Hot on the heels of Richard Murphy’s expulsion from the Progressive Economy Forum for backing MMT, I thought I’d see what PEF have against MMT. The answer seems to be not a vast amount. Though there is an article by John Weeks entitled “Fiscal Deficit and Public Debt too Large?”.
In the article, Weeks criticises MMT, though he doesn’t actually refer to it by name, which is odd.
But it’s pretty obvious he’s referring to MMT to judge by this passage: “This question begins with the recent arguments that if governments have control of national currencies — sometimes called sovereign currencies — they can fund their expenditures through money creation. This view derives from the argument that taxes do not directly fund spending.” Now if that’s not a reference to MMT, I don’t know what is. He really ought to have clarified things there. But never mind. Moving on…..
His basic criticism is the not entirely invalid point that MMT is fine for large countries, but not so good for small ones. However, his article does have weaknesses.
He says, “funding expenditure via money creation…. the ability to do so requires that the currency be safe from speculation against the exchange rate. That requires either that the national currency serve as an international medium of exchange (reserve currency) or that the government possesses substantial foreign exchange reserves.”
Well the first flaw in that argument is that the fact of a currency being an “international medium of exchange” will not necessarily protect it from speculative attacks if speculators think the relevant government is incompetent or has got something wrong. The UK pound is an “international medium of exchange” but that didn’t stop speculators forcing it out of the European Exchange Rate Mechanism in 1992.
Conversely, it does not make sense from speculators’ point of view to attack a currency simply because it is not an international medium of exchange, as long as the relevant government (unlike the UK government in 1992) isn't doing anything silly.
A virus strikes.
So let’s take a not unrealistic scenario: say economies Worldwide are hit by a virus which we’ll call “Covid-19”. That would mean that every country would need to implement some stimulus. Now as long as a small country whose currency is not an international medium of exchange implements stimulus via money printing, and makes it clear it has no intention of letting its “printing to GDP” ratio exceed that of other countries, why would speculators attack the relevant currency? Darned if I know, particularly if the country concerned has a record of behaving in a prudent manner.
Or take another not unrealistic scenario as follows. Citizens in the latter small country go into savings mode: the opposite of “irrational exuberance” if you like. The effect of that would be that the value of its currency on forex markets would drift upwards because of the reduced demand for imports, plus unemployment would rise to an unnecessarily large extent.
If the government and central bank of the country had their wits about them, they’d implement enough stimulus to return employment to its previous level. And if they did that via money printing, and again made it clear they intended doing no more printing than was needed to bring their economy back to full employment, then the value of their currency on forex markets would simply return to its previous level, all else equal. Again: no good reason for speculators to attack.
In short, I suggest that a small country whose currency is not an internationally accepted medium of exchange would be able to use MMT as long as it behaves responsibly.
Low interest rates.
Another argument put by Weeks is the thoroughly feeble idea that existing low rates of interest are not “sustainable” because “If interest rates remained permanently low, that would require a substantial restructuring of pension funds and private portfolios in general.” Well actually that’s one huge non-problem and for the following reasons.
The money that funds interest payments to savers does not come from thin air: it comes, in the case of interest on government debt, from taxpayers. But taxpayers and “people saving for pensions” are the same lot of people! Thus if interest rates fall, taxpayers pay less tax, so they can allocate the relevant increased income (net of tax) to saving a bit more for their pension. Problem solved!
As to interest on PRIVATE sector bonds, much the same applies. To illustrate, if a corporation can fund itself more cheaply because of a fall in interest it needs to pay on its bonds, that leaves money in the pockets of those buying its products and/or it means more money for its shareholders, which they can devote to saving more for their pension!
I’m not bowled over by John Weeks’s criticisms of MMT.