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Governments can always control yields if they desire

Today, I am in the mountains north of Melbourne (Healesville) talking to the – Chair Forum – which is a gathering of all the Superannuation Fund Board chairs. I am presenting the argument that the reliance on monetary policy and the pursuit of fiscal austerity in this neoliberal era, which has been pushed to ridiculous extremes around the globe, has culminated in the socio-economic and ecological crisis that besets the world and is pushing more and more policy makers to express their doubts about the previous policy consensus. I will obviously frame this in the context of Modern Monetary Theory (MMT), given that our work has been the only consistent voice in this debate over a quarter of the century. What economists are suddenly coming to realise has been core MMT knowledge from the outset.

There is increasing evidence that MMT is now mainstreaming.

Last week, the conservative Australian daily, The Australian published an article on MMT. It was critical but that is not the point.

Yesterday (January 28, 2020), the major financial daily, the Australian Financial Review (AFR), published an article – Why you need to know about modern monetary theory – which, although containing some errors, represents a very important step in the broader acceptance of our ideas.

There has been an evolution of these articles about MMT in the mainstream media around the world over the last several years, as the mainstream policy consensus starts to break down.

The first generation expressed the fears of the mainstream that a credible challenger was in its midst and chose to publicise the criticisms from mainstream macroeconomists such as Kenneth Rogoff, Paul Krugman, Larry Summers and others as well as giving space to a potpourri of critics who displayed little knowledge of what they were actually writing about.

Then some more serious attempts to engage emerged, but still not capturing what MMT was actually about.

More recently, I have seen some articles that more faithfully attempts to introduce MMT ideas to their readers and restrict the temptation to just repeat the standard mainstream attacks that have been present since we first set out on this journey in the mid-1990s.

The AFR article is an example of the latter.

It argues that “Conventional economics has struggled to explain much of what’s happening in the world today” and that “Modern monetary theory (MMT) uses iron-clad rules of accounting to offer not just plausible but logical explanations for many conundrums that leave orthodox economists scratching their heads.”

There are problems with the article though, although, in general, it marks are huge step forward to the mainstreaming of our ideas.

For example, the article repeats the claim that MMT is just ‘accounting’, or ‘description’, or an ‘observation’.

It says:

Finally, it’s not really a “theory” – it’s actually a straight-up application of accounting rules to explain how money works in an economy where the government controls its own currency. In other words, an economy like Australia’s. It’s not unlike how the “theory” of gravity is simply an application of the rules of physics.

That is an oft-repeated claim but if MMT was just “an application of accounting rules” then we would have very little to say.

The clue that the article is a bit confused here is the next phrase “to explain”.

I put this point to rest in this blog post – Understanding what the T in MMT involves (September 20, 2018).

Accounting is clearly important to MMT as we aim to be stock-flow consistent.

An example, is the sectoral balances framework, which we inherited from past approaches to providing an alternative perspective of the National Accounting framework.

By dint of the accounting definitions inherent in that framework, clearly it must always be the case that a government deficit is exactly equal to a non-government surplus and vice versa.

Decomposing that to another level, we know that the sum of the government financial balance, the private domestic financial balance and the external financial balance must always add to zero, which is just a derivative of the accounting statement in the previous paragraph.

But if that is all MMT was then we don’t get far.

The question is how do those financial balances adjust when one or more changes to ensure that accounting identity is maintained.

The answer requires us to theorise about economic (and human) behaviour.

What drives saving and consumption decisions by households?

What drives investment behaviour by firms?

What drives import spending?

What drives exports?

Behavioural theories are required to answer those questions and they are important parts of the body of work that we now refer to as MMT.

But the fact that the mainstream press is now focusing on the policy dissonance and associating MMT with a way of resolving the ignorance and contradictions that besets mainstream macroeconomics is an important development.

In that regard, the – Minutes of the Federal Open Market Committee – from the October 29-30 meeting, which record the discussion of the US central bank’s monetary policy setting body, were quite interesting.

The meeting considered a “Review of Monetary Policy Strategy, Tools, and Communication Practices”

As governments resist the increasing call to prioritise fiscal stimulus to overcome the policy void, central bankers are trying to come to terms with the options they might have left in an effort to avoid recession.

Moreover, it is not just recession that is of concern to them. They are also trying to maintain their own credibility by pushing inflation rates up to their explicit or implicit inflation targets.

The central banks really trapped themselves by articulating their policy stance in terms of an inflation target, which they then call their desired stability levels.

The problem is that inflation rates have consistently been below their targets despite massive growth in central bank balance sheets as a result of QE and other policy interventions.

It is only a matter of time, when the consensus will shift and acknowledge that the policy instruments they were using that have failed to achieve their goal to stimulate inflation were motivated by mainstream theory.

The failure is a failure of that mainstream theory.

Only MMT has been able to explain this failure.

The discussions at the FOMC, in this regard, were interesting.

A part of the briefing the FOMC participated in focused on “balance sheet tools”, which up until now had been principally “the large-scale asset purchase programs implemented by the Federal Reserve after the financial crisis.”

However, at this meeting they discussed:

… policy tools that the Federal Reserve had not used in the recent past, participants discussed the benefits and costs of using balance sheet tools to cap rates on short- or long-maturity Treasury securities through open market operations as necessary.

Read that again.

The central bank was confirming that it had the policy tools available to cap government bond yields (rates) at whatever maturity it chooses, including all rates.

The dicsussion noted that various likely benefits, including “might require a smaller amount of asset purchases to provide a similar amount of accommodation as a quantity-based program purchasing longer-maturity securities”.

But, as expected, some FOMC members were antagonistic because:

… managing longer-term interest rates might be seen as interacting with the federal debt management process.

That is central bank speak for the central bank using its currency-issuing capacity to facilitate the treasury department deficit spending without any intrinsic need for the latter to match those deficits with debt-issuance in the non-government sector.

The fact that the US central bank acknowledges this capacity stands in contradistinction to on-going mainstream macroeconomic theory.

Even the more ‘progressive’ New Keynesians fall prey to the myth that fiscal deficits drive up interest rates.

Remember Paul Krugman (January 9, 2017) – Deficits Matter Again – asserting that:

What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and “crowds out” private investment.

This supply-determined view of banking is clearly not describing the way banks operate in the real world.

Loans create deposits whether the economy is at full employment or has idle capacity.

Banks do not have a finite quantity of ‘money’ to dish out and will extend loans to credit-worthy borrowers. If they cannot find the reserves in the interbank market to cover shortfalls when the transactions are resolved within the daily payments system, they know they can always access the necessary reserves from the central bank.

But, moreover, the idea that the ‘market’ determines interest rates and bond yields assumes that the government and the central bank is passive.

They may be. But only by choice.

The point that the FOMC Minutes quoted above is making is that the central bank can always control bond yields at any maturity they desire including all maturities and sets the short-term interest rate, which then conditions market rates anyway.

According to the statement released by the Bank of Japan (July 31, 2018) – Strengthening the Framework for Continuous Powerful Monetary Easing – the QQE with Yield Curve Control – program has several aims, including:

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent” and in a footnote they said “In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.”

I wrote about QE in Japan in these blog posts among others:

1. Bank of Japan’s QE strategy is failing (April 24, 2018).

2. Japan again demonstrates basic errors in mainstream macroeconomic theory (August 28, 2019).

3. Bank of Japan once again shows who calls the shots (September 3, 2018).

The lesson that most economists do not understand is that the bond markets operate within the space granted to them by the policy decisions of the government.

The central bank always calls the shots on yields and the bond markets only set yields if the government allows them to.

This should tell you that all the claims made by mainstream economists and the sycophantic commentators that just copy their words that bond markets will drive yields up when they lose trust in a government’s ability to pay and this sparks a crisis which can only be resolved by fiscal austerity are hollow.

The bond markets can never drive a currency-issuing government into insolvency.

The bond markets can never drive yields up to elevated levels unless the government (via its central banks) allows that.

The bond markets are mendicants in this context.

In this blog post – Direct central bank purchases of government debt (October 2, 2014) – I discussed the way the Australian government shifted in the 1980s from a tap system of debt sales to the current auction system.

In the former system, the government set the rate it would pay on debt issued and if the bond markets were not happy with the return and declined to buy the debt, the central bank would always buy the difference.

In the neoliberal era, this was the anathema so they shifted to a system where the government would announce an amount it wanted to borrow and the bond dealers would then bid for the debt by disclosing yields they were prepared to pay.

We saw this play out before our eyes when the systems shifted.

In 2000, the Deputy Chief Executive Officer of Australian Office of Financial Management (a division of Treasury that manages the debt) claimed the old tap system where the central bank would always buy debt not wanted by the private sector was:

… breaching what is today regarded as a central tenet of government financing – that the government fully fund itself in the market. It then became the central bank’s task to operate in the market to offset the obvious inflationary consequences of this form of financing, muddying the waters between monetary policy and debt management operations.

