Great news: the US can help itself to limitless riches!

Stephanie Kelton and co-authors have a great new economic theory which is set out in this Huffington article. (Article title: “We can pay for a green new deal.”)

As they put it, “Here’s the good news: Anything that is technically feasible is financially affordable.” Well that is indeed good news. It’s even better “good news” than the “good news” that Jehova’s Witnesses try to broadcast.

Lets think about this.

It would be “technically feasible” for the US to have a UK style National Health Service. It would also be “technically feasible” for the US to build a nice six bedroom suburban house for every family in the US. Plus it would be “technically feasible” for the US to build 20 new aircraft carriers. So why doesn’t the great US of A go right ahead  and order up all those goodies and more? I’m baffled, as I’m sure you are (ho ho).

Permanent zero interest rates.

The idea that the central bank base rate should be kept permanently at zero is very much an MMT idea. At least the two co-founders of MMT, Warren Mosler and Bill Mitchell both advocated the idea. Mosler’s exposition of the idea (co-authored by Matthew Forstater) is in a paper entitled “The Natural Rate of Interest is Zero”.

Bill Mitchell’s exposition is in an article entitled “There is no need to issue public debt”.

The idea that interest rates should be kept permanently at zero comes to the same thing as saying that neither government nor central bank should borrow anything: i.e. the only liability they should issue should be zero interest yielding base money.

I found Mosler and Forstater’s paper unnecessarily complicated – or perhaps it’s just me being stupid. Mitchell’s is more common sense and contains numerous good points. Mitchell criticises some of the defective arguments put for government borrowing, but he does not deal with all of those defective arguments.

Milton Friedman also advocated a zero government borrowing regime in a paper entitled “A monetary and fiscal framework for economic stability” (American economic review). But he does not go into much detail.

In short, I think the above three articles leave room for a bit of improvement, so I’ve just turned out my own attempt to argue for a permanent zero interest rate. That’s in a paper entitled “The arguments for a permanent zero interest rate.”

A simple reason to ban private money printing.

Under the existing bank system, a private / commercial bank, when granting a loan, does not need to get the relevant money from anywhere: it can simply produce the money from thin air. See Bank of England article, entitled “Creating Money in the Modern Economy” for confirmation of that point.

If you think that amounts to counterfeiting, then you’re not the first to think that: the French Nobel laureate economist Maurice Allais thought likewise (see article entitled “Credit Markets and Narrow Banking” by Ronnie Phillips).

There is however another reason for banning money creation by commercial banks which seems to have been largely or totally overlooked in the literature, which is as follows.

When a commercial / private bank creates new money and lends it to sundry borrowers, that money gets spent: after all, there’s not much point in borrowing money unless you spend it on something. For example when someone borrows money to buy a newly built house, their money ends up, at least initially, in the pockets of the construction workers, brick and cement manufacturers etc.

On the simplifying assumption that those workers and manufacturers simply bank their newly acquired money and don’t spend it, then in effect, those workers etc have granted a loan to the house purchaser. And those workers will earn interest on that money, especially if they put it into term accounts.

Of course in the real world the latter workers and manufacturers will spend their money fairly quickly, thus the money quickly gets dispersed among THOUSANDS of people. But the above point remains: those thousands of depositors have made a loan (via a bank) to the house purchaser. In short, those depositors are money lenders: they are into COMMERCE.


Should taxpayers back commercial transactions?

But wait a moment: there’s a widely accepted principle that it is not the job of taxpayers or governments to stand behind COMMERCIAL ventures. So when a bank goes bust, what’s the justification for taxpayers / governments rescuing depositors who have deposited money at banks so as to earn interest? There is NO JUSTIFICATION at all!!

Indeed, if you place money with a stock-broker or mutual fund (“unit trust” in UK parlance) or with any other investment intermediary and with a view to earning interest or dividends, there is no taxpayer / government insurance for you, and quite right. So what’s the justification for such insurance in the case of an investment intermediary that happens to call itself a “bank”? I can’t see one.

So if we’re going to to dispense with the latter glaring inconsistency or preferential treatment for banks, we need to have two distinct types of account. First, there need to be totally safe accounts for those who are not into commerce, i.e. who do not aim to have their money loaned out so as earn interest. After all, having a totally safe way of storing and transferring money is a basic human right, I suggest.

Second, there needs to be a category of bank account where depositors want their money loaned out by their bank so as to earn interest, but no taxpayer backed insurance is available.

And what d’yer know? That’s exactly what full reserve banking (aka “Sovereign Money”) has always consisted of!

