Category Archives: Opinion

Is Public Debt a Real Issue?

OK I just couldn’t help myself. I have to take issue with one of my favourite Australian economists yet again. A terribly nice guy.

This is a repost of a comment philosopher Tom Hickey wrote at the Economist in 2012.

First some abbreviations that are in use in the comment

NGDP = nominal GDP
MBS = Mortgage Backed Securities
QE = Quantitative Easing
ZIRP = Zero Interest Rate Policy

MMT proponents argue is that there is a difference between money created by fiscal deficits and money created by bank lending. When the government issues currency into non-government it does so through the Treasury directing its bank, the Fed, to credit non-government deposit accounts, e. g., to pay for fighter planes or to pay grannie’s social security. The transmission from reserves to bank deposits is direct and does not depend on bank lending. Moreover, since there is no liability corresponding to the assets created in non-government in crediting these bank accounts, deficit disbursements inject net financial assets into non-government. Conversely, bank lending nets to zero since each asset has a corresponding liability, so non-government net financial assets remain unchanged no matter how much banks lend.

The reason that NGDP targeting will not work is the flawed notion of the transmission mechanism from reserves to spendable bank deposits. When the Fed buys financial assets of whatever type, it simply increases bank reserves. The erroneous presumption about transmission is that that banks lend against reserves or lend out reserves. Neither is the case, as MMT points out. Rather, bank lend against capital based on demand from creditworthy borrowers willing to pay a rate that is profitable enough for the bank to risk it’s capital against. Increasing bank reserves does not spur banking lending and it does not affect the factors banks take into consideration in lending.

From this is simple to see why NGDP through increasing bank reserves, e.g., via QE, will not increase effective demand and spur increased investment to meet it. The transmission mechanism is bank lending, which is in abeyance, and increasing reserves will not increase it as the failure of QE has shown. Unless the Fed would buy real assets like houses instead of financial assets like MBS, it cannot not inject net financial assets into non-government, and there is no reason to expect an increase in effective demand due to increased bank reserves.The US is already at ZIRP and has been for some time. That has done nothing either. MMT predicted the failure of monetary policy — QE1 and QE2, as well as ZIRP, and QE3 will also fail unless the Fed would purchase real assets, which it is not permitted to do under current statute even under emergency powers, at least as I understand it. Time for fiscal policy to step up to the plate.

Now, John Quiggin calls himself an Old Keynesian but I find he is closer to a left-wing New Keynesian

As he said on RT:

…the only difference between the market monetarists and ordinary old keynesians as I see it is that they precisely treat nominal GDP as if it is a policy instrument when of course it is the target.

As we can see there is an immediate contradiction between Hickey’s second paragraph and Quiggin’s view. Perhaps that’s not the transmission mechanism he had in mind. So I asked:

Whilst we could agree with fiscal policy as indicated by Hickey above, how exactly would the monetary policy part work?

Remember the goal of monetary policy is to get you to change your behaviour with existing income contra fiscal policy which does it with additional income.

What we end up with is that monetary policy as conventionally defined cannot do nGDP targeting but fiscal policy can. That raises the question of why you would target nGDP when there are many better targets to use.

Or we could invoke the colloquial version of Goodhart’s Law:

When a measure becomes a target, it ceases to be a good measure

We could continue to discuss how government debt is functionally the net money supply and how debt management is the mechanism by which we adjust rates and more but I feel that avoids the most provocative and productive question.

Would it not be better to target real outcomes & real supports with fiscal policy? Some examples could be any of the Australian Real Progressives goals.

RATs are not a Panacea

Dr David Berger writes on Twitter:

RATs (Rapid Antigen Tests) are not the simple answer they are being made out to be.The more COVID around the more complex their use becomes. They have a place as part of a large range of measures.Sole focus on RATs and their sketchy implementation causes more problems than it solves. 

Seems like we’ve now seized on RATs the way we once seized on vaccines as our “way out of the pandemic”. We’ll test everyone regularly to see if they’re “safe”, safe to be in school, work, etc.If your RAT is negative, you’re good to go. If it’s positive, then obviously you’ve got COVID and you have to isolate. That way we separate out the people who can spread COVID and then readmit them to normal life when they aren’t infectious anymore. Simple, huh?

No, not so simple. RATs may be quick and easy, but they are much less sensitive (i.e. much less good at picking up cases of the disease) than PCR tests. And when the consequences of a false negative are severe (closing down a school or emergency department) that really matters

Not only that, but the more cases there are in the community (“the higher the prevalence” aka “the higher the pretest probability”), the more false negatives you are going to get. Big problem. This paper in August 2020 looked into the question:

https://www.nejm.org/doi/10.1056/NEJMp2015897

Have a fiddle with the interactive graphic in the paper above. Play with the sensitivity slider on the blue and green plots and see what it does to where they intersect the horizontal dotted line (set arbitrarily at a 5% or 1 in 20 false negative rate – pretty bad hey?).

