Boring inconclusive waffle from Nouriel Roubini on MMT.

In a recent article by Roubini entitled “The Allure and Limits of Monetized Fiscal Deficits” he claims MMT has overestimated the number of problems that monetizing fiscal deficits can solve.

Unfortunately he is totally unclear on exactly what problems monetization can solve and which ones it can’t solve: he ends by saying “a semi-permanent monetization of fiscal deficits in the event of another downturn may or may not be the appropriate policy response. It all depends on the nature of the shock.” Unfortunately he does not spell out exactly which “shocks” can be cured by monetization and which can’t.

However, he does say, “But what if the next recession is triggered by a permanent negative supply shock that produces stagflation (slower growth and rising inflation)? That, after all, is the risk posed by a decoupling of US-China trade, Brexit, or persistent upward pressure on oil prices.”

Well now, a big change to US-China trade patterns or Brexit certainly involves changes to relevant economies: e.g. some US firms would make stuff previously imported from China, which would require investment in capital equipment needed to make relevant stuff, plus employees would have to be trained to use that equipment, and that all takes time.

In that scenario, simply trying to maintain the current near record low unemployment levels by monetizing deficits (or raising demand any other way come to that) would probably not work. But to repeat, creating the latter capital equipment and imparting new skills to employees would not take for ever. That is, after a year or two, there’d be absolutely no reason not to get back to the current near record low unemployment levels.

In contrast, getting back to earlier levels of GDP per head would not be possible assuming free trade between China and the US (or between the UK and mainland Europe) has a GDP raising effect (and my guess is that it does).

As for the “stagflation” that Roubini mentions in this connection, there is (to repeat, sort of) absolutely no reason for stagflation in the sense of a permanently higher combination of both inflation and unemployment. But (also to repeat, sort of) THERE IS a reason for stagflation in the sense of “a permanently lower level of GDP than would otherwise have obtained”.

Another point which Roubini completely misses is that the fact of monetizing the deficit DOES NOT tell you anything about the OVERALL stimulatory effect of a set of monetary and fiscal policies, and for the simple reason that there are several other factors influencing that overall stimulatory effect. It’s a bit like asking how far the accelerator has to be depressed in a car for it to go at a given speed: silly question because there are numerous other factors influencing the speed of the car, like how many passengers it’s carrying, whether it’s going uphill or downhill, whether the car is heading into the wind, or has a tail wind, and so on.

Conclusion.  If the above paragraphs of mine are not 100% clear, they are at least ten times clearer than Roubini’s waffle. And finally, I'm indebted to Mike Norman's MMT site for drawing attention to the above Roubini article..

Some of the economists who oppose the right of private banks to create money out of thin air.

 

Josiah Stamp, director of the Bank of England in the 1920s:  

"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding sleight of hand that was ever invented...".

Irving Fisher, professor of political economy at Yale in the early 1900s: 

"We could leave the banks free . . . to lend money as they pleased provided we no longer allow them to manufacture the money which they lend."

(Fisher's book, "100% Money and the Public Debt", p.15)

Josiah Stamp: "If you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money...".

Martin Wolf, chief economics commentator at the Financial Times:

See his Financial Times article entitled "Strip private banks of their power to create money."

As for why a system has not been set up where private banks are barred from money creation, Milton Friedman's explanation was:

"The vested political interests opposing it are too strong, and the citizens who would benefit, both as taxpayers and as participants in economic activity, are too unaware of its benefits and too disorganised to have any influence."

(Friedman's book, "A Program for Monetary Stability" Ch.3.)

James Tobin (Nobel economist):

“Deposit insurance is a delegation to private enterprises of the government's sovereign right to coin money.”

 
Tobin opposed the right of private banks to create money, and his above point was that absent deposit insurance, liabilities issued by private banks are essentially in the nature of shares: those liabilities can lose much or all their value. But once an insurer with an infinitely deep pocket insures the liabilities (i.e. government), those liabilities effectively become money, since (like dollar bills or £10 notes) they cannot lose value (inflation apart).  The above quote is from his work “The Case for Preserving Regulatory Distinctions”.

Felix Martin: see his book "Money the Unauthorised Biography", last chapter in particular. 

Laurence Kotlikoff, economics prof in Boston, USA. See his book "The Economic Consequences of the Vickers Commission". (Free online)

Joseph Huber, chair of economic and environmental sociology at Martin Luther University of Halle-Wittenberg, Germany. 

