Friday, 11 September 2020

Seems the New Economics Foundation don't quite understand MMT.


At least that would seem to be the case to judge by the NEF article entitled “Changing the Fiscal Rules” written by Alfie Sterling, David Powell and Frank van Lerven.  Their argument is basically as follows.

Dealing with global warming will require a huge amount of investment in alternative methods of energy generation etc: both public and private sector investment. But increasing such investment is hampered by current fiscal rules which limit deficits and government debts. As they put it, “Given the speed and scale of transition required, the current fiscal rules (targets for government debt and borrowing) are a real limiting factor for sufficient public finance.”

Complete nonsense!  If the deficit is limited to X% of GDP and government  wants to invest yet more in green stuff, it can raise taxes in order to fund that investment!!

Next, the authors cite the old canard that there is some fixed and maximum possible level to government debt as a proportion of GDP. An example of that idea is  Kenneth Rogoff’s now widely discredited 90% figure.
As the NEF article puts it, “Essentially, the current fiscal rules assume that the best time to use so-called ‘fiscal space’ (the scope for further public borrowing before the amount of overall public debt presents significant risks to the economy).”

Then, the authors say “In the UK, we propose the Treasury should begin work immediately on how to define new fiscal targets borne from a more sophisticated analysis of how and when to use fiscal space.”

Er – yes. That “more sophisticated analysis” has been around for about thirty years: it’s called Modern Monetary Theory.

As MMT correctly stipulates, there is no upper limit to the debt as long as the debt does not give rise to excess demand, excess inflation or an excess interest rate rise. As to WHY a high debt may cause the latter “excesses”, reasons are thus.
A larger debt will TEND TO raise demand (all else equal) since government debt is a private sector paper asset (little different to money). And the more money people have the more they are likely to spend.  Though a high debt will not NECESSARILY have that effect, e.g. given low levels of consumer and business confidence.

As to why a high debt will tend to raise interest rates, central banks will tend to counter the latter excess demand by raising interest rates.

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