Not caused by modern monetary theory

For those who don’t know Richard Murphy was the inventor of Corbynomics. He also pushes a number of, hmm, interesting economic ideas. I’ve had much sport this past decade and more examining his claims and truth be told there’s always one or more hole in his assertions.

The basic problem is that he’s simply not well rooted in economics. He’s trying to work from first principles, which is just fine. But when he reaches what actually might be a correct answer – which he has on occasion – he’s unaware that other people have also had that thought before. And thus he’s entirely ignorant of what thousands of other people have mused about the same point over the past couple of centuries. This is obviously also true when he reaches a wrong answer.

If you like, it’s the incompleteness, stemming from ignorance, which is the problem. At which point, we have this:

What it says is that hyperinflation only happens in some very particular circumstances:

Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy – to name a few.

I think we can safely rule out MMT as creating any such risk then.

As such will all those referring to Zimbabwe and the Weimar Republic kindly take note and presume henceforth that they will be deleted? Normal levels of government spending intended solely to create conditions of full employment have not, and never will of themselves, create hyperinflation. It’s a suggestion not even worth debating.

D’ye see the missing bit there? Quite, he’s glided over both the “to name a few” and also the “political mismanagement.”

The problem with Modern Monetary Theory being that it provides wondrous opportunities for such political mismanagement. I’m entirely willing to agree that the central insights of MMT are correct. Fiat currency is just government created. Government can indeed just print more to finance spending. Tax can indeed be used to reduce any subsequent inflation. I’m entirely fine with all of those as possibilities.

I don’t think they work well, printing money to spend is known as monetisation of fiscal policy, not something with a great track record. I can’t see how taxation, happening as it does in arrears, can be used to fine tune inflation. But that’s not my point about MMT at all – rather, that it’s a positive encouragement to political mismanagement. Giving politicians carte blanche to spend whatever they wish just doesn’t sound like the start of a good story.

But let’s think in more detail about the more specific claim. Hyperinflation only happens under very specific circumstances therefore MMT isn’t going to be a problem. And I’d agree that Weimar isn’t an example of MMT going wrong, nor was Hungary’s experience with the pengo. Zimbabwe’s was – they just kept printing money until that last set of 100 trillion Z$ bills weren’t worth enough to buy the ink for the next set. Sure, it was political mismanagement but then I’m arguing that the monetisation of fiscal policy actually encourages such.

From that Cato report there are other such incidences. Peru in 1990, for example, had hyperinflation:

The García government reacted to the growing external deficit in exactly the same way as had the governments of Velasco and of Belaúnde—by postponing corrective action while the problem continued to worsen. As ever, a major fear was that devaluation would worsen inflation. Inflationary pressures were, in fact, beginning to worsen behind the façade of control. To some degree, they were growing in response to the high rate of growth of demand and output, reducing margins of previously underutilized productive capacity. But the more explosive pressures were being built up by relying on price controls that required a dramatic expansion of credit to keep the system in place. Prices of public sector services—gasoline above all, oil products in general, electricity, telephones, and postal services—were frozen at levels that soon became almost ridiculous in real terms. The restrictions on prices charged by state firms drove them ever deeper into deficits that had to be financed by borrowing. The borrowing came from wherever it could, but principally from the Central Bank. At the same time, Central Bank credit rose steadily to keep financing agricultural expansion. Still another direction of Central Bank credit creation was the financing used to handle the government’s new structure of multiple exchange rates. Differential rates were used to hold down the cost of foreign exchange for most imports, again with the dominant goal of holding down inflation, while higher prices of foreign exchange were paid to exporters to protect their incentives to export. The Central Bank thus paid more for the foreign exchange it bought than it received for the exchange it sold.

