This is the third (and final) part of my response to an article published by the German-language service Makroskop (March 20, 2018) – Modern Monetary Theory: Einwände eines wohlwollenden Zweiflers (Modern Monetary Theory – Questions from a Friendly Critic) – and written by Martin Höpner, who is a political scientist associated with the Max-Planck-Institut für Gesellschaftsforschung (Max Planck Institute for Social Research – MPIfG) in Cologne. Today, we will discuss inflation and round up the evaluation of his input to the debate. The overriding conclusion is this. As a researcher, I am instinctively driven to dig deep before I make public comment. It is easy to think you have an idea that is novel and then venture forth with it. One usually finds, fairly quickly, once you start digging into the literature, that the idea is anything but novel. Modern Monetary Theory (MMT) has been around for around 25 years now (give or take) but has really only gained traction in this era of social media (blogs, tweets, YouTube, etc). Many of the issues raised in the Makroskop article have been covered extensively over the last 25 years. Many academic and non-academic articles have been written by us on these issues. Thus, if my response here is not sufficient, then I urge readers to consult the massive literature we have built up for further clarification.
The previous part in this series:
1. My response to a German critic of MMT – Part 1 (March 26, 2018).
2. My response to a German critic of MMT – Part 2 (March 29, 2018).
To ensure these blog posts do not become too long, I decided not to quote his original German.
So, when I quote Martin Höpner using quotation marks “”, I am providing my translation, and, given my German to English is not perfect, nuanced errors in translation and interpretation (usage) are possible.
I have in the last two days, though, had my translation checked with a fluent German speaker and writer to minimise possible errors.
Now to detail.
If we all knew MMT then the economy would collapse
Martin Höpner’s final ‘concern’ follows from him recognising what he terms “the biggest fascination generated by MMT”, being the fact that tax revenue is not required to fund public expenditure.
Public expenditure is “not limited by income” and the “state does not need taxes for financing purposes.”
He also notes that MMT emphasises that “taxes fulfill important purposes” and he lists some of these ‘purposes’:
1. They ensure that the non-government sector accepts the issued currency.
2. They punish unwanted behaviour – for example, tobacco excises.
3. They can redistribute income.
Note that in listing these functions he leaves out one of the most important in terms of macroeconomic stability – to create non-inflationary real resource space for government spending – by depriving the non-government sector of purchasing power.
Why didn’t he mention that function, especially as he proceeds to talk about inflation? Keep asking yourself that question as you read on.
He thinks that the “consequences” of understanding that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency to be “outrageous” because that understanding would open up new possibilities currently considered to be taboo.
For example, he says there nothing to stop the central bank just buying government bonds directly.
As if that is a new occurrence?
There is no real difference, by the way, between central banks buying the debt in the primary issue or in secondary markets (once it is issued). QE has seen central banks buy enormous quantities of debt in the latter way. There has been no collapse.
The outrage continues – he claims that the:
The state could … go on an unlimited shopping spree with the central bank’s credit card without … raising taxes at all (at least for funding purposes).
Note the language. We must always be careful in the choice of language we use. This is particularly the case in inter-disciplinary work – given that Martin Höpner is a political scientist rather than an economist.
Sometimes, we might unwittingly use language from another discipline when commenting outside of our own discipline that reinforces concepts etc that we would not want to reinforce.
Recognising that the state is not financially constrained does not mean it can go on an “unlimited shopping spree”.
Such a government can only purchase whatever is for sale in its currency, including all idle labour.
Yes, it can compete with the non-government sector for resources it is currently using (through purchases) but unless it deprives the non-government sector of the capacity to continue using these resources (through taxes) then it would just cause inflation.
No sensible government would do that and there is nothing in MMT to suggest we have ever advocated such stupidity.
Note also the use of the term “central bank’s credit card”, which immediately invokes the ‘household budget’ metaphor, which is standard neoliberal thinking.
Please read my blog post – Government budgets bear no relation to household budgets – for more discussion on this point.
A ‘credit card’ allows a financially-constrained entity (like a household) to spend in advance of income and then pay back the credit extended.
