Radical economic ideas grab attention amid low-inflation torpor
Sanders campaign adviser Stephanie Kelton is a leading advocate of MMT. Photo: stephaniekelton. com What is clear, warned Fraser, is that these unusual policies “have had a pervasive and frankly quite worrying impact on the pricing of financial risk.” Earlier this month the Reserve’s deputy governor, Philip Lowe, said it was “very rare” for central banks to worry that inflation is too low. “Yet today, we hear this concern quite often, and the ‘unconventional’ has almost become conventional,” he said. Lowe warned the abnormal monetary
policies being adopted in some countries were “a complication for us” because they put upward pressure on exchange rate. But in a world where traditional economic remedies are proving ineffective a swag of other unorthodox policy suggestions are getting a hearing.
One controversial option being canvassed by experts is for central banks to deliver “helicopter drops” of cash directly to citizens’ bank accounts in the hope they will spend it and revive growth. Even more radical is a proposal for governments to mandate an across-the-board pay rise for workers. Olivier Blanchard, a former chief economist at the International Monetary Fund, and Adam Posen, president of the Peterson Institute for International Economics, recently recommended the Japanese government try this approach to boost growth. The Bank of England’s chief economist, Andy Haldane, raised eyebrows last September when he argued abandoning cash altogether would make it easier for central banks to manage downturns. He warned that in future it might be necessary for central banks to opt for negative interest rates – when depositors are charged for putting their money in the bank – in a bid to encourage spending.
One problem with that strategy, however, is that people are likely to convert deposits into cash. Eliminating cash and replacing it with a government-backed digital currency would remove that option. “This would preserve the social convention of a state-issued unit of account and medium of exchange… But it would allow negative interest rates to be levied on currency easily and speedily,” Haldane said. Modern Monetary Theory has ardent proponents As central banks struggle to revive growth, attention has shifted to fiscal policy – the way governments use taxation and spending to influence the economy.
Even the hard-heads at the IM have advised governments, including Australia’s, to spend more especially on infrastructure. The fund’s most recent assessment of our economy said “raising public investment (financed by borrowing, thus reducing the pace of deficit reduction) would support aggregate demand, take pressure off monetary policy, and insure against downside growth risks.” Amid these debates about fiscal policy, a radical school of thought called Modern Monetary Theory, or MMT, has gained more prominence. Proponents of this theory have been on the periphery of mainstream economics for more than two decades but their profile has been raised by this year’s US presidential race. Academic economist Stephanie Kelton, a leading advocate of MMT, is an adviser to presidential hopeful, Senator Bernie Sanders. Kelton calls herself a deficit “owl” rather than a deficit hawk or dove. The hawks, of course, have a straightforward view of government finances: deficits are bad. The doves say deficits are necessary when economic times are tough but they should be balanced by surpluses over time.
But deficit owls like Kelton have a far more radical take: deficits don’t matter. The starting point for Modern Monetary Theory is that a currency issuing government can keep printing and spending money but never go broke, so long as it doesn’t borrow in a foreign currency. The Australian Commonwealth, for example, will never run out of Australian dollars because it is a monopoly issuer of that currency. It can always create the money it needs and, therefore, will always be able to service debts.
The MMTers claim that in the modern era of floating exchange rates and deregulated financial markets, governments can, and should, run deficits whenever they are needed. There is a strong moral case for this: in a modern economy, there’s no good reason to have unemployed labour or capital. For the MMTers mass unemployment is a great evil and its daily, human cost dwarfs other economic challenges. They acknowledge there are limits to government spending. Resources in the real economy can be constrained and taxes are an essential tool to ensure demand for the currency and to cool the economy if it overheats. But there’s plenty of scope for governments to print and spend money without causing inflation or triggering a financial crisis.
MMTers say sophisticated modern economies like the US and Australia are in no danger of the hyper-inflation which plagued Zimbabwe last decade or Germany’s Weimar Republic in the 1930s. Modern Monetary Theory has an intriguing link to Australia. The term was coined by veteran University of Newcastle economist, Professor Bill Mitchell, and he is a passionate advocate for the theory. Mitchell argues that outdated “gold standard-type thinking” – from a time when governments accepted effective constraints on how much currency they could print – is wrongly applied to the modern financial system with fiat currencies, floating exchange rates and deregulated financial markets. “The economics that apply now are nothing like the economics that applied under a fixed exchange rate, convertible system,” he said. Mitchell says a fundamental problem is that most people, including politicians, wrongly equate government finances with managing their own household budget.
“The way mainstream economics is taught plays on that analogy all the time in the sense that the government has a financial constraint just like you and I,” he said. If fact, says Mitchell, household budgets and government finances have nothing whatsoever in common. He doesn’t even like to use the word “budget” to describe the government’s finances because it implies they work like a household budget. “A government that issues its own currency, like the Australian government, has no financial constraint.
That’s the starting point.” Mitchell admits the claims of Modern Monetary Theory “spins people out” but he points out that most governments run deficits most of the time. “The Federal Government in American has run fiscal deficits about 88 per cent of the time according to data going back to 1913,” he said. “In the Australian setting…
people on both sides of politics say ‘we’ve got to get back into surplus’ as if that’s the norm. Well, that’s never been the norm in our history. The norm is near-continuous budget deficits.” For MMTers the never-ending political debate in Australia about returning the budget to surplus is at best obsolete and at worst damaging.
It goes without saying that most economists take issue with Modern Monetary Theory. Nobel Prize winning economist and New York Times columnist, Paul Krugman, wrote in 2011: “I wish I could agree with that view…but for the record, it’s just not right.” Another American post-Keynesian economist Thomas Palley branded it a “policy polemic for depressed times.” Sydney University Professor, Tony Aspromourgos, who is an expert on public debt and Keynesian economics, said some fundamental tenets of Modern Monetary Theory are perfectly sound, but it doesn’t follow that the level of government debt and debt servicing costs are irrelevant to economic policy.
“It’s a big step to say it doesn’t matter what the level of public debt is because governments can always fund it by printing money,” he said. “Full employment is of course a vitally important economic policy objective. But the use of fiscal policy to pursue that goal needs to be reconciled with plausible public debt trajectories.” Professor Dick Bryan, an expert in the theory of money from Sydney University, said deeply entrenched public beliefs about money and wealth meant that if any government embraced Modern Monetary Theory it would be likely to cause huge disruption. “If a state suddenly adopted this and said “we’re churning out greenbacks or Australian dollars” the money markets – filled with people of the old faith – would run wild,” he said. “It’s likely that access to real wealth would shift around in very unpredictable ways if this was executed.” Bill Mitchell is not surprised by the criticisms.
He readily agrees it’s “a big ask” for economists with traditional training to accept a theory that “turns everything on its head.” “It takes a long time for ideas to permeate and spread and Modern Monetary Theory is very young in that process,” he said.