Charming Chalmers

Australian Modern Money enthusiasts are a passionate bunch. Many have got on their soapboxes about our newest Treasurer’s first appearance on 7.30.

The challenges in the economy are pretty clear. We’ve got high and rising inflation and, therefore, rising interest rates.

We’ve got real wages falling backwards quite substantially and we’ve got a trillion dollars of debt in the budget, which will take generations to pay off, but is not currently going to deliver a generational dividend.

And so, the challenges that I’m inheriting from my predecessor are pretty serious challenges. We want to be up-front about that.

We’ve already begun the work of trying to address particularly those three challenges that I mentioned.

The promises that we made during the election, the commitments that we will budget for in the October budget, are all about trying to increase the speed limit on the economy without adding to those inflationary pressures.

It’s economic orthodoxy to say, if you’ve got inflationary pressures, then you need to increase the size of the economy and you need expand its capacity and you do that with cleaner and cheaper energy, you do it by making the workforce bigger through childcare reform.

You train people so that they can work more and earn more in those higher-wage, higher-skill opportunities that emerge in an economy like ours.

And so, our economic plan, our economic agenda, is geared towards those inflationary pressures, and also getting real wages moving again, in a way that doesn’t add substantially to the budget bottom line, but improves the quality of the spending in the budget.

It will take generations to pay down the debt that we’ve inherited.

The budget is heaving with a trillion dollars in debt – not enough to show for it, because there’s all of these rorts and all of this waste that you and I have talked about before.

So the first step is Katy Gallagher and I will begin, as soon as possible, an audit of those rorts and that waste in the budget and that will be an important way to try and go through the budget line by line to make sure that we can either improve the budget position or invest the taxpayers’ money more wisely to get a proper economic dividend for the country.

We’ve already highlighted $11.5 billion worth of budget improvements. We did that when we released our costings during the campaign. We hope to find more budget improvements so that we can improve the budget over time.

But I’ve got to be up-front with you and with all of your viewers, Leigh, and say this is a big, substantial problem – you can’t just flick a switch and make a trillion dollars of debt disappear. It’s going to be a lot of hard work over a long period of time but that hard work has already begun. – Jim Chalmers, Treasurer.

I interpret these statements a bit more generously than most. They are a startling contrast to his 2019 comments.

“I don’t believe MMT is a sustainable funding model for the services that Australians rely on. The only way to properly fund these is by ensuring we have a sustainable level of revenue.

People raise MMT from time to time and I find the conversation interesting, and I try not to dismiss any genuinely-held ideas, but I’m not convinced.

Richard Holden is an economist I have a great deal of respect for and his views aren’t a bad summary of mine, at The Conversation.

Job Guarantee also very interesting and I’m following the debate in the US fairly closely.” – Jim Chalmers, MP.

Reviewing his comments today that it will take generations to pay off the debt is correct if we assume by paying off the debt, he means letting the government debt mature. We are always issuing new debt. The AOFM has announced its future plans. The followers of MMT know that over the course of time the total number of dollars that have been drained from the banking system to maintain the overnight cash rate is called the national debt.

“That’s just a rule someone made up.”

What I believe he really means is there is little productive investment coming out of that deficit matched with debt. As Ross Gittins recently wrote “Who said the shortfall between what a government spends and what it raises in taxes must be covered by borrowing from the public? That’s just a rule someone made up.” This is what I believe the Treasurer means by not delivering a generational dividend.

What is interesting are his remarks on the speed limit of the economy & reference to inflationary pressures, it is as if his words are taken from Stephanie Kelton’s NY Times best seller The Deficit Myth

Every economy has its own internal speed limit, regulated by the availability of our real productive resources—the state of technology and the quantity and quality of its land, workers, factories, machines, and other materials. If the government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. There are limits. However, the limits are not in our government’s ability to spend money, or in the deficit, but in inflationary pressures and resources within the real economy.

There is only so much demand that can be placed on our material resources—our workers, factories, machinery, and raw materials—before we push things too far. Once an economy reaches its full employment potential, any additional spending—whether it comes from the government, the domestic private sector (households and businesses), or the rest of the world (foreign demand for our exports)—carries inflation risk.

Chalmers continues about building capacity, increasing wages & removing inefficient spending from the reported rorts. All good things!

The Treasurer does put much of the focus on the debt & the budget bottom line. The debt is in service of targeting the overnight cash rate & the budget bottom line outcome is determined by many different actors outside of government spending and can not be successfully targeted by the government. This is known as an endogenous outcome.

And the debt can be disappeared with the flick of a switch, stroke of a pen, and so on, just by debiting the securities (debt on issue) accounts & crediting the exchange settlement (reserve) accounts. Or you can shift debt issuance to the purview of the RBA – very similar to the previous remark – and ta-da, no more national debt. The choice whether to do this or not is a political policy choice.

