It is Wednesday today and only a short blog post. I am heading to New York city today from London. More on that tomorrow. It is clear now that journalists from all over the globe are starting to pick up on the shifts in policy thinking that I have been writing about – the admission by policy makers that monetary policy has reached the end of its effective life (not that it was ever particularly effective) and that there is a crying need for a return to fiscal dominance, which was the norm before the neoliberal era began several decades ago. We have not yet reached the stage where the dots are being fully joined – monetary policy dominance dead -> fiscal policy dominance desirable -> neoliberalism dead. But that will have to come because the fiscal policy activism will have to be aimed at addressing targets that have been neglected by the neoliberal era – real wages growth, quality and security of employment, restoration of public services, environmental care priorities, scope and quality of public infrastructure, and the like. But as the journalists are starting to file copy on this topic, some are very lazy – and just want to have it on the record that they were part of the throng. One of the laziest offerings I have read was published today in the Australian on-line newspaper, The New Daily (September 23, 2019) – The economic weapon too hot for the RBA to mention: Helicopter money – and written by finance journalist Michael Pascoe, who is usually more careful with his words. While many might think any publicity is good for the spread of our Modern Monetary Theory (MMT) work, my view is that falsely constructing MMT can add to the already stifling dissonance among the public that has been mislead for years by the framing and language of the mainstream economists.
Michael Pascoe begins with the questions:
What if the Reserve Bank had an economic weapon that would let the government have its budget surplus cake and eat it too?
A weapon that could push billions of dollars directly into the economy without increasing Commonwealth debt or moving interest rates?
Neither question is particularly profound.
Anyone who would pose them as if they were sort of unfathomable mysteries is just rehearsing the usual mainstream economics narratives that suppress clarity about what it means to be a currency-issuing government.
The Australian government is a currency issuer.
And as the monopoly issuer of the currency, its spending can never be intrinsically revenue constrained.
The Reserve Bank of Australia is a creature of government legislation, the – Reserve Bank Act 1959.
It tells us that:
1. “the Governor is the accountable authority of the Bank”.
2. “The Bank has such powers as are necessary for the purposes of this Act” – which are extensive in relation to the issuance of currency.
3. The Treasurer has powers to override the decisions of the Bank.
4. “The Governor and the Secretary to the Department of the Treasury shall establish a close liaison with each other and shall keep each other fully informed on all matters which jointly concern the Bank and the Department of the Treasury.”
5. “The Governor and the Deputy Governor … are to be appointed by the Treasurer”.
6. “The Bank shall, in so far as the Commonwealth requires it to do so, act as banker and financial agent of the Commonwealth.”
7. The Treasurer can determine the distribution of any profits the RBA makes including that “the remainder shall be paid to the Commonwealth”.
8. The RBA issues the currency under the direction of the Treasurer.
That is pretty categorical.
There is no question that the government can spend its currency into existence without have to increase Commonwealth debt. It never needs to issue Commonwealth debt.
And when it does issue Commonwealth debt, such transactions are not providing the ‘funds’ that enable the government to engage in the act of spending.
In fact, as I have noted often, the non-government funds that are used to purchase the debt are correctly seen as being past deficit spending that the government has not yet taxed away.
And, further, all spending comes from ‘nowhere’ – some official in the Department of Treasury (the policy arm) telling some official in the Department of Finance (the accounting arm) to instruct an official in the RBA (the currency arm) to change some numbers in relevant accounts to facilitate the accounting record of the spending decisions.
So if you understand that you will easily see how lazy the Michael Pascoe article is.
He talks about this “weapon” as bing in some way an “unconventional option” which no RBA official dares talk about because:
You don’t want little kids to get ideas about dynamite fishing in the dam.
He calls the ‘weapon’ – “helicopter money” and claims (in the sense of trying to ‘scare the horses’) that it is:
… at the nuclear end of the central bank’s arsenal and, like nuclear reactions, is powerful and dangerous, requiring very careful control.
And soon after we get the obvious links that have held back understanding for decades:
It’s a process that can take an economy the way of hyperinflation – the Weimar Republic, Zimbabwe, Argentina.
Okay, I am not going to provide a history lesson here.
