By Gareth Vaughan
The idea that the Government needs more tax revenue and to ramp up borrowing in order to fund the economy's recovery from the COVID-19 crisis, thus burdening future generations with paying debt back, is "utter and complete total nonsense," according to Steven Hail.
Hail is a lecturer at the University of Adelaide School of Economics and a Modern Monetary Theory (MMT) economist. He spoke to interest.co.nz in a Zoom interview.
Against the backdrop of COVID-19, this year's Government Budget forecast net core Crown debt to rise from $57.7 billion in 2019 to $200.8 billion in 2024. That would see it rise from 19% of Gross Domestic Product to 54%. With the election looming in September, rising government debt has become an election issue.
But applying an MMT lens to the world shows the conventional way we look at government debt is wrong, Hail says. Hence his response to a question about future generations being burdened with paying it back.
"It's complete nonsense, utter and complete total nonsense," says Hail.
"What is a government deficit? It's just a contribution that a government is making of new dollars to the monetary system. A deposit in the banking system that the government is making, if you like. Is the government going to run out of dollars? No that's technically impossible given our monetary systems."
Hail notes a point made in a recent book by Stephanie Kelton, another MMT economist. In her book The Deficit Myth, Modern Monetary Theory and How to Build a Better Economy, Kelton flips around the conventional thinking that government taxing and borrowing precedes spending. Instead, she says, a currency issuer spends before taxing and borrowing.
The importance of being a monetary sovereign
The New Zealand Government is a monetary sovereign, Hail says. What does this mean and why does it matter? It means the Government issues its own currency which it raises taxes in, has a floating exchange rate that isn't fixed and doesn't guarantee conversion into gold or anything else, and NZ has no significant foreign currency denominated debt.
"So what is the national debt that they are adding to at the moment? It is best described as the net money supply of dollars. It's dollars the government has spent in the system, they've not yet taxed back out of the system," Hail says.
"There can never be a crisis relating to New Zealand government debt. The New Zealand government can never become insolvent in its own currency. And it's not just MMT economists like me that will tell you that. It's right wing conservative central bankers like Alan Greenspan in the US who've explained that in the past. It's Nobel Prize winning economists like Joseph Stiglitz who'll tell you that."
"And actually when you come to think of it, it's obvious. If you are the currency issuer you can never become insolvent in financial liabilities that are in your own currency. And the issuance of interest bearing debt, [such as government bonds], is something that you choose to do. It's not something that you're forced to do," says Hail.
From an MMT perspective, the orthodox way of looking at the Government, the Government Budget in the economy and understanding our monetary system, is 50 years out of date, says Hail.
A key distinction MMT makes is that governments such as NZ's are currency issuers. In contrast individuals, businesses and local government are all currency users. Hail argues this is perhaps the most widely misunderstood important fact about economics.
"You or I, or a local authority like the South Australian state government, we're all currency users. So before we spend dollars we have to go and get them, - earn them, run in our past savings or borrow them prior to spending them. If we borrow them we have to repay them in the future. And if we take on too much debt we can struggle to repay that debt and get into financial difficulties We can potentially become insolvent," says Hail.
"If you see a government that way you think that the Government has to raise money through taxes, or has to borrow money by issuing debt before it can spend. If you're a state government, or a national government which isn't a currency sovereign like the Government of Italy, that applies to you. You have to get money before you can spend it."
"The Italian Government has to get euros before it can spend them and can potentially become insolvent. There's insolvency risk there if they can't at least guarantee the support of the European Central Bank...But that's not the case with New Zealand's government or the Australian Commonwealth Government because they are currency issuers, because they sit at the top of their domestic monetary systems. Instead, as far as the Australian Commonwealth Government is concerned, it spends dollars into circulation which are new dollars. Every dollar that our government spends literally is a new dollar," Hail adds.
"You spend new dollars into circulation if you are the currency issuer, you don't have to go and get the dollars before you spend them."
But if the Government just spends and doesn't tax, if it runs limitless deficits, Hail says of course there'll be too many dollars in the system, there'll be too much spending in the economy, you'll go beyond the productive capacity of the economy, there'll be upward pressure on prices and there'll be inflation. Accelerating inflation, potentially hyper inflation.
