In his July 28th critique of Modern Money Theory in the Daily Friend, the Institute of Race Relations’ online newspaper, Ivo Vegter builds several straw-man arguments that have nothing to do with MMT. Vegter’s article, tritely entitled “Magic Money Tree Theory”, was in response to an article by Duma Gqubule in which Gqubule listed SARB credit issuance as one of the funding options for the proposed Basic Income Grant (BIG).
Vegter’s argument is full of contradictions. Early in his piece, he says that MMT “did not emerge from any of the great schools of economics”, but then quotes Jeff Deis as saying “MMT finds origins in early twentieth-century chartalism“.
To back his claim that MMT “did not emerge from any of the great schools of economics”, Vegter provides a link to an article on MMT co-pioneer Warren Mosler’s website, which contains the following passage:
“MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.”
Vegter then waxes lyrical about the shortfalls of Quantitative Easing, and inflationary monetary policy, but MMT does not advocate for QE, nor for inflationary monetary policy. QE is a policy choice that existed before MMT, and MMT is all about preventing inflation.
Leading MMT scholars have never advocated for QE, but rightly pointed out that it would lead to inflated asset prices, lower interest rates but no broader inflation. 20 years of QE in Japan and a decade of QE in the US, EU and the UK have proven them correct. This does not mean that they support QE. It just means they understand the monetary system.
This is how leading MMT scholar L. Randall Wray put it in a recent article.
“MMT does not support quantitative easing (QE), nor does it prescribe “helicopter drops,” for the simple reason that there is no such thing as a “helicopter-money” alternative to financing a fiscal-stimulus package. Instead, what MMT does is describe how a government that issues its own currency actually spends, taxes, and sells bonds as a matter of course. In doing so, the theory demonstrates that a government like that of the US does not, in fact, face financial constraints.”
“What MMT actually prescribes has nothing to do with sending “cash” to people or banks. Nor is the Fed “doing MMT” when it engages in QE or lends hundreds of billions to financial institutions. MMT merely underscores the fact that the Fed faces no financial constraints on its ability to buy assets or lend; it does not prescribe any particular action in this direction – and indeed is skeptical of such policies.”
“So, what does MMT prescribe? In terms of concrete policy proposals, MMT economists have long supported the idea of a universal, federally funded job guarantee program, which would act as a macroeconomic stabilizer during times of crisis. Jobs, not cash, is MMT’s answer to economic downturns. It calls for moving the payrolls onto the federal budget, putting recipients to work (on responding to the crisis, when it can be done safely), and letting the private sector hire them back as the economy recovers.”
Having built up a straw-man argument to make it seem like MMT scholars support the issuing of currency to finance financial speculation (QE), Vegter then contradicts that implication to say “All they want is that governments, instead of funneling (sic) new money to the banking sector and its wealthy clients, pour it directly into the real economy, to alleviate poverty and fund grand projects favoured by the left like green technology, smart cities and electric cars.”
Surely even Ivo Vegter must see the difference between issuing currency for financial speculation that boosts profits for non-productive financial sector companies and the already rich, and issuing currency to fund productive investments that increase our available supply of green energy, goods and services; reduce private sector costs (including the costs of extreme inequality, climate change and habitat destruction); and increase the incomes of our poorest citizens.
The SA Reserve Bank’s constitutional mandate is to “protect the value of the currency in the interest of balanced and sustainable growth“. Increasing the supply of locally produced energy, goods and services protects the value of the currency. Doing that while decreasing our extreme inequality, unemployment and poverty, while protecting our environment, makes growth more balanced and sustainable.
In order to maintain the value of the Rand, the state has to regulate the supply of Rands so that there is enough money in the private sector to support productive investment and employment which increases the supply of energy, goods and services.
If demand for labour, energy, goods, services and speculative assets (non-productive financial investments) is outstripping supply and driving prices higher, the state can reduce the amount of Rands it spends into the private sector and limit bank lending. It can also remove excess Rand supply by increasing taxes, and the interest the private sector pays to the state for Rands. But that only makes sense when the economy is running near full capacity.
While there are large numbers of unemployed and idle resources, as is the case now in South Africa, it would make more sense to respond to demand pull inflation (if there was any) by increasing investment by state and private sector in order to increase the production of energy goods and services to meet excess demand.
During economic downturns, because liquidity and demand for goods and services is lower, the private sector has less incentive and ability to invest productively. Households and companies are loath to borrow, and prefer to pay off debt, while banks’ appetite for lending is reduced due to increased risk of default. This limits the supply of Rands created by bank lending.
In order to maintain employment and productive investment, our state, as issuer of Rands, has the capacity to increase private sector demand, employment and productive investment, by spending more Rands into private sector bank accounts while taxing less out. This increases private sector savings without increasing private sector costs or debt. When those savings are spent onwards, sales, incomes and profits increase. Increased savings and profits make private sector investment more likely.
