Tag Archives: RBA

Six (6) Benefits of MMT

Two or three years ago, I was economically illiterate. I could barely tell you the difference between a stock and a bond, let alone a stock and a flow. I had no interest in the topic, even though I was engaged with a local activist group.

“I use to think MMT-ers were just copping out every time they shrugged and said, ‘just regulate it’.”

 

I am nowhere near being as conversant in macroeconomics as I would like, but I am definitely an enthusiast. These days, the newspaper articles that capture my interest are the ones about the state of the economy. The very articles I spent most of my life skipping right past.

I am now of the opinion that Modern Monetary Theory (MMT) is a necessary part of the toolkit for anyone working for social change, and that every citizen should have a basic understanding of macroeconomics, preferably of the MMT kind. How can I convey the importance of economic literacy to my friends whose eyes glaze over at the mere mention of words like “inflation” and “deficit”? Exactly my reaction a few years ago.

Before I set out what MMT has to offer the concerned citizen, I should note that MMT paints itself as politically agnostic. That is certainly so in the sense that MMT is descriptive of the monetary system. However, in the current context, within the current economic and political neoliberal regime, understanding MMT is a political act. Think of the monetary system as a public utility. The monetary system can be used by any political agenda. If you don’t recognise the existence of that utility, if you don’t understand MMT, another agenda can more easily control the monetary system, and hence resources. The concepts that makeup MMT are politically neutral. Comprehending MMT can inform political choice.

In the hands of those who care, the potential of MMT is to help design an economy that serves humanity and the planet. Let’s have a look at that potential in more detail; the reasons you might want to make the effort to #learnMMT.

  1. MMT enables you to understand the capacities of the state.

Like it or not, the state plays a central role in the monetary system. Once you understand the monetary system, you understand certain “capacities of the state”. These capacities MMT describes are fiscal (the government’s ability to spend and tax), and monetary (the government’s ability to adjust interest rates and issue bonds).

Furthermore, MMT helps you to distinguish when fiscal or monetary policy is best applied, from when another capacity of the state, its regulatory capacity (the ability to make and enforce laws) is best applied. Without MMT, the role of these three capacities remains obscure and confused. For example, with MMT you can better assess when a tax might be used to adjust behaviours, and when it might be better to use regulation, as in the case of lowering carbon emissions.

I use to think MMT-ers were just copping out every time they shrugged and said, “just regulate it”. Now I understand that being able to distinguish when we need regulation, and when to adjust the settings of the economic system, is a very important distinction to be able to make. This is hugely beneficial for active citizens as it enables you to formulate your diagnosis and solution to any issue much more precisely and therefore effectively. It is a distinction that neoliberalism seeks to collapse.

MMT shows us that the fiscal and monetary capacities of the currency issuer belong to the government at the federal level, not to the government at the state or local level. However, I believe you could still lobby at the state and local levels to lobby upwards. Even more radically, you might lobby state and local governments to operate at a loss until “bailed out” by the federal government.

Take the response to climate change. Let’s assume general agreement by climate activists upon a set of policies we’ll call the “Green New Deal”. In the time before the next election, you could invite local and state governments to start implementing their parts of the action plan. And when they ask us “how will we pay for it,” you say, “you borrow whatever money you need, in Australian dollars”. And when they ask, “How will we pay it back?”, you say, “you demand the government bail you out, as it did with the banks”. As an intermediary step, you could get a bunch of state and local governments to sign on to implement a Green New Deal via this funding model. Which brings me to…

  1. You no longer need to play the “How do we pay for it?” game.

You no longer need to waste precious activist time and energy strategising how to tax the rich. Or, as MMT-ers like to say, you don’t get caught up in “Robin Hood” politics. Dr Stephanie Kelton describes playing the “How do we pay for it?” game as having to fight the battle on two fronts (your policy position & how to pay for it) instead of one.

Kelton goes further and says the posing of the “How do we pay for it?” question is a divide and conquer strategy. It gets everyone fighting over who will pay for it; should we tax corporations and make them pay for it, should we tax the financial sector and make them pay for it, should we tax workers with superannuation and make them pay for it? We end up fighting amongst ourselves over the funding and get nowhere with the policy.

