Macroeconomics, Money (MMT Style) and Post-Brexit Recovery, All in One Twitter thread

Yves here. Richard Murphy has recapped a Tweetstorm on money, MMT, and economics with a UK twist. It’s a fine high level summary of how money works that I suspect some of you will find helpful in presenting MMT to friends and family who might be willing to entertain it.

Having said that, a few minor clarifications are in order. Murphy mentions QE, which operated differently in the US than in the UK. Here, the Fed bought not only Treasuries but high quality mortgage securities, nearly entirely government guaranteed ones. The reason (and Bernanke was explicit about it) was to lower interest rates on mortgages. That both boosted housing prices (a big imperative after the housing bust) and also helped increase consumer incomes, since the homeowners who weren’t losing their homes to foreclosures could refi. However, the dirty secret is that refis benefit bankers and intermediaries more than consumers, since most of the economic value of the refi is stripped out in fees.

A second issue is that MMT may face a test if the UK undergoes a super hard Brexit or a crash-out. Willem Buiter, who is a conventional macroeconomist and therefore not on board with MMT, has argued that the UK is Including results for Reykjavík on the Thames, that like Iceland, it is a small open economy with an outsized banking sector and like Iceland, vulnerable to a triple crisis: a simultaneous currency, bank, and government funding crisis. MMT proponents will correctly contend that a country can never be unable to fund spending in its own currency.

What could constrain the UK in a Brexit crisis scenario is the currency plunging, combined with little domestic value added and non-tariff trade barrier (read customs chaos) putting the UK in a wringer: imports scarce due to Brexit dislocations, expensive due to that plus the weak pound, and the UK unable to get any meaningful export benefit from the weak currency. We saw a version of this movie already, in the sterling crash of 2007-2008. Philip Pilkington wrote a post on this in 2014 that was so important that we ran it again in 2016 since it had implications for Brexit. From our intro:

I’m posting this article that Philip Pilkington wrote in 2014 because it highlights some interesting things about the UK current account and the sterling. Pilkington argues that the sterling is only propped up by financial inflows into the City of London and that any threat to these financial flows can easily result in a sterling crash (he made a similar argument in this Guardian article which came out around the same time). He argues that the UK is not like the US which, because of its reserve currency-issuing status, can run very large current account deficits with little or no consequences for the dollar. The sterling crash after the Brexit confirms his argument: all it took was a big scare.

But this is where the problems come in. As Pilkington shows, last time the sterling took a big hit in 2007-08 export prices didn’t fall and make the UK more competitive, they rose and made the UK less competitive! The reason? Global supply chains. The inputs that UK companies use to make exports are themselves imported. When the sterling falls, the inputs rise in price so the firms have to raise the prices on their export goods. As Pilkington points out this means that all the adjustment must take place on the side of real incomes: that is, peoples’ living standards must fall through rising prices.

If you’ve been at all paying attention, the Tories have bizarrely hung the City out to dry…even if there is a deal. Most of the individual firms will do well enough or even very well because they recognized the need to protect their businesses and got licenses and set up or beefed up operations in the EU. But that reduces that critical pound-supporting money flow to London.

In other words, the UK may become an object lesson in what happens when a country that controls its currency manages to engineer a sudden inflation constraint precisely when it would normally really like to create a ton of money to spend more to offset a domestic deflationary shock and prop up its banks.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

This Twitter thread, published Friday morning, took about four hours and 40 years of thinking to write…

I keep hearing people complain that the ‘mainstream media’ does not understand economics and that we’re talked down to as if everything must be explained as if the economy is a household. In this thread I explain all you (and they) need to know. Economics in one thread then….

Very few people seem to understand how money is created. Mainly that’s because when they’re told it seems so simple that they can’t believe something that’s so important that we’re willing to pay a lot to get it is created so easily. This thread explains how money is created.

What this thread also explains is that if we understand money we can completely reimagine how the economy really works, which is the pathway to rebuilding from the mess we are in. Which makes this a pretty big deal. I make no apology for its length as a result.

Let’s start at the very beginning. A person goes into a bank and asks for a £1,000 loan. The bank checks them out, and agrees. And that is all that it takes to create new money. Money is just a promise to pay. That simple exchange of promises is all it takes to create it.

Most people think there must be something that backs up the value of money. Gold, most likely. But there isn’t. Money is just a promise to pay, and has been for almost 50 years now. Mutual promises to pay creates all the money we have.

So in the example of that £1,000 loan, the customer promises to pay the bank. So the bank opens a loan account for them. That records their promise to repay. And the bank puts £1,000 in the customer’s current account. They promise to let the customer spend that how they want.

Two promises. Two accounts. And as a result we get new money. That is how all money is created. It is as simple as that.

There is no one else’s money involved in this process. The bank does not lend out the money saved with them. And there are no notes and coin moved from one pile to another pile to back this all up either. There are just two promises. And then there is new money.

Making money really is as simple as promising to repay it. So why is it so expensive for some people to get hold of it? That’s not because the money itself is expensive. Clearly, it isn’t. That’s because there’s a risk that they will break their promise.

Money itself is really cheap. The pure price of borrowing money has been falling for hundreds of years. It is now officially 0.1% per annum in the UK. That’s the rate set by the Bank of England. Or just £1 a year for every £1,000 borrowed. Which is staggeringly cheap.

That’s the rate the government pays. Around £800 billion of money deposited by UK banks and building societies with the Bank of a England gets interest paid on it at 0.1% a year. And if the Bank decided the rate could be 0%, or even negative.

So the reality is that money is almost free. Allowing for inflation, which is higher than this interest rate, money is free to the government. In fact, in reality people are paying the government to hold their money.

But the government borrows more cheaply than anyone else. It creates the currency – the pound – and declares it legal tender. And it has its own bank – the Bank of England. This means the government can lend to itself. So it can never run out of money. It is risk free.

The rest of us don’t have a bank, and can’t declare the money we make to be legal tender. So all other lending is riskier. Including the money that you lend to your bank, which is exactly what you are doing if you have a bank account that’s in credit.

If you think you have ‘money in the bank’, think again. You have not. You just have a promise from the bank to pay you money if you demand it. And if they can pay it, of course. You’re now the banker. They’re the borrower. And you have the risk they won’t repay.

And that risk is real. Remember Northern Rock? The government stepped in. This is why all bank deposits in the UK have to be guaranteed by the government to a limit of £85,000. If they weren’t it’s likely no one would trust the banks to repay.

But what this means is that for most people (not the wealthiest, and not big business) the government guarantees all the money that we have. And it even, by implication, guarantees that the banks exist so that they are there to lend if and when we require it.

How is it possible that although all money is made by promises – including yours, and mine – the government is so important? First, it alone creates the currency. Secondly, as I noted, it has its own bank. So it can always repay, because it will always lend it money.

So, it’s the government and it’s Bank of England, and their promise to pay that is actually behind the real value of our money. Not gold. Not notes. Not coins. Not how strong the rest of the UK banking system is. The promise that the government makes is what matters.

But why is its promise so good? Because it has the means to back it up. Having a bank is not enough. Having the means to tax changes everything. That, and the ability to pass law to make sure tax is paid. And then only in the currency the government chooses – the pound.

Tax is what gives the pound its value. If the government could just create money without limit it would soon be worthless. But it does not do that. Tax ensures that the government can control the amount of money in the economy.

A lot of that money is created by the government. Every time it spends it tells the Bank of England to pay whoever is required. And it does that, because it trusts the promise the government makes to repay it. Well it would, wouldn’t it? After all, the government owns it.

But what the Bank of England does not do is check whether it’s got money available to lend the government to spend. It does not need to do so, after all. All it need do is trust the government’s promise to repay. And then it creates the money that the government wants to spend.

This is really important though. What it means is that tax does not need to be collected before the government spends. Instead the government always spends the money its bank creates for it when instructed to do so.

