Tag Archives: neochartalism

Neochartalists On Turkey, Part 2

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This is in continuation of the post Neochartalists (“MMTers”) On Turkey, written three days ago and which didn’t discuss what neochartalists (“MMT” people) have to say about the crisis. I am looking specifically a blog post Turkey Tells Us Nothing About MMT – But MMT Tells Us A Lot About Why Turkey Is In Trouble by Bill Mitchell written yesterday.

Bill Mitchell is responding to critics and he describes their criticisms as follows:

I have noticed a lot of Internet traffic about Modern Monetary Theory (MMT) and the situation in Turkey at present. Apparently, as the narrative goes, MMT is finally being revealed as a fraud because Turkey’s economy is going backwards and its currency is depreciating rapidly. The logic, it seems, is that if a nation enters rough economic waters and the financial markets sell its currency (although remember someone has to be buying it simultaneously) then that proves MMT is false. An extraordinarily naive viewpoint if you think about it.

As if someone having to be buying it simultaneously is some kind of owning of critics!

Anyways, Mitchell straightforwardly denies there’s some issue with neochartalism in the conclusion:

What is clear, an MMT understanding leads one to worry intensely about a nation that has built a growth strategy on vast amounts of foreign currency debt and expanding exports. The two arms of this sort of growth strategy leaves a nation highly vulnerable to changes of circumstances in world export markets.

Add in a central bank that is also borrowing foreign currencies and showing it intends to use their stores to defend the lira.

Add in a deregulated banking sector that is flooded with foreign debt to maintain profits.

Result: disaster pending.

So at least he accepts there’s a crisis rather than dismissing the whole thing as meh!

I don’t think his point about over-reliance on exports is correct but his main points is the holding of foreign currency debt by the government (or the central bank).

The important point however is that an external crisis will always go through a phase where the government has negative open positions in foreign currency. Neochartalists can always claim that neochartalism is right but that’s useless to anyone. Neochartalists fail to understand why such a thing happens from a monetary theory/finance perspective.

The idea that some governments have to necessarily issue debt in foreign currency comes as counterintuitive but the alternative is shutting down of the foreign exchange markets and economic activity with the rest of the world. When the exchange rate is falling, the government must sell foreign exchange to stabilise. Like buying foreign exchange has an depreciating effect on the currency, selling has the reverse. The sale of foreign exchange shifts foreigners’ portfolio from assets held in the domestic currency to assets held in foreign currency, bringing about a reduction in order flows to sell. But the amount of foreign exchange to be sold can be large. And the above illustrates how governments/central banks would need to obtain foreign currency to sell and in the process become indebted in foreign currency. It’s as simple as that!

Of course the government/central bank can also obtain foreign exchange from purchases in the foreign exchange markets, when exports are high compared to imports, and build reserves this way without affecting the exchange rate too much and many countries’ governments do that, but it’s not always possible as exports depends on competitiveness in world markets and general demand conditions.

Ronald McKinnon—although a neoclassical economist—understood this problem and had a fine description of problems governments face because of the foreign exchange market in his paper Money And Finance On The Periphery Of The International Dollar Standard, published in 2002. See Section 6 on various options available via fixing or floating exchange rates and banking/finance regulation and limitations. You need to filter out the wrong stuff to extract the good parts!

So blaming the government for having government debt in foreign currency isn’t helpful. It’s just like neoclassical economics: the theory goes wrong, blame the actors instead of wondering if your theory might be wrong.

Neochartalists (“MMTers”) On Turkey

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In recent days, the Turkish Lira ₺ has been depreciating a lot. In fact, the President ordered interest rate cuts as he thought it would stop the crash but that made the problem worse. The central bank has sold foreign reserves to try to stop the fall but it doesn’t have enough reserves.

For now, I just wanted to record a ridiculous proposal by Warren Mosler to cut the policy rate to zero, something he has been advocating for every country with floating exchange rate since forever.

On August 31st this year, he tweeted:

I’ve proposed that Turkey cut the policy rate to 0 to reduce inflation and firm the lira.

Randall Wray, in a chapter What A Long, Strange Trip It’s Been: Can We Muddle Through Without Fiscal Policy? in the book Post-Keynesian Principles of Economic Policy written in 2006 made this claim:

… for such a country [a sovereign nation with a floating currency] (even Turkey), both a budget deficit and a current account deficit are indefinitely sustainable.