"So the role of taxation in the system is to delete some of those dollars from the private sector to limit the ability of the private sector to spend, to create room within the productive capacity of the economy for the Government to spend on public goods and services and infrastructure and all the other things that the Government needs to spend on, without creating inflation."
"We've got into the habit in recent decades of governments auctioning things called bonds, debt securities, to approximately cover the gap between what the Government spends and what it raises in taxes...Government bonds do play a useful role in the financial system. Amongst other things they give fund managers, including superannuation fund managers that are going to be providing for peoples' retirement income in the future, attractive, interest bearing, safe assets that they can hold over time," Hail says.
"But governments like the Australian government and the New Zealand government are not obliged to issue those bonds to the private sector. The Government could choose not to auction debt securities and the Government wouldn't run out of dollars under those circumstances. So the Government spends new dollars into the system. Once those dollars are in the system those dollars are available to pay taxes and taxes play an important macroeconomic role in our economy. But they don't literally pay for federal government spending."
A private sector surplus
Hail says when the Government spends more than it taxes, it's just making a net deposit of new dollars in the banking system called a government deficit.
"You could say it's a private sector surplus. They're giving us more than they're taking away from us. And the national debt, that's just the sum of past deficits net of surpluses. The national debt is just dollars the Government has spent into existence that they haven't yet taxed away."
When the Government repays its debt it's "just converting that term deposit back into a transaction account again," says Hail.
"That's all. It's not like a currency user getting into debt where you can get into financial difficulty. It's not like the Government of Argentina issuing US dollar denominated bonds. The repayments on those are a burden on future generations of Argentineans because Argentina doesn't issue the US dollar and can run out of US dollars, and has to go and borrow more or earn those US dollars in order to make those repayments. It isn't like the Greek Government borrowing euros because Greece doesn't issue the euro. Again they're a currency user not a currency issuer. It's completely different to the New Zealand Government or the Australian Government," Hail says.
Excessive deficit spending will show up as inflationary pressures, he adds.
"The deficit spending that the New Zealand Government is doing at the moment, and the increase in what people regard as New Zealand's national debt, is inflation risk. There is no other risk. And while there's no significant inflation risk on the horizon, then not only can you be relaxed about deficit spending by the New Zealand Government, it's much better to think of it as a surplus for the private sector than a deficit for the Government. The time to panic is if they try to rein it back."
Hail argues that Japan, with the highest government debt to GDP ratio in the OECD at around 200%, has not been at risk of a financial crisis. However countries like NZ and Australia, with high household debt levels, have been at risk of a financial crisis. The latest Reserve Bank of New Zealand figures show household debt as a percentage of nominal disposable income at 163.4%. That's the highest it has been since the Reserve Bank data series began in 1998. Meanwhile, servicing as a percentage of nominal disposable income is at a record low of 6.8%, thanks to low interest rates, also at their lowest point in the history of the Reserve Bank data series.
"These [NZ, Australia and Japan], are all monetary sovereign economies. Government debt is never going to trigger a financial crisis in any of these three countries. It's excessive private sector debt, and especially household debt, that's the concern. And if you were to push the New Zealand Government's Budget towards surplus again post-pandemic, you would be weakening private sector balance sheets and either pushing the economy back into a slump once more, or pushing the household sector towards an even higher level of household debt and making the financial system more fragile. And the eventual potential correction more severe," says Hail.
'What it is technically possible to do the Government can always fund'
I asked Hail whether, when applying an MMT lens, the Government could afford the following options if it chose to pursue them; Tackling climate change, increasing military spending, cutting taxes, launching a jobs guarantee scheme, and paying for the rising superannuation and health costs of an ageing population.
"They should always be looking at inflation risk. Because when we say that our governments can never become insolvent, what we are saying is that there is no purely financial constraint that they work under. But there is still a real constraint. So New Zealand has a limited productive capacity. Limited by the labour and skills of the people and capital equipment, technology, infrastructure and the institutional capacity of business organisations and government in New Zealand. That limits the quantities of goods and services that can be produced there is a limitation there. Also it depends on the natural resources of a country," says Hail.
