in Sterling?
Are you back to pretending that we can just print as much money as you want without consequence?
You do realise the money has already been created don’t you? How else could it beenplaced on deposit with the government? In that case, what does your question mean?
Brenda Cook,
Your question is not clearly presented. Are you actually arguing that it makes no difference whether it is owed in Sterling, or not? Is that your position?
“’if it is to pay for current consumption, which it increasingly is, it is a problem in itself: the interest has to be paid and it
constrains other public choices. In particular, it allows us to live beyond our means and pass the cost to the next generation, which will have to pay for it.’”
This is a familiar, but silly argument. If we are required to pay for “current consumption” that is because of serious failures that is a function of a failing economy that requires remediation. Not to sustain consumption given the obvious problems of poverty and its consequences (in schools, housing, foodbanks, health – the list is growing fast), and now widely reported; then future generations will pay in the effects on them of poverty, ill health and poor education. What is worse, the infrastructure is inadequate now, and therefore we are handing future generations an infrastructure catastrophe. A country in the 21st century with failed infrastructure, much of it over 200 years old and still asked to do a job it was not fit for in the modern world, or designed to do, and a population far larger that the infrastructure designed for it; with services and standards of living and health to match. The absurdity of those who propose this as our legacy to the future; they thin the future generations are going to than us for leaving them in this mess.
What this argument about not leaving a burden on future generations (offered by the baby-boom generation comprising the largest number of greedy, self-satisfied self-servers Britain has ever produced); who believe implicitly in the old Scottish complacency “it’ll see me oot”.
I was quite surprised by the number of submissions in the inquiry that mentioned Modern Monetary Theory (MMT). Three years ago I had never heard of MMT, and I have seen a noticeable increase over the years.
The committee inquiring on “How sustainable is our national debt?” had 47 submissions, of which 10 mentioned MMT. That’s 21% or 1 in 5 submissions. Of those, 2 submissions (20%) felt it necessary to dismiss MMT, while the other 80% were positive or neutral.
The criticisms of MMT is part of the natural progress in seeing a new idea replacing the old. The US Senate has already condemmed MMT, as has the House of Representatives.
Parliamentary Committee web site on the National Debt
https://committees.parliament.uk/work/8090/how-sustainable-is-our-national-debt/publications/
US Senate resolution to abandon MMT
https://www.congress.gov/bill/117th-congress/senate-resolution/136
US House of Representatives condemning Modern Monetary Theory
https://hern.house.gov/news/documentsingle.aspx?DocumentID=315
Your post, Richard, asked a very straightforward question – and there clearly is very straightforward answer.
Their Lordhsips – and their picked advisers – are scared because MMT offers a clear understanding of economics which returns all the major questions of the day, and in practically solvable terms, to political action. Worse still, it is being heard about and increasingly understood. It gives back both agency and resources to heal society for the many -and not the few*. A J P Taylor used to say that nobody could understand the politics of Britain in the last decades of the 18th century unless they realised that the political classes went to bed and dreamed of tumbrils in the Strand.
*(In our totemic ‘constitution’ nothing so symbolises “the few” as their ermined company, and especially the corrupt grifters who have been so prominent in their ludicrously inflated ranks in recent years.)
It seems that they are using 2 kinds of definitions of “debt”.
They are implying that a company can’t issue debt to expand its capital accumulation. What do they believe is the purpose of financial markets, a casino?
Richard,
I find it interesting that the first session in which someone specifically named and criticised MMT was on February 20th. On February 20th a dozen written submissions had been published to add to the ten already published. Many of these questioned the narrative of the National Debt but I can only find two which mention MMT by name. So why did a respondent then and again on March 5th. raise MMT specifically? The Chair’s opening question on March 5th was, “We have received a fair amount of evidence from various sources, some of whom argue that the UK Government do not have a National debt and if they do it is heavily overstated. So does debt matter?” It is difficult not to come to the conclusion that some on the committee were concerned by the tone of many of the written responses and primed their interviewees to dismiss MMT.
Another exchange I found interesting was when Lord Davies asked the Economic Secretary to the Treasury whether it would not be better to go from an assessment of what needs doing to a level of public expenditure rather than fixing expenditure from other variables first. The answer was basically that they did it the way they did because that was what had always been done! Good to know the critical analysis that goes on in the Treasury.
https://committees.parliament.uk/oralevidence/14465/pdf/
Thanks
@Ian Tresman
“47 submissions, of which 10 mentioned MMT”
My own submission was (I hope) consistent with MMT, but I was careful not to mention MMT directly. This was because I suspected that the committee would be MMT-allergic!