But that means something else. It means the government never spends taxpayers’ money.

It also means that tax does not fund spending. That can happen without tax.

So what does tax do? It does something really important. It recovers the money the government has spent into the economy. Enough has to be collected to control inflation and make good on the promise that the government gives when it guarantees all our money.

Does that mean the government has to balance its books? No way does it mean that. Controlling inflation is the goal, and what we’ve learned is we can run deficits, and control inflation.

But that has come at a price. That’s been unemployment, low wages and lots of crap jobs that add little value to society or the lives of those who do them. To be polite, that’s the economic policy of a callous government that does not care.

Forcing people into meaningless, low paid work is a price too high to control inflation, even if that also means lower taxes and that deficits do not threaten to create economic instability. There has to be a better way to manage the value of money than this.

And there is. We could have a government promise full employment. It could create the jobs we need. It could force up the minimum wage by guaranteeing local work for anyone who wanted it. And we could improve benefits too. All using government made money. Not tax.

But would there be inflation then? Not if we then taxed enough and cut spending a bit. But people at work in good jobs do pay more tax. And they claim fewer benefits. So that condition is easy to meet. And if we still needed more tax? Well, we could do that, if needed.

But that need would not be to fund the spend. Tax is never needed to fund spending. Always remember that. It’s needed to control inflation. And to redistribute income and wealth, and other social reasons. But not to fund spending. Ever. Money does that.

So, I hear you say, why do governments borrow then? After all, if they can create all the money that they need why do they have to borrow other people’s money? Doesn’t the fact that they borrow prove me wrong? No, it doesn’t. Because they don’t need to borrow.

The government did have to borrow when money was in short supply. That was when it was backed by gold. That system ended way back in the last century. Since then, remember, all money is just a promise to pay. But also remember, the government has by far the best promise.

So, people who are cautious, like big pension funds, large companies, the wealthy and banks themselves want somewhere as safe to save as ordinary people – those with less than £85,000 in their bank account – have right now. And that means they want to save with the government.

But they can’t not in ordinary bank accounts. Because the government has set a limit in them. So the government has adapted, fairly surreptitiously, a gold standard era savings mechanism to meet this need for a safe savings account in the modern world of money.

That mechanism is ‘the gilt’. Gilt, of course, is gold. Once, these gilts were gold backed savings products. Not any more they are not, of course. Remember, everything about money is just a promise to pay now. Gilts, or government bonds, are like everything else in this regard.

And money is not scarce for the government now, either. It could have all it needs on overdraft at the Bank of England if it wanted. And it need not pay interest on that. So why doesn’t it go for this cheapest of all funding options? Because people need safety, that’s why not.

So, just as the government guarantees most people’s money in the bank, it also offers gilts (or government bonds) for those with millions or billions to save because they too want guarantees on their money. And they will accept a low rate of interest to get it.

Government bonds are not, then, real borrowing by the government. They are instead a savings mechanism. Sure, they look like a loan. But then so too is a building society bond a loan to a building society. But it’s also a savings account in reality.

And that’s what government bonds are: they are just savings accounts. That’s all. And, as I noted when I explained how money is created, savers’ money is not involved in money creation by lending, at all.

In the same way, government borrowing is not in involved in the funding of its spending. Sure, the government borrows. But then all savings institutions do, all the time. But they don’t lend savers’ money out. And the government doesn’t fund spending with borrowing either.

And before questions are asked about quantitative easing (QE) and where this fits in, let me address that one. QE is a process that involves the government buying back gilts. So, it is a mechanism to control the amount of savings it makes available. That’s it. No more.

QE also controls the amount of money in the banking system. QE forces money out of government gilts because the government buys them back, making them more scarce. The flip side is that government pays for these bonds using free money that the Bank of England creates for it.

This money creation puts more money into commercial banks, backing up the government guarantee that they will be solvent. That money injection is pretty important in that case.

But just to add to the list of what QE does, it also shatters the myth that governments are under the thumb of bond markets, for good. Now if bond markets get uppity about anything the government simply has the power to buy its debt back and bond dealers are left high and dry.

And another QE fact; by controlling the money supply into commercial banks the government gains almost complete control of short term interest rates, and through QE it has a massive influence on long term rates too. QE delivers protection from economic shocks as a result.

I’m not saying QE is a universal good, by the way. It’s forced money into the stock market, and overinflated it. That has increased inequality. Neither is good news. But it does add a powerful weapon to the government armoury for controlling the economy.

So, the government can now create money at will, control how much of that is in commercial banks and in government backed savings accounts at any time, control inflation through the tax system and deliver full employment if it wants, all if we understand money. Pretty cool, then.

But to make sure this is clear, where does this new knowledge that comes from the very simple understanding of how money is created (not printed, or made – created is the right word) leave us?

First, it says the government underpins the value of all our money, because whilst all money is a promise to pay, the government’s promise is the best, and our banks could not function without the support of that promise. We need to remind arrogant bankers of that, often.

Second, whilst cash saving is important to people it’s also pretty important to realise that it is much like dead money. It is not used to fund bank lending or to pay for government spending. That does really mean the state should not be subsidising it with things like ISAs.

Third, spend comes before tax, always.

Fourth, the government always spends its money, and not taxpayers’.

Fifth, tax does not fund government spending. Tax is instead used to control inflation, redistribute income and reorganise the economy, but never to fund spending, and that’s true in any country with its own central bank and currency and that never use another country’s currency.

Sixth, the government does not need to borrow because it can always create the money it needs on overdraft at the Bank of England.

Seventh, the borrowing it does do is a favour to those who want to save with the government. It does never need the money people save with it.

Eighth, that means we need never have a debt crisis. If we don’t need people’s money, because the government can always create its own, where’s the debt crisis? Especially when a government can always repay on demand, simply by asking the Bank of England to make the payment?

Ninth, the amount of savings a government wants to accept, and the interest rate it now has to pay on it, can always now be controlled through the QE system. All this does is regulate the government backed, cash based, savings system. Nothing more, and nothing less.

Tenth, I stress, that means all interest rates are now heavily influenced by the government and many are under its direct control. So where is the interest rate panic?

Eleventh, inflation is not now controlled by interest rates – because we don’t want them to rise. It’s going to be controlled by tax. I admit, right now no one has an ideal tax to achieve this goal. I am working on it. It is possible. And it’s progressive, and so fair.

Twelfth, we can have full employment at fair wages, and it pays for itself.

Thirteenth, there is no need for austerity, at all in that case.

Fourteenth, please go and talk about this. By really understanding something as simple as how money is created – and by being aware that it is never in short supply as a result – we can rebuild from the mess that we are in. We can have the sustainable world we want.

Sorted. The End.

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  1. Sound of the Suburbs

    Every effort has gone into hiding how the monetary system works, and everything about debt, money and banks is obfuscated to the nth degree.
    Even the most basic things you take for granted aren’t true.
    Banks don’t take deposits or lend money, and this is quite clear in the law. It is important for the legal system to know, but they don’t really want anyone else knowing.
    You are not making a deposit; you are lending the bank your money to do with as they please. This is why they can do bail-ins; it isn’t your money once you have put it in the bank.
    They are not lending you money; they are purchasing the loan agreement off you with money they create out of nothing.

    Richard Werner explains in 15 mins.
    This is RT, but this is the most concise explanation available on YouTube.
    Professor Werner, DPhil (Oxon) has been Professor of International Banking at the University of Southampton for a decade.

    When knowledge is gained, it is quickly buried again.