A currency-issuing government (including its central bank) does not have a ‘credit card’.
First, it is very damaging in relation to the edification of the public to consider the fiscal outcome of a currency-issuing government to be equivalent at any level to the currency-using household budget. While the accounting analogy holds ($s in and out) that serves only to confuse.
For example, revenue to a household gives it increased purchasing power. Revenue to a currency-issuing government provides it with no increase in its capacity to spend. That is a fundamental difference.
Similarly, the meaning of a surplus is vastly different in the two cases. A surplus for a household means it is saving. Saving for a currency user is an act of foregoing consumption now to enhance future consumption and is driven by what economists call time preference and yields on saved funds.
There is no such meaning that can be given to a public surplus. The government does not need to stockpile financial assets in its own currency in order to spend tomorrow. The capacity to spend in its own currency is not dependent or contingent on its current or past fiscal position. It is only dependent on there being goods and services available for sale in the currency it issues.
Thus, one has to wonder why Martin Höpner confuses himself (and the readers) in a matter of two or three paragraphs.
In the first instance, he correctly observes that a currency-issuing government is not financially constrained. Then, virtually within a few following sentences, he invokes terminology that implies the opposite.
Language is very important in advancing or blurring understanding. Neoliberal framing has deliberately invoked language and the use of metaphors to hide the fact that a currency-issuing government is not financially constrained.
Martin Höpner’s use of this language, presumably unwittingly, does not help advance a progressive message.
Please also see my blog posts on the importance of language and framing:
1. How to discuss Modern Monetary Theory (November 5, 2013).
2. Framing Modern Monetary Theory (December 5, 2013).
The published paper that arose from this work – Framing Modern Monetary Theory – appeared in the Journal of Post Keynesian Economics (Vol. 40, No.2, 2017).
For the original working paper, go to Framing Modern Monetary Theory.
Martin Höpner’s problem with the notion that a government is not financially constrained is that, in his words, MMT proponents have not sufficiently accounted for the “real constraints” facing government spending and thus we come up with “overly optimistic conclusions”.
He asks us to “think through what would happen, if the budget constraint myth was removed”.
Inevitably, uncontrollable inflation would have to break out. Without budgetary limitations there would be no limits holding back public spending. The private sector would have to follow. This would undoubtedly generate both significant inflation and problems in stabilizing the external value of the currency. Readers will spontaneously come up with many other ways in which inflation would occur as soon as the myth of budgetary restrictions is eliminated.
On such an important point, in a nation that suffers a deep pathological ‘inflation angst’ that is obsessive, Martin Höpner leaves this assertion without any causal logic being advanced.
His notion is that if the public is finally educated to the level that it understands that the government is not financially constrained then all hell will break loose.
Governments will go wild spending unlimited amounts of currency. The private sector will get in on the act – how exactly?
The currency will collapse and inflation will spontaneously erupt from the cracks in the ground! Sorry, I just had to write that last bit.
The point is that all spending carries an inflation risk.
But pretending that the government will run out of money if it builds a new hospital or school or maintains the public highway and transport systems, or introduces a Job Guarantee does not reduce that risk.
What view of democracy in advanced nations does Martin Höpner have that we would allow our governments to go wild once we knew they were not financially constrained?
And how exactly would that knowledge lead to a private sector spending spree? All private agents are financially constrained. Knowing that the currency-issuing government is not doesn’t alter that one bit.
A stronger economy based on a fiscal policy that aims to create full employment will provide better conditions for the private sector that is true.
But that same fiscal policy capacity has all the policy capacity it needs to discipline an emerging inflationary spiral emanating from the non-government sector.
Martin Höpner wants us to continue to have some “necessary myths” to ensure there are “real restrictions on public spending opportunities”.
He uses an example from political science based on the idea that there is a separation of powers between the executive and legislative arms of government.
He claims that separation in fact does not exist – it is a ‘myth’ and that the real power lies within government rather than opposition – but that we keep the ‘myth’ up “to keep things going”.
I found that a very curious argument to make in this context. But, overall, the analogy fails because it is flawed in its initial premise.
For example, in a Westminster system, the executive comprises the Ministers who are also key players in the legislature and dominate the legislative program.
