Tuesday, 30 April 2019
Roger Bootle tries to criticise MMT.
That’s in a Telegraph article published yesterday (29th April 2019) entitled “The taboo that should only be broken in extreme circumstances.”
His first criticism is that Modern Monetary Theory (MMT) is not “modern”. Presumably he is trying to suggest that there is nothing new in MMT, though he doesn’t expand on that point, so it’s not entirely clear what his “not modern” point is supposed to be.
At any rate, that “not modern” criticism has some validity in that MMT has been accused of being little more than Keynes writ large: i.e. it can be argued that MMT is little more than Keynes’s point that the solution to inadequate demand is for the state (i.e. government and central bank) to print money and spend it (and/or cut taxes) or borrow money and spend it.
My answer to that is that a significant proportion of the economics profession are so clueless that they do not even understand Keynes, thus MMTers have been right over the last ten years to lambast the various economists who don’t get that simple basic point made by Keynes. (For some examples of economists who don’t understand Keynes, see the previous article on this blog, entitled “What MMT is up against.”)
Bootle’s next criticism is that given the large amount of national debt left over from dealing with the recent recession, any further stimulus needed to deal with another down turn will push interest on the debt to excessive levels. As he puts it, “There are serious worries that, with the debt so high, governments will not be able to respond to a future economic downturn by relaxing fiscal policy again.”
Well the answer to that is that interest on the debt will not rise unless the state issues EXCESSIVE amounts of base money and/or debt: that is, amounts that are in excess of what is needed to deal with inadequate demand.
To illustrate the reason for that, let’s take the simple case of where interest on the debt is zero, i.e. the only state liability is zero interest yielding base money. (That scenario is not wildly unrealistic, incidentally: both of the co-founders of MMT, Warren Mosler and Bill Mitchell have advocated that scenario, and Milton Friedman advocated the same.)
In the latter scenario, recessions can be dealt with via Keynes’s “print and spend” solution. That works first because the fact of spending more on say health and education employs more medics and teachers, and second, the increased money supply induces households to spend more. And for those on the political right who would prefer tax cuts to more public spending, cutting taxes has a similar effect: it increases household’s stock of money.
That solution to inadequate demand does not require any rise in interest on “the debt”: that is, there is no reason to offer anyone who holds base money interest for holding that money.
However, if the state were to print and spend an EXCESSIVE amount of money, then clearly the inflationary effect of that would need to be countered, and one option there would be to offer “money holders” some interest so as to dissuade them from trying to spend away their excess stock of money. So called “money” is then turned into so called “debt” because debt is simply a fancy name given to a chunk of state issued money on which interest is paid.
And as MMTers and Martin Wolf pointed out, state issued money (base money) and so called debt are virtually the same thing if one is talking about relatively short term debt and relatively low rates of interest. (Re Wolf, see para starting “The purchases of…” here.)
In short, as long as “print and spend” or “borrow and spend” are having a genuine recession beating effect, there is no need to raise interest rates. Ergo Bootle’s claim that further bouts of print and spend will automatically raise interest rates does not hold water, as long as that print and spend is not more than is required to do what’s required of it, i.e. deal with deficient demand.
Next, Bootle makes the popular complaint that QE has boosted asset prices and caused “significant distortions in the economy”, as he puts it.
In fact QE is simply a move towards the set up advocated by the founders of MMT and Milton Friedman mentioned above: a set up where there is no government debt, or if you like, where interest on the debt is zero. That is, QE simply takes chunks of debt and turns them into cash.
Now assuming MMTers and Friedman are correct to claim that GDP is maximised where there is no government debt, then moving towards that set up does not constitute “distortion”. Quite the reverse: it constitutes a move AWAY FROM a distorted set to towards a less distorted set up.
Obviously the political left objects to the boost in asset prices that results from QE, and that’s a not unreasonable objection. But that can be dealt with via increased taxes on the rich.
Next, in the second half of his article, Bootle says that MMT advocates “print and spend”: see his para starting “This is where MMT comes in” and subsequent paras.
Well there can’t be any objection to that claim of Bootle’s: as pointed out above, MMT does (like Keynes) advocate print and spend.
Bootle then objects to print and spend on the grounds that it might lead to hyperinflation, but he admits that in a serious downturn, government and its central bank need to get together and do some QE.
But fiscal stimulus plus QE comes to the same as print and spend! (I.e. government borrows £X, spends it back into the private sector and gives £X of government bonds to lenders, then the central bank prints £X and buys back the bonds. That all nets out to “government and central bank print £X and spend it (and/or cut taxes)”).
So who exactly decides when print and spend is needed? Well that all depends on the relative powers of the finance minister and central bank governor. If the latter is all powerful, then why not just have a rule that says something like “money printing will be allowed at the discretion of the central bank”.
In contrast, in the case of non-independent central banks (e.g. the Bank of England prior to 1997), the finance minister is all powerful. But that did not (contrary to Bootle’s suggestions) lead to hyperinflation in the decades between WWII and 1997. Admittedly the UK suffered excess inflation in the 1970s, but then so too did most other advanced countries.
Alternatively, if the central bank has some sort of genuine independence, then why not just go for an MMT print and spend system where some sort of central bank committee has the final say on whether print and spend will be allowed and how many dollars worth shall be allowed?
Indeed, the latter sort of set up is advocated by Positive Money, though PM do not actually say the committee needs to be a central bank committee: that is, PM argues that any sort of independent committee of economists would do.
Plus Ben Bernanke recently gave an approving nod in the direction of the latter sort of central bank committee which would determine the amount of print and spend allowed every year. Plus Adair Turner (former head of the UK’s Financial Services Authority) gave a similar approving nod. See here, and see para starting “A possible arrangement….” here.
Perhaps Bootle does not realize that in tangling with MMT, he is also tangling with Bernanke and Turner.