Sunday, 19 January 2020

Simon Wren-Lewis, MMT & Positive Money on fiscal / monetary coordination.

SW-L recently published an article entitled “Monetary and fiscal cooperation: the case for a state dependent assignment.”

He seems to have moved a bit closer to the MMT and Positive Money (PM) positions. Assuming I’ve got the SW-L, MMT and PM positions right (rather a big assumption perhaps), the three positions are thus.

SW-L says “use interest rate cuts to impart stimulus if rates are well above zero, and if they are near zero, then go for monetary / fiscal coordination, i.e. just create more base money and spend it, and/or cut taxes.” (Incidentally Keynes gave the thumbs up to the “print and spend” idea in the early 1930s)

MMT says, “Interest rates should ideally never rise above zero (i.e. the rate paid on government and central bank liabilities should not rise above zero)”. Milton Friedman thought likewise. However while MMTers back monetary / fiscal coordination, they are unclear on exactly who decides how much stimulus to impart.

PM’s position is the same as MMT, except that PM is very clear on who takes the above decision. PM says some independent committee of economists should decide the size of the deficit (maybe a central bank committee) while strictly political decisions, like what proportion of GDP is allocated to public spending stays with politicians and the electorate. (Incidentally Ben Bernanke said recently that he thought that sort of PM arrangement would be OK. See his passage starting “A possible arrangement…” here.)

I agree with the MMT / Friedman idea that interest rates on central bank and government liabilities should remain at zero, except in emergencies. Reason is that any rate above zero means that tax has to be raised on the population as a whole to fund interest paid to people who have nothing better to do with large amounts of cash than deposit it at the central bank.

SW-L’s flawed criticism of MMT.

I don’t agree with one criticism SW-L makes of MMT. That’s in this para:

“The first is MMT. This in effect reverses the conventional assignment, with fiscal policy doing the demand and inflation stabilisation in all states of the world. If that happens debt looks after itself. I am not in favour of MMT, because I think independent central banks have been very successful at controlling inflation, and a government using fiscal policy would be less successful.”

The flaw there is that MMT does not actually advocate what might be called “conventional fiscal policy” (i.e. government borrows $X, spends it and gives $X of bonds to lenders). That is, MMT (as intimated above) advocates fiscal / monetary coordination. Indeed, Warren Mosler in the second last para of a Huffington article entitled “Proposals for the Banking System” advocates the abolition of government debt.


SW-L versus PM.

Re the apparent difference between SW-L and PM namely that SW-L says the central bank should “advise” on how big the deficit should be whereas PM says the central bank should determine how big it is, there is not actually much difference there.

Reason is that as SW-L says, and rightly, ultimate power rests with politicians, thus politicians can always ignore advice or “determination” coming from the central bank. However, the advice of the central bank (or other committee of economists) should certainly be made public. The electorate have an absolute right to know if government has ignored expert advice.

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