From The Times reprinted in The Australian. Insane enough just as an economic principle, but to have it endorsed by Alexandria Ocasio-Cortez and then presented as a sensible idea by the Economics Editor of The Times [!!!!!] shows how low we have fallen. This is the entire column and if you cannot work out how insane this is, you do not have even the most preliminary grasp of how an economy works. But let me give you a hint. The aim is to open the spigot to public spending almost to an infinite extent since a government printing money in one’s own economy and then spending it apparently has no downside. And then when the price level starts to rise, you increase taxes to put things right again. I love the idea of trying to raise taxes as prices are rocketing while interest rates are held level. That this is not seen as obvious idiocy and an invitation to disaster really makes me wonder how far gone economic theory has gone. That it is even being published in respectable newspapers is more depressing than almost anything else.
Modern Monetary Theory: Who’ll be brave enough to try it?
In the past decade, the world has suffered two global crises: the financial disaster of 2008 and the eurozone sovereign debt crisis two years later. Policymakers responded with bailouts, cheap funding schemes, zero interest rates and quantitative easing. In one sense, the past ten years was a period of intense economic experimentation. In another, nothing has changed.
Following previous crises, macroeconomic ideas were replaced. After the Second World War, Keynesian, under which governments spend to create demand and protect jobs, was ascendant. After the inflation-induced recessions in the 1970s, the big idea was monetarism, using interest rates and the money supply to keep prices under control.
And now, after two existential crises? Nothing. The fundamental macroeconomic ideas have not changed. Labour and the Tories do battle on the scale of the deficit, like two old fools arguing who should pay for the last round long after the bar has closed. Beyond that, John McDonnell’s socialist revolution is pilfered from crumbling communist textbooks. It’s all a bit disappointing.
A new idea is slowly gaining momentum, though, particularly in the United States, where the charismatic Democrat Alexandria Ocasio-Cortez has been championing it. The idea is modern monetary theory and, as with many new ideas, it is not actually that new. Its origins date back to 1993 and it even featured in the 2016 US election. Bernie Sanders’ economic adviser was Stephanie Kelton, a prominent advocate of MMT.
At first glance, the theory seems barmy. As long as a government borrows in its own currency, it need never default because it can always print the money it needs. Described that way, MMT sounds like that other MMT, the magic money tree, or Jeremy Corbyn’s “People’s QE” – the kind of thing Weimar Germany and Zimbabwe tried with devastating inflationary consequences. But that’s because we’re looking through the wrong end of the telescope.
Warren Mosler, a former banker and hedge fund manager, went back to basics when he was developing the idea. The challenges governments face are growth, unemployment and inflation. To achieve those goals today, central banks use rates to regulate the economy while governments manage the public finances.
Mr Mosler and Ms Kelton look at the world differently. Running a budget deficit is not a sign of overspending, they say. Inflation is. Viewed though that lens, deficits look fine so long as inflation is under control. If inflation is low, unemployment high and the private sector is not picking up the slack, the government’s role is to create productive work through tax cuts or spending. The new jobs will create enough demand to drive up prices.
But who finances the deficits? That’s where money-printing comes in. It is here that convention is flipped on its head. Under MMT, tax and spending decisions are taken to regulate the economy, ignoring the impact on the public finances. If inflation picks up, rates don’t budge (Mr Mosler would have them set at zero). Instead, taxes rise to suck demand out of the system. In doing so, the budget may move into surplus. The central bank’s role is simply to finance the deficit.
Surely markets will hate this and punish governments with higher borrowing costs? Proponents reply that the government does not need to borrow from the market. When the state cuts income taxes, it creates more domestic savings. Those savings are exactly equal to the state’s additional borrowing. As a nation, one hand owes the other. The central bank only need mark the debt on the government’s ledger.
The key here is to think of the state as a monopolist, not a household. A government that borrows in its own currency has a monopoly on the money supply so cannot run out and go bust. Foreign investors might lose money on their dollar assets, but the debt can always be paid. The model does not work for countries without their own currency, such as eurozone members. As they do not control their currency, they must live within their means and ultimately balance their books. They are not monetary monopolists, just households for the purposes of budget management.
Although MMT has been jumped on by deficit-spending left-wingers, the theory is not intrinsically fiscally irresponsible. Mr Mosler claims to have developed the idea after a steam room session with arch-hawk Donald Rumsfeld, the former US defence secretary. JW Mason, an economist at the City University of New York, reckons it would lead to smaller budget deficits over the long term, provided politicians are bold enough to combat inflation with higher taxes.
Ultimately, the theory reframes and simplifies our conception of the economy, drawing the focus on to the core priorities of employment and inflation. The deficit would no longer be an obstacle. There would be no tension between fiscal and monetary policy, just a single lever. Responsibility for economic management would fall to politicians, ending the outsourcing to technocrats that has provided legislators cover for so long. And there would no place for an independent central bank.
In a way, MMT is nothing new. Japan’s national debt is 2.4 times the size of its economy, three times UK levels, but most is owed to Japanese pension funds and its money-printing central bank. In Britain, the 527 billion pounds of debt raised by the state between 2009 and 2012 was largely matched by the Bank of England’s 375 billion pounds of QE. Today, Donald Trump is blowing up the US deficit and driving up inflation in what looks like a practical demonstration of MMT.
There, in a nutshell, is the problem. The theory states that President Trump should be raising taxes, not cutting them. But would politicians ever have the courage to raise taxes if domestic inflation is climbing, despite high unemployment? The whole reason central banks were given independence was because politicians cannot be trusted to make unpopular decisions.
What MMT does prove, however , is that we will not run out of new ideas as long as we can describe the world in different ways. That, at least, is encouraging.
He thinks it’s great that we have new ideas to consider. We will certainly never run out of stupid ideas. One more post-modernist crank. This was the most acute comment at The Oz which exactly states what needs to be said, written by “Tony”.
This is seriously dangerous stuff. Fundamentally, money is not wealth, i.e. income producing assets, goods and services etc, but rather just a system for exchanging such. One can argue about Keynesian and Monetarist policy till the cows come home but ignoring the fundamentals of wealth creation through favorable investment (not speculative) conditions and rising productivity always produces rising living standards for workers and good margins for capital. The State can then appropriate (Tax) a portion of that generated wealth. Fundamentally, increasing the money supply by Gov does not produce more wealth- that is impossible- but at the margins it is useful for ironing out the natural cycles of investment but that is it.
It is bananas to think that printing money actually creates real wealth and is safe to do so as long as we borrow from ourselves or foreigners in our own dollars. If this fallacy were true, why would anyone invest or work at all? Lets just print money and borrow in AU$ and sit at home relaxing on a “universal income” paid by Gov. Wow, that sounds great. Where do I sign up? OK, vote Greens or ALP, no probs.