"If you spend beyond that productive capacity it can be inflationary and that can frustrate your objectives, frustrate what you're trying to do. So it's always inflation risks that's important. Within that productive capacity, however, what it is technically possible to do the Government can always fund. So yes, you can fund any of those things but there's always an inflation risk and that inflation risk is not specific to government spending. It's specific to all spending."
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101 Comments
"The idea that the Government needs more tax revenue .... is "utter and complete total nonsense,"
Precisely!
Under MMT tax is not needed, at all. There will be those who suggest it's 'needed to control inflation' but even that is a spurious argument.
All these years that we've been told that we need to work and be productive; pay taxes to fund our economic and social protection is deemed a Fools' Thinking; part of the past.
Go out and buy whatever you want for whatever nominal price you want, because it's all free. That little renter in Ponsonby you like the look of? It's got a sticker price of $5 million. Forget about that. Pay $6 or 8 or 10! It doesn't matter.
Go out and buy whatever you want for whatever nominal price you want, because it's all free. That little renter in Ponsonby you like the look of? It's got a sticker price of $5 million. Forget about that. Pay $6 or 8 or 10! It doesn't matter.
That's not what the interviewee alludes to or even recommends. In fact, he goes as far to say that NZ and Australia are in the poo because the little renter in Ponsonby has been bidded up to a hefty price tag through the issuance of debt to the private sector (h'holds). He's saying that the whole model that NZers think is 'normal' (taking on debt from banks to buy houses in a quest for capital gain) has reached its limits and the only way forward is for the public sector to spend into the economy). He makes good sense when he suggests that people want govts to run surpluses while h'holds accumulate world-beating debt to gamble on house prices. The whole idea is illogical.
Very good interview and very well directed by Gareth.
There is no public understanding of how inflation undermines the money side in transactions, nor, for that matter, how inflation transfers real savings and earning power from the individual to the state, which is the unstated objective of modern monetary policies.
It is ignorance of the role of money in this regard that permits governments to finance a significant and growing portion of their spending without resorting to unpopular taxation.
https://www.goldmoney.com/research/goldmoney-insights/anatomy-of-a-fiat…
And what about when our trading partners won't trade in our currency anymore as we're constantly debasing it?
We need to spend lots of ours, to buy a little of theirs, thus making us poorer.
The only ways around this are
1) We print more (thus compounding the issue) or
2) All our trading partners do the same, in which case it's really just a game of tiddlywinks.
Now you see, you're thinking about the External Account, aren't you?!
That doesn't matter either! Everyone is going to be doing it. So the price of anything is irrelevant.
All that matters is that the Government(s) in all of its guises can issue debt and monetise it. That's' it.
You're not getting it, and neither does BW above. The Government does not issue debt. It creates and spends money in it's policy objectives. This is all about our Government being the sovereign owner of our currency, and since Bretton Woods and the separation from the gold standard, it can issue as much money as it needs, whenever it needs.
I am plowing through Kelton's book at the moment, and it is clear she is working from deep within a capitalist 'free market' system. Despite that there is some real genius in this. MMT economists argue that the constraint in and economy under MMT is inflation. But this is flawed. Inflation is one of the constraints, but comes from a perspective of unbounded growth. The obvious flaw is that we live on a finite planet, with finite limits to the amount of resources available from minerals, land, oxygen, water, living space and so on. And this is where Government regulation comes in.
Under a 'free market' the theory is that market forces will find the natural balance and limits to resources. But as climate change is teaching us, this might not occur until after we have made the planet uninhabitable. In addition while the 'free market' theory argues that markets should not be 'manipulated' or 'controlled' by authorities, it ignores the fact that in the absence of regulation human psychology leads power individuals and groups to try to manipulate and control markets to their own benefit.
So MMT is not a free for all money scramble, but it does mean that pretty much all of the socio-economic issues we face can be funded and fixed pretty easily by the Government, if they want to.
You're not getting it, and neither does BW above. The Government does not issue debt. It creates and spends money in it's policy objectives
Let's not get into semantics and recognise that government created liabilities, and that includes money, are debts registered on the government's RBNZ balance sheet.
As we discussed the other day Audaxes Liabilities may not exist as debt. And any money 'created' by the Government does not have to be paid back, as debt would, because it is not borrowed from anywhere. The liabilities manifest in a different way, but yes there are costs through the demands on resources, the environment and so on. this is where the Government's true responsibility lies, the enactment and implementation of sound robust regulation.