The belief we need to find ways to pay for the “nice things” as we might call our preferred policies, can be used as a trojan horse to wheel in other policy at odds with the public good. Professor Bill Mitchell notes the example of the sale of Telstra. In the late 1990s, the federal government claimed it needed to sell off Telstra in order to fund environmental initiatives and sustainable agriculture. The summary of the Natural Heritage Trust of Australia Act 1997 actually states: “The main source of money for the Account is $1.35 billion from the partial sale of Telstra.”

So what response might you make in the face of this question? As Kelton counsels, you simply state, “The RBA will clear any payment authorised by parliament,” or you just dismiss the question as irrelevant.

Engaging with the “How do we pay for it?” game assumes you need the rich to achieve your policy goals. That misplaced dependency hands over your power to a group that is not likely to share your priorities. You also become an inadvertent part of the problem by perpetuating neoliberal myths. With MMT, you can assert you are being “fiscally responsible”, and insist on being taken seriously while avoiding the assumptions of orthodox economics and avoid bolstering the neoliberal point of view out of ignorance.

Instead, you can focus on the real debate. Do we have the resources? Is this a national priority? If the real resources exist, should they be deployed for public benefit or allowed to be used for private gains? For example, if the policy goal were universal dental care, now you can focus on the real questions. Do we have enough dentists? Do we have enough dental schools? Do we have enough dental clinics? Do we have enough resources to build dental clinics? And so on. You simply outline the resources and the spending required to achieve explicit, concrete goals.

From this example, you might see how such a discussion might galvanise those who know something about dental care. You can see the value of citizens contributing to this and other discussions about national priorities. Widespread knowledge of MMT can potentially motivate more civic engagement and cut through the apathy and powerlessness engendered by the neoliberal TINA (there is no alternative) stance.

With MMT you can stop being apologetic about spending in the name of the public good. Pensioners, social security recipients, and public servants can get out from under the belief that they are the beneficiaries of “taxpayer’s money”. Of course, all such spending should remain transparent and accountable.

With MMT, you will avoid playing those other related games: the “balance the budget game,” or the “fiscal constraints game.” No more will you make impotent arguments, such as thinking you can take out the neoliberal opposition, by accusing them of increasing the government deficit. Further, MMT allows you to see when government deficits are used to put money in the pockets of vested interests, for example via subsidies for corporate donors to political parties.

  1. You can see through the “we can’t afford it” excuse.

This is the converse of point one. With MMT you can see through the neoliberal excuse for business as usual: “the government doesn’t have the money,” “we’re broke,” “the nation already has a huge debt,” “the government will need to borrow money.” MMT reveals orthodox economics is mostly a load of rubbish, and you don’t have to accord it any respect. Call out the nonsense when you see it, and stick to your demands in the face of these false obstacles. Those who use these excuses will be forced to state their other objections to any policy goal. For example, if a government is opposed to the achievable goal of full employment, MMT might reveal the agenda behind keeping a “reserve army of unemployed” is to drive down wages and conditions.

  1. MMT offers a good B.S. detector.

From the above, you can see that MMT enables you to score politicians and pundits on their ability to speak accurately about our national situation.

MMT reveals that bad policy is driven, not just by the extent to which the political system is corrupted by money, but also by the extent to which the political system is corrupted by orthodox economics. With MMT you can tell when decision-makers are beholden to bad ideas.

  1. You won’t be intimidated by the scale of any project.

Take the transition of our economy and society that an effective response to the climate crisis requires. With MMT, you no longer need to be afraid of “big dollar amounts”. In WWII the United States moved 50% of its GDP into the war effort and ran a budget deficit of 25% of GDP, and inflation never rose above ten per cent. They were able to achieve this because they understood the fiscal capacity of the state, and how to use it to create the necessary “policy space” to prosecute the war. Various calculations put something like a Green New Deal at about 5% of the GDP.

With MMT you can stand certain that the mass mobilisation of resources required to meet the climate emergency is possible. Depending on your point of view, you could see the need for a massive mobilisation as a good thing. MMT reveals that the entity best placed to achieve this is the federal government. We can reclaim the optimum role of government, which is to deploy resources at a national level in the name of the public good.

