From the FT:
... it is worse than that: the economics profession is not even sure how expansionary an expansionary fiscal policy is, because of crowding out. This would be funny if the consequence were not millions of homes repossessed worldwide and lives wrecked.
I suggest that the solution to this farce is to abandon the distinction between fiscal and monetary policy, as advocated by Modern Monetary Theory. Under this regime, government simply creates new money and spends it (and/or reduces taxes) in a recession.
Conversely, when inflation looms, government reins in money via extra tax (and/or reduced public spending) and “unprints” it, or extinguishes it. As to government debt, that becomes near irrelevant: it can gradually be whittled down to near zero and be left at that level.
Ralph Musgrave, Durham.
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Phew! So it's not just me who thinks that the distinction between 'fiscal policy'* and 'monetary policy'** is completely artificial.
Ralph's longer summary of Modern Monetary Theory is here.
* Which in turn relates to two barely related areas, i.e. tax decisions and spending decisions.
** Setting interest rates in order to control money supply and/or controlling the money supply to influence interest rates, with a vague hope of controlling inflation.
Wednesday, 11 May 2011
Reader's Letter Of The Day
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24 comments:
One could consider an ancient idea for controlling inflation - from time to time, hang bureaucrats.
I just 'love' the MMT proponents. The spending = add money, tax = reduce money view is correct but then to go on to assert that deficit does not matter is a step too far. Most people/lender/PeopleBankOfChina never heard of MMT and will not accept the government 'reducing' money supply through taxation. It is eay to print, but to unprint is very hard.
Further to that, to QE is easy but to unQE will be interesting. Imagine uncle Ben/Uncle King calling up JPM and says, I want to sell you £10bn worth of stuffs and I will sell more, will you buy them? JPM Trader: err..sir.. we got computer problem right now and cannot execute trade...click...
Further, MMT only deals with base money and ignore credit money as well as how the velocity of money chanes over time.
Yes, good letter and you're absolutely right about the distinction between fiscal and monetary policy being totally articial. People need to get to grips with Modern Monetary Theory. It gives a good basic explanation of how money works and why it works that way. However in a world of Fractional Reserve Banking, governments aren't the only entities that can create money. Banks can do it too.
So it's important to take the money-creation role of the banks into account when setting policy. That has to be controlled by interest rates or by setting reserve requirements otherwise the government's attempts to control its own money creation process by balancing tax and spending will prove irrelevant.
So MMT is a big part of the Answer but it's not the whole Answer unless the Government mandates 100% reserve banking so that it becomes the sole money creation entity.
My academic opinion of MMT is bagoshite.
Anon: "It is eay to print, but to unprint is very hard."
Nope, it's as easy to unprint as it is to print - you just raise taxes or cut spending. Sure, this might be politically difficult, but that's no reason not to do something.
D, don't worry about the banks. They mainly create money by blowing land price bubbles (which LVT will fix); MMT is merging fiscal and monetary policy to as few variables as possible to try keep the real economy going.
AC1, it's not shite at all, it just strips things down to bare essentials.
As Ralph's longer summary points out, during a recession it is just as good to cut taxes as to increase spending, they come to much the same thing, and the nigh-certain benefits of cutting taxes probably outweigh the dubious benefits of increased spending. On what? for a start.
It's total bollocks
It assumes that the Bureaucrat can discern the correct level of demand for an economy.
"Under this regime, government simply creates new money and spends it (and/or reduces taxes) in a recession."
aka
"Under this regime, government simply creates inflation in a recession."
Deliberately boosting the money supply, either by reducing interest rates or directly as in this proposal, simply causes inflation.
MW Last para last comment - yep, persackerly. Cutting taxes is always the best thing to do. Governments hate to do that because it is an admission that they are useless at spending (other peoples) money.
Which brings us to our current debacle. The politicos have not yet accepted that the solution now is to cut taxes AND spending.
Phew! So it's not just me who thinks that the distinction between 'fiscal policy'* and 'monetary policy'** is completely artificial.
Well, as a layman, I wasn't sure but didn't want to say anything.
Further, MMT only deals with base money and ignore credit money as well as how the velocity of money chanes over time.
I've been reading Steve Keen's blog and he appears to demonstrate that credit money is dominant.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
AC1, of course a bureaucrat can't tell to the n-th degree, but you can spot when private sector employment is falling and/or prices are rising, so its a trade off between the two.
AC, in a deflationary period, it doesn't cause inflation, it prevents deflation. Nobody claimed that the MMT leads to perfect results, it's just a nice simple way of looking at things.
L: "the solution now is to cut taxes AND spending" Agreed.
JH, this economic stuff is mainly smoke and mirrors and/or downright lies.
DNAse, all money is credit money, next question. Bank notes and coins in your pocket is credit money. Physical gold is not 'money' in that sense.
@MarkW,
Of course it is the unprinting political process that is difficult but we live in a democracy after all at the tyranny of the 51% in a FPTP election is all that counts.
Also, raising tax at the right people is much harder to do. Those who profit from the printing usually have ways to stash their loot at a safe place (even your LVT can't fix that). Can't see UK government taxing People Bank Of China (or the OPEC).
So, the burden of the unprinting hits the middle class who did not (relatively) benefit much from the printing.
