4 Key Ignored Points in the Inflation / MMT debate

If anyone needs any examples or evidence in advance that something is extremely amiss in Western, especially United States, economics; we could point to how the 1st richest country on Earth has only the 15th highest standard of living, and 10% of the people there own 70% of the stuff (including, crucially, property).

On the other side of the Atlantic, the ruling German Christian Democratic party is already reciting its usual miserly prayers about resistance to performing stimulus at an EU-wide level, risking echoes of 2008-2013 when the Eurozone’s economic recovery was postponed unnecessarily by needless austerity. In plain English, this meant more real human beings undergoing more preventable but real unemployment, poverty, and miscellaneous suffering than was needed. And that is time those people can never get back.

Thankfully, with Bernie Sanders in situ as chair of the Senate Budget Committee, the United States appears to be emerging gradually from frugalist thinking. 

It is beginning to use the same techniques to fund desperately needed social spending and public investment that it has been using all along to pay for military spending (which has gobbled up $7.5 trillion from 2009 to 2019) and bank bailouts. Namely, issuing the currency from its central bank, the federal reserve, and simply crediting the relevant bank accounts to spend on both short-term stimulus ($1.9 trillion) and longer-term public investment projects ($1.2 trillion for now – with a planned $6 trillion later). 

Just for perspective: even this initial $3.1 trillion injection (1.9 short-term + 1.2 medium-term) is enormous for a $21 trillion a year economy, representing a shot in the arm worth 15% of one years’ economic activity – something on a scale not seen since Franklin Delano Roosevelt’s New Deal from 1933 on. 

But this medium-term chunk has already been negotiated down from roughly $3 trillion to $1.2 trillion with several voices already beginning to warn that taking this action to jump-start the economy and create opportunity on a large scale for low and middle-income earners will drive inflation and ultimately impoverish the economy.

Inflation has caused great economic harm many times and in many places around the world throughout history. But, where we’re stood now, is this time and place one where inflation should be a concern? 

I find the discussion in the political and media spheres to have roughly four gaping holes in them. I’d like to try to quickly fill them in. I’m not saying that no one is making these points, but I feel they could either be made a tad less vaguely or are being completely sidestepped by the people saying we should not be spending money on developing our economies or saving them from collapse.

1: What really causes inflation? 

Two of the most common orthodox weather vanes used for predicting and warning about inflation are:

1. The percentage of the population employed and;
2. The overall level of cash in circulation in an economy (liquidity)

They are kind of interrelated since the more money is being earned, the more money is likely to be circulating in an economy.

The first orthodoxy, which persists in the face of oceans of evidence to the contrary, is that any more than 95% employment will lead to inflation. The logic (formulated in the university, not in the street) goes that if unemployment is any lower than 5% then labour has too much of an upper hand in the job market, employers have too much demand for the supply of workers, and so need to pay them more, and have to raise their prices to be able to pay them. This has had the perverse effect of brainwashing policymakers into believing that having every 20th person unemployed is a good thing.

The second orthodoxy is that too much cash circulating around the economy will lead to too much demand and buying power for the amount of stuff that there is to buy and so will cause prices to rise, making that cash’s worth meaningless. The entire Western World has been pumping cash into circulation since 2008 and has still not seen the hoped-for inflation of 2% per year until recent months. 

Depending on how you slice it, we have a body of observable evidence at least 12 years long, and arguably 15-20 years long, demonstrating that neither of these two orthodoxies play out in reality.

Incidentally, orthodoxies are always wrong over medium-term timelines since, once they get written down in the textbooks, the world moves on and changes (as it always does), but the printed text stays the same, and the lecturer-priests that have come to identify with the teaching feel that the world is wrong for having not read the textbooks. More on that another time.

Where the second orthodoxy really trips itself up is in how it fails to realise the importance of the ratio of circulating cash (liquidity) to buyable stuff (value). The buyable stuff is often mentioned in passing but the emphasis is always on the liquidity. Let me try to bring this into sharper contrast. 

Imagine two boxes. One with the amount of money in it and another with all of the buyable stuff or productive assets in it. Let’s just say Box 1 is money and Box 2 is value. 

Inflation happens when there is too little valuable, buyable stuff in Box 2 for the amount of money that is in Box 1.

If the government spending is making the country more materially wealthy with things that make the economy work better, then it takes the pressure off the inflation equation because the money going into Box 1 is also adding to the amount of real-life value in Box 2. 

**Edit: The issue is more to do with distribution of liquidity among the majority or among low and middle income earners. The total amount of liquidity in circulation can be enormous, but if most of it is pooled in the assets and deposits of billionaires and not circulating, it can be thought of as not in circulation for all intents and purposes – thanks to @sdgrumbine for this reminder. I highly recommend giving his account a follow.**

The important question is: what will the liquidity flowing into Box 1 be used for? 

Will it be channelled to people as pocket money to boost consumption, or will it be used for building valuable things that make our world wealthier and more developed? Or will we continue to do what we currently do and feed it to middle-man retail banks to use to enrich themselves and their investors? More on that below.

