Summary. If the state issues too little money, people will try to save in order to acquire their desired stock of money which will result in excess unemployment. In contrast, if too much is issued, that causes excess demand and inflation and the state will need to borrow back some of that money so as to constrain demand. But that involves the poor paying extra tax to fund interest paid to money hoarders, which makes no sense. Ergo the optimum amount of state lilability to issue (i.e. government debt and central bank reserves) is whatever brings full employment while keeping the rate of interest paid on state liabilities at zero.
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I’ve no idea what proportion of MMTers will agree with the reasoning here, but the paragraphs below set out my own ideas as to why the optimum rate of interest on state liabilities is zero.
Take an economy where the state (i.e. government and central bank) issue a form of fiat money, as is the norm nowadays. The only significant exception to that norm is the Eurozone, where several countries share a currency and central bank. But actually the conclusions reached below apply to the Eurozone as a whole just as they do to a country which issues its own currency.
What is the optimum amount of currency for the state to issue? Well if it issues an insufficient amount, people will try to save so as to acquire their desired stock of fiat / base money, and that will cause excess unemployment (Keynes’s “paradox of thrift”).
Alternatively, if the state issues too much, that will tend to induce everyone to try to spend away their excess stock of money, which will result in excess demand and excess inflation.
The latter excess demand / inflation can of course be countered by having the state offer interest to anyone who deposits money with the state, and that is known as “national debt”. But that interest has to be funded via tax imposed on the population as a whole. In short, the less well-off pay tax so as to subsidise those who hoard large amounts of money, which clearly makes no sense.
Ergo the best or optimum amount of money is whatever brings about full employment without needing to raise interest on state liabilities above zero.
Of course, given the constant shocks to which economies are subjected to in the real world, it is doubtless impossible in practice to hit the latter ideal all the time or even much of the time. But at least the latter ideal should be the AIM.
Commercial bank money.
Having rather suggested above that the demand for money is met by the state, clearly that is not true in that commercial banks also issue money. However, as is widely appreciated in economics (or at least in MMT circles), commercial bank money nets to nothing: that is, for every dollar of such money issued, there is a corresponding dollar of debt owed by the private non-bank sector to banks. Thus such money is not a net asset as viewed by the private sector non-bank sector. And in addition to there being a demand for commercial bank money, there is presumably a demand for a form of money which is a net asset for the private non-bank sector. The latter form of money is what this article is all about.
Infrastructure.
As distinct from public debt incurred simply to damp down demand, there is debt incurred so as to fund infrastructure. And clearly since private infrastructure providers incur debt there would seem to be nothing wrong with public infrastructure providers doing the same.
Indeed, there is nothing wrong with that as long as the conditions attached to relevant bonds are the same as those that obtain with public infrastructure: e.g. bond holders stand to lose their money if relevant infrastructure projects fail.
In contrast, if holders of the latter infrastructure bonds are guaranteed against loss gratis the taxpayer, then that’s a subsidy of infrastructure. Of course such a subsidy may be justified, but it’s up to advocates of such a subsidy to provide some very good reasons for the subsidy.
Should infrastructure bonds be QE’d?
Having admitted that government bonds designed to fund infrastructure may be justified, does that mean that having the central bank print new base money and buy back such bonds with a view to imparting stimulus is a good idea?
Well the trouble there is that if it makes sense to fund infrastructure and perhaps other public investments via bonds, it clearly does not make sense to then QE the bonds, because that amounts to funding those investments via new money.
That is, the better course of action would seem to be a more conventional form of stimulus, e.g. simply create more base money and spend it, and/or cut taxes.
Another problem with infrastructure bonds.
The economically untutored think that when government borrows to fund spending, taxpayers who would otherwise have had to fund the spending are excused that sacrifice, and those who lend to government make a sacrifice instead.