The so-called “central tenet” – is pure ideology and has no foundation in any economic theory. It is a political statement. But mainstream economics is happy to blur the boundaries between theory and ideology when it suits.

What they really wanted to deliver was an elaborate system of corporate welfare so that the financial markets could get their hands on risk-free financial assets upon which they could benchmark their speculative pursuits.

The impact of this antagonism to direct central bank purchase at the time saw the government also abandon their commitment to full employment, which satisfied the conservatives who saw unemployment as a way to redistribute more of the national income toward profits.

The auction model merely supplied the required volume of government paper at whatever price was bid in the market. So there was never any shortfall of bids because obviously the auction would drive the price (returns) up so that the desired holdings of bonds by the private sector increased accordingly.

But you see the ideology behind the decision by examining the documentation of the day. This quote is from a speech from the Deputy Chief Executive Officer of AOFM:

The reduced fiscal discipline associated with a government having a capacity to raise cheap funds from the central bank, the likely inflationary consequences of this form of ‘official sector’ funding … It is with good reason that it is now widely accepted that sound financial management requires that the two activities are kept separate.

Read it over: reduced fiscal discipline … that was the driving force. They were aiming to wind back the government and so they wanted to impose as many voluntary constraints on its operations as they could think off.

So the fact that the Bank of Japan has been basically funding fiscal deficits at zero burden without “inflationary consequences” should tell you that the hype around central bank yield capping is ideological rather than sound economic logic.

And now, the US Federal Reserve is considering returning to a cap system, which it successfully deployed after the Second World War.

The Wall Street Journal article (January 26, 2020) – Fed Officials Weigh New Recession-Fighting Tool: Capping Treasury Yields – provides some historical discussion about this.

Also see my blog post – Operation twist – then and now (March 31, 2010) – for more MMT-oriented analysis of the US period of yield capping.

The WSJ tells us that:

With yield caps, by contrast, the Fed would commit to purchase unlimited amounts at a particular maturity to peg rates at the target.

The central bank can always do this.

There is never a reason for yields on government bonds rising should that be deemed undesirable.

So the categorical or blanket claim that fiscal deficits will drive up yields is just false.

Conclusion

Of course, the better solution is for the government to stop issuing debt altogether and instructing its central bank to credit bank accounts when spending needs to be facilitated.

After all, the build up of the asset side of central banks around the world over the last decade is really just a sign that this has been happening anyway – via some institutional gymnastics that assuage fear but don’t alter the facts.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

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    This Post Has 81 Comments
    1. The same kind of thing happened in the UK following the GFC.

      A mass media/Government/public hysteria over the state of the nations finances. The debt! The deficit! The bond vigilantes! Greece!

      Meanwhile…

      The Bank of England had embarked on a 340 Billion odd bond buying scheme, which we were told was some magical financial instrument, except it was just a plain old open market operation. The BofE had even told the Government there was no need to pay them interest on all the bonds they were holding.

      So there in plain site and widely reported was an institution which could magic away all that ‘debt’ with a few key strokes.

      And when i pointed this out and asked people why are we panicking about this, This is what they said..

      The Debt! The Deficit! The Bond Vigilantes! Greece!

    2. Meanwhile, The [quasi-independent] Bank of England has [wait for it, wait for it….can you bear the suspense?] ….kept interest rates on hold at 0.75%.

      So Mark Carney, in his last interest rate meeting, has gone out, not with a bang, but with a whimper, and helped to remind us of the irrelevance of monetary policy to generating prosperity in the national economy. (Although when used like a club, it can help to destroy prosperity, at least for the majority, as Thatcher/Geoffrey Howe and Reagan/Paul Volcker demonstrated a generation ago).

      In Mark Carney’s final interest rate meeting as governor, the Bank’s Monetary Policy Committee (MPC) voted 7-2 to keep rates unchanged.
      […]
      However, the MPC said it was poised to cut interest rates if a post-election bounce failed to materialise.

      Two members of the MPC wanted to cut the rate to 0.5% immediate (for all the good that would do).

      Of course, the obligatory negative reference to Brexit:

      The Bank also warned that persistent Brexit uncertainty had harmed the UK’s long-term growth prospects.

      Brexit drag
      The Bank said Brexit-related uncertainty had “weighed on investment” over the past few years.

      Policymakers said companies’ Brexit plans had diverted money towards preparing for the UK’s departure from the EU that would otherwise be invested elsewhere.

      This has reduced the UK’s long-term growth prospects by limiting the space in which the economy can grow without the risk of overheating.

      This would force the Bank to raise interest rates, which would in turn slow the UK economy.

      Policymakers now believe the UK’s potential growth has been reduced to 1.1%. This is down from 2.9% before the financial crisis and 1.6% over most of the past decade.

      However, there is at least a nod to fiscal policy:

      An expected rise in spending by the government in the March Budget could provide a further boost to growth, policymakers said.

      [Source: BBC News website]

      And we know that a consistent and well-target rise in public spending generally, and a job guarantee plan, could eliminate unemployment and underemployment, and banish the curse of zero-hours contracts and the gig economy completely. But they won’t say that.

    3. @Mark Redwood.

      Indeed.

      The UK’s QE is now approx £435bn. There’s no “had” about it either; Gilt purchases are still continuing as older bonds mature.

      Now at around a quarter of so-called “National Debt” (aka private sector savings), QE peaked at around one third a few years back.

      Makes a complete mockery of the govt-as-household analogy!

    4. @Mark Redwood @Mr. Shigemitsu @ Mike Ellwood,

      The Bank of England returned the interest it received on its bond purchases to the Government! This should have given the game away but didn’t as there was very little transparency around something that should have been properly explained to the public: This Guardian article by Larry Eliot is almost a tick list of mainstream misconceptions and useful as an educational tool about what is wrong with mainstream theory: https://www.theguardian.com/business/2012/nov/09/bank-of-england-gilts-interest

    5. Bill: Re the MMt talks in London. I may be in London at the time of those talks. However as I have seen you speak a number of times I don’t want to take a spot away from someone who has not. If I am available I’ll drop by the venue and see if there is an empty seat and attend only if I won’t prevent someone else from doing so. I’m sure it would be interesting to meet some British MMTers if it does work out. Surprisingly my partner has agreed to come as well.

    6. “And we know that a consistent and well-target rise in public spending generally, and a job guarantee plan, could eliminate unemployment and underemployment”

      Only the Job Guarantee can eliminate unemployment. Discretionary public spending has to be paid for, because it attempts to use higher level resources that are already deployed.

      Government spends unemployment. Which means for the government to employ a resource, it has to un-employ it from where it is currently being used. And it has to do that by taxing, banning or defunding the current use somehow – up front.

      Hobby horse projects have to be funded with real resources, which have to be ‘taxed’ out of the system first. Far too many MMT supporters forget that.

      We would be better framing the MMT policy view as the right to sell your labour hours to the Bank of England for £10 per hour, with all other levels of government then required to run a fully balanced budget. Most MPs could probably get their head around that.

      All injected money into the system then comes with a Union Jack attached. The same system the EU used to convince people they were paying for things. A very useful framing device in the regions.

    7. A great thorough explanation.

      For a young person like me, it’s great to learn about the previous tap system vs the current auction system.

      Learning about economics has convinced me that alot of pain is man-made.

    8. Bill,

      “The question is how do those financial balances adjust when one or more changes to ensure that accounting identity is maintained.

      The answer requires us to theorise about economic (and human) behaviour.”

      It is appropriate you emphasize this point. Many people that comment here have a too facile view of how the accounting balance equation can be used. It cannot be definitively said, ex ante, that $1 of government deficit will result in $1 of private surplus. (I have read many an argument by MMT proponent based on this proposition – they should know better).

      A deep understanding of the behaviourial relations between income and other variables is required before any such claims can be made.

      Additionally, the balance equation can be fleshed out in ways which obviously add complication and counter facile arguments, viz.:

      private surplus = consumer surplus + business surplus

      and in turn:

      consumer surplus = surplus of top 1% wealth holders + surplus of the rest, say.

      It could be that a private sector surplus in total is comprised of a large surplus of top 1% wealth holders offset to some extent by a deficit of the rest.

      Is this a good thing? Is a private surplus in itself a good thing? It seems to me these questions are never discussed – it is presumed a private surplus is a good thing.

      Additionally;

      government deficit = federal deficit + state deficit.

      So who knows where $1 of, let’s say, federal deficit is going to end up.

      The facile discussions had by MMT proponents using the balance equation are not sound.

    9. @ Neil Wilson,
      You are the one who doesn’t yet understand the economy with MMT.

