Is it really taxpayers’ money?
A short and simple tutorial…
“It’s taxpayers’ money,” is an all too familiar cry, from media reporters when they try to expose spending waste, welfare cheats, or excessive expense claims by politicians. It resonates well with taxpayers. It’s good promotional advertising for those with an agenda, whether it be a current affairs program, a publicity-seeking politician, or community groups unhappy about their latest funding cuts.
It even floats into the general conversation around the barbeque or the dinner table. Everyone uses it to add emphasis to their point of view.
The problem is, it’s not true.
Taxpayers’ money is never spent. Taxpayers’ money does not fund federal government spending. As hard as it might be for the average worker to grasp this simple fact, when the penny does finally drop, it can’t be un-dropped. Once the average person understands the purpose of taxation and its relationship with public spending, an intelligent conversation can begin. But not before.
So, pay attention
The simple example of the bucket with a hole in the bottom should be enough for people to realise how wrong their perceptions about taxation have been. The tap that fills the bucket with water, is government spending, the hole at the bottom is the collection of taxation. They are two quite separate functions.
All federal government spending is new money created by the government through the agency of the Reserve Bank. It deposits funds into the commercial banking sector to generate economic activity. It guarantees the reserves required by the banks to lend money. All it needs, is one computer to digitally transfer a set of numbers to another computer. That’s it!
At the other end of the process, money is drained out of the system to maintain a balance that ensures just the right amount remains in circulation to maintain stability. We call it taxation. How hard is it to understand this?
What happens to the taxation money that is drained out? It is credited against the money the government has spent, thus reducing the overall level of money created. In the banking system, that is what happens when you repay a loan. Your repayments are credited against the outstanding balance, thus reducing your liability to the bank.
Taxation reduces our liability to the government that created the money.
So, is that so hard to grasp? If you have ever borrowed from a bank, you should know how that works. Now simply apply the same procedure to government spending and taxation. Voila!
So, the next time you hear anyone complain about taxpayers’ money being wasted, you should be able to say quite comfortably, “It’s not taxpayers ‘money.”
Of course, there will be those who will counter this explanation by saying that there is a limit to the amount of water in the tap. Not our tap! It can’t run out of water anymore than a scorer at a football match can run out of scores, or a mathematician can run out of numbers. A currency issuer (our federal government) can never run out of money to issue.
Furthermore, a shortage of taxation revenue, in no way, restricts a currency issuing government from spending.
There are those who know all this and try to explain it to others only to be rebuffed and ridiculed. Perhaps it is because the explanations have been too complex. Perhaps it has been because the recipient has been so indoctrinated by the media, our schools and universities that for someone to come along and challenge such time-honoured maxims is too much to absorb.
There’s an election looming. Perhaps they could be reminded that a flat earth was also once a former time-honoured maxim. Bon chance mes amis.
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You say: Taxation reduces our liability to the government that created the money. Is that so, or is that taxation reduces the government’s liability to the government that created the money.
It’s just a roundabout argument that it’s not tax payer’s money when for all intents and purposes it actually is. A pointless article really, that achieves little.
Longwhitekid, perhaps you could explain what you mean.
As a universal (unless there are exceptions?) model how would it look to say the current situation in Venezuela using the same terms?
@Michael: You would have to look at the historical effect of economic sanctions by the USA disliking a socialist government being successful in the Western Hemisphere and so challenging the domination of national economies by the US corporations. There is also the desire to suppress supply of Venezuelan oil to their people outside of the US oil corporations. Then you could consider the above argument.
Thanks John, an interesting explanation, but as you expected, those who have been indoctrinated will not accept. Perhaps if you add that, when Governments stop adding money, everything dries up. This is what happened with most world economies during the GFC. Australia spent money (ie filled the bucket) and our economy continued to flourish. That spending has been decried by their successors, who have totally failed in all but spin, and yet their lies of being good ‘managers’ are accepted as fact by many.
No. It is NOT “all tax payers money”
It belongs to Murdoch and his ilk, who had had this non-extant money almost ripped off them by evil socialists on behalf of motley shirkers and leaners, who they thwarted by offshoring said lucre to places like the Caymans and Seychelles.
I think the term “taxpayers’ money” is used as shorthand for two different concepts:
1) that the money spent by the government belongs to all Australians as a whole and therefore should be used to benefit the nation as a whole, as opposed to for the benefit of one or only a few.
2) that the tax withdrawn from circulation is directly transferred to spending programs
It appears the two have become conflated to the current usage implying that the money only belongs to people who have paid tax, and that therefore anyone who doesn’t pay tax should have no say in or right to the benefits of the money’s use.
If only there was an easy way to explain all that to the masses!
Michael, what New England Cocky said as well as poor economic management by the Venezuela government particularly borrowing in a foreign currency
John…the free printing of currency would imply that it only has a value designated by the universal agreement of other “players” in the “sovergien currency” field…Ie..Once we had the “gold / silver standard” that valued a nation’s currency against held gold or whatever….I suspect that Fort Knox is still open for business?…So it must exist that EVERY currency must hold a certain agreed value or there would be rich people everywhere…would there not?…How is the value of currency sustained in these times?
John, I like your simple bucket analogy.
Soozka, not really. “Taxation reduces our liability to the government that created the money.” Simply means: When we are taxed, we reduce or eliminate that taxation obligation or liability when we or someone else sends our cash to the government. Nothing complex here. The government and the central bank (RBA) are considered one entity. The RBA is the only organisation that can create Australian dollars.
Longwhitekid, not really. John’s simple analogy is an accurate portrayal of the reality of national government finances. It is the consequences of this reality that are very powerful. For example the federal government can afford anything that can be purchased in the economy – there is no real need for austerity and mediocre government services. The government does not incur any debt from deficits. The government can spend ‘enough’ into the economy so that aggregate demand increases so that full employment results without incurring debt or ongoing inflation. Government surpluses in no way add to the government’s future capacity to spend – the opposite being true due to the economic contraction that results.
Hardly pointless when this reality blows the LNP’s reason for being out of the water or demonstrates that we can afford adequate government services, infrastructure, full employment or fund the transition to environmental sustainability for example.
Both Venezuela and Zimbabwe shrank their economies and deficit spent well beyond the productive capacity of their economies hence producing high inflation.
John, what you say is true, but saying that it’s taxpayers’ money is still a perfectly good general description.
That new money is, in effect, the taxpayers’ money. It is made possible by tax money being taken out of the system. If that money wasn’t taken out then it becomes extremely difficult or impossible to add more without seriously damaging the economy, depending on how productive the economy is.
When you watch a movie you’ll say the character moved across the screen. But he didn’t. The movie is made up of a succession of new still images flashed in front of your eyes. No person actually moved across the screen. But it is pedantic to insist on that. We say the person moved.
In the same way, yes, the taxed money is not the same as the new money that is spent by the government, but the effect is essentially the same as if it was… with one small difference: it is slightly decoupled, so that the government is restricted by the productivity of the economy. If the economy is more productive (as it tends to become over time) then the government can spend more than they tax, though I don’t think this has a terrific impact on things. Mostly, as your illustration of pouring water into a leaking bucket shows, the balance is between what’s taxed out and what pours in.
So, yes. If you want to be strictly correct, it isn’t taxpayer money, but common understanding indicates that for all general purposes it is.
John Kelly I consider myself to be reasonably intelligent, reasonably educated and , admittedly, only modestly acquainted with the monetary system but it pisses me off mightily when you say ‘ how hard is this to understand?’ Because I have followed you, and other MMT proponents for some time now and none of you have explained it to my satisfaction. It seems to me that everyone, be they individual or company, gets some sort of income. If that income is below the tax free threshold — or otherwise artificially minimised — they don’t pay tax. Now I know we don’t actually pay tax, it is withheld from our income and is directed to the government. I accept that the government can print as much money as it likes, but surely it’s expenditure is constrained, to some extent, by the amount collected/ withheld from those who pay taxes. If they spend more than they “collect” then they are in budget deficit, if they collect more than they spend, they are in surplus. In my household, that equation means either I dip into savings or, in a low spending year, my savings increase. Now I appreciate that the government doesn’t have one (or more) savings accounts at People’s Choice Credit Union but doesn’t it have the equivalent in the Reserve Bank? It is all very well to say the government can print/spend as much money as it likes but doesn’t it run the risk of ending up like one of those countries with runaway inflation,what Paul Keating once suggested we ran a risk of becoming, a banana republic?As a certain person has been known to say, ‘Please Explain” but do it in a way that doesn’t make it seem like you are superior to me. Because you haven’t done it yet.
John, I wish I’d had you along with a small group of locals from around here when we met with our local council to plead with them to spend money on repairing and maintaining a local bridge that they plan to close in 2019 due to lack of funds to keep the bridge open.
This was a bridge built in 1932 as part of stimulus spending during the great depression (irony ?) and the labour to build it was largely drawn from unemployed diggers from the Great War ; scroll ahead 86 years and the bridge is in need of substantial refurbishment but the local council – who were gifted the bridge from the state government – have no money – without increasing rates in the local area – and they can’t get any state or federal grants despite what we are told about the economy humming along. They are loathe to borrow money so a valuable piece of community infrastructure is seemingly lost.
Perhaps they could invest in a printing press !
Who cares? Of the largest 40 taxpayers in Australia NOT one is on the electoral roll – NOT one is entitled to vote. Government is NOT an extension of taxpayers but a creation of citizens – because it’s citizenship (and only citizenship) that entitles one to vote. Taxpaying is neither necessary not sufficient in that citizenship qualification. And we criticise the young for not understanding how Democracy works. Hilarious.
Just for the record, the three biggest taxpayers in Australia are the banks – headed by the Commonwealth Bank which pays about $3 billion a year. The fourth largest is BHP – after it has avoided its moral obligations by channeling contracts through Singapore.
Or does the language (and the underlying concept) not matter?
RomeoCharlie29, the federal government prints the money. They can print as much or as little as they want. They don’t have to borrow it and they don’t use the money they get from us in taxes — that money is destroyed (it’s basically numbers in an account anyway). The taxes make room in the economy to allow for new money to enter it. This keeps the economy alive. A stagnant economy is one where money hardly moves (that’s why cutting back on government spending is such a terrible idea). Keeping money moving is a major part of the whole exercise.
Terence Mills, the limits on spending are more open for a federal government that prints its own money. Local councils are very limited by their account books, unfortunately.
Matters Not, excellent point.
But if one wants to get simplistic, it’s not taxpayers’ money AFTER it’s been paid to the government (tax office)because of legal obligation. It then becomes the government’s money. Just like when you pay for $X for a kilo of sausages it becomes the butcher’s money. It does not remain the buyer’s money.
Is that so difficult to comprehend?
It’s the government (the Commonwealth) that pays for politician’s expenses NOT the taxpayer. And it’s the Commonwealth that ought to be accountable. That taxpayer’s think it’s their money is just so wrong and on so many grounds. But don’t Let the Sleepers Wake. Let them think it’s their money. Hilarious.
“The government and the central bank (RBA) are considered one entity. The RBA is the only organisation that can create Australian dollars.”
I disagree with those statements. The Bank is an independent statutory authority. It does decide if we need more cash (ie notes and coins) but it does not decide on the issuance of bonds. Since October 2006 the Bank no longer even acts as agent for the Australian Government in conducting tenders of Australian Government Securities.
The Reserve Bank also provides an overdraft facility for the Government that is used to cover periods when an unexpectedly large mismatch exhausts cash balances. The agreement between the Treasury and the Reserve Bank places strict controls on access to the overdraft facility, as well as imposing a market-related interest rate on the facility. The overdraft is used infrequently, generally to cover unforeseen shortfalls in cash balances, and is extinguished at the next Treasury Note tender.
Now I agree that it doesn’t have to be this way….but are we talking about the current reality or what we could potentially do?
I accept that taxes remove money from the economy but they aren’t destroyed – they are credited to a government account and those account balances do matter.
That, for me, is where this discussion always falls down.
@Andreas Bimba. I do not understand how we incurred a liability to the government in the first place, which our taxes are ostensibly paying off, unless that liability which we incurred is associated with “government” spending public money on us. And once you get to that position, then you are talking, at least in part, about tax-payer’s money.
In fact, it’s the citizen’s money. It is, of course, not “the government’s money”. The government, being a representative government, is only acting as the representative of the citizens.
There is, therefore, something “complex” there, your assertions to the contrary notwithstanding.
We could, of course, learn our lines off pat and repeat them like a mantra without there being any understanding of those lines nor of the assumptions underlying them. That would merit the comment — Nothing complex here — but it wouldn’t be a sensible way to proceed.
I’d like to see a much fuller explanation which ordinary mortals like myself are able to understand without it being in parrot-fashion and without our being expected to regurgitate it parrot-fashion. I’ve tried reading Bill Mitchel’s blog. I get lost in what he writes. I’d seriously appreciate someone who does understand what he’s on about being able to explain it, taking into account the difficulties faced by ordinary folk in understanding the specialised use of the terminology.
Further, the government and the RBA are not one entity and never were. If they are considered to be one entity then there is something seriously wrong with the thinking that relies on their being considered one entity.
I also find Bill Mitchell’s blogs very tough going. They completely ignore any form of accounting for this created money and the current RBA rules.
What we could do is have the RBA buy the government bonds, which really just means credit an account with a certain amount of money, but they are precluded from doing that as the rules stand. They can trade in them once they are on the market but they can’t buy them direct.
I would be much happier if MMTers said tax revenue does not constrain government spending. (And then pandered to we anal maths people by showing me how they account for it)
I too find Bill Mitchell’s writing hard to read.
One person who has a talent for making MMT understandable is Stephanie Kelton.
@soozka Maybe the problem is looking for complexity where the only complexity has been manufactured so we mugs can’t understand and therefore leave it all to the ‘smarter’ ones to manage.
The federal government issues the currency and there is no limit to what it can print.
Any comparison to state govs, councils, citizens is rubbish.
Read up on why Zimbabwe etc ended up with hyper inflation and you’ll find it’s almost impossible to apply that to Australia.
What hasn’t been mentioned here so far is that taxation also creates a need for the Australian dollar. The ATO won’t accept anything else. Without that need the $AUD would plummet and therefore our international purchasing power.
Ok, I may have a go at this in a blog at some point, but…
Money is simply an IOU.
All money, whether it’s in the form of notes and coins, bank deposits, bank cheques, whatever…
Because the government is backing that IOU, it has more value than mine would. (Well, for most people anyway!)
Now, if I tell you that I need money to pay off my credit card and I’ll pay you ten percent interest over the next year because I’d rather give you ten than them twenty, you can see that it’s a win/win, and IF YOU TRUST ME, you’ll think it’s a good deal. So, I can issue as many IOUs as I like and the only problem is when people expect me to pay up.
Of course, because the government is issuing its own IOUs, it should never have a problem. Except, of course, when it issues too many, than it alters the value of the IOUs because, if everyone’s rich, it’s hard to offer someone enough money to mow your lawn or cut your hair because they’re a millionaire too. (Maybe we can let in some illegal immigrants from Mexico to do that sort of work when Trump builds his wall!)
Ok, it’s a bit more complicated than that… But not much.
There is an excellent, simple description of “Monetary System Reality” on the main page at elliswinningham.net. You can’t miss it. Look for the 4 emojis.
I would have posted it here but AIMN doesn’t allow inserting graphics or pasting.
We have been brainwashed over many years by economists and governments saying a government budget is the same as a household budget. They are clearly NOT the same! Govts, like Aust, UK, USA etc, who issue their own currency, cannot run out of their own currency. They can buy anything available for sale in their own currency. They are constrained only by the availability of real resources like labour, materials etc.
Households ARE constrained by the income earned by that household. Spend more than you earn and you are in debt and need to borrow.
When the major parties claim they will deliver a budget surplus it really means that they take out (tax) more $$ than they put in (spend). This creates a private deficit and we currently have one of the highest rate of private debt in the world!
The Govt spends FIRST then taxes afterwards. It doesn’t need to collect taxes to keep spending in its own currency.
Taxes legitimise our currency because you can only pay your taxes in Aussie dollars which creates a dependency. Taxes are used to create desired social outcomes eg. high taxes on cigarettes to encourage people to give up smoking.
Personally, I prefer to use the term “public” money rather than “taxpayers” money as it avoids that myth that the govt must tax in order to spend – it doesn’t!
Another excellent source for MMT information is gimms.org.uk – The Gower Initiative for Modern Monetary Studies. I recommend their ‘Basics’ and ‘Fact Sheets’ as a good starting point.
Late to an important post. Why does this topic always bring out people who want to say something? Thank you, John.
Longwhitekid… is correct. Taxpayers’ money can be counted and is a serious pool of resources in the Australian Federal budget process. It just can’t be spent, bro, and that is the lie that is perpetuated upon us. The trick that stops us having nice things, like a living safety net and pensions for old people, who now have to work until they are sixty effing seven to get the paltry hand out.
But, if an Australian Government tried to inform the banking system that it doesn’t want to borrow to fund its ‘deficit’ anymore… Yeah, nah. BIS won’t let you and has the power to seriously f#ck with countries that try.
Gough and JFK both thought they could fund progressive spending without the help of the banks. JFK wasn’t even reminded of the deal done on Jeckyl Island in 1913…
@Miriam English. Thanks for the name Stephanie Kelton. I’ll look up what she has to say.
@ Ian Hughes. Thanks for both links. I’ll follow them up.
As my posts make clear, dc, those are not the bits that I find hard to follow.
And, no, I don’t think that it’s looking for complexity where none exists when one tries to give substantive meaning to what other people say and, in the attempt, explain where one’s difficulties in following what they are saying are.
Well intentioned people who actually do understand what they are talking about and who have a lot of patience are then in the position to explain further.
