Friday, 11 October 2013
Positive Money’s ideas and Modern Monetary Theory are joined at the hip.
One of the leading lights of MMT, Warren Mosler, suggested that the only liability government should issue is money (monetary base to be exact). I.e. he suggests that government issue no interest paying debt (see 2nd last paragraph here).
That amounts to saying that the central bank base rate should be permanently held at zero – a point which Warren argued in more detail here.
But that in turn implies that adjustments to aggregate demand (AD) should be made by fiscal means rather than monetary means (like interest rate adjustments), and there is much to be said for that. For example, an interest rate cut (or QE) channel stimulus into an economy JUST VIA investment. That makes as much sense as channelling stimulus into an economy just via restaurants, theatres, and subsidised electricity and . . . add a few other sectors of the economy or products you like - at random.
But adjusting AD just via fiscal measures means we need a quicker method of doing that adjustment than we have at the moment: in particular, we don’t want to have to wait while politicians spend months debating the pros and cons of various types of government spending (and/or tax cuts) before stimulus is effected. But at the same time, we do want the electorate and politicians to retain control of strictly political decisions, like what proportion of GDP is allocated to public spending and how that spending is split between education, defence, etc. How to square that circle?
Well the solution is set out in a publication authored by Positive Money, Richard Werner and the New Economics Foundation. And the solution is easy: let politicians decide whatever they want in respect of the above POLITICAL points. But when it comes to the DEFICIT, leave that in the hands of a committee of economists. And if those economists thought that £Xbn of stimulus was in order over the next six months, they’d say to politicians, “Here’s your £Xbn. Do what you want with it, but we advise that stimulus spending is spread FAIRLY WIDELY: concentrating the spending on just a few products or sectors of the economy will result in distortions or wild gyrations in spending on those areas.”