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.
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.