  1. MMT inoculates against racism and fascism

MMT allows you to tell an abundance story, rather than a scarcity story. That is, MMT enables you to think in terms of collective cooperation, rather than competition for scarce resources. The belief in scarcity, the belief that someone else’s gain is my loss, tends to divide a population along racial, ethnic or gender lines. For example, people operating within the scarcity story start to blame the immigrants “for taking our jobs”. As soon as you head down that track you are entrenching the power of the policy-makers who are the real cause of the problem (for example those with a “surplus obsession”) and you risk encouraging unfair scapegoating.

This is a written version of a presentation Anne of Modern Money Australia  made to the local NENA group

What’s the Best Way to Destroy the Economy?

I can think of nothing more fundamentally foolish, more unequivocally self-destructive to our economic well-being today than attempting to balance the federal budget or place it in surplus. It is totally unnecessary and every dollar we cut from government spending is a dollar taken from someone’s income. That we should be so enthusiastically pursuing such a policy when there are almost 3 million unemployed workers is mind-boggling. How is further lowering the effective demand for goods and services supposed to help? It cannot, of course, and will only serve to make things worse–much, much worse.

This is the most important issue facing our economy today and the terrible irony is that it is completely avoidable. There is no logical reason to be obsessing over the debt and the deficit.

Explaining why cutting government spending (or raising taxes, which is the functional equivalent) is such an idiotic idea in the midst of the worst stagnation since the Great Depression is actually relatively straightforward. The real challenge is dislodging the conventional wisdom that is already so deeply-seated in people’s minds (including those of both Chris Bowen and Josh Frydenberg).

How the Private Sector Creates Unemployment

This is probably the single most overlooked issue when it comes to discussing the debt and deficit. One cannot truly understand the role of the federal budget without explicit recognition of the following structural problem: the private sector does not generate sufficient demand to make it profitable to hire everyone who is willing to work. Consumers do not want more, more, more. They reach a point, as do firms, when they are satisfied, where they don’t want another big-screen TV, house, car, evening out, et cetera. This tends to happen at the end of economic expansions (the Roaring Twenties, for example), which is why they then become recessions. Once the recession is underway, not only do incomes fall, but households and firms will opt to spend an even smaller percentage of these smaller incomes. Downturns, therefore, can be very difficult to escape by relying on the private sector alone.

Note that meanwhile, there has been no change whatsoever in our ability to produce goods and services! There was no technological reason, for example, for the suffering during the Great Depression. We had the ability to continue to produce output at the 1920s level; what was missing was sufficient demand to hire everyone willing to work. As a consequence, living standards collapsed. That’s where the system breaks down, as it did in October 1929 and December 2007.

How the Government Can Supplement Employment (and private sector profits)

Situations like the 1930s and today benefit no one. Unemployed workers would like jobs, employed workers would like not to have to support (formally or informally) the unemployed, and entrepreneurs would like to sell more output. There is an obvious solution: the federal government can supplement demand. Start off with a simple example: just imagine that they pay people $30,000/year to stand on a street corner and make nice comments about passers-by to raise national morale: “My, don’t you look handsome today!” “Go get ‘em, tiger!” “You’re important and people like you!” While this may make the others feel uncomfortable and cause them to avoid these particular street corners, it is nevertheless a net addition to aggregate demand. This is so because when these public greeters go home from work, they spend money from their incomes. This takes nothing from the mouths of existing workers because we already had the ability to produce more (again, compare the Roaring Twenties with the Great Depression). On top of that, the formerly unemployed now have jobs plus the ability to purchase goods and services and entrepreneurs earn more income because their sales rise–everyone is better off.

Now let’s make the example a little more realistic and actually give the government employees something useful to do (but not necessarily profitable, since that’s what the private sector already does). Instead of street corner greeters, they could be soldiers, airmen, sailors, marines, librarians, teachers, police officers, firemen, social workers, national park rangers, et cetera. This adds even more to the nation’s wealth because now even the formerly employed enjoy more goods and services (for example, protection from domestic and foreign aggression and a place to go camping). Remember, the core economic problem is the private sector’s inability to generate sufficient demand to employ everyone. This solves it by supplementing demand. It creates more employment, higher wages, and greater profits.

