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Tag Archives: Bill Mitchell

Printing Money

Adair Turner is a British Lord as well as a businessman and academic. He is, according to Wikipedia, a member of the UK’s Financial Policy Committee, a chairman of the now abolished Financial Services Authority, a former chairman of the UK Pensions Commission and a member of the Committee on Climate Change.

Recently, this celebrated Baron Turner of Ecchinswell issued a paper that he delivered to the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015.

Turner’s article is heavy reading but it is summarised and commented on more simply, by John Cassidy of The New Yorker under the title, ‘Printing Money’.

As most of us know, the term ‘printing money’ is a misnomer. Apart from a small percentage of notes and coin, today all money is processed via electronic transfers from the Central Banks to the private banks who in turn credit their respective account holders. Money today is, essentially, just numbers in a computer moved around in millions of transactions every day.

Turner’s article is essentially about Overt Monetary Financing (OMF) which is the creation of debt free money to fund government deficits.

At present most Western fiat currency issuing governments finance deficits by issuing interest bearing bonds to the private bond market.

Such a process is a hangover from the fixed exchange rate mechanism of the gold standard era.

mitchOMF, as described by economist Bill Mitchell“brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.”

Modern Monetary Theorists (MMT) support OMF. It is money creation without debt.

The difficulty supporters of MMT have faced in the neo-classical world is that whenever we attempt to explain it, the words, ‘printing money’, ‘Weimar republic’, ‘Zimbabwe’ and more recently, ‘Greece’ are thrust in our faces as if to suggest that such a proposal would send us bankrupt, that hyperinflation or at least some kind of inflation would destroy our economy.

The reality is that none of these outcomes would result with OMF. Inflation occurs when excessive spending outstrips the ability to supply. However where a nation has underutilised resources, i.e. unemployment, and OMF draws on those resources to increase supply and meet that demand, inflation will not happen.

In reality, it is the pathway to full employment which brings about an increase in the tax base, a debt free fiscal position, as well as growth and higher living standards.

There are those that argue that continued growth based on the exploitation of finite resources is unsustainable and they are right. However, people are our most important resource and within us we have one resource that is not finite: the mind.

socialGround-breaking discoveries in technology and social cohesion continue to reduce our dependence on natural resources. They will continue to do so as our minds continue to search for better ways to do things. And money, a product of the mind, which has evolved over time to be what it is today, is now another of our most powerful resources.

It is as infinite a resource as is organisation, initiative and discipline. But money has, almost from its inception, been corrupted by individuals and governments to service greed.

Money needs to be restructured to serve its most wholesome purpose: equality. Modern Monetary Theory seeks out that wholesomeness, that equality.

As a direct consequence of the corruption of money as a resource, evidenced by the GFC, we now have the gurus of macroeconomics throwing their hands in the air, bereft of ideas on how to restore economic growth. Little wonder they are now slowly but surely turning their heads towards the simple principle of Overt Monetary Finance.

Turner writes, “My proposals will horrify many economists and policymakers, and in particular central bankers. Printing money to finance public deficits is a taboo policy. It has indeed almost the status of a mortal sin.”

While Cassidy writes, “Given the problems of debt overhang and slow growth, and the high toll that an extended period of economic stagnation could take on Western democracies, we face a choice of dangers. We could revert to the standard model, hoping that another round of debt issuance in the public and private sectors will juice the economy. Or we could resort to something different and radical: the electronic printing press.”

Bill Mitchell’s blog on the subject of Adair’s article and Cassidy’s response to it, reflects his own take on the changing attitudes to the way economies are managed.

He writes, “It is interesting that more people are now talking about things that the MMT crowd have been writing and thinking about for a fair while now.

It is clear that ideas that were considered ‘crazy’ some years ago and now being entertained as being plausible by the mainstream media.

Given the vilification that our small group endured when we set out on this MMT journey, I find all of this rather amusing. Apparently it takes a British lord to give an idea credibility. So be it.