But strange as it might seem, the above very simple reason for adopting full reserve does not seem to appear in the literature. And I am moderately well acquainted with the literature: I wrote a book on full reserve banking. At the very least, references to the above simple idea are rare, thus the idea needs to be given greater prominence.

So I’ve just published a paper which explains the above simple reason to back full reserve, and which argues for the idea to be given greater prominence. The title of the paper is “A new justification for full reserve banking?”

Mariana Mazzucato the evangelist.

Far as I can see, all she does is to put the basic left of centre point of view, but with the difference that she uses semi-technical language to do so. That fools everyone into thinking she’s saying something new.  But then fooling people (especially intellectuals) has always been the easiest thing in the World. I’ll run thru this interview with her published by The Wharton School at the University of Pennsylvania.

First, she deals with the defects in the way GDP is measured. She says (para starting “What we include…”) that if you marry your cleaner, GDP as conventionally measured, declines because a cleaner gets paid cash, whereas a wife does not, and that allegedly proves that conventional measure is flawed.  Well economists have always known that housework done by the conventional “stay at home wife” is not included in GDP, and that that is a flaw in the way GDP is measured. Nothing new there.

The $64k question is: exactly what do we do about that flaw? Do we take it to the point that the time people spend tending their gardens is added to GDP? No easy answers there, and Mazzucato does not provide any answers.

Second, in answer to the question “Do you think the next recession….”, Mazzacato claims the next financial crises will be worse because Europe has a number of anti-immigration parties in power or nearly in power.

The logic there eludes me. Why does wanting tighter controls on immigration mean your knowledge about running the finance sector is defective? I’m baffled.

Moreover, the bank crisis ten years ago (the worst in living memory) took place under relatively pro-immigration regimes. That’s hardly evidence that pro-immigration folk are good at bank regulation.

Third, Mazzacato makes the point (which any half educated person has always known) namely that government funds nearly all basic research (mainly at universities). That research has, as Mazzacato says, made possible smart phones and other technological improvements.

The explanation for that is of course that basic research is very expensive and risky: the only institution likely to fund it is government. But that again is not news.


Excessive debts.

Next, in this Medium article she claims that private debts have become excessive and that the “only” way out of that problem is to find a better way of valuing publically produced stuff, like the output of the UK’s National Health Service. Again, I’m baffled. Just assuming some magic way can be found of valuing the output of the NHS (and there’s nothing on the horizon in that regard that I’m aware of), why would  that cut bank’s tendency to lend and build up private debt? In contrast, Positive Money (and other advocates of full reserve banking) have a very SPECIFIC proposal for cutting private debts: those debts would decline under a full reserve banking regime.

Positive Money and its supporters, of which I’m one, have done a hundred times more than Mazzucato to get private debts down. (Incidentally there’s a paper by me, with what I think is a new idea on that subject, due to be published in the next day or two. I’ll do an article about it this coming week all being well.)


Mission orientation.

One of Mazzucato’s main ideas is “mission orientation”. That’s the idea that government should spent astronomic sums on projects or types of research with a SPECIFIC AIM. She gives two examples: the Appolo moon shot and the recent German Energiewende (research into new forms of green energy production).

Well now there are major problems with both those examples. Re Apollo, that was a complete farce from the strictly economic point of view. The basic purpose of Apollo, as was made clear by President Kennedy when he first announced it, was to enable the US to get one up on the Russians. If that’s Mazzucato’s idea of a sensible way of spending money, it’s not mine.

Of course Appolo brought FINITE benefits. Given the billions that it cost, it could hardly fail to. For example it improved our understanding of the geology of the Moon. But it was a LUDICROUSLY expensive way of doing that, given that had the US waited a few decades, it would have been able to do the same thing with unmanned robots sent to the Moon.

Apollo also improved rocketry. But there was no need to go to the Moon to do that.

As for the German Energiewende, that addresses a problem which is unique in the last million years or so during which humans have been on planet  Earth: the fact that humans are about to wreck the climate of the planet they live on. Clearly that calls for some sort of spending on the scale of the Marshall Plan or World War II. But what other areas justify that sort of spending? Darned if I know.

Random charts - 65.

Large pink text on charts below was inserted by me.

I’m tired of fake progressives.

So is Bill Mitchell. See for example his article entitled “When neoliberals masquerade as progressives.” But if you Google the name of his blog (“Billyblog”) and “progressive”, you find plenty more articles by him criticizing self-styled progressives.

Of course there are some genuinely progressive progressives. Unfortunately there are about as many people who haven’t the faintest idea how to bring about “progress” who describe themselves as progressive because that’s the cool thing to do nowadays.

