Tag Archives: Rohan Grey

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.

 

 

John Quiggin’s Modern Money Evidence Based Framework Review

John Quiggin has very kindly reviewed Macroeconomics by William Mitchell, Randall Wray and Martin Watts, an undergraduate textbook based on Modern Money Theory (or Modern Monetary Theory).  It is a very good review.

Quiggin begins with the headline ‘Modern Monetary Theory: Neither modern, nor monetary, nor (mainly) theoretical?

Perhaps such a headline was designed to be clickbait, as the headline has a more negative tone than the review itself.

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.

There are a few minor disputes I have with the review.  The review is very good up until this point:

“The second, which might be called ‘popular MMT’, or, more pejoratively, ‘vulgar MMT’, is a movement in which the statement ‘taxes don’t finance public expenditure’ is interpreted to mean that governments can increase spending as much as they like, with no need for an offsetting increase in tax revenue. This view was presented by pastor Delman Coates, speaking at the Third Modern Monetary Theory conference at Stony Brook University”

I think this is a misunderstanding. 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.

Which brings us to “Anyone looking for a defence of the claim that we can have a Green New Deal, or some other large-scale expansion of public spending, without any increase in taxation, will be disappointed,” which is fairly reasonable but it depends on what we include in the GND, what we don’t spend on, the use and access to resources we already have. It is a little US-centric but you can see it demonstrated quite successfully by Stephanie Kelton here:

From about the 26th minute

Overall, John Quiggin has presented what I would consider a satisfactory review of the Macroeconomics textbook. As Quiggin suggests some of the positions presented by the text are perfectly aligned within various existing Keynesian paradigms.  However, an issue with mainstream Keynesianism is that it never provides the clarity that MMT has. Even from John Quiggin himself, on MMT and Russia he wrote:

“…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.

Anyone a little MMT literate will not deny the use of taxes in an MMT frame, its 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.

I hope this has reconciled the differences between pop-MMT and Academic MMT.  Those that follow Modern Monetary Theory share a view with Joan Robinson about mainstream Keynesianism which she called ‘bastard Keynesianism’.  Modern Money Theory is a coherent attempt at reconciling Keynes view and other ‘modern’ views in the operational macroeconomic paradigm we work in today.

Australian Economists and Modern Money Theory

Australian economists and others are finally entering the public discussion on Modern Money(tary) theory.  It is welcome.  Below are the tweets that inspired this post (re-post).  The post itself comes from Andrea Terzi whom you can follow on twitter @ndrea_terzi.

Australian Real Progressives has previously dealt with many misconceptions about Modern Money(tary) theory.  Australian audiences should have discussions with Bill Mitchell, Martin Watts, James Juniper, Phil Lawn, Rohan Grey and Steven Hail to discover the nuance and complexities of Modern Monetary Theorists and how it differs from ‘smart traditionalists‘.  Hopefully, the post below goes some way to addressing the differences.


The Civilized Money View (aka MMT, or Modern Monetary Theory) has historical precedents:

First, the notion—developed by Adam Smith—that the wealth of a nation is measured not by monetary values, but by its capacity to produce goods and services.

Second, the notion of money—developed by John Maynard Keynes—that any modern state claims the right to declare what money is.

While Smith’s concept hints to full employment as the primary policy objective, Keynes’s concept hints to the management of money as instrumental to reach such objective. Furthermore, MMT explicitly recognizes that the currency itself is a public monopoly.

This leads to an appreciation of the monetary system fundamentally different from the traditional Monetarist-Keynesian paradigm.

What follows is a summary of eight key differences between these two models: the Monetarist-Keynesian paradigm (MK) and the Civilized Money View (or MMT)

1.
MK – The central bank controls the money supply indirectly through its power to control the monetary base.

MMT – The private sector uses bank deposits as money, and bank deposits are not directly controlled by the central bank: they get created by government spending and bank loans.

2.
MK – Because the central bank controls the money supply, it also controls the nominal interest rate in the money market.

MMT – Because it is the monopolist of money, the central bank controls the interest rate.

3.
MK – The long-term nominal interest rate is determined by private preferences about real saving and investment, as well as by inflation expectations.

MMT – The central bank has the power to control the interest rate at any maturity: the interest rate is a purely monetary phenomenon.

4.
MK – A monetary expansion can expand output and employment temporarily and yet, at some point, it generates inflation.

MMT – Any operation by which the central bank buys or sells financial assets does not make the private sector any richer and has little or no consequence on private spending decisions.

5.
MK – Government decisions are largely driven by short-term personal goals of politicians, and thus the management of money should be the responsibility of an independent institution with a long-run horizon.

MMT – While monetary policy can only set interest rates, fiscal policy is much more powerful, since any deficit of the public sector generates an equivalent financial surplus of the private sector, and thus affects spending decisions.

6.
MK – Taxes serve the purpose of financing government spending.

MMT – Because government spending takes resources off the private sector and simultaneously generates income and wealth in the private sector, it will cause inflation from excess demand unless a sufficient amount of taxes is levied on the private sector.

7.
MK – If the government spends more than its tax revenue, it must borrow funds from the private sector, and this reduces funding to the private sector.