      You are talking about the UK because you imply that clearly.OK.

      The UK can buy resources from the rest of the world and finished stuff too.
      The UK can produce more stuff itself and more raw resources too.
      Are all the factories in the UK being used at full production?
      The NHS uses little real resources, mostly it uses a lot of expensive labor. It can also be fully funded with deficit spending.
      All the schools also are mostly labor not resources, except gas to heat the buildings.
      OTOH, the JG program is going to cause more consumer spending on food and stuff. You didn’t seem to realize this would also suck up real resources

      Your vision that all “hobby Horse” spending must be fully paid for with taxes in clearly wrong if you include the NHS.
      It is less clear, but also true that some additional deficit spending can be made when the UK produces more or buys more from the world.

      Bill says that one can’t look at the money *only* to see when the economy is being fully utilized. One must look at the use of *all* the real resources available and necessary.

    10. Henry, you say “It cannot be definitively said, ex ante, that $1 of government deficit will result in $1 of private surplus.”

      Are you arguing that total government deficit does not always equal total non-government surplus? It seems clear that $1 of federal deficit spending ends up as $1 in the non-federal sectors of the economy. Which category you choose to stick state and local and foreign governments in shouldn’t seem to matter so long as you remain consistent.

    11. Steve, you say “Bill says that one can’t look at the money *only* to see when the economy is being fully utilized. One must look at the use of *all* the real resources available and necessary.”

      That is pretty accurate. But you need to work on the rest of the comment. Labor is most definitely a ‘real resource’. And health care uses a lot of that resource. It ain’t free.

    12. Greetings Neil, good to see that you are still around. I have missed your old blog & insights. Bill said that you had got fed up with trolls, shame, and yet even here a MMT commentator misunderstands your words & analysis.
      I can see your point in framing policy as ‘the right to sell your labour hours to the Bank of England for £10 per hour’, my only improvement on this would be £17.25 per hour to allow for a true minimum living wage at todays costs. Non-Gov employers would then have to be closer to £20 /hr, an acceptable living wage. The UK needs to aim for a high wage economy that befits it’s GDP & 1st world ranking.

      Steve_A. Sorry you have made a bit of a faux pas there. Niel has a considerable body of MMT work to his name and no one on Earth could accuse him of ‘You are the one who doesn’t yet understand the economy with MMT’.
      Unfortunately I don’t know where all Neil’s old 3spoken.co.uk website blogs & articles where archived or if they are still available to read. Maybe Neil could point us in the right direction and you could spend a couple of months coming up to speed.

    13. I’m with Henry Rech with regard to his clarification of the sectoral balancing aspect of MMT. And I believe that Bill is, also. While it’s true that a public sector deficit is often necessary to create a private sector surplus, how that surplus is distributed is of crucial concern. A surplus which simply deepens the pockets of the wealthy is not a goal that MMT should support, but sometimes it seems that certain advocates of MMT, often lay rather than professional, make an overly facile affirmation of private sector “savings” without adequate discernment of the “bank accounts” into which those savings go. Such a broad brush affirmation does damage to the receptivity of MMT by elements of the more radical left, with whom continuing outreach and dialogue are vitally necessary.

    14. Hi Newton. I know what you are saying, but I don’t think it is a significant problem among MMTers.

      How many proponents of MMT did you see supporting Trump’s tax cuts for the wealthy as good policy. Just for example. You might have seen some who said that increasing the deficit through those tax cuts wasn’t going to blow up the economy but I didn’t see any that said increasing the private sector surplus in that particular way was preferred policy.

      One of the things that MMT has taught me is that our government does not need the wealthy’s stinking money in order to do the things we want it to do. That is an important lesson.

    15. Jerry,

      “Are you arguing that total government deficit does not always equal total non-government surplus?”

      As an ex post accounting record, the balance equation is always valid.

      What I am referring to is the easy way in which MMTers use the balance equation to mount arguments about one thing or another. They will start with, “let’s say the government deficit increases by $1, then, assuming no change in the external position, the private sector surplus will increase by $1.” What macroeconomic impact a change in the government deficit will have cannot be ascertained without a behavioural model – the balance equation by itself can tell you nothing – absolutely nothing.

    16. Jerry,

      “One of the things that MMT has taught me is that our government does not need the wealthy’s stinking money in order to do the things we want it to do.”

      But you do need the real resources their money can buy – so you do need to separate them from their “stinking money”.

    17. Henry @16:15,
      So Bill is right- the math all works out and then MMT relies on assumptions about human behavior just like he says in this post.

    18. Henry @16:20- No Henry. No. If they want to buy various ‘masterpieces’ of art from one another, then no- the government does not need their stupid money. But if they are consuming many multiples of real resources when there is a constraint and that harms the rest of us then yes- we need to restrict that. And that might, but not necessarily include, separating them from their money through taxation.

      But we don’t need their money to have our government do what we want.

    19. Where did I say the labor is not a “real resource”?

      If you go backup there and re-read my post knowing the labor is a real resource and that if people earn more and they spend this extra money on food and stuff, then their increased incomes will result in more food and stuff being bought.

      I said the the budget of the NHS in the UK is mostly paid to its employees. That it doesn’t spend that much on other real resources. Is this view wrong?

      Neil is still wrong that **all** the budget items on the UK budget [except the JG program] MUST be paid for with tax revenue [or bond sales which he didn’t mention]. Perhaps it is a good idea to lie to the experts and the voters and say what Neil said we should say. But, the NHS also needs more money to save the lives of the workers and voters; and their children who will be future workers and voters. The JG is not enough for the UK, IMveryHO.

    20. Using America as an example, we can tax the income of the super rich and their wealth to take back what they tood in improper way over the last 35 years.

      But, this is not enough.
      I suggest a 1000% tax on all political ads bought by PACs.
      I suggest a 90% tax on all campaign donations to political parties and candidates by PACs.
      I suggest a 300% to 900% ‘sales’ tax on jet fuel for corp. jets and personal jets.
      I suggest other such taxes on luxury stuff that uses a lot of carbon and money spent to influence the political system.

      Almost impossible to imagine how such taxes could be passed, but we need them to save our democracy and humanity or civilization from ACC, aka AGW.

    21. @ Steve American

      I share Ucumist’s respect for the depth of Neil’s MMT knowledge, going back some years to a time – I would guess (though I don’t know for sure) – pre-dating substantially your own involvement.

      Having said that, I do think that Neil too often does does himself an injustice through the way in which he chooses to frame his arguments. For instance, while he may be entirely correct *conceptually* in what he is saying above, at what point does coming out with statements like “Government spends unemployment” or that “We would be better framing the MMT policy view as the right to sell your labour hours to the Bank of England for £10 per hour, with all other levels of government then required to run a fully balanced budget” connect with anybody’s real-world common experience? Rather than shedding light on the ideas he wants to communicate it just creates incomprehension.

      I think Neil deludes himself in asserting that “Most MPs could probably get their head around that”. I sure as hell can’t get my head around it and I don’t believe I’m completely stupid – and moreover I have the advantage over “most MPs” of having some passing acquaintance with MMT’s ideas (which they haven’t).

      I do wish Neil could bring himself to frame his arguments in ordinary language instead of in the abstract terms he seems to be more comfortable with. But for my part I’d still rather that than go without his input altogether.

    22. To Neil Wilson: I wondered what had happened to you. Sorry to hear you got worn down by the trolls, etc. Wearing good people down is their objective. I too greatly appreciated your take and at times different slant on MMT. Please let us know where your blogs are archived. Thanks.

    23. “[A]ssuming no change in the external position, the private sector surplus will increase by $1”

      The external sector is part of the private sector.

    24. Somebody please correct me if I’m wrong.

      The 3 sectors are.
      1] The gov. =Fed., state, and local.
      2] Private = the people of the nation and the comps. & corps.
      3] External.

      The “non-gov.” sector is the total of Private and External.

    25. I think that is right Steve. That is how MMT sections off the economy for analysis as far as I know. You could divide it up further if you wanted to and had the data. Or less- national government that issues currency and then everything else on the other side.

    26. “Neil is still wrong that **all** the budget items on the UK budget”

      Once you have all the unemployment hoovered up by the Job Guarantee, how do you get resources? You have to ‘crowd out’ another use using some mechanism.

      For example let’s talk about doctors.

      Doctors don’t grow on rich people. Taxing rich people won’t give you any doctors. You have to make some existing doctors unemployed first before you can hire them.

      There are only three ways to do that at the current price.

      Tax something that uses doctors, until they sack a few due to lack of funds
      Ban something that uses doctors from using doctors.
      Stop lending money to something that uses doctors so they will sack a few due to lack of funds.

      Or you enter into a bidding war with the current use until the existing use drops out of the auction due to lack of funds – which is how you create inflation. This is the only mechanism the mainstream Walrasians recognise.