How the Government can Finance its Spending

Whence comes the money the government uses to pay the soldiers, airmen, sailors, marines, librarians, teachers, police officers, firemen, social workers, and national park rangers? It could tax the private sector, but that’s not terribly effective since it raises demand in one place by lowering it in another. So, they should deficit spend. To keep it simple, let’s say the manner in which this is accomplished is direct borrowing from the Reserve Bank of Australia. This means the Treasury sells its debt to another branch of the government, in exchange for which it receives the cash it needs to pay those workers. When the debt becomes due, they sell more. Because all Australian debt is owed in a currency we are legally permitted to produce, it is impossible to face debt default. We can choose to default, but we are never forced to.

This is not inflationary. This is true for a variety of reasons, the most critical of which being that it does not represent more money chasing fewer goods since the quantity of the latter rose–that was the whole point of the exercise. We wanted to lower unemployment and produce more output

Conclusions

That’s the essential story in as few words as I can tell it.

The bottom line is that the private sector does not generate sufficient demand to hire all those who are willing to work. The real irony is that we have plenty of capacity to produce output for them; they just can’t afford to buy it. But, if we supplement this with public sector deficit spending–something we can finance forever since the debt is owed in our own currency–then this absolutely unnecessary problem can be solved.

To do the opposite, to lower government spending (or raise taxes) in the midst of a period of high unemployment, is not only counterproductive, but it’s also cruel. The federal government does not borrow in order to be able to afford something it could not otherwise buy. Rather, the goal of deficit spending (at least when we are at less than full employment) is to stimulate demand. This is not analogous to how a household budget works.

There are, of course, complications (some real, some imagined), but these pale in significance to the benefits. First off, for those who are worried about the size of Australian government debt, not only is that a red herring, but it is actually more likely to get worse by cutting government spending. The biggest factor driving the deficit right now is the fact that during periods of high unemployment, tax revenues fall and government payments for unemployment and income assistance rise.

We don’t turn this around by creating more unemployed people!!!

Second, it does not cause government corruption. That’s a separate issue–the government can be plenty corrupt with surpluses! Furthermore, don’t forget when looking for abuses to cast an eye on the private sector, too (something about which Adam Smith, the father of capitalism, was terribly concerned). Markets are about as effective at controlling corruption among workers and firms as democracy is in preventing abuses in government. That is to say, they help, but they are not panaceas. We should remain ever vigilant.

Third, government spending is not crowding-out the private sector. The idea that entrepreneurs are just dying to employ more workers and raise production if only Queensland would lay off a couple more teachers is downright silly. In fact, I strongly suspect that those making such arguments don’t truly believe them.

I don’t think Chris Bowen and Josh Frydenberg are bad people, they are just ignorant. That would be their business except that their decisions affect millions. In their rush to be “fiscally responsible,” they are being economically irresponsible.

This has been a remix of John Harvey’s article at Forbes magazine for an Australian audience!

Five (5) Things to Read Before You Comment on Modern Monetary Theory (MMT)

There is much to do in the media from business and economic commentators about Modern Monetary Theory. Everyone from Adam Triggs to John Quiggin to Michael Pascoe and Richard Holden and even Andrew Leigh seem to have something to say.

Anyone that wishes to comment on Modern Monetary Theory is best to go to a primary source of the Modern Money developers. These include Australia’s own Bill Mitchell and Martin Watts, as well as many scholars from the University of Missouri-Kansas City and Bard College in New York and other institutions. The full list has grown to be quite long and could never do a comprehensive list justice but those that should be viewed as a primary source include Warren Mosler, Randall Wray, Stephanie Kelton, Pavlina Tcherneva, Mat Forstater, Scott Fullwiler, Fadhel Kaboub, Rohan Grey, Raul Carrillo and Nathan Tankus.

A number of simple articles or social media threads are out there to clear up some perceived confusions about Modern Money. None of the commentary below is intended to replace over 25 years of academic work that can be found at the scholarly institutions.

The first is 20 Simple Points to Understand Modern Monetary Theory by Warren Mosler. Mosler has a couple books out explaining these further in mostly simple terms but grasping the full intent of these points is essential to understanding how today’s Modern Money works.

