Time to kill the debt bogeyman once and for all

Here’s a piece I wrote in the Guardian responding to Scott Morrison’s distinction between “good” and “bad” debt. Unfortunately, the comments included plenty of people who are under the impression that, thanks to Modern Monetary Theory, there’s no need for taxes and therefore no need to think about budget balance. That’s wrong, as I explain here, with an endorsement in comments from leading MMT economist, Warren Mosler.

35 thoughts on “Time to kill the debt bogeyman once and for all

  1. I do get it, Simon. The discussion suggests that money creation is under or poorly utilised as an economic instrument due to miss-perceptions of what “debt” is about in a national government (sovereign) economic context. MMT is an understanding of that process as applied in various political and economic structures.

    My question was “is an enhanced use of MMT an important capability for governments to cope in rapid reaction with progressive environmental change with the subsequent required economic adjustments”.

    The munitions example refers to goods that have been purchased by the government and have effectively disappeared. I believe that in creating a certain amount of money to compensate for the loss of those goods the economy is brought back into balance without negative impact (even though as I say this I cam see some flaws). However in the case of cyclone Debbi, how far can the government go with disaster relief funded by the printing of money to cover the loss of productivity during the rebuild? Can it only print the lost taxation value or can it go further?

    Can a better understanding of MMT assist governments to cope with rapid structural economic change? In the aviation analogy Debbie equates to the loss of an engine during flight (fiscal year), the pilots must change the way the aircraft is configured in order to complete the flight and land safely. Is MMT an instrument that can be actively and accurately used to assist in the precise dynamic control of the economy?

  2. “how far can the government go with disaster relief funded by the printing of money to cover the loss of productivity during the rebuild?”
    Productivity lost is replaced with rebuild. If you ask if you can import as much as it is needed to replace lost production, the answer is yes but only for those that are using their own currency for trade. Those are members of former British Commonwealth, Japan and Swiss. EU if allowed to print. What it would be considered a reserve currency is not only for US dollar but for those former empires that trade only in their own currency, that do not have to borrow from foreign banks to import but from their own banks. Every other country is fighting to sell production to those 6 countries to get their people employed and raise GDPs. They dont know how else to employ their own people.

    Answer to 2nd question is that governments know what they should do but pretend that they are constrained by debt and deficits.
    3) yes. By using fiscal policy more then monetary policy. Monetary policy comes with a lag of about a year while fiscal affects the economy as soon as spending starts.

  3. From my observation over the past few years, most of the Guardian readership tends to support higher marginal tax rates for the upper income brackets independently of any economic theory whatsoever. (Upper income brackets meaning for anyone earning more than themselves)

  4. BilB :
    My question was “is an enhanced use of MMT an important capability for governments to cope in rapid reaction with progressive environmental change with the subsequent required economic adjustments”.

    Sorry for going off on a long rant – I’m used to people missing the point, not looking for more elaboration.

    With regard to your question about replacing infrastructure, and the extent to which the government can put money into it, the question is always the broader economic context. If the economy has a lot of slack (on top of the slack created by the destruction produced by the natural disaster) then the government can command a lot, if the economy is already near full engagement then there’s not much space for the government to command additional resources for reconstruction. There’s no magic formula, it’s just a question of how much economic space there is for government expenditure. If necessary the government can /make/ space (this is probably the most important use of taxes), but that’s still essentially the same question – how much economic space does the government have, and how can we make sure there’s enough space for the government to do what we want it to do.

    That gives a clue to the answer to your second question – how can an understanding of MMT help us deal with rapid change. The first question is what do we want the government to do – once that’s been answered, the next question is how can it be done, and finally how do we make sure that the government has access to the resources it needs. The first part of that is straight politics; the second part is generally the technical part; and the third part is where an understanding of MMT comes in. If rapid change is needed and the political will is there the government can always do it, one way or another – if necessary, they can go on a war footing and essentially command all the resources available in the economy to achieve their ends. That’s a very big hammer, and the political will to go that far is very difficult to find, but it’s the far end of a spectrum, not something qualitatively different from any other application of government power. MMT just makes the spectrum of potential government power clear.

    The question of whether MMT can contribute to dynamic control of the economy is a separate matter. Governments aren’t exactly nimble entities – this is why they tend to fail pretty badly at driving the whole economy all the time (this is part of the problem with communism). Ideally you want to set up government-supported systems that allow the rest of the economy to self-organise into dynamically stable systems. That’s hard, obviously, but there are some proposals put forward by MMT proponents that can help – the job guarantee is one example. But again, that’s not really anything inherent to MMT.

    All of this, though, is fundamentally orthogonal to the core issue, which is that /politics/ underlies all of this. And we /want/ it to – rule by technocrat, regardless of whether they’re MMT oriented or neo-liberals to the core, is never a good thing. MMT can help governments achieve their aims, but it’s not magic fairy dust that can make governments do the right thing (whatever that is).

  5. @BilB

    “I don’t understand the quantitative easing mechanism, but the end result was putting money back into the US economic system.”

    I am not sure there is a unique mechanism, which characterises ‘quantitative easing’. The finer points seem to me to depend on the particular institutional set-up of ‘the economy’. Quantitative easing since the GFC amounted to a monetary authority buying debt securities (even some equity I understand) that was issued by the private financial sector but denominated in official currency units (eg US$). In exchange for the debt securities, the sellers obtained other financial securities – cheques written by the monetary authority, either directly or via financial institutions who carried out ‘money transfers’ – cheques or electronic. In this sense, you are quite right in saying ‘money was being put back into the economy’. So, what is ‘money’? Junk bonds – at values lower than their face value one would hope – were exchanged for official currency units – to keep financial institutions from going bust. Which raises the question: What is ‘the economy’? People who lost a lot of their superannuation ‘money’ (value) didn’t get the official currency units, etc. etc.

  6. Ernestine
    Money going to banks is not same as money going into economy. Money can stay inside banks just as it was the case with QE. It just filled up bank reserves and it stays there making interest that CB is paying banks interest on excess reserves.

    MMT says loans are new money, reserves are created when those loans are deposited back into the banks. Reserves are not loaned, so banks do not need reserves to be able to loan new credits. But, CBs went with that logic to excuse their giving money to bankss, paying face value to bad assets.
    CB took bad assets and with it became the biggest bad bank as when they split banks into good and bad banks. CB carries bad assets now.

  7. Yet, anytime you mention banks and money you enter MMT domain. Since mainstream economics have no knowlege of banks and money (don’t even allow discussion if it) the best you can say is “hope” as in “i hope they did not pay face value”, hopefully QE will push more lending out, negative rates will hopefully force banks to do more lending…
    That is mainstream talk on banks

    You do not wish to enter MMT discussion, yet you enter it all the time but on the level of a layperson.
    And also talking about economics is in MMT domein since it talks about money and mainstream would like not to talk about money and how it is created. Mainstream economics is mostly about barter and refuses to acknowledge that todays economics is about money-debt-barter economy.
    You wont be able to stop knowledge about money and banks enter the public discussion.

  8. By a suitable definition of ‘mainstream economics’ you can include or exclude any body of literature to substantiate your claim regarding MMT.

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