In the case of just boosting consumption, there is a strong argument that there is a serious inflation risk there and so this should probably only be done in cases where the economy is experiencing serious slowdowns and people are at risk of not being able to feed, clothe, and shelter themselves (like in a pandemic lockdown).

To use a metaphor – imagine printing money to pay people to raise and care for geese that lay golden eggs – would we rather save the money, which is essentially an imaginary social construct anyway – and have fewer of the precious golden eggs? 

Gold is just another means of exchange you say? Fine, imagine we could pay people (imaginary) money to produce real things we need like energy or food – the point is that we can’t eat money, but we can eat food.

There is a phenomenon I call abstraction flipping. Sometimes people with less exposure to the practical side of life, or whose entire existence has been spent in the abstract realms of classrooms, lecture rooms, or newsrooms, can be susceptible to thinking the symbols we invent for things are more real than the things we’re representing. Thinking money is more real than the stuff it can buy belongs to the same family of error of thinking that words are more real than the things they label. This brings us back neatly to why there are real human beings undergoing real unemployment, poverty, and miscellaneous suffering in order to save imaginary money that we issue digitally.

Lastly, on this point – we’ve missed our 2% inflation target consistently for about 13 years now. A few quarters of 2.5% or 3% is not enough to compensate for years of undershooting our inflation targets. 

It would be naive of us not to wonder: “why the panic?”

Remember: deflation is good for the very wealthy as it preserves the relative buying power of the deposits and assets they have accumulated whereas inflation eats into the buying power that they have stored up. Cui bono?

2: “You can’t just do that”

Our brains are designed to take shortcuts and listen to how things sound in order to save energy on having to follow detail and figure out what things mean. 

Just printing money and giving it to people without making them earn it just sounds so wrong.

Let’s apply the exact same logic to what is literally already happening, though. Right now, our central banks — which are owned by us — lend money to retail banks at a certain interest rate. The money is created and issued to these retail banks by the central bank when it is borrowed by a business or a consumer. Then these retail banks lend our own money back to us at about twice or three times that interest rate. 

And this is why the manager of my local Allied Irish Bank branch has earned the right to drive a brand spanking new Aston Martin?

Where’s the “you can’t just do that” attitude here?

Rockstar economist, Stephanie Kelton’s Jobs Guarantee proposes a state agency that offers employment to anyone unable or less willing to work in the private sector. The agency would constantly identify and close any gaps in the social needs of a given area, be they schools, housing, roads, or hospitals, and pay people to work in an agency that perpetually develops our societies. The idea is that any idle capacity that the private sector isn’t using gets put to work by the state on development work and so nothing is wasted, especially not people. The money they’d be paid would flow into Box 1, but the assets they’d build would flow into Box 2 and so if done correctly, it wouldn’t result in inflationary pressure.

I’m not saying banks don’t produce any value at all – but which of the two organisations described above seem the more parasitic to you?

3: Is it even debt at all?

Because most of us work and live in entities like households and businesses that:

a) must earn more than they spend and;

b) have an income that is independent of our spending 

we describe and imagine the practice of the government spending more money into an economy than it extracts out in taxes as either “adding to the public debt pile” or “deficit spending”.

A few important things here. 

First of all: an economy’s spending and income are literally one and the same thing. The more spending gets cut at the macro-level of an entire nation, the more the overall income falls (yes, there can be minor leakages if a country imports significantly more than it exports but that is rarely at enough of a magnitude to invalidate this point). At the zoomed-out level of an economy, spending and income are not independent the way they are for households and businesses.

Next thing: if the central bank is issuing the currency and the department of finance/treasury is spending it, and both are part of the state, then who is in debt to whom?  Can the state really be in debt to itself? 

As Eric Lonergan recently asked: “if you owned a bank and you took a mortgage out off yourself, would you really be in debt?”.

Where some might have some justifiable concerns is in whether state-employed bureaucrats will be able to direct or centrally plan the needed development work effectively. The Soviet Union’s experiments with a command economy rather than a demand economy were an unmitigated disaster.  

But then this point can be overstated if it’s allowed to justify complete blockage of public investment or allowing of the infrastructure to crumble to developing world levels through lack of maintenance. China seems to be able to manage its public investment projects quite well. If the state cannot be trusted whatsoever to direct this investment and development, how did we ever end up with any public infrastructure at all?

Even if we agree to call it ‘deficit spending’: this again is shoehorning the narrative into household or business accountancy dynamics rather than macroeconomics. If a state is issuing more money into an economy than it is extracting out in tax, this is in fact ‘surplus spending’ since there is more cash flowing in than is flowing out. This is not a pedantic point: the current description literally suggests an opposite meaning to the practical reality that is in operation.

4: Is it revenue at all?

I won’t labour this point.

I’ll just ask two simple questions. I suggest you turn them over in your mind a few times.

If the government needs to ‘earn’ its spending money from taxing its citizens, then how did that cash get there in the first place?

Why do people believe that governments can only spend the money that they’ve issued into the economy once it’s been laundered through people’s wages and extracted back out as taxation again?

Originally published on Blind-Spots June 30, 2021.

Sometimes public debates contain some critical gaps, either in their information, or logic. Blind-Spots seeks to fill these spaces in and bring clarity where there is avoidable confusion.