The Fight for the NHS/MMT economics

[ks.234]

On the second point, I'm saying that central banks creating money directly for government spending ("the government can print as much money as it likes, it can never run out of dollars") leads to devaluation of the currency because the supply of money outgrows the growth of real goods and services and people eventually lose faith in the currency as a store of value.

This is another myth. Government creating money does not create devaluation. If the government creates £1m and gives it to me, and I put the £1m in a box, then nothing will happen. If I decide to go out and spend that £1m on a Rolls Royce that costs £1m, nothing will happen. The only time devaluation or price inflation occurs is when lots of people who have also been given £1m also decide to go out and buy a Rolls Royce and the supply of Rolls Royce’s dries up. Inflation is when spending creates demand for resources that have been used up.

This is covered in The Deficit Myth available for less than £5, and excellent book for anyone wishing to understand MMT

https://www.amazon.co.uk/dp/B081JVRT57/?tag=pinkfishmedia-21

 

[ks.234]

... ultimately, you still need tax rises or increased borrowing at some point to "pay for" increased public spending, unless you think it's no problem that the debt (and interest on that debt) continues to increase forever (which is not to say there shouldn’t be a debt at all—as per a household—just that there is an optimal range which the debt should fall in).

No. Taxes do not need to be raised to fund spending, either before or after the event. Spending is not pushing the debt onto our children and Grandchildren as often claimed. This is a fundamental understanding of MMT and ‘indebting our grandchildren’ myth is just story to frighten the horses. Households have to pay back their debts, Goverments do not.

Again, all explained by Kelton https://www.amazon.co.uk/dp/B081JVRT57/?tag=pinkfishmedia-21

 

[ks.234]

I’m far more worried about the USA, politics there is full of extremists on both sides. Whatever they do with their dollar, the rest of the world has to deal with.

Because of the actions it had to take following the financial crisis and then Covid, the Fed has found itself much more “in control” of the US economy than it ever had been previously. Huge potential for its actions to become highly politicised…

Central banks are just tools in the hands of the legislature. I’d be more worried about the road our politicians are taking us in. A road towards more private debt, unemployment, economic instability and climate crisis. And what’s more the story that we are told that this is the only road available, that all other roads lead to ruin, is a lie. This road, the road we’re on, is the one that leads to ruin, but it’s paved with gold for those at the front of queue.

 

[Heckyman]

MMT doesn't really claim that there is a free lunch, in my view. Instead it claims that it's worth considering that the cost of the lunch could be much cheaper.

I'll try to explain by way of analogy. MMT says that the economy is like a household where there are depressed teenagers lounging about. The teenagers represent the unemployed and the underemployed. At the same time, the house needs loads of work, the youngest child needs babysitting, Grandma needs looking after, etc. One day, the parents hit on an idea: to write IOUs for work done. To stay in the house, the teenagers need 20 IOUs a month.

What happens? The house gets painted, cleaned, maintained and improved. Granny and the youngest child gets looked after. And lots of this gets done for no cost (or negligible cost), because it uses resources that were under-used. To this extent, MMT says that there are some almost-free lunches to be had - employing unused resources just has to be better than leaving them idle.

Is everything an almost-free lunch? No - the household doesn't have all the resources it needs. The household needs to buy the paint to paint the house, etc. So, the parents need to understand what is 'free' and what creates obligations that need paying for. This is - in an imperfect analogy - the central message of MMT. It doesn't say that all obligations created by fiscal spending are free - it says that governments are not fiscally constrained. The constraints are elsewhere - inflation and real resources. So, returning to your post above, of course you need tax rises at some point to create the fiscal space for government spending. That's consistent with MMT as I understand it. It's just that MMT talks about tax rises to control inflation. Either way, it amounts to much the same thing.

The absolute size of the deficit in any period, though, and debt-to-GDP ratios maybe don't tell you much, as long as - crucially - the government is directing its resources responsibly.

Thanks, that added more to my understanding of MMT than an hour of listening to Mrs Kelton! What comes across as the USP is the emphasis on utilising unused resources for social good.

