A Rational Debate on Spending?

Twitter is full of comments around MMT being something you do – rather than something that is, We have articles like ‘Don’t let the Reserve Bank just give the Government money’ and articles that the leader of the opposition tells shadow cabinet to find cuts and spending offsets ahead of campaign.

How Governments Actually Spend

The foundations of MMT are quite simple. Currency issuing governments spend via appropriation bills, the spending is authorised and the relevant account at the central bank is marked up. That bank then credits the appropriate customer. Irrespective of past fiscal positions or the balance the government runs or the bonds they choose to issue, this process doesn’t change. There should be nothing controversial about that. That is the way government spending operates.

The idea that somehow our treasury departments are at the mercy of central bankers or bond market traders is ridiculous. We have seen the Australian government spend some $200bn over COVID and central banks around the world have been purchasing debt on what is called the secondary market. (referred to as Quantitative Easing)

I won’t walk through the whole process here you can read this post and this post. The crux of it is the Australian government creates the dollars via appropriation bills. The finance.gov.au website says there are two types of appropriations:

annual appropriations—a provision within an annual appropriation Act or a supply Act, that provides annual funding to entities and Commonwealth companies to undertake ongoing government activities and programs

special appropriations—a provision within an Act (that is not an annual appropriation Act or a supply Act) that provides authority to spend money for particular purposes (e.g. to finance a particular project or to make social security payments). Special accounts are a subset of special appropriations.

And continues with ‘While appropriation Acts authorise the drawing of money from the CRF [consolidated revenue fund]*, they do not authorise the spending of that money. Legislative authority is required for the Commonwealth to enter into arrangements to spend relevant money for a particular purpose.’

*The CRF is a ‘conceptual’ account created under the Australian constitution. All ‘money’ irrespective of where it is, exists within the CRF. A group of accounts the Australian government holds at the Reserve Bank are known as the offical public accounts (OPA) The numbers in these accounts do not form part of the money supply.

Think of the CRF as a transactional account that records what has been spent and what has been taxed. The numbers in it aren’t what can be spent. The authorisation of spending that comes after the appropriation is found in the Public Governance, Performance and Accountability Act 2013. It has its genesis in the Audit Act 1901. I am working through understanding and detailing the changes. Today the PGPA Act of 2013 under section 51 says

(1) If an amount is appropriated by the Parliament in relation to a Commonwealth entity, then the Finance Minister may, on behalf of the Commonwealth, make the appropriated amount available to the entity in such instalments, and at such times, as the Finance Minister considers appropriate.
(2)  However, the Finance Minister must make an amount available if:
(a)  a law requires the payment of the amount; and
(b)  the Finance Minister is satisfied that there is an available appropriation.

The UK for example has its origins in the Exchequer and Audit Departments Act 1866 where the first three subsections state:

(1) This section applies in respect of sums which Parliament has authorised, by Act or resolution of the House of Commons, to be issued out of the Consolidated Fund.
(2) The Comptroller and Auditor General shall, on receipt of a requisition from the Treasury, grant the Treasury a credit on the Exchequer account at the Bank of England (or on its growing balance).
(3)Where a credit has been granted under subsection (2) issues shall be made to principal accountants from time to time on orders given to the Bank by the Treasury.

If you want further evidence that bond issuance or taxes are irrelevant to government spending the UK Government used what they call the Ways and Means facility. They describe it ‘as the government’s overdraft account with the Bank of England (the Bank), i.e. the facility which enables sterling cash advances from the Bank to the government.’

The UK Treasury scrapped the issuance of bonds entirely.

“HM Treasury and the Bank of England (the Bank) have agreed to extend temporarily the use of the government’s long-established Ways and Means (W&M) facility.”

As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19.

It is coaxed in language to give readers the idea bonds are used to fund spending in ‘normal’ circumstances.

‘The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations.’

The markets never ‘fund’ treasury operations. The appropriation bills do that. The authorisation of the spending marks up an account at the central bank and this is what gives the banks the ability to purchase bonds. It doesn’t matter what the past fiscal positions are. What matters is spending today and whether there are available real resources.

What has been happening with QE is that the debt management departments of treasury have been issuing bonds, having financial institutes buy them and the central banks have been buying them a week or so later. The UK stopped with this whole charade for a while on April 9 2020

So when stuff.co.nz writes

Purchasing debt (issued in the form of bonds) on the primary market means that instead of purchasing bonds from third parties like banks and investors, the Reserve Bank would buy the bonds directly from Treasury itself. One part of the Government would buy bonds issued by another part of the Government, cutting out the middleman. It’s a big move.

They have no clue what they’re talking about. Bond issuance funds nothing. Bond issuance switches currency in reserves to securities accounts. The latter is interest bearing. Though now the interest is paid from the treasury arm to the central banking arm of the government and the central banking arm then credits the treasury. Apparently ending this will be a great cause of concern.

But Treasury’s biggest concern was that skipping the secondary market would give New Zealand a bad reputation as it would look like the Reserve Bank was simply printing money for the Government to spend.