It takes it back through taxes Audaxes. By carefully crafting taxes they could significantly address many of the social equity issue in society, while still enabling people to grow, have a good lifestyle etc. But the real physical limits of our world will need to be considered too.
Treasury supplies money to the Reserve bank as a loan. The reserve bank then releases that money to the govt as it sees fit to achieve the balance of keeping inflation under 1-2%. It may do this in a number of ways. Treasury can write that debt/loan to the RBNZ off which may be inflationary. Maybe not in current times because inflation is relative and if all countries are doing the same is there any inflationary pressure on the macro economy which would effect the value of the $NZ? The important thing is that money keeps moving through the NZ economy even of its a debt neutral exercise. Does the micro economy remain intact?
I believe exactly what you've described is going to happen which is precisely why crypto is going to succeed. We're globally complicit in this madness, and we need a monetary system where the levers are outside of political control. Bitcoin and Ethereum are the first cabs off the rank as a value store and smart contract solution respectively. But many more block-chain based solutions to come including several government run versions from various countries.
No he's not. Your just proving the point of a quote I read the other day from Mark Twain; it is easier to fool people than to convince them they have been fooled. In effect you, and the rest of us, have been conned by Governments who did not understand what being the owner of our own currency meant. Don't worry many economists still don't get it either.
The one crucial point behind MMT for us is that our Government is the owner of our currency, the NZ$. Therefore they are the ones who can decide how much is sloshing around in the economy. This also means they do not have to tax to fund their spending. they just create the funds they need. BUT crucial to this is they have a responsibility as to what happens in the economy when money is released into it. Too much money can create inflation, so tax is used to take money from the economy to control inflation. The value of our currency would not fall if the Governments policies recognised all the constraints and taxed responsibly. The proof of how this works is our housing market.
Our Government essentially handed control of at least part of the money creation opportunity to the private banks (because of no regulation as to issuing credit/debt). So these banks set about issuing debt to people wanting to buy houses. That debt is being created at a factor of around 3 - 5 (and possibly more) of their (the banks) capital assets. As we have seen this issuing of this 'money' in one area of the economy only (it was solely focused on housing), it caused quite significant inflation in housing across the board, leading to us being one of the most expensive countries in the world in this area.
Our Government essentially handed control of at least part of the money creation opportunity to the private banks (because of no regulation as to issuing credit/debt).........
I think you mean the RBNZ, not the govt. The govt does not control the ability of commercial banks to lend into existence.
The government was supposed to follow up the monetary stimulus with fiscal support to the building industry, and help create a construction boom out of it. We waited for resourcing and material market reforms, and targeted migration but those things never arrived.
So much money was pumped into the demand side of the housing equation (mortgage lending) and not enough on the supply side, with construction design projects falling over due to lack of funding.
Not saying any of this was good or bad for us in the long run - just the fact that monetary stimulus from our banks in the absence of fiscal reforms from the government has worsened the housing crisis.
Not according to David Chaston who rightly points out banks do not create money the banking system does. And they lend out money from mum and dad depositors who put money in the bank for them too lend.
Individual people do not take drugs.. But the drug community does... Ah..
Richard Werner - Banking and how Banks Create Money
https://www.youtube.com/watch?v=yB_Ic6dnJVs
https://www.youtube.com/watch?v=8FT-zyTX2nE
That debt is being created at a factor of around 3 - 5 (and possibly more) of their (the banks) capital assets.
If you are discussing the RBNZ imposed capital requirements levied against bank assets (Loans & mortgages), the leverage is much greater.
According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest
Total madness. There is a good book from the 18th century ‘Fiat Money inflation in France’ - I’ll find a link. Down the track these loonie thoughts lead to wars!
http://www.libertarianpress.com/fiatmoneyinflation/Fiat%20Money%20Infla…
Saw this chap on DFA last year. Public sector academics of course love a bit of MMT but I’m not sure if it’s the best route to efficiency and being competitive in a globalised system.
Anyway the loonies are now influencing the politics and it is route that the world is heading. You could argue that their has been a monetary Cold War going on since 1997 repeal of glass Stiegall. Initially the private banks started up the cannons and now the governments that can issue their own currency are having to do so to underpin the financial sector.