    Our knowledge of banking has been going backwards since 1856.
    Credit creation theory -> fractional reserve theory -> financial intermediation theory
    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

    Today’s policymakers can’t see the fundamental flaw in the free market theory of neoclassical economics, which was discovered by the University of Chicago in the 1930s.
    The US trusted free markets in the 1920s, but by the 1930s, the free market thinkers at the University of Chicago were in the doghouse.
    The free market thinkers at the University of Chicago were just as keen as anyone else to find out what had gone wrong with their free market theories in the 1920s.
    The Chicago Plan was named after its strongest proponent, Henry Simons, from the University of Chicago. He wanted free markets in every other area, but Government created money.
    To get meaningful price signals from the markets they had to take away the bank’s ability to create money.

    Henry Simons was a founder member of the Chicago School of Economics and he had worked out what was wrong with his beliefs in free markets in the 1930s.
    Banks can inflate asset prices with the money they create from bank loans.
    Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
    “Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
    Real estate lending was actually the biggest problem lending category leading to 1929.
    Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.
    Margin lending had inflated the US stock market to ridiculous levels.

    The IMF re-visited the Chicago plan after 2008.
    I think they must have some idea what the problem was.

    When knowledge is gained, it is quickly buried again.

    What did the economists learn in the 1940s?
    In the paper from 1943 you can see …..
    They knew Government debt and deficits weren’t a problem as they had seen the massive Government debt and deficits of WW2.
    They knew full employment was feasible as they had seen it in WW2.

    Balancing the budget was just something they used to do before WW2, but it wasn’t actually necessary.
    Government debt and deficits weren’t a problem.
    They could now solve all those problems they had seen in the 1930s, which caused politics to swing to the extremes and populist leaders to rise.
    They could eliminate unemployment and create a full employment economy.
    They could put welfare states in place to ensure the economic hardship of the 1930s would never be seen again.
    They didn’t have to use austerity; they could fight recessions with fiscal stimulus.

    We forgot everything they learned after the 1930s, and removed the things that stopped politics swinging to the extremes and populist leaders rising.

    MMT is rediscovering what was known in the past.

  2. Richard B

    One small correction to your intro. Murphy is no longer a member of the Progressive Economic Forum. It may be interesting to compare why in relation to this thread!

  3. Steven B Kurtz

    Murphy underplays a critical detail. Global confidence in a currency IS affected by the amount of money created, tax and other revenue flows to the government, and the debt that a country carries. The pound was around $US 5 a century ago. It declined to near $1 as the British Empire slowly gave up its king of the hill status. The $US has been in slow rolling decline for some decades against the Euro (DM prior) Swiss Franc, Chinese Yuan, and others. Its reserve status is waning.

  4. Foy

    Excellent, finally a relatively short, easy to read explanation of the banking system and MMT that even my mum can understand. Been waiting a while for something like this, others have come close over the years but this I think is the best so far. Needs to be spread far and wide. Thanks Richard.

  5. Steve

    Early in the post, “And the bank puts £1,000 in the customer’s current account. “. This seems glossed over. “Money is just a promise to pay”. Then where did the 1000 pounds come from?

    Sorry if this is a basic question, I’m not arguing against. It does seem like a major hole in the discussion.

    1. Foy

      The accounting entries in the banks financial books are:

      DR Asset – Loans (Promise to Pay by borrower) $1000
      CR Deposits (of borrower) $1000

      That is literally it. The next transaction is then for the borrower to use the loan for something. Lets say it was to buy a car, then there is the following transaction in the banks books:

      DR Deposit (of borrower) $1000
      CR Deposit of seller of car (if with the same bank) $1000

      If seller with different bank then
      DR Deposit (of borrower) $1000
      CR Reserve Settlement balance $1000 (which is then transferred to the central bank for settlement with sellers bank)

      It really is just keystrokes, the money doesn’t ‘come’ from anywhere. Usually the above transactions happen simultaneously when the loan is approved, the borrower never ‘sees’ the deposit in their account, its moved immediately on creation to the seller as part of the loan transaction so they don’t blow the loan on something else more fun, say in Vegas.

      The bank then has to hope to get a reciprocal transaction from other bank(s) to balance its books at end of day, or go to to Overnight Interbank Cash Market to borrow from other banks to cover the transaction to balance its books. Each day they net these balances.

      This can be hard to get your head around the first time (it was for me) after being told for years that banks collect deposits and lend them out (loanable funds theory). They don’t do this, they create the loan out of thin air (new loans create deposits).

      1. Steve

        So if the borrower doesn’t use the money for cash, the money just moves around as entries in whatever ledger. That makes sense. If the money is withdrawn (say for cash purposes), then the bank has to hit the cash market. I guess at that point, the same thing happens on a meta level–more ledger entries but between banks. Thanks Foy.

        1. Foy

          Yep Steve, if the money is taken out as cash, then when it is spent it will get deposited by the recipient in a bank somewhere and the same balancing process applies, if it’s the same bank then things back in balance if not then they go to the Overnight Interbank Cash Market.

          This whole process shows that when the bank makes a loan to a borrower, lets say $1m for a house, if the borrower and the seller of the house both bank with the same bank, the bank has created $1m out of nothing, it’s done a couple of keystrokes on its books, and is now making 4% on or whatever the interest rate it charges for the loan – less any deposit interest which is close to zero these days anyway. Money for jam. And as Chuck Prince from Citibank said in 2007 “we keep dancing (creating loans and deposits) while the music keeps playing”

      1. AbateMagicThinking But Not Money

        Money; Social Construct is the phrase and Fiat is the word:

        If the government says “peso”, peso it shall be so , as long as enough people tag along. Pounds sterling, US dollars etc are a social construct just like the laws that back them up.

        Therefore the acceptance of a currency is seemingly a kind of elemental socialism.


        ps Funk money (gold and silver) is also a social construct, because sometime, somewhere, someone said words to the effect: “this shiny, heavy stuff is really valuable” and enough people tagged along.

    2. pebird

      Think of money not as a thing but the recording of a contractual relationship in which someone promises to repay what is provided. The promise creates the money.

  6. Tom Pfotzer

    First, thank you to Yves for publishing this piece, and Richard Murphy for creating it. It is very helpful to me. Explaining complex concepts in simple language is a gift, and I certainly appreciate it.

    I would like to contest these points made by Mr. Murphy:

    a. He asserts that gov’t action can result in “full employment” with “non-crap jobs”. That’s false. We have crap jobs because we haven’t replaced the “meaningful” jobs of creation – e.g. mfg’g, design, etc. that were obliterated by automation with new ones that are momentarily “safe” from said automation’s inexorable maw. The effect of automation is concentration, and the effect of concentration is more automation. I have not seen any government of any stripe address this fact, and I believe that’s because it can’t be done.

    b. He asserts that taxes are irrelevant to spending, because the gov’t doesn’t need taxes to spend, and that taxes are simply a mechanism to reduce inflation. If the gov’t retired (burned) the money it received from taxation, it would lend credence to his argument. But gov’ts don’t burn that money; they spend it, while (simultaneously) creating even more money to cover the delta between what they take in with taxes and what they spend. If the underlying economy isn’t creating additional wealth in proportion to the new money created, then inflation results. And we see that indeed, inflation is happening: the purchasing power of the dollar is falling, a lot, over time.

    c. He seems to posit that money creation will naturally result in wise allocation of money. That most certainly has not been the case here in the U.S. We create a lot of money, and spend it on making bombs, spying on everyone, and maintaining a lifestyle and consumption level totally unsupported by wealth generation. We eat our seed corn.

    d. He says that the U.K. found out the hard way that making poor strategic decisions at the national level ultimately resulted in a reduction in the value of the pound. He asserts that, because of “reserve status” that somehow the U.S. is immune to that same effect. Empires end, and they often end by hollowing out from within. When the hollowing out proceeds far enough, the collapse commences.

    And that’s the core problem of MMT. Making money is not the same thing as making wealth. That’s why I – and maybe many others – have a rough time accepting MMT.

    If our economy was creating a great deal of wealth – systematically and transparently – people wouldn’t need “safe” places to park their stored wealth (money). They’d invest it.