The reality is more likely to be that those who lend to government make no sacrifice at all. After all, if you have cash to spare, and find you can lend to government at interest, you’re likely to regard yourself as better off, and thus INCREASE your weekly spending, not cut it. That means the central bank will sniff inflation, assuming the economy is already at capacity, and will thus raise interest rates. That in turn means mortgagors and firms which have borrowed pay more interest, which comes to the same thing as raising tax on middle and lower income / wealth groups: hardly the object of the exercise! In fact that all comes to much the same as a tax increase!
It could be argued against the latter point that only a small proportion of government debt nowadays is bought by individuals as opposed to institutions. However, institutions are owned by individuals, thus the ultimate holders of government debt are still individuals.
Thus if to illustrate, you contribute to a private pension scheme, and the scheme uses spare cash to buy government debt, that makes you better off in much the same way is if you owned that government debt personally. Your consequent increased income / wealth may induce you to cut your contribution to the scheme and spend more on consumer goods. Thus the net effect is arguably much the same as where you personally own government debt.
Plus if we’re going to consider this question on an “all else equal” basis, we need to assume that after tax income inequalities remain constant: i.e. we need to assume government will rectify the above increased inequality by raising tax on the better off and cutting tax on the poor (something that government is in practice quite likely to do).
Plus government will presumably want to make good that increased inequality by raising tax on the rich and cutting tax on the poor. Net effect; much the same as funding the original government spending via tax in the first place!!
Conclusion.
Funding infrastructure via government debt is pretty much a waste of time. Infrastructure might as well be funded via tax. All of which leaves us with the conclusion reached several paragraphs above, namely “…the best or optimum amount of money is whatever brings about full employment without needing to raise interest on state liabilities above zero.”
However, if government bonds are in fact used to fund infrastructure, those bonds are clearly very different from bonds issued just to damp inflation. Thus the two types of bond ought to kept separate.
So the final conclusion is that infrastructure bonds apart, interest on government and central bank liabilities ought to be kept at or near zero for as much of the time as possible.
Free banking, as the name implies, is a system where banks do pretty much what they want, plus there’s no deposit insurance or bailouts for banks which fail.
But at the same time (at least under some versions of free banking) people are free to stock up with central bank issued notes ( $ bills, £ notes, etc). Moreover, in the UK (and doubtless some other countries) people are free to deposit money at state run savings banks which invest only in base money and government debt (National Savings and Investments (NSI) in the case of the UK). Thus under the above versions of free banking, people would be free to have accounts at NSI type savings banks presumably.
And stocking up on central bank bills / notes plus depositing at savings banks like NSI come to the same thing as the safe accounts offered under full reserve, where depositors’ money must be matched by base money at the central bank.
Now deposits at a free bank come to the same thing as the “Investment Accounts” advocated by Positive Money and similar accounts proposed by other advocates of full reserve banking. Those are accounts where deposited money is loaned on or invested, and depositors carry the risk, i.e. take a hit if silly loans or investments are made. For a list of advocates of full reserve, see article entitled “Some of the economists who oppose the right of private banks to create money out of thin air”.
Under stricter versions of free banking, there is no role for a central bank. However it is very hard to see why those who want complete safety for their money (or at least something as near complete safety as is possible in this world) should not have it.
Moreover, having a totally safe way of storing and transferring money strikes me as a basic human right.
It could be argued that a central bank’s ability to provide complete safety derives from the right of the central bank’s owner, i.e. government, to extract limitless amounts of money by force from taxpayers to make good any money lost by the central bank. However, there’s a weakness in that argument: under full reserve, the central bank (unlike commercial banks) does not take any risks with depositor’s money: that is, such money is not loaned on or invested.
Moreover, if there are in fact any risks involved in accounts at the central bank, it would be perfectly legitimate to charge depositors an insurance premium in respect of those risks.
Conclusion The best form of free banking comes to the same thing as full reserve banking, thus advocates of free banking should give up and admit that full reserve banking has free banking in check mate.
SW-L recently published an article entitled “Monetary and fiscal cooperation: the case for a state dependent assignment.”
He seems to have moved a bit closer to the MMT and Positive Money (PM) positions. Assuming I’ve got the SW-L, MMT and PM positions right (rather a big assumption perhaps), the three positions are thus.