No-one is under the impression that the dominant force in the legislature is not the executive, which is the government.
In the US-style presidential system, the President (as leader of the executive) is less dominant and everyone understands why and how.
There is no obfuscation going on when we discuss where the formal power lies in our political system of the type that neoliberals use when they frame and discuss how the monetary system operates.
In the context of MMT, though, Martin Höpner thinks it is useful to maintain the myth that “taxes finance public spending” in order to maintain the discipline on our elected representatives.
I find that a very despairing view of modern life.
It amounts to saying that we have to maintain a society that operates in a state of ignorance, living a deliberate fiction, just because our democracies are too weak to maintain orderly government and responsible policies.
Meanwhile, this state of ignorance permits governments to impose damaging austerity, which leaves millions jobless, millions underemployed, rising poverty rates and starvation in many countries, the rise of Wall Street and its counterparts all around the world, and inequality levels that will undermine social stability.
That is the consequence of Martin Höpner’s ‘necessary myths’.
Education is a liberating force and improves the accountability of our polity and forces them to conduct themselves more transparently no matter how venal their instincts might be.
Moreover, Martin Höpner then uses this argument to outline his “most general doubts about MMT”.
After advocating that we maintain a sort of primeval ignorance within society, he has the temerity to claim that:
I find the body of theory as premodern, as lagging behind the state of knowledge about money as a social phenomenon. MMT is able to perform magical operations that work on paper, based on a highly mechanistic understanding of money. The theory, on the other hand, is little concerned with the limits of the real operability of operations, which result from the fact that money users are not parts of a machine, but real people equipped with sociological and psychological characteristics.
Here we get into the classic neoliberal argument of “trust”.
The argument is that if the government goes wild with money, then people will lose their:
… fundamental trust … [in the] … value of the money. There would be an explosion of uncertainty about the future. Such a loss would reduce the willingness to invest to zero, trigger fears about the safety of savings and a flee into property – in short, it would mean the economy would collapse.
So, a fully employed economy, with growth in real incomes and real wages, high productivity, excellent public services, growing capacity to engage with renewable energy and arrest climate change, high quality schooling and health care, better public transport systems will disturb our psychological state such that we will reject all those things and do what?
What might we do?
Stop purchasing goods and services? If not, then with growing population and growing real incomes why would firms stop investing?
If some firms became scared in this environment others would just take the market share, thanks very much.
Would there be a boom in suitcases because people thought they would have to carry around lots of notes just to buy a cup of tea? (We are well past the Weimar days Martin!).
Sure enough, and I repeat this point regularly, MMT is not a theory of everything.
It does not intend to provide a deep study of human psychology. That is what psychologists do.
But when you think about the rational, maximising ideas of human behaviour, advanced by the mainstream economists (homo economicus), which psychologists indicate isn’t remotely like the way we behave, MMT policies reflect well on what psychologists actually do tell us about human behaviour.
We like security (full employment and good pay).
We do not like disadvantage and inequality (equity policies).
We appreciate access to high quality public services (public infrastructure).
So it is a fanciful idea that an understanding of MMT will lead to economic collapse and that the currency-user has to be kept in ignorance about the true policy space that the currency-issuing government has.
It is damn right primeval (premodern).
There it ends.
Despairingly, high powered research institutions still pump out stuff that resorts to these most primitive arguments.
The upshot is that Martin Höpner thinks that MMT provides a correct understanding of the way in which the fiat monetary system operates and the capacities of the government as the issuer of the currency but that it would be dangerous for any political party to espouse that correct understanding because people would go wild and lose trust in the money and Armageddon would follow.
According to him, it is better, for now, to keep society in a state of deliberately induced ignorance in order to preserve the way things are.
As if the way things is a worthy benchmark anyway (millions unemployed etc).
Reclaiming the State – Big Discount
Pluto Books has gone mad this Easter.
All their stock is being offered at a 50 per cent discount, which is better than the author’s discount I can get normally.
That means you can purchase our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World – online, for half price (and the Paperback version comes with a free e-Book).
The offer ends on April 9, 2018.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.