A fine display of economic illiteracy by the Resolution Foundation.

 
There’s a one hour webinar type production by the Resolution Foundation put out last November on the large public debt resulting from Covid and what to do about it. It's entitled "Paying for Covid" The main speakers were former UK finance minister Phillip Hammond and Helen Miller of the Institue for Fiscal Studies (IFS).

The production is a total and complete farce. Both Hammond an Miller are convinced that tax rises will be needed to “pay for” the debt. That completely ignores the possibility that the private sector will be willing to hold a larger stock of debt at a near zero rate of interest than in previous decades. Indeed that willingness to hold a large stock is already staring us in the face.

That of course is not to say that the increased “willingness to hold” will be so large that no consolidation will be required at all. The important point here is that it is clearly impossible to predict what that “willingness” will be in a year or two’s time, thus any predictions as to how much consolidation will be needed are a total farce.

But RE folk appear to be totally unaware , first, that the latter willingness may be sufficiently large to make consolidation wholly unnecessary. Second, they seem totally unaware that even if some consolidation (aka tax rises) are needed, the extent of those tax increases is wholly unpredicatable.
 
And if government does consolidate, i.e. withdraw money from the private sector when the private sector actually wants to retain that stock, then the private sector will just respond by saving in order to acquire its desired stock, which in turn will lead to Keynsian “paradox of thrift” unemployment.

The IFS, incidentally has a reputation for having zero grasp of macro-economics, thus Helen Miller’s support for the above RF nonsense is no big surprise, e.g. see here and here.

The above production by the RF is advertised as being a summary of a much longer (150 page) work of theirs. They are not totally clear in the above webinar production on which of their many works is referred to, but it looks very much like this one, entitled “Unhealthy Finances”.

The abstract of the latter work is certainly very much along the same lines as the webinar production, i.e. it is riddled with obsolete ideas and phrases like “fiscal space” which I demolised ten years ago on this blog, and which Bill Mitchell (co-founder of MMT) also demolished long ago.

MMT vindicated.

Brian Romanchuk makes the point that MMT is becoming more widely accepted in that the debate on the debt does not (as it use to) concentrate on what the maximum safe size of the debt is or whether the bond vigilantes will scupper a country if the debt gets too large. Instead, the debate is about how big the debt and deficit can get without sparking off excess inflation.

And the latter has for many years been one of the basic points made by MMT: i.e. that there is no maximum possible size for the debt as a proportion of GDP. Rather, the only important question is how large the debt and deficit can be before excess inflation kicks in.

But there’s another way in which the debate has shifted onto MMT ground, which is closely related to the above point. It’s to do with the MMT point that government and central bank have no option but to meet the private sector’s so called “savings desires”. Savings desires is MMT speak for the amount of government and central bank liability that the private sector wants to hold: that liability being government debt and base money (aka “reserves”).

I.e. if the private sector wants a bigger stock of base money, and the state does not provide it, then the private sector will save with a view to attaining its desired stock, and the result will be Keynes’s so called “paradox of thrift unemployment”.

Over the last ten years or so there has been a never ending, desperate and ultimately futile attempt by the Tory Party in the UK to cut the deficit and debt. Unfortunately they’ve been hit in the face by brute reality: the reality that the state just has to meet the private sectors “savings desires”, as shown in the image below.

Larry Elliot of the Guardian needs to study MMT.

Larry Elliot tries to put in a good word for the recently announced Starmer bonds. That’s in a Guardian article entitled “Keir Starmer’s recovery bonds….”

Elliot’s justificaton for the bonds is that “The thinking behind them is that only a fraction of the excess savings built up during the pandemic will be spent so the rest could be doing something more useful than sitting in bank accounts.” 

The flaw in that argument is that the fact of some group of people hoarding money and doing nothing with it does not stop government and central bank creating any amount of money they want and spending it, provided (as pointed out by MMT) the amount printed and spent is not so much as to cause excess inflation. 

Moreover, as Elliot rightly says, if the above “hoarders” are to the induced to lend to government, then the rate of interest will need to be above that currently offered on government bonds. But that will tend to raise interest rates generally. I don’t see mortgagors being too thrilled at the rate of interest they have to pay on their mortgages being raised.
 

Positive Money’s latest publication, “The Tragedy of Growth”.

Positive Money, the economics think that that used to concentrate on advocating full reserve banking, is now publishing a lot of stuff which is doubtful quality. The first para of the conclusion of their latest publication “The Tragedy of Growth” says, “This report has shown that continuous GDP growth consistently fails to deliver enhanced life satisfaction, alleviation of poverty, or environmental protection.”

So who ever said that growth or the free market DOES give us “environmental protection”? No one.!! As every introductory economics text book has explained for decades, the free market does not deal well with externalities. For example factories which spew contaminants into nearby rivers normally won’t stop untill the law forces them to stop.

As for the “alleviation of poverty” anyone with half a brain worked out at least a century ago, that the free market, left to its own devices, pays market price for everything and everyone. And the free maket price for people who have physical or mental problems is around zero. So in a totally free market, they’d starve, unless supported by friends or family. And that truism obviously applies regardless of how much growth we have. 

Also, this publication fails to make an important point which is of relevance here, namely that growth in the form of increased productivity to the tune of X% is still desirable as long as that is matched by an X% reduction in the working week. The net environmental effect of that would be zero, all else equal. At least I didn’t spot that point being made. 

 
The net effect of the latter “X%” point would be that everyone would enjoy the same standard of living but would not need to work so many hours a week to maintain that standard of living.  

Dan Awrey backs full reserve banking.

