Guest Post: Ralph Musgrave

Monetary policy is nonsense.

As far as I can see, MMTers tend to favour simply creating new money and spending it into the economy when stimulus is needed, rather than fund such expenditure from borrowing. Certainly Warren Mosler advocated that in a Huffington article (2nd last paragraph). He said that government should issue no liabilities at all, apart from monetary base. (Milton Friedman also advocated a “zero government borrowing” regime.)

As Warren rightly points out, the main effect of government borrowing is to artificially raise interest rates.

The numerous flaws in monetary policy.

Apart from Warren’s interest rate point, there are several other basic flaws in monetary policy, and as follows.

1. As to QE, its effect is to enrich the rich by boosting asset prices, plus it destabilises developing economies.

2. Interest rate cuts channel stimulus into the economy just via increased investment spending. That makes as much sense as channelling stimulus into the economy just via restaurants, massage parlours and car production.

3. The BASIC PURPOSE of the economy is to produce what people want. And “what people want” comes in two basic forms. First there is public sector stuff: law enforcement, education, roads,  etc. Second, there’s the stuff produced to meet demand from household spending: cars, food, etc.

If there is excess unemployment, then there is scope for producing more stuff (public and private sector). So the reaction to excess unemployment should be to expand both public spending and household spending.
As to investment, employers can work out for themselves whether or not to expand investment in reaction to the latter increase demand. And in fact increased public spending and household spending will tend to increase investment spending AUTOMATICALLY, given that extra demand.

4. Central bank base rates do not seem to have any effect on rates charged by credit card operators.

5. There might be a case for monetary policy if it worked more quickly than fiscal policy. However, the lags seem to be roughly similar in each case: about a year.

6. As soon as a country issues debt that pays interest, other countries and their citizens buy some of the debt, and the issuing country becomes indebted to foreigners and has to pay interest to those foreigners.  Of course if the US issued no interest yielding debt, foreigners could still build up a stock of US dollars. But there’s no need for US taxpayers to ACTUALLY REWARD foreigners for doing that.

Reversing stimulus.

Unfortunately, abandoning monetary policy and implementing the “create new money and spend it” policy would not be plain sailing. But it wouldn’t be TOO DIFFICULT.

One apparent problem is that monetary policy is easier to reverse than fiscal: for example raising interest rates isn't difficult. And reversing or “tapering” QE is not difficult in principle: the central bank just sells government debt back into the market.

However, the very fact that monetary policy is likely to be reversed means that recipients of any cash they get as a result of monetary easing tend not to commit their money on any long term basis: e.g. they might just buy stock exchange investments – which can be easily sold. And that’s not of much use to Main Street.

Secondly, if reversing fiscal policy took the form of increased income tax, that might cause political difficulties. But against that, the UK reduced it’s sales tax (VAT) down and then up again in the last five years. That caused no problems. And adjusting payroll taxes doesn’t seem to cause problems.

Politicians.

Another obstacle to the “create money and spend it” policy is a bunch of economic illiterates known as politicians.

The electorate and politicians have every right to determine what proportion of GDP is taken by public spending, and how that public spending is split between education, law enforcement, etc. They also have every right to determine how taxes are collected.

In contrast, politicians are just not qualified to measure inflation or work out how much stimulus will produce how much extra inflation. That sort of decision is to a significant extent already in the hands of committees of economists (e.g. central bank interest rate committees). And ideally, decisions on the amount of stimulus should be ENTIRELY in the hands of that sort of committee.

Thus the reality at the moment is that we have to deal with a herd of bulls in a china shop: politicians. Getting them to implement the right amount of fiscal stimulus at the right time is near impossible. And a recent and disgraceful example that is the fact that it’s primarily US politicians who have stood in the way of allowing a decent stimulus package in recent years, which had it been implemented, would have resulted in millions more being in work since the recent crisis.

So we’ll probably need monetary policy for several decades yet so as to counter the effects of that herd of bulls.

Politicians will always have the final say of course. But when it’s TRADITIONAL for politicians to influence stimulus, a country is in trouble. An extreme example is Argentina where if the central bank governor doesn’t do what politicians want, the governor gets the sack. Look at the result.

So ideally (and hopefully in the long term), it will be traditional just for just economists to take decisions on stimulus. In that scenario, we’ll be able to dispense with monetary policy and concentrate on “create new money and spend it” policy: i.e. expand the production of what people want when the economy has spare capacity

Ralph Musgrave