Saturday, 30 March 2019

It’s a herculean task getting simple new ideas into the heads of the self-styled “intelligentsia”.

For years, Positive Money has been trying to get it into the heads of UK politicians that the bulk of the money supply is created by commercial banks rather than central banks. PM has had limited success: the proportion of members of parliament who understand that point has risen from a miserable 10% or so around eight years ago, to a miserable 30% now I believe (though I’m not an expert on the exact figures).

However, in this article I want to concentrate on an equally simple point which is equally difficult to get across. This is an idea first set out, far as I know, by Positive Money. PM have repeatedly set out the idea plus I’ve repeatedly set it out on this blog over the years. But looks like I need to set it out again (and again, and again, and again). Some of the people who don’t understand the idea are listed at the end below. Some are economics professors, who you might think would be open to new ideas.

Unfortunately that’s far from true: people at the top of professions often seem to be under the illusion that they are omniscient: quite often they’re the opposite, i.e. pig ignorant. 

I’ll use short words and sentences and simple language as far as possible so as to make it easy to understand. Here goes.

There is a problem involved in deciding exactly who decides the amount of stimulus the economy gets. The problem is this.

Stimulus can come in the form of extra public spending and/or tax cuts (funded either by borrowing or by new money). Interest rate cuts are another option of course, but I’m concerned with the first option here.

The problem is that while politicians and the electorate obviously have the right to decide clearly political questions, like what proportion of GDP is allocated to public spending and how that is split as between education, health, etc, politicians are almost completely clueless when it comes to technical economic points, like measuring inflation and deciding how big the deficit should be (i.e. how much extra public spending / tax cuts there should be) in order to deal with a given excess amount of unemployment.

Thus if for example some sort of fiscal responsibility committee (made up of economists) or a committee at the central bank decide on the size of the deficit, it might look like they are necessarily also making or at least influencing above mentioned political decisions.

Well there is actually a simple way round that problem explained long ago by Positive Money. That is, it is perfectly possible to have a committee of economists of the sort mentioned above decide on the size of the deficit, while politicians retain the right to decide the above mentioned strictly political decisions. The way to do it is as  follows, and by the way I’ll assume just to keep things simple that stimulus is implemented via what is sometimes called “overt money creation” (OMC). OMC simply consists of the authorities creating new money (base money to be exact) and spending it (and/or cutting taxes), and idea recently given the thumbs up by Ben Bernanke and the deputy governor of Japan’s central bank. 

The committee decides how much stimulus there shall be (expressed in terms of pounds / dollars etc, or in terms of a percentage of GDP), while politicians decide the above mentioned strictly political points.

To illustrate, the committee could announce for example “There needs to be stimulus to the tune of 3% of GDP in the next six months, and here’s the money.” Meanwhile politicians are free to pitch public spending at say 30% of GDP and taxes at 27% (leaving a deficit of 3% which is funded by the latter new money). Alternatively politicians can make that 35% and 32%, 40% and 37% or whatever they want.

Do you get it now? Under that system, politicians have complete control over the proportion of GDP allocated to public spending, while those who are technically qualified to decide how much stimulus there should be make that decision.

Moreover, that system is not actually much different to the existing system under which politicians can pitch the fiscal deficit at whatever amount they like, but the central bank (assuming it is independent) has the power to adjust what it sees as a deficient or excess amount of stimulus stemming from that fiscal deficit via interest rate adjustments.

As for economists and others who seem unable to grasp the idea that having a committee  of economists decide the size of the deficit does not need to involve that committee in riding roughshod over the democratic / political rights of politicians and the electorate, here is a sample. Incidentally that should not be taken to imply that I think the economists and others below do not do good work in some respects. 

Economists who don’t get the above points.

Bill Mitchell. See his first para, sentence starting “For the record I am deeply opposed…” in his article entitled “Effectiveness and primacy of fiscal policy – Part 1.”

Incidentally, I actually tried to explain the above solution in a comment after Bill’s article, but he censored it. As you doubtless know, many academics nowadays are scared stiff of free speech and open debate.

John Cochrane. See his article entitled “Central Bank Independence”, passage starting,  “We all know how to stoke inflation…”. (I actually tried to explain the above Positive Money point in the comments after Cochrane’s article. Cochrane seems to be more open to free speech than Mitchell.!!).

