This is the second of two openletters to Professor Bill Mitchell. Both were submitted as comments to his blog. Both have been rejected.
On Friday 14th August, the Governor of theRBA, Philip Lowe, provided evidence to the House of Representative StandingCommittee on Economics. Modern Monetary Theory (MMT) was referred to several times. See: The Hansard. https://parlinfo.aph.gov.au/parlInfo/download/committees/commrep/868db039-2384-4ce9-a502-1354709677d2/toc_pdf/Standing%20Committee%20on%20Economics_2020_08_14_7974.pdf;fileType=application%2Fpdf#search=%22committees/commrep/868db039-2384-4ce9-a502-1354709677d2/0000%22
On Tuesday 18th August, Bill Mitchell, Professor ofEconomics and Director of the Centre of Full Employment and Equity(CofFEE) at the University of Newcastle, and the Australian co-founder of MMT,posted a rejoinder on his blog. The rejoinder was headed “RBA Governoradopts a political role to his discredit”. See: http://bilbo.economicoutlook.net/blog/?p=45630
Bill Mitchell,
In your blog you criticised the Governor of the RBA, Philip Lowe, for making “a series ofpolitical statements outside of his official role as central bank Governor”.
Philip Lowe was responding to the following statement by the Chair,Tim Wilson: “…it sounds to me like you're saying that monetary policy isexhausted, in terms of what can be done to provide economic recovery”.
You summarised Philip Lowe’s response under two headings: ReformingIndustrial Relations, and Furthering Deregulation. This is your summary:
1. “Reformingindustrial relations – reread, further deregulation that has alreadydramatically undermined the ability of workers to share in productivity growth,created a working poor underclass, cut the wages of the lowest paid, and more.
2. Furtherderegulation – to reduce oversight on private infrastructure projects, reduce“planning and zoning restrictions” (read: make it easier for greedy propertydevelopers to invade neighbourhoods and build more towers that later have to beabandoned due to shoddy construction techniques)”.
Your summary verbals the Governor. This is what Philip Lowe actually said:
Mr Lowe:I wouldn't say it's exhausted; I think there are limits to what more it canreasonably do. We could make some adjustments to the package we introduced inMarch. I don't think that at the moment we would get any traction from makingadjustments. But the main thing going forward is going to be fiscal andstructural policy; that's the reality we face.
CHAIR:You then said, just at the end of your remarks, that you see the solution beingthe promotion of an environment that enables business to expand, invest andinnovate. Do you want to outline for us where you see possible or importantreforms that can enable industry, businesses and enterprise to do so?
Mr Lowe: I don't have a shopping list of things that I would liketo do, but I have a shopping list of general areas.
One is the industrial relations system. I think there's a processgoing on at the moment to try to make the enterprise bargaining system moreflexible so we can get back to a world where businesses and employees can gettogether and make their businesses work effectively rather than be weighed downby process, which is what happens at the moment. So industrial relations isone. I think the general approach we have to innovation—the financing ofresearch and development—is an area to look at.
Another area is the general approach to regulation. There are manyexamples at the moment of projects taking a long time to be approved. Thatslows down the dynamism of the economy. Planning and zoning restrictions Ithink is another area where we could do things to make the system and theeconomy more dynamic, as is, over time, making sure that we have a workforcethat has the right skills and that is adaptable.
So it's human capital, physical capital, skills, regulation andthe labour market; they're the areas that we should be focusing on.
Later inhis evidence to the Committee, Philip Lowe was asked by Adam Bandt: “Given that the government could get better rates by effectively having you finance the debt rather than by going to the private markets, why shouldn't we be looking now at getting people back into work through having the Reserve Bank assisting with the financing of some government debt?”
This isPhilip Lowe’s reply: “I agree 100 per cent with you that we should be lookingat programs to get people back into work. I, like you, am very concerned aboutyoung people. In a way, they're paying the price to keep the rest of us safe.We talked earlier about the uneven nature of what's going on. There are manypeople who still have jobs and who have been going about their lives reasonablywell, and there's another group of people who are suffering tremendously. I seethose people as really paying the price so that the rest of us can stay safeand the economy can eventually rebound. We need to protect those people who arepaying the price right now. So I agree with you.
Thesolution, though, I don't think is monetary financing by the central bank. As Isaid in the introductory remarks, if we were to finance the government itdoesn't change the intertemporal budget constraints; the government would stillhave to ultimately pay for the spending. There would either be inflation if wedidn't control it properly, or the banks would pay through implicit tax, orthere would have to be higher taxes later on for the government to pay back themoney the Reserve Bank had extended to it. The financing is not an issue. Thegovernment can borrow this morning for 10 years at 0.9 of one per cent and canborrow for three years at one quarter of one per cent. So the financing is notthe problem here.
The firstorder issue—and I think this comes back to modern monetary theory as well—isthe idea that the government should just keep spending to achieve itsobjectives. It's called modern monetary theory; it's really some propositionsabout fiscal policy. The first proposition is that the government should justkeep spending to achieve their objectives—either full employment or inflationor whatever. The second proposition is that it shouldn't worry about financing.But the first proposition is that the government should keep spending. Somodern monetary theory really isn't about anything monetary; it's really aboutfiscal.
I thinkthat's where the debate needs to be: how much government spending should therebe? Resolve that answer, and I'm not worried at all about the financing. TheAustralian and state governments will be able to finance themselves atextraordinary low interest rates for a long period of time. So the financingconstraint is not the issue.”
RogerTonkin
FormerLecturer in Econometrics, Macquarie University (Retired)
20thAugust, 202