"To pay for the large costs (Governments).. decided unanimously to fund the (problem) entirely by borrowing."
The only difference is that this 'problem' isn't physical, it's theoretical.
https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
Rubbish, it can be made illegal in a matter of days if a govt so wishes (as many countries have done). If govts feel their revenue or power is sufficiently threatened by it that is exactly what they will do. There is a huge amount of regulatory risk associated with cryptocurrencies.
Rubbish, it can be made illegal in a matter of days if a govt so wishes (as many countries have done).
Creating a giant black market. Trying to shut down things on the internet is akin to trying to kill a Hydra by cutting off it's head. Just look at The Pirate Bay.
As I've said before, if people think something is real, and behave as if it is real, then it's real.
If governments act like there's a debt that is going to require taxation to increase in order to pay back, and then they increase taxation so that they can pay it back, then the debt is real, regardless of whether some theory says it is or not.
In other words currency is being debased to nothing .. while everyone runs equally eye watering deficits
Something which cant last, wont last
Inflation is coming BIG TIME then ... in the form of currency collapse
All currency is just promises
So we are stacking up the promises
Its just that the deliverables are dwindling
No problem with the theory, it is what it enables that is the problem. It enables a system based on government patronage. This leads to society separating into camps, whichever is in power bestows gifts on its followers and steals from its enemies. This leads to either the Argentine outcome or the Yugoslavian outcome, neither of which is desirable.
The political problems are enormous. If you want to destroy all incentive for productivity, then this is the answer.
I'm not sure MMT should be described as a theory, more a description of how the monetary system actually works.
I think the bigger problem has been the propensity for the powers that be whether political or business to treat the economy like a household. How much unnecessary pain has been inflicted on economies by post GFC austerity policies? The whole point is that if there is excess underutilized productive capacity in the economy it makes economic sense for the government to use it.
"more a description of how the monetary system actually works."
Agree
"The whole point is that if there is excess underutilized productive capacity in the economy...."
Which there isnt ... Economists will scream black and blue there is ... but it is the eroeis of fossil fuels that do the heavy lifting
ultimately if there arent viable "customers" for your output you might as well sit on your a%3e ... those Ghost cities arent the silver bullet
Not sure I agree Roger. I think it is more putting the role of Government into focus. what do they actually do? I agree that a corrupt Government that only will work on a patronage system will be problematic. But then isn't this an opportunity for us, the people, to challenge them?
You are absolutely right Roger the political problems are enormous. I suspect this is where the current Govt is heading with its thinking note their hints about there not being much detail around policies in the run up to the election, these ideas are currently being floated by the Biden camp in the US Imagine the state providing vast handouts to its followers who sit around producing virtually nothing real wealth creation will largely collaspe.
Ah, yes. Cancelling debts....
"In June 2015, the Reserve Bank of Zimbabwe said it would begin a process to "demonetize" (i.e., to officially value a fiat currency at zero). The plan was to have completed the switch to .... the Chinese yuan and make it their main reserve currency and legal tender after China cancelled debts"
"Owning your own debts" ends up at the same endpoint. ie; your currency is worthless.
Not today. Read this balance sheet carefully - the RBNZ has claims on the government, ie bonds purchased to offset the created liabilities to banks disposing of said bonds under the QE programme.
Audaxes I'm not that familiar with reading balance sheets. What I do see is that RBNZ has claims on the government are going up.
Does that mean that the RBNZ has the NZ Gov by the short and curlies? That despite NZ (supposedly) owns the NZ Reserve Bank?
Please enlighten me. ಥ_ಥ
Geoff Bertram recently spoke to the NZ Fabians about this:
NZ Fabian Society encourages debate about these issues:
Don’t fool yourself. Don’t think that you can be wise merely by being up-to-date with the times. Be God’s fool—that’s the path to true wisdom. What the world calls smart, God calls stupid. It’s written in Scripture,
He exposes the chicanery of the chic.
The Master sees through the smoke screens
of the know-it-alls.
Checks out.
Gareth - despite a long history of it being raise on this site, there is no mention of energy, or globalisation (supply of resources, like energy.
The nearest it gets is the last two para's, but it fails.