Ann Pettifor. See article entitled “Why I disagree with Positive Money and Martin Wolf.”

Malcolm Sawyer (former economics prof at Leeds University, UK). See his paper “Full Reserve Banking: More ‘Cranks’ Than‘Brave Heretics’” in the Cambridge Journal of Economics – passages starting “The central bank imposes a target growth….” (section 5.1)  and passage starting “…an FRB will nullify…” in his “Concluding Remarks”.

Thursday, 28 March 2019

Permanent zero interest rates.

MMTers tend to back the permanent zero interest rate idea. E.g. Warren Mosler (and Matthew Forstater) wrote a paper entitled “The Natural Rate of Interest is Zero.” Milton Friedman also said he couldn’t see the point of interest yielding government debt (see his para starting “Under the proposal…”.  Plus I set out my ideas on this subject here.  

As I explained in my above article, the basic argument against letting interest on state liabilities rise above zero is that full employment can perfectly well be achieved without any such interest rate rise. That is, to get the private sector to spend at a rate that brings full employment, all we need do is issue the private sector with enough base money to spend at the rate that brings full employment. Of course that’s easier said than done, but at least the latter is a simple and powerful theoretical point.

That is, there is no point and no need to issue more than the above amount of base money: if more is issued, then central banks / governments will have to offer interest on that money with a view to inducing the private sector not to spend away what it regards an excess stock of base money. That is, taxpayers will have to be robbed so as to fund the interest, and those who hoard base money will be the lucky recipients of that money. The logic in doing that, to put it politely, is not clear.

Negative interest rates.

The above argument for a permanent or at least more or less permanent zero rate does not however deal with the possibility that negative rates are desirable. So let’s think about that, and we’ll start with an ultra-simple hypothetical economy where the only form of money is base money (notes and coin plus perhaps accounts held at the central bank).

If an inadequate amount of base money is issued, demand will be deficient. That means the central bank will cut interest rates and may try to implement negative rates. But negative rates involve charging everyone and every firm in proportion to their stock of base money: the administration costs of doing that are significant.

Far cheaper, as far as real costs go, is simply to issue the private sector (to repeat) with whatever amount of base money induces it to spend at a rate that brings full employment, and at a zero rate of interest. Creating base money costs nothing in real terms, as Milton Friedman pointed out.


Commercial banks.

Of course in the real world, fortunately or unfortunately, it’s not just central banks that issue money: commercial banks can do so as well. But that doesn’t make much difference to the above argument. To illustrate, if the amount of money commercial banks can issue is related directly to their stock of base money (i.e. so called “reserves”), then commercial bank issued money replaces some central bank issued money. Otherwise the argument is much the same.

And in fact the amount of money that commercial banks could issue in many countries before the 2007 crisis was actually related to each bank’s stock of reserves. Thus the above simple hypothetical model is far from being unrealistic.



The argument for a more or less permanent zero interest rate is not weakened by the possibility that negative rates are desirable. If anything, the argument for a permanent zero rate is strengthened.  

Tuesday, 26 March 2019

MMT says the debt doesn’t matter because we can always print money and buy it back?

Numerous journalists who have suddenly become experts on MMT since Occasion-Cortez semi-endorsed it have claimed that MMT consists essentially of the claim in the above title.

Well now the idea that government can borrow and spend without limit with the central bank then printing limitless amounts of money to buy back such debt is so obviously absurd that that’s just more evidence that the above journalists are clueless.

MMT does however have something to say on about the debt and money printing which is at odds with the conventional wisdom.

MMTers are a varied bunch of people who spend much of their time disagreeing with each other. But the difference between the conventional take on the debt and the MMT take is (I think) approximately as follows.

In the eyes of what might be called the “ultra conventional supporters of the conventional wisdom” (e.g. Kenneth Rogoff, Carmen Reinhart, Martin Feldstein, etc) the debt / GDP ratio is important.

MMT’s answer to that is that the size of the debt is irrelevant as long as interest on the debt is low. Reason is that low interest yielding debt comes to much the same thing as money (base money to be exact), as pointed out by Martin Wolf. In other words, if the private sector wants to hold a larger than normal amount of money, what of it? Where’s the problem?