Next Scott Fullwiler elaborates on the differences between currency creation and the expenditure of currency. This nuance is frequently overlooked in discussions of Modern Money. Fullwiler continues into how this affects central banks and interest rates determined by central banks.

Thirdly there is a number of Frequently Asked Questions researched by myself as they are commonly asked questions to those discovering Modern Monetary Theory for the first time. These include links to the Modern Money scholars accessible works and links to financial commentary in the media for further reading on any particular question that anyone may desire to delve.

Rohan Grey continues this list with mischaracterizations and misconceptions of Modern Monetary Theory. Grey delves into how Modern Monetary Theory is applicable to ALL countries, its relationship to the role of institutions and how they affect economic behaviour and its relationship to the law.

Fifth and finally Raul Carrillo addresses some other typical criticisms of Modern Monetary Theory. Carrillo demonstrates that Modern Monetary Theory is rooted in legal, sociological, anthropological, historical, and cultural foundations. Modern Money can offer insights into what we generally deem to be beyond monetary & fiscal policy. Ideas about labour, banking, crisis, development, ecology, inequality, trade & payments have consistently been part of Modern Money thought.

These simple references are to allay any source of confusion with what media commentators are calling Modern Monetary Theory. It is a comprehensive body of knowledge that is a synthesis on chartalism, credit money, Godley’s stock-flow consistency, functional finance, endogenous money, Minsky’s financial instability hypothesis and the work of Marx, Keynes, Kalecki, Veblen and Post-Keynesian and Institutional thought.

The textbook Macroeconomics by Mitchell, Watts and Wray is for those who would like a more scholarly introduction. It is the textbook of the future.

Does Money Really Grow on Rich People?

In my previous post I outlined why jobs don’t come from rich people: capitalism runs on spending (sales), not savings. Job opportunities appear naturally when businesses forecast sales growth and expand output accordingly (and similarly disappear under reverse conditions). When viewing the economy as a whole, we can observe that private sector investment responds to rising incomes and spending as entrepreneurs expand output to match market demand and banks have confidence lending. In the absence of spending growth, accumulated savings do nothing.

So when tax policy provides powerful incentives for all households with surplus earnings to not spend their income (e.g. incentives like salary-sacrifice and other investment tax advantages), another source of spending must compensate for such savings and buy the output that workers are being paid to produce. If there is no other source of spending to replace what is being saved then sales decline, inventories build up, the economy slows, and people lose jobs.

To state the problem in simple terms, incomes are a cost to businesses. So if some portion of incomes in the economy are saved and not spent, then some portion of the economy is not able to sell all its output. Spending equals business income. Economic growth necessitates that incomes are spent, or some other source of spending must make up the difference.

This begs the question: how do we get more spending, especially when the economy is in decline? Are we left helplessly waiting for the “natural forces” of the “free market” to auto-correct or is there an alternative?

Oddly, the dominant view held by both sides of our political divide is that money grows on rich people and we have to rely on them to get the economy moving. We may not think about it in these terms, but it is evident in our approach to economic policy.

On the political right, this mostly takes the form of further cutting taxes on corporations and high income earners in the hopes that they will invest in job creating endeavours. Despite the fact that the rich already hold large amounts of cash and other assets, the stubborn belief persists that if we enable the wealthy to retain even more money finally they will spend it on the good things we need. Here, we don’t get money from rich people, but instead have to help them keep more of their income since the rich are the primary providers of good things like investments and jobs. (I’ve explained already why this fails, and instead drives up asset prices which is what rich people do with their excess when the economy isn’t growing).

On the political left, we have a different problem: the Robin Hood complex. In this view, the wealthy apparently have all the money available to spend and so we have to take it from them in order to give to the needy, fix a bridge, or give teachers a raise. Unfortunately, this kind of thinking serves only to elevate the power and importance of the wealth-class over our political process while creating direct conflict with money-interests over every aspect of public finance.

Yielding to this belief forces our elected officials to justify every government spending initiative and tax policy, not by the merits of the project to serve the public good and the economy, but by how much can be taken and by what means from bankers, corporations or the wealthy.

There’s a real alternative (TIARA).

We’ve forgotten that money doesn’t grow on rich people. We make our own money via the institution of government and it’s time we remembered how to use it properly. Sorry billionaires, you’re actually not so important after all.