      Or you can try and steal resources from a poorer nation by outbidding them, which is just a variation of the previous option but with far more dubious morality. Reducing medical outcomes in a poorer country to prop up the medical outcomes in a rich country is just colonial appropriation by another name.

      You cannot create doctors on demand. They take years to produce and *reduce* your current capacity while they are being produced. This is largely the same across all the service sector, and quite a lot of the productive sector. Machines don’t just create and install themselves. These are the ‘supply side limitations’ that cannot be ameliorated by waving your hands and shouting ‘magic money’

      MMT is, at its core, about learning to think in real terms and forgetting about currency symbols. Look after the real things and the accounting will look after itself.

    27. “I sure as hell can’t get my head around it”

      Perhaps you could explain your difficulty. I only gave a one line summary. Isn’t the usual approach to ask for an expansion rather than the post you came out with?

      In non-this-audience terms you would express it as follows:

      1. All layers of government will run a balanced budget. They will only be able to spend what they have taxed, and when they run out the cheques will bounce. Government will no longer be allowed to run an overdraft, or sell any bonds. If government wants to buy more stuff they will have to tax somebody first.

      2. Individuals will have the right to sell their labour hours to the central bank at £10 per hour for 37 hours per week. This applies to everybody whether they have a current job or not. After all the central bank is supposed to ensure everybody is employed effectively via the interest rate adjustment mechanism. If they fail to do that its only right they should pay for their failure.

      Labour purchased by the central bank will be allocate to the Work Coaches in the local area and be available for use by any public body who wishes to engage them, with final responsibility for engaging the temporary labour laying with the local tax raising entity.

      3. Central government limitations on the tax raising powers of local government are withdrawn. Local tax levels then become a matter for local politics to determine.

      4. Consequential changes to the operation of banking and pensions I won’t bore you with. Yes I have thought about them.

      MPs know about balanced budgets. They talk about them all the time.

      They know the central bank is supposed to magically sort out inflation and unemployment by some mysterious hand wavy means. The framing here is that central bankers are being held to account for their interest rate choices – if they fail to eliminate unemployment they pay for it. Currently there is no cost to them for getting it wrong. (That solving the problem is impossible using their mechanisms is for us to know and central bankers to find out. We don’t care, we have a Job Guarantee).

    28. “my only improvement on this would be £17.25 per hour to allow for a true minimum living wage at todays costs.”

      This is very noble of you, however if you went to that level you would do nothing other than create inflation.

      Demand has to be made effective before you get a positive economic effect. Simply introducing the Job Guarantee (by whatever mechanism) would boost GDP in the UK by at least 3% overnight and likely by more depending upon the strength of the multiplier.

      That boost needs a consequential boost in supply to match it and avoid too much inflation . It is here that we hoover up the spare productive capacity of the nation. To produce more loaves of bread we need to not only to run the machines longer, but staff them and supply them – all of which increases variable costs in real terms and potentially highlights supply restrictions down the spending chain which is what drives inflation. After all there is little point working extra hours if there isn’t any increase in supply of the things you want to buy with the money. You may as well have gone fishing.

      Additionally you can only shove so much of your currency into Chinese, et al hands before they start asking for something real in return. At which point you can view the transaction sequence as you buying your own country’s exports, and then swapping it in real terms with the Chinese. And those exporters need staffing and supplying, etc, etc,

      The academic JG literature warns of the potential for a one off spike in inflation on introduction if the process isn’t managed properly.

    29. I’d like to say I’m delighted to see Neil Wilson’s re-emergence.

      His indefatigable comments on the Guardian’s CiF over a period of several years were what first exposed me to MMT, and, having had a sort of sub-conscious nagging sense that the relationship between governments and money were not quite as ubiquitously described, it was like a lightbulb going on in my head, so I’m very grateful to him for that.

      I understand that his framing can often seem, like MMT itself, counter-intuitive and at times almost wifully obscure, but I enjoy the challenge of unpacking the real meaning inside the puzzle, and it is always rewarding.

      I think the misunderstanding regarding his “balanced budget for govt departmental spending” statement above, is the condition that should, and would, obtain *once there is full employment as a result of a successful implementation of the Job Guarantee* – because up to that point there will still be unused resources to soak up the extra spending, but afterwards, any extra spending that’s not equally taxed away will result in more money chasing the same amount of resources, which is inflationary.

      Neil is just making you work a bit harder to get it, perhaps because he’s got a bit bored of hand-holding newbies, and can’t resist being teasingly provocative at times, but that’s precisely why I always enjoy reading his posts.

      By the way, good luck to anyone seeking to challenge him on MMT – I will enjoy watching the very one-sided battle which will ensue.

    30. @ Newton Finn,

      Regardless of private sector savings distribution, an accurate understanding of basic Sectoral Balances still has high political value, because the government can no longer pretend that “Govt Debt” is a “burden” on future generations, but is, instead, simply “National Savings”.

      The irony is that, given the mal-distribution, the wealthy should be in favour of large government deficits, rather than against them!

      If it can be made clear to the richest that deficit spending is to their benefit just as much as it is to a disabled single mother living on a sink estate, and that their taxes are *not* an essential pre-requisite to that spending, then they are much less likely to politically oppose fiscal expansion – or a party that would propose it.

    31. “MMT is, at its core, about learning to think in real terms and forgetting about currency symbols”.

      Very true, and quite profound – especially in centreing on “learning”. To learn we have to turn to teachers, and I don’t think I’d be entirely wrong to suppose that you see yourself, in a good deal of what you write, as being in an educational role.

      As I see it you were employing on this occasion (which you often do, I think) allegory as your pedagogical tool. I didn’t suppose you wanted it understood as an actual policy proposal that the BoE *literally* buy working-hours from people etc. (or did you?). By presenting familiar things from an unfamiliar angle – disconcertingly so – people can be surprised into understanding something better than they had previously. I take it that you were offering that image as a means to that end.

      All I was saying was that, in the first place in my own case it didn’t click – not in the elliptical way you presented it anyway; It didn’t convey to me what the idea was which you clearly believed it should convey – or any particular idea at all come to that. In the second place that your presumption that (in effect) virtually anyone would be able to grasp it was (IMO, using myself as a guinea-pig) unfounded. Obviously I could be wrong about that.

      I’m obliged to you for humouring me by now going on to elucidate the idea. I shall have to take time to worry at it because it doesn’t persuade me first time around. I must confess I can’t immediately see in what way this alternative framing of the JG concept is more persuasive than the more conventional one – by which I suppose I mean:- who else would it persuade than those susceptible to the more conventional arguments already out there, and if the answer were “none”, then what would be the point?

      Incidentally, I don’t think that from this:- “MPs know about balanced budgets. They talk about them all the time” – anything at all can be deduced one way or the other about the likelihood of their being persuaded by it either. I personally consider that highly unlikely but, again, I could be wrong.

    32. @Neil – great to see you posting again.

      Quick q – Central Banks should ‘pay for their failures’ – but the BoE doesn’t control the money supply. If unemployment is rising due to lack of demand and interest rates are at, or close to, zero – what policy instruments are open to them to prevent their ‘failure’? Are you referring to the CB in the abstract as part of the aggregate gov here? Surely it would be a failure of fiscal adjustments, which is the Chancellor’s remit. What should the CB do when its interest rates hit zero and you still have unemployment?

      Thx

    33. Steve_American
      Friday, January 31, 2020 at 11:56

      The NHS uses little real resources, mostly it uses a lot of expensive labor.

      Steve, I wonder where you got this idea from?

      Go round any large hospital in the UK, especially the teaching hospitals associated with universities, and you will find a colossal amount of sophisticated and expensive technology. And in-patients have to be fed.

      Then there are the extensive buildings, usually in constant need of maintenance, and often being expanded (the hospitals I visit always seem to be). And car parks (a precious resource in the crowded UK).

      Then there are the drugs / medicines, used in hospitals and specialist clinics, etc. And the drugs prescribed by family doctors (who, while not technically NHS employees, are funded from the NHS budget): People with sufficient income pay a non-trivial amount towards these, but children and older adults, and those with chronic illnesses get them free, not a trivial amount, and the government (via the NHS) subsidises the full amount of the cost over and above the contribution made by those who pay for it. Real resources anyway, whoever is paying. And family doctor practices usually employee teams of practice nurses who administer minor treatments and tests, using further resources, all provided by the NHS.

    34. Neil @23:58, you say-
      ““my only improvement on this would be £17.25 per hour to allow for a true minimum living wage at todays costs.”
      This is very noble of you, however if you went to that level you would do nothing other than create inflation. ”

      I think you need to be careful here. I realize I don’t know much about wage rates in the UK, or even if there is a minimum wage and what it might be- so maybe 17.25 would indeed be overly inflationary for the UK. And I apologize for that, and for switching the context of my remarks to the US where I actually have some familiarity with facts and wages and living standards.