SW-L says “use interest rate cuts to impart stimulus if rates are well above zero, and if they are near zero, then go for monetary / fiscal coordination, i.e. just create more base money and spend it, and/or cut taxes.” (Incidentally Keynes gave the thumbs up to the “print and spend” idea in the early 1930s)
MMT says, “Interest rates should ideally never rise above zero (i.e. the rate paid on government and central bank liabilities should not rise above zero)”. Milton Friedman thought likewise. However while MMTers back monetary / fiscal coordination, they are unclear on exactly who decides how much stimulus to impart.
PM’s position is the same as MMT, except that PM is very clear on who takes the above decision. PM says some independent committee of economists should decide the size of the deficit (maybe a central bank committee) while strictly political decisions, like what proportion of GDP is allocated to public spending stays with politicians and the electorate. (Incidentally Ben Bernanke said recently that he thought that sort of PM arrangement would be OK. See his passage starting “A possible arrangement…” here.)
I agree with the MMT / Friedman idea that interest rates on central bank and government liabilities should remain at zero, except in emergencies. Reason is that any rate above zero means that tax has to be raised on the population as a whole to fund interest paid to people who have nothing better to do with large amounts of cash than deposit it at the central bank.
SW-L’s flawed criticism of MMT.
I don’t agree with one criticism SW-L makes of MMT. That’s in this para:
“The first is MMT. This in effect reverses the conventional assignment, with fiscal policy doing the demand and inflation stabilisation in all states of the world. If that happens debt looks after itself. I am not in favour of MMT, because I think independent central banks have been very successful at controlling inflation, and a government using fiscal policy would be less successful.”
The flaw there is that MMT does not actually advocate what might be called “conventional fiscal policy” (i.e. government borrows $X, spends it and gives $X of bonds to lenders). That is, MMT (as intimated above) advocates fiscal / monetary coordination. Indeed, Warren Mosler in the second last para of a Huffington article entitled “Proposals for the Banking System” advocates the abolition of government debt.
SW-L versus PM.
Re the apparent difference between SW-L and PM namely that SW-L says the central bank should “advise” on how big the deficit should be whereas PM says the central bank should determine how big it is, there is not actually much difference there.
Reason is that as SW-L says, and rightly, ultimate power rests with politicians, thus politicians can always ignore advice or “determination” coming from the central bank. However, the advice of the central bank (or other committee of economists) should certainly be made public. The electorate have an absolute right to know if government has ignored expert advice.
In August 2018, Charles Leadbeater, visiting professor at the UCLIIPP published an article entitled “Movements with missions make markets.”
Incidentally, UCLIIPP drew attention on Twitter to this article about eighteen months after the article was written. One reason for that, I’d guess, is that no one seems to pay much attention to UCLIIPP. Certainly it’s rare for anyone to respond to their tweets and there are no comments after Leadbeater’s article, even eighteen months after it was published. UCLIIPP personnel seem to be desperate to draw attention to themselves and justify their salaries. Personally I give my own blog articles just one mention on Twitter: the day they are published. And that’s it, unless an article is of specific relevance to something I’m dealing with months or years later.
Anyway, Leadbeater’s article basically claims that the contraceptive pill, and the success thereof is an example of the so called “mission” idea pushed by UCLIIPP, and which thus supports the latter idea.
A “mission”, as the word is used by UCLIIPP authors, is a project which has no immediate economic benefits, but which does involve technological spin-offs, i.e. solving technical problems, which at a later date will probably bring economic benefits. The example cited over and over again in UCLIIP literature (including in Leadbeater’s article) is Kennedy’s Moon shot. The latter was clearly astronomically expensive and there were almost no obvious economic benefits: the main motive was to get one up on the Russians.
Another example of UCLIIPP literature which explains what is meant by a mission is an article of theirs entitled "Missions: a beginner's guide."
