Saturday, 30 January 2021

So there’s nothing new in MMT?


One of the main ideas behind MMT, if not the main idea, is the claim that the size of the deficit and debt do not matter: that is, much the most important aim should be to minimise unemployment in as far as that is consistent with not exceeding the inflation target by too much. As to the deficit and debt needed to attain that minimum possible amount of unemployment, that is relatively unimportant


However, there are those who claim there is nothing new in MMT and that the above “D&D don’t matter” idea has always been an inherent part of standard economics. Simon Wren-Lewis (former Oxford economics prof) is one of those. Unfortunately that is not entirely consistent with a 2014 publication of SW-L’s which says the following.


“So what does macroeconomic theory tell us is the optimal level of government debt? Policy makers are desperate for guidance on this (such that what evidence there is gets too much attention e.g. R&Rs 90%), but most macroeconomists offer very little help.” (Incidentally, “R&R” refers to Kenneth Rogoff and Carmen Reinhart, two Harvard economists who over the last ten years have been about the two most vociferous and influential advocates of austerity: i.e. keeping the debt and deficit down even if that means excess unemployment.)


Plus in an article entitled “Is government debt a burden for future generations?” published in 2011 SW-L says “My own view is that it makes sense for governments to have a long run target for debt…”. That is hardly consistent with his more recent and more MMT compliant claims that the size of the D&D doesn't matter.


In contrast to the above lack of any clear ideas on what the optimum amount of debt is, MMT is crystal clear and advocates the following.


1. The deficit, to repeat, should be whatever cuts unemployment to the minimum that is consistent with hitting the inflation target.


2. That in turn will mean that the stock of base money and debt (the sum of those two sometimes being referred to by MMTers as “Private Sector Net Financial Assets”) will vary, but the exact size of the stock is unimportant: to repeat, the all important objective is minimising unemployment.


3. As to the proportion of PSNFA made of debt versus zero interest yielding base money, and the rate of interest paid on the debt, that is what MMTers call a “policy variable”: in other words government and central bank between them can arrange any rate of interest on the debt they want. To illustrate, paying no interest on the debt at all, which effectively means there is no debt, is easily arranged, at least in principle: just arrange for there to be a stock of PSNFA which is sufficient to induce the private sector to spend at a rate that brings full employment, but not so much that PSNFA holders think they have an excess stock, and try to spend away that excess stock thus causing excess demand and inflation, which in turn would require damping down via an interest rate hike (i.e. having government pay interest on PSNFA).


The reason it is reasonable to assume demand varies with the size of the stock of PSNFA is simply that PSNFA is a euphemism for “state created money”: with some of that money being instant access and normally yielding little or no interest, and some of it being locked up in the form of loans to government, and yielding a higher rate of interest. And households’ weekly spending clearly varies with the size of their stock of money.


Also you should not fall for the trap of thinking that digital state created money (i.e. state created money other than in the form of £10 notes, $100 bills etc), i.e. bank reserves, is not available to households: reason is that most state created money (aka base money) is matched by someone’s or some firm’s deposit at a commercial bank. To illustrate, if someone sells $X of government debt as part of the QE process, they’ll get a cheque from the central bank for $X which they deposit at their commercial bank, and the latter passes the cheque on to the central bank and demands that the latter credits the commercial bank’s account in the books of the central bank with $X.


To recap and summarise, one of the basic MMT claims is that the stock of PSNFA should not be so large that PSNFA holders have to be offered interest on some of their stock of PSNFA with a view to inducing them to abstain from trying to spend away what they see as their excess stock of PSNFA. Incidentally Milton Friedman also supported the latter “zero debt” or “zero interest on the debt” idea, with the exception that he thought offering interest on the debt would be a good tool to have in reserve for emergencies – an idea which seems very reasonable.





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