Clearly, the neochartalists should accept the shortcomings in their theory. There’s a good literature in Post-Keynesian theory about external constraints.

Neochartalists start with a wrong claim “imports are a benefit, exports a cost”. In that they make it look like mainstream theory is for restriction of international trade whereas in reality it’s just the opposite. By starting completely wrong, they reach the most ridiculous of conclusions. Turkey has to improve its balance of payments and international investment position by improving its trade balance. Zero interest rate won’t help.

Link

Marc Lavoie’s Lecture On Policy Response To The Pandemic From A Post-Keynesian Perspective

There’s a lecture (on Zoom) by Marc Lavoie hosted by Department of Economics at Kyungpook National University, from January this year which I only found recently.

The lecture is on some aspects of policies such as fiscal policy, large scale asset purchases by central banks (LSAP, or “QE”) during the pandemic and some comments on neochartalism or “MMT”. Basically distinguishing PKE and neochartalism.

Enjoy!

Neochartalists Arguing For Tax Cuts Again

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There’s a recent article by Randall Wray and Edward Lane for Levy Institute titled Why President Biden Should Eliminate Corporate Taxes To Build Back Better. I mean it’s ridiculous!

Neochartalism (“MMT”) is a trojan horse for reducing tax rates on the super-rich. They tend to argue erroneously  that since output can be expanded by a rise in government expenditure without raising tax rates, it implies that tax rates ought not be raised. Warren Mosler has a proposal to remove most taxes.

To be sure, Wray proposes an alternative without realising that both taxes on profits and alternatives can be done.

Neochartalism is a mix of old and new, with the new part significantly wrong. So it becomes Post-Keynesians in a difficult position as agreeing with many criticisms may sound like helping neoliberals. But with such extreme proposals, Post-Keynesians ought to criticise “MMT” more, simply to distinguish themselves.

Stephanie Kelton Trying To “Out-Right-Wing” Joe Biden ‼

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Joe Biden has been a neoliberal ghoul all his life and has helped oligarchs from a position of power. In recent times—perhaps due to pressure and threat from populists—he has adopted policies such as the recent large stimulus.

Biden is also talking of raising taxes on corporations and Janet Yellen, the US Treasury Secretary has proposed a minimum tax on corporations across countries, to prevent a race to the bottom policies.

Of course none of this means that they’re ditching neoliberalism. It is just a change to maintain the status quo. Elite preservation, basically.

There have been apologia from the left such as by J.W. Mason who has announced that there is a decisive break from neoliberalism! In general the left loyalty in the United States is the highest now, and that’s a sad thing. You won’t find for example, economists criticising Janet Yellen for conflicts of interests after taking $7.2 million in speaking fees from Wall Street, a kind of a bribe.

But there’s something even worse now. Stephanie Kelton one of the leading voices of neochartalism (or “MMT”), has a new opinion article Biden Can Go Bigger And Not ‘Pay for It’ The Old Way for The New York Times with the description:

By focusing on how much revenue they hope to raise from tax increases on the well-off, Democrats risk limiting the scope of their ambitions.

The article is deceitful too, claiming it’s not opposed to tax hikes but in the ending we see:

If Congress and the White House want to be responsible stewards of both society and the U.S. dollar’s value, then rather than focusing on taxation of the rich, they should prioritize and supply exactly what it would take, in terms of real resources, to electrify the nation’s power grid, repair every deficient bridge, give caretakers a living wage, upgrade our railways, and deliver clean drinking water and high-speed broadband to every home.

So you know, trying to out-right-wing Joe Biden, the neoliberal ghoul!

The trouble with neochartalists is that while it’s true that output can be expanded by increasing government expenditure and not increasing tax rates, that doesn’t mean that one can have like government expenditure equivalent to 50% of GDP, with taxes at some 25%. Taxes have to rise, and while more output bring in more taxes, it might not be sufficient enough and tax rates have to rise too.

Obviously, neochartalists’ political positions are a suspect. Obviously the Biden administration’s language is like from a book on neoclassical economics with arguments about “fiscal responsibility” etc, but one of the most reactionary politician has agreed to raise taxes and that is some bare minimum in the path to economic equality, so why try to puncture it?

