Underlying many of the wildest spending promises made by the most irresponsible political parties this election is an idea popularised by so-called Modern Monetary Theory, aka Magical Monetary Theory. This is the idea (as articulated by Chloe Swarbrick yesterday) that "the right-wing mythology around a government budget being the same as a household budget is exactly that, a mythology."
According to MMT theory, government budgets differ different to normal household budgets (to over-simplify just a little bit) in that the money for government spending literally grows on trees.
If you need more, just print more.
To be perfectly fair, there's a little more to it than that. But not much. And for politicians promising billions of dollars of overspending, for whom the seduction of easy money is irresistible, anything close enough is good enough.
So what more is there? For a government like New Zealand that uses its own currency, MMT argues that government spending does not depend on first raising revenue through taxation or borrowing. Why? Because:
A monetary sovereign creates the dollars by spending and then those dollars disappear when taxed or are transformed into government bonds when the government runs a deficit. The government, therefore, is not financially constrained. MMT proponents argue that government deficits are private-sector surpluses, public debt is private wealth, and big government programs shouldn’t be limited by questions such as “How will we pay for it?” The real constraint, they insist, is the availability of labour and other resources.
So keep printing until all labour and resources are on fire. And then stop.
"Stopping" is just one of the many political problems with the economic argument: there's barely a politician in the known universe who can stop (over)spending once started.
So it's fortunate that Jonathan Newman has enlisted several luminaries to explain in a new book, from an Austrian perspective,
what the MMTers get wrong. [FREE DOWNLOAD
HERE of an advance PDF copy].
Newman is also giving a chapter-by-chapter summary on
Twitter of the main points, often engaging there with the theorists of MMT -- insofar as they're able to. These are some of the highlights...
Chapter 1 dismantles MMT’s foundational myth that money originated with the state. ...
Chapter 2 diagnoses the “spending illusion” that infects MMT. Joseph T. Salerno shows that MMT is “the unwanted stepchild of the neoclassical quantity theory” ... The spending illusion not only persists in MMT but is put on steroids, resulting in bizarre claims about how the state institutes money and policy prescriptions that “will inevitably distort prices and interest rates, divert resources from those uses that best serve consumer preferences, precipitate inflationary booms and asset bubbles, and generate financial crises and economic depressions.”
In chapter 3, Robert P. Murphy refutes the claim of MMT proponents that government debt represents private sector wealth. The so-called sectoral balance approach ["their debt is your money" say MMTers] is employed by MMT proponents in misleading ways. They imply that the only way the private sector as a whole can save and invest is if the government accumulates debt. Murphy exposes their faulty assumptions and sins of omission. Importantly, government debt is repaid with both explicit and implicit taxation (money creation), meaning that government debt service ultimately comes at the expense of the private sector. ...
In chapter 4, Patrick Newman demolishes the idea that government spending can ever be productive. ... Government spending ... should be considered consumption and not investment. Newman reviews the concerns held by Simon Kuznets [the inventor of GDP analysis] about the inclusion of government spending in aggregate production statistics, and then evaluates the growth-inhibiting consequences of government spending in light of its true nature: waste.
In chapter 5, Karl-Friedrich Israel exposes the faulty premises of MMT’s inflation management aspirations. MMT acknowledges that price inflation is an important constraint on government spending. [The author shows that] attempts to measure and respond to price inflation are bound to fail however ... [Furthermore] MMT has no dependable guide for determining if, when, and where government spending is pushing beyond productive capacity [or whether politicians would ever have the capacity to stop spending once started].
In chapter 6, Per L. Bylund points out [that] ... MMT proponents entirely ignore the wealth-creating, resource-economising market process—entrepreneurship and economic calculation are wholly absent from MMT analysis. Instead, they reason from accounting tautologies ... and assume that policymakers can effectively and efficiently manage scarce resources without market prices and the profit-and-loss mechanism.
In chapter 7, Joshua A. Mawhorter shows that MMT prescribes policy from a “privileged position,” taking for granted the laissez-faire preconditions for monetary sovereignty, and instead proposing policies that would undermine it. [Ayn Rand called reasoning like this as committing the Fallacy of the Stolen Concept.] It is this monetary sovereignty, according to MMT, that opens the door for deficit spending, debt monetisation, and government control of resources ... [yet a]chieving monetary sovereignty requires quite the opposite: limited government, sound money, and a flourishing private market economy based on capital accumulation. The US is the MMT proponents’ “monetary sovereign par excellence,” but its economic history exhibits institutions and policies condemned by MMT.
Chapter 8 is the chopping block for the MMT job guarantee proposal [reflected in the Greens's own $8 billion "green jobs guarantee"]... MMT overlooks the fact that apparently idle resources are in such a state for a reason. Resources may have no known valuable use or may be held idle temporarily because the owner anticipates a valuable use in the future. Labourers may withhold their services because they value leisure more highly or as a negotiating tactic in a labour strike. A ... job guarantee programme [financed by printed money] would not reduce idleness in the way MMT proponents desire but merely redirect valuable resources and labour away from productive and economising uses and toward wasteful projects chosen by central planners who are inherently unable to engage in economic calculation.
As you'd expect, the book is filled with countless examples illustrating the arguments.
It's out officially in December, but fortunately you can download a PDF advance copy now just in time to send a copy to your favourite politician ...
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