See his book "Sovereign Money Beyond Reserve Banking".




This review of the book says "The concluding part of this book is dedicated to . . . advocating a move towards the sovereign monetary prerogatives of issuing the entire stock of official money and benefitting from the gain thereof (seigniorage). The author argues that these functions should be made the sole responsibility of independent and impartial central banks with full control over the stock of money (not the uses of money).....". 

Maurice Allais (Nobel economist). 


Ronnie Phillips's paper "Credit Markets and Narrow Banking" (Levy Economics Institute working paper No.77), starts, "Maurice Allais's view, share by others, that the credit created by fractional reserve banking is the equivalent of counterfeiting has led to recommendations for reform of the financial system to separate the depository and lending functions of banks."

The bizarre economics of Ann Pettifor’s Green New Deal.

Summary. Ann Pettifor claims that government can borrow tens if not hundreds of billions to fund the GND, and that money can be repaid fairly quickly from the additional tax revenues flowing from the extra jobs created. The flaw in that argument is that unemployment is currently near record lows in both the US and UK, thus it just isn't possible to raise numbers employed to any great extent. I.e. while spending vast amounts on the GND is certainly possible, that can only be done by cutting expenditure elsewhere.

___________

Ann Pettifor has just written a book, “The Case for the Green New Deal”. I’m all for doing something about man made climate change. Unfortunately her ideas on the economics of the Green New Deal (GND), in particular how to fund it, leave something to be desired, to put it politely.

The sub-heading of a Guardian article by her entitled “The beauty of the Green New Deal is that it would pay for itself” says “Governments around the world do not need to raise taxes in order to transform their economies and avert climate disaster.”

Indeed, the article describes the various ways in which the GND, and much else it seems, can be funded simply by borrowing. And one of the main sources of borrowing, if not the the main source, is apparently the Bank of England: that is, all we need do is have government go running to the BoE and ask for tens of billions, with government giving the BoE bits of paper called “bonds” (effectively IOUs).

Then, as if by magic, government can apparently spend tens if not hundreds of billions on loads of lovely GND stuff: wind farms, solar panels, better home insulation and all the rest of it.

Now I suspect most readers will have spotted the snag here, or at least they’ll be muttering that old phrase “if it sounds too good to be true, it probably is”.

One snag is that it’s government that owns the BoE! That is, the BoE is simply part of the government machine. Thus the above mentioned bits of paper (bonds) which government gives the BoE are an irrelevant administrative detail: they are of no economic consequence. Indeed, government does not need to go running to its central bank to come by money: in the First World War, the UK Treasury actually did some money printing.

Put another way, the large pile of bonds which the BoE (and other central banks) now hold as a result of QE are little more than a charade: they could all perfectly well be scrumpled up and thrown on a fire, as many people have pointed out, including me in a letter in the Financial Times.

Or put it yet another way, the “government borrows from central bank and spends billions” carry on boils down to, or nets out to “government as a whole (including the CB) prints billions and spends it”.

In contrast, the important economic effect of the above “borrow and spend” exercise, is (prepare to be amazed) . . .  the actual spending!! That is, firms up and down the country would find themselves buried under a pile of new orders for wind farms and other stuff: orders which they couldn’t possibly fulfil, given the astronomic sums that need to be spent on the GND. The result would be hyperinflation.

The only exception, or partial exception to the latter hyperinflation problem would come where the economy had a large amount of spare capacity. In that case, firms would welcome the new orders and would use them to take on members of the dole queue.

Unfortunately unemployment is currently at near record lows (both in the US and UK), thus the economy has little or no spare capacity.

Of course it can always be argued that a bit more output can be squeezed out the economy by better training and similar. But if the amount of training and education is currently sub-optimal, then it ought to be increased anyway: that is, the latter training point has nothing specifically to do with the GND. Plus, given the number of graduates that end up working at MacDonalds, it is debatable as to whether the amount of education is currently inadequate.


Borrowing from pension funds etc.

Apart from borrowing from the BoE, Pettifor claims pension funds and insurance companies would be attracted by the GND bonds. She also mentions commercial banks.

No doubt the latter three types of institution would be attracted, but trouble is that they’re already lending what they regard as the optimum amount at current rates of interest. Put another way, to induce them to lend more interest rates would need to rise. But that would push up interest rates in general, which would hit every mortgagor in the country: in effect, every mortgagor would pay what amounts to more tax  - exactly what Pettifor claims is not needed to fund the GND.