    The fact that the gov’t has to issue gargantuan amounts of “gilts” in order to “do us a favor” by providing a harbor for equally vast amounts of “dead” money….that tells us very eloquently where the problem is. We can’t find productive uses for the money we already have.

    So why print even more??

    1. Samuel Conner

      > “And that’s the core problem of MMT. Making money is not the same thing as making wealth. That’s why I – and maybe many others – have a rough time accepting MMT.”

      I think this is unfair. It would be more accurate to say something along the lines of

      “This is a (or perhaps the) core problem of political action of governments that recognize and utilize the fiscal freedom that they actually have.”

      MMT thinkers are keenly aware that all deficits are not equal, that some are unproductive or destructive. That’s not a flaw of MMT, which is descriptively accurate in its account of money and government spending; it’s a flaw of our political processes, that seem to favor the less publicly useful kinds of deficit spending agendas.

      As to the question of “crap jobs”, I think it’s clear that employment in conventional for-profit enterprise is going to be impacted by automation, especially in the manufacturing sector.

      As Keynes might have put it, we seem to be approaching a solution to the “economic problem” (scarcity versus abundance — though we are also bumping up against real constraints in terms of physical resources and the health of the ecosystem). We are not close to solving the “distributional problem”. The Job Guarantee concept, which includes a generous baseline social safety net, is the MMT proposal. I think it’s worth trying. The jobs would not be manufacturing jobs; they would be primarily be service jobs. I think the firm sector ought to welcome this; the current low-paid crap jobs environment depresses consumer demand. Managers of firms tend to not like concepts like the JG because of the preference of managers for a precarious and docile work force. The suffering of the unemployed is a price the firm sector is willing to pay for control of wage inflation.

      As Stephanie Kelton puts it in “The Deficit Myth,” current economic practice (enshrined in the Fed’s “dual mandate” that is actually a single — inflation control — mandate) regards unemployment not as a policy target (to get lower), but as a policy tool . Human suffering (and reduced output) is the price we are willing to pay to manage inflation under present arrangements. MMT thinkers believe that a JG (combined with taxation as needed) would provide an alternative inflation anchor that would result in much less suffering.

      1. Tom Pfotzer

        Samuel: thanks for your reply.

        You said:
        “This is a (or perhaps the) core problem of political action of governments that recognize and utilize the fiscal freedom that they actually have.”

        I agree with your re-framing of where the problem lies, but my core objection was that MMT just gives the gov’t a free-er pass to waste both time (on an idea that doesn’t solve the fundamental problems) and more resources (everyone contributes a little of their savings’ buying power for each increment of inflation).

        Then you said:
        “…employment in conventional for-profit enterprise is going to be impacted by automation, especially in the manufacturing sector”.

        I think you are significantly underestimating the impact of automation on employment at all levels. Services, mining, transport, ag…great big swaths of the economy have already been decimated. The only parts of the economy that are currently less affected are the ones with big entry barriers (medicine, defense).

        This statement you made is very interesting to me:

        “MMT thinkers believe that a JG (combined with taxation as needed) would provide an alternative inflation anchor that would result in much less suffering.”

        Why do you believe this, tho? If the “jobs” don’t create wealth equal to money consumed, then this is just more water-treading. So, the key is “which jobs?”…right?

        Is it fair to say that MMT is a somewhat-less-fettered Keynesian spending program?

        Implicit in Keynes’ deficit spending during hard times philosophy was that the economy could actually generate wealth, that investment could actually produce a return. That an economy could actually “get back on its feet”.

        Is that actually where we are / the conditions which pertain here in the U.S.?

        So if MMT is basically a re-distribution method, if the re-distributed proceeds are not used to create new wealth-building industries (like env. restoration, or waste-stream re-purposing, or more-perfected solar energy capture and storage, etc.) then we are treading water, and MMT is at best a distraction. Given human nature as expressed by our government’s behaviors, MMT may become the “enabling technology” that results in an even-worse torrent of mis-allocated resources.

        1. Grebo

          Core MMT is a description of how our monetary system works. If politicians understand it they can use it how they will (the military budget suggests they already get it). If voters understand it they can choose politicians more wisely.

          Traditional Keynesian spending was somewhat indiscriminate; paying people to dig holes and fill them in again. That works macroeconomically but neither MMT nor Keynes think it sensible.

          MMTers advocate government spending on public goods to ramp up the economy to capacity. The JG will absorb the few unemployed left, providing a floor on wages and benefits, an anchor for inflation and some needed local services that could never turn a profit.

        2. Samuel Conner

          The core problems are political, and thus problems of human decisions. Given that MMT is simply an accurate description of how money, spending and taxes actually work in governments that have monetary sovereignty, I suppose you could think of as an “enabling technology” in the sense that an accurate understanding of anything enables one to better achieve one’s goals that are impacted by that thing that is more accurately understood. Accurate understanding physics is in the same way an “enabling technology.” It’s a human decision whether to use physics to design and build better nuclear weapons rather than, say, better diagnostic imaging devices.

          It has been repeatedly noted in NC comments by various commenters that MMT principles can be employed for evil purposes as well as for good.

          Regarding “which jobs create wealth”, I think you are analyzing prosperity too narrowly. Medical jobs don’t create material wealth in terms of valuable physical assets, but clearly these jobs are valuable to society in terms of their contribution to human well-being. Most JG jobs would probably be service related. One example, IIRC, that is mentioned in Stephanie Kelton’s book, is “in home care for the elderly.” There is going to be a massive need for this in the future.

          Automation reduces the cost of production of many goods, and leads to a surplus of human talent that could be deployed to other socially beneficial uses. I agree that my remarks understate the future impacts. But this is not a reason to panic over automation. If it were possible to automate the cleaning of lavatories, would we regard that to be a worse outcome than the situation in India in which the sewers are cleaned by “manual scavenging”. There’s a crap job, and poorly paid.

          Criticisms of the JG concept often express the belief that this would require massive and inflationary deficits to implement. JG proponents don’t think so. Randall Wray has, IIRC, written that he thinks that after implementation and equilibration, the total number of people enrolled in a JG system would be in the single digit (low single digit, IIRC) millions of workers. He says this because he believes that total economic activity would rise significantly and the private sector would respond by hiring out of the JG worker pool in order to meet increased demand.

          You may ask — where does this end as automation proceeds into more and more areas, including areas “occupied” by JG service workers? It’s a good question. Peter Frase surveys the possibilities in his “Four Futures” essay. I think that JG is the least problematic approach to reach the beneficial “egalitarian” quadrants of his analysis. On present trends, we seem likely to arrive at the “exterminism” quadrant; one could argue that apparent (US) elite indifference to the consequences of the pandemic for most of the population is a hint that at a mental level we are already in that quadrant.

          Regarding the inflation constraint aspect of the JG, I think that ought to be uncontroversial. As I understand it (citing from memory a Wray/Mitchell book, but the analysis is not unique to them) there are, at a fundamental level of analysis, only 3 kinds of costs for any final product or service — land rent on the land from which the base raw materials were extracted or on which they were grown, labor costs in all the intermediate and final stages of production, including the labor required to produce the capital goods involved at all stages of the process, and profit at all stages of the process.

          Obviously, labor is a major cost component of every good or service whose cost is not dominated by monopoly or cartel profits. JG specifies the system wide minimum labor cost and in this way provides an inflation anchor. As wage pressures rise, the JG pool shrinks, supplying additional workers to the private sector at marginally above the JG wage. (Of course, further automation is another private sector response to wage pressures)

          I have encountered in NC comments offense at this feature of the JG, perhaps the commenters prefer something more radical to promote worker well-being. JG looks to me like a vast improvement on what we have now.

