Monday, 15 October 2018

Taxes don’t fund public spending?

MMT has suddenly become much more popular and widely recognised in the last three months or so. The recent converts and some of the old timers keep banging on about the MMT claim that taxes don’t fund public spending: rather, governments simply print / create money and spend it, then they collect whatever amount of tax is needed to control the resulting inflation.

The truth is that that is just ONE WAY of looking at it. Another equally valid way of looking at it, is the more traditional way, namely that governments aim to have taxes fund public spending, and they then ideally run whatever deficit is needed to maximise numbers employed without bring excess inflation. Indeed the latter way of looking at is the way Keynes “looked at it” for what that’s worth, the MMT can almost be defined as Keynes writ large.

However, the above first way of looking at it is certainly a useful mental exercise: it’s a particularly useful exercise for the more clueless members of the economics profession. That’s the members of the profession who suffer from “debt-phobia” and “deficit-phobia”, or “mediamacro” as Simon Wren-Lewis calls it.

In short, I don’t think the above first “taxes don’t fund public spending” is a big insight. At least it’s not an insight of the same importance as the demolition of “fiscal space” idea (popular in IMF circles) which various MMTers have set out. E.g. see this “Billyblog” article, and one of my articles on the subject.

Friday, 12 October 2018

The Greek tragedy would not have happened under full reserve banking.

Under full reserve, anyone wanting interest from their bank, i.e. anyone who wants their bank to lend on their money, is deemed (quite correctly) to be a money lender. That is, they are into commerce. And there is a widely accepted principle that while entering into commerce is thoroughly laudable, it is not the job of taxpayers to come to the rescue of commercial ventures which fail.

That principle is adhered to under full reserve, in contrast to the existing bank system which basks in the delusion that money which has been loaned on is totally safe.

Moreover, under most versions of full reserve (certainly under Laurence Kotlikoff’s), depositors can CHOOSE what sort of borrowers get their money: that is, depositors have a choice between for example funding mortgagors with plenty of equity in their houses, or NINJA mortgages, or loans to Greece (which has a long history of not repaying debts) so as to enable Greece to buy German built submarines, and so on.

Under full reserve, precious few depositors would have chosen to lend to Greece (or Argentina, come to that). In contrast, under the existing system, Euro banks assume the ECB will come to their rescue however silly their loans. So why not lend like there’s no tomorrow?

Of course the above “full reserve treatment” for Greece would probably not have meant Greece escaping austerity entirely. But at least austerity in a relatively mild form would have kicked in earlier, and remained relatively mild, which in turn might have meant that by now (2018) the whole Greek mess might have been solved.

Wednesday, 10 October 2018

Nonsense from the IMF.

Their latest barmy idea is that government can be compared to a household in that they claim the ratio of government assets to government liabilities are important. The reality is demand for government liabilities would probably exist even if government had no assets at all.

Conversely, it is perfectly conceivable that despite a government having trillions worth of assets, there is relatively little demand for its liabilities. And if in that situation the relevant government tried to issue liabilities to match its assets, the private sector would just try to spend away those liabilities (i.e. base money and government debt): the result would be excess inflation.

The IMPORTANT consideration is what rate of interest government pays on its liabilities: if it has issued far more liabilities than the private sector wants to hold, government will have to INDUCE the private sector to hold those liabilities by offering a high rate of interest: not a good idea.

In contrast, if the rate of interest is about equal to the rate of inflation, as is the case with the UK at present, then in real terms, government is paying no interest at all on its liabilities. Personally I’d recommend always aiming to keep the rate of interest below the rate of inflation: that way the relevant government makes a profit at the expense of its creditors.

A very similar objective is a permanent zero rate of interest as recommended by Milton Friedman and the two co-founders of MMT, namely Warren Mosler and Bill Mitchell. For more on the permanent zero interest idea and for links to relevant works of those three authors, see my “Open Thesis” paper entitled “The arguments for a permanent zero interest rate.”

Monday, 8 October 2018

The deluded advocates of the Job Guarantee.

It has become fashionable among advocates of the Job Guarantee (JG) in the last year or two to argue that the wage for JG should be well above the existing minimum wage. In fact various Levy Institute works have argued that the JG wage should be DOUBLE the existing minimum wage.

Well now, there can’t possibly be any objections in principle to raising the minimum wage - maybe even doubling it. The pros and cons of that are obvious. The pros include better pay for the less well off, while the obvious potential con is less work for those lacking skills, experience and so on. Thus a decision on the minimum wage simply requires research into where the best compromise between the various pros and cons lies.

But what is completely barmy is advocating a JG wage well above the existing minimum wage while not advocating a rise in the minimum wage itself, or at least not raising the minimum wage for non-JG employers to the JG level.

