Thursday, 21 May 2015

Leading economists back Positive Money and MMT, sort of.


Positive Money and MMT have featured prominently on this site of mine for years. So it’s good to see three leading economists in The Guardian backing an idea that PM and MMT have have backed for an equally long time if not longer. That’s the idea that in a recession, the state should simply create new base money and spend it and/or cut taxes (or as some MMTers put it, “create fiat” and spend it).

The three economists are Mark Blyth, Eric Lonergan and Simon Wren-Lewis. (Incidentally, I am NOT an official spokesman for PM.)

The need for “create and spend”, as the article makes clear, is especially urgent given that what with monetary policy having arguably run out of steam, some new form of stimulus may be needed. However, in saying that, the authors diverge from PM thinking in that PM advocates that “create and spend” is the best form of stimulus even where monetary policy has NOT RUN OUT of steam.

That is, in their submission to Vickers (authored jointly with Prof Richard Werner and the New Economics Foundation), PM criticised interest rate adjustments, and righly so. My own main beef with interest rate adjustments is that they are DISTORTIONARY. To illustrate, when interest rates are cut, lending and borrowing based activity expands, whereas non-lending based activity does not. That makes as much sense as imparting stimulus by boosting just car manufacturing, restaurants and garages, with everything else from hospitals to hotels being ignored. There is also plenty of evidence that interest rate adjustments do not actually work too well.

A second “divergence” from PM policy comes in this passage in the Guardain article: “Parliament needs to equip the Bank with the infrastructure to administer payments, and determine in advance the recipients. An equal payment to all households is likely to be the least controversial rule.”

Well that would certainly be ONE WAY of implementing “create and spend”, and that’s nowhere near the first time that’s been advocated. But why go to all the bother of setting up an entirely new system for disbursing new money when we already have such systems in place: existing public spending programs, plus there are sundry taxes that could be cut. There’s VAT, income tax, payroll taxes – the list goes on and on and on.

Moreover, the above “distribute to households” system suffers the same defect as interest rate adjustments: it’s distortionary. That is, there is a HUGE CHUNCK of the economy which is NOT DEPENDENT on households’ tendency to spend: the existing public sector – health, education and so on.

If stimulus is to be politically neutral, the public sector should have it’s share of stimulus, shouldn’t it?


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