Moreover, if government and/or central bank want to print money and buy back low interest yielding debt, or some of it, then again: where’s the problem? That’s exactly what several central banks have done, and big time, over the last five years or so under the guise of QE. As you may have noticed, the sky has not fallen in.

Several establishment economists claimed QE would cause hyperinflation. MMTers said it would not. MMTers were right.

In contrast to low interest yielding debt, there is high interest yielding debt, though of course the dividing line between the two is blurred. Printing money and buying high interest debt back is a different kettle of fish.

Given what a central banks sees as excess demand and inflation, CBs normally raise interest rates by mopping up excess amounts of base money in private hands by selling government debt, the effect of that being to raise interest rates. Plus the private sector is dissuaded from trying to spend away what it sees as an excess stock of base money by being offered a higher rate of interest on that money.

Thus if that process is reversed, i.e. money is printed and some of the debt is bought back, the private sector will than have what it sees as an excess stock of money. Demand and inflation may then become excessive.

However, MMTers tend to claim that interest on the debt should never be allowed to rise significantly above zero ever. E.g. the founder of MMT, Warren Mosler published a paper entitled “The Natural Rate of Interest is Zero”.  And my own attempt to argue the same point is in an article entitled “The Arguments for a Permanent Zero Interest Rate.”

One of the basic reasons for saying interest on the debt should never  rise much above zero was actually alluded to above. That is, there is clearly merit in supplying the private sector with whatever amount of base money induces it to spend at a rate that brings full employment. As for supplying MORE THAN the latter amount, with the result that government and CB then have to artificially raise interest rates so as to dissuade the private sector from trying to spend away its excess stock of money, that is clearly senseless. The effect is that everyone with a mortgage has to pay an artificially high rate of interest, while those with a desire to hoard money manage to earn an artificially high rate of interest on their money.

The benefits of the latter scenario are, to put it politely, not entirely clear. Or to put it more bluntly, the latter scenario is barmy.

Monday, 25 March 2019

“Inclusive growth”: a near meaningless phrase.

I’ve discovered why economics think tanks and similar repeat the phrase “inclusive growth” like demented parrots. It’s because the Joseph Rowntree Foundation (JRF), which hands out much of the funding for think tanks in the UK, is keen on “inclusive growth”. So think tanks, even if they aren’t too good at thinking, do at least know which side their bread is buttered.

If you want an example of a senior economics think tank employee who can’t think, there’s a so called “chief executive” of a leading London based think tank who has never written an article or paper on economics (far as I can see from a Google search). Plus her tweets make Hello Magazine look intellectually stimulating. But I won’t mention names: it’s up to you do some rooting around and see who I’m talking about…..:-)

As for “inclusive growth” here are just three examples which illustrate the popularity of the phrase. But do a bit of Googling and you’ll find plenty more. 

Anyway, according to the subheading of a JRF article entitled “What is inclusive growth and why does it matter?”, inclusive growth consists of  “Ensuring economic growth benefits everyone….”.

Well I’d guess that about 95% of the population, including most right wing Tories and Republicans, agree that we need some sort of social security system, plus relatively high taxes on the rich so as to reduce the inequalities that would exist in a totally unregulated free market. So the latter “benefits everyone” idea is hardly novel.

Next, the opening sentence of the first of five bullet points in the JRF article says, “Poverty is bad for growth – So say the IMF and OECD. This is partly because they weaken the ‘consumption engine’ - the amount of money people have to spend on goods and services in the economy.”

Well actually that just ain’t true: that is, given a relatively high level of inequality, any lack of demand (and hence growth) coming from the poor can always be compensated for by extra spending by the rich!

The rest of that first “bullet point point” then lists the disadvantages of high levels of inequality, for example the fact that such inequality tends to reduce the extent to which society as a whole can make use of the talents of the poor.

Well as already pointed out, nearly everyone accepts that there should be limits to the extent of inequalities.

The second bullet point starts with “The fiscal costs of poverty are huge” (in bold). Well those costs are not actually real costs to the country as a whole in that they simply consist of taking money away from the better off the donating it to the less well off.

That is, clearly there are advantages in raising the skills of the less well-off and in supplying them with the capital equipment needed to make use of those skills: that means the latter transfers are no longer needed. On the other hand imparting skills involves real costs. So what, in general terms, is the optimum amount spend on training and capital investment? Well I suggest the age old criterion “whatever pays for itself” will do. I.e. the amount spent on education and capital equipment should be whatever brings a commercial return on that investment.