MMT: Commonly Asked Questions

When I do a search on Google for Modern Monetary Theory, these are the questions that come up under “People Also Ask”!

What is the MMT rule?	Is MMT just Keynesianism?
What is MMT in simple terms?	Is Quantitative Easing the same as MMT?
Does MMT cause inflation?	What are the problems of (modern) monetary theory?
Does Japan practice MMT?	Which countries use MMT?

What is the MMT rule?

Not sure.  Inflation Constraint over Revenue Constraint perhaps?

Spending then Taxing and Bonds (STAB) over TABs perhaps?

My personal favourite though

Everything in the economy is run on buffer stocks and price rules/controls to some extent.

Further Reading: Stephanie Kelton’s The Deficit Myth

Is MMT just Keynesianism?

No.

MMT rejects standard Keynesian thinking about “generalised expansion” in favour of employment buffer stocks and hence increased reliance on automatic stabilizers.

Further Reading: Bill Mitchell’s MMT is biased towards anti-cronyism

What is MMT in simple terms?

A correct operational description of a given currency regime/arrangement

Is Quantitative Easing the same as MMT?

No.  MMT does not advocate for QE

QE is a financial asset swap of Government Securities for Cash/Cash deposits.

Further Reading: Greg Hannsgen’s MMT does not advocate (or mean) “monetisation“

Does MMT cause inflation?

 No. MMT is not something you implement.  The constraints are the real resources – regardless of how they became constrained.

Further Reading: Bill Mitchell’s Ultimately, real resources constrain prosperity

What are the problems of (modern) monetary theory?

The problem it is accused of is free lunches and naive politics, both to an extent are false.  There is a free lunch in financial arrangements being a currency monopolist and a free lunch in how far the production possibility frontier (PPF) can be pushed.

As for turning off financing, that’s one, done the same way as now, two, done even better with more automatic stabilisers. No external intervention is necessary.

The only problems with MMT are ones based on foreign transactions as listed here:

There are five issues that need to be managed when dealing with foreign transactions. 

First, pass-through inflation that comes from the rising cost of imports following a depreciation is a relevant concern.

Second, the balance sheet impact of depreciations when debts denominated in a foreign currency are present is also a concern. 

Third, the possibility that foreign reserves dwindle and prevent foreign debt servicing and the purchase of imports is also a concern.

Fourth, some countries are highly dependent on food and energy imports and/or cannot develop on their own. 

Fifth, if there is no internal desire to accumulate the domestic currency, the ability of the government to spend without disrupting domestic prices will be limited. 

MMT proponents have long recognized these problems but, instead of giving up to the neoliberal policy agenda, they have embraced policies that work around these problems in order to give priority to full employment.

Further Reading: Eric Tymoigne’s Seven Replies to Critiques of MMT

Does Japan practice MMT?

Yes. And No!

Japan’s experience has invalidated mainstream claims about the dangers of “excessive” deficits and debt. While Japan has the highest debt-to-GDP ratio in the world, it has not faced higher interest rates or inflation or been shut of out of credit markets. Instead, the yields on Japanese government bonds track closely the BOJ’s policy rate. This is consistent with MMT’s arguments that high deficits and debt, as conventionally defined, need not have negative consequences for a country that has its own nonconvertible currency.

On the other hand, the Japanese approach to policy has been the antithesis of MMT. Instead of a strong fiscal boost, which could have gotten its economy out of the recession that followed the 1980s speculative boom, Japan has implemented small and inconsistent fiscal measures, reversing course more than once. This has led to higher deficits and debt due to automatic stabilizers while growth has stalled. Instead of learning from this experience, Japan has moved further away from MMT’s prescriptions by relying on unconventional monetary policy measures, such as QE, which have been largely ineffective in boosting growth or reflating the economy.

Further Reading: L. Randall Wray & Yeva Nersisyan’s Has Japan Been Following Modern Money Theory Without Recognizing It?

Which countries use MMT?

All of them. Remember MMT is a correct operational description of any given currency regime. It is the financial practice of a given nation.

It recommends all countries achieve monetary sovereignty over time.

Further Reading:
Stephanie Kelton’s How Do You Solve a Problem like Inflation
Fadhel Kaboub’s A Financial Sovereignty Strategy for Egypt

MMT Does Not Advocate (or mean) “Monetisation”

Modern Monetary Theory in no way endorses “monetisation.” To the extent monetization is simply a name for quantitative easing (roughly, RBA purchases of long-term bonds), we either oppose it or find it only mildly effective and sometimes propose alternatives.

