In April 2020 the Economic Society of Australia (ESA) held a webinar about the Australian Government’s fiscal response to the COVID Crisis. It included economists Steven Hamilton, Richard Holden, and Nicki Hutley facilitated by Shane Wright. Towards the end of the webinar, there was a Q&A, and questions were asked about Modern Monetary Theory.
As you will see we get the usual misinformation that its printing money; that QE is printing money; that it is printing money indefinitely and; there’s a Debt to GDP ratio limit (per Reinhart & Rogoff); as well as worry about the credit rating agencies; and the hyperinflation argument.
Nicki Hutley
Stephen and Richard will answer this question far far more theoretically than I will.
You know I’m following the debate interestingly and I love reading Krugman who’s just so into this and he’s very animated at the moment.
I like to call it magical monetary thinking. There are certain assumptions that you need to have for MMT to hold true; and one of them, obviously, if you look at Japan you could say well 200 percent Debt to GDP you know not not harming them.
There are a few things and there’s the Rogoff and Reinhardt study that sort of says when you get to a certain level of Debt to GDP it has an impact on your long-term growth for a start.
There’s also this assumption that everybody will that there won’t be some confidence effect, that rating agencies won’t come in and increase the price of your debt – that you can just keep wearing down the debt through growth and because growth is higher than the level of the interest rate and that is not always true. It might hold true for a while but it won’t hold true permanently. It’s a bit magical thinking to believe that we could suddenly, suddenly the world is completely different from everything that economic theorists have have held true for a long time.
[I’m] not saying that these theories don’t change over time but I’m certainly not convinced.
Steve Hamilton
Here’s all I’ll say as far as I can tell I had to ask someone what MMT was not that long ago.
to be honest with you as far as I can tell it’s a combination of two things. A set of things that almost every economist agrees with and then a set of things that almost every economist thinks are totally insane.
Right! So if we deal with the first group first it’s not news that there’s a thing called the inflation tax; like yeah of course we can fund anything we want by printing money that’s not news; you could do that but you’ll pay for it in inflation.
I think there is a set of MMT proponents that sort of it’s have it’s essentially an empirical question there’s a set of MMT proponents that think you can do it without an inflationary consequence and I think to me at some point inflation has to bind right otherwise you just print in infinite, infinite amounts of money and and we have to agree that some point inflation is going to bite.
So I kind of think we don’t need to think about MMT so much we can just say yes it makes sense the Reserve Bank uh is is is is doing its darnedest to keep buying bonds through QE right and in the short run we can get away with this printing money to pay for these kinds of assets without sparking inflation and I 100 per cent agree we should do that; but to do that infinitely and forever, I don’t know. I suspect Richard has a similar view.
Richard Holden
Let’s be clear QE is not MMT. And you know Phil (Lowe) was at pains to make that point yesterday that they’re buying on the secondary market they’re not just printing money they’re buying bonds. Right Japan issues bonds okay. The MMT folks say you don’t need to issue bonds you can just print money.
I think the way to think about that is the government’s balance sheets got a balance. What’s on the asset side the present discounted value of all future tax revenue that they can collect. What’s on the liability side? There’s bonds and there’s money. Okay now you can always issue more liabilities to cover liabilities but what happens if people think the market thinks you’re not being able to cover that at some point on the asset side with future tax revenues?
Well, the price of money falls – so what does that mean, it means inflation goes up right!? So that’s what’s sometimes known as the fiscal theory of the price level.
And the empirical evidence none of these MMT folks like it when you say Weimar Germany or Venezuela or Zimbabwe but you know try try France in 1981 under the Mitterand government that try
to put their feet their sort of toe in the water on this and inflation started getting out of control very quickly and had to reverse course or Germany under Gerhard Schroeder in 1998 same sort of thing
so um I think as Steve said the idea that
deficits that we can’t have like you know 80 per cent or 90 to use the Reinhardt Rogoff number Net Debt to GDP and some; there’s some magic number in which case it all falls apart that’s clearly wrong the idea that we can’t have a strong fiscal response is silly.
The idea that we can print money not issue bonds um and get away with it indefinitely that really is silly
Holden improves from his piece at The Conversation called “Printing Money is not the solution to all economic ills” and that is a genuine positive as it shows an evolution in his thought. I say he improves because unlike others he recognises that QE is not MMT. Unfortunately they all seem to be a little obsessed with seigniorage.
Please follow the links throughout this post as they correct the misunderstandings these economists have.
In fact, nothing described by any of these economists even resembles MMT. They would all do well to read the Explainer: What is Modern Monetary Theory?
Australian Real Progressives 