Category Archives: Misconceptions

Myths and Misconceptions about Modern Monetary Theory

Modern Money’s Job Guarantee

Australian Real Progressives has mentioned this piece previously as a parry and riposte to nominal progressives in this piece but it deserves a full treatment of its own.

Modern Monetary Theory (MMT) is an incredibly complex body of work that studies macroeconomics. At its most elemental level, it says a currency is a social and legal construct. Currency issuers spend via an appropriation bill and are not financially constrained, though they are constrained by real resources. A monopolist of a currency can purchase whatever is for sale in the currency it issues, including idle labour. Thus unemployment is a political choice.

Within the body of work that is MMT it uses a Job Guarantee (JG) as a macroeconomic price anchor and stabiliser which I will explain below.

There have been claims that the Job Guarantee is workfare. It is not. It is a voluntary offer of a job to anyone, anywhere paid at a living wage with access to all the National Employment Standards just like every other worker.

The social policy setting of the JG is the policy manifestation of a technical concept to eliminate the tradeoff between unemployment and inflation. Current orthodox economists identify a link between rising employment and rising inflation and use unemployment to discipline the inflation rate. MMT economists say you can achieve the same end by using a ‘buffer stock of employed’ rather than a ‘buffer stock of unemployed’. This is what the Job Guarantee is.

The reason for the fixed-wage is the anchor. It sets the general price level. All prices within an economy are a function of government spending. The JG chooses to use employment as the anchor for the general price level. In the event of accelerating inflation, the cause of inflation can never be the wages of the JG workers because by definition they are purchased from the bottom and released from the pool when a better offer is made.

The JG is a small part of a broader full-employment agenda. Ideally, you want the pool to be as small as possible. It is not there to replace existing skills-based employment. It is there to sit alongside a national skills development framework to assist those that need it in finding future employment.

It ensures ’loose’ full employment as workers are drawn in and out of the JG pool rather than ending up unemployed. The automatic spending triggered by those entering the JG mean the government’s spending is directed when and where it is needed most – the unemployed.

The advantage workers have particularly those at the bottom who often hold little, if any, bargaining power is that the JG sets the floor for wages. Private employers would be forced to compete with what we as a society determine to be the absolute minimum socially inclusive wage.

A Job Guarantee is designed to create work to suit the individual. It is administered at the local level but funded by the federal government. The workers within this program are free to unionise and advocate whether something should be classed as a JG job. They are free to take part in determining what the living wage should be.

The work would be of public benefit and assist the JG worker in upskilling and finding work in the private or public sector. It is there to enhance the individual’s well-being and provide a public purpose. It is not used as a punitive system of punishment.

In a similar way to how the Commonwealth Employment Service worked, the unemployed person would have a case manager that held their CV and attempted to match that person to a job but rather than having that individual lay idle, they have the opportunity to maintain and enhance their skillset while seeking better employment working actively with their case manager to match them with an appropriate job.

The types of work that can be done are limited only by our imaginations. We could pay musicians to give workshops on band dynamics, pay them to create and assist in the organisation of community festivals, we can have arts programs where artists can paint murals in public spaces and aid others in their own skill development. Surfers could be paid to pass on surf life safety skills and teach others how to identify and avoid rips. They could take part in sand dune rehabilitation. There is massive potential to enlist thousands of unemployed in ecological restoration and plant trees along with other flora to mitigate against climate change while they undergo study in a related area.

Most importantly the JG allows the most disadvantaged in our society an opportunity to engage in paid employment which would lead to recognition in the community and vastly improved self-perceptions and a more prosperous society.

Jengis Osman is a union organiser based in the NT. He is a member of the NT- ALP Left and a research associate at the Centre of Full Employment and Equity. Twitter This first appeared in Challenge Magazine and is giving a fuller treatment on Jengis’s website Fighting Fish.

 

MODERN MONETARY THEORY ENHANCES DEMOCRATIC ACCOUNTABILITY

MODERN MONETARY THEORY (MMT) is a description or if you prefer, a systemic analysis of currency as it presently exists.

It reveals that taxation is important in driving demand for currency among other things, including the creation of unemployment. After all, there is no unemployment in a non-monetary economy.

Adam Triggs, a research fellow at the Brookings Institution and Crawford School of Public Policy at Australian National University (ANU) wrote back in 2019 that MMT ‘looks like a solution in search of a problem’. That is not the case. MMT shows that the new economic consensus on the monetary system is false and it also shows what tools are available in the modern money toolkit.

Triggs proceeds:

‘If its [MMT’s] stated objective is to achieve full employment, then it appears unnecessary.’ 

This simple sentence is misleading in the extreme. MMT is just what exists. It has a preference for sovereign currencies but can explain any monetary system.

