Tuesday, 13 September 2011
If only Dani Rodrik understood MMT.
Dani Rodrik trotts out, and goes along with the alleged dilemma that 99% of the elite in the US and Europe think they face. This is that stimulus is needed, but governments are already heavily in debt and can thus allegedly cannot afford much more stimulus.
The latter so called dilemma is a complete non-problem for those of us who understand Modern Monetary Theory (MMT). Rodrik’s solution to the problem is to have what he calls an “independent board” solve the problem. Well that was easy, wasn’t it? Let’s solve the world hunger problem and global warming by appointing committees to solve those two problems. Put another way, the $64k question which Rodrik doesn’t answer is exactly what ideas and principles does his “board” use to solve the problem. The principles / ideas should be as follows.
The structural debt and deficit.
Re the structural part of the debt, reducing it is child’s play: just print money and buy back the debt (i.e. Q.E. it). To the extent that that is too stimulatory or inflationary, just raise taxes and use the money collected to buy back more debt. The money printing element is stimulatory/inflationary, while the tax element is deflationary. Mix the two in the right proportion, and the net effect is neutral. I.e. GDP remains unaltered, as does the total number employed, etc etc. Meanwhile big chunks of debt disappear.
Of course the latter wheeze COULD to some extent result in debt being replaced with monetary base, which might seem a bit of a cheat. Explaining the reasons why this is not a cheat leads us nicely into the question as to how to deal with the “non-structural” part of the debt and deficit, i.e. the stimulus element. After that it will hopefully be apparent why no “cheat” is involved.
The stimulus element.
Rodrik makes a big mistake when he says that “Everyone agrees that the country’s public debt is too high and needs to be reduced over the longer term.” Well MMTers don’t agree it is too high. In the view of MMTers, private net financial assets (of which the debt is an important part) need to be whatever induces or “stimulates” the private sector into spending at a rate that brings full employment.
If that level of assets happens to be larger than ever before, so be it. If it happens to be smaller than ever before, so be it.
A predictable response to the latter point is that debt involves paying interest, and there must be some limit to the interest rate burden that governments can carry.
Well at the moment, the REAL rate of interest on US debt is NEGATIVE!!!!! So there is not much of a problem there. However, if rates turn significantly positive in the future, then obviously there is a problem: a problem which calls for a solution.
And the solution is simply to have the above mentioned government issue net financial assets consisting of NON INTEREST PAYING debt: i.e. cash, or monetary base. Put another way, if a government wants to spend more, what on earth is the point of it borrowing something (i.e. money) which it can produce in infinite quantities itself? Paying someone else to borrow something which you produce yourself for free is RAVING BONKERS!!!
Milton Friedman in 1948 advocated a monetary / economic system which incorporated the latter idea: i.e. a system under which governments issue no interest paying debt. (See page 250).
It would be nice of today’s so called economists had actually studied economics and knew about ideas which are now over sixty years old.
Readers will hopefully have tumbled to why the above “cheat” in connection with the structural debt and deficit is no cheat at all. Assuming the interest paying debt is reduced (or, a la Friedman, abolished), then the monetary base needs to be whatever “stimulates” the private sector into spending at a rate that brings full employment without too much inflation. If that level of monetary base is $1 per person, so be it. If it happens to be $10,000 per person, who cares? The IMPORTANT point is to bring about full employment.