My own does not explicitly do so either. I did not think it would be useful.
Yes, I tried to include those that were MMT-friendly without mentioning MMT directly. But I may have missed some, not least because there is then no argument from critics who disagree as to whether or not a submission is based on MMT. So I hope I have a conservative estimate.
If there had never been deficit spending, so that government spending always matched tax income, where would the money for all the growth we have enjoyed, benefited from, and prided ourselves on, have come from?
Precisely
The Gower Initiative for Modern Money Studies (GIMMS) evidence to the inquiry was submitted on the 7th February, but not published on the inquiry website until the 12th March.
The final oral session was on the 14th March. It only became known that was the final session when one of the committee members was encouraged to invite alternative views, i.e. GIMMS, for debate and we were told it’s too late.
I think that tells you something.
I’ve watched, or scanned the transcript of, most of the oral sessions. Three things are clear –
1) None of the participants in the oral sessions understand what the debt is. Their views are not very far off the “maxed out credit card” nonsense we’ve been getting recently from both main parties, and certainly support the idea that government should be scared of ‘the markets’. Some of them seem to be especially concerned about whether foreigners will continue to buy gilts.
2) The committee chair realised that most of the written evidence was saying debt should not be a concern, and he started making that point in later oral sessions. Several of the witnesses took that as an invite to make inaccurate caricatures of MMT, hence demonstrating they had not studied the source material.
3) The committee chair was explicit about the problems faced by government, so much so that you’d think he was angling for a job in a Labour government. I think you could summarise his view, supported by others, as that we can’t fight our way out of this rut unless we indulge in more debt, and that’s impossible because it would be unsustainable (unless some magical fiscal rule can be made to work). 😉
Thanks
What I think perplexes me is if MMT actually does work ( and I’ve no view one way or another if it does ) why has no government tried it , or even had a proper debate about it.
They don’t have to try it. It describes what actually happens. The problem is the imposition on reality of a worse explanation of it.
Sorry maybe I’m being a bit dense but I don’t understand that reponse . You say it actually happens? MMT that is? Your last sentence makes no sense to me but maybe I’m missing something. Could you explain it to me perhaps in simpler terms. That is ‘The problem of imposition on reality of a worse explanation of it’. I may be dense but the more I read the sentence the more I can’t figure out what you mean.
My point was quite simple, but let me put it in a different way.
All theories seek to explain reality. My argument is that MMT explains reality better than anything that is said by neoclassical/neoliberal economists. That is because it reflects the fact that all governments spending is funded by new money creation, tax exists to cancel that created money, and government borrowing is not as such borrowing at all, but the safe depositing of funds already created by the government with it for safekeeping because the government alone has always got the capacity to make repayment of sums that it holds on behalf of those saving with it.
This is, of course, an interpretation of reality. That reality is dressed up in more complex ways than this summary implies. Like all theories, what I just said tries to cut through the crap to explain the substance of what is going on.
My argument is that this interpretation  explains reality much better than neoclassical/neoliberal thinking does because these pretend that taxation and borrowing fund government spending, and that such expenditure is constrained by them as a consequence, when that is not true.
Hence, my claim, that MMT is actually happening because it explains the real world, which neoliberalism does not .
Hence, my claim that we are suffering the consequence of trying to impose neoliberal thinking on our system that does not work as neoliberalism suggests, meaning the policy is in conflict with reality, rather than enhancing its capacity, which is what I suggest that MMT could do .
Is that less cryptic?
John asks the most pertinent question: ‘ why has no government tried it , or even had a proper debate about it?’
And then, since ‘how will you pay for it?’ is the most powerful weapon the Tories use against Labour, why doesn’t the Labour party use MMT to hammer the Tories?
It’s a question my wife continually challenges me with when I complain about the latest Tory austerity move.
The only possibilities that make sense are that a) Starmer, like most politicians and economists here and in the US have been successfully bamboozled into believing in the traditional economics, which says much about those economists and politicians, or b) that Starmer is scared of attempting to educate them for fear of a ruthless backlash of the intensity felt by Galileo when he challenged the geocentric orthodoxy of his time.
Why doesn’t the Labour Party use MMT to hammer the Tories?
I agree with Ian Tresman’s advice to “follow the money”.
I’d add that most politicians are not even sightly intellectually curious. They don’t even consider questioning the prevailing orthodoxies about finance. Of course, that is partly because the super-rich and the big corporations, whose approval the politicians are depending on for their own advancement, don’t want them to. But I don’t think most of them know that the orthodoxies are wrong and deliberately uphold them regardless; it’s much more that they believe the propaganda that the top finance people are the “masters of the universe”, or at least the experts in finance, so what they say must broadly be right. This is part of the common general deference to the rich and powerful, which can include baseless attribution of positive qualities, both moral and intellectual, to them.
