Modern Monetary Theory (MMT) is a description of the existing monetary system and its interaction with the production mechanisms. It takes a unique viewpoint that highlights opportunities that remain out of sight to traditional methods.
From this viewpoint comes a number of suggested policy proposals. So how do those proposals help keep things running smoothly?
Jobs
We know how MMT helps an economy avoid a recession and pullback. After all, we’ve been talking about little else for the past ten years. You implement a Job Guarantee which injects additional spending into the economy where it is needed at precisely the right amount — all completely automatically.
The Job Guarantee is an advanced auto-stabiliser which implements ‘Spatial Keynesianism’. ‘Spatial Keynesianism’ is just a fancy way of saying that spending happens in the locations that need it. More in some areas and less in others depending upon the level of other activity at the time.
So as the economy moves out of recession and into growth what do we need to do to stop overheating?
Well, firstly, you implement a Job Guarantee which injects additional spending into the economy where it is needed at precisely the right amount — all completely automatically. “Precisely the right amount” means that it is withdrawn progressively and spatially as private economic activity increases. People hired away from the Job Guarantee start being paid with private funds, not public funds, so you get a swap of spending power, rather than an increase.
Over the cycle people come on and off the Job Guarantee which grows and shrinks government spending automatically. All without any politicians or central bank ‘experts’ making any discretionary changes. The result looks something like this over the cycle
In fact, the private sector can be encouraged down the route. Controlling labour supply makes labour expensive which shifts the capital/labour ratio towards using more capital. You can ensure competition is intense because you’re no longer terrified about firms going bust or moving abroad; the Job Guarantee ensures there are always jobs in a locality that people can take. You don’t need the jobs of the private sector; they are a nice to have. This is the correct approach to take, because the private sector actually creates jobs as a side effect of its main task of destroying them with capital investment (hence capitalism, not jobism).
Government can set policy to eliminate price adjusting firms — via a combination of regulatory action (a strengthened Competition Authority with power to break up cartels rapidly) and competitive action. The Post Keynesian view of a firm shows that quantity-adjusting, time shifting competitors will outcompete price adjusters at any given quality level. Nobody gives up market share willingly in a truly competitive market.
Intense competition, and regulatory authorities aiming their 12-bore at price adjusters who break cover, along with tough government purchasing tactics, force businesses to compete or fail. Failure moves workers from the private sector to the Job Guarantee, activates the auto-stabilisation mechanisms and avoids cascade contagion. Only the misallocated resources are purged.
With the Job Guarantee in place you can let firms go bust and can hold firms to a much higher competitive standard than if you are relying on private firms to ‘provide jobs’. Job security is provided by a liquid local job market backed by the Job Guarantee, not by propping up individual firms with state subsidies. Businesses can be treated as cattle, not pets. If we are to have capitalism, we should have it — raw in the teeth and brutal — but merely restrict its effects to the capitalists. Those that survive this Ninja Challenge will then have truly earned their spoils.
The Job Guarantee helps prevents an unsustainable boom by creating an environment where bad firms can fail early and fail often.
Movement between the private sector and Job Guarantee automatically stablises the fluctations in business activity.
Banks
Alongside the Job Guarantee are the Mosler Mechanics for banks. These regulate the asset side of banks and prevent the banks creating another Minsky Moment.
The job of a bank is to promote the capital development of the economy. That is its public purpose; the job it is licensed to do. All other activities that conflicts with that purpose must be prevented.
For banking to be effective it must be boring — bowler hat boring. The job of a bank is to provide capital development loans to the economy based solely upon credit analysis. All other activities deflecting from that purpose are Ultra Vires.
That means:
- Banks can only lend directly to borrowers for capital development purposes (i.e. business credit lines and household loans), and the banks keep those loans on their books until cleared.
- Banks must operate on a single balance sheet. No hiving things off into ‘off balance sheet’ subsidiaries to try and hide them.
- Banks cannot accept collateral. Collateral is a fixed charge over an asset as an insurance policy and aligns the incentives of banks with those possessing assets, not ideas. It stops banks being capital developers and turns them into pawn shops. That is the wrong alignment of incentives. We want loan officers with skin in the game. Their success should depend upon the success of the borrower. Banks should line up in insolvency with the other unsecured creditors (and importantly behind the remaining preferential creditors — employees).
- Depositors are protected 100% at all amounts. A depositor in a commercial bank is holding nothing more than an outsourced central bank account. They are not investors in the bank and should never be treated as such.