Those who are not well-intentioned, or who do not have a lot of patience, or who are not able to explain simply but are reliant on jargon, or who actually don’t understand what they are talking about sufficiently to be able to see and deal with the difficulties that the other person is having, reply in the manner in which you have done.
Excellent article John… but for those having trouble they may find the following article by Dr Ellis Winningham useful.
Federal Taxpayers Do Not Fund the Federal Government; The Federal Government Funds Federal Taxpayers
He uses the US as the example having worked fir the US Fed But it works exactly the same for ALL countries that have their own currency like Australia, the UK, Japan, China, Canada etc
They can also look up Professor Bill Mitchell’s teaching resource his blog… in particular articles titled:
“Taxpayers do not fund anything”
“Where do we get the funds from to pay our taxes and buy government debt?”
“Zimbabwe for hyperventilators 101”
And Dr Steven Hails lecture on YouTube (for the none readers) titled:
And Professor Stephanie Kelton (Bernie Sanders economic advisor) GetUp presentation:
AND consider the following:
“We are not going to get out of the economic doldrums as long as we continue to be obsessed with the unreasoned ideological goal of reducing the so-called deficit. The “deficit” is not an economic sin but an economic necessity.” ~ William Vickery Nobel Laureate. Vickrey was awarded the 1996 Nobel Memorial Prize in Economic Sciences
AND Taxes For Revenue Are Obsolete, written in 1946 by Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York and published in a periodical named American Affairs.
“…inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue… It follows that our Federal Government has final freedom from the money market in meeting its financial requirements… All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.” He goes on to explain how, with Federal spending not revenue constrained, the first function of taxation is to regulate the value of the dollar, which we know as regulating inflation. The notion of the Federal government ‘running out of money’ and ‘dependence on foreign borrowing’ as well as ‘sustainability’ is categorically inapplicable. The operative CBO ‘scoring’ is the inflationary effect, rather than simply a revenue forecast. “
Have just finished listening to Stephanie Kelton interviewed by Jimmy Dore. https://youtu.be/5baKgv7Zl5g
Am clearer on government deficit compared to household. And why nations like Australia do not fall in a heap because of increasing government debt. Why there was no apocalypse when Tony Abbott declared a big bad debt, which a couple of years later we heard nothing about.
Also clearer on how sovereign governments can issue currency according to what it believes is a priority, such as bailing out banks, spending on defence. All of which begs the question why can’t the government spend on the greater good? Infrastructure, education, pensions.
Spending on the greater good puts more money into the economy. The wealthy are like a deep sink where money goes to die, whereas for the majority of people they/we spend, on rent, food, clothing all the things which keep the economy ticking over.
It is the majority who create jobs, create demand and supply.
A good government would invest in its nation.
Kaye Lee: I know you worry about what happens from an accounting perspective and you are probably correct in what you say. However, let me try to put things in perspective.
Let us go back to the time that currencies were backed by gold. In those days, if you had X tons of gold in your treasury, you could only issue Y total dollars, since each dollar represented a fixed amount of gold. Now, when the government needed to spend, it needed to be sure that it did not spend more than the number of dollars it got as revenue, because otherwise, it would have “overspent”. The way to get around this was to have an account where all the taxes went, so that the government expenditure could be checked against this. In case the expenditure exceeded the revenue, bonds were issued, to borrow money from the economy. This way the number of dollars on issue never exceeded the number Y. The bonds were “backed” by other government “assets” (whatever they might be) and offered interest so that the “lenders” of the currency to the government would be encouraged to buy the bonds. To ensure that this structure was maintained, treasury was only allowed to “borrow” for deficit spending and a (supposedly independent) Central Bank was the only one that could issue the currency. It had the gold.
When the gold standard was abolished and currencies became fiat, people didn’t quite understand what was happening, or for other reasons of habit, they continued with the accounting practices of old. Hence, everything proceeds as if the currency is backed by gold, except that it no longer is. Hence the need to “borrow” to finance deficit spending is now redundant, because there is no physical limit on how much currency the government can issue. However, this fiction is maintained by having a (supposedly independent) Central bank which issues the currency, while treasury is still constrained to “borrow” by issuing bonds to the “primary market”. Of course the bonds are traded on a “secondary market” to allow prices to go up and down and to allow financial service “industries” to make money by doing nothing much except shuffling money around. The Central Bank cannot buy the bonds in the first instance but is allowed to intervene in the secondary market, which it does, in order to influence the bond yields, which are closely tied to the “interest rate setting” of the Central Bank.
I hope this explains why the current arrangements are so convoluted and devious, and if I have misunderstood something, someone may please correct me.
However, this is my best untangling of the system, and what MMT says is that much of this arrangement is not really necessary. For conceptual clarity, and in actual fact, the “bonds” can be bought directly by the Central Bank, which means they need not be issued at all. The government can issue currency to finance its expenditure, only keeping in mind the need to avoid inflation. This has nothing to do with “balancing the budget”. This suggested procedure is called “Overt Monetary Financing”.
However, the neoliberals love this present system, because it allows them to continue the myth of “living within ones means”, “balanced budgets” etc. and continuing the “government as household” analogy, which is very useful when cutting social services, but notice they never worry about deficits when cutting “revenue” (e.g. by giving tax cuts.) The cuts to revenue have always been justified by claiming they will actually increase revenue, although this has never really eventuated.
 When Peter Costello had retired all of Australia’s “debt” and had a surplus budget, there was no longer any need to issue bonds, but the bond markets pleaded with treasury to continue issuing them, so the market would not “dry up”, and treasury decided to comply (much against the advice of Bill Mitchell).
 We have discussed this earlier, so I won’t repeat.
Joseph Carli, our dollar is, of itself, worthless. Under a fiat currency system, it’s value is determined by the value of the things we produce, things which the rest of the world wants. There is no gold standard anymore. Not since 1973 in the US and 1983 in Australia. There is no agreed value. Every currency is valued according to what its nation produces.
Miriam English, the best example I can give you is Japan. The Bank of Japan has been buying government debt for the past 30 years. They have bought so much that classical economists have been predicting the nation’s economic collapse for at least the last 20 years. The Japanese government has a “debt” to GDP ratio over 200%. That debt will never be repaid. Tax revenues in Japan are dwarfed by government spending, so taxes are certainly not funding much at all. However, Japan’s productivity is what drives its economy. I don’t think anyone in Japan sees their taxes as the mainstay of their government’s ability to spend.
I cannot see Conservatives going for MMT, they don’t get to control the means of production, well not as much.
The way I see it MMT works on the value of the economy, by which I mean an active economy with a majority of people able to participate and as I said above, creating the supply and demand. Which helps to keep the government in check by issuing money according to the needs of a people friendly economy.
If I have this completely wrong, I’d like to know right now. Because I feel the theory is becoming clearer, although I am finding the words to express my understanding difficult to assemble.
I’m asking for help here!
” There is no agreed value. Every currency is valued according to what its nation produces.”…….JEEzus!….knowing some shonky property developers who “cook the books” on the valuations of their portfolios, THAT system could be a licence for some “in the know” to print money!
I really do appreciate everybody’s attempts to help answer my concerns but none of you do. It always reverts to telling me yet again about gold standards and households…none of which has anything to do with what I am talking about. I agree with soozka that it always leads to the same old lines.
No MMT proponent ever accepts the current rules for the RBA that the government may not be overdrawn on their account.
There is absolutely no need to issue bonds to influence the overnight lending rate or whatever that term is. They could achieve exactly the same thing by offering interest for banks on overnight deposits. I agree that the bond market is a spurious and unnecessary construct.
I also find the argument that taxation creates demand for a currency spurious. Think of how many dollars the Australian government has “spent into existence” over the years. Taxation is never going to make an impact on that. I could pay in any currency and it would just be converted from the pool already in existence without having the slightest impact on demand for our currency.
If you want people to understand the potential you can’t ignore the current rules. Those of course could be changed. But we must deal with current reality if we want to work out how to change it.
I am trying to tell MMTers where they are falling down in their explanations. Not trying to disagree with the concept. if you want to convince people then you must understand where your explanations are lacking.
A really good summary Ian @5:57PM and also dc and great kick by Rossleigh which I think went in the right direction plus quite a few others as I was writing this verbose response.
Soozka, that taxation liability just refers to things like income tax, GST, taxes on profits and so on. I think Steven Hail’s Youtube talk which goes for about an hour gives a good and fairly comprehensive introduction to macroeconomics.
Poor Bill Mitchell cops more than his fair share of criticism and his blog and most of his activism is done during his spare time but I agree Stephanie Kelton can explain things more simply.
Kaye, as I see it the federal government and all its departments and associated entities decide how much to spend and who receives the money and then the RBA deposits the funds in the recipients accounts. The RBA doesn’t wait for enough taxes to be received before depositing into those accounts. Apparently first Warren Mosler and later Stephanie Kelton both confirmed this is the way the US federal governments finances work and indeed the same applies to all nations with their own fiat currency and central bank. Only then was this concept added to MMT’s core concepts. It seems such a simple and trivial observation but the consequences like full employment being possible are major.
The above applies regardless of whether or not treasury bonds are issued to match deficits. As far as I recall Canada doesn’t issue bonds to match deficits but the US and Australia do but this is a relic from the time currencies were still pegged to gold. In any case the bonds do not fund deficits but are conceptually really a special type of term deposit for financial institutions to park their surplus currency at the central bank as well as being used to control interest rates. MMT’s core principles operate now in all advanced countries with their own fiat currencies regardless of whether or not bonds are issued. The aim is to get nations to adopt fiscal policy settings that are optimal – that allow adequate government services and a dynamic private and government sector that provides full employment. An understanding of MMT’s core principles enables the possibility of this optimisation.
The RBA may well be a semi independent statutory authority but it does deposit the federal government’s, and any associated federal government entities, spending requests (via Treasury?) into the appropriate accounts. The RBA just issues the money regardless of whether the government’s total spending less taxation revenue is in deficit or surplus. Warren Mosler in the US found that the FED hardly ever communicated with the Treasury Department and certainly never sought authorisation from them or checked their balances before issuing any spending. Deficits are therefore also financed through currency issuance. The RBA and the Treasury department operate in accordance with current legislation which is enacted by the federal parliament. The government working through and with the parliament can amend any legislation. Whether we think of the RBA, Treasury and federal government as one entity or three doesn’t really matter.
Federal taxation is definitely accounted for and is needed to estimate the size of any deficits or surpluses for budgeting purposes but the point is taxes do not fund spending, currency issuance does. Effectively all federal taxation is discarded. The best indicator of whether currency issuance minus federal taxation is adequate is when full employment is attained. If we had a Job Guarantee Program and the numbers employed by this program was heading towards zero as workers found better paid jobs in the private and wider government sector, then that is a signal to reduce federal spending or to increase federal taxes as resource limits are being approached.
Miriam @4:13PM. Rather than productivity allowing more net spending (spending less tax) it is really idle productive capacity especially unemployed workers that allows more net spending without incurring ongoing inflation (or debt). Nevertheless you are right improving productivity will result in more unemployed and higher profits, both of which will also provide more economic space for higher federal government net spending but generally to a lesser extent under current circumstances than idle productive capacity.
Ian Hughes thanks for those links, i think I’m getting it. And if i can get it then those cleverdicks in parliament have already got it ….
As the fiscal brains in the RBA and the Treasury know sh#t from clay so i believe that Frydenburg and Bowen, the economic spokespersons for the Liberal and Centre Right Parties, are deliberately keeping the peons bamboozled with their financial double talk.
The whole economic and financial scenario is a fantasy and a fraud.
Romeocharlie29, I’m neither superior to anyone nor inferior to anyone except my wife. I just report economic facts. The first thing to mention is that a federal government is not like a household or a business. The government is the currency issuer. Households and businesses are currency users. Big difference.
However, as matters stand right now, you are right to say that the government has an account with the RBA and the usual debit and credit transactions take place. The thing to grasp here is, that this is a political choice. It’s a household/business mentality that drives this. It’s not the function of a fiat currency system to account for expenditure this way. The government is not constrained by taxation revenues. It’s only constraint is the availability of things it can buy in its own currency. Paul Keating was referring to the availability of resources, not money. If we run out of resources, then we will become a banana republic, like Zimbabwe. It could also happen if we borrowed in a foreign currency, like Venezuela. But we won’t be doing either of those things. Be assured though that regardless of the state of our economy, the RBA would never bounce any of its own cheques. Nor would it ever deny supplying reserves to the commercial banks. I hope this helps.
I thought I was starting to get it.
I guess not.
Paul Davis, don’t overestimate the intelligence or learning capacity of those in government. Few if any understand MMT. Most of them are not particularly bright. Just look at Tony Abbott, Scott Morrison, Craig Kelly, Pauline Hanson, Barnaby Joyce… could you find a more witless bunch anywhere?
Kaye Lee: “No MMT proponent ever accepts the current rules for the RBA that the government may not be overdrawn on their account.”
Please excuse me. Where did I say this?
I thought I made it plain that Treasury needs to issue bonds to avoid being “overdrawn”. I am sorry if that was not clear.
Incidentally, they can be overdrawn. They have a special facility for that, if I remember correctly, but there is no need to labour that point.
Even I have an overdraw facility in my bank. How would the federal govt. not have that at the RBA?
totaram, you didn’t say it. I did. I give up. If I hear the words household or gold standard one more time I will scream. You guys refuse to accept the rules we currently work under and if you won’t do that then we will never make change.
John, the RBA may not bounce cheques but they do require any overdraft to be settled immediately by the issue of bonds and it is a facility that is rarely used and on which the RBA charges the government interest. I reiterate, this does not have to be the case but it IS the case now.
Diannaart, Yes, you have it right. It’s not just MMT that works on the value of the economy. All nations’ exchange rates are based on the value of their economies. All nations’ economic health is contingent on what they produce. They should not stop spending until they reach 100% utilisation of their available resources, regardless of the tax take.
John Kelly, we can never run out of resources… at least not if we play our cards right.
The educated human mind (that thing Joe Carli hates) is capable of creating endless resources out of nothing — ebooks, videos, music, scientific research, blogs, computer programs, etc.
A lack of physical resources is not even a barrier to production of physical goods — miniaturisation, efficiency of materials, special composite materials, quantum-level engineering where the qualities of materials can be altered by making structures near the atomic scale, creating physical objects out of the carbon in the air (plants already do this, and carbon is turning out to be the most useful material ever — stronger than steel, better conductor of electricity than copper, and lighter than both).
Of course this requires a government that is willing to invest in its people’s education and health. Good luck finding one in Australia these days. 🙁
Kaye Lee, yes you are right. But that is not what we are talking about.
John, you have to understand that if you want to convince people then you can’t just ignore these things. So you are talking about potential rather than our current reality?
Thank you, now I can move on from there.
I know I must sound simplistic but, I need to set a foundation before reading and studying more. I found Bill Mitchell rather inaccessible, perhaps I can return to him when I have a better understanding.
One thing I do know is that a healthy economy is more like a healthy ecosystem. Too much or too less like a bottle neck of one or more parts – the entire thing tips over.
Which leads me to saying moving towards sustainable recyclable production would work with an MM system.
John Kelly: I appreciate your attempts to educate the public about the true nature of fiat currency, and as you have seen I do throw in my two bits, when I can. As you will see from the various responses and discussions, it is a hard task. To be frank, I have given up any hope that any politician will admit to the truth of MMT in the few years left to me. So I have decided, as I mentioned in a previous thread to focus on the 3 sector financial identity.
This identity is independent of the currency in use and/or any particular political-economic ideology, as it depends purely on financial accounting arithmetic (at most one might use school level algebra). Even this is so difficult to get across that I am truly amazed. I have anecdotal information that Wayne Swan refused to accept it, saying “I don’t agree” and walked off, and my attempts to alert people to its implications meet with complete incomprehension. All I want to tell people is that a government budget surplus, when the nation does not have a trade surplus, requires increasing private sector debt. This is not a desirable outcome, contrary to those who think that a “budget surplus” is the epitome of “good economic management”. So here is my interaction with an ardent ALP supporter on the Guardian:
Social democracy is incompatible with “delivering larger budget surpluses than the coalition”, in case you haven’t got it yet. These surpluses will only be delivered on the back of increasing private debt, which the punters are unlikely to go in for. Result? Contraction of the economy as is already in evidence compared to the rest of the world. And also no surplus, as Wayne Swan discovered.
Response from Alpo88:
In case you haven’t got it yet, Social Democracy is perfectly compatible with delivering a surplus when the economy is going up and the surplus comes from better taxing the 1%, Big Companies and Multinationals (which the Coalition will never do), whereas the poor and middle class receive tax cuts. The ALP is happy to go into debt when the economy is going down, as a result of international contingencies (they have already shown that during the GFC… were you asleep?). This is Keynes’ counter-cyclical approach to the budget. You should start listening to the real ALP totaram, not to the fantasy ALP created by restricted MMT ideological views. The ALP are Keynesians, they are not Neoliberals. If you want them to embrace MMT you must provide rational argumentation not based on propaganda. The best chances for MMT may come from focusing on the Job Guarantee… I am more than happy to help there.
As you can see s/he missed the point completely. What can we do?
Kaye Lee: “You guys refuse to accept the rules we currently work under and if you won’t do that then we will never make change.
John, the RBA may not bounce cheques but they do require any overdraft to be settled immediately by the issue of bonds and it is a facility that is rarely used and on which the RBA charges the government interest. I reiterate, this does not have to be the case but it IS the case now.”
But I just agreed it is the case! You are not even reading what I write! What is the point of writing anything if you completely ignore it and then say you will scream? I might as well say I will scream too! Count me out. I can’t believe you know any mathematics.
totaram and John Kelly, the point is, as Kaye has been saying, you need to explain it better. You can’t blame other people for not getting it. That would be like me complaining about my readers not understanding one of my stories; it isn’t their fault — it’s mine.