Of course, this doesn’t hold water. Top finance people are experts in making money for themselves, not in using finance for the public good. And the GFC blew an obvious hole in the credibility of the financial orthodoxy. But these points have no hold on people who are sufficiently intellectually incurious.
Ideologically they are neoliberal, meaning they want to shrink rather than expand the state. MMT says they could expand the state to meet need. Given they do not want to do that they deny it is of relevance.
“What I think perplexes me is if MMT actually does work ( and I’ve no view one way or another if it does ) why has no government tried it”
Richard is right, MMT only describes what happens, it is not a prescription for how to do economics, but it does help you decide what you might be able to do, and the consequences.
Why aren’t governments taking MMT on board? The usual answer is to “follow the money”. For example, MMT understands that high-interest rates will not do what the government (of Bank of England) claims. Lower interest rates means that many people who benefit from higher rates, will lose out.
MMT also shows that neoliberalism is a failure (based on the last 14 years of evidence). The argument is that austerity is a policy which will benefit the country in the long term. That is nonsense. It is designed to break public service, privatise it, so that a small minority can profit from it. Just look at the water utilities, dumping raw sewage into our rivers while giving money away to shareholders and executives, and claiming there is no money to improve the service.
The claim by Charles Goodhart that “The Government can always pay [the debt] by creating money to pay it off, but that causes inflation” shows that he’s obviously not looked at any data for the UK since 2008. He sounds like an A level economics student who’s never seen any data. Any MMT economist would have done a lot better on this question. (As did Joe Stieglitz, although his answers were also flawed).
As for Blanchard: increases in govt debt reduce capital accumulation – really? If the increased debt is funding public investment the exact opposite is the case. It’s incredibly sad that these two guys, both luminaries of the mainstream economics profession, are so detached from reality.
Agreed
Goodhart obviously does not understand tax and its relationship with MMT.
Because Goodhart knows that tax is unpopular which in itself is a totally populist misunderstanding of what tax actually is.
The culture in this country is to reduce taxes – it’s even glorified and ratified by policies like TESSAs.
The anti-tax bent of this nation – promoted and financially supported by wealth that gains more from these policies than the man or woman in the street – works against those men and women, leading to the justification of the underfunding of public services and the nullifies the creative use of MMT to solve our problems. What a tragedy.
Goodhart has revealed that he is not a economist; he’s fantasist.
How do you get bad economists struck off?
This is similar to the idea that there is a wage-price spiral. In theory perhaps, given particular assumptions, but the real world evidence demonstrates that it does not actually happen in practice (increase and wages slowly catch up).
Theoretical insights that don’t predict or explain what happens in the real world may be interesting as intellectual exercises – and may provide a convincing (but false) narrative – but they not much use as guides to the practical steps we should take.
The example i use to describe the visualisation problem is this:
Academics and theoreticians know about Energy, Friction, momentum, work done (joules) distance, time, weight, etc. with regard to hammers and nails; BUT, ask them to drive a nail and they cannot a) start the nail, lift it to the correct angle to get it to embed twice the distance into the wood as the “head” of the nail end.
Roughly speaking:
Nor b) can they hit it straight enough (without considerable practice, then it is like riding a bike) to go cleanly “in” to the wood, nor straighten it if they DO bend it, enough to be able to get it straight-enough, further in. Practical experience required, especially in hardwood.
Similarly with Cash, Savings and Mortgages, the primary uses of money, nor Buildings, detail in the use of them, maintenance, design, etc. But ** I NOTICED something**
interesting, hope this helps:
RICHARD
Hi Richard (thanks for your recent comment on my stuff, saying you “get it, [maybe] not going to happen”
Did i not see a reference in the recent 2024 budget blurb to a subtle shift in language – reference to “government debt excluding Bank of England”)? In other words they might be lifting the lid on the spending limits? To suit themselves, obviously.
I would like to see frivolous consumption down, renewables investment up, as you know; underfloor warmth-stores heated by summer sun, ultra-insulation to keep the warmth in (doubly “warm-roof; warm-walls” wind-shielded between buildings) Governed by mechanism (adjustable) for “special purposes, ring-fenced.” for example 20-year money at 1.5% fixed with the one-third slice ‘for green and public good’ might help local authorities (if made universal in the long run
Best warm regards, will try to send an email soon, hope you can find time to comment again
Ian G
re above example theory-vs-practice: ‘twice the distance into the SECOND wood, that is [sorry]
[…] By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future. […]