      The current national minimum wage in the US is $7.25 per hour. It’s pathetically low and not a living wage in just about any region of this country. If a Job Guarantee program effectively more than doubled that to $15 per hour I could imagine an immediate spike in some prices as the economy adjusted to that. But would that inflation be the only effect of the increased wage?

      I don’t think so. I think that in addition, we would see a shift in real income that raised real living standards for the least paid workers in the US. Now maybe that would come at the cost of lowering living standards slightly for the more well off in society- but maybe not. In any event, it is a legitimate viewpoint for anyone to argue that inequality of incomes is such that raising the wages of the lowest paid is a worthwhile policy in spite of some costs.

    35. Mr Shigetmistsu,

      “Regardless of private sector savings distribution, an accurate understanding of basic Sectoral Balances still has high political value…”

      MMT has used the sectoral balance equation to diffuse the negative implications of the federal deficit arguing increasing deficits increases national savings (assuming no changes in the external balance).

      Is this valid?

      Take the basic equation and omit the external balance for simplification, so:

      S – I = G – T

      Now S = Y – C – T, so

      Y – C – T – I = G – T.

      Eliminating T from both sides and rearranging we have

      G = Y – C – I.

      If G is increased, to preserve the balance, this means either Y increased, C decreased, I decreased or some combination of those occurred.

      Firstly, we can’t tell which of these happened without specifying a behaviourial model.

      Secondly, if C and I decreased, is that a good thing? These will have employment consequences.

      Thirdly, we should not ignore the unspecified distributional effects (and the unspecifiable distribution effects without a behaviourial model) .

      I would say that it is a cursory understanding of the sectoral balance equation that has political value. A thorough understanding undermines this notion. Increased national savings might actually be unwanted.

    36. Henry Rech is technically correct in everything he says @9:51 As far as I can see. And I am sure he is better at algebra than I am and I have never ever thought he was trying to mislead me or anyone else.

      But lets look at this statement here in English language (mostly sort of).
      G = Y – C – I.
      If G is increased, to preserve the balance, this means either Y increased, C decreased, I decreased or some combination of those occurred.

      ‘If G is increased’ – even the English language used here suggests something unless you were to think that the government has absolutely no control over its spending ever. There is some behavior there- some causal element that gets you to where the statement ‘If G is increased’ is actually a true fact or observation. So back to the equation. Well we know total economy wide spending is always equal to total income(Y) for any period. And that G (government spending) is one part of total spending and so we know that any policy that was designed to increase G that didn’t decrease the rest of spending is always going to increase Y (total income) in the economy. And we also know that there is no fixed or limited amount of money in the economy and we know that the government actually creates the darn currency that it spends at virtually no cost and can do so whenever it decides to.

      So keeping all that in mind, what is the most reasonable immediate assumption about the statement “If G is increased, to preserve the balance, this means either Y increased, C decreased, I decreased or some combination of those occurred.” If you don’t come up with Y (total income) increased as most likely then I just don’t know what you’re thinking at all. You actually would have to develop fairly elaborate behavioral models in order to explain decreases in C (consumption) or I (investment).

      The sectoral balances approach is a powerful tool to analyze the economy.

    37. @ Mr Shigemitsu

      Thanks Mr. S for taking pity on me!

      I get it now. I was provoked, without realising that that was the whole point. Like an unsuspecting trout I rose to Neil’s bait.

      I’m reminded strongly of Banksy. Deadpan, needling, elusive. Neil is another Banksy, only working in a different medium, and I’ve failed to appreciate that.

      I’ll try not to be so slow-witted again. But I can’t guarantee I won’t be: I’m a slow learner you see.

    38. [“Neil Wilson wrote,
      “my only improvement on this would be £17.25 per hour to allow for a true minimum living wage at todays costs.”

      This is very noble of you, however if you went to that level you would do nothing other than create inflation.

      Demand has to be made effective before you get a positive economic effect. Simply introducing the Job Guarantee (by whatever mechanism) would boost GDP in the UK by at least 3% overnight and likely by more depending upon the strength of the multiplier.”]

      I said this to Bill, IIRC, his response was that ‘inflation’ is an *on going* increase in the general price level.

      I took this to mean that while there would be a short period of time with price increases, that the economy would stabilize and the price level would stabilize. So, do you see a 17.50 pound JG wage as causing inflation to continue for years?

    39. [“Neil Wilson
      Monday, February 3, 2020 at 22:00
      “Neil is still wrong that **all** the budget items on the UK budget”

      Once you have all the unemployment hoovered up by the Job Guarantee, how do you get resources? You have to ‘crowd out’ another use using some mechanism.

      For example let’s talk about doctors.

      Doctors don’t grow on rich people. Taxing rich people won’t give you any doctors. You have to make some existing doctors unemployed first before you can hire them.”]

      Personally, I think that this was a poor choice as an example. You may want to give another.
      My reply to “doctors” is —

      In the short run, doctors would have to get more done. Faster or longer hours.
      In the medium run, the gov. could let some very experienced nurses do some of the work doctors are doing.
      . . Also, bring in doctors from India, etc.
      In the long run the gov. could give scholarships to train more doctors.

      The gov. could also draft all the doctors into the NHS and not let them work in private practice.

      Using the tax laws to force doctors to want to work for the NHS is the wrong tool to achieve that aim.

      In other words the UK gov. has other options than the ones you listed.

      BTW — I am a well read, intelligent retired American. In college I studied Materials Engineering and Anthropology for 7 years. I changed majors. I never took a course in Economics. I took courses in math up to differential equations (where I got lost), in Chem., in Physics, in Materials Eng., etc. I did this while avoiding service during the Vietnam War. Luck me, I was not drafted.

      So, you know far more than me about economics. I think someone said.

      This does not mean that I will roll over and let you tell me what to think. OTOH, I’m very open to arguments that can convince me. I came to MMT about 8 years ago, I started with Dr. R. Wray’s Primer. I found Bill’s blog about 2 years ago. I’m on and have been on a mission to convince people using the internet that MMT is better. I retired to SE Asia about 5 years ago, so I don’t have much chance to spread MMT face to face.

    40. Jerry,

      “The sectoral balances approach is a powerful tool to analyze the economy.”

      The point you made about my comments (viz.: “If G is increased, to preserve the balance, this means either Y increased, C decreased, I decreased or some combination of those occurred.”) related to #2 point is valid. This is why playing with the sectoral balance equation is inadvisable, even dangerous.

      If fact, it’s not an equation – it’s an identity and should not be tampered with.

      I did what I have accused MMT proponents of doing – using the “equation” to “analyse” the economy. Can’t be done. In terms of pure mathematical logic what I said in my comments related point #2 is valid. However, it’s economic nonsense.

      Your comment illustrates the point I have been making for several years.

      I would say that the sectoral balances approach is a dangerous way to analyze the economy.

      The point I was endeavouring to make was that increased national savings might actually be unwanted. I took a (the wrong) shortcut. I will rework my argument.

    41. Oh my goodness Henry. I’m thinking you are saying that I was right because you were wrong but that Ultimately, I was wrong because you were wrong for the same reason? Well I admit it is always interesting to argue with you and this is a first in my experience so far.

      I get it that you don’t think these identities can tell us anything worthwhile. I honestly don’t understand why G=Y-C-I cannot be called an equation though. And I don’t understand why you can’t accept that there could be powerful actors in the economy that have intentions and can affect the overall economy through their actions. And why we couldn’t get some idea of those effects through estimates of the accounting.

    42. @ Steve_American
      “In other words the UK gov. has other options than the ones you listed.”

      Steve

      I think you’ll find if you carefully read again what Neil wrote that all the (longer-term) options you list were already included by Neil, expressed in his own (terse) way.

      And this one among your shorter-term:-

      “. . Also, bring in doctors from India, etc.”
      was expressly included, and deprecated, as follows:-
      “Or you can try and steal resources from a poorer nation by outbidding them, which is just a variation of the previous option but with far more dubious morality. Reducing medical outcomes in a poorer country to prop up the medical outcomes in a rich country is just colonial appropriation by another name.”

      I must say I strongly agree with Neil in regard to that – it seems to me – definitive verdict on that one.

      Also, I can’t see any *essential* difference between:-

      – “The gov. could also draft all the doctors into the NHS and not let them work in private practice”
      and
      -“Using the tax laws to force doctors to want to work for the NHS … to achieve that aim”.

      The first tool is no less coercive in nature than the second (the effect of which BTW is far less peremptory and more indirect, therefore easier to accommodate-to as it works its way through the system). So what makes it somehow inherently less “wrong”?

