This economic revolution is playing out in real time. Today, they attack the budget.
The budget is built on a lie. Everything we know about the budget is wrong. Every number Josh Frydenburg laid out for us on Tuesday misses the point.
That’s the word from MMT – modern monetary theory.
Ok, so we’re picking up from last week and the week before. I’ve been explaining that the ideological dam has broken. People now realise that the tools we have for managing the economy just don’t work the way we expected them to work.
Quantitative Easing (QE aka printing crap-cans of money) should have created inflation. It didn’t.
So we need a new theory for understanding the economy, and with any new theory comes a new set of tools.
And as I said last week, Munters (my name for MMT proponents) believe that:
- Capacity constraints, not money, create inflation;
- Interest rates are a useless policy tool if there’s no demand (looking at you RBA); and
- Governments are not constrained in the way we thought they were.
The second point there potentially kills off monetary policy and the RBA’s agenda completely, but point three could be a complete game changer.
And budget night will never be the same again.
The key point the Munters make is that the way we’ve been trained to think about the government budget is wrong. It’s the wrong metaphor.
The metaphor we’ve been trained to use is to think of governments as a household. Households can’t live beyond their means, so neither can governments. Households have to balance their budgets, and so do governments. If households are saving money (earning more than they spend) that’s a sign of good money management. The same is true for governments.
All of this is simplistic in the extreme, but Munters are also keen to point out that it’s actually wrong too.
It’s wrong for two reasons:
1. Governments can print money
If a nation is ‘monetarily sovereign’ (it has a flexible exchange rate and issues debts in its own currency), then are no hard constraints on how much money it can print. It might create inflation that way, or it might devalue the currency, but both of these things can be managed, and depend a lot on what else is happening in the local and global economy.
As Munters argue, inflation only comes from capacity constraints, not automatically out of money creation – as QE has proved.
A household obviously cannot print money to pay its debts. If I tried to pay my creditors in JonCoins, I’d probably end up in jail.
Munters argue that given this important difference, it makes almost no sense to compare governments to households.
2. Governments are not in the business of making money
Munters also argue that it’s not helpful to have a government that is motivated like a household (maximising its own wealth) or a business (maximising profits.)
Here the idea of ‘sectoral balances’ comes in. This is just the accounting identity that if the government sector is in surplus then it is lending money to the other sectors in the economy. That necessarily means that the other sectors must be a net borrower, and must be in debt.
So a government that forces itself into surplus, forces households and business into debt.
Is that a great outcome?
And if point one above is true, it’s much worse for households and businesses to be in debt since they can’t print money to pay off their debts.
So while it might be nice at the individual level for governments to be running a surplus, taking the economy as a whole, it’s not clear that a wealth-maximising government is that great a thing.
Not a Free-for-all
This is not to say that Munters think it is a free-for-all and that governments can do whatever they want. It is only to say that governments are not constrained in the way we thought they were – in the way that the ridiculous governments-as-a-household metaphor would have us believe.
And that means that there is a much greater role for governments to print money and support demand than we previously believed.
This idea runs totally against the prevailing economic wisdom.
But the prevailing economic wisdom has failed.
And MMT is an idea who’s time has come.
I’m not arguing it one way or the other. I don’t have a horse in this race. But I can see the writing on the wall. Momentum is with the Munters.
And the implications are going to be huge.
More on that next week.