Friday, 24 February 2017

The fact that monetary policy increases inequality is not an argument against monetary policy.

The above is a popular myth which Positive Money seems to have fallen for. See their tweet below. Indeed the myth can be put in more general terms: the fact that ANY policy or policy change increases inequality is not an argument against that policy or policy change.

Reason is that (as explained by the Italian economist and philosopher, Pareto) the only really important question is whether a policy increases GDP (within environment constraints of course). If it does, and specific groups are adversely affected, that’s not a problem. All you have to do is tax those who benefit from the change, and pass the proceeds on to the losers, as Pareto explained. As a result it is possible to arrange for everyone to be better off. Nothing wrong with that, is there?

In the particular case of QE, which Pos Money particularly objects to, there is actually an argument for taking QE much further: that is, there is an argument for turning the entire national debt into base money. Milton Friedman and Warren Mosler argued for that policy.

If Friedman and Mosler are right, and GDP is actually increased by that move, then the fact that QE increases inequalities is irrelevant for the above reasons.

Having said that, I still support Pos Money because I think they are right on a very fundamental issue: the full versus fractional reserve banking argument.


  1. Your last sentence is mistaken. Positive Money DOES NOT advocate full reserve banking. What PM proposes is the complete ABOLITION and PROHIBITION of deposit taking by private sector banks.
    PM proposes that existing bank deposits be taken over by the government/Central Bank. The role of Private sector banks would be reduced to become mere agents of the CB: See the executive summary of:
    PM’s proposal is similar to Tobin’s option (a):
    Deposits and the payments system would obviously be secure in the hands of the CB - no need for deposit insurance, lender-of-last-resort facilities or bailouts.However the same benefits would be achieved with Full Reserve banking without abolishing private deposit-taking banks. Deposits would remain the liabilities of private deposit-taking banks.
    Full Reserve banking is briefly described by Tobin as his option (b) in the above reference.
    However, the best, clearest and simplest Full Reserve banking proposal was the original March 1933 Chicago Plan Memorandum:
    (7) That banking legislation be enacted providing for incorporation of a new kind of institution.
    (a) which alone shall be entitled to accept funds subject to check or to payment on demand;
    (b) which shall be required to maintain reserves of 100 % in lawful money and/or deposits with the Reserve Banks;
    (c) which shall serve exclusively as institutions for deposits and transfer of funds;
    The primary objective of these proposals for permanent reform is that of effecting a complete separation, between different classes of corporations, of the Deposit and the Lending functions of existing commercial banks. The now typical commercial bank would, in effect, be broken up into at least two distinct corporations, say, a Deposit-Bank and a Lending Company. The Deposit-Bank would serve exclusively as a depositary and agency for transfer of funds (checking); it would be prohibited from lending or investing depositors' funds; it would derive earnings solely from service-charges. The Lending Company, on the other hand, would engage in the business of short-term lending, discounting, and acceptance; it would be prohibited from accepting demand-deposits, and even from providing their short-term creditors, if any, with any effective substitute for checking facilities; thus, it, like other corporations, would be in position to lend and invest only the funds invested by its stockholders (and, perhaps, bondholders).
    Unfortunately many subsequent proposals for banking reforms have been mixed up with unnecessary, "cranky" and monetarist ideas, e.g. Fisher, Friedman and other Chicago ideas for controlling the money supply, Kotlikoff's “Federal Financial Authority”, and more recently PM's proposals for CB takeover of bank deposits and a “Money Creation Committee”.

    1. Well there's enough detail there to keep me occupied all weekend! Thanks for that. I won't give an immediate response, but will certainly do so in due course.

    2. First, how does one define full reserve? There are no online dictionaries that give a definition. But Wiki says “banks would be required to keep the full amount of each depositor's funds in cash, ready for immediate withdrawal on demand. Funds deposited by customers in demand deposit accounts (such as checking accounts) would not be loaned out by the bank…”.

      That definition is OK by me and on that definition, Positive Money do advocate full reserve. The summary of their work “Sovereign Money” says “In a sovereign money system, payments would be made via transfers between Transaction Accounts which would hold risk-free central bank money..”. That comes to the same thing as the Wiki definition, except that PM advocate the totally safe accounts are held under the same roof as what they call “investment” accounts, whereas others (e.g. Friedman) say the two types of account should be under separate roofs.

      Tobin’s “b” plan comes to the same thing except that he suggests (as does Friedman) that “safe” money could be put into government debt.

      You suggest that “PM proposes is the complete ABOLITION and PROHIBITION of deposit taking by private sector banks”. That’s news to me. Where do they say that? “Sovereign Money” actually says “Funds in Transaction Accounts would be held in full at the central bank (recorded as liabilities of the central bank), but the payment services connected to these accounts would be administered by private sector payment institutions..”. In other words when a private bank accepts safe deposit money, it passes that on sharpish to the central bank.

      Re the Chicago Plan Memorandum and their “new kind of institution”, I can’t see the difference between setting up entirely new “kinds of institutions” and simply altering the law that governs exising banks, which is what PM proposes.

      The Chicago lot want separate institutions (like Friedman and Kotlikoff), whereas PM go for different types of account at the same institution. But the basic principles are the same.

      Re your last para, you say “Unfortunately many subsequent proposals for banking reforms have been mixed up with unnecessary, "cranky" and monetarist ideas, e.g. ……. a “Money Creation Committee”.

      I agree that the MCC idea is not necessarily part and parcel of full reserve. Far as I remember, neither Friedman, Kotlikoff nor Tobin advocate that. However, I don’t agree with the “crank” description. The MCC system simply gives a committee of independent economists the last word on the size of a stimulus package. But an “independent committee of economists” already has that power: the BoE MPC!

  2. Actually I don't see much difference between a tax redistribution of wealth as you propose and what PM are saying.
    PM would prefer to see a QE for the people not financial markets...i,e some sort of citizens dividend or even a tax cut maybe to help the less better off.In a nutshell they want the Gov to pump QE direct into he economy to help the lower levels of society,which is exactly what you are saying should be done to correct inequality.

    This is would of course be a combination of monetary and fiscal policy which PM advocates,using them in combination.

    All PM is saying on that tweet is that current monetary policy(central bank QE)is not working,since it is now just increasing the value of shares and property....all owned by the richer percentiles.The rich benefit more than the poor

    1. I agree PM's proposal would or could be the same as mine so far as income distribution goes. However my point is that if Friedman and Mosler are right to say GDP would be raised by QEing the ENTIRE national debt (and obviously that's a big "if")then my proposal captures that GDP increase, whereas PM's does not.

  3. You are right PM do not advocate printing money to pay off the entire National Debt.They advocate printing money as a much smaller amount and targetting it in some "fair" manner.This would however break the mould on QE thinking.Once it has been breached maybe the idea of doing it on a larger scale could begin to to be realised.One everyone realised it hadn't caused rampant inflation and the sky had not fallen in.
    The BoE owns about 30% of the UK national debt as it is, so why not and that is part of the state is it not?We more or less are doing that now


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