      I would arrive at exactly the opposite judgment to yours as to their respective merits.

    43. @Henry Rech,

      If private sector savings increase, then the Government can safely spend the equivalent amount into the economy without causing inflation.

      One could argue that whatever the Government buys with that extra spending may well be of far greater use to society than whatever the wealthy would have spent it on, thereby making the case for greater private sector savings, and higher deficits.

      Of course, the Government would have to know this beforehand, in order to act usefully.

      Of course, Bill and other left wing MMT advocates argue for higher taxes on the wealthy to hamper their accumulation of savngs, not only in order to divert their spending from commanding otherwise useful resources (although I’m not sure the govt needs to commandeer the nation’s yacht- and limousine-making resources any time soon), but also to curtail the “potential energy” that those savings offer them in terms of political influence and power.

      However, the risk in doing this is that you will forever place the wealthy and powerful in implacable opposition to MMT, if it is to appear linked to this sort of ‘punitive’ taxation. Maybe it would be smarter to just let them swoon over their multiple-figured bank statements, while the government gets on with spending more in an attempt to directly improve life at the lower end of town?

    44. @ robertH and indirectly Neil,

      You misunderstood me. I didn’t mean to say that drafting doctors into the NHS or importing doctors from India was morally better, I meant to say that it was more effective because it would be more direct.

      And to reply to both of yours reply that importing doctors is immoral, I would point out that importing food from many 3rd world nations is far worse. Those nation’s people need the food, but the 1st world has the money to buy it from poor nations when their people are hungry. The 1st world can also give them fiat money to pay their debts so they don’t need to export food to get money to pay those debts.
      . . Why aren’t you both going on about the morality of taking their food {that they need every day} and are going on about to morality of taking their doctors that they rarely need and often can’t afford anyway? Why?

      Do you remember me saying here long ago that economists are blind to the fact the the automation in the cloth industry in England starting in the 1700s was able to create more jobs in England BECAUSE the cloth was mostly sold in places like India where the cloth was cheaper and better than their homemade cloth. This destroyed whole castes of the Indian population who had made cloth for centuries. So, the job losses were mostly not in England, they were in India. But the job losses were somewhere. And mostly this was done with water power not steam power, so no increased carbon emissions.

      PS — I didn’t read his whole post because {as I said} it is a bad example. Easily dispatched.
      This is like my suggesting {here somewhere in the last week} that instead to taking the super rich’s money as they earn it, we put a 1000% tax in the ways they spend it, only the ways we object to. Like buying ads to subvert the political process and muddy the minds of the voters. Or putting jet fuel into a lear jet.

      IIRC, our Bill is against a carbon tax because it’s indirect. He has said that it’s better to be more direct.

    45. Neil,
      what your argument about doctors being a limiting resource boils down to is —

      The UL Gov. can’t spend more money on the NHS to improve the lives of the citizens and residents because there are not enough doctors.
      That trying to spend such money will be inflationary over the long term.
      That it doesn’t matter that the shortage of doctors is the result of the policies used during the decades of neo-liberal austerity.
      That no other changes in how the NHS provides healthcare to the citizens are possible.

      So, therefore, the UK Gov. must tax someone to get money and thereby deprive someone of the use of some resources, so that there will magically be enough doctors in the UK to provide healthcare to all the citizens and residents of the UK.

      I’m sorry but, I don’t see any connection between taxing someone and there magically being more doctors.
      This right here is why I think this example is not a good one for you to use to make your case.

      Maybe, Neil, you could tell me more about this connection that you see and I don’t.

    46. Steve, all human labor is almost always a limited resource. It’s kind of the reason why people get paid to go to work. Highly skilled and specialized and extensively educated labor such as medical doctors are an even much more limited real resource.

      I think Neil and MMT in general points out that the government always has to recognize that its spending at any particular time needs to recognize the availability of the real resource at that time. When you have reached the current limit of that resource- spending more money in an attempt to get more resource doesn’t magically produce more overnight.

      So the government might recognize that there is a shortage in the medical doctor resource that it needs and invests other real resources to do something about that Maybe it hires more people to teach more smart young people to be doctors- well that is a diversion of resources right there- both of the already skilled teacher’s labor and the potential labor of the students. There are real costs every time the government diverts real resources away from how they otherwise might be used.

      And mostly, the government diverts those resources by spending its currency. But the currency only is able to divert resources if it has value- and that value is mostly dependent on the government being able to effectively tax the populace. And the amount of taxation necessary is always going to be linked, even if loosely, to the amount of resources the government wants to divert to its (or hopefully our) uses.

      So that is one chain of thinking that Neil might have been trying to explain to you.

    47. @ jerry,
      Maybe that was Neil’s point. If so, he totally ailed to say it clearly.

      What he said was that ALL GOV. SPENDING MUST BE FULLY PAD FOR, except for the JG Program.

      When called out to explain this claim, he pointed to doctors.

      It took me a while to see the problem with that. Which is that taxes will not create more doctors, and taxes will not free up doctors who are working in the private sector to treat rich people either. {I’m not aware of if this is even possible in the UK.} That is, rich people will suck it up; pay the taxes and still see their doctors to maintain their health or even their life. This is a poor example to show why ALL GOV. SPENDING IN THE UK *MUST* be fully paid for with tax revenue.

    48. Well Steve, the point is that the taxation is what sets up the ability for the government to use its currency to spend to eventually create more doctors. But a categorical statement that all government spending in the UK must be paid for with tax revenue is not an accurate claim under Modern Monetary Theory as I understand it. Much depends on the savings desires of the private and foreign sectors of the economy.

    49. Oops, my bad.
      There at the last all in capitals I left off Neil’s exception, which is all spending for JG program.
      I did say it more than once above though.

    50. Jerry,

      “’I’m thinking you are saying that I was right because you were wrong but that Ultimately, I was wrong because you were wrong for the same reason? ”

      I concede the point – increase government spending, income rises unless of course Ricardian Equivalence is invoked. I was arguing in the way I criticize MMTers for sometimes arguing , from an identity.

      “I honestly don’t understand why G=Y-C-I cannot be called an equation though. ”

      Because it is an ex post accounting record. It is not a behavioural function.

      ” And I don’t understand why you can’t accept that there could be powerful actors in the economy that have intentions and can affect the overall economy through their actions. ”

      Who says I don’t accept that as a possibility? Where does this come from? What has it got to do with anything I said?

      “And why we couldn’t get some idea of those effects through estimates of the accounting.”

      Because you can assume any conditions you need so that you can derive any conclusions you want. Hardly a rational process and of course lacking in any intellectual integrity.

    51. “But a categorical statement that all government spending in the UK must be paid for with tax revenue is not an accurate claim under Modern Monetary Theory as I understand it. Much depends on the savings desires of the private and foreign sectors of the economy.”

      I would suggest you haven’t quite understood it. Because that is not what is being said.

      What is being said is that *discretionary* government spending *ought* to be covered by taxation via a balanced budget amendment, because MPs can largely get their head around that.

      The *automatic* part of government spending is delegated to the central bank who pay £10 per hour to those who remain unemployed after the application of the monetary policy jiggery pokery and the redistribution from the discretionary government spending.

      The Job Guarantee automatically offsets the excess savings in the private and external sectors – as it is designed to do since it is the ultimate auto-stabiliser. That’s where the magic happens, hidden ‘off balance sheet’ at the central bank – just as it is under the current Interest Rate Targeting regime.

      I think it was Warren Mosler that said that once the Job Guarantee is in place, the traditional rules of economics are essentially restored. Because by definition at that point you’ve used up all your spare labour capacity. Additional discretionary spending, or tax cuts, then operate according to traditional ‘tax and spend’ rules.

      In real terms what government at all layers has available to deploy are the manpower and resources it has taxed away from the private sector *plus* the manpower that remains on the Job Guarantee.

      Any Hobby Horses have to be built with that – because there is nothing else. You can’t rely on the Chinese working for nothing forever. And the majority of humanity outside the US dollar currency area can’t rely on it at all. Because our opponents will shout “currency crisis” if we do.

    52. Neil –
      That’s an imho bad old idea associated with the Swedish School. Lerner’s Economics of Employment has a critique of it. I think he had the basics on how to expound the theory righter than the moderns. The main thing, what convinces people is good abstract theory, not framing or gimmicks. But thought out very carefully and written well. The opposite of what most people say about popular, or academic explanation.

    53. “{I’m not aware of if this is even possible in the UK.}”

      It is. All general practice doctors in the UK are private businesses, and always have been. They just have a contract with the NHS.

      The belief that ‘private medicine frees up capacity in the NHS’ is widespread – even though it is a pack of lies. The same consultants work for the private hospitals as they do with the public ones.

