Things are obviously getting desperate out there in financial media commentary land. If one could express written text in graphical terms then there are a number of financial journalists out there that look – like a rabbit caught in the headlights – that is in a state “of paralyzing surprise, fear, or bewilderment.” A good example of this increasingly observed syndrome is an article in The Australian newspaper today (June 30, 2020) by Adam Creighton – Never forget that governments have no money – it is always ours (subscription required). This sort of journalism is becoming an almost daily occurrence as it becomes obvious that capitalism is now on state life support systems and the extremities of government intervention are demonstrating very clearly what Modern Monetary Theory (MMT) economists have been saying – and the only ones that have been saying it – for 25 years or so. I often note that Japan has already pushed the fiscal and monetary policy parameters beyond the limits most countries have explored in peacetime and mainstream economists have systematically predicted various scales of disaster and have always been wrong. Now all countries are at extremes and still no fiscal disaster. But the mainstream mouthpieces – these financial journalists who seem to think the stuff they read in first-year text books from these mainstream economics programs are in same way the basis for expertise and knowledge – are in advanced states of dissonance. Drivel follows.
By next weekend, a better article will appear in The Australian – the details of which I will make public soon.
The conservatives and the pretentious self-styled economists in Australia who just mouth mainstream nonsense are having conniptions at present as a result of one of their own seemingly demonstrating some support for MMT.
I refer to ABC finance report and correspondent in The Australian Alan Kohler, who in recent weeks has written a few articles demonstrating he is coming to terms with MMT.
Go back to the March, when I wrote this blog post – It’s Modern Monetary Theory time! No, it always has been! (March 23, 2020).
This was a discussion in response to an article that Alan Kohler had written in The Australian (March 23, 2020) – It’s Modern Monetary Theory time as the state steps in (subscription required).
There were problems with the article which I pointed out.
Alan reached out to me that morning and we had a long conversation on the following Wednesday, which was published by Alan on his high profile podcasting service.
I also made the podcast available – My podcast with Alan Kohler (March 30, 2020) – once it was published by Alan on his site.
It has proven to be a popular podcast and may have shifted Alan’s thinking a little.
He has followed it up with other podcasts and articles that suggest he is no longer hostile to MMT.
On Twitter, he has been getting a lot of flack from various kouky, or should that be kooky, characters who are desperately uncertain now that their standard mainstream narratives are falling apart and MMT is broadening its appeal to people who are seeing evidence unfold that gives them confidence in our work.
It is interesting to see their discomfort.
They can easily ignore academics like me. But they would have thought, given his high public profile, that Alan Kohler was ‘one’ of them. Safely embedded in their Groupthink, and a defender of their myths and fictions.
The evidence is that the club is breaking down. There will be many more deserters as it becomes more and more obvious to people that mainstream macroeconomics has run its race – and came last.
Adam Creighton’s byline tells us he “is an award-winning journalist with a special interest in tax and financial policy. He was a Journalist in Residence at the University of Chicago’s Booth School of Business in 2019”.
Must be a pretty thin field in line for the awards one suspects. And he seems to have over sampled the Chicago monetarist kool-aid!
Moreover, he needs a copy editor. The narrative proves itself wrong as he stumbles through the normal arguments, not realising that statements he makes in a seemingly disconnected way, disprove statements he has made in the previous paragraph.
Never mind consistency.
This is rabbits and headlights stuff.
Creighton starts with this classic:
Governments have become so pervasive it’s easy to forget they have no money of their own. They fund themselves in two ways: taxation and borrowing.
Which raises the obvious question – where do the people/organisations that pay tax get the currency from?
And where do the people who adjust their saving (wealth) portfolio by swapping one or more assets held to add government bonds, get their savings from in the first place?
And what is the Reserve Bank of Australia doing when it credits bank accounts on behalf of the Australian government – typing numbers into bank accounts – which the accountant/statistician records as government spending?
And what does that little piece of legislation – Currency Act 1965 – mean?
And for that matter the – Reserve Bank Act 1959 – if the Australian government has no currency of its own?
Then, next paragraph, as he launches into characterising MMT as part of a ‘loony left’ type fantasy he effectively contradicts his opening line.
Modern Monetary Theory, a set of ideas with growing appeal, especially on the left of politics, posits a third way: simply creating money. Governments can instruct their central banks to create money, which their treasuries can spend on whatever they want, ideally soaking up spare capacity in the economy, so the argument goes. It would be wonderful were this true, but there is no third way.
