In 2013 French economist Thomas Piketty’s book ‘Capital in the Twenty-First Century’ was released and became a best seller.
On May 18, 2014, the English edition reached number one on The New York Times Best Seller list for best selling hardcover nonfiction and became the greatest sales success ever of academic publisher Harvard University Press. As of January 2015, the book had sold 1.5 million copies in French, English, German, Chinese and Spanish.
Piketty’s long book labouriously traversed years of taxation records in various countries. It’s thesis however was relatively simple- capitalism has an inbuilt tendency to create greater and greater inequality and this can only be checked by state intervention. Capitalism’s tendency to produce inequality results simply from the rate of return on capital generally exceeding the rate of economic growth. Returns on assets, like real estate and shares are disproportionately held by the wealthy. Because they rise faster than overall economic growth, the total overall proportion of wealth held by the rich must increase relative to everybody else.
Piketty proposed that a progressive annual global wealth tax of up to 2% to redress inequality. Obviously that hasn’t happened.
In early June Stephanie Kelton’s book ‘The Deficit Myth’ will be released in Australia. This book may well be the next best seller book on economics.
Kelton is a proponent of Modern Monetary Theory (MMT). So what is MMT?
Its proponents say that it is neither right-wing nor left-wing. It is just a description of how the monetary system actually operates in countries like Australia, the US, and the UK. These are countries where governments issue their own currency and where that currency is not pegged to another currency or the gold standard.
There is a “money tree” in these countries. It is a computer server in the central bank (the Reserve Bank in Australia). This computer generates new digital currency on a regular basis. This is where the money in these economies originates. When people claim there is no such thing as a money tree they need to be asked ” well where does the money come from then?”
The way the monetary system operates is not how most people and many economic commentators imagine it to be. They imagine that governments must first tax or borrow before they can spend. MMT says the sequence is the opposite- governments spend first. After they spend they can then tax or borrow in amounts that match their spending. That this is the actual sequence is not contested by anybody. MMT also asserts that whether they tax or borrow to offset the amount they have spent is a policy choice.
All economies are resource-constrained. This means that they have a limited amount of natural resources, skilled labour, existing economic infrastructure, etc. But there is no operational constraint on how much money a currency-issuing government can create. The only constraint is an economic one. It is an important one. Government spending is constrained by the risk of inflation.
Inflation occurs when the amount of money in the economy exceeds the economy’s productive capacity to produce enough goods and services to absorb that money. To avoid this, government taxes back some of the dollars it has spent into the economy. Rather than taxation receipts being necessary to fund government spending, for MMT the important function of tax is to limit private spending so that the government can spend without causing inflation.
MMT still recognizes that taxation also has other important functions. Because taxes must be paid in the currency-issuing nation’s own currency, the requirement to pay tax creates the demand for that currency. Tax can also be used to redistribute wealth or to provide incentives or disincentives for different types of investment or spending (to disincentivize buying cigarettes for example).
So what does MMT say are the limits on government spending that increases the productive capacity of the economy commensurate with the new money invested? The answer- there are none. The government does not need to tax or borrow to engage in this spending. This view has huge implications in relation to the real choices a Federal Government can make in providing further economic stimulus in a highly deflationary economic environment.
In a recent webinar, organized by the left of the ALP in Victoria, MMT economist Steven Hail imagined a hypothetical question from ABC journalist to ALP federal leader, Anthony Albanese. The question was “The ALP has called for continuing economic stimulus. How do you propose to pay for your plans?”
Under current conventional economic policy settings Mr. Albanese would answer “We would like to have the budget in surplus. But we will have to borrow the money now while interest rates are low and then pay the debt back later”.
Mr. Hail says that an answer informed by MMT would be “Parliament will authorize the expenditure. The Parliamentary Budget Office has assessed our productive capacity and the spending will not be inflationary”.
The Parliamentary Budget Office operates to provide transparency around fiscal and budget priority issues, provides confidential costing services to all parliamentarians, and publishes a report after every election that shows the fiscal implications of major parties’ election commitments.
There has been precious little attention given to MMT by the Australian media. An exception has been Alan Kohler who conducted a lengthy interview with leading Australian MMT economist Bill Mitchell.
The publication of Ms. Kelton’s book will likely result in further media attention. Politicians and think tanks will be asked to comment. Some will react by claiming MMT can only result in hyperinflation. Such claims require scrutiny and one hopes the debate may reach a higher level than that. A Cato Institute study of all 56 recorded hyperinflations found that they have only occurred under extreme conditions such as war or a complete collapse in the productive capacity of a country. Hyperinflation has never been a consequence of monetary policy or politicians creating new money just before an election.
Watch this space!
This video provides a six-minute explanation of the basics of MMT.
—Mohamed El-Erian, chief economic advisor, Allianz