It is better that these ideas penetrate the mainstream debate through which ever means than be sequestered by the mainstream media and wheeled out as a way of humiliating commentators who dare to challenge the mainstream paradigm.”

lennonLet us hope that as the world continues to struggle with flat demand and little improvement in employment, some national leaders with a sense of vision and a passion for equality, will catch on to the idea and implement a strategy to mobilise our underutilised resources. Such a vision would go a long way toward that mythical image John Lennon created when he penned, ‘Imagine’.

 

AIMN Interview: Bill Mitchell – an unreasonable man

George Bernard Shaw observed that; “A reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore, Shaw argued; all progress depends on the unreasonable man.”

Within Shaw’s definition, Bill Mitchell is an unreasonable man.

As an economist, Mitchell has persistently argued against the Chicago School theory of ‘trickle down’ since the mid 1980s and continues to do so today. He remains in his own words; “One of a few trying to pull together post-Keynesian theories with other insights to create what we now call Modern Monetary Theory.”

“However,” he adds “there’s now a lot more than five people talking about it and reading about it, following our work, and I get a lot more invitations to speak overseas. There’s now a second generation of MMTer’s who are our young Ph.D. graduates going out and spreading these ideas.”

As someone who is wary of giving interviews and who guards his written work closely, it came as a surprise when Mitchell agreed to my request to talk about MMT.

“A lot of what I tell them often goes over their heads” says Mitchell referring to the MSM. “They rarely if ever mention my name, and then they go to my blog site, paraphrase what’s there and write it up as their own work.”

The plan was to ask Mitchell a range of general questions across a broad spectrum of MMT, rather than a detailed explanation of two or three of the finer points of a controversial discipline that is rapidly gaining popularity as an extremely powerful counter argument to neo-liberalism, especially among the unemployed.

Economics tragics may visit Mitchell’s blog site http://bilbo.economicoutlook.net/blog/ should they wish to examine Modern Monetary theory in greater depth.

I found the softly spoken Mitchell not only generous but also patient, for which I offer my sincere thanks.

(Italics are the author’s}.

I began by asking Mitchell: “What are the most common misconceptions about MMT?”

Mitchell: It’s not so much misconceptions about MMT but rather peoples misconceptions of the capacities of governments.

The classic analogy that people have whether they articulate it or not, is that the government is like a super sized household, and I’m talking about currency issuing governments here, not Eurozone governments,” he emphasised. “And are subject to the same constraints that a household is.

We all know about budgets. They’re things we have to continually manage on a weekly basis in our households. We give our kids a ‘budget’ to teach them the value of money.

So it’s natural that we personalise our integral understanding of how the government approaches things, and the first thing that we presume is that the government can run out of money. After all, we can run out of money, and we know that if we want to spend that we’ve got to earn income and we relate that at government level as raising taxes or that we have to sell assets.

If we want to raise money we have to sell some stuff on e-Bay, and so we interpret that in the government sense as privatisation. The third option is that we have to go to the bank and borrow or use our credit card and we interpret that as government borrowing.

So from this, we build a picture of government being like us. We see it as bigger than us but we see it financially constrained in the same manner that we are, and just like us it can’t ‘max our credit card out’ or ‘spend like a drunken sailor’ and that ultimately we’ve got to pay the piper, and all these morality tales that we build into frame the narrative.

That’s the biggest misconception. We don’t appreciate that the Government has no financial constraints.”

AIMN: MMT always draws fire from its critics through its insistence that governments can simply print more money to cover debt.

Mitchell: This is the second misconception. The average person has a total misconception of a ‘cost’. So, when MMT says that the government has no financial constraints, that’s not the same thing as no constraints. For example, you and I can’t buy anything and everything that we want in Australian dollars because we can only buy what our spending resources allow us to.