- Regulation is provided by the bank resolution agency, which is a public body funded entirely by government. There is no charge or levy to the banks for the operation. The job of the bank resolution agency is to ensure the banks are properly capitalised given their loan book and declare them solvent. If they are not, they take the bank over and resolve it with any excess losses absorbed by government. This aligns the incentives of the regulator. If they get the solvency calculation wrong and the capital buffers exhaust, the regulator stands the cost.
- The Central Bank provides unlimited, unsecured lending to regulated banks at zero interest rates. Collateral serves no purpose since the bank has been declared solvent (and therefore there is no reason for it to be illiquid), and collateralised Central Bank lending just shifts the losses to depositors who are protected 100% anyway.
- Once you get rid of interbank collateral and funding requirements, you get rid of one of the final excuses for keeping Government Bonds. National Savings annuities for pensions (allowing retiring individuals to receive a secure lifetime income) would get rid of the final one. Transferable instruments that confer government welfare on the owners do not serve the public purpose. Government welfare receipt is a social decision, not a market driven one.
As the asset side is heavily regulated, you want the liability side to be as cheap as possible. Unlimited central bank access ensures liquidity for depositors and allows lending-only banks to arise. It gets rid of the Interbank overnight market and replaces it with central bank overnight accounts. It puts the Central Bank ‘in the bank’ as a major investor — with open access to the commercial bank’s loan book via the work of the solvency regulator.
All levies, liquidity ratios, reserve requirements and the like are eliminated. The cost of maintaining the collateral system is eliminated. The result is loans at a low price with the quantity restricted solely by credit quality. As an economy heats up, credit quality declines and loans become restricted — systemically preventing the Ponzi stages of finance that lead to a Minsky Moment.
Proscribed banks, forced to rely on credit analysis for profit, help prevent a boom by issuing less credit as project quality declines.
You get a natural and steady withdrawal of funding that is far more surgically targeted and responsive to local conditions, than the carpet bombing approach of interest rate adjustment.
This leaves the payment system, which should be as costless as cash and clear just as instantly to eliminate transaction frictions. Whether that should be publicly provided, or remain outsourced to the banks is an open question. Depositors are a cost to the bank and would effectively be a tax, but leaving them with the banks would give them an incentive to get the cost of clearing provision down. It may boil down to a political question that depends upon your view of the effectiveness of public and private provision. I’d lean towards an Open clearing system created by the state (or even states) and available to all on an open licence. We want one good clearing system like we have one good Linux.
Banks are currently too complicated, too large, too impersonal, too intertwined and systemically dangerous. They need to be simpler, smaller, more local and relationship oriented in scope. All of which are easy to achieve once you adopt the Mosler Mechanics for banking.
Once again, because there is a Job Guarantee and a government that will use fiscal policy, we don’t need the banks to provide endless credit, any more than we need private firms to provide endless jobs. Banks and firms can be maintained at their appropriate natural size and location as determined by the technological level of the economy and where people actually reside.
Government
MMT describes a currency as a simple public monopoly, and that monopoly rules apply to its use. Where a nation has its own currency, runs its own central bank, floats its currency on the currency markets and has no material state-owned debt in any other denomination, the government controlling the currency is in charge and sets the rules of the game.
Government can command any resources available for sale in its currency and can use its sovereign power to force those resources to be freed up so it can purchase them for the public good.
This is in sharp contrast to the neo-liberal viewpoint which is that government is just another organisation in the system that has to compete for resources by price. Business and banks always get first choice of resources and government has to make do with the scraps. They believe the bankers and businesses should be in charge and that the population are just factors of production to be shifted around, like ingots of steel, as business requires.
MMT shows there is a different approach. You can determine that business and banks are servants of the people. Government can take first choice of resources for the public purpose, then allow business and banks to work with what is left, before hoovering up any left over resources with a Job Guarantee.
The public wrap of the private system provides a containment vessel around the nuclear power of capitalism. We can draw its power without the boom. We can fuel it with public investment and improve the power output.
The focus of government action shifts from money to the actual things we need to buy for the public purpose. Smart people talk about government buying, not spending.
From this, government sets the policy for spending and taxation at a level that allows the Job Guarantee and other auto-stabilisation mechanisms (such as standby investment contracts) to function.
Government keeps the Job Guarantee anchor working by making discretionary policy tight enough to maintain a functional buffer.
Because Job Guarantee jobs are just living wage jobs you don’t need to get people ‘off the Job Guarantee and into work’. They are already in work doing things people see as useful and delivering valuable output. Therefore you can adjust policy more slowly based upon data from the Job Guarantee as to how liquid the buffer is in different parts of the country.