Neochartalism And International Acceptance Of Currencies

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There was a recent critique of neochartalism by Costas Lapavitsas and Nicolás Aguila at the Developing Economics blog titled Monetary Policy Is Ultimately Based On A Theory Of Money: A Marxist Critique Of MMT.

Now, I don’t think that there is any Marxist theory of money, The true description of money and everything else can only be via using national accounts and the flow of funds, like Post-Keynesian stock-flow consistent models but the article has some interesting critique:

For Marxist political economy, monetary sovereignty depends on the relationship between capitalist accumulation in a nation-state and the ability to acquire world money, which in turn reflects a country’s place in the world market. The need for world money becomes clear once we consider capitalism as a global system, as it is needed for commodity transactions, the transfer of value, and the settlement of obligations among different parts of the world. The passage from the national to the international realm is a major problem for neo-Chartalist theory as there is no supranational state choosing units of account or having the power to tax at the international level.

The capacity to acquire world money necessary for participation in the world market differs dramatically among nation-states, and thus the global monetary system is hierarchically structured. In contemporary capitalism, one country, the U.S.A., issues quasi-world money, subject to competition by others. The lack of monetary sovereignty for other countries, far from being a policy choice, results from their subordinated position in the international hierarchy. This is particularly relevant for analysing economic policy in developing countries, where MMT prescriptions lose much of their appeal …

As long as countries are trading goods and assets with the external world, the acceptability of the currency is critical. Here taxing residents isn’t sufficient to make the currency acceptable to foreigners.

There’s an implicit wrong idea in neochartalism that the exchange rate adjusts smoothly to make things fine. A sort of an invisible hand sneaked in.

So unlike what neochartalists (the ones calling their theory “MMT”) say, floating the value of the currency won’t do the trick. It’s not like there’s always a price, sometimes there is no price to clear the foreign exchange market and the government might need to step in and meet the demands of investors.

Fiscal policy has a strong role to play, but ultimately exports have to rise in the long-run and fiscal policy becomes endogenous to it as Nicholas Kaldor had argued.

To make matters complicated, neochartalists also say similar things without saying that they realised these things only after they were challenged and forced to make changes. Big changes!

Thomas Palley likes to point out that neochartalism is a mix of old and new and the new is significantly wrong. The new relies heavily on claims about acceptance of currencies in the international markets. Such erroenous notions make them claim things like current account deficits are indefinitely sustainable. As long as acceptability of the domestic currency is not cast in stone, that’s of course not true.

Joan Robinson On Central Banking And Deficits

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Jo Michell reminded everyone in a tweet of a quote from Joan Robinson with the comment: “Joan Robinson covered pretty much all of MMT in half a page in 1937.”

😉

It’s a passage from her book Introduction To The Theory Of Employment, pages 72-74 (in the second edition):

CREATION OF MONEY THROUGH A BUDGET DEFICIT

A budget deficit financed by borrowing from the Central Bank has effects similar to those of gold-mining. We have already seen how a budget deficit influences incomes. If there is an increase in government expenditure without any corresponding increase in tax receipts there will be an increase in incomes and activity. This is true equally whether the government borrows from the public or from the Central Bank. If the borrowing is from the public there is no further effect to be considered. But if borrowing is from the Central Bank, then on top of the direct effect of the deficit upon income there is the effect of an increase in the quantity of money. For the Central Bank, in lending to the government, increases the ” cash” of the banks, just as it does by buying securities or by buying gold. The direct effect of the deficit comes to an end as soon as the budget is balanced, but the effect upon the quantity of money remains as a permanent legacy.

The increase in the quantity of money, which takes place cumulatively as long as the deficit is running, will tend to produce a fall in the rate of interest and (unless confidence has been badly shaken) the effects of an increase in investment, induced by lower interest rates, will be superimposed upon the direct effects of the budget deficit in increasing consumption.

At first there will be a drag upon the fall in the rate of interest because the direct effect of the budget deficit in increasing incomes raises the demand for money, since the requirements of the active circulation depend upon the level of income. But the increase in demand for money will be very slight (so long as money wages do not rise) compared to the increase in supply, and it is a once-andfor-all effect, while the increase in the supply of money is cumulative.

…

The whole difference between a budget deficit financed by creating money and one financed by ordinary borrowing lies in this reaction upon the rate of interest.