          1. Tom Pfotzer

            Samuel, thanks so much for the thoughtful reply. Next round:

            a. I accept your point that MMT is simply an explanation of the status quo of money creation and government finance

            b. we agree that “The core problems are political, and thus problems of human decisions”

            c. we agree that “wealth” isn’t just stacks of gold coins, and isn’t necessarily an income stream from a productive enterprise. Rather wealth is some sort of “stockpile” of resources, whether it be in the form of money, or a stand of timber, the knowledge resident in the minds of the people, and so forth.

            d. we may not agree that automation results in the freeing of human labor to be allocated to some other, more valuable pursuit. That appears to not be happening as-advertised. The velocity and scope of the primary displacement from automation is not matched by the velocity and scope of the “subsequent re-use” of that same labor. This mis-match is a core component of the economic malaise of the West. It is one of two major reasons that U.S. HH income is falling (in real terms, they’re flat in nominal). Globalization is the 2nd reason here in the West, and it’s the reason incomes are still rising in China/Asia. New industry formation (source of new high paying jobs) is seriously lagging the rate at which labor is being factored out of production.

            What puzzles me a little is why the excitement about MMT if it’s just a “better explanation of what already is”? My current take on MMT is that it’s a much-desired rationale for the “deficits don’t matter” perspective, and will likely contribute to the erosion of what little fiscal restraint we have left.

            If the effect of deficits is the steady devaluation of the currency via resource mis-allocation, then deficits truly do matter.

            I haven’t read the “Four Futures” essay you mentioned, and I certainly will in short order. And yes, we do seem to be in the “exterminism” quadrant. Can’t wait to see what Peter Frase says about how to get out of it.

            Hopefully our paths cross again.

            1. Samuel Conner

              You are most kind.

              Re: “The velocity and scope of the primary displacement from automation is not matched by the velocity and scope of the “subsequent re-use” of that same labor. This mis-match is a core component of the economic malaise of the West.”

              Indeed. If this were a “low church” service, I would be on my feet shouting “Amen! Preach it, brother!”

              The unwillingness of the private sector to fully employ the available human talent results in unemployment, with vast consequences for the affected people (and negative wider social consequences even for those who are employed), and permanently lost output in terms of tangible goods and the socially beneficial consequences of the useful services that could have been provided by the unemployed.

              This isn’t a consequence of automation only — it happens at national level also as a result of globalization. US workers have been cruelly treated by the off-shoring of jobs without serious sustained effort (which I think would have required some form of industrial policy, which you mention in your prior remarks; agreed) to re-employ them at the same scale that they have been made redundant.

              I think if you dig through Bill Mitchell’s “Billy Blog” for “Job Guarantee” tags, you will find useful discussions. Mitchell is an elder statesman and one of the founders of MMT and I have the impression that he is the originator of the JG concept of relying on a “buffer stock” of employed workers rather than a “buffer stock” of unemployed workers as an anchor for control of wage inflation.

              IIRC from one of his posts,

              The national central bank is the “lender of last resort”, capable of making up liquidity shortfalls within the financial system

              The national treasury is (in Keynesian terms) the “spender of last resort” which is capable of making up shortfalls in aggregate demand (“capability” and “political will” are, of course, very different)

              Mitchell has adapted the “last resort” notion to assert, persuasively IMO, that the national fiscal authority should function as “employer of last resort” to make up for shortfalls in private sector demand for labor. What this JG labor pool is used to accomplish is, of course, a political decision. It is not hard to envision socially beneficial functions.

              I think that part of the excitement about MMT is that it provides a reality-based counterargument to the present consensus that “there is no alternative” to fiscal austerity; on the TINA premise, the future is destined to be worse than the present, and the present is already bleak for many people. And in saying this, I am not implying that I think there are no constraints at all; there is clearly a real (people, capital and plant, raw materials) constraint on what the economy can produce, and therefore there are limits on what the Federal government can purchase.

              Stephanie Kelton, in her book “The Deficit Myth” helpfully invites us to turn our attention from “fiscal deficits” toward “real world deficits” in terms of healthcare, decent employment, housing, quality education and other areas. The pre-occupation with shrinking the federal fiscal deficit has the consequence of worsening real world deficits in the lives of the citizens, and the private sector cannot (and, frankly, does not want to) compensate — a public sector surplus is a private sector deficit.

              “Fiscal restraint” per se is not the problem. The problem is wise utilization of the public fisc to mobilize underutilized productive capacity of the nation to meet real needs of the population. Once again, we land back at the political problem.

              Alas, IIRC I don’t recall that Peter Frase’s essay dwelt on the route by which the undesirable quadrants could be avoided. IIRC, he simply developed a vision of the range of possible outcomes. The path we choose and the outcome that leads to are up for debate.

            2. Left in Wisconsin

              My turn:
              MMT is only half the story of the change in economic thinking that we need. The other half revolves around the concept of value and the flaws in our current economistic thinking about value. I agree with you that a lot of the excitement around MMT seems to be related to the “free lunch” implications that many draw (inaccurately, as I am reminded over and over whenever I point this out). I think this is also the reason why mainstream economists hate MMT so much – because they are wedded to a money-based notion of value, they can’t accept the core MMT premise that money creation does not require, and indeed is not directly related to, value creation. Where I think you run into a problem is when you talk about “wealth generation.”

              In a nutshell, and where I think your argument hits a snag, is that money-based measures of value do a poor job of measuring real value (and so real wealth creation, as opposed to wealth realization). This is for many reasons, of which here are some of the most important:
              1. Considerable real value is created by non-paid work and by public spending.
              2. Value realized by firms depends on large part on this non-paid work. Also on government-funded R&D. Also on what Veblen called the “shared knowledge” of the “industrial community.” The fact that corporations are able to realize as sales the proceeds from all this value does not mean they created it all.
              3. Also, of course, there is no reason to think (a la Marx) that employers pay workers even their fair share of these proceeds, much less their fair share of the total input values (so they could, for example, reimburse their own family members or others who provided the care and nurturing required to make them productive in the workplace).
              4. Value-chain analysis shows pretty clearly that power (Wal-mart, Amazon, etc) determines who reaps most of the value created, not “productive factor analysis.”
              5. Economistic value measurement means that raw materials (like oil) are valued/priced based on their costs of production and short-term supply&demand (and market manipulation) without any real consideration of externalized costs or long-term implications. This seems unwise and is by no means the only way to think about it.

              By definition, there is an infinite demand for care work. (Who couldn’t use a therapist, if ability to pay was never a problem?) Also, I would argue, care work is virtually always more valuable than non-care work, regardless of sales, profits, or compensation. Once we recognize that there are a multiplicity of ways to think about value, some more true than others, economistic value being down toward the bottom of the truth scale, new vistas appear.

              There are a handful of economists like Mariana Mazzucato and Jayati Ghosh (and more than a handful of non-economists) beginning to think about value in these terms. Former BoE Gov Mark Carney is one mainstream figure moving in this direction, as evidenced by his recent Reith Lectures.

              1. Tom Pfotzer

                @Left in Wisconsin:

                This is a great line of dialog. I hope Yves somehow can fit in a few posts that present/reinforce/develop these ideas.

                The lens that I currently view this thru runs like this: Capitalism can only do what’s profitable in the (relatively) short run. If one can’t turn a profit on solving the problem, however valid, necessary, or useful the solution might be, capitalism can’t do it.

                I like capitalism, for a lot of good reasons. But – and this is no blanket condemnation – capitalism is limited.

                Some problems just plain ain’t profitable, short term, to take on, and that leaves it to [something else] to address.

                Isn’t that what we’re all grappling with…what’s that “something else” force, and how can it be deployed in order to solve the really big problems that short-term profit-seeking is simply incapable of coping with?

                I ask/invite you to develop the subject further. And thanks for the references, I’ll read up and be ready when you move ahead with this.

              2. Tom Pfotzer

                And just to stir the pot a little…

                You stated that “…they can’t accept the core MMT premise that money creation does not require, and indeed is not directly related to, value creation”.