Okay, it sounds like governments do have their own currency and the central bank is part of government (not the attribution “their central banks” and “their treasuries”).
The ‘left-wing’ narrative is clearly part of Creighton’s agenda – as if he thinks the old ‘Cold War’ stuff goes down these days.
But he thinks that:
MMT is the left-wing version of the extreme supply-side economics of the 1980s that propounded that government could raise tax revenue by lowering taxes.
The reference to the 1980s is apparently to the Laffer curve.
Problem is that this is a decade or more out.
In fact, Arthur Laffer, who was an economics professor at Chicago, who had dinner one night in 1974 with Donald Rumsfeld, Dick Cheney and journalist Jude Wanniski at some swish hotel in the capital.
The topic was President Ford’s tax policy and deficit fears. Laffer apparently drew a diagram on a serviette at the restaurant which purported to show that if the government cuts taxes it would increase its tax revenue.
Evidence has never supported the diagram. But never let some facts get in the way of a theory – that has always been the mainstream way!
Wanniski, who was at the dinner with Laffer and co, was the person who promoted the term ‘supply-side’ economics in his book – The Way the World Works (published 1978) – after Nixon’s economic advisor, Herbert Stein introduced the term to give succour to Laffer’s ideas in 1976.
In fact, Reagan never really pursued ‘supply-side’ fiscal strategies to deal with inflation in the 1980s. The Federal Reserve boss Paul Volcker used what was then conventional monetary policy to purge inflationary expectations, which really only were purged during the 1991 recession.
What really defined the 1980s in the US was not so much supply-side economics but the ‘starve the beast’ strategies that Ronald Reagan, on advice from Dave Stockman, pursued in those times.
Dave Stockman thought he was a genius by devising what he thought was a devilishly clever strategy whereby the government would cut taxes and run the fiscal deficit up, and then, after people were used to the lower tax regime, the government would have political support to introduce massive spending cuts based on a fear campaign about deficits.
That way, the Republican dream of small government would be achieved.
The only problem the strategy didn’t work.
So how this relates to MMT is rather obtuse to say the least.
Apparently, Creighton thinks that MMT is best characterised as claiming there is a “costless way to finance government spending” and channelling, presumably one of his ideals, “there are still no free” lunches.
And, coup de grace (apparently);
“Money creation” is just another form of borrowing.
I gave an interview for the ABC this morning which will be featured in the coming days. The Deputy Governor of the RBA, who I supervised as an honours student way back in time, is also a guest. It will be an interesting juxtaposition.
But part of the interview was aimed at disabusing the notion of “money creation” or ‘printing money’.
The mainstream textbook rendition is that governments do not have their own money unless they print it (go wild)!
So they have to either ‘spend taxes’ or ‘spend borrowed funds’ if they have ‘overspent taxes’. Alternative, they can go wild and just ‘print the stuff’.
This characterisation is totally inapplicable.
Governments are spending every day by crediting bank accounts (as above).
They don’t need tax revenue or bond sales to do that unless they introduce voluntary accounting rules that say that accounting records of tax receipts have to be a certain set of numbers before they can instruct the central bank to credit bank accounts as spending.
Similarly, with bond auctions.
But even with these artificial institutional arrangements, the funds from taxes and bond sales are irrelevant from the perspective of the intrinsic capacity of the currency-issuing government to spend.
So they are always ‘creating currency’ and spending it into existence, irrespective of these accounting gymnastics.
The no ‘free lunch’ argument provides a segue into one of the important distinguishing features of MMT, which makes the claims by many that there is ‘nothing new’ or ‘we knew it all along’ pale.
Mainstream economists talk about a ‘government budget constraint’ as an a priori (before the fact) financial constraint on government spending.
In fact, it is just an after the fact accounting record of a number of spending and monetary operations.
But the important point is that it is without doubt that the government has the capacity to type big number into computers and call it spending. That breaks us from the mainstream myths.
But there is no ‘free lunch’ at full employment. If there are idle productive resources – then the lunch can be very cheap indeed.
The way that MMT economists correctly characterise this is to say that financially there are no constraints on government spending but there are real resource constraints and if the government wants to maintain price stability then it has to calibrate spending to fit within the real constraints.
In other words, the numbers that appear in fiscal statements that the mainstream call ‘costs’ are not what MMT calls a cost.
We calculate the ‘cost’ of a government policy decision in terms of the change it makes to current real resource usage.
For example, the extra food a Job Guarantee worker might be able to consume as a result of having a job and an income is a cost of the program.