What else can borrowing pay for?

In her article, Ann Pettifor makes much of the fact that the loans needed to fund the GND can be paid back fairly quickly because GND spending raises numbers employed, which in turn raises tax revenues.

Well if that’s the case, then there must be loads of other projects costing tens of billions which can be similarly funded: indeed she herself claims in her article that Kennedy’s Moon shot and the £30bn UK HS2 rail project are or were funded via borrowing.

But why stop there? Since any public spending funded via borrowing can apparently be paid back fairly quickly via the tax revenues coming from the extra jobs created, why don’t we just abolish all taxation and pay for everything via borrowing!! Instant riches for every household in the country!

If you haven’t started to smell a rat by now, then your sense of smell must be severely defective.

The flaw in her argument is that when government spends more money there shouldn't be and normally isn't any great increase in numbers employed. To illustrate, if an extra few billion are spent on the HS2 rail project, clearly that project creates jobs. But if as a result, total numbers employed for the country as a whole rise, then it logically follows that total numbers employed before the project got going must have been less than was possible!

Of course governments often don’t make a good job of keeping employment at the maximum level possible. But they do try! So normally when governments decide to spend a few billion extra, they assume (sometimes rightly and sometimes not) that spending in other sectors of the economy will have to decline by a similar amount. So they raise taxes on alcohol, tobacco or whatever to pay the latter extra spending.

Moreover, given the fact that unemployment is currently near record lows, it looks like the assumption that total numbers employed cannot be raised just at the moment in the US or UK is approximately right, if not “spot on” right. 

A mild criticism of MMT by Simon Wren-Lewis.

Summary. SWL argues against using fiscal policy alone to regulate demand on the grounds that monetary policy is easily delegated to experts. In fact, as Positive Money has argued for years, the decision as to what the SIZE OF the deficit should be is easily delegated to experts, though of course strictly POLITICAL decisions, like what proportion of GDP goes to public spending should remain with politicians.

Plus, assuming MMT’s “permanent zero interest rate and zero government borrowing policy is correct”, and assuming that policy has been implemented, then it just shouldn’t be possible to implement monetary policy.

___________

 
 
The relevant article by SWL is entitled “Labour’s fiscal credibility rule isn't neo-liberal – whatever MMTers say”, published by the New Statesman.

SWL starts by criticising Bill Mitchell for claiming Labour’s fiscal credibility rule is neo-liberal. I’ve no quarrel with SWL there: i.e. I also find Mitchell’s “neo-liberal” charge very strange.

Next, in the para starting “MMT wants to go…”, SWL says that MMT wants to “…use fiscal policy to stabilise the economy at all times, and not just when monetary policy is out of action. This is not a ridiculous proposal. The question is whether it would work as well as the current regime. Most macroeconomists prefer using interest rates when possible because rates can be moved quickly. This also enables the decision to be easily delegated to experts, which avoids party political influence interfering with macrostabilisation.”

First, note that SWL does not flatly disagree with the MMT stance there, since he says “This is not a ridiculous proposal.”

Second, the fact that interest rates can be changed quickly does not mean the ACTUAL EFFECT of those changes comes quickly. Indeed, there’s a Bank of England publication which claims the full effect of an interest rate change takes a full year to materialise.

Third, SWL’s main argument for interest rate changes rather than fiscal stimulus is that “This also enables the decision to be easily delegated to experts…”.

Well it’s true that decisions on interest rate changes can be easily delegated to experts: indeed, that has actually been done in numerous countries without difficulty.

But it’s not actually difficult to delegate the decision on how large the fiscal deficit / surplus should be to experts either!! Indeed, Positive Money has been advocating just that for near ten years. And Bernanke recently gave an approving nod to that sort of set up.

Of course strictly POLITICAL decisions like what proportion of GDP is allocated to public spending and how that is split between education, health etc should remain with politicians, as Positive Money rightly says. But the “size of the deficit” decision is easily delegated to experts.

As to exactly where to find the latter “Positive Money” point, PM has made the point in numerous publications, but PM’s submission to the Vickers Commission (jointly authored by the New Economics Foundation) is just one example. See pages 10 to 12.


MMT’s permanent ZIRP / no government borrowing policy.