After a bit more inconsequential waffle, the JRF article then quotes the OECD definition of inclusive growth:

“Economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.”

Well that’s simply a repetition of the statement of the obvious I set  out several paragraphs above, namely that everyone agrees there should be limits to the degree of  inequality.

The JRF article then says, “Inclusive growth is a somewhat vague and slippery term being interpreted and adopted by many different interests/organisations.” Er – yes  - you can say that again.

To be more accurate “inclusive growth” is an absolutely “must use” phrase if you’re working for a think tank or similar and want to advertise your social justice warrior credentials and your caring credentials. Plus, bandying the phrase around will probably help attract large amounts of money for your organisation from the JRF. Apart from that, the phrase is pretty much devoid of meaning.

Sunday, 24 March 2019

The money created to do QE could have been spent on green investments?

Paul de Grauwe makes the above claim in an article entitled “Green Money Without Inflation” published by Social Europe. To be more accurate, he claims that as bonds bought by the ECB as part of their QE effort mature, they can be replaced with what he calls “Environmental bonds”, with the relevant money being spent on green investments. See under his heading “ECB Options”.

Well certainly some QE bonds can be replaced with environmental bonds, but it is very debatable as to exactly what proportion can be “replaced”. Reason is this.

The inflationary effect of printing £X of money, spending that money on environmental bonds, with the money  then being spent on solar panels, better home insulation or whatever is much the same as far as  inflation goes as printing money and spending on any other type of public investment. Moreover, there is little difference between that and allocating the money to public current
(as opposed to capital) spending. That is, the money in both cases goes towards hiring labour, purchasing materials etc which are then used to make solar panels, build schools, upgrade the law enforcement system, etc etc.

In contrast, the inflationary effects of conventional QE are much less. Indeed, as de Grauwe himself puts it in reference to conventional QE, “All that money has gone to financial institutions which have done very little with it.”

Conventional QE (certainly in the US and UK) has consisted almost entirely of printing money and buying up government debt. But as Martin Wolf (chief economics commentator at the Financial Times) rightly said, there is little difference between base money and government debt (a point which MMTers have also been making for a long time). That is particularly true in the case of short term low interest yielding government debt. Indeed, base money is in effect zero interest yielding, zero term (to maturity) government debt.

In short, conventional QE is not all that different to giving everyone two £10 notes in exchange for their £20 notes, the inflationary effect of which would be around nothing.

Ergo, and contrary to de Grauwe’s claims, maturing QE bonds cannot be replaced Euro for Euro with environmental bonds. 

Friday, 22 March 2019

Drivel, hogwash and nonsense from Bloomberg on MMT.

With MMT having suddenly become flavour of the month, thanks to Occasio-Cortez’s semi-endorsement of it, every other journalist has overnight become an expert on the subject, despite clearly knowing nothing about it in many cases. Not that that will damage the careers of journalists all that much: after all, the job of a journalist is fill up newspaper column inches with hot air, waffle and clap-trap. For some bizarre reason, newpaper readers pay good money to read this nonsense.

At any rate, the Bloomberg article claims that controlling monopolies and “businesses’ excessive pricing powers” is an important element of MMT’s preferred way of controlling inflation. Well that’s news to me! (Article title: “A beginner’s guide to MMT”).

I’ve backed MMT for about ten years and have read at least a thousand articles and blog posts by MMTers. I don’t remember much stress being put on the monopoly question or “businesses’ pricing powers”, important as those questions are.

As to where the Bloomberg authors get that idea about monopolies and pricing powers from, they are commendably honest there: they got it from a Financial Times article on MMT which itself was not representative of MMT thinking.

This is a classic example of what goes on in the newspaper / periodical industry: one journalist publishes some nonsense, then a more journalists, rather than do any worthwhile research, just repeat what they’ve read by the latter first journalist.

Moreover, it’s pretty obvious that we need to do as much as is feasible to control monopolies and cartels whether we have an MMT regime in place or not. Thus there is a distinct lack of logic in the claim that the control of monopolies and cartels has anything specifically to do with MMT.

Sunday, 10 March 2019

Pathetic criticisms of full reserve by Messers Bentata, Giménez Roche and Janson.

