The first point—that (fiat) money is ultimately a governmental construct in modern capitalist economies, and central banks can indeed produce as much of it as they want—is not news….
is the promising way Jonathan Portes kicks off his argument in ‘Prospect’ against Modern Monetary Theory (MMT), which he calls ‘Nonsense Economics’. He continues:
a sovereign government that prints its own currency (like the US, UK, or Turkey, but unlike eurozone countries) can, in principle, never be forced against its will to default, this is broadly correct.
(I like the broadly), but he doesn’t elucidate, so I won’t…
Money is ultimately a creation of government—but that doesn’t mean only government deficits determine the level of demand at any one time. The actions and beliefs of the private sector matter as well. And that in turn means you can have budget surpluses and excess demand at the same time, just as you can have budget deficits and deficient demand. Remember that the UK’s budget was in surplus in 1987, at a time when the economy was in an unsustainable boom.
I don’t think anyone has ever suggested that MMT definitively requires budget deficits. And of course the private sector matters, but it is necessarily less influential than the creator of money, the government.
Does MMT then argue that governments can simply spend whatever they like? This is perhaps the nub of the issue.
It isn’t and no it doesn’t.
You can create money out of nothing, but you can’t create doctors, schools, or consumer goods.
Both from an economic perspective and from a common sense one, taxing and (government) spending happen at the same time. It’s not much help to tell a chancellor trying to write a Budget—setting out her tax and spending plans—that reversing the order would magically solve all their problems.
So that means if I nip out for a pint of milk even whilst I’m being paid to work, it doesn’t matter which comes first because the income and expenditure are happening at the same time? Of course the government budget is not a household and that is rather the point. So knowing that you spend first is very different, even if in doing so you know that you have to tax.
And no matter what the Bank of England did, long-term interest rates would rise, as the private sector—not just “markets” or Goldman Sachs, but ordinary businesses and households—observed that we were not just spending more than we were taxing, but that we were consuming, or trying to consume, more than we were producing, and that inflation was the inevitable consequence.
This goes against Richard Werner’s empirical proof that the Central Bank’s interest rates follow rather than lead, but also suggests that Jonathan Portes has ignored the role of tax in counteracting inflation.
Equally, it also means that MMT—at least the credible version—does not mean there is no limit to deficits, just a different one, dictated by the potential impact on inflation. MMT isn’t a magic money tree after all. And what does this mean in practice?
…..Worse, it’s easy to point to circumstances where on the face of it a naïve MMT-based approach would have pointed you in precisely the wrong direction for the short term. For example, in 2011-12, when inflation rose sharply, even as the economy remained weak. Wren-Lewis and I argued strongly at the time that deficit reduction should have been slowed, not accelerated. MMT—unless you reintroduce some more orthodox thinking via the backdoor—would tell you the opposite.
All this rather proves that either he or MMT or both, have ignored tax.
But one thing is absolutely certain. The claim that that MMT means that a future government can dodge hard choices about how to pay for decent public services is just plain nonsense.
If we presume that MMT says we don’t need to raise revenue in order to spend it then it doesn’t claim any such thing.
Richard Murphy has always said that MMT supporters do not properly understand tax and Jonathan Portes seems to me, on the evidence of this article, to fall into the same category.
What Jonathan Portes misses is that the ‘financial constraints’ are self-imposed. It’s bad enough – in reality – being short of teachers, nurses and doctors. But having bogus self imposed financial constraints is just – well – self imposed.
Finance is man made.
Jonathan Portes, as a former Treasury civil servant, seems, regrettably, to suggest that finance should make man.