Tag Archives: Ian MacFarlane

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.


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.

Welcome to the Year of Modern Monetary Theory

The year 2020 is gone.  In Australia, on average more than one article in finance, media or on popular blogs about MMT appeared every day of the year.

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We had Alan Kohler (financial journalist), James Culham (Institutional Portfolio Management, ANZ) and  Emma Alberici (ex-ABC economics correspondent) come to somewhat of an understanding with MMT.  John Quiggin (economist) review the Modern Money textbook, Nick Gruen (economist) outline it correctly on a podcast.  RBA Governors past and present (see Gallery above) comment on Modern Monetary Theory – even appearing in the senate select standing committee of economics.  It has had many runs in both the Australian Financial Review, The Australian and other media outlets.

Here’s hoping the trend continues. 🍷

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.

Progressives should not be apprehensive about MMT. Here’s Why!

Often we hear about how Modern Monetary Theory is neither modern nor monetary – I think this is a simplistic view.

We heard it from RBA Governor Phillip Lowe and similar from the former RBA Governor Ian MacFarlane.  MacFarlane certainly has a better grasp of MMT than Phillip Lowe.

I said the following on John Quiggin’s review of the Mitchell, Wray, Watts textbook:

MMT uses the word ‘Modern’ in a polysemic way.  ‘Modern’ is intended as Keynes used the word in A Treatise on Money and since the closing of the gold standard window in 1971.

It is monetary as in it is about how money instruments (currency) shifts real resources (not to be confused with monetary policy) and it is a theory in the scientific use of the word – an evidence-based framework.

Economists often seem unable to break free of jargon or the specialised definitions of their profession. The average person is likely to hear the everyday meaning of words like “government debt”, rather than the economic definition, which in this case would be “net money supply”. We need economists to communicate more directly if they are to enhance our education of economic topics that are constantly misrepresented in the media. For example, people probably think of all the following as “monetary stuff”: my bank deposit; the government securities in my superannuation portfolio (bonds); the (“fiscal”) spending by the government of the day. Yet economists would want to point out important distinctions between these phenomenon. We need simple, clear language to understand these distinctions.

Currently, the Modern Money view is being challenged by other progressives as noted here and parried and riposted here.

It has also been targeted as having an “anti-tax” agenda by some progressives.  Sure they add a minor nuance to it as “movement MMT” but once again I think this is a misunderstanding which once again I hope I have clarified above.

To repeat what I have said previously. Governments can increase spending as much as they like with no need for an offsetting increase in tax revenue or non-fiscal offsets if there is little to no risk of politically unacceptable inflation. This is what these people mean and is perfectly compatible with ‘academic’ MMT and is neither anti-tax nor about weakening workers power, it is about courage, compassion, connection, hope, optimism and empowerment of workers – those currently working and those that are involuntarily not working that desire to do so.

It is a little US-centric but you can see it demonstrated quite successfully by Stephanie Kelton here:

From about the 26th minute

We only need to be better than today’s unemployment policy choice.

There are also many that seem obsessed with taxation revenue instead of building capacity.

“…so it’s usual to speak of public expenditure being paid for by taxes (or, better, tax revenues)…”

To say this is completely misleading to all except but perhaps well-heeled economists. Even as Quiggin wrote and intended to mean “…Taxes are the primary instrument by which resources are transferred from private to public expenditure…” or any other economist that uses a similar phrase.

Saying it is paid by tax revenues gives the wrong impression.

Reframing from money’s ‘how will you pay for it?’ to ‘how will you resource it?’ makes it much clearer and shows money itself is no object [also the title of a Stephanie Kelton presentation].

This itself exposes it is not about an increase in tax revenues but about access to resources and thus resource constraints (inflation) which is detailed informatively by Scott Fullwiler, Nathan Tankus and Rohan Grey at the Financial Times.

Again to repeat myself. MMT’s foundational point is taxes drive the currency. The point about not increasing taxes or tax rates from proponents is that it may not be required to raise them to use particular resources, especially if they are currently idle.

We constantly get comments about revenue/tax revenue as well but revenue raised is  like a budget outcome is determined within the economic system.  We use the fancy word ‘endogenous’ for that.   As Beardsley Ruml wrote many years ago Taxes for Revenue are Obsolete and Tax Policies for Prosperity and he makes a very persuasive case.

Revenue raising evokes false frames for ways thinking about the Australian economy.