Typing numbers into computers to operationalise government spending is not a cost (although the energy needed to run the computers is).
The real resources that are deployed as a result of the spending represent a ‘cost’ because they might have been used in another use.
So, in what way then does this mean that the government always has to borrow?
Creighton offers an example:
Imagine the government made JobKeeper payments without issuing bonds or raising taxes. The Reserve Bank would have to “create money” by making a loan to the Treasury, recording it as an asset. At the same time these billions in JobKeeper payments would be recorded as an increase in the value of banks’ deposits held with the Reserve Bank, an offsetting liability of the Reserve Bank.
The private banks in turn would allocate these payments to their customers’ deposit accounts.
The recipients could spend their JobKeeper payments as they wished, causing money to shift among banks, but in aggregate the banking system cannot get rid of the additional money.
Meanwhile, the central bank must pay interest on commercial banks’ deposits. So what started out looking like “money creation” ended up being a loan from the private banking system to the central bank, which increased its asset and liabilities in the process.
This just relates the discussion that entered the early MMT literature about the impossibility of so-called ‘debt monetisation’.
I discussed that issue in the introductory suite of blog posts:
1. Deficit spending 101 – Part 1 (February 21, 2009).
2. Deficit spending 101 – Part 2 (February 23, 2009)
3. Deficit spending 101 – Part 3 (March 2, 2009).
Obviously, if the central bank wants to target a positive policy interest rate, and fiscal deficits are adding net financial assets to the banking system, which shows up in the reserve accounts that the banks have to hold at the central bank, then the central bank has to drain those excess reserves by offering to exchange government debt instruments (or any acceptable collateral actually) in exchange for the reserves.
The banks will make that swap because typically the excess reserves earn nothing or earn below competitive interest rates.
The reason the central bank would do that is because in trying to find a competitive return on the excess reserves, the banks will seek to loan them to other banks on the interbank market.
But as Creighton correctly observes, these intra-bank loans cannot rid the system of an overall excess of reserves.
So the competitive efforts by the banks, which shuffle reserves around drives down the short-term interest rate to zero (if there is no central bank support rate paid on excess reserves), and, as a consequence, the central bank loses control of monetary policy (expressed as some positive short-term interest rate target).
Of course, in recent times, most central banks have shifted to paying a competitive rate on excess reserves.
Only MMT accurately described all of that in the literature.
And this led us to note that whether the government issues debt to the non-government sector or just instructs the central bank to pay interest on excess reserves is functionally equivalent in a conceptual sense.
The difference is that numbers are in one account (debt) or another (excess reserves).
But what happens, in the context of on-going fiscal deficits, if the central bank neither conducted open market operations (drained the excess reserves with debt sales to the banks) or didn’t pay a support rate on excess reserves?
Then the short-term interest rate would be driven down to zero and the banks would build up increasing reserve balances – which in aggregate they could not get rid of and for which they earned no return.
Then the story is different and Creighton ignores that obvious option.
He does acknowledge what has been going on for years around the world and which has just begun in Australia in March 2020 – central banks buying up the government debt in secondary bond markets.
The process is:
1. Treasury conducts primary issue auctions that push debt out into the dealers.
2. RBA buys the debt when it is traded in the secondary market.
3. Excess reserves are paid some support rate – in Australia’s case below the typical interest on the bonds. Capital gains are made by the holders who sell the bonds to the RBA.
Well Creighton thinks that this amounts to “financial repression” because the commercial banks have to hold larger reserve balances, which pay little interest.
Why do they sell the bonds to the RBA if they prefer them to the liquidity of increased reserves? Capital gains obviously.
No-one is being coerced into anything.
The debate shifts to Japan;
After decades of quantitative easing the Bank of Japan’s balance sheet has exploded to more than 100 per cent of Japan’s GDP without kickstarting inflation.
So, the standard lines that ‘money creation’ in his language is ultimately inflation is rejected by his own observations.
His only problem then, it seems, is that low interest rates do not allow the banks to screw the public and transfer massive amounts of profit to shareholders.
Hardly an attack on core MMT.
We still haven’t been able to detect any logic here to justify his opening assertion that “that governments have no money – it is always ours”.
We have actually had a case built by Creighton to tell us that the government has lots of its own money.
So, still searching for an angle, he decides that fiscal deficits (with central banks buying debt in secondary markets) don’t work anyway, after saying in the previous paragraph that “there is a case for borrowing more and taxing less to fund government payments”.
The reader gets many of these confusing contradictions in the article.