 

[Heckyman]

This is another myth. Government creating money does not create devaluation. If the government creates £1m and gives it to me, and I put the £1m in a box, then nothing will happen. If I decide to go out and spend that £1m on a Rolls Royce that costs £1m, nothing will happen. The only time devaluation or price inflation occurs is when lots of people who have also been given £1m also decide to go out and buy a Rolls Royce and the supply of Rolls Royce’s dries up. Inflation is when spending creates demand for resources that have been used up.

This is covered in The Deficit Myth available for less than £5, and excellent book for anyone wishing to understand MMT

https://www.amazon.co.uk/dp/B081JVRT57/?tag=pinkfishmedia-21

Mmm, how does the Govt decide that you are worthy of £1m, and everyone else isn’t?

I did read the sample chapter of the Deficit Myth but it didn’t seem much different to the presentations I’ve seen her give.

 

[laughingboy]

Thanks, that added more to my understanding of MMT than an hour of listening to Mrs Kelton! What comes across as the USP is the emphasis on utilising unused resources for social good.

That's my main takeaway, too. But because it describes the way the money system actually works, and because it uses models such as Wynn Godley's sectoral balances to understand it, MMT allows questions about the fundamentals of the economy to be asked (such as, why do we pretend to fund government spending via bond issuance? Or what, if any, should be the role of monetary policy if, in theory, everything can be kept in balance via fiscal policy?).

 

[ks.234]

…. what, if any, should be the role of monetary policy if, in theory, everything can be kept in balance via fiscal policy?).

From what understand this is key, not just for MMTers, but for a moral approach to tackling unemployment and underemployment. Economists of all stripes have noticed for decades that the control measures available to central banks to control the economy are insufficient and that interest rate control has in some cases actually raised the rate of inflation. What is required is government intervention to balance the economy.

However, monetarist thinking dictates that there is a ‘natural rate’ of unemployment that has to be maintained. In other words the present rate of unemployment is maintained as a matter of policy and if it falls, that is a bad thing that needs to be corrected, and is.

That the misery and hardship of unemployment and underemployment is maintained as a government policy, and in the US written into an act of Congress, is surely morally repugnant?

 

[Heckyman]

Kelton's arguments are making more sense now I've watched this 2 minute summary of Marx's model of an economy (from 30'36").

The key insight is that because you sell at a profit, new money must keep coming into the system. And how effectively commercial banks allocate that new money (credit) determines how well the system functions.

I recommend the whole video if you want a unique and well-argued critique of the current politico-economic system.

 

[laughingboy]

From what understand this is key, not just for MMTers, but for a moral approach to tackling unemployment and underemployment. Economists of all stripes have noticed for decades that the control measures available to central banks to control the economy are insufficient and that interest rate control has in some cases actually raised the rate of inflation. What is required is government intervention to balance the economy.

However, monetarist thinking dictates that there is a ‘natural rate’ of unemployment that has to be maintained. In other words the present rate of unemployment is maintained as a matter of policy and if it falls, that is a bad thing that needs to be corrected, and is.

That the misery and hardship of unemployment and underemployment is maintained as a government policy, and in the US written into an act of Congress, is surely morally repugnant?

Yes, the funny thing is, central banks know that employment and inflation are linked (the Phillips curve describes the relationship) but the BoE's remit is based entirely on inflation. According to the Phillips curve, this means that unemployment is government policy.

In the UK, the BoE is meant to target an inflation rate of 2% (Why 2%? Why not 3% or 4%?). In any month where inflation misses this by more than 1% (Why 1%? Why not 0.5% or 2%?) the chair of the Monetary Policy Committee has to write to the Chancellor to explain why, like a schoolboy being told to write "I must not exceed 2%" 100 times. The target is meant to be symmettrical (see Monetary Policy Remit) so over a period of years you'd expect CPI to average very close to 2%, but from 2014 to 2020 average CPI has been 1.3%. The bank has failed to get inflation to anywhere near 2% because it does not have access to fiscal policy.