Do The Neochartalists Advocate “Printing Money”?

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The question is wrong 🤡

It’s commonly claimed by the opponents of neochartalism or “modern monetary theory” or “MMT”, that the theory advocates the use of “money-financed deficits” or “printing money”—the lowbrow language. This claim is because of a poor understanding of the theory and I say this as a critic. Many Post-Keynesians who don’t identify as chartalists also keep spreading this. Of course this isn’t the complete story as the neochartalists themselves create this confusion indirectly/unknowingly about their own theory.

Imagine a financial system such as in Canada where banks have zero reserve requirements and little bank settlement balances/reserves outside crises. The government can expand fiscal policy by simply raising government expenditure. You could think of the deficit in one period/year as “endogenous”, which will depend on how much taxes come in, which in turn depends on how the private sector responds to the stimulus (with complications of international trade). The difference between the two will be the “net borrowing” in the language of national accounts. If there’s a surplus, the government would be a net lender. But let’s assume it’s in deficit. The government has an account at the Bank of Canada and it will make this shortfall by issuing debt.

The private sector would have additional income and wealth because of the stimulus and the borrowing. Because: the stimulus would raise output and income of the private sector and also because the very act of deficit also adds to the private sector wealth.

Banks would lend more because of the rise in output would lead to more demand for loans, the central bank has a large control of the interest rates and could even set the whole yield curve. There’s no crowding out and the reserve requirement is zero! Banks would also also have more income and their capital-adequacy would improve to allow them to lend more.

Loans make deposits and in the aggregate they won’t be constrained really in lending although individual banks would need to fund themselves as not raising would cause them to have large overdrafts at the Bank of Canada, the central bank and they might run out of collateral to post at the central bank.

The private sector would decide how much of its wealth it wants to allocate in banknotes and how much in government bonds and other financial assets. If the private sector wants more banknotes, they’ll ask their banks which in turn would obtain from the Bank of Canada by going in an overdraft. The Bank of Canada would buy government bonds in the financial markets and bring the reserves back to zero from negative.

In other words, the amount of banknotes and government bonds that the private sector wishes to hold is entirely decided by the private sector. The phrase “money-financed deficits” implies that the Canadian government and the Bank of Canada decide how much this is and is misleading.

Anything here is a typical story in neochartalism. Although neochartalist would like to go more such as proposing “no-bonds” with all deficit spending from the beginning of time to be reflected in banks’ settlement balances at the Bank of Canada, it’s not like a strict requirement that neochartalism would only work with zero-bonds. They’d be comparatively happy with more fiscal expansion than no expansion or contraction or an expansion which is not much.

The main reason for the stimulus and the rise in output would be the act of increased spending of the government itself. Money vs. bonds decided by the private sector needs.

The reason neochartalists’ claim sound like “printing-money” in the lowbrow language is that the above dynamics is poorly understood by their opponents, because monetarism is a prejudice which affects almost everyone.

But to complicate that’s not all. There’s a Stephanie Kelton paper with the title Can Taxes And Bonds Finance Government Spending?

This misleads the reader into thinking that neochartalists are advocating “printing money” but the arguments above show how misleading the phrase itself is. What the “MMTers” are saying is that the government has a virtually large borrowing ability. The phrase “borrowing” makes us thinking that there is some sort of intrinsic constraint. Hence their rejection of the word “borrowing”.

To prove all this, neochartalists try to draw long T-accounts so that the reader is convinced that everything is fine, government deficit is actually mirrored as private sector deficit, the mechanics of central banking in trying to prove in detail how the government can raise as much funds as it wants, so that the reader is convinced there’s no hanky-panky.

But in an effort to prove that they go into overkill. So for example, typically governments can’t have overdrafts at their central bank because neoliberals have made this the law to “discipline” the government. So some positive critics such as Marc Lavoie would try to constructively critique them in a friendly way but others would simply dismiss them using this as an excuse. Neochartalists would respond to former saying that it still doesn’t constrain the government which is true but it’s not a perfect argument.

And in all this they also end up claiming horribly wrong things that taxes needn’t be increased. That is unfortunate as it gives their opponents an even bigger chance to dismiss them. Some like me have criticised them for this too but “MMT” has kind of become this catch-phrase for everything Post-Keynesian so the ones with bad faith exploit it to dismiss the whole of Post-Keynesianism.