I have recounted before the story of me at high school. I was very good at maths but somehow I had missed the connection that y and f(x) are exactly the same thing. It is bleedingly obvious to me now of course and I do not know why I didn’t get it in the first place but when I did, it was such a relief. When you are teaching people, you have to try to understand the bits they don’t get, not just plough on with the same old lines every time. It might be a silly thing like me not understanding properly what f(x) actually meant.
You also have to avoid saying things that are not true like the RBA and the government are the same entity. Or that taxes are destroyed when they are actually credited to a government account. Or that the balances of those accounts mean nothing.
Instead of the same lines being trotted out every time, try to listen to the bits that people don’t get. It may not be what you are talking about but it may just help them make that f(x) leap into understanding.
totaram, please understand that your responses might be coming when I am typing. I do read them but I might be one step behind.
PS I know I am an annoying student because I push and push until I understand. Don’t mistake that for dissent.
The best description of how to understand what a deficit and surplus really are was given by Stephanie Kelton:
Basically she explains that if the government spends $100 into the economy and pulls out $100 in taxes, that’s generally called a balanced economy.
If the government taxes $110 back out then the government is running a surplus, but the citizens are $10 poorer.
If the government taxes $90 then it is running a deficit and the citizens have an extra $90.
Deficits are not the horrible things we are generally told; in fact, surpluses are.
Good point Kaye. I won’t say that the taxed money is destroyed anymore.
Fact is its never just taxpayers money because under the Constitution the people are sovereign and the gov merely exercises that sovereignty on behalf of and with the consent of the people. Hence all funds held by the gov are held in various accounts that are referred to as The Consolidated Revenue Fund. On th basis that the gov ‘owns’ those funds, it does so only in the exercise of the people’s sovereignty. Hence, th people own all funds held by gov and they do so regardless of their taxpaying or employment status. Sovereignty is an element of citizenship and of birthright. Not of taxpaying status. Case closed. Its never just ‘taxpayers’ money. Its the citizens money. Moreover, the gov is the sole shareholder in the Reserve Bank. Any interest it pays or fees it pays to th RBA is inevitably returned to the gov as dividend. Thus, it can produce as much currency as it requires as the currency will ultimately be returned to it via dividends. No reason why it needs to issue bonds or borrow money from foreign sources as it can generate all it needs. Case closed. Its never just ‘taxpayers’ money…its th money and property of all citizens…as a matter of law
Miriam @8:31PM that’s a really good point. The productive capacity is an ever rising limit in a healthy advanced economy that knows how to educate, innovate and make and sell the results. And this is also possible within a reducing environmental footprint as long as we DON’T JUST RELY ON MARKET FORCES but utilise expert advice, government planning and intervention in the market to bring it about, for example introducing a carbon tax. Very few I suspect have grasped this point.
Interesting insights Totaram especially about Albo and how the ALP see themselves as Keynesians which makes them neoliberal – lites.
Not only are the LNP dinosaurs endangering life on earth by ignoring global warming, they along with the ALP enforce completely avoidable misery on millions of unemployed and those dependent on government support and they both block a potentially much more dynamic and environmentally sustainable economy that priorotises human welfare and the natural world.
Here’s a simple explanation…
I always said to my maths students that if they didn’t understand it was my fault and that they must keep asking questions so I could understand what they didn’t get. I would also encourage them not to be embarrassed to ask because if they didn’t get it then no doubt others were having the same problem and they were helping all of us to talk about it.
Once we had this group of Japanese teachers come out who sat in on some of my classes to observe. Talking to them afterwards, they said my classroom was very different to theirs where questions were seen as disrespectful – something I couldn’t fathom. I think also that their students felt it an admission of failure to ask questions.
Poor John must be sick to death of me but I truly am so close to being a convert. I think it is my anal fixation on accounting that is causing some of the probs for me.
*” The productive capacity is an ever rising limit in a healthy advanced economy that knows how to educate, innovate and make and sell the results. And this is also possible within a reducing environmental footprint as long as we DON’T JUST RELY ON MARKET FORCES but utilise expert advice, government planning and intervention in the market to bring it about, for example introducing a carbon tax. Very few I suspect have grasped this point.”
Actually I have managed to grasp this point. I get how money invested into producing outcomes like educated healthy people, clean environment, infrastructure, thriving services and other businesses keeps the inflation rate in line.
Not so sure how the too big corporates fit in.
And still don’t see the neoliberal LNP nor the Keynesian Labor wanting to change.
Still with Kaye Lee that taxes don’t disappear.
For those that struggle with Bill Mitchell, you might find Ellis Winningham easier to follow. I certainly do. Stephanie Kelton is also very good at simplifying things.
Seems to me that if concepts are more clearly analysed/described or whatever, then discussion might be more rational (and understandable). Perhaps what is needed is more questioning – more critical consciousness – and more pedantry if you like. Here’s an example from above that causes difficulty.
Seems to me that the concepts of citizen and taxpayer are being conflated – used interchangeably perhaps – and therefore the meanings given to both are corrupted. To me that’s a mistake. (Seems to me that the taxpayer concept is the appropriate one in this context. Please inform.
As I’ve argued above the biggest taxpayers are not citizens. etc.
If that point is valid, then why was the statement above completely ignored? Is it the case that people don’t really listen or read what the ‘other’ writes? Or are some commentators’ statement more legitimate than others? Please explain.
In the immortal words of Forest Gump, “I’m feelin’ tired. Think I’ll go home now.”
Matters Not, yes. I should have said taxpayers… or perhaps society. I said “citizens” purely from a storytelling perspective to encourage the reader to identify with the person having extra money or less. But it was just to illustrate a broad point.
I might also point out that when I said having a surplus is the bad thing, I could, under certain circumstances, be technically wrong there too, as there are three parties involved, not just two — government, taxpayers, and foreign interests. Again, I was trying to illustrate a point by simplifying it. Having a surplus from selling goods to foreign interests can be a very good thing.
Yes the emergence of foreign interests into the debate is an interesting development (better late than never). As I recall, it required the emergence of an expert to correct simplistic claims made.
After all, MMT is a theory and as Lakatos et al pointed out, all acceptable/legitimate theories have the capacity to jettison ‘belt’ claims as developments occur.
PS, I don’t think the concepts of society, citizenship and society benefit by being used interchangeably – whether it be for the purposes of storytelling or otherwise.
PS, the second use of ‘society’ immediately above should be replaced by ‘taxpayer’. (If that’s not immediately apparent.)
Dianaart, the big corporates need to have their political influence excised which Kaye suggested a few weeks ago. After all the business sector surely would also benefit from the extra sales from a dynamic economy with full employment on a planet that is not about to kill itself?? Too many of them apparently prefer feudalism instead with the masses as lowly paid serfs, unemployed or dead.
Kaye, you probably want the relevant core MMT principles of currency issuance funding spending and taxes being used to remove money from the economy and being discarded, to be confirmed in the accounts of the RBA and Treasury. That’s a fair question and maybe the academics here can provide some evidence. I sure can’t as I’m just an unemployable engineer waiting for better political and economic management. The way I see it though is that whatever way the government currently does the accounts for its spending, taxing, borrowing and the issuing of bonds it is largely an irrelevance. MMT founding economists Warren Mosler’s and Stephanie Kelton’s point is that national government spending is through currency issuance and taxation revenues are being discarded and this is what really happens when you have a fiat currency, the rest is just pointless flower arranging. I too however would like to see some ‘evidence’ that I can also use to convince others rather than accepting the words of Mosler and Kelton. I did try to read Kelton’s proof, as initially she was also sceptical of Mosler’s observations of the FED’s operations, but it is a huge and complex academic research paper well above my expertise.
Matters Not, the government taxes or removes money from the private sector. The private sector includes all citizens, even if they work for the government. Not all citizens are taxpayers and as you point out not all taxpayers are citizens. I think the paragraph:
“If the government taxes $110 back out then the government is running a surplus, but thecitizens are $10 poorer . … If the government taxes $90 then it is running a deficit and thecitizens have an extra $90.”
According to MMT’s sectoral balance formula should really be:
“If the government spends $100 into the private sector and taxes $110 back out then the government is running a surplus, but the private sector will be $10 poorer . … If the government taxes $90 then it is running a deficit and the private sector will have an extra $10.”
But I can’t really criticise anyone that substitutes citizens or taxpayers for private sector. Confused, so am I.
Andreas Bimba, I am here to examine ideas, and therefore try to leave individuals out of the equation.
It’s deliberate. Individuals take criticism personally when none is intended. Such is life. LOL.
Private sector. Yes. Thanks Andreas. I was struggling trying to think of the proper term. My mind has been soggy all day, hovering on the edge of headache.
Matters Not, actually it was totoram who mentioned the third part in the equation (at January 10, 2019 at 8:50 pm). But before he could explain in more detail, I think he retired in exasperation at the rapidfire conversation when it kinda became confusing with people replying to things said earlier, with dialogue getting out of sync, as happens in fast conversation.
Matters Not… “expert”? You surely weren’t referring to yourself there, were you?
Federal taxes are counted and, under Australian budget processes, the taxes levied in each fiscal period form the major portion of the Government’s spending program. If there is excess spending to be done, the extra dollars are borrowed on the financial markets. And public monies is the correct term. Taxpayers’ money is a political term so that we understand that there is a policy choice in how the money is spent.
We can seek to educate people all we like that the borrowing is unnecessary, but it won’t change how things work now.
Governments exist to keep the peace and do things that the private sector won’t do like educate people for free…. They need to spend money to delivery outcomes and our system of government was designed to make laws and, primarily, make decisions on how the taxes collected are spent.
Taxes have always swelled the coffers of the monarch, it’s how soldiers were paid in the day, and so is it thus.
MMT is impossible with the political system we have. The real question is how do we get a government that works for the nation and not just corporations? I am still waiting for my coal/iron/gas… cheques
You are all doing my head in. I’m going back to bed.
Thank you John, good explanation and it is how I’ve come to understand the money system. Could you please explain then why we “need” to borrow money from overseas at high interest rates?
I remember when the LNP first came to power one of the first things the treasurer did was to transfer $10 Million to the reserve bank. I recall thinking this was a very strange thing to do since the RBA creates the money. Does anyone else remember this and could someone here explain what this was about.
Miriam English, I most certainly don’t claim expertise re MMT. And you? You surely aren’t referring to yourself as an expert are you?
I think you will find that the ‘expert’ I refer to appeared some weeks ago when a similar discussion on MMT saw the introduction of the huge windfalls which came to Norway via oil and gas. Her ‘putting the record straight’ seems to have now spread to those who have lesser claims.
As an aside, this morning on ABC radio, we have Cormann ‘spending’ $37 000 on a plane trip. One report had Cormann billing the taxpayer. A later report had the Defence Department billing the Government. Seems like there’s confusion all round. And that’s on the ABC.
Yes it is ‘within the rules’. Which says much about the quality of the rules.
@Kaye Lee re:” I think it is my anal fixation on accounting that is causing some of the probs for me.”
It took me ages and ages to get my head around the “accounting” ledger style thinking that’s been drummed into me my whole life.
I’ve boiled it down to;
The federal gov creates the money!.
Therefore they can never ever run out of it!
Throw all the other rules out.
They don’t ‘have’ to issue bonds to match spending, that’s just a hangover from the gold standard days. Anyway who cares if they do issue bonds they will always just create more money to pay them.
As a new-comer to Oz, I was surprised by the peoples’ reluctance to pay tax; there was always talk about how to cheat and not to pay any, or at least ‘not your fair share’……but less..
People also complained a lot about the poor quality of the public schools, but seemed happy to pay high private school fees…. If you managed those high Private school fees, that meant you had gone up one class/caste….
In my Nordic country, we were willing to be taxed, and found our schools, in any village, better than good…and universities more or less free…..
helvityni – cheating is anathema, look what happened to the cricketers, football coaches and the like who dared to cheat and gain a unfair advantage. They became social outcasts. I think it’s called getting one’s priorities right.
In many ways we are a sad nation of intellectual boofheads – who can’t appreciate or recognise irony .
John (and others),
It must feel like you are running into a brick wall with me but that is not the case. You have shown great strength and patience dragging me through a sea of molasses with me getting stuck on snags along the way – but you are getting me closer to the shore even if it may not feel like it for those of you doing the hard work of pulling me along. I appreciate your efforts. The things I am worrying about are not important to the overall concept that deficit spending is a useful and necessary tool that the government can use without any problems to take up the slack of unused productive capacity.
i’ve boiled it down to;
The federal gov creates the money!.
Therefore they can never ever run out of it!
Throw all the other rules out.
Pretty good summary
Here’s something from conspiracyoz, often a fun website for alternative POVs
When RBA is talking money-printing, brace for a massive crash!
Maybe a bit late for this blog, but deep down I suspect the Treasury and others realise this reality, which is why there is actually very little political point scoring about the budget deficit. Private debt is another matter.
ChristopherJ, the way things appear is not necessarily how they are. John Maynard Keynes over 100 years ago realised deficit spending could grow aggregate demand and sales which could bring unemployment down as well as increase tax revenues and reduce social support expenditures. The associated economic growth could pay off the initial deficits and borrowings.
The MMT economists have combined the best and what can be proven to work from the best economic thinkers of the last 200 years including Keynes. They go one step further than Keynes and realised the national government didn’t even need to borrow to fund any deficits but could use currency issuance if a fiat currency was being used. In fact all national government spending is met from currency issuance and all national government taxation is discarded. Their insights allow us to achieve a lot more than the neoclassical approach of needing to tax or borrow from the markets before the government can spend.
Even the medieval king could have minted more coins to pay for swords, cannons, bread for his armies and anything else for sale in his realm without raising taxes, within reasonable bounds. He would have had to keep a close eye on inflation though and raised more tax revenue or cut expenditure if inflation krept up. Even China apparantly has national government deficits of an estimated 15% of GDP without much inflation according to economist Steve Keen.
The Economist Intelligence Unit 2018 Democracy Index lists more than 150 nations. At the top of the list is Norway (4.4%) followed by Iceland (1.1%); Sweden (1.3%); New Zealand (+ for the second year in a row); Denmark (1.0%) and so on. All the top 5 nations on the list are running budget surpluses with the percentages included in brackets.
Perhaps we should tell them they are going about economic management the wrong way? Perhaps Bowen is trying to follow?
Soozka said: “In fact, it’s the citizen’s money. It is, of course, not “the government’s money”. The government, being a representative government, is only acting as the representative of the citizens.”
I disagree and here’s why – think of a corporation and its directors. A corporation is a legal entity in its own right and appoints different directors from time to time to run the corporation’s business and be responsible for its well-being. “Australia” and “the government” can be looked at in exactly the same way. Australia is also a legal entity in its own right and is recognised as such by countries around the world. “Australia” doesn’t change in any way just because the government changes hands at election time. One government may have a different way of doing things to another, but that doesn’t alter Australia’s legal status.
Now, the issuance of currency is handled by the government of the day on Australia’s behalf, in the same way that directors of a corporation spend money on the corporation’s behalf. They DO operate hand-in-glove, but they are not the same.
Perhaps because we have a say on who represents us, we have taken our mental image of ownership a step further than we should and think that “Australia” is our creation, when in fact it’s only the government of the day that we “created” by voting for them.
I should add that as far as comparisons go, the above is about the limit between Australia/government and corporations/directors. A country’s spending on particular projects is only limited by what its government wants to achieve. A corporation, like a household, can only spend what they receive in income, unless they borrow and then have to repay debt.
Apologies if this has been covered elsewhere – I haven’t read all of the comments.
Agree with Phil Atkinhson (in part a least). While the citizens have the theoretical power, in practice the effective power to make the decisions resides with government. The citizen electors only exercise their power every three years or so. Well after the spending horse has bolted.
Matters Not, I suspect only Norway has a good justification for surpluses as their government receives so much tax revenue from oil and gas production that they need to remove money from the consumption part of the economy to avoid excessive inflation and they already have fairly low unemployment – 4%. Their unemployment benefits are generous so it may be difficult for them to get unemployment lower. Norway is also building up its sovereign wealth fund which will be later gradually sold off when the oil and gas industry declines. I think this fund acts to prevent their currency being overvalued now and from crashing when the oil and gas industry declines. Some of the other countries may have good social welfare systems and are more egalitarian which helps, nevertheless they could all do better with deficit spending to improve infrastructure, reduce unemployment and further improve government services – especially NZ?
KERRY, Firstly, the federal government NEVER borrows money from overseas. The government only ever raises money by selling bonds in $AU. Furthermore, it sets the interest rate (yield) and does so to influence the overnight lending rate at which banks borrow from each other to meet their daily commitments. These bonds can be purchased by anyone, here or overseas.
When the LNP came to office in 2013, the treasurer, Joe Hockey did “give” the RBA $8 BILLION. To this day, no one in or out of government knows why he did this. In doing it, however, he was able to add it to the previous government deficit to make it look worse than it was. Hockey was/is an incompetent fool.
John Kerry: This post has really got people interested! On your last point, where did the $8b come from? Was that part of the proceeds of selling off the gold reserve? In what form was it handed over to the RBA?
Hockey certainly did it to make the deficit look worse…but he also very quickly cashed in on it too as did his banker friends.
“You will find the $8.8 billion recorded as a grant in the 2014 financial statements. Before that – in 2012 and 2013 when Labor was in office – there were no “fees received for banking services”. In the ensuing years however, “fees for banking services rose from $67 million in 2014 to $76 million in 2015, thence $81 million in 2016 and $89 million in 2017.