The preference for sovereign currency is because it makes available more independent policy space, enhancing democracy. Triggs then defines full employment as an unemployment rate of five per cent. Oh, the horror! This relies on the mythical “non-accelerating inflation rate of unemployment” (NAIRU), which is sometimes transposed with the phrase “natural rate of unemployment”.

MMT defines full employment (as do all good economists) as frictional unemployment which is somewhere between one and three per cent with zero or next to zero underemployment. These are the people that are switching jobs or are ill. After all, there is no natural rate of unemployment, just as there is no natural rate of homelessness, no natural rate of poverty and no natural rate of illiteracy.

MMT shows that all spending is new spending and is effectively financed by “printing” money. However, the term “printing money” is pretty misleading in economic circles.

What economists usually mean, in fancy terms, is quantitative easing (QE) — the swapping of government bonds for cash. A plain and simple financial asset swap. Bonds are first bought with cash and when QE is implemented the bonds are swapped back for cash. The cash comes first. What MMT means is that all spending is new spending whether done electronically with keystrokes or with physical cash. So, no, QE is not MMT and nor did QE produce inflation anywhere as predicted.

Quantitative Easing explained simply.

MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Triggs talks about the world lending us our own currency which is just nonsensical. For that to be even plausible, lenders would have to get it from us first — the word “sovereign” does the heavy lifting here. Even then, unless in physical cash, it stays on accounts at the central bank. So how on earth is foreign savings in Australian dollars going to finance anything?

Triggs also delves into some new economic consensus falsehoods about rising inflation, interest rates and depreciating exchange rates — as if we do not have the tools to manage these. We do.

The closest thing to a genuine critique or critical analysis of MMT Triggs offers is an appeal to the authority of some “eminent” new economic consensus economists, including Olivier Blanchard, who is moving closer and closer to MMT.

Triggs tries again in 2020 to say MMT is just a rebranding of orthodox economics — what I have previously called the new economic consensus. This is simple to disprove as orthodox economics believes taxes and/or bonds finance government spending.

Stephanie Kelton, author of the bestseller The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, wrote a detailed operational paper that disproved that. The great irony is she was attempting to prove it.

In his 2020 article Triggs said:

For Kelton, the core propositions of MMT are that government budgets are fundamentally different from household budgets, that budget deficits are not necessarily bad, that governments should spend more when the economy is weak, and that governments should focus more on unemployment than budget deficits. She believes that the main constraint on government spending is inflation, that increasing the deficit need not make future generations poorer and that governments can’t run out of money if they have their own central bank, their own currency and no foreign debt.

If that all sounds right and logical to you, that’s because it is. Most mainstream economists have been making these points for close to one hundred years.

If Triggs accepts all this, he is approaching acceptance of MMT. However, to say most mainstream economists have been making these points for years is mistaken.

To quote the Australian developer of MMT, Bill Mitchell:

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 etcetera, etcetera that appear to not accept or understand the basic MMT claims?

Again, Triggs tries to counter with the inflation and/or hyperinflation argument against MMT — to which I repeat, MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Kelton herself reflects on this on Twitter in response to U.S. Senator Mike Braun:

‘If you get hyperinflation, then you didn’t follow the recipe. The recipe clearly defines the limits on spending.’

Kelton’s comment is a great counterpoint to relying on politicians to use the monetary system for anything beyond the public purpose. That is the reason we have democratic accountability and vote every electoral cycle.

This article was originally posted on Independent Australia on the 18th July 2021.
I improved the final paragraph.

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

MMT Does Not Advocate (or mean) “Monetisation”

Modern Monetary Theory in no way endorses “monetisation.” To the extent monetization is simply a name for quantitative easing (roughly, RBA purchases of long-term bonds), we either oppose it or find it only mildly effective and sometimes propose alternatives.

Whether it comes from Catallaxy, Rabobank or Saul Eslake, these ideas run rampant amongst the economics community.  Allow me to repeat, Modern Monetary Theory in no way endorses “monetisation.” At best we only find it mildly effective and have proposed other ways of achieving the same goal.

An example of an early MMT work that specifically criticizes even the use of the word monetisation is Warren Mosler’s Soft Currency Economics II, a paperback that is not too expensive at used book sites.

First, we believe that entities other than Canberra choose the form of Australian government liabilities through their investment, saving, financial-trading, and other choices.

Regardless of the public’s choice of assets, our central bank, the RBA, buys and sells assets to get its chosen interest rate(s). Of course, interest rates other than the cash rate are determined by other actors. The action of “the markets” (including huge banks) for bonds and other debt securities most closely approximate an uncoordinated supply-demand process. Unless, of course, market manipulation dominates there.

Critics across the spectrum have been gathering that the unique idea of MMT (perhaps because of its name) involves attempts to “pump money” into the system. This process would then likely generate inflation but would allow higher federal spending without tax increases.