What is so difficult for financial journalist Thomas Coughlan to grasp. Financial institutes in New Zealand obtain NZD in their reserve accounts at the Bank of New Zealand via the NZ Treasury marking up the account. The dollars come from the appropriation bills. There are no printers, just keystrokes.

All this reminds me of when the Australian Government introduced its own notes.

In 1910 when the Australian Government banned private bank note issuance and issued its own via treasury there were objections. The hansards record the member for Wentworth, Mr Kelly ‘We ought further to be informed what guarantees the public will have that this particular method is not being adopted for the purpose of raising money without paying interest thereon by a Government which refuses to borrow. (House of Representative Hansard No.30, p.690, 1910)

There you have it, the same old arguments because some capitalist lose their free lunch. They’d rather keep the way spending works in the dark to demonise public expenditure, collect their interest bearing assets (bonds), watch governments cut public expenditure, privatise public assets, and maintain a desperate pool of workers that work for desperate wages.

And Australia’s opposition party plays into the narrative. The second article quotes that “Two shadow cabinet members, speaking on the condition of anonymity, told The Age and the Herald emphasising budget repair at a time when the Coalition government was prepared to spend billions sent “mixed messages” and “lacked imagination”.

And whoever those mysterious shadow ministers are, are correct. We have witnessed the largest government spending since World War Two and much of the arguments that demonise public spending are the same now as they were for the last century. It is getting tiresome.

But the status quo in the ALP remains. Richard Marles writes

“As Anthony has made clear, all policy proposals should consider options to minimise the fiscal impact and/or be fully offset by savings within respective portfolios,”

That is all from me!

This is an edited post originally by Jengis Osman originally published on Fighting Fish

Can We Trust Politicians?

We are currently hearing the storyline – MMT is correct (although they don’t express it that way) but god save us if anyone finds out.

An MMT understanding allows us to appreciate that most choices that are couched in terms of ‘budgets’ and ‘financial constraints’ are, in fact, just political choices.

Given there are no intrinsic financial constraints on a currency-issuing government, we understand that mass unemployment is a political choice.

Imagine if citizens understood that!!

An MMT understanding lifts the ideological veil imposed by mainstream economics that relies on the false analogy between an income-constrained household and the currency-issuing government.

Households always have to finance their spending choices, through earned income, savings, asset sales or through borrowing. A currency-issuing government spends by instructing its central bank to type numbers electronically into relevant bank accounts.

All the elaborate accounting structures and institutional processes that are put in place to make it look as though tax revenue and/or debt sales fund spending are voluntary smokescreens, which serve the purpose of imposing political discipline on government spending.

Insiders know this, but actively decline to share that knowledge with the public.

There is also a growing claim that there is nothing new about MMT – that everything we write about is “well-understood” or “widely understood and acknowledged”. Further, apparently “everybody knows” and New Keynesians are “fully aware” that the government is not financially constrained.

It is very strange – if all the major features of MMT were so widely shared and understood – how do we explain statements from politicians, central bankers, private executives, lobbyists, media commentators etc, etc that appear to not accept or understand the basic MMT claims?

    • Where in the vast body of macroeconomic literature – mainstream or otherwise – do we see regular acknowledgement that there is no financial constraint, for example?

    • Why is there mass unemployment if government officials understood all our claims?
  •  
    • It would be the ultimate example of venal dysfunctional politics to hold that that everybody knows all this stuff but are deliberately disregarding it – for what?
  •  
    • Why do economists still claim that banks lend out their reserves?
  •  
    • Why do they think that an asset swap (liquid for near liquid) engineered by the central bank will provide banks with more funds to lend as if banks wait around for deposits before they make loans?
  •  
    • Why don’t papers on banking indicate that loans create deposits rather than engage in the fiction that it is the other way around?
  •  
    • Why do economists still claim there is a monetary multiplier operating when bank reserves respond to broad monetary movements?

I could pose hundreds of like questions. I am not naive. I couldn’t answer any of these questions if the claim that everything MMT has proposed is passe in the extreme.

These sorts of claims then lead to statements that there is “nothing new” about MMT – is designed to discredit us and to suggest we are just a bunch of misguided, politically naive intellectual minions.

Please note that MMT does not include the word “new” in its descriptor. Also, if some person out there can find any literature written by one of the major MMT academics or authors where there is a claim that the theoretical structure proposed and integrated by the writers is “new” please let me know. (I wouldn’t waste my time by the way.)

The descriptor of import is “Modern” which like all descriptors can be interpreted in a number of ways. The way the MMT literature discusses the economy and integrates components from banking, the national account accounts, a deep understanding of the way bond, currency and labour markets work – is certainly modern.

It is clear that MMT writers borrow, absorb, integrate strands of theory dating back to Marx and before. There has never been a denial of that. But there are truly novel aspects of our approach that the vast majority of economists progressive or otherwise – who are slaves of the textbook framework – still do not understand despite the claims that everything is understood.