The term used for these leakages—for extensions of Central Bank credit that did not count in the government’s budget deficit—is the “quasi-fiscal deficit.” Its total increased from about 2 percent of GDP in 1985 to about 4 percent in 1987. Meanwhile, the government’s tax revenue fell steadily in real terms, partly because of tax reductions implemented to hold down business costs and partly because of the effect of inflation in cutting down the real value of tax payments. Added together, the fiscal deficit plus the quasi-fiscal deficit increased from 5 percent of GDP in 1985 to 11 percent by 1987.

The two horsemen of this particular apocalypse—the external deficit and the swift rise of Central Bank credit—would have made 1988 a bad year no matter what else happened. But President García guaranteed financial disaster by his totally unexpected decision in July 1987 to nationalize the banks not already under government ownership. No one has yet been able to explain why he decided to do so.

Corbynomics requires price fixing of energy, no? Wages, rents and so on? There’s certainly been some talk of nationalisation of banks. We might argue about a difference of degree, yes, but is it really all that different?

Bolivia’s 1985 monthly peak rate of 183%, Peru again in 1988, Brazil in 1989, these don’t seem to have been caused by external problems but purely by internal mismanagement.

All of which means that we can’t so blithely dismiss the idea that MMT will lead to hyperinflation. Sure, there are examples of hyperinflation which have obviously been caused by war or other gross disturbance. But we’ve also examples caused just by having blithering idiots in government. Which means yes, we do need to worry about the possibilities of blithering idiots being given free hand with the printing presses.

Don’t forget, we’ve not got to prove that MMT always causes hyperinflation, nor that all hyperinflations are caused by idiot governance. For either and both to be a concern we’ve only got to show that even once or twice idiot governance has led to hyperinflation. As it has. All of which rather leads to the Dirty Harry line when considering offering those monetary powers to those who might get elected…’ve gotta ask yourself one question. “Do I feel lucky?” Well, do ya, punk?

No, I don’t. You?

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  1. “Tax can indeed be used to reduce any subsequent inflation.” Pretty sure this is just false. Coercive transfer from one group of people to another is unlikely to affect the general price level.

    Modern Monetary Theory, being modern, has not created any hyperinflation. Yet. But a little more understanding would be better than declaring, “It’s a suggestion not even worth debating.” Take Zimbabwe off the agenda? In this case, it is quite clear what caused hyperinflation: printing banknotes with impunity and without regard to any benchmark, merely for government to have cash to spend. As for whether this spending was “intended solely to create conditions of full employment,” good intentions don’t matter.

    • The main issue with it is that it just another name for tax and spend. Under traditional theory the government taxes and then spends. If they print too much then they get into trouble.

      Under MMT the government spends and uses taxes to make sure they don’t get into trouble. So spend more and taxes have to go up.

      You effectively move from a high tax / high spend economy to a high spend / high tax one. It makes not the blindest bit of difference either way; other than the risks under MMT are higher!

  2. Whilst having a shite and pondering about Modern Monetary Theory (MMT) and tax havens at the weekend a thought occurred to me that was, maybe, lost in that rather long item. For that reason I repeat it now. I said:

    Whereas neoclassical economics is designed to suggest the government has no role in an economy, MMT says (not by design, but because it is a fact) that government choice is implicit in macroeconomic management.

    I added:

    MMT might be descriptive, [but there] is within the process it describes an economic theory that demands macroeconomic management in a way that is the precise opposite of the neoclassical economic prescription which suggests that governments must leave everything well alone.

    I want to stress the significance of this. It is why Simon Wren-Lewis is wrong, in my opinion, when he argues that MMT is just a subset of neoclassical Keynesianism. It isn’t.

    Neoclassical economics is built on the assumptions of microeconomics that say that all government activity is a market aberration and therefore to be minimised. It is this logic that underpinned the idea of the cowardly politician that I described in The Courageous State (summarised here). They, when encountering a problem assume the market will always have a better solution than any they can create and so run a mile in the opposite direction. The consequence has been feeble government, impoverished political thinking, austerity and a collapse in well-being.

