MMTers: Does Adair Turner have a point?

There’s quite an interesting interview with Lord Adair Turner published here. This bit in particular caught my eye:

“I think the crucial thing, the crucial question you need to answer when you accept that we can do fiat money creation is how to discipline and I’m going to address this subject in a lecture in Germany in February, because some of my very senior German friends have said to me, “Adair, you’re absolutely technically right that this is possible”, but, without quite putting it this way, they say, “we mustn’t tell the people!” Because if the people know, and if the backbenches of Parliament as well as the small elite technocrats know that this is possible, people want to do it – not to the extent of 2% of GDP or not just when we’re in a crisis – they’ll want to do it to the extent of 10% of GDP every single year because the Chancellor of the Exchequer will know that he can always create some fiat money so the head of the Department of Health will come through and say, “so why don’t I have some of this?”

“So, we have to find…the way I think about what we did with fiat money creation…it’s like medicine which, taken in small amounts, is good for us but taken in large amounts is toxic and fatal and, essentially, we’ve decided that it’s so dangerous that we’ll put it in the medicine cabinet, lock the door and throw the key away. And for most time, throwing away that key hasn’t harmed us too much because there were other things that were so great in the economy but I think we are now in an environment where throwing away the key has harmed us. If we take it out of the medicine cabinet, we’ve got to have a believable set of political economy processes. And I think that’s the challenge to the Occupy movement and people on the radical left: how would you place it in a discipline. Now here’s one way I might place it in a discipline, say we can do it within the framework of an independent central bank: you could have a thing that says the Treasury can have an element of an unfunded deficit or it can write off some of the existing debt owned by the central bank but only with the approval of the Monetary Policy Committee of the central bank in the pursuit of a 2% inflation mandate. They can agree this amount in order to make sure at least that you hit the 2% inflation target but they have control of it. In some way or another you’ve got to place limits on it because central banks independence and rules on non-monetising, they’re like those commitment devices that people who are trying to give up smoking, or diets. On one level, it’s completely arbitrary to say you’re not allowed another chocolate until 4 o’clock in the afternoon rather than 3:59 but you have to do these rules because otherwise you won’t stick to it”.

A point pushed by Positive Money people is that a committee of clever people should decide how much new money to create rather than leaving it to private banks. The passage above seems to me to be quite a clear exposition of this idea. Others would argue that this is anti-democratic, and the decisions should be taken by elected politicians. So my question would be, does Lord Turner have a point?

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15 thoughts on “MMTers: Does Adair Turner have a point?

  1. The Govt already plays a huge role in the amount of money creation there is in the economy each year via the size of its deficits.

    For example, if there was $ 1 trillion in new M for a year $750 B from private banks and $250 B from Govt deficits and you dont like that ratio, simply have the legislature tighten credit rules and increase the deficit the following year. We dont need some special committee, thats what the whole budgeting process is for, to determine how large a contribution to the money supply the Govt is going to make each year via the deficit.

    The problem with the current debate is not the mechanics of the system but the way its viewed. Pols dont want to limit bank lending because that would limit bank profits and the bankers pay good money to bribe pols not to do this. And the Govt is constantly trying to shrink the deficit. So these two things are backwards not because the system is broken but because our knowledge is broken.

    And wrt inflation and Govt creating too much money, I’ll believe that when I see it. I’ve not seen any evidence that the public has ever erred on the side of too large deficits and too high inflation EVER!!! So I dont know why this should be such a large concern.

  2. Adair Turner and his German friends our wrong. There are many ways to run the economy into the ground. No reason to think full comprehension of the policy space a full appreciation of MMT opens up leads to greater dangers than otherwise. It at least opens up the possibility of tackling for example retooling the economy in accordance with the dictates of ecology not to speak of the job guarantee. In fact, this capacity enhances the sovereignty of the state over powerful social interests that seek to use the state to serve their rule of the rest. If parliament has the power to declare war it is equally entitled to exercise to the full its fiscal powers. Who has greater legitimacy? Parliament may be imperfect but it is less so than any cabal of so-called technocrats. Today the UK government like so many is under the sway of the 1%. This is no standard of sobriety for the sake of which the people must be kept in the dark about MMT.

  3. “They’ll want to do it to the extent of 10% of GDP every single year”

    They might, and then the economy will collapse and the people will vote them out and give the other lot a go.

    The alternative is what we currently have – rich people borrowing money constantly to drive up asset and house prices while their central banker mates refuse to take the punch bowl away or control them in any sensible manner, and then abusing the fiat system to keep the party going.

    Politicians have to be allowed the maximum space to screw up, because the alternative is that somebody else screws up that you can’t get rid of.

    The idea that there is such a thing as a benevolent dictatorship, or a set of people with perfect foresight is nonsense. They are both examples of the Wisdom of Solomon fallacy.