In 2017, Pierre Bentata, Gabriel Roche and Nathalie Janson  (BRJ) authored a paper entitled “Full reserve banking reform proposals: The wrong answer to the relevant question of the control of the money supply.”

The paper is a litany of mistakes and errors, which I will run through.  On page 3, the paper deals (ironically) with an alleged weakness in the EXISTING system. The authors claim that when commercial banks (henceforth just “banks”) lend more, they require more reserves. As the paper puts it, “This increase implies a need for more narrow money as liquidity reserves to cover liquidity leaks from the interbank clearing system. Central banks, independent or not, hardly refuse to provide these reserves against the banks’ government debt holdings precisely because their mandate involve safeguarding banking solvability and sustaining economic growth. This generates a moral hazard situation where deficit-prone governments increasingly issue debt knowing that banks will buy it to back the refinancing of their reserves, which allow in their turn to accommodate a growing demand for credit by increasing the broad money supply.”

There are two errors there.  First, banks cannot just “buy back” government debt if banks are short of reserves (aka base money) because central banks will only accept base money in payment for government debt: i.e. banks cannot use their own home made money to buy back government debt. Governments and central banks just won’t accept the stuff.

Second, central banks do not just supply banks with reserves willy nilly, as BRJ suggest. Central banks DO MAKE reserves available to banks which are short of reserves, BUT AT A PRICE. And it is precisely that price that damps down lending and borrowing when such damping is needed. I.e., and contrary to BRJ’s claims that central banks can “hardly refuse to provide these reserves”, the price charged by central banks for supplying reserves in effect amounts to refusing to supply extra reserves.

The paper then claims (p.4) that full reserve (FR) claims to solve the latter problem by stripping “banks of their broad money creation abilities”. That’s in the para starting “To eliminate both…”.

Well actually, while FR does propose the latter “strip”, it’s not for the outlandish reason dealt with a couple of paras above, namely anything to do with banks  alleged ability to buy back government debt willy nilly.

Cantillon effects.

Next, the paper claims (p.4) that large Cantillon effects would accompany the introduction of FR. As BRJ put it, “First, the transition mechanisms to shift the banking system from the fractional to the full reserve systems would result in massive Cantillon effects (i.e., real purchasing power redistribution), which could result in large intersectoral movements of resources in the economy.”

The Cantillon effect is basically the idea that given a money supply increase, those who get hold of the newly created money can profit at the expense of the rest of the community. That is certainly a possibility, and in fact the Cantillon effect comes in two basic forms.

First, it is always possible that a money supply increase causes a GENERAL rise in prices (as opposed to a rise in the price of a limited set of commodities). But (amazing as this might seem) the advocates of FR do not propose increasing the money supply by so much that hyperinflation, or anything approaching hyperinflation is the result. They propose limiting the amount of money created by enough to  ensure that inflation stays close to the existing inflation target: 2% or thereabouts.

A second way the Cantillon effect can work is that the newly created money is concentrated on the purchase of relatively few products, which clearly means that the firms supplying those products do very nicely – possibly at the expense of the rest of the community.

However, EXACTLY THE SAME problem can arise under the existing system. That is, if government and/or central bank decide to implement stimulus, and that stimulus is concentrated on relatively few products or sectors of the economy, then clearly the problem mentioned in the above paragraph can arise, namely those specific sectors may profit at the expense of the rest of the community.

In short, the latter “profit” problem is a potential problem under the existing bank system just as much as under FR. Thus the conclusion is that the Cantillon criticism made by BRJ is nonsense.

Predicting how much stimulus is needed.

Next, BRJ claim “…it is impossible to know in advance what the money supply should be, as lags and aggregation problems would still plague monetary authorities in the new system. The resulting discrepancies between money supply and demand could entail lingering and cumulative distortions in the economy.”

Well again, exactly the same problem applies under the existing system! That is, governments and central banks have big problems in knowing EXACTLY how much stimulus to apply: to illustrate, while unemployment in the US is at a fifty year low, there are those (e.g. the leading MMTer Stephanie Kelgon) who claim it could go significantly lower without inflationary consequences.

Next, BRJ say “….the independence of the monetary authority would be doubtful since its money creation is intimately linked to government policies.” Again, exactly the same problem applies under the existing system: that is, while some central banks are supposedly independent, the reality is that politicians are always putting pressure on central banks to do those politician’s bidding (normally to cut interest rates) rather than have central bankers go by their own judgement. Indeed, Donald Trump is putting pressure on the Fed at the time of writing.