In fact, as former Bernie Sanders aide and MMTer Stephanie Kelton puts it in her terrific new popular book (for example, on p. 36), you might as well think of bonds and money as “yellow dollars” or “green dollars”—more or less the same, except one pays interest.

Another place to find a good critique of the idea that deficits “pump money” into the economy is The Scourge of Monetarism by Nicholas Kaldor. In the writings in that 1980s book, Kaldor sought to dissuade British policymakers from an earlier round of fiscal austerity.

What MMT does is explain how the federal spending process works always. It does not call for a change in a method of financing. Moreover, the always-existing method of increasing spending does not require tax increases unless there is a macroeconomic need for them—say to dampen aggregate spending and cool down the economy. Hence, there is nothing magical about the number zero for the federal deficit or deficit increases. The federal government indeed never “pays for” new spending the way households or Australian States or local councils do. Hence, worries about higher deficits as such should not slow our crises responses ever.

This is a remix of Greg Hannsgen, Ph. D, UMKC graduate, Levy Economics Institute Research Associate post.  The original can be seen here.

Australian Progressive Economists are at it Again!

As Kate Raworth says in Doughnut Economics, economics is the mother tongue of public policy.  So it is vitally important to understand the operational interactions of economics correctly to formulate public policy.

Nominal Progressive Economists like John Quiggin, Andrew Leigh, Richard Holden and others are at it again.  Andrew Leigh and his colleagues have an issue with Modern Monetary Theory but have not done their most cursory research about the constituent parts of MMT.

Real Progressive Economists should have a real connection with Keynes and Kalecki and other economists done correctly and not what Joan Robinson called “Bastard Keynesianism”.

Every Modern Money Theorist and other MMT proponents would agree that MMT and “conventional economic thinking” can arrive at the same or similar conclusions.

What follows is an adaptation of the work of the Swiss MMTist Andrea Terzi.

Modern Monetary Theory has historical precedents.

First, the notion—developed by Adam Smith—that the wealth of a nation is measured not by monetary values, but by its capacity to produce goods and services.

Second, the notion of money—developed by John Maynard Keynes—that any modern state claims the right to declare what money is.

While Smith’s concept hints to full employment as the primary policy objective, Keynes’s concept hints to the management of money as instrumental to reach such objective. Furthermore, MMT explicitly recognises that the currency itself is a public monopoly.

This leads to an appreciation of the monetary system fundamentally different from the conventional economic thinking / bastard keynesianism paradigm.

What follows is a summary of eight key differences between these two models:  the Bastard-Keynesian paradigm (BK) and the Modern Money View (or MMT).

1.
BK – The central bank controls the money supply indirectly through its power to control the monetary base.

MMT – The private sector uses bank deposits as money, and bank deposits are not directly controlled by the central bank: they get created by government spending and bank loans.

2.
BK – Because the central bank controls the money supply, it also controls the nominal interest rate in the money market.

MMT – Because it is the monopolist of money, the central bank controls the interest rate.

3.
BK – The long-term nominal interest rate is determined by private preferences about real saving and investment, as well as by inflation expectations.

MMT – The central bank has the power to control the interest rate at any maturity: the interest rate is a purely monetary phenomenon.

4.
BK – A monetary expansion can expand output and employment temporarily and yet, at some point, it generates inflation.

MMT – Any operation by which the central bank buys or sells financial assets does not make the private sector any richer and has little or no consequence on private spending decisions.

5.
BK – Government decisions are largely driven by short-term personal goals of politicians, and thus the management of money should be the responsibility of an independent institution with a long-run horizon.

MMT – While monetary policy can only set interest rates, fiscal policy is much more powerful, since any deficit of the public sector generates an equivalent financial surplus of the private sector, and thus affects spending decisions.

6.
MK – Taxes serve the purpose of financing government spending.

MMT – Because government spending takes resources off the private sector and simultaneously generates income and wealth in the private sector, it will cause inflation from excess demand unless a sufficient amount of taxes is levied on the private sector.

7.
BK – If the government spends more than its tax revenue, it must borrow funds from the private sector, and this reduces funding to the private sector.

MMT – Unless it loses its power to define what money is, the government is the currency issuer: It faces no funding constraint, and it must spend or lend first, before the economy has the funds needed to pay taxes and buy government debt.

8.
BK – Price stability is a precondition for economic growth and job creation.

MMT – A government deficit of a size that matches the private sector’s desire to accumulate financial savings is a precondition for full employment.

Modern Money takes many strands of classical economists, Keynesian economists and Post-Keynesian economists and weaves a consistent coherent synthesis of the many strands to describe the operationally correct procedures of the macroeconomy.

Once these are understood and not mythologised into deadly innocent frauds, noble lies or rules of thumb heuristics it opens up policy space.

So then you can argue for your public policy goals, whatever they may be, not just on their own terms but in a holistic complete way without any misunderstandings.