More than that, the story falls short because in the case of open economy, the government has constraints, brought because of historic reasons causing large differences in competitiveness between nations. Trade imbalances can cause fiscal policy to be constrained and the international investment position to be unsustainable.

But this part is a digression for this post. The main point is that the claim that “MMT advocates printing money” is a lowbrow claim.

Another Thomas Palley Critique Of Neochartalism

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The new issue of Review Of Keynesian Economics (ROKE) is out. Thomas Palley has another critique of Neochartalism or “Modern Modern Theory”, tilted What’s Wrong With Modern Money Theory: Macro And Political Economic Restraints On Deficit-Financed Fiscal Policy. 

I don’t agree with many things but it’s worth a read, as has his other critiques been. From a political economy perspective, the problem of the world is the the liberal international economic order which exists and is totalising. This imperialism needs to be overthrown and new order needs to be established. This is completely missed by the neochartalists because they tend to think that as long as a country’s currency is truly floating, fiscal policy can do the trick. Dismissing the constraints brought from international trade, this way.

Globalists need to be defeated.

Neochartalists also do all sorts of verbal gymnastics in throttling any debate about increase in tax rates. In fact Warren Mosler argues for removal of most taxes. Oh wow! How did us mortals miss such a simple solution to the problem of the world!

Basically neochartalists blur the distinction between two separate issues:

  1. Tax rates needn’t rise to increase domestic demand and output.
  2. Tax rates ought to rise for a fair distribution of the national income.

One can believe both (1) and (2) consistently as typically economies run at less than full employment. Neochartalists however use (1) to throttle the debate on (2).

But if you discuss these issues with them, they concede this but yet the next time seem to argue like before. Another way to see this is that they have no proposals to raise taxes even though they have all sorts of proposals everywhere.

Thomas Palley warns us against this hilarity. He says:

More generally, it is pure semantics whether taxes raise money to finance government spending, or taxes destroy money in order to create the space for reissue of money to finance spending. Taxation and spending occur simultaneously, and taxes are an intrinsic part of the system and cannot be done away with. Even when the economy is far from the full employment/inflation target, taxes are needed to finance the vast bulk of spending. Money-financed budget deficits provide some space at the margin for temporary additional spending, which eventually either has to be cut or be financed by some combination of taxes and borrowing when the economy’s constraints bite.26

…

  1. If the economy is away from steady state, and the inflation rate and the money–GDP ratio are both rising, then there will be additional temporary financial space along the traverse to the steady state.

Fiscal policy is hugely important and mainstream economists underplay the role of fiscal policy even after so much fiscal policy came to the rescue in this new lockdown crisis. But the problems are much deeper. Imperialism has to be defeated. A new international economic order with planned trade instead of free trade, together with coordination of policies (including fiscal policy) needs to be established. Without the imperial power of either the United States or other international institutions. But something democratic at the international level. Nor is neochartalists’ claims about the importance of fiscal policy original as there’s a tradition of Post-Keynesian economics stressing the importance.

Neochartalists’ Rhetoric Against Raising Taxes

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Neochartalists (“MMTers”) have a strange political positions. Although many of their proposals can be left-leaning, some of their proposals are highly right-wing. So Warren Mosler argues for removal of most taxes for example.

In a recent “webinar”, Monetary Finance In The Age Of Corona Virus: MMT And The Green New Deal, Stephanie Kelton is seen making similar rhetoric.

click to see the video on YouTube

The irony is that she has been an advisor to Bernie Sanders, the politician who has proposed large increases on taxes on the rich and has even said that billionaires shouldn’t exist (i.e., nobody should have a net worth above $1 bn).

Roughly, her argument is that the super-rich’s expenditure as a proportion of income and wealth is less than the poor and if the US economy has full employment and the US Congress wants to do additional spending it will have to raise taxes to offset the demand rise due to the additional expenditure. But matching $-for-$ doesn’t help, as billionaires only a small fraction of their income and wealth.

But this is a ridiculous argument. Taxes can be calibrated so the government expenditure rise can be matched $-for-$ with a fall in the super-rich’s expenditure. So if the US government wants to spend $1 additionally, it can calculate how much billionaires need to be taxed so that their expenditure falls by $1.