MMT is a great lens for understanding such circumstances. As you say, what is required is government intervention to balance the economy. There has been no chance of on-target or above-target inflation because monetary policy is exhausted and the government won't spend/intervene.

By the way, I'd recommend this article by Bill Mitchell (incl. the video explainer about the Phillips curve at the bottom of the article), to anyone who wants to understand why the MMTers think that MMT is different to New Keynesian economics. It's the Job Guarantee, folks.

 

[PsB]

Central banks are just tools in the hands of the legislature. I’d be more worried about the road our politicians are taking us in. A road towards more private debt, unemployment, economic instability and climate crisis. And what’s more the story that we are told that this is the only road available, that all other roads lead to ruin, is a lie. This road, the road we’re on, is the one that leads to ruin, but it’s paved with gold for those at the front of queue.

In many countries like the US, UK and the Eurozone, they're no tools of the legislature. They are generally central bankers appointed with a general mandate (price stability, sometimes economic growth) and considerable independence from whatever government happens to be in power.

• The current head of the Federal Reserve is a Republican but was appointed by Obama and is still in place - there was nothing Trump could do about it. The President gets to pick the head but only from the Fed's Board of governors: they are chosen by the President but go through a Senate confirmation process and serve a single 14-year term. Hard to fire... 6 of the 7 governors today are Republicans. They have to deal with the heads of the local reserve boards (NY, Chicago, etc.)
  
• ECB governance was inspired by the famously independent Bundesbank. The head of the ECB and the Exec Board members are nominated by the 19 heads of state, grilled and confirmed by the EP and the governing council of the ECB, and confirmed by the ECouncil. The rest of the governing council is made up of the heads of the Eurozone central banks. The head of the ECB and the Executive Board members have a single non-renewable term of 8 years, i.e. very hard to remove (quite similar to the Fed). Looking back, I don't think Draghi or Trichet were just a tool of any legislature.
• The governor of the BoE is appointed by the Chancellor to an 8-year term renewable once, so maybe this one is a bit less independent. Still, in practical operational terms, the BoE was given considerable powers by New Labour (to set interest rates in particular), powers subsequently extended by the Tories (financial policy committee, supervision of the City), and does not seem particularly accountable (see the GFC).

This independence of central banks is one of the main questions I have about MMT (raised earlier, haven't seen any response).

 

[laughingboy]

This independence of central banks is one of the main questions I have about MMT (raised earlier, haven't seen any response).

MMT sees central bank independence as a comforting fiction at best and a block on coordinated policy action at worst (see here, if you have time on your hands).

I really don't know where I stand on this, which is one of the reasons I'd still describe myself as a slight MMT sceptic.

 

[PsB]

MMT sees central bank independence as a comforting fiction at best and a block on coordinated policy action at worst (see here, if you have time on your hands).

MMT proponents would say, wouldn't they? ISTM it's a major issue right at the core of their theory. If the central bank cannot be relied on to do as it's told, then the rest is mostly academic. My guess is that MMT proponents would end central bank independence immediately. Not sure what the impact of that would be in terms of currency markets, possibly not good.

 

[Tony L]

This independence of central banks is one of the main questions I have about MMT (raised earlier, haven't seen any response).

Agreed. This is an area I’d like clarifying too. As the saying goes; ‘the Federal Reserve is neither federal nor a reserve’! There is a degree of independence to the BoE as I understand it too.

There’s still a hell of a lot I really don’t understand at all, though I do think prioritising inflation and employment as the primary control mechanisms makes a heck of a lot of sense as these appear to be by far the most destructive elements if they go ‘wrong’.

 

[ks.234]

Yes, the funny thing is, central banks know that employment and inflation are linked (the Phillips curve describes the relationship) but the BoE's remit is based entirely on inflation. According to the Phillips curve, this means that unemployment is government policy.