Another weakness in SWL’s argument is that assuming MMT’s “permanent zero interest rate policy / no government borrowing” policy is correct, and assuming that has been implemented, then monetary policy will be impossible. (For some arguments behind the zero government borrowing idea, see my article here.)

That is, interest rate cuts would be impossible since they are already at zero (unless on goes for negative rates, but that involves well known problems). Plus if there is no government debt, then QE is impossible (unless the authorities buy up private sector assets, but that’s non optimal in that those private assets are presumably in private hands because they are BETTER held in private than public hands).

J.K.Galbraith says, correctly, that deficits crowd out private money printing.

There’s an article by Galbraith in The Nation which is interesting. It’s entitled “In Defense of Deficits”. In it, he says (I’ve put his words in purple italics):

"For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in "net financial wealth." Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits".

Actually I very much doubt that “Wall Street, the corporate media and right-wing economists” are smart enough to realize that deficits crowd out private money printing. I suggest the latter collection of economic illiterates have just fallen for the ever popular idea that government and household budgets are comparable: i.e. the idea that government debt is some sort of “burden” and that that debt necessarily has to be repaid at some stage.

The latter “household analogy” is debunked for example by Steven Keen, the New Economics Foundation, and Richard Murphy.

At any rate,  Galbraith’s point ties up with (though is not identical to) the point I have been making for a long time, which is thus.

Full employment can perfectly well be achieved with just one form of money, namely central bank issued money or “base money” as it is often called. Private banks CAN BE allowed to then create their own rival form of money, but that will raise demand which means taxes have to be raised and base money has to confiscated from the citizenry.

Thus in effect, central and commercial banks are rival money printers. Both realise that excessive money printing leads to excess inflation. But at the same time,  both – certainly private / commercial banks – are keen to maximise the amount of money printing they do. And to that end, private banks devote very large amounts of money to bribing and cajoling politicians into leaving their money printing activities untouched.

The latter bribery and propaganda works a treat: politicians are fooled every time. Even self styled “progressives” are fooled.



And finally, please note that I am indebted to Kathryn Cannon for drawing my attention to the above Galbraith article.

The inane drivel produced by the Harvard economics department.

Kenneth Rogoff and Carmen Reinhart, professors of economics at Harvard, have published dozens of papers and articles promoting the idea that if national debts grow too large, a heavy price has to be paid to reduce them. Other “economists” at Harvard have produced similar nonsense.

R&R’s basic reason is that cutting the debt probably requires what they call “financial repression” – a term Rogoff invented. Indeed he has introduced other emotive terms into this argument like “debt overhang” in place of the single word “debt” (which would do perfectly well). The reason for employing emotion may be that R&R’s command of logic and the facts is not too good, as indeed I show below. 

Or perhaps they are just a good propagandists, and have realised that very few people (academics included) are swayed by logic or facts, whereas if you can wield emotion in the right way, then you’ll have about 90% of your audience by “you know which part of the male anatomy”.

Anyway, R&R us a definition of financial repression (FR) at the bottom of p.8 of NBER working paper No. 18015. The paper is entitled “Debt Overhangs: Past and Present.” The definition, which I’ve put in green italics runs as follows.

Financial repression includes directed lending to the government by captive domestic audiences (such as pension funds or domestic banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and a tighter connection between government and banks, either explicitly through public ownership of some of the banks or through heavy “moral suasion”. It is often associated with relatively high reserve requirements (or liquidity requirements), securities transaction taxes, prohibition of gold purchases (as in the US from 1933 to 1974), or the placement of significant amounts of government debt that is nonmarketable.
 
So in general terms, FR consists of one or more damaging / distortionary measures the aim of which is to cut government debt or make it easier for government to deal with its debt.

There is of course another and very obvious damaging way of cutting the debt, namely a period of excess inflation. And R&R (several times) mention inflation as a way of cutting the debt (in real terms). But curiously, they do not classify excess inflation as a form of FR. I don’t regard that as a very logical classification, but never mind: I’ll stick with it in the paragraphs below.

 
R&R’s central claim is complete nonsense.
 
So the central claim is that governments are forced to employ damaging strategies to cut their debts. That claim is actually nonsense: that is, it is very easy for a country which issues its own currency to cut its debt. All it has to do is print money, buy back the debt and as to any excessive inflationary effects of that money printing, that can be dealt with simply by raising taxes and/or cutting public spending.

