Professor Richard Murphy is a public supporter of Keynesian fallacies and MMT. He recently provided a glimpse into this increasingly popular perspective by alleging that the Bank of England is deliberately crashing the economy by reducing its Asset Purchase Facility (APF).
The latest budget increased government spending, borrowing, and taxes. But as MMT advocates seek to unburden governments from borrowing and think that taxes should be used as a demand-control tool, they would prefer that these were not part of the equation. That said, this sort of budget is preferable to them over a cut in all three. As Murphy sees it, the budget’s success has been scuppered by the Bank of England allowing market borrowing costs to reassert themselves somewhat.
Unfortunately, his allegation fits with neither the timeline nor the policy decisions. For most of the last three years, APF holdings have been reducing (see timeline) and the Bank has been content to let price inflation remain above its 2 percent target for extended periods (including now). In fact, the Bank just lowered its rate in spite of forecasting nearly 4 percent CPI. The argument that they have a bias towards monetary tightness is weak.
The aim of this article will be to elaborate on the errors of MMT that lead to these kinds of judgments, and ultimately, the same problems faced by all central planning schemes.
MMT: Wrong Starting Point, Wrong Conclusions
The beginning, for MMT, is an aggregate (net) spending statistic such as GDP. But all spending is the outcome of subjective valuation, which is completely neglected.
In fact, it warrants mentioning that the removal of the subject—acting man—from economics is a move that requires some justification. It is never forthcoming from MMT advocates, betraying their focus on policy rather than understanding. They are not alone on this, but others focus less on policy recommendations.
How then do they account for the value of money? They think it is determined by the government’s taxation authority. This leads to the idea that production does not have to precede predation if the state can print a sovereign currency. This is true (albeit nothing new), but it only results in a redistribution of wealth already created.
Their conception of value also makes them miss the driving force of the economy: entrepreneurial action that seeks to create value for others. This is replaced by the creation and centrally-planned distribution of fiat currency that is demanded back in taxes.
The Tyranny of Reality
All actors face opportunity costs due to the alternative uses of scarce goods. These can only be obfuscated and shuffled around, not globally evaded. MMT advocates are very cavalier about this with regards to government spending.
Murphy gives an example when he ridicules the idea that the government should need to “balance the books.” Here he is not referring to whether it should ever run deficits, but more profoundly, whether it should be confined by any market reality whatsoever—as if this is a choice to be made.
Murphy’s primary concern is that the government cannot spend as much as he wants it to because it goes along with the “myth” that it must raise money prior to spending it. Why do issuers of a monopoly currency not absolve themselves of such worldly constraints?
But this is not so much a myth as an accepted principle of public finance due to the trade-offs inherent in government spending. High levels of price inflation have never been popular—why must people suffer greater than current levels of permanent inflation?
Alas, it is a point of contention for Murphy that—though the central bank can put its finger on the scales—the treasury often remains at the mercy of the money markets, which operate on the marginal utilities of people who are not willing enough to finance the treasury. Therefore, other means must be used to appropriate the resources. (Murphy claims that MMT is not normative!)
The prescription is for the treasury to create (or, “spend into existence”) whatever amount is necessary to achieve a (to-be-disclosed) desirable level of general price rises, which is necessarily higher than now. Not a wit is given to relative prices, heavily distorted by the spending, but only the rise of the chosen price index. The desired level is imagined to be different from the current level because of the assertion that many factors are underemployed (another value judgment).
That is, because demonstrated preferences are not to their liking, they demand that the authorities inflate the money stock in service of the (mythical) “general welfare,” which is in fact their own welfare!
The Flywheel of Inflation
Advocates of MMT think government spending promotes economic growth. It is a component, after all, and ends up as payments to the private sector, which itself spends on consumption and investment. To the extent that the spending is deficit financed, “their red ink is your black ink.” But this government spending leads to distorted relative prices, malinvestment, and rising general prices.
The spending crowds out the private sector with predictable results. As factors and savings are shifted to the non-calculating public sector, productivity declines and costs increase. The degraded supply side reduces the goods demand for money at the same time as their monetary prescriptions increase the money demand for goods.
The ramifications of the cascading malinvestment make matters worse. As prices and spreads across the production structure—another concept absent from their framework—start to rise, refinancing debt starts to impact future spending plans. But this cannot be allowed to stand. The MMT analyst presupposes that government spending has to be maintained or grown, so they must call for intervention.
Indeed, it could be relieved by the central bank, in principle across the yield curve, and would be necessary to pin down longer yields as they start to factor in increasing prices and degraded real output growth. One imagines this kind of yield curve control would be pursued to maintain spending and investment, again at great cost in terms of the distortion of relative price signals to entrepreneurs that lead to ever greater malinvestment.
Of course, were government spending not always the solution, the treasury would reduce its demand for funds and let yields fall, reducing private borrowing costs and letting factors be drawn back into the economizing sphere. But MMT is blind to this solution. The aim of the program is not to economize on factors but to increase those under command of the government.
Solution: Tax the Price Inflation
Once price inflation becomes noticeable, central banks usually acquiesce in letting rates drift upwards and reducing their balance sheets. This is what Murphy considers “wrecking the economy.” The damage has already been done and prices are never allowed to reset in accordance with the new economic reality (minimum wage laws, etc.). But it is directionally helpful for economizing. The rate of price inflation reduces, savers get some reprieve, and some malinvestment can be recycled into profitable uses.
Now for the MMT solution. When “resource constraints” lead to their chosen level of price inflation, the idea is to re-fashion the ancient concept of taxation into a technocratic lever of aggregate demand adjustment. How exactly the taxes would be levied is up for debate by social engineers, but the cause of the price inflation—government deficit spending—would remain unaddressed and, as with all constructivist schemes, their effects would not be as intended.
Again, those who have replaced economics with spending aggregates and price indices are misled. Increasing taxes would not necessarily bring down prices. Contrary to their remarkable mechanistic fallacies, the economy consists of people acting on choices. To give one example, there is no basis for assuming that increasing income taxes would increase labor’s demand for money (i.e., more hours worked). Depending on the initial state of real incomes, they might choose more leisure.
Conclusion
MMT does not describe public finance as it is but as its advocates wish it to be. It is little but the idea of liberating government spending from borrowing and taxation. But governments will always be constrained by reality—economic and political—regardless of how the costs are meted out. It is true that some of the constraint depends on the ability of people to appreciate the cost of modern big government. Few are aware of the extent to which even “conventional” methods of public finance are an ongoing burden to the productive sector, so it is little surprise that those who value command economies think it could be pushed further with little pain.
Most troubling, as MMT misses the nature of economics, its adherents show no regard for hard-won insights, such as the economic calculation problem. Policy based on its value-laden theory would cultivate growing islands of calculational chaos that would lead to serious impairments in real incomes and wealth.
Murphy might consider the example of postwar Britain, which had enormous levels of state control and extremely high tax rates. It ended with the stagflation of the 1970s.