                Do you think it’s a good idea to de-couple money creation from wealth creation?

                1. Left in Wisconsin

                  It already is – even in cases where real value is created, the money-creation comes first (as the post says), so one can’t say they are coupled. The important point is that it matters what the money is created for, or how it ends up being used.

                  In our current world of money, banking, real and speculative investment, corporate mismanagement, extractive industries (e.g. telecoms), VC domination, etc (which others who comment here can speak to much better than I), it seems that not too much of the money created is ever really associated with the creation of real value. (But our economic accounts ascribe real economic value to it due to the need to double-entry account for all that money created.)

                  But even in cases where we believe that real value has been created, the actual money magnitudes assigned don’t seem to bear much relation to any notions of real value. Which is to say, even if we are talking about Amazon and Apple (which make real money) vs Teslas vs. Uber, I don’t think anyone can reasonably say why they are worth what they are worth, and not an order of magnitude (or more) lower (or higher for that matter), or in the case of the profits than a company like Apple makes, that they are an accurate measure of the real value created. To paraphrase Duncan Foley paraphrasing Marx, “wealth creation and wealth extraction are fundamentally distinct processes.”

                  Finally, I absolutely think we would be better off if we acknowledged this (existing) decoupling. It would make it a lot easier to pay caregivers the 80K per year they deserve and tax ultra-high incomes (and wealth once we figure out how) exorbitantly.

      2. Alex Cox

        Regarding ‘crap jobs’, surely there is elitist thinking here. There is nothing inherently ‘crap’ about driving a bus, or taking care of old people, or fighting wildfires, or serving food or washing dishes.

        These jobs are ‘crap’ only because they are poorly paid and the top 10% despise those who do them.

        There is lots of useful work to be done. IMO the ‘crap’ jobs are university administrator, health care executive, TV personality, silicon valley scamster, and similar.

        1. al

          “Regarding ‘crap jobs’, surely there is elitist thinking here. There is nothing inherently ‘crap’ about driving a bus, or taking care of old people, or fighting wildfires, or serving food or washing dishes.”

          The “elitist thinking”, is certainly built into the equation, because there are few, or more appropriately none, economically privileged individuals that want to make a career out of cleaning up vomit, feces, blood, and urine on a daily, recurring basis. The reality of caring for individuals with dementia adds further ‘interesting’ variables into that equation. And that is only pertinent for those individuals with direct experience, everything else is merely so much irrelevant words, navel gazing, and wool gathering.

          It is certainly ‘elitist’ in the sense that “I don’t think most Americans, in their heart, want to be given something,” Trump said in the interview. “They’re—I’ve spent a lot of time traveling over the last four years. People want to work for what they get.”, as Ivanka Trump mused.

          Yet, the Ivanka Trump’s of this world, or for that matter, anyone who happens to be economically privileged is not going to be first in line to work at a ‘crap’ job. That is always the duty of the “other”, because it is always the “other” that needs the “character building” experience of a “crap” job. Classism is still the status quo reality.

          There may be “lots of useful work to be done”, but in this society no one wants to do it anymore, because everyone wants to be a movie star, talk show host, entertainer, billionaire, gamer, stock market speculator, ect., ect., so a labor force is required to be imported from the less developed world to do all the jobs that no one in the first world wants to do.

        2. Samuel Conner

          Thanks for the reality check. I thought I was re-using a term I had previously encountered on this page, with an accepted meaning (“poorly compensated, though often essential, work”). Perhaps I’m an elitist at heart. My bad.

          Re your remarks; I fully agree. A great deal of highly compensated and prestigious work is not socially useful; is in fact arguably (or unarguably) “parasitic.” I would add to your list “most present-day jobs in the higher reaches of the finance sector.”

    2. Grebo

      Money is not wealth, but wealth takes money to create and to buy. If the resources to create wealth are available but unused, not having enough money is likely the reason. MMT shows there is no excuse for that.

    3. lyman alpha blob

      Others have made good points already, and I’ll add a little to the notion of ‘crap’ jobs.

      Why is say being a janitor considered a crap job while being an accounting middle manager is not? Sure, sweeping the floors might not be fun or particularly fulfilling, but neither is staring at little numbers in excel sheets all day. The difference is one gets compensated often with a less than living wage and the other provides a decent living. But is there any natural law that says this must be so? That one’s 8 hours of labor is worth inherently less than that of another? There is not. It’s this system we’ve developed over the last few centuries that claims one is more useful than the other, which is a great justification if you’re one of those at the top making the claims on behalf of the system that works so well for you.

      So if the cost of a decent living in a given area is $50,000 and unemployment also exists there, what’s needed is for the government to create $50,000 per year jobs to do whatever needs to be done. Right now there are a bunch of fall leaves clogging up the drains in the streets outside my window and they’ve been there for weeks and the town isn’t picking them up. So have the federal government provide the funds to pay someone a decent wage to do it. I have no problem paying someone $50,0o0 per year to rake leaves, especially if it means they will then spend that $50,000.00 in the local economy, in turn raising others’ fortunes as well.

      And let’s say more and more jobs become automated. Taken to the extreme, robots do all the work for free, human beings have no jobs, and therefore no money to pay for all the goods and services produced by the robots. The economy collapses unless money is circulating, so unless we’re going to abolish money altogether (perhaps something to be hoped for, but for now it’s easier to restructure the current economy to be more equitable than to create an entirely new paradigm) we’re going to have to put money in people’s hands. Sure, paying people $50,000.00 to sweep leaves may be just make-work, but then again so are a large percentage of what are considered good jobs right now. Marketers, I’m looking at you! (Not to pick too much on marketers – just an example and I do work for a marketing company so I figured I’d insult what I know).

      The mechanism described by MMT is sound. Wrapping your head around it though takes looking at the world in a different light, and understanding that a janitor’s time is just as valuable to that janitor as an investment banker’s time is to that person, and both should be compensated a lot more equitably. But MMT really is as simple as described and I know I was fairly shocked when the notion first kicked in.

      1. Tom Pfotzer

        “we’re going to have to put money in people’s hands”. Definitely agree.

        What if, instead of paying for make-work (GJ or garden-variety irrelevant job) – what if we generated a new set of industries which did really valuable stuff, and needed a lot of workers?

        That would solve most of our economic problems. If those workers just happened to be fixing the planet while they were putting food on the table, well, that would address Monster Problem #1.

        I realize that “generating a new industry” is really hard. Every self-respecting nation wants a few of them, and they’re scarce.

        Elon Musk made a few of them, darn near single-handedly (actually, single-team-edly). So, it’s clearly possible.

        Why isn’t “industrial policy” cool anymore? Every country whose income level is rising seems to have one.

        1. John Zelnicker

          @Tom Pfotzer
          December 14, 2020 at 2:29 pm

          This has been an excellent thread. You’ve made some good points, Tom, and I think most of them have been answered fairly well. I can’t add anything not already said better than I could.

          Responding to your final question: Industrial policy is not cool because it means interfering in the “free markets” and we simply can’t have that, now can we? /s

          It’s also easy to remind people that “industrial policy” is what the Soviets did and this triggers the old Red Scare fears, making much of the public scared of such an idea. Politicians promoting industrial policy will be instantly tarred as being Russian agents trying to destroy our exceptional economy.

          Truthfully, we already have an industrial policy. Just look at all the subsidies, both tax and otherwise, granted to the resources extraction companies, e.g., oil & gas, mining, etc. There are dozens of other industries with billions of direct and indirect subsidies.

          1. Tom Pfotzer

            @John Z:

            “Truthfully, we already have an industrial policy. Just look at all the subsidies, both tax and otherwise, granted to the resources extraction companies, e.g., oil & gas, mining, etc. There are dozens of other industries with billions of direct and indirect subsidies.”