And what do you know? We’ve been doing just that, and big time, over the last five years or so under the guise of quantitative easing (QE)! And where are the serious inflationary effects of QE? They’re nowhere to be seen!!! You really have to wonder whether Harvard economists have heard of QE, don’t you?

So while some sort of tax increase is probably needed to counter the inflationary effects of buying back debt, it looks like the actual amount of extra tax needed is not much.

Now the economically illiterate (e.g. Harvard “economists”) could respond to that by claiming that more tax equals a cost just like the other undesirable elements making up FR or excess inflation. But note that the SOLE EFFECT of those raised taxes is to keep demand at its full employment level: i.e. stop demand rising ABOVE that level.

Thus demand and GDP are not affected!! So where is the REAL COST associated with the latter method of cutting the debt? It doesn’t exist: at least it does not exist in the “real standards of living decline” sense.

Or to be more accurate, there DOESN’T NEED to be any effect from that tax increase other than to keep inflation under control. In contrast, when raising taxes, government MAY CHOOSE to impose some sort of distortionary tax, but to repeat, there is no need for any distortion.

Moreover, there’d be no big difficulty in using the above strategy to cut the debt to zero: or put another way, as advocates of Modern Monetary Theory (MMTers) keep pointing out, the government of a country which issues its own currency has complete control over the rate of interest it pays on its debt.


Debt held by foreigners.
 
The only exception to the above argument to the effect that cutting the debt is costless comes with debt held by foreigners, or more accurately, by internationally mobile investor / savers. That is, some of the internationally mobile, when they find they get no interest from the US government for example, may choose to invest their money in some other country – or they may invest their money elsewhere in the US.

But if they take their money out of the country, i.e. convert their US dollars to another currency, that means a temporary decline in the dollar on foreign exchange markets, which means a temporary cut in living standards for US citizens.

The effect there is essentially the same as a household which borrows from some entity outside the household, e.g. a bank – let’s say to buy a new car. The initial effect of the loan is to raise the household’s standard of living: it has a new car to drive around in. But the day of reckoning has to come at some point: the household has to work extra hours to earn the money to pay back the loan.

The latter fall in the household’s standard of living approximately equals the earlier rise due to being able to driver around in a new car.

But needless to say, R&R do not deal with the latter distinction  between debt held domestically, and debt held by foreigners or the internationally mobile. 


Any costs involved in repaying debt result from paying interest on the debt.
 
A final point here is that the latter foreign exchange related costs involved in repaying the debt would largely vanish if (as suggested by MMT) little or no interest is paid on the debt.

In other words if a government offers no reward to those holding its currency, then in the event of its raising taxes and cutting the amount of that currency in private sector hands, there is no reason for foreigners to hold any less of the currency, because the interest earned on their currency holding is at or near zero before and after the latter tax is imposed!

“Sustainability” is not a useful criterion by which to determine the optimum size of the deficit.

Olivier Blanchard, former chief economist at the IMF and Takeshi Tashiro  argue that the deficit should be held to a level such that were it to stay at that level, and all else remained constant, the debt would not continue to grow ad infinitum. That’s in their article entitled “Rethinking Fiscal Policy in Japan” (published by PIIE).

While the word “sustainable” is ultra-fashionable nowadays, the deficit does not actually need to be sustainable in the latter sense.

To illustrate, suppose demand collapses (say because of a collapse of consumer or business confidence), and a deficit bigger than can be sustained long term would solve the problem, do we take it that that deficit should NOT BE implemented: i.e. the unemployed should be left to rot??

I think not. MMT (Mosler’s law in particular) says that the deficit should be WHATEVER deals with unemployment. Keynes said much the same.

Mosler’s law, which used to appear in yellow at the top of Warren Mosler’s site, states: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” (Warren Mosler founded MMT).

Plus the fact that that deficit cannot be sustained long term does not matter, because national debt (as MMTers keep explaining) is a private sector financial asset, and the bigger that asset, the higher will private sector spending be, all else equal.

Ergo, a deficit which is larger than can be sustained long term just isn't going to continue for ever because “Private Sector Net Financial Assets” (an MMT phrase) will eventually rise to a level where demand rises to a point where little or no deficit is needed.

The above is part of a long standing form of schizophrenia that the IMF has had in relation to deficits. That is, it knows that deficits are needed so as to deal with recessions, at the same time as knowing that the resulting national debts cannot be allowed to grow too large. But it does not seem to be able to work out the optimum compromise between those two. E.g. see here and here.