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.
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…..you’ve gotta ask yourself one question. “Do I feel lucky?” Well, do ya, punk?
No, I don’t. You?