As for government dividends, there was no distribution to the Commonwealth in the year the Hockey gift was recorded (Labor had pulled out $500 million in 2013 as an apparent one-off, and a one-off which was met with a lot of noise from the Opposition at the time). In 2015 however, the Commonwealth distribution was $618 million. It jumped sharply to $2.5 billion the following year and rose again to $3.2 billion last year.
So, since the $8.8 billion RBA oblation was conferred, the Commonwealth has received $6.3 billion in return and investment banks have raked in $326 million in trading fees.”
He gambled on the Aussie dollar dropping and won with some sugar left over for his mates. Book up the expense to Labor and the returns to the Coalition.
It should also be noted that the promised “surplus” is being aided by Future Fund earnings which become available in 2020-21.
The budget accounts show in 2020-21 the Future Fund is expected to contribute $4.18bn, when the underlying cash balance is expected to be $10.96bn. The following year it will contribute $4.47bn out of an expected budget underlying cash balance of $16.62bn. (Not sure if that changed in Frydenberg’s MYEFO and I really can’t even be bothered checking on their pea and thimble tricks.)
At the risk of displaying my ignorance and torturing another analogy, it seems to me the argument becomes bogged down when you try to explain a ‘new concept’ using ‘old language’. Like using a ‘FX’ repair manual from 1948 (the first Australian car) to repair the latest (imported) Hybrid.
Accounting and economics don’t recognise ‘creationism’. Everything is reliant on the two columns, income and expenditure, one requiring offset against the other. You can’t try and define a concept advocating something that doesn’t exist in that narrative.
It’s a bit like Howard’s little trick with the Republic debate. Demand a hypothetical model be fully defined, explained and justified, only to be argued against an existing model that was over 100 years old – using the same language.
That becomes the distraction, the misdirection, that thwarts how we get the idea off the ground. We still talk of two ‘factors of production’, labour and capital, as if it is an unassailable, almost biblical, fact. It is tired old language that curtails and restricts evolution.
Back in April, 2018, Mr John Kelly wrote about UBI and why it wasn’t a good idea.
Nowhere in that article was it stated it wasn’t possible or wasn’t desirable. The intent of the delivery was discussed (payment for work, rather than payment for, effectively, citizenship), rather than the objective. This is not a new idea, but it challenges the very structure of a capitalist society, as opposed to a humanitarian society.
There are new urgencies to this discussion, being the environment and poverty, both of which currently see the Australian government (and, to a lesser but similar degree, the opposition) behave as if Australia must address these problems as a ‘Third World’ scenario, to be addressed by charitable concession rather than government action.
Back in 1967, Dr Martin Luther King wrote his last book, “Where do we go from Here: Chaos or Community”.
“I am now convinced that the simplest approach will prove to be the most effective – the solution to poverty is to abolish it directly by a now widely discussed matter: the guaranteed income.”
“The curse of poverty has no justification in our age. It is socially as cruel and blind as the practice of cannibalism at the dawn of civilization, when men ate each other because they had not yet learned to take food from the soil or to consume the abundant animal life around them. The time has come for us to civilize ourselves by the total, direct and immediate abolition of poverty.”
There is a detailed synopsis of Dr King’s book and his economic theory in a contemporary sense by Jordan Weissmann in ‘The Atlantic’, from 2014.
Bearing in mind these suggestions were from 1967, when the labour market was radically different to today, their application is more attainable and relevant today than ever. The obvious caveat is that it must be a holistic approach. Income is but one cause of poverty in our society and cannot be looked at in isolation. Education is essential if the ‘evolution revolution’ is to be progressed. As is the provision of health services. As is the environmental consideration that must factor in every facet of any contemporary society. Way back in April, Mr Kelly’s article rekindled a discussion started in 1967.
“Washington’s previous efforts to fight poverty, he concluded, had been “piecemeal and pygmy.” The government believed it could lift up the poor by attacking the root causes of their impoverishment one by one—by providing better housing, better education, and better support for families. But these efforts had been too small and too disorganized. Moreover, he wrote, “the programs of the past all have another common failing—they are indirect. Each seeks to solve poverty by first solving something else.”
It was time, he believed, for a more straightforward approach: the government needed to make sure every American had a reasonable income.
In part, King’s thinking seemed to stem from a sense that no amount of economic growth could provide jobs for all or eliminate poverty. As he put it:
“We have come a long way in our understanding of human motivation and of the blind operation of our economic system. Now we realize that dislocations in the market operation of our economy and the prevalence of discrimination thrust people into idleness and bind them in constant or frequent unemployment against their will. The poor are less often dismissed from our conscience today by being branded as inferior and incompetent. We also know that no matter how dynamically the economy develops and expands it does not eliminate all poverty.”
The problem indicates that our emphasis must be two-fold. We must create full employment or we must create incomes. People must be made consumers by one method or the other. Once they are placed in this position, we need to be concerned that the potential of the individual is not wasted. New forms of work that enhance the social good will have to be devised for those for whom traditional jobs are not available.
In other words, King believed that the government was obligated to provide both work and income for those inevitably left behind by capitalism’s economic engine. Looking back from today’s vantage point, one can even imagine that King might have supported attaching a work requirement to such a program, so long as everyone could be guaranteed a job.”
Back in the 70’s and 80’s, with the advent of computerisation doing to the economy what industrialisation did before and automation, robotics and artificial intelligence are doing now, we were having another conversation that has since all but stopped. Why do we continue to modify society to accommodate these things rather than modify these things to accommodate society?
“In 1930, the economist John Maynard Keynes speculated that technological change and productivity improvements would make a 15-hour work week an economic possibility within a couple of generations.
A biographer of Keynes, the economic historian Robert Skidelsky, revisited those predictions in his 2012 book How Much Is Enough? He proposed legislating maximum hours of work in most occupations, without any reduction in output or wages, as a way to achieve a more sustainable economy.
He is not alone. According to a report by the New Economics Foundation, a London-based think-tank, making the normal working week 21 hours could help to address a range of interlinked problems.
“These include overwork, unemployment, over-consumption, high carbon emissions, low well-being, entrenched inequalities and the lack of time to live sustainably, to care for each other, and simply to enjoy life,” the report says.”
Or there is this one;
“In our wage fixation processes we need to reintroduce the concept of the living wage. We must recognise the benefits of investing in people’s education, vocational training, improved access to healthcare, public housing and a decent living standard for those who find themselves unemployed. Elimination of tax benefits like the capital gains tax discount and uncapped negative gearing against personal income, and an effective assault on multinational avoidance, could provide the wherewithal to tackle the problem.
A Fair Go for All Australians presents evidence that Australian levels of income inequality are the fourth highest of 15 OECD countries (the US, UK and Spain are worse). It also shows that Australian tax revenue as a proportion of GDP is well below the OECD average of 34%, and notes that a number of Scandinavian countries have a tax revenue to GDP ratio of more than 40%.”
Ah well. There will be an election this year and our MSM, and likely many of us, will discuss which party or individual should be the subject of discussion. Not one party will likely ramp up this discussion. To that extent Mr Kelly, your tenacity is to be applauded.
It’s always such a good discussion. Thank you Mr Kelly and commenters. Take care
John Boyd, the $8 billion came from consolidated revenue which was balanced by a bond issue. So effectively, Hockey gave the RBA money they didn’t ask for and didn’t need, but were forced to borrow to accept. Just thinking about the absurdity of that, does my head in.
Perhaps a way to grock conservative politicians (from either side, yes Labor and such parties as the Greens have conservatives) is to reverse what they say, especially just prior to elections, when they are making their first speech upon attaining a new office, prior to budget time … of course, if such a formula is applied to extreme freaks as Fraser Anning, Pauline Hanson ignore everything above and check for the next flight to New Zealand or maybe Canada.
John Kelly…thanks….so that was basically taxation revenue from the current account?
John Boyd, not really as we were already in deficit. In the old parlance, they “borrowed the money” by issuing bonds and increasing our debt.
It isn’t what people can’t get so much as what they can’t jettison. Fully understood, MMT is starkly simple.
I had a go at a quick simple explanation. Different ways of putting it can switch on different lightbulbs, so here’s how it went:
Currency enters the economy in one of two ways – bank loans or federal outlays- and it exits the economy in one of two ways – loan repayments or payments to the federal government. Bank lending cannot increase the net stock of money in the economy and private debt can’t keep rising beyond limits that we have pretty much reached. By contrast, federal currency issuance does not add to private debt and is inexhaustible. Payment to the federal government is where dollars go to die (where federal IOUs are redeemed, to be precise). Taxation doesn’t fund spending – spending funds taxation. The point of taxation is to create a demand in the economy for dollars. You can’t satisfy tax liabilities with gold or bitcoin. The other point about taxation is that it makes room for federal spending, otherwise an oversupply of dollars to the economy would be inflationary. The federal government pretends it has to issue bonds to cover the gap between its currency issuance and currency redemption and it calls that borrowing but it isn’t borrowing at all. Borrowing is an exchange of a financial liability for a financial asset but bond issuance is the exchange of a term limited “interest” paying liability for a termless no interest liability – dollars, which are our assets on one side of the balance sheet and fed govt liabilities (IOUs) on the other side. Bond issuance actually functions not to fund currency issuance but to fine tune liquidity within the economy, to enable interest rate setting (more fine tuning) and to give social welfare to people with money to spare or to super funds flush with compulsory super contributions because Keating bought the myth that the fed govt could run out of money and decided to semi-privatise the pension system (which Costello converted into a massive tax rort for his constituency). The mainstream economic profession and punditry aren’t going to admit this. It has to come from the ground up. Budget is not even a word that applies to a currency issuing government. Issuance of its IOUs and redemption of them are incommensurate. True balance is not between payments and receipts; it’s between unemployment (not enough spending / too much taxation) and inflation (too much spending / not enough taxation). All this yammer about budget surplus or deficit is utterly inane, and “surplus good, deficit bad” is a recipe for unemployment and privatisation and ballooning private and state and local government debt. And, sadly, the ALP is just as inane as the Libs and promising to be even more surplus-happy.
I understand everything you have said. But our government isn’t pretending that is has to issue bonds. The way the rules are at the moment they DO have to issue bonds that equate to the difference between spending and revenue. Under current rules, they cannot go into overdraft at the RBA except in very short term circumstances and the overdraft must be immediately extinguished by the issuance of bonds.
I am very dubious about the oft-repeated “demand for currency” definition of taxation. As I have said a thousand times, I could pay my tax bill in any currency and it would be converted by the banks. There is plenty of our currency that has been spent into existence. There would be a far greater demand for our currency from people who want to buy our goods and services than from any taxation liability. And taxation serves other purposes like redistribution.
Yes taxation can be used to remove heat from the economy but it is not easily turned on and off so really, increasing or decreasing government spending is a better tool for that.
And at the risk of repeating myself again, there is absolutely no need for the artificial construct of a bond market to control overnight interest rates. Exactly the same thing could be achieved by the RBA offering overnight deposit interest rates to banks.
Someone who commented earlier talked about regurgitated phrases. That, for me, is a bug bear when talking to MMTers. You ALL repeat the same phrases like some sort of mantra.
Until you accept how the RBA works now, we cannot discuss how we would have to change the rules to actually embrace the potential of MMT. I get the private debt thing and the value of deficit spending and everything else you have said. But PLEASE accept that under our current system, deficit spending must be funded bond issuance. Then we can move forward as to how we could do things differently.
Kaye, I agree that there is no need for the artificial construct of a bond market to control overnight interest rates. Most MMTers also hold this view. However the idea that the RBA operates independently of government is, in my view, mistaken. Indeed there is a good case for consolidating the RBA and Federal Treasury balance sheets. The reasons being (inter alia):
(a) The RBA is a ‘creature of Federal Government’. It was created to serve public purpose, and – even if unstated – it is obliged to work cooperatively with Treasury.
(b) The RBA is Federal Treasury’s bank. All Treasury payments take place with the RBA’s authorization.
(c) The Federal Treasury possesses the unique ability to create net financial assets for the private sector, which it does (with the cooperation of the RBA) whenever the Federal Government deficit spends. These net financial assets are essential for the healthy functioning of the economy.
(d) The RBA, on its own, does not (and cannot) create net financial assets.
(e) The RBA has never refused to honour a payment requested by Federal Treasury (made using the correct format and not contravening any laws or sanctions). One reason for this is that the RBA is well aware that Government (via Treasury) can create net financial assets whenever it perceives a need to
I agree with all of those things John.
So can we stop saying that the RBA is the only organisation that can create Australian dollars. And that, aside from co-operating, the government and the RBA are one entity. Those things are just not true.
And can we stop saying taxation is destroyed when it is actually credited to an account and that account balance (with others) dictates the need for bond issuance under our current way of working.
I will stress again, it doesn’t have to be this way but that IS the way it is until we change the rules.
My very naive solution is to do away with bond issuance altogether, credit an account at the RBA with a specified amount, and record that amount in the government balance sheet as e-segnoirage. (kinda like the electronic equivalent of print more money).
Alternatively, the RBA could buy the bond issuance direct which is slightly ridiculous but would amount to the same thing.
“And can we stop saying taxation is destroyed when it is actually credited to an account ….”
This statement is imprecise and vague. Taxation is a liability (a legally enforced obligation) and is only destroyed if that obligation happens to be waived. What actually happens when a tax obligation is relinquished by a payment to the tax office is that the money supply is reduced by that amount and the stock of reserves within the banking system is also reduced by that amount. Neither bank credit money nor reserves (i.e. the only accepted measures of narrow money) move into Treasury’s RBA account. Strictly speaking the “reserves” in question are banking reserves. It would only be possible to transfer banking reserves to Treasury’s RBA account if Treasury was a bank. And it isn’t a bank, essentially because it does not take deposits.
When such fiscal operations occur, the Treasury account with the Fed is adjusted accordingly, post facto. This can therefore be regarded as an accounting record of the government’s fiscal operations (i.e. an operational account, not a transaction account). In short, the federal government does not horde money.
Neither do the credits in Treasury’s RBA account amount to a form of state fiat money, because they do not conform to the requirement that “money” is above all else an entity which is used as medium of exchange. Treasury’s credits in its RBA account are not exchanged when the federal government spends, but rather, new banking reserves are created for that purpose.
Also, irrespective of the usage, I do not like the blanket term “funds” in relation to Federal Treasury’s RBA account because this implies pre-existing money is being used for government spending. From my perspective, federal government spending does not require funding because a monetary sovereign government is effectively the creator of state fiat money, and controls the supply of that money. Moreover, being in “debt” of something one controls the supply of is a ludicrous idea.
The RBA seems to disagree with you
The Reserve Bank of Australia provides specialised banking services to the Australian Government and its agencies, other government instrumentalities, other central banks, and overseas official institutions.
The Reserve Bank provides a facility to the Australian Government that is used to manage a group of bank accounts, known as the Official Public Account (OPA) Group, the aggregate balance of which represents the Government’s daily cash position. These banking arrangements include the provision of a term-deposit facility for the investment of surplus funds, the sweeping of balances to and from agencies’ accounts held with transactional bankers, and access to a strictly limited overdraft facility.
The Reserve Bank also provides transactional banking facilities to various Australian Government agencies. The main transactional banking services offered by the Bank include:
bank account facilities;
real-time New Payments Platform (NPP) services for payments and collections;
online payment services, including real-time card-based payments;
processing and distribution of bulk electronic direct credit and direct debit transactions, including welfare, Medicare rebates, salaries and vendor payments;
various collection services, including internet, phone and online card-based facilities;
overseas payment services, including direct entry, electronic funds transfer (wires) and cheque;
document printing services where agencies can electronically request the Reserve Bank to issue cheques and electronic documents on their behalf; and
cheque reconciliation, repository and verification services including a system that can assist in the identification of cheque fraud.
YOU say it’s not a transactional account. They say different.
A small correction to my previous post, in the first paragraph: Neither currency, nor bank credit money, nor reserves (i.e. the only accepted measures of narrow money) move into Treasury’s RBA account.
Kaye said: “The RBA seems to disagree with you … ”
I am glad that you brought this up, because I do not believe there is disagreement. A colleague of mine has had correspondence with the RBA on these issues and obtained answers from an RBA economist to some interesting questions, which I reproduce below:
Question 1: Can the RBA ever, under any circumstances, run out of Australian dollars?
Question 2: Has there ever been an occasion in the past where the RBA has refused to honour a payment that was requested by the Commonwealth Government which has been made using the correct format and doesn’t contravene any laws or sanctions?
Question 3: Do any of the monetary aggregates which are published by the RBA include the balances of any accounts in the OPA Group?
The term “monetary aggregates” refers to all of the measures of the money supply (M1, M2, M3 and Mb) as compiled and published on a regular basis by the RBA. The OPA refers to the Commonwealth’s central bank account. The OPA is one of a group of linked bank accounts, referred to as the Official Public Account Group of Accounts. OPAs are maintained with the Reserve Bank of Australia (RBA), as required by subsect-ion 53(3) of the PGPA Act.
Source, for further information and discussion: http://www.fairmoney.org.au/article-2017-03-24-rba-evidence.php
Looking at the situation logically, since Treasury’s account contains neither any component of the broad money supply or banking reserves, it is impossible for it to be a transaction account. It is a logical impossibility.
They say they are and they list all the ways in which they are. Sorry. You do not convince me.
Q1&2. They will allow the government to go into temporary overdraft that must be extinguished immediately by bond issuance (and they charge interest until it is)
Q3. Not publishing something means nothing. I don’t really understand but this seems to not have anything to do with government accounts.
Looking at the situation logically, the OPA collects money and makes payments so it must, as they say themselves, be a transactional account.