The more sensitive you make the test, the further to the right the intersection occurs, meaning the higher the prevalence. The less sensitive you make it, the lower the prevalence at which you get a high false negative rate. 
So unless you have a very highly sensitive RAT – and they’re not highly sensitive, and against Omicron they are even less sensitive – the rate of false negatives increases rapidly to unacceptable levels as soon as cases start to increase in the community. 
Putting that into really simple terms, it seems obvious, and it is: the more people in the community have COVID, the more likely your test is to let some through. 
So the test becomes less and less effective at keeping your chosen environment (school, hospital, workplace) COVID-free, just at the time when you want it to be most effective. 
This wouldn’t be such a problem, of course, if the people deploying these tests understood the influence of Bayesian probability (because that’s what we’re talking about) on test result. 

But how many of the total population do you think can understand the implications of the graph above? 1 in 1000?

Whatever the number, it is very few and, as we have found out in recent years, we are a species seduced by narrative. 

We prefer stories to graphs and the story we believe RATs tell us is very simple: the person tested has COVID and is infectious or does not have COVID and is not infectious. 
That this story is not always true, LET ALONE THAT IT BECOMES LESS AND LESS TRUE THE MORE COVID THERE IS, is an almost impossible message to convey to most of the population and those who do comprehend it will say, and rightly: “So what’s the point of doing the tests then?” 
 It is a question to which the answer is not immediately evident. It’s not that widespread use of RATs alone won’t prevent any infections at all – it obviously will – but that the false sense of reassurance a negative test gives, esp as prevalence increases, leads to chaos. 
In the absence of other transmission mitigations – improved ventilation, distancing, HEPA filtering, N95 community masking etc – and the presumption that everyone is positive anyway, that false sense of reassurance (“It’s OK, we’ve all tested negative, so no need to worry”)… 

…must inevitably lead to spreading events in the very environments in which we are trying to prevent them.

RATs, then, look like a simple answer, but conceal a complexity which is almost impossible to explain to people and which drastically limits their usefulness. 

RATs alone are another false hope on the path to ending the pandemic. And it make sense: trying to halt spread only by inaccurately identifying people WHO ALREADY HAVE THE DISEASE is bolting the door after the horse has bolted. It’s one step too far downstream. 
The only way to really halt spread is to move further upstream; in other words, to reduce transmission from individuals who are infected by use of transmission mitigations. 
Once you are doing that, then it makes sense to also use RATs to try and reduce the numbers of people you’re bringing into an environment where spread can occur. 
But if all you’re doing is RATs, and not diligently safeguarding the environment too AND PRESUMING EVERYONE IS POSITIVE ANYWAY, the false sense of reassurance they give you will scupper your best laid plans. 

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.

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.

Former RBA Governor says MMT is correct!!

Sometime back Joseph Noel Walker, host of the Jolly Swagman Podcast did an interview with the former RBA Governor Ian MacFarlane.  I asked Joseph if I could host just the MMT section here but he preferred a link to the full the podcast on his site.

I take it that he has a fear that the podcast will be taken out of context and I understand that fear.  This is definitely not the intent, much of the podcast does not revolve around MMT and do not wish to inflict things that are outside the foundational scope of this site on its audience.

The piece on MMT goes for a little over 29 minutes and begins around the 42 minute mark of the approximately 102 minute podcast.

You can click on the link below to go there.

One of the things Macfarlane says is that it is only peripherally about monetary policy but that is part of the point of modern monetary theory, that is not about monetary or fiscal policy but the monetary system.

Macfarlane walks us through the process of the monetary system in an identical way to MMT, from the Treasury to the Central Bank to the Bank to the Bank Customer, maybe with slightly different nomenclature.

The primary difference Ian Macfarlane has with MMT is a normative preference (and remains consistent with MMT) is that he prefers the current method of setting the interest rate by selling securities to the primary dealers (banks) first.

Current RBA Governor Phil Lowe (PDF) has said a very similar thing:

“I am confident that the Australian government will be able to raise money in the capital markets, at very low interest rates, to finance whatever level of spending is required. It’s true that, when they have to repay those bonds to us, they’ll have to raise money in the market. They’ll be able to do that. There’s very strong demand for these securities. The best way of doing this is the government entering the market, paying these low interest rates and deciding how much money it wants to spend.”

From an accounting perspective as  Marc Lavoie’s Friendly Critical Look at MMT (PDF) points out this exchange comes out as identical whether the central bank buys securities directly or through the markets.  So nothing of substance actually happens in this exchange.

MMT shows the Interest Rate is a policy variable and in other discussions there is more than one way to set the interest rate.

There has been a lot of fightback over MMT from various members of the current economic hegemony but as is increasingly clear, the MMT framework – which is primarily a description of macroeconomic operations – is correct.