But apparently, fiscal deficits do not work and the evidence is the record from the US, Japan and Europe that:
… have been giving “money creation” a red-hot go for at least a decade without making serious inroads into unemployment.
1. Japan’s unemployment rate in 2019 was 2.29 per cent. It rose to 2.6 per cent in the pandemic (April). It has been through the GFC, nuclear meltdown, and typhoons.
2. The US unemployment rate just before the pandemic was lower than it had been since the 1960s. I am not saying they were at full employment but at the height of the GFC it was above 10 per cent and then it dropped to 3.5 per cent in February 2020.
What constitutes a serious inroad?
3. European unemployment rates are dominated by the Eurozone nations, all of whom use a foreign currency and have strict pro-cyclical fiscal rules that bias policy towards austerity and stagnation. The quantitative easing from the ECB has been aimed to stop spreads on government bonds rising and thus compromising the ability of the Member States to fund themselves through bond sales (given they use a foreign currency).
The ECB bond purchase programs have also been conditional on the Member States pursuing damaging fiscal austerity. So it is little wonder the unemployment rates remain elevated.
This is the antithesis of what MMT economists recommend and the results were accurately predicted by us. The mainstream economists claimed that the austerity would be ‘growth friendly’ and they were manifestly wrong.
So the historical record points to the veracity of MMT not a repudiation.
Finally, we get the ‘MMT economists are politically naive’ line :
And MMT advocates naively place too much faith in the skill of political leaders and policymakers. It would be the death of independent central banks if politicians were setting the scale of money creation. Once unemployment has been eroded by large monetary-financed deficits, policymakers would carefully rein in the ensuing inflation by paring back the budget deficits and lifting taxes, according to MMT. That ignores the political incentives governments face. Once inflation expectations have changed, they are hard to reset.
So we cannot trust our politicians.
So we jump of a cliff!
The central banks are not independent.
Creighton has demonstrated that by taking his readers through the links between fiscal and monetary policy operations
Monetary policy decisions have to be closely coordinated with fiscal policy impacts on a daily basis.
And that says nothing of the fact that the central banks and their boards are always political appointments.
And reflect also on the logic here.
1. Earlier he claims that “money creation” didn’t make “serious inroads into unemployment”.
2. Then in the last citation he says “Once unemployment has been eroded by large monetary-financed deficits”.
A copy editor please. At least keep the stupid argument consistent!
This ‘we cannot trust the politicians’ argument is the last resort really.
Martin Wolf wrote the other day in the Financial Times that:
In my view, it is right and wrong. It is right, because there is no simple budget constraint. It is wrong, because it will prove impossible to manage an economy sensibly once politicians believe there is no budget constraint.
There is now a line of critics who acknowledge the validity of core MMT principles but think they are to dangerous for people to broadly share in that knowledge.
Because we apparently have reached a point in history where we hate dictators and eulogise the benefits of democracy (à la Churchill in the Commons on November 11, 1947 – “democracy is the worst form of Government except for all those other forms that have been tried from time to time”), but don’t want the politicians we elect to have the flexibility to advance our well-being.
Or in simpler language – “because we don’t trust politicians”.
This has been a long standing view.
Remember the famous quote from American economist Paul Samuelson in the interview he did for the film – John Maynard Keynes: Life, Ideas, Legacy – where at the 52:50 mark into the film, he said:
I think there is an element of truth in the view that the … the superstition that the budget must be balanced at all times … aah … Once it is debunked … takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have … aah … anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by … aah … sometimes what might be regarded as myths into behaving in a way that long-run civilised life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year … in every short period of time. If Prime Minister Gladstone came back to life he would say ‘oh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.
This amounts to a world where the elites can manipulate the fiscal capacity of the state to advance their own interests (procurement contracts at will, bailouts when they mess up, etc) but if we want to do something about unemployment or poverty then the rest of us has to be held in this fictional world that appeals to our instincts of fear and uncertainty.
And, of course we then are encouraged to distrust politicians and so it goes.
My view is that once we expose these myths, more sensible political discourse can take place.
And if we do not like our government – that is they go crazy with their spending capacity – then we throw them out of office (in Australia, every three years of so).
They can hardly destroy the nation in three years.
I also think that if the standard of political dialogue was improved, higher quality candidates would seek election and push out the time-serving careerists who dominate all political parties.
It is an extraordinary world where we accept a deception because knowing the truth might require us to act differently (become more politically engaged and demand quality political behaviour).
I don’t accept that proposition.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.