In the UK, the BoE is meant to target an inflation rate of 2% (Why 2%? Why not 3% or 4%?). In any month where inflation misses this by more than 1% (Why 1%? Why not 0.5% or 2%?) the chair of the Monetary Policy Committee has to write to the Chancellor to explain why, like a schoolboy being told to write "I must not exceed 2%" 100 times. The target is meant to be symmettrical (see Monetary Policy Remit) so over a period of years you'd expect CPI to average very close to 2%, but from 2014 to 2020 average CPI has been 1.3%. The bank has failed to get inflation to anywhere near 2% because it does not have access to fiscal policy.

MMT is a great lens for understanding such circumstances. As you say, what is required is government intervention to balance the economy. There has been no chance of on-target or above-target inflation because monetary policy is exhausted and the government won't spend/intervene.

By the way, I'd recommend this article by Bill Mitchell (incl. the video explainer about the Phillips curve at the bottom of the article), to anyone who wants to understand why the MMTers think that MMT is different to New Keynesian economics. It's the Job Guarantee, folks.

Excellent. Many thanks.

 

[ks.234]

Kelton's arguments are making more sense now I've watched this 2 minute summary of Marx's model of an economy (from 30'36").

The key insight is that because you sell at a profit, new money must keep coming into the system. And how effectively commercial banks allocate that new money (credit) determines how well the system functions.

I recommend the whole video if you want a unique and well-argued critique of the current politico-economic system.

Yes, Kelton takes some getting used to. It took a while for me to turn my head upside down. Even after I grasped that the deficit was the money in our pockets, it took me until I saw Kelton’s graph…

…until I got a picture of what that meant in my head. From there it has been much easier to understand other stuff like @laughingboy suggested reading and seeing unemployment for what it is, a purely political choice rather necessary or natural, as we’ve been told for so long.

It seems to me that the essential problem is an economy driven by balance sheet mathematics, whereas what it needs is much more politics and philosophy. It needs more democracy, not more accountancy.

 

[Heckyman]

Yep, the organisation of the entire financial system is inherently political. Why? Because the creation of new money and the allocation of purchasing power by financial institutions is a vital public good, and also highly profitable. I think most ordinary people sense this on some level, but are unable to articulate it.

It's amazing how difficult it is to come by a clear explanation of "where money comes from". It's not taught in schools, even if you take Economics!

Finally I found the book I was looking for: https://www.amazon.co.uk/dp/1521043892/?tag=pinkfishmedia-21

 

[ks.234]

MMT proponents would say, wouldn't they? ISTM it's a major issue right at the core of their theory. If the central bank cannot be relied on to do as it's told, then the rest is mostly academic. My guess is that MMT proponents would end central bank independence immediately. Not sure what the impact of that would be in terms of currency markets, possibly not good.

AIUI it’s not that central banks can’t be relied to do as it’s told, but that the only thing it’s told to do is adjust interest rates to control inflation when controlling the economy as a whole, government fiscal control, is what is required. That using tax and spending to balance full employment and inflation rather than using unemployment to balance the books

I’m not up to speed with how currency markets operate and how MMT views them. Could you say a little more?

 

[Heckyman]

My take is that MMT, in times of normal interest rates and no QE, would not proscribe anything different to the pre- financial crisis system-- except for the jobs guarantee which would aim to raise employment without causing inflation to rise.

But we are not in normal times...

 

[ks.234]

My take is that MMT, in times of normal interest rates and no QE, would not proscribe anything different to the pre- financial crisis system-- except for the jobs guarantee which would aim to raise employment without causing inflation to rise.

But we are not in normal times...

Except that the pre crash system or Thatcher and Regan was based on an assumption that there a ‘natural rate’ of unemployment, and that unemployment, though very sad, was unfortunately a necessary condition, and that government spending ‘always and everywhere’ led to inflation. Neither of which it true.

 

[PsB]

I’m not up to speed with how currency markets operate and how MMT views them. Could you say a little more?

You're way ahead of me in reading about MMT, so I was hoping you would tell me about how MMT views currency markets and their influence. The articles I've seen until now mostly seem to deal with a large self-contained economy like the US.