Politicians are almost certainly useless at driving an economy. In fact the only people worse than politicians are central bankers and their lackey economists. Politicians are at least partially grounded in reality because they have to get elected.
Enhanced auto-stabilisation via the Job Guarantee and proscribed banking gets all these people out of the way. Discretionary policy is then decided by politicians in parliament once a year, and the day to day gyrations are handled automatically by the system.
Central bank civil servants can then go back to being anonymous operators, just like the ones operating social security, applying the rules they have been given and keeping out of the limelight. It’s time for the era of rock star Central Bank Governors, waving their expectations fairy wand, to end. There is no factual basis for their actions. If we turned up in a remote jungle and found a tribe managing their affairs in the way we do at present, we’d call them primitive and superstitious. The One Rate to Rule Them All is just as much of a fantasy tale as the One Ring.
Kalecki (1946) §2 made a similar point:
It should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.
The policies MMT put forward reduces the political power of bankers and the ‘captains of industry’. Reducing the scope of bank lending creates spending space in an economy and reduces the need for general taxation. Limiting lending to useful activities is, in effect, a massive tax on the excesses of banking — all without touching a single tax rate. Forcing the ‘captains of industry’ to undertake actual capitalism, where they have to invest heavily, in an environment of scarce labour resources, to gain a profit, is loathed by big business. As Kalecki (ibid.) points out:
The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.
The Job Guarantee takes that power away from business and makes them the servant of the people once again.
The neo-liberal framing of the debate studiously avoids these views, but an MMT analysis brings them both into sharp relief.
Conclusion
MMT is a description of how the current fiat monetary system operates. It takes a different viewpoint on the economic circulation that reveals insights hidden by other viewpoints (deliberately so in the case of neoliberalism).
This reveals new political choices. There is an alternative.
- Monetary policy stabilisation has been an utter failure leading to crippling levels of private debt and inequality. The idea that economic stabilisation is simply a matter of banking policy is Victorian zombie economics at its worst. The One Rate To Rule Them All belief can be rejected entirely, along with all the people that support it.
- Banking can be returned to bowler hat boring. The job of a bank is to lend for capital development and not a lot else. The Mosler Mechanics for banking puts banks back in their box, and at the same time releases a huge amount of misallocated resources for other uses. Private debt is constrained and naturally limited by credit analysis. No more private debt fuelled booms.
- Everybody can have a job in the location where they live with the help of the Job Guarantee. Business is moved from master to servant. Business must wander the nations looking for labour to serve it and compete hard to get any. Or it can engage in actual capitalism, and invest in advanced technology and techniques — eliminating jobs while driving forward productivity and our standard of living.
- We can treat businesses like cattle not pets. Those that don’t make the grade can fail to allow those that do to flourish.
- The gyrations of the economy can be stabilised automatically. We have no need for central bankers doing their Wizard of Oz routine. It’s a waste of money and borders on a superstitious ritual. The last ten years have proved that these experts are nothing of the sort, and it is time for them to find alternative employment. (Perhaps they can join Psychic Sally on tour…) Government can adjust fiscal policy with a long term view once a year in the budget, and leave the enhanced automatic stabilisers to handle the short term wiggles in the interim. We need to get people out of the stabilisation business and let fiscal policy and competitive mechanics handle it instead.
- We can contain the nuclear power of capitalism and make it work for the public good. MMT shows that the government is in charge in its own domain, by virtue of its monopoly over the currency. Government can deploy the resources it requires for the public good, allow the private sector to work its wonders with what is left, and then utilise any remaining capacity with the Job Guarantee. This puts an advanced containment vessel around capitalism giving greater control and output than ever before.
- Government can focus on what it buys and how it buys it. Once money is out of the picture we can get back to what economics is supposed to be about — the allocation of actual physical resources to tasks. If we want more nurses, where are they coming from? If we want buildings, who is going to build them and what with? What were the alternative uses? What are the opportunity costs? Just because government can command resources, doesn’t mean it should. Neo-liberalism likes to imply that market value and social value are the same. The MMT view shows they are very different beasts. Public provision has to be assessed politically on its social value and social costs.
The sovereign state with its own currency is the world’s unit of independent governance — allowing a set of people to manage their affairs in the way they wish without compromising too much to any other set of people. If you believe that system is worth preserving and can work for the good of all then the MMT viewpoint gives you the tools to make it work well.
The globalists and internationalists of both liberal and neo-liberal persuasion won’t like it. But they have failed us and their day is done.
The future is independent states of people operating democratically in co-operation with each other, not world government by an aristocracy of the arrogant liberal elite in thrall to bankers.