For two decades we and our like-minded colleagues have been putting forward the idea that a monetarily sovereign country like the United States with debts denominated in its own currency and a floating exchange rate cannot “go broke”. We have been writing about this and all the myriad implications this has for macroeconomics under what has come to be known as Modern Monetary Theory.
Excitingly, last month representative Alexandria Ocasio-Cortez brought attention to our views when she said that MMT should be “part of the conversation". This set the economics and finance media ablaze with renewed commentary. In a major step forward, the broad consensus of these pieces in a series of outlets has been to agree with my colleagues and I that the only limit on government spending is inflation. The acceptance of this crucial tenet of MMT is very welcome and new. It was not too many years ago that throughout the economics press it was commonplace to present MMT as a wild new theory and speak in worried uncertain terms about the possibility that bond markets would refuse to buy US treasury securities, causing a debt crisis. We are thrilled to move past this stage in the public macroeconomic debate.
Unfortunately, while the press has been willing to agree with this major proposition, it has not been willing to follow its implications.Apparently, the common response is that MMT is politically unrealistic in thinking that governments will be able to raise taxes to control inflation. I personally encountered this response many many times over Kevin Drum's blog. I responded that MMT proposes automatic fiscal stabilizers (income tax, welfare benefits, job guarantee) as opposed ad hoc tax increases. Fullwiler, Grey, and Tankus discuss this and many other options and considerations in a comprehensive explanation of how MMT is politically realistic in its approach to inflation.
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/
8 comments:
I responded that MMT proposes automatic fiscal stabilizers (income tax, welfare benefits, job guarantee) as opposed ad hoc tax increases. Detroit Dan
Except the economy runs on banks deposits and while Federal taxation destroys bank deposits, the banks can replace those and create even more since Federal taxation also destroys bank reserves and thus improves their Supplemental Leverage Ratio (SLR).
Thus I found it interesting that MMT proposes to limit bank "lending" (actually deposit creation) to control price inflation.
Of course if we had 100% private banks with 100% voluntary depositors, the ability of banks to safely create deposits would be sharply limited anyway.
But who wants an honest banking model? As opposed to using the current one for their own agendas?
“Apparently, the common response is that MMT is politically unrealistic in thinking that governments will be able to raise taxes to control inflation.”
Average people assume that spending an endlessly increasing amount of money on wars and weapons makers is okay, but any program that helps average people will be hyper-inflationary. Hence average people have been programmed to keep themselves enslaved.
More war? Go America!
Single Payer healthcare? ZIMBABWE!
Average people also assume (falsely) that the only way to control inflation is via fiscal policy (spending and taxing). They forget about monetary policy. For example, during World War II the US government controlled inflation by imposing the federal withholding tax on workers, and by getting workers to buy more “war bonds.” Always more. Zap the Jap. Kill the kraut. Buy more war bonds. This controlled inflation by removing money from circulation. The money used to buy War Bonds was deposited in Fed savings accounts, and was slowly dispersed into the economy as War Bonds matured.
By the end of WW II there were many billions of dollars in Fed savings accounts. Hence economists say the “national debt” was high.
Regarding the question of whether MMT is “politically realistic,” this question is based on the false assumption that MMT is a proposal. In reality, MMT describes what actually happens here and now.
Politics resides not with MMT but with the endless struggle to get politicians to work for everyone, instead of only the rich.
Looked at another way, it is indeed a political struggle to get people to admit the truth about MMT.
DESPITE ALL THIS, nothing will help us until we get the creditors under control (i.e. the banks and the bondholders).
As long as they rule, we are doomed.
Even taxing the rich works:
Portugal has found an antidote to right wing populism
excerpt:
The socialists raised the once slashed wages and pensions, reintroduced paid vacations and retracted many tax raises, all while raising wealth taxes which affect only the rich parts of the population. The government also introduced a property and real estate tax designed not to target the homes of average citizens. Costa’s socialists also put an end to the catastrophic privatizations that were once instructed by the EU and resulted in selling state assets at absurdly low prices. [bold added]
Re the idea that "it is politically unrealistic in thinking that governments will be able to raise taxes to control inflation", the answer to that was worked out long ago by Positive Money (which like MMT also advocates "overt money creation", i.e. having government and central bank simply create money and spend it (and/or cut taxes) when stimulus is needed).
The answer is not to let politicians determine the size of the deficit (i.e. public spending less taxes), but have some independent body like the central bank do that, while politicians retain the right to take strictly POLITICAL decisions, like what % of GDP goes to public spending.
But even if politicians DO CONTROL the deficit, it is actually perfectly "politically ralistic" to think that they will act fairly responsibly, at least in North American and North European countries. Bill Mitchell produced evidence that there is no relationship between central bank independence and inflation. Scroll down to first chart here:
http://bilbo.economicoutlook.net/blog/?p=9922
I've just finished reading Robert Skidelsky's 2018 book "Money and Government" which although an interesting book running through all the ideologological fads about money over the last 200 odd years is remarkable for the brain-washed condition of Skidelsky's mind. There is much ado about how Keynesianism failed because government creation and spending of money to optimise employment encouraged the workers to trigger abnormal inflation with their wage claims but little said about private sector banks being allowed to hyper-inflate economies. This is despite Skidelsky spending a good portion of his book talking about mispriced securitized bonds being the prime trigger for the 2008 Great Recession! Economic ideology appears to be currently schizophrenic in the mainstream!
but little said about private sector banks being allowed to hyper-inflate economies. Unknown
I've puzzled over that myself and first I suspected that people who oppose or fail to support banking reform are mere toadies for the banks and rich.
Maybe that but also this:
The rich rules over the poor, and the borrower becomes the lender's slave. Proverbs 27:7 [bold added]
Not that the banks actually lend but rather use government privilege to drive the population into debt.
And it's rather pathetic that rather than seek justice, they are content to be wage slaves to government instead. I suspect they'll regret that deal ...
“There is much ado about how Keynesianism failed…”
I must have left my seat and gone to the concession stand when that part came. When exactly does Skidelsky think Keynesianism “failed”?
“Economic ideology appears to be currently schizophrenic in the mainstream.”
In other words, most economists are liars.
The rich rules over the poor, and the borrower becomes the lender's slave. Proverbs 27:7 [bold added]
It sort of depends on how much is lent. The average guy, borrowing in the thousands, gets the full court press on every mis step. Better not miss a payment or ask for any redress. A loan of 50,000$ often requires the borrower to pay back 100,000$ or more over life of loan. But borrow in the 10s or hundreds of millions? All of a sudden the bank becomes your slave.
Dont even get me started on the predatory pay day loan businesses (many of which are owned by big banks), where a small debt of 500$ can sometimes require 5000$ to settle. The filthy rich only exist because of 10s of millions of poor. If you get a thousand dollars from a million people ........ billionaire!!!
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