As a currency issuing government though, we can buy whatever we want. Whatever is for sale in the currency of issue – we can buy, and… that’s all it can buy! This means that it is not constrained by how much money it can spend but what is available for sale.

In other words, we’ve converted the concept from a financial constraint to a real constraint. Material things, goods and services.

For the individual, cost is calibrated in monetary terms, how much did it cost for this phone? What is the cost of a holiday?

These are real costs for us because if we spend the money on them we don’t have the money to spend on other things because we’re financially constrained, whereas for a currency issuing government, the numbers that go on the financial statements they punch into the “Budget papers” are not costs at all.

AIMN: How is money creation accounted for?

Mitchell: Someone in an office types it into a spread-sheet. They (Reserve Bank and Treasury), have double accounting ledgers for seignorage and notes.

The accounting’s important, because it has to equal the accounting that shows dollar for dollar the government deficit equals the non-government surplus. It’s very important that people understand this.

If you want the non-government sector to run down debt, then the government sector has to run-up debt. It’s wrong to say that the accounting is irrelevant, but it’s trivial in the extreme.

When the crisis hit the US, the Federal Reserve immediately transferred 80 billion dollars with one key stroke into the American private banking system – boom! – just like that.

When Ben Bernanke appeared before Congress to explain where the money had come from, he was asked; had it come from taxes? No, said Bernanke. Then where did it come? Bernanke replied that; ‘you’re best to understand that it came out of thin air.'”

Notes and coins are trivial. They’re just a small part of it.

The other really important issue is what the concept of a “cost” is because we always talk about what the cost to government is. The cost isn’t something that appears on numbers statements or balance sheets. The cost is the real resources that are being deployed by that spending.

The “cost” is a real resources concept, not a financial concept.

So when we say ‘what does it cost for the Government to run a program?’ It’s not the dollar outlay that appears in the papers. The cost is the actual real resources that are diverted or used in that program.”

AIMN: Define real resources.

Mitchell: Well, I would argue that the federal government of Australia and all currency issuing governments should make an unconditional offer of employment at a fixed wage to anyone who can’t get a job.

Then the question becomes ‘well, how can the government afford it?’

My argument is that while the typical narrative will assess the cost in the terms of the wages paid, the overhead costs and the supervisory costs and say the cost of the program is 20 billion but this is not the cost at all.

The cost is what extra food are the workers who are converted from unemployed to employed going to consume? What extra clothing are they going to require? How much extra transport are they going to use? What materials and equipment are those workers going to use, and working capital to convert into productive output?

That’s the real cost.

The real resources of a Job Guarantee program would be the extra tools the worker’s using or the materials needed.

So when people say ‘How can they afford it?’ Of course they can afford it as long as those real resources are available and one of the clearest indications that there is a massive amount of real resources available, is unemployment.”

AIMN: You’ve been highly critical of the Job Network System/Jobs Services Australia in the past, do you think that the new model, Jobactive will fare any better than its predecessors?

Mitchell: When governments at different periods over the last decades abandoned the post WWII commitment to full employment, they created a head ache for themselves because even though they were intent on reducing public outlays, short of leaving people to starve or shooting them, they had a huge pool of unemployed that they had to manage in some way.

And consistent with all of the ideology of outsourcing and privatisation etc… they created this nightmarish system of managing the unemployed, which I call an industry. The Job Network system, Job Services Australia and the latest incarnation which has just started to unfold. It’s a new industry and it’s one that has zero productive output.

Its sole role is to manage the unemployed, rather than get them work which was the stated aim since it began in 1998.

The vast array of empirical evidence reveals that it has failed dramatically. Before the GFC, the headlines in the MSM continually featured statements from industry stating that we had massive skill shortages in Australia.

How do you get skill shortages when you’ve been spending billions of dollars allegedly re-training people, and preparing the unemployed with new skill sets? All of the evaluation, one way or the other, indicate that it’s a parasitic, failing industry.