Unfortunately the contraceptive pill is a hundred miles from being an example of a mission. The motive of the pharmaceutical companies in developing the contraceptive pill was (gasps of amazement) to make money: to make a profit! I.e. the pill was seen from the outset as something which, unlike Kennedy’s Moon shot, had an immediate economic benefit. Or at least it had an economic benefit on the assumption that anything which makes profits for corporations involves an economic benefit, an assumption which of course can be criticised.
But that isn't the only example of UCLIIPP authors citing projects which would happen anyway (i.e. without any help from UCLIIPP) as an example is their “mission” idea. Another example is the Green New Deal: that is, UCLIIPP authors try to portray the GND as an example of a “mission”.
Well the first flaw in that claim by the UCLIIPP is that scientists and others were aware of the problems stemming from CO2 induced global warming decades before the UCLIIPP introduced its “mission” idea. That is, we would be going ahead with the GND in some shape or form even if the UCLIIPP had never started wittering on about “missions”.
Second, the GND cannot be classified as a project, like Kennedy’s Moon shot, which has no immediate economic benefits. The GND, if it is successful, will stop numerous coastal cities being flooded, plus it will stop parts of Africa becoming so hot that they are uninhabitable. Those two strike me as pretty clear economic benefits!
Near the start of her book “The Value of Everything” she tries to define value. In a passage which is highlighted and which is thus presumably supposed to be of central significance, she says:
“By ‘value creation’ I mean the ways in which different types of resources (human, physical and intangible) are established and interact to produce new goods and services.”
So she isn't using the word “value” in the normal way, i.e. to refer to the worth of goods and services (i.e. what the customer is prepared to pay for goods and services). Instead, “value” refers to a process bringing about innovations and inventions.
But the above sentence is immediately followed by this sentence (also highlighted): “By ‘value extraction’ I mean activities focused on moving around existing resources and outputs, and gaining disproportionately from the ensuing trade.”
But that second sentence uses the word “value” in something much nearer the conventional meaning of the word. I.e. it refers to coming by money in an unacceptable way: a monopoly or cartel which exploits its monopoly or cartel powers to make excessive profits is presumably an example.
If you’re starting to get the impression that her book is a car crash, then be warned: it gets worse.
Shortly after the above highlighted passage, there is another highlighted passage, as follows:
“I use ‘value’ in terms of the ‘process’ by which wealth is created – it is a flow. This flow of course results in actual things, whether tangible (a loaf of bread) or intangible (new knowledge). ‘Wealth’ instead is regarded as a cumulative stock of the value already created.”
Now wait a moment. In that second highlighted passage, she appears to be saying that “value” is the wealth production process (e.g. making steel, growing food, etc). Well that’s a lot different to the above “innovation and invention” meaning of the word referred to above!!
A page or two later she says, “If bankers, estate agents and bookmakers claim to create value rather than extract it, mainstream economics offers no basis on which to challenge them, even though the public might view their claims with scepticism. Who can gainsay Lloyd Blankfein when he declares that Goldman Sachs employees are among the most productive in the world? Or when pharmaceutical companies argue that the exorbitantly high price of one of their drugs is due to the value it produces?”
Well clearly having a go at bankers and estate agents will go down well with the more simple minded section of the political left. But on the more serious question as to whether “mainstream economics” is in capable of challenging the claim by bankers, estate agents and others that their activities are worthless, that is just plain nonsense.
Introductory economics text books make it perfectly clear that while the free market price of something is one way of valuing stuff, that method of valuation is clearly a long way from being flawless. The example often given in economics text books is the “nurse and prostitute” example. Some members of the latter profession doubtless get paid more than the former, but it’s blindingly obvious that claiming prostitutes are worth more than nurses is a very dubious claim.
To summarise so far, the opening pages of Mazzucato’s book are nonsense, so I can’t be bothered making much of an effort to get to grips with the rest of the book. But she has nothing to worry about on that score: in economics and some other subjects, as long as you can spew out a string of important, technical sounding terms, you’ll go far. And if you press lefties’ emotional pleasure buttons, which Mazzucato does very well, you’ll go even further.