Moreover, the very word “progressive” is a bit silly. Reason is that anyone who advocates X presumably thinks that X represents progress. Indeed, and to take an extreme example, no doubt Adolf Hitler thought that invading most of Europe and half of Russian represented “progress”. For that reason, I never describe myself as a progressive: the word is superfluous.

An example of a fake or defective progressive is Peter May and his “Progressive Pulse” blog. In this article entitled “Positive Money and MMT (continued)” he makes the classic mistake that dozens if not hundreds of critics of PM have made (including Ann Pettifor). The mistake is the assumption that because some independent committee of economists (e.g. a Bank of England committee) decides how much new money is to be created and spent each year, that therefor that committee has usurped powers which should be those of democratically elected politicians.

The flaw in that criticism of PM, as I’ve explained umpteen times, is as follows.

Under the existing system central banks (assuming they have a fair degree of independence) have the final word on how much stimulus is imparted over the next few months. Reason is that governments / politicians can impart as much or as little fiscal stimulus as they like (i.e. “borrow and spend”), but the central bank can negate that decision by governments via interest rate adjustments. E.g. if a central bank thinks there’s been too much fiscal stimulus, it can negate that by raising interest rates.

To summarise so far, in the case of the UK, the Bank of England ALREADY DETERMINES the amount of stimulus. But it DOES NOT take strictly political decisions, like what proportion of GDP goes to public spending or how that is split between education, health, etc. And quite right. To illustrate, if government wants to expand public spending by £Xbn a year and raise taxes by £Xbn to pay for that, it is free to do so.

Under the PM system, stimulus is implemented simply by government and central bank creating new money and spending it (and/or cutting taxes). The decision as to how much new money to create, i.e. the decision as to how much stimulus there needs to be is in the hands of a Bank of England committee or some other committee of economists. In contrast, politicians are totally free, as under the existing system to raise public spending and raise taxes to pay for that extra spending.

Incidentally, and in relation to Ann Pettifor, the above referred to article of hers was published in 2014, so it is conceivable that she has changed her mind since then. However, as it happens I have been followed her blog for years and I have not seen any sign of her changing her mind on the above topic.

To summarise, under both systems (the existing system and the PM system), a central bank committee or some other committee of economists decides on the amount of stimulus, while the decision as to what proportion of GDP goes to public spending and how that is split between education, health, etc remains with politicians.

Ergo a PM system would not usurp any democratic rights of politicians.

And finally, if you’re wondering why I haven’t made the above point in the comments after the fantastically “progressive” articles at the “Progressive Pulse” site, I have actually tried to. But it seems the fantastically progressive “Progressive Pulse” site does not like publishing comments which criticise its articles in too direct a manner. At least mine don’t get published there.

Strikes  me that part of being “progressive” ought to consists of an open debate which allows all views to be aired, with the possible exception of views and comments which a downright offensive or plain stupid. But as you ought to have gathered by now, it tends to be the political left (which devotes half its time to telling all and sundry how “progressive” it is) which opposes free speech.

Academia’s aversion to free speech is pathetic.

But people are fighting back: there’s a new journal where people can write articles anonymously. So if you suspect you might be accused of what George Orwell called “wrong-think”, you can try publishing what you have to say there.   And on the same theme, I like this article by Scott Sumner (economics prof at Bentley University, Bentley University, Massachusetts) in which he says in relation to the national debt, “So how large a debt should we have?  I don’t know.” (The article is entitled "Peak fiscal indiscipline")

Now given that SS writes about a million words a year on interest rates, national debts, monetary policy, fiscal policy, and related matters, that “I don’t know” admission is a bit strange.

I actually called him out on that one in the comments after his article, and suggested what the optimum debt might be (which is actually not a hundred miles from the amount that would result from adopting the new Labour Party “fiscal rule”).  My comment appeared, but SS evidently didn’t like it, because it then disappeared. Like I say, some academics are not too keen on free speech.

I actually said:

"The debt ideally needs to be whatever induces the private sector to spend at a rate that brings full employment when the rate of interest on the debt is zero. I’ll explain.

As to best rate of interest on the debt, I see no reason why money should be confiscated from taxpayers just to pay interest to people who want to hoard dollars. I.e. agree with Milton Friedman who advocated the issuance of base money, but thought the size of the debt should be zero.

As to the AMOUNT of Fed issued dollars to issue, private sector spending varies with the stock of the private sector’s stock of liquid assets, thus the number of dollars issued, ideally, needs to be whatever brings full employment.

Obviously attaining the above ideal is difficult, but monetary and fiscal policy should always aim at moving towards it. Indeed, that’s pretty much what the UK Labour Party’s recently announced “fiscal rule” does".