The world is changing that is for sure. Governments around the world are promising to spend billions to address the coronavirus crisis and no-one (other than a few so-called progressives – see below) are talking about how governments will pay for the interventions. Everybody knows how. They have always known. The shams about governments not having enough money to provide adequate housing, schooling, health care, employment, other services, and a sustainable response to climate change are now exposed for all to see. The game is well and truly up. Everybody can now see that governments just have to announce billions of intervention and it will happen. Forget all the ‘complexity’ about accounting arrangements. Forget all the stuff that we will also drown under massive tax burdens if the government dares to help some disadvantaged person get a leg up in life. Forget all the stuff about bond markets punishing profligate governments with insolvency. Everybody can now see that the bond markets are the beggars and the government rules. Even in the Eurozone, it is obvious that the ECB is able to fund fiscal deficits of any size – ‘there is no limit’. Only the Modern Monetary Theory (MMT) economists have consistently outlined the rationale for what is going on at present. And that point is increasingly being recognised although not always in ways I think does our work justice.
Note: I had a long telephone conversation with Alan Kohler today (see below) and I agreed to appear on his regular podcast to talk about MMT.
This is what is emerging – headlines from the national broadcaster ABC this morning (March 23, 2020). The government’s own services are failing due to lack of investment in capacity.
MMT in focus
Many economists are staying quiet at present in a similar way to how they reacted to the fiscal interventions in the early days of the GFC.
They knew they had failed to see the GFC coming and had been using frameworks that didn’t even have financial sectors accounted for (because they believe in ‘efficient markets theory’).
They knew that they had been raving on for years about how ineffective fiscal policy.
But it didn’t take long, though, for them to emerge from the slime and start berating governments for using their fiscal capacity to save economies from total meltdown.
Those voices killed the growth in the Eurozone, the UK and elsewhere. They caused the Labor government in Australia to introduce a historically high fiscal contraction in 2012, which set the economy back and led to the parlous state that we now enter the current crisis.
The same economists also spent years telling the world that currency-issuing governments had to impose pernicious austerity on their nations, which attacked the most frail members of our society, ran down essential public infrastructure (such as health systems) and maintained elevated levels of labour underutilisation – why? – because they needed to have ‘ammunition in the locker’ to fight the next major downturn or catastrophe.
Well we have a catastrophe on our hands now.
And governments seem to have quickly found financial resources to deal with it.
At present, with all the promises of fiscal support, the mainstream economists are not saying much or are trying to be seen as champions for the ‘whatever it takes’ approach.
If you track the literature (both academic and popular Op Ed offerings) you will find that only the Modern Monetary Theory (MMT) economists have consistently outlined the rationale for what is going on at present.
We have been the only ones that have argued along the lines being espoused by governments now.
There are few voices at present talking about ‘fiscal rules’. It seems the British Labour Party is still stuck in that rut – the same rut that helped them lose the December election.
For example, in the recent Tribune article (March 20, 2020) – “They Haven’t Provided the Economic Security People Need to Stay Home” – the Shadow British Chancellor (still), commenting on the Sunak fiscal package wrote:
It would be wrong to cut taxes now, or to loosen regulation, at a time when we need all the revenue we can get for the Exchequer and careful action by all, including business. These kinds of moves could also endanger the funding of our public services in the future.
Not even the mainstream are saying this at present John.
There is no danger to funding public services in the future as a result of the current fiscal interventions.
This sort of narrative (from the progressive side, no less) is just repeating all the nonsense that mainstream economists have been repeating ad nauseum for years that was never true in the first place.
Today (March 23, 2020), the Murdoch-owned The Australian, the only national daily print newspaper published an article by Alan Kohler – It’s Modern Monetary Theory time as the state steps in (subscription required).
Alan Kohler is not a natural ally, although sometimes I like his take on the data (he presents to Finance Report on ABC News each night).
He has sometimes berates governments for running deficits and argued in the aftermath of the GFC deficit increases that “To return to surplus we now need spending reductions or increased taxes, or both” (Source).
He argued then that:
The AAA rating would only be lost sometime in the future if there were “no intention” of returning to surplus, which there is. So the “AAA rating under threat” story is an old-fashioned beat-up designed to boost S&P’s tattered credibility as the investors’ guardian, but that doesn’t mean the budget is in good shape – it’s not.
So not a natural ally although I would not call him a ‘deficit hawk’ in general.
Now, he is writing:
1. “It hardly seems sensible to be putting numbers on how much the Morrison government will spend to support the economy …”
2. “The economy is likely to be entirely shut down within a few days apart from essential services, in which case government support for businesses and jobs will have to be unlimited, as it is in other countries.”
3. “in any case, the pile of sovereign debt that will be issued in 2020 and possibly 2021 to keep citizens alive will have to be colossal — Napoleonic in scope.”
4. “It seems inevitable to this armchair epidemiologist that the RBA will have to end up buying the government’s debt as well …”
5. “except for the source of the RBA’s QE, and presumably the $90bn facility. That money will be newly manufactured on the RBA’s computers before being dispatched to banks at the click of a mouse …”
6. “This has a name: Modern Monetary Theory, in which deficits don’t matter because they can be funded with money manufactured out of thin air by central banks.”
7. “Up to now MMT has been mainly pushed by the lefties … and opposed by the Right, and all right-thinking economists, as the thin end of the socialist wedge. But all bets are off now — something new has come along. Capitalism has to close for a while and the state has to step up. Do governments just keep doing what they’ve always done, which is to scrimp and borrow, or do they try something new?”
That is quite some shift in rhetoric.
The only problem with it is that he mischaracterises our work in two major ways.
1. MMT is not a new regime that we will shift to. That is a fundamental mistake in understanding that many people fall into.