            Yes, of course you’re correct, and we agree that the unspoken expectation is for a policy that delivers long-term benefit to all of us.

            And this is where I always fall off the rails of top-down policy-making, and resort to my trusty “do what I can do with no external dependencies” saw.

            Right now it’s a dull saw, but every day I sharpen a few of the teeth.

            Someday it’ll work.

          2. Samuel Conner

            > It’s also easy to remind people that “industrial policy” is what the Soviets did and this triggers the old Red Scare fears, making much of the public scared of such an idea.


            A long time ago in what now feels like a different universe, I think I learned in a HS US history class that US had industrial policy in its early decades — tariffs to promote domestic manufactures. Is this still taught in the schools?

            IIRC these tariffs were part of the tension in the sectional conflict.

            Perhaps the Soviet use of industrial policy would not be so scary if this aspect of Soviet policy were framed as imitation of early US policy.

    4. .Tom

      How come jobs that aren’t doing creation crap? What’s crap about being a nurse or a teacher? Or someone who repairs or maintains things? Or a musician, poet, novelist, scholar, or blogger?

    5. aliteralmind

      > If the gov’t retired (burned) the money it received from taxation, it would lend credence to his argument. But gov’ts don’t burn that money; they spend it…

      This is incorrect.

      Al federal spending is created, all federal revenue is destroyed. Without exception. See the abstract of this 1998 Stephanie Kelton paper. This is not only the case post gold standard, it’s true ever since the first dollar was created some 220 years ago.

      The reason is for the very simple fact that, from the federal point of view, all money is accounting entries (in spreadsheets in computer systems at the Fed and Treasury). In other words, basically tally marks. Money is only physical outside the federal realm, to currency users – meaning everyone but the central government which is the one and only issuer of the currency. (Physical money is only a very small proportion of the money even to the non-government sector. Most of it is in electronic form – again, accounting entries, such as in banks.)

      As for the rest of your comments, I do hope you consider reading Keton’s 2020 book The Deficit Myth, and secondarily some papers from the quarter-century body of MMT academic literature, upon which the book is based. Here are several excellent and layperson-friendly examples to get you started.

      The MMT-designed job guarantee is a superior automatic macroeconomic stabilizer. The fact that it gives people jobs is simply a byproduct of its stabilization features. The JG is not about “jobs,” and it’s not about “creating wealth.” it’s about stabilizing the entire economy is a (vastly) superior way, and in a way that also happens to be in the only humane way possible: for all, not just for some. The latter is how we currently do it.

      As far as what is done in the JG, it is by definition “things that are valuable but not profitable.” Assisting a teacher, holding the hand of the dying, delivering food or medicine to the infirm, cleaning a park, fixing up local buildings, being paid for what is currently volunteer work, etc. are all valuable. Invaluable. Pavlina Tcherneva, a lead developor of the MMT JG, defines this to be “care work”. More can be found in questions 8 and 8a on her definitive FAQ.

      The JG does not, and isn’t intended to, create financial wealth.

      No one is going to build robots for care work. There are infinite social problems and therefore infinite work to do – again, that is valuable (in the grander sense of the word) but not profitable. (As far as I’m concerned, with our facing the abandonment of major coastal cities over the coming decades, coupled with the mass migration of hundreds of millions, mostly of a non-white color, if we don’t get a job guarantee, I don’t see how we avoid literal armageddon. There will be supercharged accusations “they’re coming to steal your jobs!” all across the planet. A jobs guarantee takes that away completely.)

      > Is it fair to say that MMT is a somewhat-less-fettered Keynesian spending program?

      Um. No. It’s really not.

      > My current take on MMT is that it’s a much-desired rationale for the “deficits don’t matter” perspective, and will likely contribute to the erosion of what little fiscal restraint we have left.

      It seems to me you’re just making stuff up and/or believing people who are just making stuff up. Engage with the MMT literature and stop asking random questions on the internet.

      (I host the podcast Activist #MMT. Here’s my collection of learn MMT resources.)

  7. Larry

    Yves rightly highlights the major problems facing the UK on exit from the EU. They can do it because they retain their sovereign currency, but they’re entire economy is so intertwined with the EU they simply cannot exit in an orderly fashion without serious trade agreements. Alas, serious work was never at the fore of the exit campaign nor it’s current implementations.

  8. Hickory nut

    Thanks for this post. Is it true that the only limit to bank money creation is legal limits based on the deposits it has? So it could make loans up to 10x it’s deposits if 10-to-1 is the legal limit?

    1. Zamfir

      The regulations don’t rely on such a reserve ratio anymore, other somewhat different regulations have become more important. But the underlying idea is still true. The amount of loans is limited by regulations.

      Those regulations are not the only limit. Without regulations, there is still a further market limit. Where depositors demand higher interest on the deposits than the bank can earn on the loans, because they worry that bank may not pay them back. Or where people stop trusting the bank and take their deposits away. The goal of the regulations is to stop the bank before they get to that limit, because it is vague and tends to collapse in an unstable fashion.

      Think of it is a speed-limit. The regulated limit says, you can’t go faster than 60 km/h in this sharp corner. But if you take a way the legal limit, I cannot suddenly go through the corner at 250 km/h.

    2. John Zelnicker

      @Hickory nut
      December 14, 2020 at 7:31 am

      No, the limit for banks making loans is not the amount of deposits it has. Banks do not lend deposits. Perhaps you need to reread some of the post.

      The actual limit for bank lending, as long as they have qualified borrowers who want to borrow, is their capital account. The money they lend and have to make good on is a liability on their books and the level of liabilities is limited by the available assets as regulated and defined by the government.

  9. pebird

    This is great.

    I would only add that in the final analysis, some real thing must back a country’s currency. Suggest that would be a country’s real assets and/or its productive capacity.

    We could think of this real thing as partial “insurance” against default.

    1. Grebo

      The government sets the price it will pay and that determines the value of its currency. By setting the price of labour with a Job Guarantee it anchors the general price level.

      A government can never (unwillingly) default on debts denominated in a currency it issues itself.

    2. Thomas Bergbusch

      The “real thing” is the Government’s capacity to enforce tax payment in its currency, and therefore its monopoly over the means of coercion within the country. So the “real thing” is mainly the capacity of the Government, by one means or other, to control the human and material resources required to enforce tax collection (and a few similar revenue-collecting activities). The external value of the currency is affected to a large extent, but far from entirely, by a country’s real assets and/or its productive capacity.

    3. anon y'mouse

      a functioning society (whatever that means!) is what backs the “currency”.

      one cannot buy bread in a famine, even with gold. and one can not eat gold.

  10. .Tom

    Does that mean the government has to balance its books? No way does it mean that. Controlling inflation is the goal, and what we’ve learned is we can run deficits, and control inflation.

    But that has come at a price. That’s been unemployment, low wages and lots of crap jobs

    What’s the mechanism here? How does running deficits and controlling inflation cause unemployment etc?

      1. .Tom

        That’s a fairly complicated text, for me at least. So can you confirm that I’ve understood the gist of it: Prices and therefore inflation depend (to some extent) on demand. And demand can be reduced by depressing household spending power. Job insecurity keeps household income from growing and is therefore good for controlling inflation.

        In a nutshell, it comes from a story of inflation based on demand.

        1. Left in Wisconsin

          Running government deficits does not cause unemployment. Government austerity – refusal to spend what is needed – in the name of an alleged need to control inflation (which allegedly will run out of control if a gov’t job guarantee or other full-employment policy is put into place) causes unemployment, or at least (as in pre-COVID US) under-employment (lack of decent-paying jobs). The private sector alone will never, except possibly in extremely rare freak circumstances, create full employment so the absence of (involuntary) unemployment requires a government jobs guarantee or analogous program (unlimited access to free job training, etc.)

  11. fjallstrom

    I think one key point in how taxes upholds the value of money what happens if you don’t pay.