Whether it comes from Catallaxy, Rabobank or Saul Eslake, these ideas run rampant amongst the economics community.  Allow me to repeat, Modern Monetary Theory in no way endorses “monetisation.” At best we only find it mildly effective and have proposed other ways of achieving the same goal.

An example of an early MMT work that specifically criticizes even the use of the word monetisation is Warren Mosler’s Soft Currency Economics II, a paperback that is not too expensive at used book sites.

First, we believe that entities other than Canberra choose the form of Australian government liabilities through their investment, saving, financial-trading, and other choices.

Regardless of the public’s choice of assets, our central bank, the RBA, buys and sells assets to get its chosen interest rate(s). Of course, interest rates other than the cash rate are determined by other actors. The action of “the markets” (including huge banks) for bonds and other debt securities most closely approximate an uncoordinated supply-demand process. Unless, of course, market manipulation dominates there.

Critics across the spectrum have been gathering that the unique idea of MMT (perhaps because of its name) involves attempts to “pump money” into the system. This process would then likely generate inflation but would allow higher federal spending without tax increases.

In fact, as former Bernie Sanders aide and MMTer Stephanie Kelton puts it in her terrific new popular book (for example, on p. 36), you might as well think of bonds and money as “yellow dollars” or “green dollars”—more or less the same, except one pays interest.

Another place to find a good critique of the idea that deficits “pump money” into the economy is The Scourge of Monetarism by Nicholas Kaldor. In the writings in that 1980s book, Kaldor sought to dissuade British policymakers from an earlier round of fiscal austerity.

What MMT does is explain how the federal spending process works always. It does not call for a change in a method of financing. Moreover, the always-existing method of increasing spending does not require tax increases unless there is a macroeconomic need for them—say to dampen aggregate spending and cool down the economy. Hence, there is nothing magical about the number zero for the federal deficit or deficit increases. The federal government indeed never “pays for” new spending the way households or Australian States or local councils do. Hence, worries about higher deficits as such should not slow our crises responses ever.

This is a remix of Greg Hannsgen, Ph. D, UMKC graduate, Levy Economics Institute Research Associate post.  The original can be seen here.

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.

I agree with Ed. And yes context of tax is everything but the current flavour is saying MMT is anti-tax. Progressive tax rates are excellent to counter inflation risk but we might not need to alter them to do more provisioning depending on where that provisioning is targeted

— AusMMT🦉 #MMT 2G ran by dquinn03 (@AusMMT) October 11, 2020

The point is MMT is not for taxing for taxing’s sake. It’s for taxing for purpose. MMT is about building capacity where possible & yes resources are finite but we are innovative (🍩econ) & find substitutes (70s gas 4 oil as an eg.)

— AusMMT🦉 #MMT 2G ran by dquinn03 (@AusMMT) October 11, 2020

No:
– MMT is not against taxing: just don't think of tax reform as a budget issue, the goal is not to balance the budget or fund projects
– JG is not about wage suppression: set a living wage that becomes the minimum standard in private sector
– MMT isn't for monetary financing. https://t.co/16rSbron3G

— Eric Tymoigne (@tymoignee) October 9, 2020

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.

 

 

Australian Progressive Economists are at it Again!

As Kate Raworth says in Doughnut Economics, economics is the mother tongue of public policy.  So it is vitally important to understand the operational interactions of economics correctly to formulate public policy.

Nominal Progressive Economists like John Quiggin, Andrew Leigh, Richard Holden and others are at it again.  Andrew Leigh and his colleagues have an issue with Modern Monetary Theory but have not done their most cursory research about the constituent parts of MMT.

Real Progressive Economists should have a real connection with Keynes and Kalecki and other economists done correctly and not what Joan Robinson called “Bastard Keynesianism”.

Every Modern Money Theorist and other MMT proponents would agree that MMT and “conventional economic thinking” can arrive at the same or similar conclusions.

What follows is an adaptation of the work of the Swiss MMTist Andrea Terzi.

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 recognises that the currency itself is a public monopoly.

This leads to an appreciation of the monetary system fundamentally different from the conventional economic thinking / bastard keynesianism paradigm.

What follows is a summary of eight key differences between these two models:  the Bastard-Keynesian paradigm (BK) and the Modern Money View (or MMT).

1.
BK – 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.
BK – 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.
BK – 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.
BK – 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.
BK – 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.
BK – 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.
BK – 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.

Modern Money takes many strands of classical economists, Keynesian economists and Post-Keynesian economists and weaves a consistent coherent synthesis of the many strands to describe the operationally correct procedures of the macroeconomy.

Once these are understood and not mythologised into deadly innocent frauds, noble lies or rules of thumb heuristics it opens up policy space.

So then you can argue for your public policy goals, whatever they may be, not just on their own terms but in a holistic complete way without any misunderstandings.