That is totally unfair and will not work in a democratic state.
So, it is a waste of time to pay attention to MMT beyond the initial ideas of surplus/deficit = unprinting/printing.
MMT is one of those theories that is all very neat on paper, but complete b*ll*cks in the real world of politicians, civil servants and voters.
I can easily estimate the electoral prospects of the politician who decides the economy is too inflationary and increases taxes, and then deletes the money received - zero chance of forming part of the next government. What taxpayer wants to work hard, pay extra tax and then be told the money has been effectively shoved in the shredder?
MMT might work in a one party totalitarian State where the economy could be directed with no thought of having to run for re-election. But in a Western democracy? No chance. Its just currently popular because the idea of printing our way out of trouble sounds a lot easier than hard work.
Anon, look, what appeals about MMT is that it is nice and simple. Whether at any stage, the government should be printing or unprinting, and if so how much, are separate topics.
My view is, in a full-on LVT world with minimal government and a CI, then LVT receipts would automatically come down slightly in a recession as rental values fall; there'd be no possibility of cutting government core expenditure as it's already at the bare minimum, and it seems a bit churlish to reduce the CI. I personally would leave it at that.
In any event, I'm a fiscal conservative and would always aim to run a surplus by having taxes that are higher than spending because a) this keeps land values low and b) helps us pay off the national debt (and once that's paid off, we still need to bank something to pay off accrued public sector pensions etc).
S; "What taxpayer wants to work hard, pay extra tax and then be told the money has been effectively shoved in the shredder?"
A taxpayer who has saved up some cash will be pleased to learn that inflation is low and his savings are retaining their value. The fact that money has been shredded will be explained away as 'repaying the national debt'.
People will believe any old crap, e.g. that high house prices make us wealthy; that QE is printing money; that VAT is a tax on consumption etc.
@Mark Wadsworth
"it's as easy to unprint as it is to print - you just raise taxes or cut spending. Sure, this might be politically difficult, but that's no reason not to do something."
As Sobers says:
"MMT might work in a one party totalitarian State where the economy could be directed with no thought of having to run for re-election. But in a Western democracy? No chance. Its just currently popular because the idea of printing our way out of trouble sounds a lot easier than hard work."
The whole MMT thing seems to rely upon those with the power over the money supply acting like angels which is totally unrealistic. Politicians love spending money and hate saying 'no' to voter demands for more spending.
QG, my point was not that printing and unprinting money was an inherently good idea. I don't know why people keep accusing me of having said that.
My point was that I am relieved that other people have also realised that the distinction between fiscal and monetary policy is highly artificial, and that if politicians are going to mess about with this sort of thing, they should at least do it the simple way.
DNAse, all money is credit money, next question. Bank notes and coins in your pocket is credit money. Physical gold is not 'money' in that sense.
I should have said credit money created by private banks is dominant over that created by central banks. At least for the most recent recession/depression. Of course you are right that land-value speculation (fuelled by the banks) was at the heart of the problem and LVT would have halted it. But I don't think you can dismiss the role of the banks in money creation (and its impact on the overall economy) so easily, at least while LVT is not in place.
DNAse, the simplest form of money which we can all understand are bank notes, which are issued by Central Banks - but the face value of these notes is a liability on the Central Bank and is recorded as such, this is "credit money" the same as a bond issued by a bank or a deposit account held with a bank.
Banks create money not governments.The latter stand on the sidelines nagging or trying to slow things down with interest rate rises. Of course if the government owned the banks they could use interest rates as a tax on credit creation an equivalent to LVT as tax on increased land values.There should be two Single Taxes as I once proclaimed very wittily some years ago.
Thank God for MMT or MW would still be arguing that banks don't create credit in their normal course of business.
DBC, I refer you to my latest budget plans. There is no need for govt to own banks (makes things worse), but there will be a 2% tax on gross bank assets, which will act like a 2% higher interest rate (or the govt creaming off the monopoly element which banks can earn in their sleep).
This would only raise half as much as all the taxes which banks currently pay (mainly PAYE, but also corp tax, irrecoverable VAT etc), so fair enough.
A 2% asset tax? Why didn't you say so? That's alright then.
I'm with DBCR and DNAse on the importance of banks in the money creation process -- Steve Keen does make a very convincing case --so I was a bit worried that you were ignoring it. Sure, LVT would probably fix things. However just in case it doesn't, I think that a belt and braces approach is justifiable. And braces in the form of a 2% tax on bank assets should control the banks propensity to create loans willy-nilly.
Derek
1. After much soul searching, that went into my draft budget.
2. The gimmick is, during credit bubbles, banks borrow and lend on wafer thin margins of +/- zero % and credit/debt expands exponentially. A 2% tax drives a wedge between the two and ensures that banks only lend on on less risky and/or higher return investments (i.e. business investment rather than house price or share price bubble).
3. The nice thing is that the optimum rate is also the revenue maximising rate, i.e. if you put the rate up from 2% to 3% and gross credit shrinks by more than a third, then we know that 3% is "too high" and the rate gets reduced again (and vice versa).
4. Sure, people will earn less interest as well, but everybody gets a share of the tax as a Citizen's Dividend (an extra £500 per year each in my example).
5. This is the other 'Single Tax' which DBC have independently dreamed up.
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