    The MMT politician does, on the other hand, have to be courageous. It is their job to decide how to put the resources of the economy to best use to the point where full employment is reached, when it is their job to then maintain economic stability. They have to intervene.

    This is not accidental: this is what the logic of the two systems delivers. And they are fundamentally different. Modern monetary theory cannot be a footnote to Keynesianism in its various guises; it is something that demands a whole new approach to political economy.

  3. “… these don’t seem to have been caused by external problems but purely by internal mismanagement…”

    Then we stand a fair chance of hyperinflation in the UK in the not too distant future as I see just about all of our main political contenders being overqualified in the field of mismanagement.

  4. Spike

    If I understand it correctly, MMT says that when you tax you destroy that money (that you earlier “just printed”). Ie, taxation is the destruction of money (to prevent inflation in theory). So no, it’s not recycled.

    • I don’t believe that. The tax payments are every bit as spendable after their confiscation as they were before. All other things being equal, seizing $1 obviates creating $1 of play money or debt-that-will-never-be-repaid, but that’s not a direct effect of the tax. Nor do all other things often remain equal.

      • “I don’t believe that”

        I’m not sure I follow? Are you saying I’ve misunderstood what MMT is saying or that MMT doesn’t understand what it is claiming? 🙂

        In the context of the “spend first / tax it back later” idea, I’ve understood that phrase to mean that quite literally they create money (rather than borrow it) to spend? In accy jargon, Dr Cash, Cr “myithical reserve” (ie the magic money tree!) (#), and then Dr “paying a diversity officer”, Cr Cash as they piss it against a wall.

        And vice versa when it’s taxed. But taken away from soneone who probably created real value in order to earn it! Between those two points in time, there genuinely is spare electronic paper floating around the economy.

        Otherwise it is no different to normal borrowing that is Dr Cash, credit liability (ie owed to the rest of the world wanting bonds etc). In the normal borrowing scenario, except for QE, all £ financial assets and liabilities match out (all savings are someone else’s borrowings).

        Hence when you say “the tax payments are every bit as spendable after their confiscation as they were before”, that’s unnecessary? If they want to spend they will just go print some more (and tax that extra back later as well).

        In the MMT world, it’s the quantum of the mythical reserve they need to keep under tight control, and in reality of course they won’t.

        Apologies if I’ve misunderstood you. And if I’ve got that wrong, then please someone say so, and explain which bit? I easily forget stuff, and especially when it’s bollocks to start with.

        # – I’m using “reserve” in the accounting sense, not banking.

        • “I don’t believe that” means I don’t believe that claim of MMT.

          When I say “the tax payments are every bit as spendable after their confiscation as they were before,” I mean the tax man does not accept a declaration that some of my wealth is now his; he wants a check, wire transfer, etc., which means that some ability to draw silver is now out of my hands and into his. That is the essence of the decision to tax me. They may then pay it out to a diversity officer, who does not in fact piss it against a wall but outbids me for a new car.

          Of course they can print more money – or create credits without hitting the PRINT key at all – but that is an entirely separate action.

  5. “Political mismanagement”

    It’s not just a possibility – it is highly likely?

    Power hungry parasites that many of them are, a politician’s number one priority is getting themselves elected. They generally don’t get elected saying that they are going to tax more. They get elected by promising the opposite: lots more smarties, for everyone. And lying once elected (and taxing more) generally won’t help them get re-elected.

    Hence you try and do everything you can not to give the buggers the tools / opportunity / excuse, not the exact opposite.

  6. Twatting on Timmy is a pretty feeble version of Murphy Richards. It would help if he had some grounding in the subject, just for starters. Where to begin with this moronic assertion

    Neoclassical economics is built on the assumptions of microeconomics that say that all government activity is a market aberration and therefore to be minimised

    ? Reference required?

  7. We should all be grateful for Mr Murphy’s presence on the international economic stage, for he is the inventor and sole possessor of the Anti-inflation Remedial System (ARS).