Dan Awrey is a law professor at Cornell and has just published a paper entitled “Unbundling, Banking, Money and Payments”.

This paper is long (about 25,000 words) and very detailed: it has 300 references. I basically agree with it, but what is odd about this paper is that it essentially re-invents the wheel.

That is, the basic proposal is that everyone should have access to a bank account which is 100% backed by money at the central bank. But that’s what Irving Fisher proposed in the 1930s and what Milton Friedman advocated in his book “A Program for Monetary Stability” published in 1960 (see in particular Ch3 under the heading “Banking Reform”). Plus there are a good sixty other economists who back that idea: see here. (Awrey’s basic proposals start half way down his p51).

But Fisher is not mentioned in Awrey’s work, nor is Friedman’s advocacy of the “100%” idea. Nor did I spot any other above mentioned sixty, though quite possibly I missed one or two.

There are of course different ways of giving everyone the right to a “100% backed” account. One way is so called “Central Bank Digital Currency” where anyone can quite literally open an account at the central bank. Another possibility is to let any institution (not just existing banks) offer accounts which are 100% backed by money that those institutions have at the central bank. Awrey backs that option and Positive Money has advocated that option since its foundation about ten years ago. But again, like all other advocates of that system from years or decades ago, Positive Money is not mentioned by Awrey.

But clearly anything written by a law professor will have plenty of detail on the law that currently governs banks and on what changes to the law are needed to implement full reserve / 100% reserve.

Awrey seems to claim (though, to my mind, he is not very clear on this) that IN ADDITON to 100% accounts, banks should be allowed to continue their present practice of accepting deposits which are supposed to be totally safe, while at the same time, lending out money. See his para starting “Perhaps more than….” (p52). That is precisly what has led to hundreds of bank failures thru history: it involves banks having liabilties which are FIXED in value, and assets which can crash in value (when it turns out that a bank has made silly loans). Certainly Milton Friedman and Positive Money’s proposals do not allow the latter practice.

In contrast, I see nothing wrong (as I explained here) with a bank or other institution accepting savers’ money while lending out money and saying that the institution will TRY TO repay savers $X for every $X deposited. But there must be no ABSOLUTE GUARANTEE that saver / depositors will not lose money.  

Alliance for Just Money.

 

Alliance for Just Money is a US based organisation which promotes bank and monetary reform. I stumbled across it a month or two ago and am delighted to have done so because it’s proposals are pretty similar to those of Positive Money, which I’ve supported for about ten years. I don’t know what took me so long, i.e why I didn’t stumble across AFJM earlier.

Anyway, one of AFJM’s proposals I particularly like (also advocated by Postive Money for a long time and recently given the thumbs up by  Ben Bernanke) is the idea that the amount of new money the central bank should create should be determined by a central bank committee (or some other independent committee of economists) while the ACTUAL WAY that new money is used is a decision which should stay with politicians. I.e. the decision as to whether stimulus money is spent on more education or health or used to cut taxes is clearly a POLITICAL decision.

Unfortunately the latter very simple idea which is about as beautiful in its simplicity as Einstein’s E=MC2 equation is EXTREMELY DIFFICULT to get into the heads of most economists. But as you probably know, a significant proportion of economists are more interested in near incomprehensible, jargon ridden nonsense than in worthwhile original ideas.

As to exactly where AFJM says it supports the latter simple idea, see item No.1 under the heading “Three Critical Reforms” on their “The Just Money Solution” page.

Adam Smith Institute tries to criticise MMT.

 

 

That’s in an ASI article by Tim Worstall entitled “This is going to be the most lovely test of Modern Monetary Theory”.

Tim’s basic criticism of MMT is that Joe Biden’s plans for more stimulus than Trump envisaged could result in excess inflation, which allegedly shows that MMT’s “print and spend” policy is flawed.

Well the first problem there is that given excess inflation, the Fed has the power to negate any excess fiscal stimulus with an interest rate hike.

Of course, if a country adopts MMT in toto, i.e. implements stimulus JUST VIA “print and spend” with interest rate hikes being ruled out, and the decision on how much to print is left with politicians, there is a danger politicians will “do a Mugabe” and print too much. And that is Tim Worstall’s basic point.

Well it’s pretty stark staring obvious that politicians, if left to their own devices are liable to do too much “print and spend”!!  The solution to that problem, (as Ben Dyson (founder of Positive Money) explained in his book “Modernising Money” ten years ago) is not to let politicians take the latter decision! Doh! (Incidentally, Ben Benanke gave his blessing to that sort of Positive Money system)

I.e. under a Ben Dyson regime, the central bank (or some other independent committee of economists) decides the AMOUNT OF print and spend, while the decision as to exactly what to spend the extra money on (or whether to implement tax cuts) stays with politicians.

To put that another way, if Biden type stimulus does prove excessive, that does not indicate a weakness in MMT: it indicates a weakness in letting politicians rather than central banks have the ultimate say in how big a stimulus package should be. 

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Endnote: Positive Money.   Ben Dyson and Positive Money certainly advocated the above split of responsibilities as between politicians and central bank for the first five or so years of Positive Money’s existence. Plus you’ll find the above “split” idea advocated in numerous PM publications other than “Modernising Money”. However Positive Money has recently been taken over by a collection of people who advocate a strange assortment of woke ideas, like trying to tell Brits they should all feel more guilty about slavery. Possibly Brits SHOULD FEEL more guilty about slavery, but that sort of thing is not really what PM was set up for. Thus I am not entirely clear what Positive Money’s CURRENT policy is on the “split” point.