As issuer of Rands, our state spends Rands into existence without having to worry about making a profit in Rands. A limitless supply of Rands means that the only benefit our state can gain from earning a Rand surplus funded by private sector deficit is a reduction in demand driven inflation or a reduction in inequality.
Maximising employment while controlling inflation is something that MMT focusses very closely on.
The least inflationary way for government to spend Rands into existence is through funding the productive employment of South African citizens and resources in ways that increase supply while reducing private sector costs. It can do this either by employing idle labour and resources directly or by providing finance to the private sector at the lowest rate possible.
Price increases can be driven by factors other than local demand for goods and services. Global demand, a drop in production or bottlenecks in the supply of energy, goods and services, and administered costs like taxes, interest rates, and electricity prices can drive prices higher.
Counter-intuitively, these non-demand driven price increases can be slowed by government spending Rands into existence. For example, if prices are being driven higher by constraints in supply of skills, energy, goods and services, the state can directly employ South Africans to produce those things and to build infrastructure to reduce producer costs and bottlenecks in supply. It can also incentivise private sector productive investment, through transfers, subsidies, and low interest loans to achieve the desired productive output.
Money creation by the state can also reduce administered price increases such as rates, taxes and Eskom and municipal electricity tariffs, which the SARB has often identified as a major driver of inflation. Because national government, municipal and SOE’s costs are driven higher by interest payments on their debt, it follows that reducing the interest rate paid by these state entities would allow them to reduce taxes, rates and tariffs that are currently been levied to offset unnecessarily high interest payments.
The SARB, as monopoly issuer of currency, can purchase debt securities (driving down yields). Even better, the SARB can issue low interest loans directly to these state entities in order to reduce the state’s inflationary interest payments to rent-seeking private sector middlemen, who currently benefit from “lending” Rands that the state creates back to the state, at exorbitant rates.
The interest rates that the state currently pays to “borrow” the Rands it issues are high only because the SARB has made a policy choice not to influence those rates lower. This policy choice should be challenged as it runs counter to the SARB’s constitutional mandate to “protect the value of the currency in the interest of balanced and sustainable growth“. All wasteful, inefficient expenditure by the state is inflationary, and the hundreds of billions that the state pays every year in interest to rent-seeking middlemen for Rands is no different, nor less corrupt.
So, contrary to Vegter’s view, the equation is not quite as simple as “increasing money supply = increasing price level”. Apart from distributing existing money from savers to spenders using taxation, money creation to finance productive investment is the least inflationary way stimulate demand, employment and economic growth. This is true of money created by both state spending and bank lending.
Money creation to finance consumption and financial speculation is the most inflationary as it drives up prices of consumer goods and financial assets. This is also true both of money created by state spending and money created by bank lending.
MMT has been clear about all of this right from the start. That is why MMT proponents have always preferred a Job Guarantee instead of a Basic Income Grant (BIG), and favoured direct monetary finance of by Central Banks of fiscal spending on productive employment over Quantitative Easing, which drives up asset prices while driving interest rates lower.
Vegters piece is full of contradiction and straw-men. He starts his article by repeating the well known “household fallacy“, quoting gold standard era author Adam Smith who famously said: “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.”
But at the conclusion of his piece he concedes that unlike households and companies, who cannot issue currency, a government with its own central bank and sovereign, free floating currency can’t run out of money and can “always pay its bills“.
He agrees that economies usually have excess capacity but then says that doesn’t mean “policymakers only rarely have to worry about inflation”, as if MMT doesn’t implore policy makers to focus exclusively on inflation when deciding government budgets.
Then to cap it off, he makes the bizarre claim that MMT is socialist by concocting another straw-man: “MMT claims that wealth is not created by private industry and productive work, but is bequeathed to the private sector by the government“.
I have never come across a single claim by any MMT scholar that private industry and productive work doesn’t create wealth. MMT merely observes, correctly, that government deficit spending funds private sector financial surplus.
If I watched you buy bread on your credit card from your baker, I would be correct if I observed that your deficit spending had just funded an increase in your baker’s savings. In observing that, I am not claiming that his increase in financial wealth was not a result of his industry and productive work.
Vegter seems to see socialism in everything that he doesn’t understand or agree with. There is nothing socialist about the state supporting private industry and productive work by financing it at the lowest interest rate possible.
Any concerns about the state crowding out the private sector can only become valid once the economy is running at full capacity. While there are idle resources and unemployed people, state employment can only crowd in private sector investment, by increasing demand, savings, sales, incomes, profit, supply of skilled labour, infrastructure etc.
That government deficit spending increases private sector savings is fact.
That government debt owed to the private sector equals private sector interest baring financial assets, is also fact.
In MMT pioneer Warren Mosler’s own words: “There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and O’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly. Proponents of MMT say that its greatest strength is that it is apolitical.”
The people who call MMT “Magic Money Tree” are the kinds of people who tend to believe in magic. Accounting realities are not for them. Real world economics is not for them. They would rather believe in fairytales like “The Invisible Hand” and “free markets”.
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