It’s creating a profit seeking behaviour or if it’s a not for profit organisation, some sort of rent seeking behaviour which is somewhat different but always manifests in high executive salaries and high management fees and captures public funding. We also know of the massive fraud in the scheme.

It was meant to be a private market for job services, and it was using all the ideological took kit from the mainstream economics textbooks about the benefit of free markets.

Yet, it wasn’t a market at all.

The government set the price because it set the contracts, the firms weren’t allowed to compete in a market, there were no competing job services. It was all stage-managed. The consumer set the prices and fixed them, there was no competition. It was just a nasty little way of deflecting public responsibility into the private providers who will have a socio-pathological bias in the way they treat the unemployed.

The whole concept of being unemployed was re-framed and suddenly the unemployed became clients or customers.

They’re not customers! They’re unemployed – they haven’t got a job!

Yet, now they’re clients, as if they’re consumers, as if they’ve got choices. In the first model of the JNS, they didn’t have any choices about placements, which is also seems to be the set up with the latest model.

The unemployed are not are a market, they’re not a product!”

AIMN: How does MMT circumvent further unemployment and create jobs?

Mitchell: First you have to understand why unemployment arises. The Neo-liberal ideology that supports this harassment of the unemployed through this unemployment ‘industry’ has created the narrative and the construction that the cause of unemployment is the individual cause. If the person hasn’t invested in skills earlier in life, has a lackadaisical attitude to life, doesn’t want to work, prefers to live on the dole even though its well below the poverty line, that somehow this is created as some sort of Shangri-la that people aspire to as a life style choice.

The unemployed, who are the victims of systemic failure, are suddenly in the media and therefore in the public eye, as the cause of the problem.

You can’t search for jobs that aren’t there. You can push and shove and harass people to search harder but if there’s only 100 jobs and there’s 120 people chasing them, bad luck! You can rev up people through fear and income support loss but if there’s a shortage of jobs – there’s a shortage of jobs!

If you understand the systemic failure – and when there’s systemic constraints individuals have very little power – one person against the system. Why does the system fail to produce enough jobs? Marx knew the answer, and later in a more acceptable form in the West, so did Keynes.

An economy is an input generating, output generating, spending machine.

If the income that’s generated in some period isn’t re-spent the next period, then the production plans of the firms that were based upon that expected spending will fail. They’ll overproduce. When they have unsold inventory, they lay off workers.

It’s so basic. Spending equals income and that equals output It’s the most basic rule of macro – economics that’s been lost in all of this.”

AIMN: Critics of Keynesian economics are quick to point out that Keynes theories eventually led to stagflation. Why would MMT be any different?

Mitchell: Keynesian economics were developed during the fixed exchange rate period, when governments did have financial constraints because of convertibility issues, the tying of currency stocks to gold stocks. Nixon ended Bretton-Woods in 1971 even though it continued to live on for another few years in various forms.

That meant that the central bank was no longer required to maintain the exchange rate, and that monetary policy was no longer tied to the need to attract capital inflow and to suppress imports to maintain the currency position. The Keynesian economics of the ’50s and ’60s was within a fixed exchange rate system, whereas Modern Monetary Theory understands that, but talks about the implications of the break down of Bretton – Woods. The world changed dramatically in 1971 but economic thinking didn’t change with it.

Keynesian economics didn’t create stagflation. The commitment to full employment didn’t create stagflation. Most people have this idea that if the government ‘spends too much’ it creates inflation.

The only way you can attach meaning to that is if you think of inflation as a certain amount of goods being available for sale and too many people wanting to buy them. In economics this is called ‘demand-pull’ inflation. Too much demand for the supply.

Inflation makes sense in that context and therefore you understand that if any of the components of total expenditure like the consumption, investment, or government spending or export spending are in sum greater than what’s available for sale, then there’s got to be some rationing device because we know that the production process responds by increasing output when there’s more spending but if it can no longer increase output it has to ration that demand somehow and that’s by price rises.

