Tag Archives: John Quiggin

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.

Modern Money: A New Hope

Originally published at the Australian Independent Media Network

Modern Monetary Theory (MMT) is not a trap but it is radical.

It shows us how to construct democracy in favour of the people and foster a better political discourse and shows that the policy space available is wider than usually assumed. This piece is a direct response to John Quiggin’s

and in its place Leia Organa’s distress message to Obi-Wan Kenobi that MMT is a new hope, writes Darren Quinn


Continue reading Modern Money: A New Hope

Politics: Debt and Taxes

In my recent piece at the Australian Independent Media Network, there was a section I was not able to put succinctly and thus left it out altogether.  Joe Weisenthal from Bloomberg publishing as @TheStalwart on Twitter has managed to do what I was unable to do.

Photo by Mike Coppola/Getty Images. Originally from  the NY Post

Joe Weisenthal writes:

When people think “x pays for y” what they think about is sales at a company (cash coming in) paying for employee wages (cash going out)

People love pointing out the math how if we taxed the rich more we could solve homelessness or some other societal ill. MMT points out we do not need higher taxes on the rich to get more homes. What we need is for Congress to allocate the money to spend on more homes, and we need the supply-side capacity to build those homes.

Ameliorating inequality by taxing the rich might be a social good, but strictly speaking, the government can do plenty more than it does even without a wealth tax or a change to the highest marginal rate on income.

If you point this out though – taxes don’t directly fund spending – you get accused of word games. The logic is that taxes diminish domestic demand for goods and services. This creates idle goods and services. Then when the government spends money, that money can be used to employ those idle goods and services. Ergo taxes *do* fund spending, in a kind of roundabout way.

Cash-in, cash-out is clearly not what’s described above

Joe Weisenthal did write all the above for Bloomberg but I have somewhat re-ordered it. I do not think it takes away from the context in any way.

So as The Stalwart demonstrates it is no rhetorical dodge and that semantics are important.

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?
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    • 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.

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.

This slideshow requires JavaScript.

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. 🍷