MMT – Unless it loses its power to define what money is, the government is the currency issuer: It faces no funding constraint, and it must spend or lend first, before the economy has the funds needed to pay taxes and buy government debt.

8.
MK – Price stability is a precondition for economic growth and job creation.

MMT – A government deficit of a size that matches the private sector’s desire to accumulate financial savings is a precondition for full employment.

This post is Creative Commons Attribution-Noncommercial-Share Alike 2.5 Switzerland License and I dare say any other country as well. It first appeared here via Franklin College’s Andrea Terzi.

I felt it was that important it had to be shared with a larger audience.  Of note is that the MK paradigm mentioned throughout is the traditional current orthodox neoclassical approach used in mainstream economics today.

Repost: Five (5) Things To Read To Understand Modern Money (MMT)

This is a repost of the original Five (5) Things To Read To Understand Modern Money (MMT) that has since been treated and edited and appears on RealProgressivesUSA.com

There is ‘much ado’ 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 advised 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, Bard College in New York, and other institutions. The full list has grown to be quite long, and this 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 and social media threads are out there to clear up some perceived confusion about Modern Money. None of the commentary below is intended to replace over 25 years of academic work, which can be found at the scholarly institutions.

The first is 20 Simple Points to Understand Modern Monetary Theory by Warren Mosler. Mosler has published several books, 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 shows the effect on central banks and the interest rates determined by central banks.

Thirdly, there are a number of Frequently Asked Questions that I have researched. They are questions commonly asked by those who are 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 dives deep into how Modern Monetary Theory is applicable to ALL countries, its relationship to the role of institutions, and how it affects 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, 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 compared to actual Modern Monetary Theory. It is a comprehensive body of knowledge that is a synthesis of 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.

Four (4) Legal Arguments for Modern Monetary Theory (MMT)

Today, many of the core propositions of MMT can be understood as essentially legal arguments. Here are a four examples:

    • MMT’s determination that that a Job Guarantee is necessary because the state creates unemployment by imposing a non-reciprocal liability (i.e. a tax) that can only be satisfied by obtaining its tokens (i.e. tax credits), and thus owes individuals the ability to work for those tokens, is an argument about legal systems design. That is to say, the Job Guarantee is a legal remedy to the problem of legally-created unemployment. This framing echoes the legal arguments made by the British peasantry in response to the 18th century enclosure movement. When the state privatized farming and hunting lands previously considered part of the commons, peasants demanded compensation. Although the enclosure story focuses on the coercive creation of private property rights and the Job Guarantee story focuses on taxation , the underlying legal reasoning is the same: when the state prevents its subjects from subsisting independently from the state-controlled, monetarily driven, social provisioning process, it cannot exclude them from equitable participation in that process.
  • MMT’s observation that the state has a “monopoly” over money can be understood in relation to the longstanding legal prohibition against counterfeiting–not only of currency, but also of private monetary instruments issued under state sanction. For example, laws against securities and wire fraud, as well as regulations prohibiting non-banking institutions from issuing demand deposits, are all examples of the state’s power to delineate the scope of legitimate monetary transactions. From this perspective, the notion that money is a public monopoly supports, rather than contradicts, Minsky’s famous dictum that “anyone can create money, the challenge is to get it accepted.” After all, the question of acceptance is, ultimately, one of legal legitimacy. Indeed, we see this quite clearly in current regulatory debates over financial technologies. For example, while the U.S. Treasury has classified bitcoin as a “currency,” the Commodity Futures Trading Commission continues to treat it as a “commodity,” and the Internal Revenue Service taxes it as “property.” Together, these legal classifications determine bitcoin’s ‘moneyness’ by establishing the boundaries of its legitimate commercial use.

    • MMT’s recognition that certain operational constraints on macroeconomic policymaking are merely “self-imposed,” rather than intrinsic to the monetary system, reflects a sophisticated legal understanding of the varying malleability of constitutional versus statutory provisions, as well as administrative rules, regulatory guidances, and mere informal conventions. For example, while the minutiae of the Federal Reserve Act may be highly restrictive to the day-to-day activities of a bureaucrat operating in the bowels of the St. Louis Federal Reserve, they don’t present any ‘deep’ constitutional barrier to a member of Congress contemplating reform of the Federal Reserve System itself. With these distinctions in mind, MMT’s tendency to analyze Treasury-Central Bank operations from both a “consolidated” as well as a “deconsolidated” approach is not a technical weakness but a visionary strength. MMT economists are not ignoring institutional granularity, they are appropriately acknowledging the plasticity of law and the power we have to change it.
  • Finally, MMT’s embrace of Minsky’s balance sheet view of the monetary economy and its commitment to stock-flow consistent models implies recognition that finance is governed by man-made accounting laws, rather than natural laws. These accounting laws are ultimately subject to the same legislative, administrative, and judicial input as any other laws. They are also subject to constant manipulation: a notion intrinsic to the concept of control fraud. . Whereas it is mathematically impossible to make 2+2=5 in the real world, such an outcome is easily achievable in the nominal realm of legal accounting and thus throughout the financial system and the monetary economy overall.

Rohan Grey is a Doctoral Fellow at Cornell Law School, where his research focuses on the legal design and regulation of digital fiat currency.

This article extract is republished from New Economic Perspectives under a Creative Commons license. Read the original article in full.