    If you don’t pay your taxes generally armed agents of the state comes and takes your property and/or your freedom. So though money isn’t backed by a commodity, it is in a way backed by the state’s capacity for violence. And down the line the property and labour that capacity for violence in turn can push into the market in search for money to pay the taxes.

    1. Mel

      I like to quibble with the statement that taxation creates the value of the money.
      I’d rather say that taxation makes the money important; because as you say, don’t pay your taxes and bad things happen.
      Then all the specific prices that reflect the value of the money get set by society, in the market. It’s usually Job Guarantee discussions where we affirm that government can set one price — in that case the price of basic labor. Try to set two or more prices, and arbitrageurs start to make your life very complicated.

      1. psv

        One important detail is that countries usually only allow taxes to be paid in the official currency.

        To take a small country with its own currency as an example, like Iceland, taxes there can only be paid in Icelandic króna. If I have only dollars and need to pay Icelandic tax, I need to sell dollars and buy króna. The need of the population to own króna for taxes is the floor of the value of the currency.

        If Icelanders were allowed to pay taxes directly in dollars or euros, the currency would have no intrinsic value, if I understand correctly.

    2. anon y'mouse

      taxes drive the currency.

      they also appear to force us into an “economy” together, trading goods and services among each other (to get money to pay taxes and for our essentials) and thus are foundational to the creation of trade and markets in these larger systems where most people are not deeply intertwined with each other and do not know and trust the other to repay “debts” marked down on sticks.

  12. Upwithfiat

    In other words, the UK may become an object lesson in what happens when a country that controls its currency manages to engineer a sudden inflation constraint precisely when it would normally really like to create a ton of money to spend more to offset a domestic deflationary shock and prop up its banks. Yves

    Then leave* us recognize that the DEMAND for fiat matters too and one way to greatly increase that demand would be to (gasp!) actually allow all citizens (at least) to use it beyond mere coins and grubby Central Bank Notes and to (double plus gasp!) eliminate all privileges for private banks such as deposit guarantees.

    Then let us hope that the country once famed for Tally Sticks will mend its ways wrt fiat creation and use.

    *sorry, can’t resist the pun.

  13. Upwithfiat

    Eleventh, inflation is not now controlled by interest rates – because we don’t want them to rise. It’s going to be controlled by tax. I admit, right now no one has an ideal tax to achieve this goal. I am working on it. It is possible. And it’s progressive, and so fair. Richard Murphy

    Taxes to curb consumption MUST fall on the non-rich since the rich don’t consume enough to matter.

    So instead of “tax and spend” we get “spend and tax the non-rich (if necessary)”? Granted the latter is superior since it closes the output gap but how is it fair to curb the consumption of the non-rich unless you plan to tax the rich enough to curb their consumption to the same extent? So that if steak is taxed out of the mouths of the non-rich that it is also taxed out of the mouths of the rich?

    1. Yves Smith Post author

      If you keep making bad faith comments, you will lose your comment privileges. You’ve been doing this repeatedly and I have lost patience. This is a complete straw man of what Murphy said. There was nary a mention of taxes on consumption. This is completely your invention. You are now going into moderation as a warning.

      1. Upwithfiat

        Since I’m in moderation I’ll speak frankly:

        Murphy and the rest of the MMT gang have been hand waving wrt to taxation to control price inflation FOR YEARS. So if I’ve constructed a straw-man, I’d say it’s excusable because as far as I can see, and as Murphy confirms in my quote of him, the MMT crowd has no man at all.

        Anyway, until the MMT School rules out taxes to curb consumption then who’s to say I haven’t made a valid, even constructive, criticism of what’s still on the table?

        1. Samuel Conner

          I think that MMT proponents generally regard taxation to be a “later resort”. The overall price level within the economy, within the JG concept, would be controlled (or strongly influenced, at least) by the level at which the JG wage would be set, much as the overall interest rate level is set by the policy rate chosen by the central bank. And this will work because labor is the principal cost component (among the 3 components of land rent, labor and profit) of most goods and services.

          One can certainly object that demand-pull inflation is still possible if large numbers of people develop a strong desire for some scarce resource (or if overconsumption of an abundant resource causes it to become scarce). I don’t think that taxation is needed to curb this kind of inflation — the rising price level itself will curb consumption in this case and thus be self-limiting. Taxation would not have been an appropriate response to the oil-shock price inflation of the ’70s, for example.

          JG controls (to the extant that this mechanism does work, which is not perfectly) the price level by setting a floor on the wage level while providing employment to everyone who wants employment. This mechanism does work (though imperfectly, I concede) because labor is the principal component (of the 3 components land rent, labor, and profit) of the cost of most goods and services.

          I know that you don’t like this government-specified wage-floor feature of the JG, but it needs to be noticed that the JG wage is a policy tool, and could be indexed to overall productivity, which would avoid the divergence — to the detriment of most workers — in median compensation from productivity that has occurred in recent decades.

          JG proponents regard the JG as a superior automatic stabilizer to current approaches to dealing with the consequences of involuntary unemployment. Their arguments look persuasive to me.

          Perhaps there is a perfect solution out there, but it seems to me that JG is more potentially implementable than alternatives.

  14. Piotr S. S.

    Hello there… I have a train of thought that, however controversial it may be, I’d like to run across the readers here, as I believe it may only help me understand better (and perhaps other too).

    (Please don’t read into that I’m against JG or base income or similar ideas; also if this comes off as elitist/”whatever notion of bad” – it’s most likely not intended, so feel free to point it out but please don’t assume intentional malice).

    To me the difference between most “crap jobs” and many of the “well paid jobs” is that which I call “the principle of substitution”, and my illustrative example is that of a neurosurgeon and a cleaning person: if the cleaning person calls in sick that day the neurosurgeon will take the broom and clean the place to a satisfactory level. However, if the neurosurgeon calls in sick… the cleaning person will not be performing any surgeries, at least not in a sane world. Or to put it in a question form “If you really believe in objective equality of professions, why not have you daughter’s tumor removed by a cleaning person then?”.

    And yes, I am aware that the investment of time to become a neurosurgeon is vastly greater than for becoming decent at cleaning. But, I’d argue here also that for certain professions you also have a much lower-level selection: vastly more people pursue the road of neurosurgery than actually make it decent doctors on the other end. So there is indeed a lot more factors here.

    So to me there is a real (objective) notion of “this job is worth more than the other” (but note that I’m against applying the job value to “person value”; a skilled neurosurgeon may be as “bad a person” as anybody else). And as for connection to the JG/base income: how much faith do we have people will not prefer to do the absolute minimum, once that absolute minimum is enough to just carry on? (yes, I may be pessimistic and/or cynical…)

    1. Samuel Conner

      Just my two cents:

      My impression from my reading in popular-level MMT literature (I haven’t dug into their technical publications in the journals) is that JG proponents believe that the majority of people find value in work and would prefer (assuming that they are not medically disabled) to work doing something useful than to be idle. From a macro perspective, paying the unemployed to do something useful (in the local community, in typical JG implementation concepts — not New-Deal style work camps in remote national parks) is superior to leaving them idle or simply subsidizing a subsistence level of consumption (a minimal basic income, for example) because it realizes for society value from the work of the workers and also is beneficial to the people themselves in medical and psychological terms.

      I concede the possibility that the “properties” of a population could change over time so that the present assumption that “most people prefer useful work to idleness” might be called into question. To the extent that governments can influence social trajectories, wise rulers ought to be very concerned that economies not change in ways that promote a decrease in the preference for useful work over idleness.

      I would argue that tolerating high levels of un-employment and under-employment (and also relaxing standards of worker safety) could be an effective way to weaken a population’s intrinsic preference for useful work over idleness, leaving only privation as the motive to perform remunerated work. So I think there is a case to be made that JG can also function as a tool for avoiding this undesirable outcome in the population.

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