Moreover, prior to 1997 when the Bank of England was given independence, the BoE was controlled by the UK Treasury, i.e. the UK finance minister. To put it bluntly, the UK finance minister had access to the printing press. That however did result in rampant inflation between WWII and 1997.

Plus, while my preference is independent rather than non-independent central banks, Bill Mitchell produced evidence that there is no relationship between central bank independence and inflation. Scroll down to the chart in his article entitled “Central bank independence – another faux agenda.”


I’ve had enough of this paper by by Messers Bentata, Giménez Roche and Janson. It’s clearly nonsense on stilts. I can’t be bothered with any more of it.

Friday, 8 March 2019

Grace Blakeley trotts out the “fiscal space” canard.

Grace Blakeley is the New Statesman’s economics commentator and the NS recently published a long article by her entitled “The next crash: why the world is unprepared for the economic dangers ahead.” As the title suggests, the article is a story of doom and gloom, which of course has the big advantage from the point of view of the NS that gloom helps sell copy. “Good news is not news” as they say in the newspaper industry.

To back up her gloomy prognostications, she cites the “fiscal space” canard (a canard much loved in that hotbed of economic illiteracy, the IMF). As she puts it, "national debt levels have significantly risen, reducing the space for fiscal stimulus."

She is evidently unaware of Mosler’s law (that’s Warren Mosler): “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”

Mosler’s law is of course just a re-statement of the point made by Keynes in the early 1930s, namely that a way out of recession is for the state to simply print money and spend it, and/or cut taxes. But unfortunately that point needs repeating over and over, because the Blakeleys and IMFs of this world still don’t understand the point apparently.

I demolished the fiscal space idea here, and Bill Mitchell demolished it here.

Note that Mosler, Mitchell and Musgrave (that’s me) are all MMTers....:-)

Wednesday, 6 March 2019

The incompetent Kenneth Rogoff on MMT.

Rogoff penned an article published by Project Syndicate recently criticising Modern Monetary Theory. The article is nonsense from start to finish. I’ll run through it, which won’t take long because it’s a short article.

First, Rogoff cites Jerome Powell (Fed chairman) as saying the US debt:GDP ratio is already high which allegedly means that there are dangers in using the Fed to fund more public spending. Well one problem there is that the equivalent ratio in the UK in 1945 was over double the current US ratio: around 250% compared to the current US ratio of around 100%. The UK 250% did not prove any sort of a problem: that debt gradually declined to about 50% in the 1990s.

Moreover, the argument that something is large (or small) compared to what it used to be, and thus that we shouldn’t allow that new size is a feeble argument. Buildings are at least twenty times as high as they were two hundred years ago. Is that a problem?

Next Rogoff says “The US is lucky that it can issue debt in dollars, but the printing press is not a panacea.” So who said money printing WAS A panacea? Rogoff doesn’t say.

Next, Rogoff says “If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency either. If that country tries to dump a lot of it on the market, inflation will result.”

So excess money printing leads to excess inflation? You don’t say! Every mentally retarded ten year old knows that. Plus MMT does not (amazing as this might seem) advocate LIMITLESS amounts of money printing: it advocates just enough to bring full employment without excess inflation. That’s it.

Next, Rogoff points to the fact that at the moment, the World is happy to absorb more US government debt at remarkably low rates of interest. He then says “That said, it would be folly to assume that current favorable conditions will last forever, or to ignore the real risks faced by countries with high and rising debt. These include potentially more difficult risk-return tradeoffs in using fiscal policy to fight a financial crisis, respond to a large-scale natural disaster or pandemic, or mobilize for a physical conflict or cyberwar. As a great deal of empirical evidence has shown, nothing weighs on a country’s long-term trend growth like being financially hamstrung in a crisis.”

OK, so what is a country supposed to do given excess unemployment: abstain from fiscal stimulus and leave a million unemployed to rot just because there are risks (as there always have been) associated with fiscal stimulus? (Note: I am not saying there actually is excess unemployment in the US right now. The US economy may well be very near capacity. I am just assuming for the sake of argument that there is excess unemployment.)