    You’ll note that Adair Turner is another one of those people who is very fond of ‘experts’. He needs reminding that ex is somebody who is past it and a spurt is a drip under pressure. They have no more clue than the rest of us.

    Financial rule by the House of Lords ended in 1910. It should not be reinstated in any guise.

  4. No, and when I read that yesterday I got quite angry. The reason the majority of citizens were denied the vote for so long was mainly due to that type of argument, an elite group believing they know what’s best for you all, and only they had the intelligence to make decisions. The fact that their decisions led to slums, and misery were then rationalized by the claim that they were “natural” occurrences.

    We don’t need patronising “superiors” telling us what we need. People need to be educated about money, not kept in the dark for the enrichment, and empowerment of the few. I believe greatly in the phrase “Let justice be done though the heavens fall”, so quite frankly I don’t care about the whining prophecies of doom from these chancers.

  5. Alittleecon says in the last para, “A point pushed by Positive Money people is that a committee of clever people should decide how much new money to create rather than leaving it to private banks. The passage above seems to me to be quite a clear exposition of this idea. Others would argue that this is anti-democratic….”

    What – so the current system under which bankster / criminals decide how much money to create IS DEMOCRATIC? Hilarious.

    As to the idea that PM is saying something startling new when it says that “a committee of clever people should decide” on stimulus, that’s ALREADY THE CASE in that the BoE MPC decides on interest rate changes, QE, etc.

    The PM system involves decisions on OBVIOUSLY POLITICAL matters (e.g. what proportion of GDP is allocated to public spending and how that is allocated between health, education etc) to the electorate and politicians. While the TECHNICAL matter of measuring inflation and deciding what stimulus is suitable over the next year is left to “clever people”, just as it is now, more or less.

    What’s pathetic about the people who object to that is that 99% of them never objected to the BoE MPC having a big or dominant say on stimulus. But as soon as PM suggests a slightly different way of doing that, they’re up in arms.

  6. Neil Wilson’s point about the House of Lords in 1910 is irrelevant and just illustrates that he doesn’t understand the issues here.

    What happened in 1910 was that the non-democratically elected House of Lords was barred from blocking money bills passed by the democratically elected House of Commons, and quite right. But that’s irrelevant because as Positive Money has spelled out loud and clear God knows how many times, PM’s proposals do not involve letting any non-democratically elected body have a say in proposed tax increases (which was the issue in 1910). PM’s proposals DO NOT involve any non-democratically elected body have a say in how much tax should be collected in the aggregate, nor in what individual taxes should make up that aggregate.

    Put another way, PM’s proposals DO NOT involve anyone other than the electorate and democratically elected politicians deciding what proportion of GDP is allocated to public spending, or how that money is allocated as between education, defence, law and order etc etc.

    The only decisions taken by a non-democratically elected body under PM’s proposals are decisions on what STIMULUS in the aggregate is suitable. It is then up to democratically elected politicians to decide how to implement that stimulus: tax cuts or public spending increases, etc. But that aggregate stimulus decision is ALREADY TAKEN to a large extent by a non-democratically elected body: the Bank of England Monetary Policy Committee (and indeed by similar central bank committees in other countries.) Thus the claim that PM’s proposals involve less democracy flies in the face of the facts.

    In fact the existing system is LESS DEMOCRATIC that PM’s system, because when the BoE decides to implement stimulus under the existing system, democratically elected politicians have no say in how that stimulus is implemented: i.e. the stimulus comes in the form of interest rate cuts or QE and those two are about the only options.

  7. As the poor rely on government, and the House of Lords cannot decide on money bills, then why not abolish the around 900 Peers altogether, who are not elected.

    Scotland can pass laws without any need of the House of Lords.

    The elite passing money laws are threatening millions of peoples’ lives each and every day, causing starvation and deaths from hypothermia.

    Economies are irrelevant. Once the noblisse oblige from the elite to us the people stops, then throughout history the people rise up.

    Why should you eat and us not?

  8. Reblogged this on Modern Monetary Theory: Real Economics and commented:
    Answer to the question in this post: No he doesn’t have a point! The electorate are quite capable, as they did in the 60’s, of understanding that if monetary and fiscal policy errs too much one way we’ll end up with too much inflation. Too much the other and we’ll end up in recession.
    That’s the way things were until the late 70’s. The oil shocks did produce too much inflation but it wasn’t demand led. There was a need for corrective action, but that inflation was used by the ruling class to banish Keynes completely. When -all that was needed was some modification.

  9. I think what he really means is that if the public have control of the money supply there is too much risk they will stop believing the “senior” people’s scare stories about inflation, create too much demand and create too much employment, pushing up wages and pushing down capital returns in real terms. That would obviously be catastrophic for those “senior” people.