      Part of MMT is the discussion of the nature of taxation. General taxation isn’t enough. You have to have ‘effective taxation’, just as you have to have ‘effective demand’. To make taxation effective it has to free up the resources the public sector wishes to use, and do it in the most surgical manner (if you excuse the pun).

      So in this case you could introduce a doctor tax – say 50% of the salary. The NHS can easily pay the doctor tax, because it all goes around in a circle. GPs who give up private practice would have it paid for them. The private hospitals less so. You keep pushing the tax up until the elasticity gives way and the private hospitals start scaling back their operations. Then you free up the doctors.

      Or you ban private hospitals completely – nationalising them fully.

      Or you accept that it takes a decade or more to train doctors, during which time you have to reduce existing doctoring capacity to free up the people to train the new doctors. And you have to free up the people that will be doctors from what they are doing presently. And create new capacity to house them all. Then maintain all that for a decade, after which you may have some doctors. Assuming they don’t get poached by somewhere else.

      It is the same story to a lesser, or occasionally greater, extent with any other skilled operative. They already have a job and a career. To make your demand effective you have to take them from that job.

      Only the existing unemployed are there to be used without resolving a resource conflict. There is no magic mechanism here. You will have to explain how you intend to make your demand effective. If you don’t then it will be assumed that price will be the arbiter, and that means inflation.

    54. ” The main thing, what convinces people is good abstract theory, not framing or gimmicks.”

      That’s simply not the case. What convinces people is a relatable story – preferably with something solid they can get their hands on and play with. Abstract anything goes over the majority of people’s heads.

      The story here is simple. If government wants to use something, it has to tax to pay for it. Everybody understands that. And the central bank has to pay people without a job if its policies fail to ensure everybody has one. Again people understand the concept of a ‘fine’ for ‘failure’.

    55. Dear Neil, I was responding specifically to Steve’s particular rendition of your argument. Sorry about any confusion that might have caused.

      But the statement “ALL GOV. SPENDING IN THE UK *MUST* be fully paid for with tax revenue” is still NOT consistent with what MMT teaches. And you know that as well as I do. I can understand your argument that if a Job Guarantee was in place then things might be a bit different- maybe tax revenue would need to be closer to government discretionary spending on average to avoid inflation than at the present time. But that JG does not necessarily totally displace changing savings desires in the private sector- nor would it prevent changes in the need of government to divert resources to different uses at different times, say in a war for example.

      MMT teaches us that the government spends first- then collects taxes. That doesn’t change with a JG.

    56. Mr. Shigemitsu,

      “Maybe it would be smarter to just let them swoon over their multiple-figured bank statements, while the government gets on with spending more in an attempt to directly improve life at the lower end of town?”

      As long as the real resources are available.

    57. Henry, is 2+2=4 an equation, or is it an identity because it makes no behavioral assumptions, or is it an ex-post record of accounting processes? I’m really not sure what the differences here are or if they are important. Is there some theory of mathematics or numbers that I just never learned? I don’t get it. My teacher in the second grade told me that 2+2=4 and that I had to memorize it and that’s what I did. Should I go back and re-analyze that decision now?

    58. Henry- the lacking in any intellectual integrity part. You know, that kind of isn’t fair. It isn’t true- I just don’t really understand your argument. And I will be honest- it hurt.

    59. Jerry,

      “And I will be honest- it hurt.”

      I had no intention at all of hurting you. That line was not directed at you personally.

      MMT proponents use the sectoral balance equation (really an identity) to mount various kinds of arguments.

      This can’t be done because the SBE does not impute causation or functional relationships.

    60. Jerry,

      “….. is 2+2=4 an equation, or is it an identity….”

      It’s an identity – it’s always true.

      S – I = G – T + X – M as an ex post record of macro accounting is always true.

      An equation is true for only a given set of values for the variables.

      For instance:

      5X = 20 is true for only one value of X (=4). This is an equation.

      C = cY + a is an equation of a particular type – it is a function, in this case it is a behavioural function. It says the level of consumption is dependent on the level of income. It describes how consumption is related to income. It explains a causation.

      Sorry if I am teaching you to suck eggs.

    61. @ Neil Wilson

      “The story here is simple. If government wants to use something, it has to tax to pay for it. Everybody understands that. And the central bank has to pay people without a job if its policies fail to ensure everybody has one. Again people understand the concept of a ‘fine’ for ‘failure’”.

      It’s up to you of course, but IMO you are mistaken in believing that bringing the central bank as an actor into your cast of characters simplifies/humanises your argument, thereby making it more readily assimilable by the man in the street (yes not PC I know, but who cares?). I suggest that the exact reverse reaction (ie bafflement) is a far more likely one.

      To the m.i.t.s. “the central bank” is a black box, its workings entirely technical in nature. It intrinsically doesn’t lend itself to being allegorised. I suggest some re-framing of your message is called-for.

      IMO the same criticism could be levelled at some other parts, but that’s just my opinion which clearly others here don’t share. By all means disregard it: I shan’t mind :-)

    62. Jerry Brown
      Thursday, February 6, 2020 at 4:32

      Agree with you completely. To me Neil’s approach, while wholly admirable in its rigour, can seem a shade too cerebral at times.

    63. @ Jerry Brown

      I suggest that if Henry had instead phrased that sentence which you took personally thus:-
      “Because ONE can assume any conditions ONE NEEDS so that ONE can derive any conclusions ONE WANTS. Hardly a rational process and of course lacking in any intellectual integrity”
      – you wouldn’t have had any issue with it, would you? Because then it would, manifestly, have been a generalisation.

      @ Henry Rech

      Thanks for that exposition. I too was floundering with what you had written up to that point! You have now made your meaning very clear.

      Moral? I suggest:- (Over-)compression doesn’t aid comprehension; usually the reverse.

    64. robertH,

      Thanks for explaining that it was not the personal “you” I was using. It was a way of generalizing.

      (I hope you get it Jerry).

    65. Henry Rech, Thankyou for the explanations. I think I understand your position somewhat better. But would it be fair to say that in some circumstances, a reasonable estimation of likely reaction behavior is possible to make, and that in that circumstance, due to the likelihood of that possible behavior, it is possible to use the sectoral balances framework as a guide as to likely outcomes? But that the strength of whatever argument is made relies entirely upon the accuracy of the estimation of that behavior? I mean this is really the position that I have always thought possible, even if I have been terrible at articulating it. Would you say it is never possible, that it is sometimes possible- but so unlikely as to be useless, or is it sometimes possible and reasonable to do?

      And I get the other thing and I should have realized it before whining about it :). But thanks.

      RobertH @19:21 and 19:39- Thanks man, I appreciate it.

    66. Jerry,

      “But would it be fair to say that in some circumstances, a reasonable estimation of likely reaction behavior is possible to make…”

      I don’t know why you’re so hung up about this question in this way – either you accept my argument or you think it is bulldust. If you accept my argument then you have (ONE has ) to be very careful how you use (ONE uses) the SBE.

      I don’t need to have a nice warm fuzzy feeling about MMT. I don’t see it as an easy panacea for the woes of society. I want to understand what I can accept and not accept. What I argue on this point does not undermine the MMT story as far as I can see – it just taints its credibility. Any new paradigm seeking to break through has to be watertight and immune from criticism and not pander to prejudices.

      I prefer rigour.

    67. Previous comment poorly laid out.

      Jerry,

      “But would it be fair to say that in some circumstances, a reasonable estimation of likely reaction behavior is possible to make…”

      I don’t know why you’re so hung up about this question in this way – either you accept my argument or you think it is bulldust. If you accept my argument then you have (ONE has ) to be very careful how you use (ONE uses) the SBE.

      What I argue on this point does not undermine the MMT story as far as I can see – it just taints its credibility. Any new paradigm seeking to break through has to be watertight and immune from criticism and not pander to prejudices.

      I don’t need to have a nice warm fuzzy feeling about MMT. I don’t see it as an easy panacea for the woes of society. I want to understand what I can accept and not accept.

      And, I prefer rigour.

    68. That’s a fair question Henry. Not sure why I care about your opinion either. Doubt the answer will be found in a sectoral balance equation. Or identity or whatever. But there probably is some reason. Don’t get any warm and fuzzy feelings on my account :)

    69. You know Henry, the field of economics, even macro economics, is an attempt to understand a portion of human behavior. Especially in regards to the behavior of how people and the institutions they have created interact with each other in order to work and produce and exchange and distribute goods and services. That’s is what economics is- in my opinion.

      You say you prefer “rigour” in this attempt to understand the behavior of human beings. Well it isn’t possible- people do stupid and irrational things all the time. Institutions and governments do stupid things all the time. How much rigour can you possibly expect from how humans react to events? It isn’t a physics laboratory- its not even close to that.