As a sovereign nation, we legislated for ourselves the ability to issue our own currency for the express purpose of ensuring our nation could provide for its defence, establish self-governance, maintain the rule of law, invest in public projects of common benefit, develop our country’s human and capital capacities, and otherwise provide for the general welfare of all who come to and reside in this great land. We issue our own currency, the Australian Dollar, and while there are limits to how we can use it, there’s a lot more room to manoeuvre than we’ve been led to believe.

We have no obligation to convert our currency to gold or at a fixed rate to another currency (we left the gold standard in 1933 and the Bretton Woods gold exchange system in 1971-73 and floated the dollar in 1983). We can’t be forced into insolvency or have bond markets demand higher interest rates. We have no significant national debt denominated in any foreign currency. Our bonds are all Australian Dollar bonds.

We have the monopoly on making Australian Dollars, and that’s a really good thing – it’s why we aren’t and never will be like Greece. We have designed for ourselves the maximum possible fiscal space and we shouldn’t be so afraid to use it. We have “room” to use our currency to maintain a robust economy at full employment and address any challenges that can be tackled by the use of our currency (see below for how we understood this during World War II).

Nations that issue their own currency and have a monetary system like ours operate fundamentally differently that those nations (like Greece) that use a currency or (like Argentina) have foreign-denominated debt. Unfortunately, our economic thinking got stuck decades ago on an obsolete gold standard, fixed exchange rate paradigm. We need a completely different approach to thinking about federal tax policy and federal spending decisions: both should be made on the basis of their public purpose and their economic effects, not on the basis of how much one raises funds for the other.

Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York (USA), explained back in 1946 that taxes for revenues are obsolete. In other words, we don’t need to first get money from the wealthy to help the less fortunate (for our friends on the Left) or to have a robust economy (for our friends on the Right). That’s simply not the purpose of federal taxation. Note the 1946 date: Ruml was at the NY Fed when we used the national currency to fully employ our nation for war while keeping inflation in check. We didn’t fund the war by asking rich people for money. (Just as we did in Australia with the Full Employment White Paper). We issued our currency to pay businesses to make products for waging war, and then used taxation, aggressive promotion of savings (government bonds are purchased with the currency that was spent into the economy), and some rationing to manage inflation. That’s still how we fund war (and everything else, in fact). The point being that money doesn’t grow on rich people. If it ends up accumulating excessively in their bank accounts, it’s our fault for having bad tax policies. We need to relearn how to use our government’s fiscal contribution to have a more broadly shared prosperity during peacetime.

Now this may surprise many readers since we are not used to thinking about it in these terms, but we already have a system that provides significant injections of new government money during economic downturns. We should make it work better. When the economy slows, tax receipts fall (that means the government takes less of its currency out of the economy) and federal payments such as unemployment insurance rise (which means the government is also adding more of its currency into the economy). I know that many of us have been taught that such “deficits” are bad, but that’s that old gold standard thinking. This is exactly why we have a currency.

So now we have the answer to the question posed above. When we need more spending in the economy because the private sector is saving and businesses are losing sales, the government can always increase its monetary contribution to the economy. It’s called good fiscal policy! It already works this way – we just need to make it work better and stop operating our currency under meaningless constraints such as “pay for” rules and “balanced or surplus budget” approaches. A well-designed tax and fiscal policy can do the heavy lifting automatically so we can avoid political deadlock during recessions (The Henry Tax Review outlined a plan). As a compliment to existing safety net policies, the Job Guarantee is designed specifically for this purpose.

Our government has been given the power of the purse. More specifically, parliament has the responsibility for managing our nation’s currency monopoly. This entails balancing the needs of the whole economy and maintaining full employment for all who seek work to earn a living.

Let’s remind Canberra and parliament of how we can get our economy back to its full potential and rise up to the challenges of our time. As we seek to change our tax policies to become more equitable and our political process more transparent and democratic, we must also remember that we don’t have to wait for rich people’s money before the government of the day (parliament) can authorise spending for public purpose and tax cuts for workers. We absolutely need to change how we tax the rich, but not because we need their money.

This has been a remix of Geoff Coventry’s article at Patriotic Millionaires for an Australian audience!