“… The Reserve Bank also provides transactional banking facilities to various Australian Government agencies. ”
I presume this is what Kaye is advancing as evidence for her argument that Treasury’s accounts with the RBA are transaction accounts. The term “transactional banking facility” does not, in my view, provide such evidence. When Treasury spends into the real economy, the payee’s commercial bank is directed by Treasury to create bank credit money in the payee’s account. At the same time the RBA supports this by creating new banking reserves in the account of the payee’s bank with the RBA. The transactions are all to do with the payee’s bank. Treasury’s account is simply marked down accordingly, post facto, to record its latest fiscal operation. It is simply an internal accounting adjustment. There has been no direct transfer of money by Treasury. Treasury has no need to horde money, and it doesn’t. The credits in its RBA accounts are not any measure of money.
Kaye said: “You do not convince me”
Oh right. So the RBA credits a payees account at a commercial bank and the Treasury’s account is debited by the same amount but you don’t consider this a transactional account???? You say there has been no direct transfer of money. Do you mean no-one delivered a bag of cash? Because there has most certainly been a direct transfer of money just as there is when I pay my tax which is debited from my account and then credited to an account in the OPA.
PS I don’t think we use the term narrow money in Australia. It would help if we left out the lingo.
Kaye said: “… Because there has most certainly been a direct transfer of money … ”
There has not been a transfer of money between two accounts, because Treasury’s account does not contain money. What is there about this that you don’t get? The post facto changes to its operational account when Treasury spends create a useful record of its ongoing fiscal operations, however in purely monetary terms it is a sterile accounting exercise.
Incidentally, the RBA has been distinguishing between narrow money and broad money ever since its inception in 1958.
From what I can gather, the terms have no relevance to government accounts but I really don’t care about semantics or lingo.
“Treasury’s account is simply marked down accordingly, post facto, to record its latest fiscal operation. It is simply an internal accounting adjustment.”
Saying words like post facto is just silly in my opinion. Of course it is an accounting adjustment and it could hardly happen a priori now could it. What banks transaction is not recorded post facto? The accounting adjustments are ipso facto.
(Lord I hate Latin competitions which seem designed to make others not understand)
John Hermann, thank you for these enlightening posts. I have cut and pasted them into my notes folder under your name for future reference.
So if you understand them John, perhaps you can translate them. If the RBA credits a payee’s account and the Treasury account is debited by an equivalent amount, or if I pay the government with my account debited and the government OPA credited, how is that not a transactional account?
Kaye, I agree… often jargon gets in the way of understanding and can be used as a defense when the speaker understands less than they are willing to acknowledge (sometimes even to themselves).
Many, many years ago I worked for a scientist who was an undeniably intelligent person, but he spoke almost entirely in jargon, so almost nobody understood what he was talking about. I often wondered if the habit began as a defensive device in a competitive schooling environment. Later it got in the way of normal interactions and isolated him from others.
There was an effort, some time back, to teach academics how to communicate so that they could talk to people without overloading their language with impenetrable jargon. I wonder what happened to that.
On occasion jargon is very useful, but most times it actually impedes understanding. Einstein wisely said:
This from my viewpoint: Money is not tangible; not in the sense of currency having any intrinsic value.
The money which we physically handle is merely a representation of credit which can be exchanged or stored at will.
Your banked assetts are likewise merely ciphers on a page, representing credit which can likewise be exchanged for goods and servicesand/or stored as required. There is nothing material about it: it is entirely representative.
So what we are really discussing is a credit system where the government controls the amount of credit available to the country with which people, businesses etc. conduct their material affairs.
There is no “money” in the old fashioned sense: It is all ‘virtual’ value.
I would often get the kids in my maths classes to explain to each other. To teach someone else requires organising your own thoughts and finding out where the other person is getting lost. The kids sometimes understood each other better plus it was a good learning exercise for them in other ways.
To make Legislation understandable (even for politicians), there’s always a set of Definitions at the outset. Also useful as a reference during the reading. Judges rely on them because it reveal intent.
Definitions – don’t leave home without them.
And another thing…
If they are not transactional accounts, how come they have a specified overdraft arrangement?
A 600word essay on what must be the most boring subject in human activity and there is over a hundren detailed explanations in a hundred different way of interpreting the subject and some of you ask ME to explain what the middle-class looks like!!
Matters Not: ‘Seems to me that the taxpayer concept is the appropriate one in this context. Please inform.’
Incorrect. If this were the case then corporations and trusts would have sovereignty and entitlements to vote, which they don’t. The clause in the Constitution from which sovereignty of the people arises is ‘the Parliament of Australia shall be chosen by the people’. Corporations don’t vote and can’t ‘chose’ the gov.The gov does not therefore exercise sovereignty on behalf of corporations as tax payers.’Citizen’ is the correct term. Taxpayer sovereignty is neoliberal ideology. .All money ‘owned’ by the gov is citizens money as only citizens have sovereignty.
All this talk of accounting procedures is irrelevant. As John Hermann says above…its a ‘sterile…exercise’. I have come to the conclusion that MMT is possible in Australia mainly because the gov is the only shareholder in the Reserve Bank.Theoretically everything it spends will be returned to it via tax or currency exchange or transaction fees at some stage in the future because, at its own discretion, the gov is entitled to all dividends from RBA.This means if the gov creates $1 billion in its account at the RBA and spends it on say infrastructure then at the end of the first year after the spend approximately 25% ( or $250 mil) of that money at least will be returned to the Gov account via taxation or fees.The rest will return in the short term over a few future years as on average the gov tax take is about 25% of GDP meaning it will get back at least a quarter of the value of its initial spend every year for four years. (Not including any multiplier effect which would give it even more).
Further, under the RBA Act, the Reserve Bank can make the gov loans as the RBA has the monopoly power to generate legal tender currency. So if the gov borrows $1 bill from RBA for its infrastructure program instead of selling bond debt and it borrows from the RBA at say 10% per annum it can pay back the first years interest of $100 mill and some of the principle in one year from the $250 mill tax it will collect from its $1 bill spending and it can do that every year until the initial $1 bill loan is repaid. After each repayment to the RBA, or at the end of the loan period, the gov can then claim back, as its dividend from the RBA, both the payment it made to the RBA against the principle loan amount plus the interest it paid on its own loan. In practical effect, this mean that the gov has no debt in this circumstance. In other words, the gov gets the whole $1 bill back from the RBA that it borrowed in the first place. It can then begin the cycle again. In effect, this process has not created any budgetary debt over the medium term because the gov loan has been paid off and its accounts balance. As the gov inevitably gets all money it spends back, the accounting procedures are merely a ‘sterile’ record keeping exercise and are all but meaningless.This is why I now believe MMT is both possible, legal and preferable in Australia – because the existing arrangements allow for it. Bond sales are completely unnecessary and should not be engaged in.They are just charity for the rich.
Kaye Lee: “The Reserve Bank also provides an overdraft facility for the Government that is used to cover periods when an unexpectedly large mismatch exhausts cash balances. The agreement between the Treasury and the Reserve Bank places strict controls on access to the overdraft facility, as well as imposing a market-related interest rate on the facility. The overdraft is used infrequently, generally to cover unforeseen shortfalls in cash balances, and is extinguished at the next Treasury Note tender.”
These arrangements are ultimately irrelevant because the gov is the sole shareholder in the RBA and can take all funds from it as it choses. As Wayne Swan rightly did.
Kaye, as far as the economy is concerned money comes out of and goes into the federal government. What imaginary transactions between imaginary federal accounts occur is utterly irrelevant to the economy.
Science tells about greenhouse effect so we seek the appropriate legislative reform. MMT tells about the birth and death of money so we seek legislative reform, unless our name is Kaye Lee. Why do you selectively defend nonsense laws in conspicuously just fiscal policy. Why make this exception?
It’s like you’re telling environmentalists they’re right but they have to understand why we need some new coal-fired power stations.
OTMP – you are taking that particular quote completely out of context. Please re-read to see that context and why I responded as I did. As for telling me that:
It’s further evidence that you haven’t read the thread in its entirety. Fact is I agree with your opening para and said so January 10, 2019 at 4:36 pm. I repeat that statement of two days ago:
For starters, the govt can’t create any money in its account. It gets revenue, mainly taxation but some other things too, or it can issue bonds.
Secondly, the RBA only issues actual bank notes. The mint makes the coins. And these represent a miniscule fraction of the monetary system. And it does not lend to the government unless you are talking about the overdraft facility. It is precluded from buying government bonds direct.
I wish someone would actually deal with what truly happens.
I am defending nothing. I am trying to tell the truth about how the system works at the moment so we can then work out how to change it. And it has nothing to do with my name. I might be the only person who doesn’t understand. But I am asking the questions I need to. Not trying to shut down the discussion but progress it, at least for me anyway.
Climate change/greenhouse effect is a real life phenomenon happening right now.
Modern Monetary Theory is as the name suggests – a theory.
That people can argue endlessly about whether it is spade or a shovel ….
As Kaye Lee said, “I wish someone would actually deal with what truly happens.”
Alan, you and I are wasting our time trying to explain it to Kaye. She has a closed mind. Which helps to explain why she is unable to address (i.e. always avoids) the main point that I have been making
I absolutely do not have a closed mind. Why the hell would I ask so many questions if I had a closed mind. Did it ever occur to you that your explanations might be lacking? Or even wrong? Or how impossibly confusing it gets when half of you say the RBA issues money and the other half say the RBA can’t issue money (as just one of the many inconsistencies in this discussion)? And when your assertions are demonstrably completely at odds with what the RBA says it does?
If I don’t understand, I keep asking. If I thought the whole thing was crap, I wouldn’t bother. You say I am “unable to address (i.e. always avoids) the main point that you have been making”. I have no idea what point you have been making. In my opinion, the main point is how deficit spending is funded (and the accounting thereof)
John Hermann, I hope you are not in the ‘explaining’ business.
Again I say – define your terms – clarify your concepts – in prospect. Be pedantic. Anticipate.
On a blog, chances are you are NOT speaking to a specialist audience.
Or doesn’t it matter?
I’m now feeling very tired. I think I’ll go home now.
Kaye said: “how impossibly confusing it gets when half of you say the RBA issues money and the other half say the RBA can’t issue money … ”
I don’t recall seeing a statement as silly as “the RBA “can’t issue money”. And if someone has said that then they are obviously grossly ignorant or deluded, and should be ignored. The RBA routinely creates state fiat money, but it cannot create net financial assets (by contrast with Treasury, which can) because all of the financial assets it creates are exactly matched by financial liabilities.
“… your assertions are demonstrably completely at odds with what the RBA says it does … ”
Not so … this is a confused misrepresentation (whether deliberate or not, I cannot say) of what I have already demonstrated.
“Did it ever occur to you that your explanations might be lacking? Or even wrong?”
This trolling question is an example of a mechanism for avoiding addressing issues that have been raised in a debate, by attacking the integrity, intelligence or knowledge of the debating opponent.
“I have no idea what point you have been making … ”
The main point I have been making (which you seem to have avoided) is that new money is created when a sovereign government spends into the real economy, rather than transferring pre-existing money. This must be so because such governments do not save or horde money. The credits in Treasury’s account(s) with the central bank are not a form of money, by any recognised definition or measure of money.
John Hermann, when you get angry instead of interested when someone questions your statements, it worries me. It makes your assertions sound like religion.
Kaye isn’t trolling. As she’s emphasised time after time, she wants to understand. She is not one to allow inconsistencies past without question, so she feels the need to work them out. You’re not helping by becoming angry instead of trying to understand/explain those inconsistencies.
I thought I understood MMT. After reading what Kaye has shown is the reality and how it clashes with what MMT people say, I now realise I didn’t understand it after all. Maybe MMT describes how an economy should work. That may be so, but if you want to get there from here you must understand how it currently works and so how to change it.
I’m inclined to think we need an MMT-style economy, though I’m not as sure as I used to be. It scares me that something so important is so incompletely understood by those who argue for it. It also bothers me that that lack of understanding is apparently papered over by jargon and repetition. Doesn’t that worry you?
Perhaps it has been because the recipient has been so indoctrinated by the media, our schools and universities that for someone to come along and challenge such time-honoured maxims is too much to absorb.
“I’ve spent a reasonable amount of time studying economics and I’ve tried to understand modern monetary theory – and I can’t”. Dr. Andrew Leigh, Professor of Economics, Shadow Assistant Treasurer. Labor Party Conference 2018.
I think this entire debate about MMT would benefit from a televised debate between Dr. Andrew Leigh and an MMT Professor of choice.
If Andrew Leigh is too stupid or too brainwashed, what hope do the rest of us have, escaping the condescending, sanctimonious retorts from MMTers, that we are all just too stupid.
If MMTers can’t explain MMT without using the excuse that everyone else is stupid; perhaps MMT is just stupid.
Some complain that MMTers don’t use maths or formulas to explain. Another red flag for me. Other economist when writing a journal article, certainly love their formulas!
In the majority of MMT discussions I have been involved in, requests for explainstion are often rejected followed by a bizarre over abundance of link sharing. It literally is “Brace yourself, the links are coming.”
In most other fields of debate, opposing parties can explain their proposition without the need for excessive links. Another red flag.
When I first came across an MMT video, I was very excited. It sounded great. The more I read, I became more suspicious that it has leanings or origins in right wing thought. I have come across this view, too much to ignore.
In the link, I link below, one of the comments says it is developed by a very wealthy person, who ran for the Tea Party and wanted to avoid paying tax! I think that’s an interesting discussion, if that is in the writing interest of fellow bloggers. (It’s certainly not mine!)
I completed a fairly thorough search on the Economics online Academic data bases a few years back. There was more criticism than support. To me, that’s a red flag.
That too raised questions, why most of the “explanations and expertise” are confined to online blogs.
Here is a forum board from a few years back. It is very interesting reading, including the comments, which confirm the concerns of some raised here.
MMT – I am still not buying it and I still believe it is a right wing concept as bizarre as those who tout Libertarian style Economics and insist the Govt is stealing their money.
Trish…since the methodology of commentary here seems to be a kind of “tag-team” cooperation, where one person makes a comment, gets legitimately criticised, sooks and then the “partner” leaps into the ring like “Killer-Karl-cox” to their rescue…I would like to apply to be YOUR tag-teamer….so I will await for the inevitable “submission hold” and then come to your rescue…ok?
Now I’m really, really tired and I just woke up. How is it that something so simple can be be so difficult to grasp? I won’t further confuse anyone other than to say that beyond the quagmire of the jargon and the complexities of the explanations given, I get it and I don’t need convincing. My suspicions about those who don’t, goes to what I think is their reluctance to forego old habits that should be consigned to the dumpster. Perhaps the two questions that should be considered are, who has been the greatest beneficiary of the current system? The answer seems to me to be the ultra-wealthy. And who is the likely beneficiary of MMT? The answer seems to me to be, everyone else. That alone, speaks volumes. As the saying goes, follow the money.
John, I would like to push for a televised debate or at least a podcast between Andrew Leigh and a MMT Professor. Who can you suggest?
Your comment just reinforces how important this debate is, because it’s just another comment that MMTers have some unique shared superior intellect, particular to the MMT crowd.
I find that statistically hard to believe.
Your recommendation for debate nomination would be appreciated.
Excellent analysis, Trish.
One of my visceral concerns about MMT is the opportunity for further corruption than we already have in government, corporations, public institutions and so on down the line. I have asked many times how such a magic pudding would be regulated, I have yet to receive a cogent answer. This includes the “no need for taxes” claim so desired by the already very wealthy and powerful.
That said, I do believe our monetary system, as with our democratic process is in need of an overhaul. Instead of swapping one system completely for another, a reasonable approach would be to take the best from many theories, sure, it is more difficult, slow and given the very human ability to engage in pointless argument over semantics would probably take generations to get right.
Working towards a worthy goal beyond our lifetimes shouldn’t stop us, should it?
I have great respect for Andrew Leigh. That concerns me too if he has looked at MMT and can’t understand it.
I am to the stage where I don’t even see the point of MMT.
For me, the important issue is that government spending need not be constrained by taxation revenue, that deficit spending spent wisely is just an investment that will bring economic and social returns and therefore it is usually a good thing. Even companies like BHP choose to be in debt because their investments bring them future gain (and of course lower their current tax liability – and yes I know the government is not a business).
This is not a wrestling match. There are no teams. It’s just people trying to understand or explain. I don’t want anyone to feel their efforts are unappreciated. And I am perturbed if people think I am being deliberately obstructionist just for the sake of it. That is not my intention.
That is a very good point. Giving politicians the ability to spend without restraint could be a Pandora’s Box considering how untrustworthy (and frankly pig ignorant like Criag Kelly) many of them have shown themselves to be
Trish Cory, thank you for the referral to Andrew Leigh. Below is a copy of an email I have just sent to him…
Hello Andrew, it has come to my attention that in response to a question about Modern Monetary Theory, you responded, “I’ve spent a reasonable amount of time studying economics and I’ve tried to understand modern monetary theory – and I can’t”. Dr. Andrew Leigh, Professor of Economics, Shadow Assistant Treasurer. Labor Party Conference 2018.
I cannot believe this and feel there must be some mistake. If, however, you did say this, then I am appalled. But, in the interests of restoring equality among the masses, I invite you to ask any question of me concerning your lack of understanding and I will ensure you receive an answer that satisfies you and puts to bed any misconceptions or suspicions you may have.
This is a serious offer. You are about to become a principal member of the federal government. You have an opportunity for greatness. Don’t stuff it up.
John B Kelly
(Contact details provided)
Trish Corey, my nomination would be, 1) Professor Bill Mitchell, Newcastle University or 2) Dr Stephen Hail, University of Adelaide. Both would be more than willing, I’m sure. On second thoughts, invite them both. It will be a hoot.
Trish, you and I are in some agreement here. I come from a slightly different direction though. My introduction to MMT was from very competent, very left-wing people as a way to make 100% employment possible — that is, a way to fund the kind of social projects that pulled the USA’s economy out of the depression in the 1920s. Personally, I’m not so interested in 100% employment, as I want artificial intelligence (AI) to release humanity from the need for drudgery, but I was interested in something that would put an end to the degrading and crushing of people’s lives by right-wing forces who deliberately maintain high level unemployment in order to keep wages low and to keep unions powerless. MMT appeared to be much of the answer to exactly that.