This isn't about labour (as I've often pointed out) or just about 'the resources of a country'. But he certainly points to the problem when you cannot repay debt. I suspect it'll be more than inflation, though. I suspect it'll be belief destruction. Can you find someone other than an economist to ask?
Using taxation to control inflation seems like a dangerous thing to me.
This aggregate command economy stuff is a sledgehammer kinda thing.
I can see that rising taxes in the face of rising prices, could put pressure on alot of households....
It won't be govt spending that will be hit, it will be the private sector.
Govt will end up being a larger % of the economy. We could end up with a command style economy.
I think of the govt provincial growth fund. How much of that money found its way into genuine , entreprenural enterprise that might lead to real wealth creation. Last night's news mentioned $500000 being given to build a sculputre. Shane Jones justified it as creating work for contractors.
Not necessarily. Taxes could be applied where inflation is becoming excessive. A retailer price gouging to increase profits for example would see an increase in tax as a discouragement. A supplier doing the same, landlords over charging on rent (actually no, I think there are other more direct means that are more appropriate for managing housing costs).
Don't misunderstand - under MMT (properly applied) it won't be a bad thing to be rich (indeed that may not even be taxed), but to get there at others expense should be actively discouraged. For example under MMT tax is used not to raise funds for the Government to spend , but to manage inflation and behaviour. An example might be; the flat rate for a company tax is set at say 40%, then a discount is applied for the number of people employed (more gets more discount to a limit), a further discount is applied for the median wage paid (employing 50 people on minimum wage will cost more than employing them at a higher rate), a further discount is applied for CEO and management pay rates being below some arbitrary factor of the median wage in the business, a further discount is available for some one operating in a small town or in the regions and so on. Ultimately it should be structured so a well run company can pay no tax at all. Also under MMT PAYE is not needed. So our spending could increase, although factors to be considered will be environmental impacts.
A question I have asked many times but never got a satisfactory answer is why do prices and costs always have to go up. In a finite system should we not be targeting price stability, and reduced demand on resources? Under MMT I can see that this is eminently possible.
MMT is only a description of how our monetary system operates here and now, it is not something to be introduced or adopted. If you deny MMT then you are denying reality.
The question we should be asking is why our politicians are telling us something completely different.
It's what they believe Tread. But many economists don't get it either. They don't understand that as a currency issuer, the Government doesn't has to tax to spend. They, and to most respects all their advisors think the only money they get to spend is what is taken in in tax. Thus the annual food scrap fights over who gets what in the budget happen all the time. So in effect MMT is exactly not what happens. Treasury is not issuing money for Government expenditure, it is tell Government how much it can expect taxes to generate, and from that the Government believes it know how much it can spend. If it's policies exceed the projected tax take, then the Government sets out to BORROW the shortfall. This is NOT MMT.
I am not sure about that, MMT tells us that all government expenditure is made by creating and issuing new currency and I don't think that any taxation and borrowing decisions change that fact. Taxation and borrowing are never used to finance government. If money is a just a government "IOU" it makes no sense for the government to borrow them back to re spend when they can just issue new ones and can they even use an IOU twice, it seems nonsensical. Stephanie Kelton says it cannot be done and government bonds are only exchanging one form of IOU into another form so nothing has really changed, just as many IOUs are still in existence. If the government wants to spend then it must issue new IOUs, only taxation can extinguish them.
You're using different words than I do, but i think you get it. BUT I don't think our Government does, as Kelton identifies with the US Government. they don't understand what being a currency issuer actually means. Even Micheal Cullen bragged about paying down the Government debt through government surpluses. But as Kelton has identified in her book for the US, that has always caused a recession.
Yes, sectoral balances show clearly what happens to the private sector when governments run surpluses, household debt must increase and savings decrease. As Bill Mitchell has said, "nothing is saved from a government surplus but private wealth is destroyed".
http://bilbo.economicoutlook.net/blog/?p=38819
The classic academic's approach to a problem is "if we assume these things we know to be false, then there is this easy way to solve all our problems". In this case, we know 'just raising taxes' is not easy, not least because it is highly distortionary to the real economy, so inflation becomes endemic. It feels like the lessons of the 1960s and 70s have been forgotten.
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