The US Congressis to vote on a Bill condemning Modern Monetary Theory (MMT).
Yesterday (Monday 29thMarch), Bill Michell, a co-founder of MMT and Professor of Economics atNewcastle University (Australia), published on his blog a copy and a detailed criticismof the Bill, and a defence of MMT.
I submitted a lengthy comment (seebelow) on Professor Mitchell’s criticism and his defence.
My comment was not approved by theblog’s moderator(s) and was not published.
This is the link to ProfessorMitchell’s blog, the Bill, Professor Mitchell’s criticism of the Bill and his defence of MMT.
US Congress to consider a vote oncondemning MMT – signals ...bilbo.economicoutlook.net/blog/?p=47140&cpage=1
My comment:
Apartfrom the claims about inflation and deficits, what other factual errors andwild inferences are in the Bill ?
MMThas its own share of factual errors and problematic inferences.
InAustralia, MMT is its own worst enemy. It makes valid points about the need for increases in government expenditure and the need for budget deficits to boost aggregate demand, to prevent recessions, to recover from recessions, and to reduce unemployment, and for a Jobs Guarantee Scheme to eliminate involuntary unemployment, but its ‘lens’ is distorted.
Itclaims to describe how monetary systems in modern economies actually work, butwhat it describes is not at all how the monetary system in Australia works.
In Professor Mitchell's blog he makes the following factually incorrect claims:
“… there are no intrinsicfinancial constraints on a currency-issuing government …”
“Acurrency-issuing government spends by instructing its central bank to typenumbers electronically into relevant bank accounts.”
“All theelaborate accounting structures and institutional processes that are put inplace to make it look as though tax revenue and/or debt sales fund spending arevoluntary smokescreens”.
In Australia, thegovernment issues currency only in the sense that Australian banknotes areprinted by the Reserve Bank of Australia (RBA), and Australian coin is mintedby the Royal Australian Mint, an agency of Treasury, but notes and coin do notenter into circulation until they are purchased by the non-bank public from theRBA and from the Mint via the banks.
All of the majorG20 central banks, including the RBA, define money as notes and coin incirculation in the non-bank public, plus bank deposits. Bank deposits are thelargest component of money. Bank deposits are created when banks lend to theprivate sector. Bank loans to the private sector are the largest component of bank deposits.
The volume of notesand coin in circulation is demand determined. The volume of bank loans to theprivate sector is demand determined. Neither the volumes of notes and coin in circulation nor the volume of bank loans to the private sector is determined by the government. MMT implicitly acknowledges that this is how money is created when it states that money is endogenous.
Notes and coin incirculation in the non-bank public are owned and controlled by the non-bankpublic. Vault cash held by the banks is owned and controlled by the banks. Bank deposits are owned by the banks and controlled by the holders of those bank deposit accounts, yet MMT persists with the fiction that all money is created and owned by the government.
The RBA isindependent of the government. It does not accept instruction from the government in the implementation of monetary policy. Central bank independence is the international norm. (Stephanie Kelton states on page 49 of The Deficit Myth that the US Federal Reserve is treated as independent by the US Treasury.)
The governmentdoes not spend by instructing the RBA simply to type numbers electronicallyinto relevant accounts. The RBA is the banker to the government. As the government’s banker it processes digital transactions initiated by the government. The government has an account at the RBA. All of the government’s payments and receipts pass through that account. Apart from a limited temporary overdraft facility, the government cannot have a negative balance in that account. This means that the government must obtain revenue from taxation and, if necessary, from the sale of government bonds, before it can spend. That is, the government is financially constrained. Revenue must be obtained first before the government can spend. MMT in Australia must know this, and yet it persists with the fiction that in Australia government spending must occur first to create the source of its revenue.
The source ofgovernment revenue is also constrained. Bank lending to the private sector is subject to capital adequacy requirements and prudential regulation.
We do not live inan MMT world, yet MMT persists with the fiction that we do. This is its blind spot, and the source of its factual errors. Until MMT corrects those factual errors, it will continue to lack credibility.
Roger Tonkin, 29th March 2021, Sydney, Australia