As we said at the beginning there is now a line of critics who acknowledge the validity of core MMT principles but think they are too dangerous for people to broadly share in that knowledge.

Why?

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 or so).

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.

I don’t accept that proposition. I believe that the truth will set us free and we will become more politically engaged and demand quality political behaviour.

So, can we trust politicians?  We can trust ourselves!!


This has been a remix of three of Bill Mitchell’s blogs for the State of Modern Monetary Theory today.

Australia’s Dangerous Myth of ‘Taxpayer Money’

  • This is a remix of the article by Raul Carrillo & Jesse Myerson for an Australian audience. The links are different (most, but not all). The original can be seen here.
There is no such thing as public money, only taxpayer money.” — Margaret Thatcher, 1983

“It’s all taxpayer money, it’s all debt, and it’s got to be paid back,” Prime Minister Scott Morrison speaking about the end of JobSeeker and JobKeeper COVID support scheme.

Australians would agree that taxpayers’ money can’t be used endlessly to run the Australian economy,” the Prime Minister told reporters in central Queensland on Thursday.

The Prime Minister by using the “taxpayer money” frame, they were spreading, however unwittingly (perhaps dog-whistling), a racist, sexist, classist myth.

Although most of us pay taxes of some kind, every time we say “taxpayer money” we prolong the illusion that society depends on certain kinds of people so we can have nice things.

Delton Clark: Transgender Aboriginal Sistagal
Delton Clark: Transgender Aboriginal Sistagal

One quick exercise shows why. Picture a “taxpayer.” What does one look like? A homeless Aboriginal trans teen? A Sudanese immigrant day labourer waiting to get on at the local abattoir?? A young mother trying to cobble together enough income to feed her family, while languishing on the Centrelink disability backlog? Unlikely. Let’s be honest: We know what sort of people “taxpayers” are supposed to be, and they’re not the ones we should be casting as the aggrieved parties.

Calling public money “taxpayer money” implicitly affirms that taxation is theft: If the money is taxpayers’ by right, what business does the government have using it for healthcare, jobs, or clean water? If we’re looking out for “taxpayers” and not the public as a whole, we are favouring wealthier groups over poorer ones—white people over Black people, men over women, Australian-born people over immigrants, and so forth. We’re hiding how the economic order relies not merely on the sacrifices of “taxpayers,” but the contributions of debtors, tenants, workers, and countless other actors. We’re perpetuating the politics behind the 1970s and 1980s demonization of “dole bludgers,” and Pauline Hanson’s One Nation movement—faux-populism that suggests the great majority rely on the wealthy, rather than vice-versa.

Not only is the “taxpayer money” frame damaging, but it doesn’t reflect how public spending actually works. A household or a business may have to stash or borrow money before it can spend any, but we are users of the currency. The Australian government, which is the issuer of the currency, works differently: Parliament votes to spend “new money” on something, then the Treasury and the Reserve Bank credit the relevant bank accounts, and…that’s it.

The government has spent new money into existence. Later, Parliament may tax “old money” back out of existence, but it isn’t collecting money in order to spend it. It’s “offsetting” earlier spending.  It may also “offset” spending in various other ways. Although Parliament taxes everyday people too heavily, calling public money “taxpayer money” makes as much sense as calling it “student debtor money” or “suspicious driver money.”

Look at a dollar bill, and you will see the signatures of its creators: not taxpayers, but the public officials who let the taxpayers hold it in the first place. Money doesn’t grow on rich people. We should heavily tax the billionaire class so we stop living in an oligarchy, but we don’t need private capital for public spending. The federal government doesn’t confiscate dollars and redistribute them. It uses its legal power to create and destroy them. 

Margaret Thatcher’s mantra was backwards: There is no such thing as “taxpayer money,” only public money. Modern money is a creature of the public, and we should use it for public power. We are all the public, and we each deserve a clear, equal say in how our economy and society work, no matter how much we each pay in taxes. It’s time to claim our democratic rights.

There is more than enough housing for the homeless, food for the hungry, and medicine for the sick. There is enough low carbon-emission technology to transform our energy system, quit exacerbating the climate crisis, and hire unemployed people all in one fell swoop. And there is more than enough public money to manage it all. 

Exposing hypocrisy may feel good, but it does little actual good. The people who primarily identify as “taxpayers” are Morrison, McCormack and the coalition’s base. Constantly repeating that their “taxpayer money” is being wasted only pressures them to violently defend their property, as the system encourages us to do under stress.

For over 40 years, Australian Laborhave chided the Liberal-National coalition for fiscal hypocrisy. What do they have to show for it? For over 40 years, the Coalition has controlled the conventional wisdom around budgets, successfully using the “taxpayer money” myth to force Labor to “starve the beast,” i.e., cut social spending to actually starve children, veterans, and many others. 

When we reinforce the right wing’s racist, sexist, classist frames in an attempt to expose hypocrisy, we lose. If instead, we root our politics in what is good and bad, just and unjust, moral and immoral, we can win.