There’s a certain possible amusement concerning this idea of Modern Monetary Theory. For the idea is bubbling up to the top of popular economic discussion just as we’re actually doing the thing itself. We’re thus actually trying it out just as people are shouting that we ought to – the implication of which is that we’re about to find out how it really works, not how its proposers think it ought to of should.
More normally we’ve got to wait a few decades between the bright idea and the failure. After all, Marx was long dead before anyone started slaughtering people to try and make that set of economic ideas work.
The theory itself is, in some ways, merely a truthful description of what does in fact happen. It’s not whole and complete for in certain iterations it claims that all money is government created – this is not so in the slightest. It’s true that fiat money is so but that’s – usually, as we’ll come to see – a trivial portion of the total money supply. By far the vast majority is in fact created by the banking system in the form of credit. No, stating that banks have government licences so this is the same thing doesn’t work – for credit is created by Fat Tony, his baseball bat and illegal lending as well. And in the absence of government licenced credit or money people will use other things. My standing the next round by simple social acceptance that it’s my turn is credit creation too you know.
That all money is necessarily created by government is not true. However, given that we have fiat money these days – it’s money ‘cuz government sez it’s money – one insight is indeed true. MMT says that a government that prints its own money cannot run out of money. Further, that it’s the printing that comes first, it gets spent, and so a government doesn’t have to collect taxes in order to be able to spend. Tax is the bit that comes later, when there’s a levy on that new economic activity created by the initial spend.
All of this is true but there’s nothing new to it. The old name for this is monetisation of fiscal policy and not only is it old enough that we’ve that alternative name for it we’ve also present and historical examples to look at. Zimbabwe and Venezuela currently, the Weimar Republic last century, Henry VIII was doing this with the debasement of the silver coinage and the principle was used by Diocletian or at least around that time with the sestertius.
That list of examples showing that there is a limitation to how far this can go. To be correct about it the money creation can only go on so long as there are unused economic resources that can be brought into employment by either this increase in the money supply or by the spending directly itself. Once the economy is at full capacity – no, this does not mean that all have “well paid employment” and all that, just that there are no spare economic resources – then any further increase in the money supply is just going to turn up as inflation.
Vide Weimar, Zimbabwe, Venezuela, Henry VIII and all that.
To which MMT% enthusiasts insist that that’s the time to raise taxes, for that’s how we withdraw that excess currency from the system and so destroy both it and the inflation. This works in theory but in practice is the more interesting bit. What tax rate kills Venezuela’s 1,000% inflation for example? Or, to look at this another way, do we actually end up anywhere different?
Under the old system of thinking we need to tax lots so government can spend lots to make the world a better place. Under the new system government spends lots to make the world a better place and we end up with high taxes. We still end up in the same place, a large government high tax sorta place. Sure, whether this is a good thing or not is arguable – having more of life determined by those who blew £11.4 billion on NHS programming and gained not one single usable line of code might not be the path to wealth and a Great Society but your view may vary. My own view is that keeping the spending of politicians on a short leash is desirable in and of itself.
But, OK, spend now, tax back later, no, the spend doesn’t have to lead to inflation because politics and politicians will do the right thing, won’t they? That’s a fair even if short description of the policy implication of Modern Monetary Theory.
Well, excellent, the thing being that we’re doing that right now. Governments around the world are printing new money then spending it. That’s what all this Covid-19 spending funded by quantitative easing is. This is exactly the MMT prescription. Which means we get to see how it turns out. As Our Merv points out:
The world is facing a coronavirus debt timebomb as countries borrow trillions of pounds to fight the pandemic, former Bank of England Governor Mervyn King has warned….
So, what is going to happen to inflation?
We are creating the hell out of the money supply at present. We clearly also have unused economic resources. But we can assume that at some point – I’d say real soon now for I’m in the V shaped recession crowd – that we will be back to full employment and full economic capacity. As we rather were 6 months back. But in this near future we’re going to be back to that with a money supply vastly, hugely, larger than what we had before.
It being important to note that QE creates narrow money – cash – not wide money or credit. The narrow money supply before all of this back in 2008 or so was perhaps £70 billion, of that sort of order. Now it’s heading past £1 trillion or so.
That is, once we do get back to full capacity we’ve a heck of a lot of money that needs to be taxed back out of the economy and destroyed.
Traditional economics says sell those gilts back into the market, collect the money and destroy it. MMT says that we don’t have to do that, for we never have to repay that debt we can just tax the money back instead. At which point there’s not really much difference, is there? We either sell the debt back and then have to pay it off through higher tax in the future or we don’t sell it back and we have to pay higher tax in the future to kill the inflation.
That is, spending now means higher tax in the future. Which is rather something we knew all along really.
But back to the top. The interesting thing about all this is that we’re actually doing the experiment right now. MMT says don’t worry about how to pay for the spending, just print the money and she’ll be fine. Which is exactly what we are doing right now. And, well, will she be fine?
Isn’t it fun that we’re about, as Our Merv says, to find out?