    Mr Murphy’s ARS will be the saviour of international socialist economies.

    Take Venezuela (please) where socialist policies have led to 13,000% inflation (h/t this august organ). It was indeed the perfect socialist society, apart from one teensy, weensy lack. They had no access to Mr Murphy’s ARS. Had they used Mr Murphy’s ARS for the purpose that it was intended, they could have fine tuned the rate of inflation to within 0.00001%.

    The only tiny, nay, almost non-existent flaw is that Mr Murphy is unsure just when to use his ARS, believing as he does that !%, 2% or 5% is the optimum rate. The solution would appear to be that as Mr Murphy is desperate for enoblement, the socialist economy has to create a House of Lords before it has access to Mr Murphy’s ARS. I have a small piece of advice to any aspiring socialist economy. Think of the HoL as a sort of KGB shop.

    Job done.

    • About time you stop pretending Venezuela tells us anything about how to run a country, either for or against. It’s not socialist, or Chavez-ist, or anything of the sort: it’s a gangster state. The entire country is run by organised crime, and has been for at least 20 years. Gangs with guns keep the population in line.

      If you want to talk economics, there’s an interesting question about whether drug-smuggling can induce something similar to Dutch Disease. To put some sense of scale on it, Venezuela exports more cocaine and cannabis than oil, by a wide margin. But mainly it’s a case of all-bets-are-off, because any profitable enterprise will be stolen.

  8. It really is about time you admitted that Murphy makes complete sense in the context where he can’t come right out and say ‘MMT won’t cause inflation because this time we’ll kill the Jews first’. ‘It was the Jews’ is the sole argument being advanced by those claiming the Weimar Republic’s hyperinflation wasn’t caused by money printing – the same one Hitler used as justification for the Holocaust. How many euphemisms do you want Murphy to invent?

  9. Try as i might I can’t get my head around this idea that we can use tax as a fine tune control to either prevent or cure inflation caused by increased government printing or borrowing. Each time I read something about it I come away thinking that its just a wavy arms justification for more government spending and that this time it will be different whenever we point to Germany, Zimbabwe, Venezuela or even 1970s Britain.

    Either they are omniscient and know that the next slug of printing or borrowing will increase inflation above their target and they will stop and increase taxes to mop any residual, or they will have to rely on inflation measurement which is a lagging indicator.

    Even they don’t believe they are omniscient, well at least the more sensible amongst them don’t, so they’re going to rely on inflation measurement to tell them when to raise taxes and by how much. This is like driving using only the rear view mirror and by the time they act inflation has happened and a unit of currency has been devalued.

    When they reach this limit they need a way of calculating how much extra to tax to extract so they take just enough to restore inflation to their target without over doing it and crashing the economy by overshooting in the opposite direction, and yet again they are relying on a lagging indicator to see if they got it right. As others have said, they have to now destroy that incremental amount of tax raised to get the money supply back to their equilibrium.

    Having achieved that unlikely scenario they then need to stop the printing presses and/or increasing borrowing, which will be like taking taking two year olds out of a sweet shop when they’ve been allowed free access or worse still telling MPs of the governing party they might lose their seats at the next election.

    My real problem with it is that the beneficiaries of this government largesse will have consolidate their cash in to wealth eg buying a more expensive house, purchase of white goods etc before inflation kicks in and the rest of us have to pay for it in the form of increased taxes and destroyed savings.

    Or have I missed something?

    • The theory is OK – it’s just the other half of Keynesianism. Running a budget surplus is contractionary, just as a deficit is expansionary.

      It runs into the same problem – theory’s fine, reality is complex.

  10. We don’t have to reach hyper-inflation before we run into problems. Any inflation transfers wealth from one group to another. 25% isn’t considered hyper-inflation, but it’s certainly no way to run an economy.

    And what would the Bank of England do? If still independent, interest rates would rocket to choke off inflation. If not, that rather implies that inflation would rocket instead.

    The whole thing is nuts!