Thursday, 12 May 2011

MMT mentioned in the FT.

Am I the first to plug Modern Monetary Theory in the Financial Times? A letter from me in the Financial Times on 11th May said:

According to Martin Wolf, Larry Summers (Obama’s former chief economic adviser) is not sure whether an “expansionary fiscal contraction” is expansionary. (“Why British fiscal policy is a huge gamble”, April 29). But it is worse than that: the economics profession is not even sure how expansionary an expansionary fiscal policy is, because of crowding out. This would be funny if the consequence was not millions of home repossessions worldwide and wrecked lives.

I suggest the solution to this farce is to abandon the distinction between fiscal and monetary policy, as advocated by Modern Monetary Theory. Under this regime, government simply creates new money and spends it (and/or reduces taxes) in a recession. Conversely, when inflation looms, government reins in money via extra tax (and/or reduced public spending) and “unprints” it, or extinguishes it. As to government debt, that becomes near irrelevant: it can gradually be whittled down to near zero and be left at that level.

This letter contains some ideas with which some MMTers will not be familiar, so I’ll explain, starting with the point about “abandoning the distinction between monetary and fiscal policy”.

This idea is actually implicit in Lerner’s “money pump” idea. That is, given inadequate demand, Lerner advocated that the government / central bank machine should simply create new money and spend it (and/or reduce taxes and leave more money in consumers’ pockets). This policy is “fiscal” in that it involves reduced taxes and/or increased public spending. But it is also monetary, in that it involves increasing the monetary base.

That ploy on its own involves merging monetary and fiscal policy. But that of itself is not to say that specific or individual monetary or fiscal policies might not, in addition to the above ploy, be justified.

This is where I part company with Lerner. Lerner certainly thought that one monetary policy on its own might be justified, namely adjusting interest rates*. I argued against this here.

I also argued here that ANY monetary or fiscal tool on its own is bound to be distortionary. The basic reason is that the ideal form of stimulus (or “anti-stimulus”) should affect every sector of the economy equally. At least there is no reason on the face of it to assume that given economic expansion (or contraction), one sector (or one type of labour) will be affected more than any other sector (or type of labour). Thus any individual fiscal or monetary tool is bound to be distortionary: it will presumably misallocate resources.

For example an interest rate change only affects entities that are significantly reliant on borrowed money. In contrast, entities that are basically reliant on equity finance are not much affected. Now given some stimulus, there is no reason for one lot getting preferential treatment.

And finally, as to government debt being irrelevant, I am rather stepping over the mark in saying this is part of MMT. However, Warren Mosler, one of the leading lights of MMT, argued that national debts can be dispensed with in this Huffington article (see second last paragraph). So that’s my excuse for saying a zero debt regime is part of MMT.

* See p.312 here – starting at headin: “Taxing and spending…..”


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