So I thought I understood enough to actively promote it. However after Kaye’s questioning of the basic knowledge underscoring MMT, I’m no longer so sure that I did understand it properly. I still like some of the concepts, but worry that if it isn’t solidly based upon clear facts, then it might end up being a disaster. (Not that the current system isn’t already a slow-motion disaster.)
Just as you have, I’ve also noticed the link-fest often indulged in by MMT explainers, though the people above haven’t really offended in that regard. Some time back I’d tried reading Bill Mitchell’s writings on MMT and found them utterly impenetrable. It reminded me of those religious leaders who bamboozled their flock with statements which defy understanding. Now, don’t get me wrong, Bill Mitchell might be a genuinely smart person who does know what he’s talking about, after all Buckminster Fuller was a very smart guy and inspired similar devotion in followers and his writing is often completely incomprehensible.
So, yes Trish. I’m with you in wanting more clear and logical description of MMT and less impatience at those listening and trying to understand.
MMT, as I understand it, doesn’t eliminate or even reduce taxes, so much as it decouples them from public spending. Billionaire libertarians wouldn’t get much satisfaction from the MMT I’ve read about, and its use to justify a job guarantee would greatly upset their applecart. But MMT is also used to make the universal basic income (UBI) possible, which is a weird beast that is loved by left-wing and right-wing people for different reasons. (I’m greatly in favor of a UBI.) Interestingly, many Australian MMT followers don’t want UBI, most notably Bill Mitchell himself, though his reasons for not wanting it smack of classism and distrust of lower class people — the worst reason of all, and makes me distrust his thinking even more.
Welcome to the Wonderful Fantasy World of Simon Birmingham –
”MMT, as I understand it, doesn’t eliminate or even reduce taxes, so much as it decouples them from public spending.”
That would be a better approach, private enterprise benefits from public infrastructure, also MMT needs a form of accounting which prevents runaway inflation and helps to maintain a balance of spending and investment rather than the potential for monetary anarchy.
Excellent John. I hope you encourage a podcast so we can listen, if he is keen for a debate.
Perhaps you can answer this. Nearly all the time, the government issues bonds to cover projected spending. They get the money before they spend it.(ie they very rarely go into overdraft). Why?
Trish Corry, you might also include Stephanie Kelton, to provide an international perspective…
Stephanie Kelton née Bell (born 1969) is an American economist and Professor of Public Policy and Economics at Stony Brook University. She was formerly Professor of Economics at the University of Missouri–Kansas City, Chief Economist on the U.S. Senate Budget Committee 2015 minority party staff and an Economic Advisor to Bernie Sanders’ 2016 presidential campaign. She is founder and editor-in-chief of the blog New Economic Perspectives.
Also, Randall Wray….
Larry Randall Wray (born June 19, 1953) is professor of Economics at the University of Missouri–Kansas City in Kansas City, Missouri, USA, whose faculty he joined in August 1999. Before UMKC, he served as a visiting professor at the University of Rome, Italy, the University of Paris, France, and the UNAM, in Mexico City.
Hell, let’s make it a party and invite Ellis Winningham….
Kaye Lee, that is purely a political decision. Why indeed!
Miriam, It was my concern that a UBI is a right wing concept, which saw me researching, concerned it will eradicate the need for unions, which will have all sorts of negative consequences such as an increase in Individual agreements and an erosion of conditions, including safety at work.
Also, that we already have a UBI In Australia (albiet too low) but it has limitations for who can access it. Why would it not be better just to extend the cap and increase payments?
I sure as hell don’t need a UBI and I’m sure Gina Rinehart doesn’t either.
For those interested, read up on Professor Peetz work or if you get an opportunity attend his public lecture on the future of work. You can ask questions at the end too.
Everything I read about MMT appears to be grounded in right wing ideology.
I HAVE raised all these types of questions on AIMN before…
Diannaart said, “MMT needs a form of accounting which prevents runaway inflation and helps to maintain a balance of spending and investment rather than the potential for monetary anarchy.”
Yes, this is one of the things that worries me. Using ordinary accounting, where what is spent is controlled by what is taxed seems to be a good way to control spending so it doesn’t go haywire. It hasn’t stopped a lot of our problems, and I can see its flaws, but at least it controls spending.
When I’d promote MMT I’d point out that spending should ideally be determined by the potential productive capacity of the country. The problem is, how can anyone work that out? The answer I’d privately come up with (but had never heard suggested by MMT-ers) is that economists could watch the value of the money, curbing spending if inflation grows and spending more if it doesn’t. But I worry that this might have significant lag time, so would be very difficult to manage. I imagine a lot of damage could be done in a year… I wonder if it could be managed under shorter time scales.
Rather than it being a political decision, it seems to me that it is a necessity to cover the rules under which the RBA manages government accounts. Those rules could be changed – is that what you are saying?
Trish Corry, there’s nothing right wing about Bill Mitchell and he invented MMT
Kaye Lee, yes.
Miriam English, the productive capacity of the nation is, full employment.
A televised debate (while not an original idea) IS a good idea. On the pro side you could have Professor Stephanie Kelton, (Female, internationally known as an advisor to Bernie Sanders): Steven Hall Lecturer in Economics, University of Adelaide (articulate and presents well); NOT Bill Mitchell – choose elsewhere.
On the other side, you could have Dr Judith Sloan – a former university Professor and is from the ‘right’. Current Professor John Quiggin who is not a fan of MMT and is from the ‘left’. If one must have a politician, then (former ANU Professor) Dr Andrew Leigh fits the bill (although I suspect that the Labor Party would want to have the Treasurer in waiting on the panel.
But would it have universal appeal – I think not. A pity
Matters Not, Bill can be a bit testy and gruff, but I can’t imagine a debate of this magnitude without him.
Please not Judith Sloane – the self-described “laconic economist” who just sneers at the world in general from her supposedly lofty heights at The Australian. She is a very ugly woman and I am not talking about her looks.
Is Judith Sloan a former university professor ? I never knew, well, live and learn…I might have to miss the debate..
On the pro side you could have Professor Stephanie Kelton, (Female internationally known as an advisor to Bernie Sanders…
Thanks for pointing out Professor Kelton’s gender, because it has everything to do with debating MMT.
I know my observation has nothing to do with topic, neither does MN’s comment of professor’s sex.
While you here have all been talking about small-change in money….I’ve been down the garden watering the tomatos and cucumbers….but I am attracted by the possibility of money growing on trees. . .
Judith Sloan..Helvi…is a professional w**ker !
Trish, I can understand your suspicion for a universal basic income (UBI). A lot of other people (on both left and right) also share your doubts.
The reasons I like a UBI are these:
We are going to have massive job losses soon through the large scale introduction of robotics and artificial intelligence (AI). In fact this has already begun. This automation is raising productivity greatly, so we need to find a way for all of us to share in the proceeds instead of just the wealthy. Any “solution” that has the bulk of humanity thrown on the scrapheap is not a solution at all.
A UBI can give everybody the choice to work or not work as they desire. It lets them start up businesses, or spend their time in charity work, or looking after their kids or parents, or adding that extra room to their home, or finally travelling to see the Great Barrier Reef, or whatever they think best suits their temperament and life-goals.
By making the payment universal and not subject to tests there are no thresholds that discourage people from improving their circumstances. There are no petty bureaucrats deciding to throw someone off payments because they got out of the wrong side of bed that day. An employer can’t threaten someone with job loss because people want to join a union — if they can survive fine on a UBI then the employer’s threat has no teeth, and the power shifts into the workers’ hands because they can more easily strike.
Musicians, programmers, writers, artists, video makers would finally live in a society that supported them. At the moment creative workers are the most discriminated against in our society.
Those are the main reasons I became interested in modern monetary theory (MMT) — it offered a way to get there. I was also encouraged by the job guarantee as a temporary relief from the dislocations resulting from massive automation. But I see a job guarantee as purely temporary, as a bridge to a more long term solution in the form of a UBI, because no matter what we do, we won’t be able to hold back the tide of automation. The only form of labor that might be cheaper than automation would be outright slavery, and I don’t imagine anybody would welcome that.
“Those rules could be changed – is that what you are saying?”
“Kaye Lee, yes.”
That is all I have been saying all along John. As things stand, taxation is not “destroyed” – it is credited to a government account, the balance of which determines the need for bond issuance.
If we can start with how things actually work now, then we can work out how to change them.
There’s good money in that profession Joseph.
Kaye Lee, all along this journey, we have been talking about substance while you have been talking about form. It’s easy to change rules. We are trying to change the way people think.
Diannaart,if you are going to have a TV debate, then some attempt at gender balance is essential. Personally, I wouldn’t have Judith Sloan (commonly known as Dame Groan) on any Panel. But in the interest of gender and political balance – she seems the likely candidate.
John Kelly, if you want to win hearts and minds – don’t use Mitchell.
John Kelly said, “Miriam English, the productive capacity of the nation is, full employment.”
No, most definitely not. If we take an extreme example, we could use the popular science fiction theme of a population of couch potatoes tended by highly productive machines. This would be a society far more productive than we have today (no sick days, no holidays, no sleep hours) yet would have zero employment.
Please note that I’m not advocating that. I’m just giving that as an example of how large-scale automation shifts productivity away from employment. In fact it has been doing so for centuries. Most people used to be employed on the land, growing food. Now far more food is produced by a tiny percentage of the population using tractors, combine harvesters, etc.
You might say that full employment plus automation would be even more productive, but that’s never going to happen. How many long distance 50 year old truck drivers are going to get jobs as computer programmers when the wave of self-driving trucks hits soon?
One day enforcing gender parity will be a thing of the past. Because men and women will simply be equals. Which also means that sometimes there might be more women than men on a debating team and vice versa.
Still waiting on suggestions as to how MMT can be maintained and not exploited. And, why we can’t look at implementing a balance of economic strategies instead of the usual “either or”.
John Kelly, no. Kaye has been a reality check. MMT people are fond of saying that taxed money is destroyed and government spending is created anew (I know because I was one of the ones saying it). Kaye showed that this simply is not true. That was a big problem because MMT people repeatedly asserted it.
Recognising that it isn’t true of the way things are now and understanding how it might work more logically in the future is, as Kaye keeps saying, a way to get from here to there.
Miriam English I know of other developments here (in Australia) that will cause much perturbation in what is now highly skilled, well paid jobs. The technology already developed will cause significant displacement.
Diannaart, that day has not yet arrived. And it is the economics profession we are talking about.
It has never been the potential (or what you call substance) that has concerned me John as I have said countless times. There are just so many seemingly erroneous statements about how things actually work now that it distracts from the broader discussion. The idea is one thing but the process (or form) is also important and should not be ignored.
I too am interested to hear an answer to diannaart’s question about safeguards to prevent politicians spending unwisely though I grant that we already suffer from that problem. How much worse if they feel completely unconstrained? Not sure there is an answer – none occurs to me yet anyway.
Oh dear. Now I’m feeling more tired. I think I’ll go home now.
Matters Not, yes. Computer programmers will be another endangered profession, as well as some kinds of artists and musicians. Journalists are already under pressure from AI copywriters. Doctors, lawyers… many more will see big changes in their job prospects because of AIs.
This new kind of automation is different from previous waves. In the past it was the unskilled laborers who were most under threat from automation. Now it will be increasingly white collar workers.
Unlike most people I see this as a good thing… though not without painful dislocation.
I’m very careful these days, I don’t use peoples’ first names, I don’t say Mrs Judith Sloane , just Ex-Professor Sloane…….sometimes I forget, so sorry…
I used get letters addressed to Mr Helvi…I felt so much more powerful….
I’d better go too… things to do… I’ll look in again later.
Yes, Miriam English, I am well acquainted with the history of such developments. And while it’s a good thing for some (the owners of that technology) it has profound implications for society as a whole.
The technology I’m alluding to does involve computer software and will halve the cost of what is currently an expensive process. More capital concentration on the horizon.
Dame Groan can also be referred to as Honorary Professorial Fellow …
Just thinking of the endless possibilities of MMT.
Bigger, better weapons of war, no need to justify expense …
I have been reading all the comments with great interest:
I am far from an expert but it has to be said that we live in an MMT world but our government refuses to operate in accordance with MMT principles.
We might ask why the economy is not being managed to maximise employment, minimise inequality and fully fund public services such as education, health etc. I believe the answer is that is due to politics and maybe some attachment to the Gold Standard era.
Many smokescreens have been erected over the years by both economists and politicians to obscure the economic realities that the federal government is not limited by tax revenues though the “budget” (should be called “fiscal statement”) clearly seeks to perpetuate the myth that taxes are needed to fund spending and any shortfall has to be covered by debt issuance.
Yes, as Kaye Lee insists, there are rules that have been put in place to frustrate or deny the government’s capabilities. But rules can be changed, nothing is immutable. It needs awareness and political will.
Want to read a critical evaluation of MMT? It does focus on the US but …
I’m sure MMT advocates know the counterarguments
Here’s a local.
Money for nothing?
Diannaart: moneyis not the real issue but resources can be misused and they are. (eg Cormann’s use of the RAAF to fly all over the country for dubious purposes, as just one example). Notice that the government always has money for the military but never enough to enable age pensioners or the unemployed to live decently, or the health system to be fully resourced.
MMT can be misused just as much as current neoliberal based practices.
MN: John Quiggin does NOT understand MMT. That is quite clear from his posts. He does not seem to understand that “debt issuance” is more of a monetary operation to control interest rates, not to “cover” a so called shortfall between taxes and spending.
MMT does not advocate spending without constraints, and taxes are needed (along with other reasons) to destroy some of the spending capacity of the non-government sector so that overall spending by every actor in the economy does not exceed the economy’s capacity.
I also would like to see a debate between MMT proponents and those against its use.
And Richard Holden does not understand MMT either and misrepresents it in the link you supplied.
Harry you could be correct I just wouldn’t know. Nevertheless, how is it that you know – while the vast majority of economic professors aren’t believers? Does that frame of mind extend to the climate scientists?
Re those against its use. Perhaps we could refer to nations where it’s in use? But maybe not?
Miriam, taxation does not actually control federal government spending. It controls the inflationary impact of federal government spending. Without taxation we would have hyperinflation. In addition, the RBA’s open market operations can be thought of as “fine tuning” aimed at keeping inflation within the prescribed target band (it does not do a good job in this regard, but that’s another story). And of course taxation has important secondary purposes and functions.
Several recent comments talk about a “red flag” raised because many mainstream economists do not “understand” MMT (or functional finance, on which MMT is largely based). It should be understood that mainstream economists (the orthodoxy) are neoclassical at their core, which in my view only serves the modern neoliberal agenda. It is blind to the analyses of MMT economists, who are heterodox and largely concerned with what is required for serving public purpose. So I would say that (and in my experience) the mainstream are aligned with the broad agenda of the political right and the heterodox (or at least the MMT component of the heterodox) are aligned with the broad agenda of the political left.
“….“debt issuance” is more of a monetary operation to control interest rates, not to “cover” a so called shortfall between taxes and spending.”
The government doesn’t issue bonds to control interest rates. The RBA might trade in them to achieve that but the issuance of bonds is, in fact, prompted by the shortfall between revenue and spending.
Issuing bonds is a way of withdrawing liquidity from the private sector, thereby freeing up “fiscal space”. This does not imply that money is transferred to federal government coffers. Narrow money (reserves, currency, bank deposits) is simply replaced with broad money (bonds).
And round and round we go on the same circle. That is NOT the way it works at the moment John.
Are you suggesting that the money received from the sale of bonds is not credited anywhere? Why on earth would the government issue bonds to withdraw liquidity from the private sector when the private sector is already dangerously indebted?
And what of the coincidence that the amount of bond issuance exactly equates to the size of the deficit?
This is sooooo frustrating. As soon as one of you agrees that, under our current rules, the government issues bonds to cover the shortfall, the next one comes along saying that isn’t the case.
I feel a need to apologise to Kaye for suggesting that she was trolling. I now realise that she was simply being a somewhat strident in her criticisms, but otherwise rational and willing to debate the issues.
Kaye Lee, the RBA does indeed issue bonds to hit it’s overnight target. From their website…..”The Reserve Bank sets the target ‘cash rate’, which is the market interest rate on overnight funds. It uses this as the instrument for monetary policy, and influences the cash rate through its financial market operations.”
The reference to “financial market operations” is code for bond issuance. During the Howard era, bonds were still being issued even though there was a surplus and we were supposedly debt free.
Kaye, you still don’t seem to get what I am saying. Money is not received from the sale of bonds by the federal government. Yes, money is received when bonds are sold on the open market (i.e. between two non-government entities). There is a big difference between the operations of a monetary sovereign and similar operations by everyone else. All of your other related questions will fall into place and the answers will become obvious when you appreciate this fundamental point. To repeat what I said a little earlier, when the central government sells bonds to the private sector, all that happens is that narrow money in the hands of the private sector is replaced by broad money. The process is very simple .. the RBA simply marks down a reserve account held with it and marks up a securities account held with it. Nothing could be simpler.
The RBA doesn’t issue bonds as I have continually pointed out. They TRADE in them, they don’t issue them. Surely you understand that? It’s a BIG difference.
Perhaps it will “all fall into place” for you guys if you can grasp that simple but very important point.
“”The AOFM develops an issuance program each financial year based on the Australian Government’s expected financing requirements as set out in the Budget and as updated in the Mid‑Year Economic and Fiscal Outlook.”
And I no more believe that the sale of bonds is not credited to an account than I believe that taxes aren’t credited to an account.