Please read my blog post – Zimbabwe for hyperventilators 101 (July 29, 2009) – for more discussion on this point.
Note that has been in the public domain for more than a decade.
So any person who was interested in the topic and tying it to Modern Monetary Theory (MMT) would surely have done the simple research to see what the core body of MMT work might have said about Zimbabwe and associated hyperinflation discussions.
Obviously, laziness reigned and Michael Pascoe thought he could then write:
There is a tribe of “modern monetary theory” economists who claim the government doesn’t need to ever worry about budget deficits, that governments can just let debt rip to keep the economy running.
The helicopter money concept is different – there’s no government borrowing.
Well, I suppose being a “tribe” is slightly more organic than being a ‘sect’, which is another collective label that is bandied around by those seeking to discredit us.
But his description of our work is plain wrong.
1. We do not claim (and have never claimed) that the government never needs to “worry about budget deficits”. We contextualise the fiscal position in a way that mainstream economists fails to.
We show the conditions that will determine whether a particular fiscal position is appropriate or not.
But we do that by analysing the real economy and how the spending and saving decisions (and outcomes) of the government and non-government sectors impact on the real economy.
We see no meaning in analysing financial ratios or aggregates in isolation.
So, under certain circumstances, a fiscal deficit of 3 per cent of GDP will be appropriate, but, under other circumstances, a fiscal surplus of 3 per cent of GDP might be required to maintain responsible fiscal policy.
Then, again, a fiscal deficit of 10 per cent of GDP might be warranted.
The point of departure of the MMT economists, such as myself, is that the fiscal position is only relevant when we consider the real state of the economy.
It is never a matter of financial solvency.
2. The core MMT position is the a currency-issuing government should not issue debt.
It should use the central bank-treasury nexus to ensure that fiscal policy is implemented and bank accounts are credited and debited, as appropriate to facilitate that implementation.
That is identical to ‘helicopter money’.
I have written about that extensively:
1. Helicopter money is a fiscal operation and is not inherently inflationary (September 6, 2016).
2. Keep the helicopters on their pads and just spend (December 20, 2012).
3. The consolidated government – treasury and central bank (August 20, 2010).
Those blog posts provide the detail that defines what an MMT understanding provides. I urge you to read them so that you are clear on these issues.
Sure, as Michael Pascoe notes:
What’s interesting now is that influential, relatively conservative economists are proposing ways to use the nuclear option safely given that the developed world has reached the limits of monetary policy and many governments’ fiscal options are also limited.
But the MMT economists have consistently argued in this way and the rest of the profession is slowly catching up as their previous prognostications have been demonstrated to be false, ineffective or something similar.
The rest of Michael Pascoe’s report just follows the trail of the ‘rats’ who are deserting the mainstream ship and starting to advocate for policies that better exploit the currency-issuing capacity of the elected government.
I keep running into economists when I am abroad …
The Adam Smith Wikipedia Page, tells us that:
A large-scale memorial of Smith by Alexander Stoddart was unveiled on 4 July 2008 in Edinburgh. It is a 10-foot (3.0 m)-tall bronze sculpture and it stands above the Royal Mile outside St Giles’ Cathedral in Parliament Square, near the Mercat cross.
It was funded by the Adam Smith Institute and is located at 192 Royal Mile, Edinburgh EH1 1RF.
The problem is that many people think of Smith as being the father of ‘free market’ economics (the so-called ‘invisible hand’ of the market).
Taken together, they do not provide a manifesto for the unfettered greed that the likes of the Adam Smith Institute would like to promote.
I will write more about his some time in the future.
This is music …
I was taking a deep breath this morning in London after a somewhat whirlwind week of bunny-hopping around Europe talking about MMT and the Green New Deal.
This was a monster recording and featured Jimmy Smith (Hammond organ), Lee Morgan (trumpet), Art Blakey (drums) and one of my favourites, Kenny Burrell (guitar).
It was recorded on February 25th, 1958 at the Manhattan Towers in New York City.
At the time – Lee Morgan – was just 19 years old and only lasted to 33 years of age. He was shot by his de facto wife in a jazz club where he was performing.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.