    It’s a bit like a head of a church not wanting church-going to be mandatory because people might realise they won’t go to hell when they stop going.

  10. I think it’s also total obscurantism.

    What the government spends money is common sense. What do we want to happen? Where do we want GDP to go? If we want 5% to go to pension holders then… tada! that’s the sum done. They love to contrive the question into abstract inter-bank lending-borrowing instrumentation to hide at all costs the pure and simple fact that the government can just spend directly whenever it wants on whatever it wants.

  11. The problem is that MMT should present early on a perspicuous concept of the economy involving monetary flows in and out of circulation. We believe that circulation is where inflation and deflation occur. It does not occur when more money is created but not spent into circulation. We see that with EQ. It does not occur if new money is created and shipped by rocket ship to the Moon.
    I propose an analogy from hydrology which makes it clear we do not want to oversupply circulation with more than just enough money to clear the market of produced goods and services at full production and employment and stable prices.

    Let IF = (E + G + I) be inflows into circulation, where IF is the aggregate inflow, E is the aggregate
    of money inflowing from Exports, G is aggregate government spending including deficit spending,
    and I is aggregate investment from savings. Let OF = (M + T + S) be outflows from circulation, where M is imports, T are tax revenues collected but not spent by government, and S aggregate savings. Now for the hydrology part:
    IF – OF = (E + G + I) – (M + T + S) = ΔC
    is the change in circulation, where Δ denotes “change in”. When IF > OF then ΔC is positive. The
    quantity of money in circulation is increased by ΔC. When IF < OF then ΔC is negative. The quantity in circulation C is decreased.

    Now, let C' denote the quantity of money in circulation that is sufficient to clear the market of goods and services at stable prices and wages and there is full production and employment. Suppose the economy is new, there is lots of unexploited raw materials and a large number of idle unemployed workers. Then the aim of monetary policy should be to increase IF over OF so that C grows toward C' in a timely fashion. That's where MMT is at today, trying to get government to facilitate increases in IF over OF while holding OF as small as possible, so that ΔC is large, positive. But there is a limit to which IF should be sustained at greater than OF. When C reaches C', there will be full production and employment, and further injections of positive ΔC will only lead to what we would say in hydrology (I think), an overflowing of C, i.e. excess money in circulation which will lead to bidding up prices and, horrors, inflation.

    I had thought of writing a blog on this called Inflows and Outflows in Modern Monetary Theory, or
    How do we fill the pool without its overflowing?

    So, back to when C has reached C': We need at this point to reduce IF or increase OF to a point where IF and OF are equal. Then IF – OF = ΔC = 0.
    There should be constant outflows to aggregate savings. Imports may be huge, like they are now with everyone buying goods made in China at WalMart and Target. Taxes may have to be raised if G is heavily into deficit spending at C'. Otherwise G could be reduced and taxes left where they are.
    The hydrological analogy with waters flowing into and out of a swimming pool with three inlets and three drains helps us to see as a whole the nature of the economy, and the flexibility we have in adjusting it by manipulating the various inflows and outflows to and from circulation, of money.
    This is what Kant would have called a community and Peirce a three. We do not want to overflow the pool! That's inflation. A little overflow might be acceptable because it could water the lawn, but a lot might cause a flood and damage people's property.

    The financial experts of Germany who fear that the public will demand ever increasing inflows of money from deficit spending don't know people. Once the people understand the simple theory of what the government is trying to accomplish, they will not be inclined to demand overflowing injections of money into circulation. They will want increases in inflows when they do not have jobs, do not have incomes to by goods and services with. They do not want devaluation of their dollars with inflation. They are gaining nothing from it once it exceeds, say, 3% per annum. But now we can show them how we can open the drains to lower excess money in circulation.

    It is now obvious that MMT does not advocate hyperinflation and further that what we seek is a balance of inflows and outflows of money such that production is at full capacity with low but natural levels of unemployment, and stable prices. We love C'.
    We can discuss how taxes may need to be raised, the Fed may have to sell to banks and others Treasuries it has purchased earlier and swapped for new securities. Treasury will also sell securities as investments in time-deposit accounts with interest at the Fed. Imports will be encouraged. We can show that most of the securities in the national debt formula do not fund government operations. Most of the securities correspond, like CD's, to time-deposit accounts at the Fed. The money of the principal behind those securities is still there to be paid back. Deficit spending authorized by Congress does appear to create debt, but on closer examination we see the Treasury there swapping new securities it creates for old mature securities held by banks, and doing this over and over, forever, so the principal never gets paid back. Effectively deficit spending that way is debt-free. Interest on the debt can also be created in the same way by Treasury selling securities to acquire the interest money; and those securities will be rolled over forever also. And the banks will love the free interest.

    So, doesn't hydrology show us a way to present our wares? (Pun intended).

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