“The AOFM’s cash management role ensures that there are sufficient funds available on a day to day basis to meet the Australian Government’s cash needs. Funds are received from tax and excise collections and debt issuance, while government outlays and debt maturities reduce cash balances. The AOFM liaises closely with the Australian Taxation Office (ATO), RBA and individual government spending agencies to gather information and combine this with experience and judgement to forecast daily revenue receipts and outlays. There can be significant mismatches between these ‘in’ and ‘out’ flows leading to times when the AOFM needs to liquidate short term financial assets or undertake short term borrowing (through Treasury Notes) to meet shortfalls. “
A speech delivered by Rob Nicholl from the Australian Office of Financial Management, 29 May 2018…..“From next year the focus will be on: how to support interest from a wider variety of investors but with declining issuance and reviewing our approach to managing the cash portfolio.”
He is saying that as the budget moves into surplus, there will be less bond issuance, thus creating challenges in managing the overnight target rate.
AOFM/RBA/TREASURY it’s all one entity in the broader scheme of things. I think you are splitting hairs. It’s this thing about substance and form I referred to earlier.
The Australian Government maintains a group of bank accounts at the Reserve Bank of Australia (RBA), known as the Official Public Account (OPA), the aggregate balance of which represents its daily cash position. The AOFM is responsible for management of the aggregate OPA balance.
The AOFM’s primary objective in managing the OPA balance is to ensure that the Australian Government is able to meet its financial obligations as and when they fall due. Other objectives are to minimise the cost of funding and to invest excess OPA balances efficiently.
Meeting the primary objective requires close attention to the within-year variability and uneven pattern of the Australian Government’s receipts and expenditures. There is often considerable cash flow volatility as a result of mismatches in the timing of revenue receipts and expenditures.
Cash proceeds not required for immediate purposes are invested in term deposits with the RBA. During periods when there are short-term funding needs, these can be met by increasing the volume of Treasury Notes on issue and/or redeeming term deposits.
As part of the Australian Government’s banking arrangements with the RBA, the RBA provides an overdraft facility to the government. The terms of this facility provide that it may only be accessed to cover unexpected temporary shortfalls of cash (for example, to cover a sudden previously unplanned outlay). This means that it is used very infrequently.
Kaye, I think John Kelly is right in the sense that the issuing of new Treasury securities (bonds and notes) to the private sector involves BOTH the Treasury and the RBA. The role of the RBA is to mark down a reserves account held with it and commensurately to mark up a securities account held with it. In regard to what one believes, this is determined by one’s perceptions and understanding. Unfortunately federal finances are not altogether straightforward .. there are some subtleties and nuances to master.
I have shown you multiple pieces of evidence from official sources that very clearly show that the RBA has nothing to do with the issuance of bonds. The issuance is determined by the AOFM prompted by the shortfall between expected revenue and expenditure.
Perhaps you could show me one quote from an official source that says the RBA is the one who decides on and carries out bond issuance. Actually, forget that. You can’t. because it isn’t true.
John Kelly, that speech, if anything, verifies that bond issuance is in response to meeting the financial needs of the government which, if it goes into surplus, can be reduced. It’s main thrust was what sort of AGS people like and how to keep attracting investors from different sources.
In the MMT literature one encounters the idea that a good case exists for consolidating the RBA and Federal Treasury balance sheets. Indeed Bill Mitchell goes further by saying that the RBA should be incorporated in the department of Treasury. The reasons being:
(a) The RBA is a ‘creature of Federal Government’. It was created to serve public purpose, and – even if unstated – it is obliged to work cooperatively with Treasury.
(b) The RBA is Federal Treasury’s bank. All Treasury payments take place with the RBA’s authorization.
(c) The Federal Treasury possesses the unique ability to create net financial assets for the private sector, which it does (with the cooperation of the RBA) whenever the Federal Government deficit spends. These net financial assets are essential for the healthy functioning of the economy.
(d) The RBA, on its own, does not (and cannot) create net financial assets.
(e) The RBA has never refused to honour a payment requested by Federal Treasury (made using the correct format and not contravening any laws or sanctions). One reason for this is that the RBA is well aware that Government (via Treasury) can create net financial assets whenever it perceives a need to do so.
(f) When the RBA holds primarily Treasury securities in its assets portfolio, it collects interest income paid by Treasury to cover its operating expenses, and returns a very significant portion of that income to Treasury.
Kaye, you are again misrepresenting what I said previously. I did not say the RBA is the entity that decides on new bond issuance, I said that it is a necessary participant in the mechanics of that issuance. The RBA and federal Treasury do not operate independently of each other, they operate on a cooperative basis.
There are two people called John commenting here.
John KellyJanuary 13, 2019 at 12:45 pm
“Kaye Lee, the RBA does indeed issue bonds”. No they don’t.
And of course the RBA, being the government’s bank, is a “participant in the mechanics”. It credits and debits the government’s accounts and will not allow it to spend more than it has in those accounts. The government cannot just spend willy-nilly. That does not mean a government cheque will bounce. If they go into overdraft they must immediately extinguish that overdraft by issuing bonds to cover the shortfall. However they usually issue the bonds (if necessary) BEFORE they spend to cover that spending.
Now I’m really, really, really tired. I think I’ll go and slash my wrists now.
Errrr…perhaps we should just agree to disagree rather than self-harming.
Anyway, the conversation is on an infinite loop with little value (for me) in continuing. Sorry to be such a pest.
I have been called “malignant” recently, not on this thread, but I dared to hold a different POV on another AIM blog … therefore it is with much trepidation I am going to suggest that John Hermann is simply repeating himself and I don’t understand how what he writes answers any questions I or others have raised. I am prepared to have the descriptor of “stupid” added to my list of failings.
Also, Bill Mitchell maybe smarter than Einstein, however, there are others who see MMT a little differently. Referencing Bill is a bit like referencing a god, which is fine if one is a believer, not so much if one is a sceptic. Besides, not all MMTers are in lock step, or if they are, there is something very wrong.
Kaye said: “Kaye Lee, the RBA does indeed issue bonds”. No they don’t.
Kaye, you have not been reading what I said. The RBA does not “decide” on bond issuance, but it does “issue” bonds in the sense that (under instructions from Treasury) it reduces credits in reserve accounts and commensurately increases credits in bond accounts.
Kaye said: “It [RBA] credits and debits the government’s accounts and will not allow it to spend more than it has in those accounts. The government cannot just spend willy-nilly”.
The RBA cannot prevent Treasury from spending. On economic and financial matters, Treasury has the whip hand. The ultimate reason being that Treasury can create net financial assets, while the RBA cannot create net financial assets. Everything else involves playing out accounting games, which in part serve to give many people – like Kaye – the impression that the reality is otherwise, i.e. the impression that Treasury has a finite stock of dollars at its disposal. The reality however is that Treasury has a bottomless pit of dollars at its disposal, at least in principle (I say “in principle” because if it creates more financial assets than is required to purchase all the goods and service that the economy can produce then inflation will take off). Irrespective of statements put out for public consumption by civil servants who work for the RBA, I think the RBA’s financial economists on the whole have a good understanding everything I have been asserting in this thread.
Sorry to hear you have been insulted on other threads Diannaart — there is no excuse for ad hominem. We should all try to be nice to each other, and to apologize when we make mistakes. I make mistakes all the time, and try to learn from those mistakes.
MN: “Nevertheless, how is it that you know – while the vast majority of economic professors aren’t believers?”
See John Hermann’s comment at 1146 today. Basically most economists who were trained in the last thirty years were inculcated with Monetarist, Neoclassical views and deviation from its orthodoxies were active discouraged, even penalised.
Japan is probably closest to operating along MMT lines. Its public “debt” is over 200% of GDP but it has low inflation and low unemployment, both metrics that should have suffered if the neoliberal orthodoxy was anywhere near correct.
BTW, I accept the science of CC but economics is a heavily contested subject so there is no valid analogy there.
Thank you. That what you have just said is one of the nicest things I have heard recently – massive tree falling on house (mine) belligerent neighbour and very good ones too. But at present am waiting for insurance inspection to arrive, hopefully tomorrow. And just feeling a tad out of sorts. So, thank you. (BTW I think I excelled in Mistakes with honours.)
I don’t understand a lot of what you are saying, also I am extremely mentally and physically fatigued, so I’m not so sure I even understand what I am writing here. But, I appreciate courtesy.
I do know that there is rarely a single fix for many human constructs, many things really are complicated. Economics is no exception.
All I would like to see is a collaboration instead of a debate.
We have enough confrontation, enough win/lose. We need to learn from our experience, knowledge and mistakes, therefore we need more education regarding our fiduciary system. Too much of our monetary system is either sleight of hand, creative accounting, and/or paternalistic what we need is pulling together what works with new progressive ideas and ways to implement.
As Kaye Lee says we cannot change the system without full awareness of rules and other constraints.
Until then no amount of proselytising is going to convince enough people at a grassroots level, let alone those who already hold the reigns of power. It is also a shame we are presently governed by idiots, greedy narrow minded and bigoted.
John Hermann: I believe Kaye Lee is trying to come to grips with MMT but she points out that there are a number of rules and conventions in place NOW that supposedly “prohibit” operating as it could. But (And I apologise it advance if I misconstrue Kaye’s argument) she seems to think this is a major stumbling block as the RBA is supposedly independent under the rules and conventions
Of course, no rule or man-devised convention is immutable and can be changed if the will is there.
I doubt that will is there under both major parties, at present.
Diannaart: Sorry to learn of the damage to your house from the fallen tree and the stress it appears to have caused. I hope it is fixed as soon as possible.
I also agree that we need more collaboration and recognition of common interests instead of confrontation and debate which degenerates into personal attacks at times.
Online comments have their limitations such as a lack of nuance that is more apparent in face to face discussions. Of course the subject matter at hand is quite fraught.
I agree Harry, however I would say that the supposed independence of the RBA is actually a carefully nurtured illusion. I also find it interesting that the ability of federal Treasury to borrow directly from the RBA has never been removed – through legislation to that effect, as it has in the U.S. Prior to 1982, such borrowing occurred regularly in Australia (much as still happens in Canada today). However since that time such borrowing has become a rare event in Australia, and the policy to restrict it has been implemented voluntarily on the grounds of “sound finance”. There is no reason why much of Treasury’s issue of securities to the private sector could not be replaced with direct borrowing from the RBA. It would save a bit of interest, and would be more efficient in other respects. However I am not in favour of phasing out the issue of securities altogether, because they perform other very useful functions – like providing mutual funds, pension funds super funds etc with a source of risk-free investments for the purpose of broadening their investment portfolios and managing their risk profiles.
No I don’t think it is a stumbling block. I have always said the rules can be changed. But it’s awfully hard to work out how to change the rules if you don’t agree on what they currently are.
From 1938 until around 1983 the central bank (which was the RBA after 1958) issued 1% loans directly to the Australian federal Treasury mainly to accommodate emergencies and lags in revenue (short term deficits) and was able to broaden its lending activities under instruction from the federal government. Following in the wake of the report of the 1981 Campbell Committee into the operation of the Australian financial system, the federal government reverted to the practice of doing virtually all of its borrowing from the private sector at market interest rates. It is interesting that governments never hesitate to use central bank borrowing to defend their citizens in times of war. If the will was there, this practice could be extended for the purpose of eliminating the social and environmental destruction that has arisen from unsustainable economic policies. And in reality, a government that is in debt to its own central bank is not really in debt at all.
Kate Lee. The RBA is banker to.the Gov by law. So see as c, d, e – in particular- below. Its not what it ‘does’ under its current policy but what it ‘can’ do.
RESERVE BANK ACT 1959 – SECT 8 General powers
RESERVE BANK ACT 1959 – SECT 8
The Bank has such powers as are necessary for the purposes of this Act and any other Act conferring functions on the Bank and, in particular, and in addition to any other powers conferred on it by this Act and such other Acts, has power:
(a) to receive money on deposit;
(b) to borrow money;
(c) to lend money;
(d) to buy, sell, discount and re-discount bills of exchange, promissory notes and treasury bills;
(e) to buy and sell securities issued by the Commonwealth and other securities;
(f) to buy, sell and otherwise deal in foreign currency, specie, gold and other precious metals;
(g) to establish credits and give guarantees;
(h) to issue bills and drafts and effect transfers of money;
(i) to underwrite loans; and
(j) to do anything incidental to any of its powers.
RESERVE BANK ACT 1959 – SECT 27
Bank to be banker for Commonwealth
The Bank shall, in so far as the Commonwealth requires it to do so, act as banker and financial agent of the Commonwealth.
So as banker to th gov the RBA can do the things at s 8 RBA Act. That should clear things up for u.
From my reading here (and I could be wrong, so please correct me if I am) I believe Kaye Lee is very clear on what the RBA can do, if not down to the precise detail.
Therefore, OTMP, what is your point?
Kaye Lee is far from clear about what the RBA CAN do. She is focusing on what it currently DOES under its current policy adoption. But what the RBA DOES is not all it CAN possible do. For example, she says RBA DOES not make loans to Gov.That is not the same as saying that it CAN’T make loans to gov – which the legislation clearly says it can. She also says the RBA does not issue bonds -which are just a form of securities – yet the legislation clearly says it can. So clearly Kaye Lee is incorrect about what the RBA can and does do because what it does do is what it needs to do under the legislation including the items listed at s 8 of the RBA Act and which it is empowered to do. In effect she is derailing the debate about MMT because she is focusing on what the RBA currently does and not on all that it is empowered to, and can, do.Hence under current legal arrangements MMT is perfectly possible. If the RBA does not adopt an MMT strategy then that is a matter of policy not law. As, if it were adopted, MMT would be a change of policy, then it is a moot point, and does not matter, what the RBA currently does. The only real questions are whether the current arrangements allow an MMT strategy to be adopted and whether they should be. What it currently does is mostly irrelevant to those questions.
So many things get conflated in this discussion.
The RBA’s role in monetary policy is one thing and certainly may involve buying and selling bonds in a secondary market. That’s a different issue.
This article was about whether taxation funds government spending.
I would contend that taxation does not constrain government spending but, under current circumstances, any shortfall between revenue and spending will be funded by debt issuance which is decided by the AOFM (not the RBA) based on projected income and expenditure.
I do not think it is true to say “taxation is never spent’ because the RBA makes payments on behalf of the government and the government account is debited accordingly.
The simplest proof of this is that if taxation was never spent, there would be absolutely no need for an overdraft facility.
OTMP, you misunderstand the difference between trading in bonds (to control monetary policy) and issuing them (to fund deficit spending).
And I am not sure how to say this any more clearly YES I AM SPEAKING ABOUT THE CURRENT RULES.
“I do not think it is true to say “taxation is never spent’ because the RBA makes payments on behalf of the government and the government account is debited accordingly.”
The debiting of Treasury’s operating account is nothing more than an accounting exercise. It does not imply that the credits in this account are a form of money, or that money is transferred between two accounts when government spends into the real economy.
“The simplest proof of this is that if taxation was never spent, there would be absolutely no need for an overdraft facility.”
The “overdraft facility” is obfuscatory language, which tells us nothing more than that federal Treasury can borrow from its central bank. And a government in debt to its own central bank is never in any form of financial stress. The reasons being: (a) if the loans are small, there would be no fiscal issues anyway, (b) if the loans are large, they would usually have an extended term, and inflation would diminish their relevant magnitude over time, (c) such loans have traditionally enjoyed very low interest rates compared with market rates, (d) existing regulations ensure that most of the interest income received by the RBA returns to Treasury, and (e) loans may be effectively rolled over at the discretion of the government, in perpetuity.
‘…a government that is in debt to its own central bank is not really in debt at all….’. Absolutely. Especially where the gov is the only shareholder in the central bank and given the gov can get a return on the debt/loan of 25% per annum via tax while paying a much lower interest rate than that 25%. And can claim its own interest repayments back as a dividend.
Kaye Lee.I misunderstand nothing and you misrepresent my argument and position to exert some sort of delusional sense of ur own superiority. No where did I mention the purpose of the bond issuance. But for the record see RBA Act s 8 ss j.
Clearly, you are wrong on just about every point.This is because you are starting from the accountancy conventions. Ultimately, the ‘rules’ are the law.
Also the last statement implies that the purpose of taxation is to provide funding for spending purposes. However a major purpose of both taxing and bond issuance to the private sector is to withdraw liquidity from the real economy as a counterbalance to the inflationary effects of federal government spending. Note also that the word “revenue” strictly refers to money received — its use does not imply that the money received is stored anywhere or is used for spending in any direct sense.
It isn’t the term “overdraft facility” that is obfuscatory language. It is very simple in fact. If they spend more than they receive they go into overdraft and have to see to it immediately by debt issuance (and pay interest until they do – and yes, they are in a roundabout way paying interest to themselves.)
Treasury Notes are short-term discount securities issued by the Australian Government primarily used for within-year financing. The volume on issue varies depending on the flows of Australian Government receipts and expenditures.
FFS. So you guys see this as a pissing contest where I am trying to make myself look superior????
That really f#cking pisses me off. I am outa here. MMT can go f#ck itself. I will NEVER EVER speak of it again. I’ll leave the blind faith stuff to the acolytes.
“The “overdraft facility” is obfuscatory language, which tells us nothing more than that federal Treasury can borrow from its central bank”.
Absolutely correct. An overdraft is just an extended line of credit i.e.a loan.
‘ I will NEVER EVER speak of it again’ Well now maybe the debate can progress beyond accountancy conventions.
To John Kelly,
I am sorry for my outburst. I very rarely get angry but I will not tolerate the many slurs and accusations that have been made against me here. They aren’t even the problem really. The disdain shown to people asking genuine questions is just so counter-productive to the cause that I know you genuinely care about.