The currently fashionable answer to the latter point in JG circles is that the existence of a generous JG wage will force other employers to compete, and raise their minimum wages to about the same level. Well that’s a bit like saying that the minimum wage for employers with more than twenty employees should be raised in the expectation that those with FEWER THAN twenty employees will be forced to compete! Why not just raise the minimum wage for ALL EMPLOYERS?? Be a darned sight simpler wouldn’t it?

Or how about raising the minimum wage for all those working INDOORS in offices and factories in the hope that employers will be forced to raise the minimum wage for those working OUTDOORS? Equally barmy, don’t you reckon?

Another problem with the above barmy idea is that a higher wage for JG work than for other employers will draw employees away from regular work and into JG work which is inherently less productive than regular work, and that clearly has a GDP reducing effect – not that I’m saying the OVERALL effect of JG is necessarily to reduce GDP.

As for exactly WHY JG work is less productive than regular work, that’s quite simple. Reason is that employers, both private and public create the most productive jobs first, i.e. they abstain from turning potential jobs in to real jobs if they think those potential jobs are insufficiently productive. In contrast, if some sort of employment subsidy is available, JG or any other type of employment subsidy, then employers will bring some of those relatively unproductive jobs into being.


Another point is that it’s not very politically astute to advocate a new system, JG or any other new system, in its most expensive form: that is guaranteed to turn off finance ministers and politicians who are always desperate to avoid more government spending, given that there are a near infinite number of worthy projects that can potentially absorb billions upon billions of taxpayers’ money.

Put another way, why not advocate the new system, at least initially, in a relatively cheap or paired down form? That will be more acceptable to politicians. Plus there is such a thing as diminishing returns: that is (as the introductory economics text books explain), the INITIAL tranche of any new product normally brings big benefits, while as output of the new product increases, the benefits of yet more of the product gradually decline as output increases. Or to put in economics jargon, marginal product declines as output rises. And that phenomenon is almost bound to apply to JG.

So if you want to impress politicians with the benefits of a new product or system, keep it small scale to start with.

And finally, anything new is bound to have teething problems (in as far as JG is a new idea, which it isn't really). That means that if you go for small scale initially, the mistakes will be small. In contrast, if  you go for big scale, any mistakes will be catastrophes, which will make your new idea a laughing stock for the next decade.

Friday, 5 October 2018

Private Eye helps counter financial fraud.

Private Eye is an  excellent guide to what's really going on in the world: much better than those deluded respectable broadsheet newspapers like the Guardian or Telegraph. I'm pleased to see Private Eye is doing its bit to fight financial fraud in its latest issue. See below.

Thursday, 4 October 2018

A conundrum relating to full reserve banking.

One of the basic flaws in the existing bank system is that commercial banks (i.e. money lenders) can to a significant extent simply print the money they lend out: i.e. create it via book-keeping entries out of thin air. If you’re a money lender, clearly that’s preferable to having to actually EARN the money you lend out or borrow it at the going rate of interest.

That constitutes a subsidy of commercial banks: indeed the French Nobel laureate economist, Maurice Allais, and David Hume (writing almost 300 years ago) argued that the above activity essentially amounts to counterfeiting. Re Allais, see opening sentences here.

On the other hand it could be argued that no matter how dodgy a bank is, there is nothing wrong with government run deposit insurance which pays for itself, as does the US deposit insurance system, the FDIC. After all: if an activity pays for itself, if it’s commercially viable, what’s wrong with it?

And when the liabilities of a commercial bank (i.e. deposits at a bank) are backed by state run deposit insurance, those deposits are then “as good as gold”: i.e. they are as good as $100 bills or £10 notes.

So what’s wrong with that “commercially viable” deposit insurance? Well I suggest what’s wrong is as follows.

There is no sharp dividing line between money and non-money. For example, what’s the difference between $X of bonds which  someone holds in a reputable non-bank corporation and which mature in a week’s time, and $X which they have in a term account at a bank and which matures in a week’s time? Almost do difference at all!

Thus there are an infinite number of shades of grey between money and non-money, with the purest form of money being anything which is absolutely guaranteed not to lose value (inflation apart) and which is available to the “money holder” relatively quickly.

Thus the simple fact of upgrading a form of money from relatively dodgy money to “fully backed by taxpayers” money, which is what deposit insurance does, is itself a form of money creation. And whoever creates money is subsidised by the community at large, whether it’s a traditional backstreet counterfeiter turning out fake $100 bills or a respectable commercial bank creating money from thin air.

Ergo, deposit insurance is not quite what it seems: it is not a bog standard commercial activity which is entirely justified because it pays for itself. Part of the reason it pays for itself is that it is a surreptitious form of counterfeiting, or to put it in more polite language, it involves upgrading a not entirely secure form of money to something better. And that ipso fact is a form of money creation.