      But even people with a modicum of common sense are able to predict how most people might react to certain events- but that process can not be described as anything ‘rigourous’. Maybe we can come up with estimates or educated guesses. And that is what economics is and all it is ever going to be unless you replace human behavior with computer algorithms. In which case it will no longer be the ‘social science of economics’ and be just another part of computer tech.

      In the hopefully long time before that would happen, we have learned how to get an idea of human behavior at a broad scale by using accounting identities that divide the results of those actions into various sectors where changes in one sector will definitely reflect or result in changes in some other sector. And to say that people cannot draw any reasonable estimates based on their knowledge of human behavior as to how those various sectors will react to changes, even designed changes such as government policy- well its like sticking your head in the sand so you can ignore what’s going on in the world. Those estimates might not be as ‘rigourous’ as you would like- but I think is would be silly to ignore them and even stupider to complain about others using them without a really good reason to back yourself up.

      So that is pretty much the reason I give a damn about what you write on this blog. I don’t care if you have warm fuzzy feelings for MMT- but I do know you are an intelligent person who is interested in this subject. And I, for some reason, have a certain amount of respect for your opinion based on our past discussions. So I have an interest in articulating my point of view even if you don’t want to hear it.

    70. I know that I’m a nobody with no economics training.

      However,

      Warren Mosler has said that the Gov\Fed should set the interest rate it pays on reserves and bonds at zero.

      Has anyone asked if this would be harmful to the economy? Currently, bond are used by insurance comp., etc. to earn returns on their assets so they can pay out when claims are made. Bill says he has been asked by such people to help get the EU to change its policies so their comp. can buy more bonds that pay better interest rates.

      Also, if the super rich can’t invest in bonds that pay interest then what will they do? It seems to me they will invest in something else and this will likely drive up the price of whatever they invest in. Be it land, paintings, corp. stock shares, whatever. Is this going to be good or bad for the economy?

      Might it be better to let them park their money in bonds and leave it there? I’m suggesting that the Gov. or the Constitution set the interest rate and offer bonds at that rate on a “take it or leave it” basis. The interest rate could be set at the CPI +X%, where X = some small number less than 1%.

    71. Steve, why the heck are you worried about what options the super rich have? They have all kinds of options that working people don’t have. The government doesn’t need to give them a guaranteed return on their money. They want to make money on their money they can invest it on possibly productive enterprises like every person who ever started any business ever did. And risk a loss or maybe help develop something that would be good for everyone else. Or they can just spend their money like everybody else- that’s the only guarantee anyone gets when they get money. Government guaranteeing a return on the very money the government creates is not smart.

    72. Jerry,

      Ok your comments on rigour and human behaviour, in general.

      If what you say is correct then why bother with any model of economic behaviour? Just make it up as you go along or however the whim takes you.

      The thing with using the SBE to prognosticate about economic behaviour is that it is not designed to do this. The SBE can be abused in such away that by judiciously choosing your (one’s) assumptions you (one) can come up with any conclusion you want (one wants). As far as I am concerned this lacks at least intellectual integrity and ultimately rigour.

    73. Jerry,

      And BTW, just so we are clear, the SBE is NOT a model of human behaviour – it is an accounting record true by definition with no implicit or explicit characteristic of causation.

    74. Steve, the reason I disagree is because when government policy grants an automatic safe return on its bonds (which it doesn’t need to issue in the first place) that becomes the absolute minimum return or profit baseline that people will demand for any investment activity whatsoever. And in general, I believe that actual investment in new technologies and production methods and things like housing and health care treatments and infrastructure in general are the way we improve the human condition. So putting an unnecessary floor on expected returns is likely to reduce the incentives of individuals to actually take those risks and make that investment activity more costly and therefore reduce it. Is anyone who can make a guaranteed return of 4% by holding a no risk government bond going to put their money at actual risk by investing it in a company that might only have a return of 2%? No.

      I understand that eliminating guaranteed interest makes it more difficult for insurance companies and private pension administrators to do their jobs, but I think it is a worthwhile tradeoff. If the citizens of a country decide that it is good policy to have the government guarantee the savings of ordinary citizens up to some particular amount I wouldn’t have a problem with it. But government bond issuance as currently done is often, as Bill says, just welfare for corporations and the already wealthy. And that comes at a cost to the rest of us.

    75. Jerry,
      1] What I suggested was less than 1% above the CPI. IIRC, most central banks have been targeting 2% inflation. So, I see my suggestion as being 1.5% to 2.5% fixed rate on my bonds, not ever 4%.
      2] I think that nobody is going to invest in a risky venture that only has a 2% estimated rate of return.
      3] If the society needs such investment then the Gov. will have to do it in some way. Ways like going to the Moon, direct investment, or a tax break, etc.
      4] For the last many years we have seen QE policies in place that had the effect {IMHO} of driving up the prices of housing and corp. stock shares. This has priced the public out of buying houses, driven up house & apt. rents, and stock prices. This is a cost of the current system. How can MMT be used to fix these damages to the economy?
      5] If my rate of bond interest was set by the Constitution then it would be very hard to buy off Congress to raise it. Pegging it to the CPI would cause the rich to lobby Congress to fix how the CPI is calculated such that it would be higher than actual inflation. Would this be so bad if the CPI was being used to increase payments to the bottom of the income distribution? Examples are the COLA for Soc. Sec., other welfare payments, and maybe a delayed raise in the JG wage. Note a delayed {by 1 or 2 years} raise in the JG wage, not as soon as it happens. I’m hoping that delaying it would keep the inflation control effects while still keeping the JG wage socially inclusive as the decades go by.
      6] You spoke about a cost to the nation of paying interest on bonds {that I’m selling to help insurance comp.}. I hope you didn’t mean a cost in money, and I think you were referring to the costs you had postulated earlier in your reply.
      . . I have already claimed that those costs are not going to happen for the most part. And, I have mentioned other costs that are or will happen if there are no new bonds being sold. The super rich feel a need or drive to invest in something to make their money grow. This has damaged the economy already with housing and stock prices. You just ignored my mention of those costs and postulated some other costs. Please respond to my costs and my explaining away of your costs {being alack of investment by the rich in marginal projects that don’t even return more that the inflation target rate}.

    76. Steve, I agree with 0% risk free interest rate as many MMT economists also seem to.

      My use of the numbers 4% and 2% for profit were meant as illustrative examples- not as actual, at the moment expected, returns on anything.

      Most of what is commonly called investment in stocks, bonds, real estate, is not at all what economists call ‘Investment’ which is always the somewhat risky use of someone’s financial resources, or time and effort, into expanding productive capacity or creating real goods in some way. That gets very confusing for me also. Instead it is a form of attempted savings which hopes to make ‘capital gains’ appreciations. If speculation in real estate becomes a problem because it drives up prices for ordinary people that need a place to live- then the government needs to tax that speculation and whatever capital gains that drive it.

      The real costs, to the people, of government paying interest to wealthy people and corporations is that it increases their spending power- including their abilities to consume more real resources and to influence elections and government for their own purposes. For doing absolutely nothing that we need. You are right that the actual monetary interest payments on the bonds aren’t in themselves the real cost though.

    77. Jerry, you wrote, “The real costs, to the people, of government paying interest to wealthy people and corporations is that it increases their spending power- including their abilities to consume more real resources and to influence elections and government for their own purposes.”

      I addressed this problem directly in the set of blogs this week sometime. I didn’t cut\tax their income I taxed their spending.
      I suggested a 100% tax on jet fuel being put into a lear jet or corp. let, etc. And also other carbon using excessive consumption.
      I also suggested a 1000% tax on spending by PACs to influence elections including muddying the public’s mind with lies, etc.
      I also suggested a 90% tax on campaign donations by PACs to candidates and political parties.

      Nobody, incl. you, commented on my post. I was following Bill’s lead and suggesting we tax what we dob’t want very heavily and not try to stop those things we don’t want to taxing their income. But, yes, taxing ‘rentier’ income seems fine with me.

    78. I think that setting a govt-mandated guaranteed minimum on bond yields is among the worst ideas I’ve come across.

      Steve’s defence of it strikes me as being akin to saying: “OK we all know that rentier capitalism is poison for the wider society, but why not fight poison with more poison?”

      If – as we know full well to be the case – the richest one per cent , five per cent, whatever .. are putting all their effort into screwing the rest of us I’ll be damned if I can see any good reason for cutting them any more slack than the vast quantity of such they’ve already finegled for themselves.

      The way to deal with them it seems to me is by every legitimate means to cut down on the vastly privileged position they already enjoy at the expense of the rest of us. I’ve never heard that the best way to kill a parasite is by feeding it with more of what it thrives on.

      And if the pensions and insurance industry (the very core of the FIRE sector) is in dire straits then it better find its own remedies not look for government handouts.

      My 2c-worth.

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