OTMP, your aggressiveness and sneering at Kaye makes you look bad and paints your beliefs as something that can’t stand up without chest-beating. That puts it on a par with religion. You lose face terribly by doing that. I think at that point you convinced most of the audience that MMT might be a mistake. If you can’t make a sensible explanation without insults then what substance do you have?
It’s a good thing I didn’t poke my head in as it would have ended up a right-royal punching bag. My knowledge of money matters stops at counting the change when I buy lunch at the corner deli.
But it’s fine to ask questions. Especially here (though I confess that on this subject I didn’t have the guts to). One shouldn’t be condemned for doing so.
So all I got out of this is both Andrew Leigh AND John Quiggin are both stupid. A ridiculous accusation.
No one can answer any questions about MMT without losing their cool or they just accuse the person of being too stupid to understand it; although they have put up sufficient support for their arguments.
For the last five years or so, it’s been my exact experience.
Professors of Economics are not stupid. They are not brainwashed in some Neo-Classical diatribe. They understand fully the various schools of thought and can lecture on the pros and cons of same and challenge thoughts on each school.
These Professors write umpteen journal articles, successfully complete research grants and publish books.
These professors are not stupid, nor are they brainwashed.
Maybe MMT is a radical concept that does not work in practice. It’s no different to the libertarian Economics supporters with their concept of a total user pays society and no taxes. It can’t be proven to work, but they make the same accusations as MMTers.
I sincerely do hope Andrew Leigh or maybe even John Quiggin will agree to a debate we can all observe.
I think it will be a hoot, but for different reasons to the author.
If it’s a panel of 3, my preference would be Andrew Leigh, John Quiggin and David Peetz as the future of work will most certainly be raised.
Trish, Neoclassical economists are not stupid, as you say – they know what side their bread is buttered on. However many of them engage in groupthink as a substitute for original thinking, and they are largely ideologues in regard to those aspects of economic theory that support the neoliberal agenda.
In regard to MMT, this is now a major part of what is now called PostKeynesian economics, which differs from Neoclassical economics by, among other things, placing public purpose at the top of its list of priorities.
MMT is also supported by professors around the world who write umpteen journal articles and successfully complete research grants and publish books. If you were not aware of the outstanding academic credentials of MMT economists, then I would suggest that you have a fair amount of homework to do to become informed.
All I can add is that Pig Iron Bob, the LNP’s holy grail, Australia’s longest serving prime minister, never bothered with a budget surplus. Never had one, never insisted on one. Not one. Ever.
Well how come this is not reflected in the Academic Economics databases then, John Hermann.
Why are other economists not trying to build on MMT theory, like occurs with other theories?
” Why are other economists not trying to build on MMT theory, like occurs with other theories?”….Because it is a crock of shit!, Trish..like all these theories for economic miracles just by shifting decimal points around or columns of figures from the red side to the black side of the accounts book are just a crock of shit and have been crocks of shit since the earliest bean-counters first latched on the old pea snd shell game of financial chicanery!
I don’t know the first thing abour MMT ot PPT or FFS! or any other acronym or analogy for economic miracles, but I DO know the synonym for “accredited accountantcy professor” and THAT is : “A bullshitting shyster”.
I remember back in the early eighties when the first personal computer I ever saw was being put through its paces by this ex-airforce techy I knew..and he punched in the codes and keys and up came this slow grafic sketch on the screen of a pornographic scene…and I had to remark that after thousands of years of human evolution in intelligence, THIS display of what has to be the oldest form of “entertainment” known to man is the best we can do?
It is the same with this foolish pursuit of the perfect monetary solution for an imperfect society…and I ask now what I asked that old ex-flyboy as he gloated on the future prospects of a brave new world of unlimited possibilities…:
“Who’s going to grow the potatoes?”
Thanks Trish for calmly saying what I also feel. My Trump temper tantrum was not helpful.
I still have some hope that modern monetary theory (MMT) might have something to it. I may be wrong, but I don’t want to dismiss out of hand any idea that might help to deliver, first a Job Guarantee, and then a universal basic income (UBI).
Certainly, the pure free market extremists have fallen flat on their faces, and traditional economics doesn’t seem to help a lot when faced with excessive pooling of money in fewer and fewer hands, leading to stagnation. And none of them have a plan to deal with large-scale automation and the massive unemployment that will result.
We clearly need a better approach. Maybe MMT has some useful ways to solve these problems. But we need to work out how to get there from here, and we need to solve the problem of corrupt government misusing the potential advantages MMT says it can deliver. We can’t afford a corrupt government using MMT to devastate our country. Look at what the LNP have managed to do even with restrictive accounting practices holding them back. Imagine how they could mess up our country if they could just print money willy nilly, pretending they were contrained by some ephemeral measure of “potential productivity”.
Thanks for your response Trish. What you need to appreciate is that the discipline of economics is a divided house. The current neoclassical mainstream (the majority) are in many respects the gatekeepers, and try their best to keep the heterodox economists out. However the others (who in many cases are distinguished in terms of their academic credentials) cannot be suppressed. The heterodox economists (largely but not exclusively postKeynesians, there are also ecological economists and others) have set up their own peer-reviewed journals, and even their own university departments – sometimes called departments of Political Economy (the one at Sydney University is an example). However there are also individual heterodox economists scattered all over academia in this and other countries, and many of them have impressive publication credentials.
Your two somewhat loaded questions deserve to be answered. I don’t know how you gained the impression that MMT economists do not appear in academic economics databases. They do. And they also appear in both the mainstream media and social media outlets. You might not be aware that Prof Stephanie Kelton (ome of the leading MMT economists in the U.S.) was closely identified with the Democratic Party and in particular was appointed economic advisor to senator Bernie Sanders. She very recently visited Australia and featured in a range of media interviews as well as well publicised lectures.
In regard to your second question: “Why are other economists not trying to build on MMT theory, like occurs with other theories?” the short answer is that MMT is a growing movement within the economics profession, and that change takes time. MMT is largely grounded in what is called Functional Finance, established several decades ago by the PostKeynesian British economist Prof Abba Lerner.
One of the things I intended to achieve in my contributions to this thread was to inform others that there exist academic and financial economists (some of whom work for the RBA and other central banks) who understand very well that the entries (or credits) within federal Treasury’s central bank account do not conform to any known definition or measure of money. The simple reason for this being that these entities do not (and cannot) be used as a medium of exchange, implying that we are not talking about a transaction account. This is why I prefer to use the term operating account. It also explains without any difficulty the statement often made by MMT economists that payments made to the central government in fulfillment of tax obligations do not entail the transfer of money between any accounts, and that the commensurate adjustments to Treasury’s account are nothing other than post facto accounting adjustments. Such accounts are of course very useful records of the central government’s various fiscal operations.
I will be happy to elaborate on any of these points.
Joseph Carli: its easy to call MMT a crock of shit etc but I have to say, it is abundantly clear you do not understand it. That’s hardly surprising as we’ve all been brainwashed and so we cannot see the wood for the trees.
Kaye Lee:And may I say I am sorry the conversation has become heated as this does not help. Frustrations arise easily in fraught, contested topics such as MMT. There is no excuse for name calling etc.
Harry..: ” it is abundantly clear you do not understand it.”……..There’s nothing TO “understand”, Harry…the fact that YOU can see the entire discussion around the subject only leads to MORE confusion, give ample proof that there IS NO understanding NOR is there any desire from the “Economic Genius’s” to elucidate on the contrived complexities of the subject….and there is a salutary reason to learn from that …: If I can appropriate WTTE. from Friedrich Nietzsche to the efffect..:
” If a subject that needs to be understood is expressed in such a way as to be totally obscure in its expanation, it has to be presumed in all accuracy that whosever interest it is to keep clarity of the subject being understood WILL try to confuse the reader so the subject WILL NOT be understood.”
Hence, Harry…just going by all the confusion seen in this commentary section by most commentators….The subject under discussion IS a crock of shit!
That is fine Joseph, but we disagree. I do not think MMT is obscure, its mainstream economics that obscures and obfuscates, hiding behind a wall of BS.
Cheers. And a few commenters have tried very hard to explain it.
Well…congratulations, Harry..there you are, the 233’d comment an a post of just over 600 words and if we allow a conservative average of 30 words per comment, that makes around 7000 words trying to explain a “simple concept”…You are correct if you see me as the one who is confused and deluded…
Well I tried to politely engage Joseph but all I get is snide replies. I guess I will ignore your “contributions” from now on this site.
Harry, I think it’s wise to ignore Joe these days. He ranted at length in a recent article and in its comments that he believes thoughtful, polite exchange is the mark of a degenerate middle class, and that aggressiveness and rudeness are preferable. Since then I resist the temptation to reply to his comments. Nothing good comes of it and it seems merely to feed his grim, angry pleasure.
Miriam and Harry..:
Good for you , Harry..and what with your excellent skills at engagement and thin skin at receiving, I look forward to that!…
And YOU Miriam??…I would have thought that yourself, as a writer of stories and tales, would be in agreeance with me…I mean, if any one of our stories contained a plot that took over two hundred attempts and over 7000 words to try to explain..(and even then not agreed upon!) I reckon we’d be relegated quite quickly to the “remainder list”…why look there back a couple of posts, I put up a story taking us into the heart of a sadly despairing person..a most complicated emotional journey at the best of times..and much more intricate and interesting than explaining about a pocket full of small-change…a story of around 3000 words that needed NO accompanying explanation and attracted over 200 views with only one person commenting..and her’s was a compliment (which I give hearty thanks for..madam!)…
No…I think I will leave it there…I wouldn’t want to draw the ire any more of those who are so wise and so well informed on these matters.
Kaye: “The government doesn’t issue bonds to control interest rates. The RBA might trade in them to achieve that but the issuance of bonds is, in fact, prompted by the shortfall between revenue and spending.”
A dollar is a financial asset in the hands of currency users. On the other side of the ledger, it is a financial liability of the currency issuer. The government admits this. The admission is plain as day in the consolidated accounts of Treasury and the RBA.
So when dollars are used to purchase bonds, federal liabilities are being exchanged for federal liabilities. That is not borrowing, Borrowing is receiving an asset in exchange for a liability.
What we really (not aspirationally) have is fake borrowing being arbitrarily triggered by the difference between incommensurate numbers: currency issuance and currency destruction. Not real borrowing to address a real shortfall.
The economy of currency users doesn’t give a hoot what imaginary figures are represented in what imaginary federal spreadsheets. Unless the imaginary contraints do real world damage. Sadly, they do.
Trish: “Why are other economists not trying to build on MMT theory, like occurs with other theories?”
For the same reason that priests are the last to build on secular philosophy.
Imagine you had a body of learned work. How easy would it be to disclaim its central axioms? It would be unthinkable but you wouldn’t let yourself get that far. The need for ever having to disclaim it would be unthinkable.
A commodity or commodity-backed currency is a resource – an asset of whoever holds it, be it government or other economic actor. A fiat currency is no kind of resource, no kind of commodity. It is an IOU – a financial asset to its users, a financial liability of its issuer.
Mainstream economics still clothes fiat currency in commodity currency concepts. That should have stopped in 1971 (USA) and 1983 (Australia) but old habits die hard – and they suit privatising small government ideology.
Trish, here’s Warren Mosler (along with our own Bill Mitchell MMT co-founder) giving the tick to John Quiggin.
Money for nothing?
Quiggin has taken MMT misinterpreters to task – but he is happy to be endorsed by the real thing. As here:
Time to kill the debt bogeyman once and for all
Miriam English. How dare u.? Kate Lee misrepresented my argument and then proceeded to criticise me from her arrogance. Thats aggresive like ur allegations are . The rest of ur comment regarding religion is so ludicrous it doesnt justify a reply Too much nepotistic back slapping on this site. I won’t be back. Had enough of it.
Marion English this is yet another example of ur aggression
“Harry, I think it’s wise to ignore Joe these days. He ranted at length in a recent article…”
U should be banned from this site. Evidence shows that u r just a troll
Miriam English should be banned for stating fact? Joe did rant, something he does frequently. He responds to any difference of opinion with insults.
As I am disagreeing with your opinion right now.
It’s ok to have a different POV.
You see, Dianna…if I was to heed the likes of Miriam, I wouldn’t get out of bed in the morning…Whereas in reality, I get out of bed every morning and kiss the day!….unlike some who are too lazy to get out of bed and only kiss their own arse!
You see, Joseph, differences of opinion are opportunities for learning.
OTMP, I stand by my statements. You think I was being aggressive? Read again what I wrote at January 13, 2019 at 10:25 pm in response to you. I’m quite puzzled as to how you can see that as aggressive. If you look over my posts you can see I’m definitely no troll. (The suggestion actually makes me smile, it’s so silly.) Especially see my comment at January 14, 2019 at 10:37 am.
Just look at the comment by you at January 13, 2019 at 9:23 pm and your dismissal at January 13, 2019 at 9:34 pm of Kaye’s careful, persistent questions, and then your anger today at 10:56 am and 11:00am.
OTMP, here is some honest, well intended advice:
Please calm down. Take some time away from the computer. Go for a walk in a park or play with the dog. Listen to some gentle music.
As for Joe, I actually have some respect for him. I was very pained recently when he descended into an angry classist rant and further rude and unpleasant comments. That was why I was suggesting holding off from feeding that anger. He does have a rather disturbing tendency to make some quite misogynistic and classist statements, and from time to time appearing to disagree purely to be antagonistic, but otherwise he’s basically a good guy who deserves some respect for his desire and ability to learn.
I suspect you’re basically a good guy with a very low threshold for frustration. Please try to control that angry old man syndrome. It does you no favors.
Joe, I’m glad you get out of bed each day. And delighted you kiss the day (lovely way to put it). I wouldn’t have it any other way.
“Professors of Economics are not stupid. They are not brainwashed in some Neo-Classical diatribe. They understand fully the various schools of thought and can lecture on the pros and cons of same and challenge thoughts on each school”
I once talked to a third year uni economics student and asked him if they still studied John Maynard Keynes or whether it was just Chicago School friendmannism. His reply was ‘who is John Maynard Keyes?’. He was serious. He had never heard of Keynes. He also said that every time a share is traded on the stock market the company for which the share was issued gets the money paid for the share. I had to explain to him that the company only gets the price for the first issue of its shares not all subsequent sales because after that first trade all subsequent trades were speculative and the vendor of the share got the price paid. He insisted I was wrong.
Yes that is what is produced in uni economics courses. Nongs brainwashed in neoliberalist dogma & ideology.
MMT Is perfectly logical and possible in Aust because the gov has sovereignty over th production and issuance of its own legal tender and is the sole shareholder in the RBA capable of claiming just about all revenue from the RBA at will meaning it can never be in debt in loans made in its own currency.
In fact quantitative easing is just a form of MMT and the Japanese are still doing it and the USA has only recently stopped doing it. If quantitative easing is possible then so is MMT because they are basically the same thing.
Great post Oppose !
NO NEED FOR RBA IN MMT.
Pape v ATO is a High Court Constitutional case where a barrister and member of the National Party Mr Pape sought to oppose the Rudd Govs stimulus package. The stimulus cheques were to be paid to people through the ATO not from the RBA. Stimulus amounts were also to be paid under social security laws rather than via the RBA. This case shows that an Aust gov via Treasurey and it’s own departments can generate new funds for virtually any purpose and distribute those funds via any institutional or legislative arrangement it choses. There is no need to even use the RBA. Mr Pape was unsuccessful and the stimulus payments went ahead.
This case is important for anyone interested in how MMT could be implemented in Aust.
Thanks for sharing this information.
An explanation of MMT in simple terms:
A sovereign government, as the monopoly issuer of the nation’s currency, is not faced with financial constraints and can purchase whatever is available for sale in that nation’s currency.
Now, assuming the nation has sufficient real resources (labour, skills, physical resources), then that government can maintain full employment with an above-poverty minimum wage at constant prices (the JG), through appropriate management of the public and private sectors.
[But any description of MMT beyond that simple base statement eg examining the role of treasury, central bank, commercial banks, private citizens, and other non-government entities, will of course become increasingly complicated].
Empirically speaking, Mosler points out (to candidate Gore) that in the us “the last six periods of surplus in our more than two hundred-year history had been followed by the only six depressions in our history”. l’ll be interested to see how our economy fares after our surplus.
OTMP love your name and I do oppose them as well!
I’ve been through the same frustrated loop here. Its pointless as you just discovered. Certain people here throw tantrums regularly and personal insults and then apologise for it as if it is the first and only time: hilarious! Absolutely no insight ever.
I understand perfectly well your description of the difference between what the RBA ca do and what it currently does due to political motivations or merely convention. The rules are broader than current usage. Simple. If it makes any difference and you are still reading these posts I found your information the most straight forward and logical.
Monetary theory is not accounting and has little to do with mathematics or logic and more to do with a system being created to justify an existing fact: ie the theft of resources and money from the people by the ruling establishment whoever they may be in any given time or place.
I think a monetary system should primarily benefit the people above all else, anything else is theft no matter what its called.
My post here is a philosophical one not intended to add to the hubris above as the elephant in the room is that no matter what the rules state about taxation or the RBA, clearly governments red or blue flagrantly rort the system which inevitably benefits the private sector over the citizens.
it seems to me that the rorting is the point and I do not know if a system could be created that would not allow vested interests to exploit it.
This entire conversation just goes to show how successful the creators of our financial system have been in confusing everyone. I think its hilarious that so many words can be typed on this topic with no clarity ensuing. I agree with Joseph and Einstein 🙂
An excellent article John. I would suspect that all the people making negative comments about this article have never bothered to learn anything about Modern Monetary Theory. There is much-researched information available online. So, until these critics have spent the time to inform themselves about MMT, they should keep their opinion to themselves. Once they are fully informed then make informed comments based on facts. Beliefs and opinions are not facts.