Rogoff’s masterly solution to the latter “risks” is a longer term structure for US debt. (Bonds issued by the US government only last about three years compared to more like ten years for the UK)

Well frankly that has little to do with the arguments for and against MMT. There are a whole string of pros and cons associated with long and short term government bonds, with official UK views clearly differing from US views.

Then in his penultimate paragraph, Rogoff criticises QE. Well what’s that got to do with MMT? Practically nothing.

In short, if this Project Syndicate article of Rogoff’s is any guide, he doesn’t have the faintest idea what MMT consists of, and in as far as he does have a grasp, he totally fails to land  any punches on it. 

Given that Rogoff was advocating a limit to stimulus at the height of the recent recession (i.e. advocating austerity) it’s a wonder anyone  still listens to him.

As Laurie MacFarlane of the New Economics Foundation said in a tweet, it’s a bit of a puzzle why Rogoff is still employed as an economics professor at Harvard.

Monday, 4 March 2019

Ambrose Evans-Pritchard tries to criticise MMT.

That’s in this article in the Telegraph entitled “Drink deep from the fountain of debt at your peril, my American friends.”

His article is actually aimed against the new and relatively relaxed attitude to rising government debt, an attitude which of course MMT supports under specific circumstances. Thus while MMT gets several mentions in the article, the article is not aimed SPECIFICALLY at MMT. Anyway….

First he seems to suggest MMT favours printing near limitless amounts of money and spending it on various goodies. That’s where he says "Everything can be paid for on the never-never: a Green New Deal, "Medicare for All", free university, and higher pensions backed by helicopter money fom the US Fedral Reserve when needed.”

Well the reality is that MMTers have said over and over that inflation places a constraint on the amount of money printing. Indeed, and ironically, Evans-Pritchard himself actually refers to the fact that MMTers are aware of the inflation constraint!

That is, later in the article he says, "They accept that there can be an inflation constraint on deficit spending, but neglect the risk that foreign funding can dry up in a world of open capital flows. Nobel economist Paul Krugman - usually a deficit dove - says the MMT brigade fail to grapple with the problem of "snowballing debt", when interest rates rise above the trend growth rate of the economy. "As debt gets every higher people will demand ever increasing returns on holding it." he wrote.”

As for Krugman’s latter criticism of MMT, that’s no better than Evans-Pritchard’s. To illustrate, if interest on the debt is 1% and growth is zero, what of it? The fact that interest on the debt is larger than growth does not bring about a “snowball” effect. All that happens is that year after year, taxpayers have to pay for interest on the debt. Big deal. That situation is perfectly “sustainable” to use the fashionable phraseology.


I forgot to include a response to Krugman’s above claim about “As debt gets ever higher people will demand ever increasing returns on holding it” when I put the above article online earlier today.

Anyway, the answer to the latter “high return” point is that there is an all important distinction between where increased debt is used for legitimate reasons (e.g. to bring the economy up to capacity) and in contrast, where the economy is already at capacity, but politicians are incurring more debt simply to ingratiate themselves with voters.

Politicians are always tempted to fund public spending via debt rather than taxes because voters tend to be more aware of tax increases than  any rise in interest rates that might be caused by more public borrowing. David Hume, writing 300 years ago was aware of that temptation: see 5th para of his essay “Of Public Credit”. Nowadays economists sometimes refer to that temptation as the “deficit bias”.

To illustrate the legitimate use of debt, let’s assume interest on the debt is 1%.  If there is excess unemployment in that scenario, that simply means the private sector is doing too much saving (i.e. stocking up on 1% government bonds) rather than spending (which would create jobs).

The solution, as Keynes explained, is for the state to spend more (net of tax), and that can be funded by issuing more “1% debt” or simply by printing money (which equals 0% debt). There is no reason why those who clearly want more “1% debt” should demand 2%. As already indicated, debt holders are hoarding 1% debt: i.e. if offered more of the stuff, they’ll grab more of it. So in that scenario, Krugman’s point doesn’t work.

In contrast, if the economy is already at capacity, and government borrows and spends more, one effect will be excess inflation (because the economy is at capacity). In that scenario, government or central bank will have to implement some sort of deflationary measure to counter the excess inflation, like raising interest on the debt.  Among other effects, raised interest on the debt will tend to  dissuade debt holders from trying to spend away what they regard as an excess stock of debt.