That’s a sensible thing and therefore we understand that all expenditure components generate inflationary forces if they outstrip supply. The stagflation of the ’70s, stagflation being inflation and unemployment, the inflation component had nothing to do with the demand being too strong, it was the oil price rise. and so we had up until then the relatively rarer concept of ‘cost pushed’ inflation where oil prices rose, raw material costs rose, the costs of production rose, that pushed up prices and then the government responded to that with contractions to fiscal and monetary policy which caused the unemployment.

As long as you don’t have raw material shocks, and spending is keeping pace with productive activity then there wont be inflation.”

AIMN: Does MMT think it’s worthwhile chasing the very wealthy for their taxes providing they aren’t spending their gains, rather, why not run an increased deficit over a over a short term. What about the rest of us? Why can’t we have the option of saving rather than paying taxes?

Mitchell: The fundamental principle is that if the non government sector which is made up of the external sector and the firms and households all together and all of their spendings and savings plans, don’t spend as much as they earn each period, then there’ll be a spending gap.

If that gap’s not filled then there’ll be unsold goods produced from last season, leading to worker lay-offs. So the fundamental idea relates back to the causes of unemployment. If the non-government sector isn’t intent on spending all their income each period, then the government sector has to fill the gap. Typically, it has to run a deficit.

Then you say; what about all those rich people who have got lot’s of savings? Why don’t you tax them more and run a smaller deficit. But if the government reduced its deficit to tax individuals who aren’t spending, then you’re going to get another spending gap and then the level of spending will fall below what’s required to maintain full employment.

Progressives love the idea of taxing the rich but MMT’s builds on the work of Abba Lerner’s 1940s work, Functional Finance and what Functional Finance tells you is governments never tax to raise funds.

The function of tax is to reduce the spending power of the non-government sector. Why do we want to reduce to spending power of the non-government sector? So that you can create more space, real resource space for the government sector to spend, so you keep the economy below the inflation constraints.

The level of taxes that you’d want to raise in total are calibrated by the amount of spending space that you want the government to have to maintain full employment. So taxes aren’t to raise revenue. That argument implicitly assumes that you could reduce your deficit because you’d have more money.”

AIMN: So you’re not in favour of the ‘Buffet Solution’ to tax the the rich?

Mitchell: It completely misunderstands the role of taxation and that’s an understanding that MMT completely re-orientates your thinking about. It’s to reduce spending power to create more real resource space. Given that there’s got to be an overall tax take to make real resource space available for the governments program, it’s not to fund the government’s program, it’s to make the real resources idle that the private sector may have been using, labour and other resources. Because if you don’t make those idle then the government will just create inflation.

Given that there’s got to be some level of taxes commensurate with your aspirations for a public sector program then the question is valid; how do you raise the revenue? What principles might be bought to bear? One of them is fairness and equity. Do you want low income earners having less purchasing power and the higher income earners paying tax disproportionate to their income?

Is it better to deprive the high income earner the third BMW in the garage or the yacht? Or the latest holiday to Aspen, relative to taking the food off the table of a low income earner? These are equity issues and MMT can’t guide on equity issues. They’re moral philosophies that you have to bring to bear on public policies and society has to develop its own set of norms for that.

I believe that I have a progressive leaning and I think that fairness tells me that I would much rather a low income earner having more food on the table or going to a cafe once a week or attending a sporting event or the cinema than a high earner going to the best restaurants in Aspen every a year.”

AIMN: Finally, any thoughts on the style of economics currently being taught in high school?

Mitchell: It’s consistent with the problems in the undergraduate programs in universities in that it’s essentially teaching a wrong paradigm, it’s ingraining students with invalid constructions about the way the monetary system operates. It uses metaphor and terminology that are plain wrong and it reinforces the inapplicability of the paradigm being taught. My view is that students would be better off not studying it at high school.

 

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