Wednesday, 17 July 2013
QE happened because the elite doesn’t understand Keynes or Modern Monetary Theory.
Cutting interest rates in a recession is daft enough: if it works, it boosts investment, which means it distorts economic activity towards the production of investment goods, a distortion that has to be unwound come the recovery. But QE takes the process even further, which amounts to yet bigger distortions (stuffing the pockets of the rich being just one of the distortions).
So why was QE implemented?
The explanation is simple: the elite suffers from debt and deficit phobia, so strict limits are put on the size of the deficit. In contrast, QE is a form of spending that does not count as deficit (for reasons that are far from entirely logical).
So that keeps the elite happy: a form of spending that doesn’t count as deficit? Whoopee.
The restraints put on the size of the deficit in the US are obvious enough: Congress over the last few years has refused to net spend enough to bring a rapid escape from the recession. But the same applies in the UK: once you’ve listened to a few speeches by the UK finance minister (and for that matter speeches by Labour Party leaders) it’s obvious they have a deficit complex as bad as Congress in the US.
Modern Monetary Theory.
So is MMT right to say the deficit doesn’t matter? Or (same thing) was Keynes right to say, “Look after unemployment, and the budget looks after itself”?
Let’s run thru the arguments - or should I say let’s run thru the never ending litany of mistakes we get from the IMF, OECD, Rogoff, Reinhart, leading Republicans, Democrats and in the UK, Labour and Tory politicians.
And let’s suppose the deficit is simply made big enough to maximise employment (in as far as inflation allows) and regardless of the size of the deficit.
1. The first stock response to the above idea is that the result will be a ballooning national debt. Well the answer to that is that a deficit can accumulate as EITHER extra debt OR AS an expanded monetary base. (Indeed, as a result of QE the deficit actually has accumulated very largely as an expanded monetary base).
So the idea that a deficit necessarily expands the debt is wrong.
But let’s assume first that the deficit accumulates as extra monetary base. Now comes stock response No2….
2. “Inflation will go thru the roof”.
Answer: not if the economy was in recession and there was spare capacity.
3. “But that extra money could EVENTUALLY prove inflationary”.
Answer: that’s a problem easily dealt with by raising taxes. That effectively confiscates money from the private sector and reduces demand and inflation. (Incidentally, MMTers often claim the purpose of tax is to control inflation, not to raise funds for government. And as will be clear from the argument here, that MMT point has some validity.)
Now let’s assume the deficit accumulates as extra debt. Stock and entirely predictable response No.4….
4. “If the national debt gets too big and interest rates rise, government then has to fork out large sums by way of interest”
Answer: if interest rates trebled tomorrow (to take an extreme scenario) there’d be no IMMEDIATE NEED for government to pay so much as one additional penny by way of interest. That’s because the rate of interest on government debt is fixed at the time such debt is issued.
In contrast, there’d be a need to pay extra interest on debt reaching maturity – debt that needed to be renewed or “rolled over”. But if a government finds creditors charge an exorbitant rate of interest, why borrow? Why not just print money (as suggested by Keynes)?
As to stock and entirely predictable response “that would be inflationary”, see “2” above.
5. “That extra tax is a burden on households and the private sector generally: i.e. the bill for that money printing has to be paid eventually”.
Answer: that extra tax does not make anyone worse off – all it does (to repeat) is to control inflation. I.e. the extra tax does not reduce anyone’s real incomes. In fact (and ironically) the extra tax makes everyone BETTER OFF in that we’re better off with inflation under control and with it not under control.
The extra tax does however reduce everyone’s stock of money. But money is not a REAL asset: it is no more real wealth than the Monopoly money handed out at the start of a game of Monopoly.
Money is certainly an asset AS VIEWED BY an individual holding it. But from the point of view of the country as a whole, money is not an asset: it’s just numbers in computers or bits of paper.
6. “We can’t run a deficit for ever: i.e. the budget must balance eventually”.
Answer: the historical fact is that over the very long term, no government (UK or other) has balanced its budget. And the reason is simple. Given inflation of 2% or whatever, the REAL VALUE of the national debt and monetary base will fall. And assuming those two are going to stay roughly constant relative to GDP in the very long term (which they do), then they’ll have to be topped up. And the only way of topping them up is via a deficit!!!!
Deficit phobia is irrational. Ergo there is no reason to implement stimulus via QE rather than via a deficit.
And finally, it would be unfair to Osborne to suggest he is any more clueless than other members of the elite (on the political right or left). Dean Baker (who is director of the Centre for Economic Policy Research in Washington DC) once said, “In elite Washington circles, ignorance is a credential”. I agree.