Saul Eslake on MMT

Transcript

HOST: Now we’ve got a little bit of time for Q & A um I’ll try and summarize some of the questions and pose them to Saul.  Uh now there were a couple of questions Saul on uh modern monetary uh theory uh now you did sort of address that a little bit. There’s also a question um being asked about your thoughts on the RBA uh governor’s speech which you’ve sort of um already uh alluded to but maybe if i get um put these two questions to you so someone has asked uh… Adam Sadiq… giving your comment on government arrangements with central banks re: conversion of debt he’s asked are we effectively already seeing MMT in action?

Uh what are the implications of this? So another person’s also asked um you know is it a time to try uh MMT now? You’ve already sort of mentioned that you don’t agree with that. Maybe I could also roll that into another comment which another question that someone has asked about inflation uh you know a concern about inflation into the future with the the fiscal stimulus and the monetary policy in action scene they’re all sort of a little related?

ESLAKE: Yeah good  questions and thank you for those. Um I’ve said in a couple of other places that i don’t respond to proponents of MMT by referring to Weimar Germany or Zimbabwe or Venezuela or post-Soviet republics and so forth; all of which did experience hyperinflation in the wake of monetary financing of deficits because i know enough about the history of those circumstances to recognize that they were all examples of monetary financing of deficits in circumstances where the supply side of the economies in question had been devastated either by foreign occupation as in the case of Weimar Germany or Chiang Kai-Shek’s China or wartime destruction as in the case of post World War II Germany and Hungary or by egregious economic manage mismanagement in the case of any number of Latin American banana republics and Zimbabwe.

The evidence is including from 1930s Japan and Germany where MMT was effectively practised although they didn’t use that term that’s one reason why I don’t think MMT is especially modern uh that monetary financing of deficits isn’t inflationary in circumstances where there’s a considerable margin of spare capacity in the economy so you could in current circumstances experiment with MMT if you are having difficulty financing your budget deficit at acceptable interest rates in the ordinary conventional ways and I would note that Bank of Indonesia, for example, has gone a fair way down that path already as has the Bank of Korea and the Bank of England has raised the possibility that it might do.

I can also concede that in some cases and Japan comes most readily to mind the difference between what MMT proposes and what the bank of japan is actually doing could be seen as semantic in the sense that while the bank of japan and other central banks who bought government securities are receiving interest they’re in effect handing that interest back to the government in the form of dividend payments to the central bank and you could even say that the Reserve Bank of Australia is doing something along those lines.

However, I would also go on to say having conceded that kernel of truth is one of the questions picked up to proponents of MMT that one of the key differences is that proponents of MMT typically argue that it should be governments who decide whether monetary financing should be adopted how much monetary financing should be adopted they often say 100% and when monetary financing of deficits should be turned off and they say that because they think elected governments, that is politicians should be the ones who decide when the marginal spare capacity in the economy has been exhausted and they say to quote Bill Mitchell one of the Australian proponents of MMT

“that that is when the last unemployed person works into the job guarantee office”

that runs the job guarantee that MMT proponents typically propose should be funded by inverted commas printing money the two problems i have with that are that politicians have amply demonstrated in the past that they can’t be trusted to as McChesney Martin famously could it take away the punch-bowl when the party started to get going they just simply have too many incentives to continue to spend money without either paying interest on it if they borrow it or asking people to pay taxes for it if they finance it in that way to be trusted with that decision and that’s not to say that central banks always get it right but they get it right more often than politicians do and ultimately, of course, they are accountable to politicians for whether they do get it right or not since politicians appoint them can sack them under certain circumstances and also hold them to account through uh parliamentary committees and the like.

The second thing is that i think the experience particularly of the 1970s after the first oil shock tells us that capacity is actually multi-dimensional that it’s not only labour but it can also be capital and just as the first oil shock rendered redundant large swathes of the capital stock that were being used at that time and the most obvious example of that is the concord but if you think more broadly that observation applies to a lot of the manufacturing capital stock that had been used in western countries on the presumption that energy would always be cheap that was in effect unusable after the first oil shock and one of the reasons for the stagflation that most western countries experience between the mid 70s and the mid 80s was that policymakers didn’t recognize that we reached potential GDP dictated by the availability of productive capital even though we still had quite high unemployment which also owed something to the demographic bubble that was hitting the workforce at that time and they continued with very stimulatory fiscal policy even though they’d effectively eliminated the output gap , hence resulted in higher inflation.

Now, this partly goes to the second question that you put me to while I don’t think there’s any risk of higher inflation in the near term at all. Indeed there might still be more risk of deflation than inflation for the next couple of years it’s probably the case that COVID-19 has rendered not usable a significant proportion of the capital stock that was in use in advanced economies before the pandemic hit.  Think for example the capital stock tied up in public transport systems, in civil aviation, in hotels, in conference centres, perhaps, in high-rise buildings that may never be fully utilized again.

That capital stock still exists but if we don’t recognize that it will never be used we may actually end up overestimating the level of potential GDP and hence not recognizing when we’ve hit when we’ve eliminated the output gap and if we continue to have stimulatory policy settings in those circumstances then we might end up triggering some unwelcome inflation.

Of course, if we still have high unemployment at that time and we want to reduce it even though we’ve reached the output gap dictated by a capital constraint then what policymakers would have to do would be to engineer a shift in demand to more labour-intensive forms of demand probably using taxation as the policy instrument. and while you know i don’t have any intellectual problem with that i can foresee quite a lot of political problems with it, that policymakers especially those who need to get re-elected every now and then would be pretty quick to identify.

HOST: Thanks a lot that’s a really interesting point too about the uh the spare capacity in the capital and I think people forget about that and focus on the labour market and the supply in the labour market.

Just a little quick follow-up for myself do you think that uh if central bank it’s worth completely in charge of any MMT that alleviates some of the dangers I suppose you pointed out of course they’re still appointed by uh the elected government and do you think that is just too much of a danger?

ESLAKE: Well that’s what Stanley Fisher is in effect proposing um but really and the more thoughtful MMT proponents are quite open and honest about this that in effect entails the subjugation of monetary policy to fiscal policy that monetary policy in effect becomes an instrument by which fiscal policy is implemented and you know I’m never one to propose that fiscal policy decisions ought to be hived off to an independent authority in the way that for example, Nick Gruen has done because I think fiscal policy decisions that is how much of your income is taken by the state forcibly and how much of it is spent on other people that’s an inherently political decision that ought to be subject to democratic processes and accountability in a way that I’d argue although some people would probably feel differently, doesn’t really hold with regard to the setting of the level of interest rates. I mean yes I suppose that has a quasi-political dimension but I don’t think he is as inherently political as decisions about taxation and government spending and the distribution of income are.

So uh you know I think that those sort of decisions do properly remain within the realm of people who we can vote out if we don’t like what they do or people who we can vote in if we prefer what they propose to what the people who are there already are doing um but as i say I think MMT proponents don’t really concede when they’re honest –  which you know I’m not suggesting that most of them aren’t – uh MMT proponents think that these decisions should be made by governments not by elected governments not by technocrats.

HOST: I think uh most of us probably agree that uh favour the technocrats with those decisions than the government.