A government does not suddenly ‘apply’ or ‘switch to’ or ‘introduce’ MMT.
Rather, MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.
It helps us better understand the choices available to a currency-issuing government.
It allows us to understand that most choices that are couched in terms of ‘budgets’ and ‘financial constraints’ are, in fact, just political choices.
There are no financial constraints on a currency-issuing government, only real resource and political constraints.
And when life is threatened, as it is now, those political constraints soon evaporate.
MMT is not a regime but an accurate perspective on reality.
It lifts the veil imposed by neo-liberal ideology and forces the real questions and choices out in the open.
In that sense, MMT is neither right-wing nor left-wing – liberal or non-liberal – or whatever other description of value-systems that you care to deploy.
I mean by that, that while MMT provides a clear lens for viewing the system, to advance specific policy platforms, one has impose a value system (an ideology) onto that understanding.
To talk about MMT’s prescriptions is to reveal a lack of understanding about that distinction.
The point is that MMT is what is.
It is not a matter of moving to MMT.
By eschewing the discretionary use of fiscal policy and imposing fiscal rules, or, the alternative now of spending significant amounts to address the coronavirus crisis, a government is not exercising ‘non-MMT’ policy options in the first instance, and, ‘MMT policies’ in the second.
The MMT lens allows us to tease out and more accurately predict the consequences of such a policy choice.
Please read my blog post – The erroneous ‘lets have a little, some or no MMT’ narrative (February 20, 2019) – for more discussion on this point.
2. Deficits clearly matter in MMT, but, not for the reasons that mainstream macroeconomists claim.
In MMT, all constraints on government action are real. By that I mean the available real resources that it can purchase.
I have been using this framework in some presentations to get the point across.
The following slides consider two broad states – currency sovereignty and capacity utilisation – and didn’t alternative combinations of each in assessing what the constraints on government spending are.
A nation is monetarily sovereign if it issues its own currency, floats it on foreign exchange markets, does not issue debt in a foreign currency and sets its own interest rate.
Australia is sovereign, Germany is not.
The first option is:
Case 1: Australia at full employment – the constraints on further government spending pertain to real resource availability. There are no financial constraints present.
All productive resources are currently in use.
In this case, if the government wants to increase its share of use for whatever reason, then it has to deprive the existing users of that use so as to transfer the resources into the public sector.
If it tries to do that by competing at market prices with the existing users then inflation will result.
Deprivation can be achieved in a number of ways but an important vehicle is tax policy.
The imposition of taxes reduces the purchasing power of the non-government sector and renders the resources they would have been deploying with that purchasing power unemployed.
The government spending then brings those ‘unemployed’ resources back into productive use.
The taxes, however, do not provide any extra financial capacity to the government. As the issuer of the currency, it has all the financial capacity it needs.
Case 2: Australia with mass unemployment (coronavirus case) – here there are no constraints on extra government spending.
There are idle resources that can be brought back into productive use with extra spending (higher deficits usually) and no inflationary constraints likely.
Case 3: Eurozone Member State at full employment (a highly unlikely juxtaposition) – now there are two constraints – financial and real.
Without monetary sovereignty, the government has to go to the private bond markets to get the funds to cover any deficits.
It also faces the same real resource constraints as in Case 1.
Case 4: Eurozone Member State with mass unemployment (coronavirus case) – here there are no real resource constraints but the financial constraints persist as a result of not having monetary sovereignty.
This is the dreaded case for a Eurozone nation.
They have credit risk (that is, can default on outstanding debt) and the bond markets know it.
And their capacity to raise taxes to repay the outstanding debt obligations is impaired when there is high unemployment.
So even though there is mass unemployment and chaos, the bond markets might refuse to fund such a government at sustainable yields because of fear of debt default.
This is the situation that occurred in 2010 and 2012 in the Eurozone crisis as yields skyrocketed on the debt of various nations (Italy, Greece, Spain etc).
It was only the intervention of the ECB (as the currency issuer) that saved many nations from insolvency as bond markets pushed up yields.
The same thing is happening again now and the recent statement by the ECB has, once again, stopped total meltdown.
But the fact is that it exposes the flawed architecture of the EMU, where the ECB has to violate the spirit of the Treaty (no bailouts) and guarantee Member States deficits (via its unlimited QE secondary market program).
So when Alan Kohler claims MMT says that deficits do not matter he is not understanding what we write.
I most recently wrote about this issue in this blog post – Rounding off the Masterclass in London last weekend (February 26, 2020).
There is a chapter on this issue in our textbook – Macroeconomics.
The point is that deficits do matter.
Cases 3 and 4 do not apply to Australia or any other currency-issuing government. Only Cases 1 and 2 are relevant.
And applying the ‘fiscal logic’ that is applicable to Case 1, when, in fact, the nation is confronted with a situation like Case 2, will always make matters worse.
To proceed, we have to understand what the purpose of fiscal policy is.
It is not to achieve any particular ‘number’ (financial ratio). That sort of logic is based on the belief that Cases 3 and 4 are dominant.
The purpose of fiscal policy is to advance well-being and that includes sustaining full employment and environmental health. It also means that essential public services such as the health system are maintained with adequate degrees of freedom to meet calamities.
The austerity years have undermined all these agendas and have left us with elevated levels of labour underutilisation, a climate emergency and now a health emergency.
The first picture above which describes a breakdown of the government service delivery mechanisms is characteristic of the lack of capacity left in the public sector as a result of the obsession with surpluses.
Tomorrow, I will unveil a 10-point (or something) plan to deal with the current situation.
For all those who might think the proposed fiscal intervention is huge, I will explain that it is, in fact, so far, only about the scale of the intervention that the federal government provided during the early days of the GFC.
It is at least half as big as will be required.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.