Perspectives on Modern Monetary Theory
Professor William Mitchell
University of Newcastle
Australia
http://www.billmitchell.org

Overview§ Modern Monetary Theory (MMT) is now a conversationin academic, government, and activist circles.
§ We think it provides a superior lens for understanding
how the monetary system operates and the capacities ofcurrency-issuing governments.
§ It is ground in institutional reality.
§ It has provided a very accurate predictive framework on
macroeconomic aggregates for 25 years now.

A peek at the real world …

Japan – basic central bank discount rate§ Question: Could a mainstream economist explain thosegraphs?

§ Answer: No!

GFC disaster – a long-time in the making …
§ Mainstream macroeconomists became very smug in the1980s and 1990s.
§ They were blithely unaware of reality and the standard‘models’ which policy analysis was formulated
considered ‘money didn’t matter’.
§ GIGO - they failed to anticipate or predict the GFC.

Malpractice …
§ If engineers had have failed as badly as mainstream
economists have they would be imprisoned formalpractice.
§ Mainstream macro teaching and research programs havebarely altered.

Basic mainstream myths …
§ The government is like a household.
§ ‘Printing’ money is inflationary.
§ Deficits drive up interest rates – crowding out.
§ Fiscal surpluses necessary to pay for ageing population.
§ Fiscal space defined by financial ratios.
§ QE increases capacity of banks to make loans.
§ And on …

And the consequences …
§ Elevated resource wastage.
§ Massive income losses.
§ Increased income and wealth inequality.
§ Rising poverty rates.
§ Hollowing out of the middle class.
§ Financial market errors – Widow maker trades, GFC, lostprofits.
§ Increasing recognition that monetary policy dominanceis failing.
§ Eurozone!

Modern Monetary Theory (MMT)§ MMT began its development around 25 years ago –standing on the shoulders of giants!
§ It is now being subjected to increasingly hostile response
from a range of quarters.

BOJ Governor Haruhiko Kuroda, July 19, 2019

“The government must refrain from making
wasteful spending. We’re not carrying out MMT.”
Prime Minister Shinzo Abe, March 19, 2019

“I have no plans to make Japan a testingsite (for MMT)”
Finance Minister Taro Aso, April 4, 2019

Lens versus values§ MMT is a not a ‘regime’ that we can 'go to’.
§ There is no sense in saying “MMT policies are …”§ MMT is a lens – enhances understanding of the capacityof the currency-issuing government.
§ Exposes myths that are used to suppress those capacities
and options.
§ Exposes the veil of ideology.
§ Policy requires us to overlay our value judgements on
this understanding.

Evaluating the constraints on government spending

MMTYesYesRealEvaluating the constraints on government spending

MMTNO
YESNoneEvaluating the constraints on government spending

MMTYESNO

Financial/RealEvaluating the constraints on government spending

MMTNONO

Financial

Evaluating the constraints on government spending

Mainstream
Macro
YES
Not a
relevant
distinction

Financial/RealEvaluating the constraints on government spending

Mainstream
Macro
NO
Not a
relevant
distinction

FinancialHaving your own currency means …
§ There is no intrinsic financial constraint.
§ Government can, intrinsically, purchase anything that isfor sale in that currency, including all idle labour.
§ The government chooses the unemployment rate.
§ It doesn’t mean that the government can purchaseunlimited quantities of goods and services without
consequence.

Having your own currency doesn’t mean …
§ That the nation will be richer.
§ Within the resources available, the government canensure those resources are fully employed.
§ The nation may remain poor if there are limited realresources.

Spending creates income and employment …
§ One sector’s spending is another sector’s income.
§ There is one spending level commensurate with fullemployment.
§ If one sector reduces its spending another has toincrease spending to maintain full employment.
§ Non-government saving desire creates need for fiscaldeficits.

What is appropriate fiscal position?
§ Context is crucial.
§ Fiscal deficits are neither good nor bad.
§ Full employment fiscal condition.

Inflation risk …
§ All spending carries an inflation risk.
§ Debt-issuance doesn’t reduce that risk.
§ The ‘printing money’ myth – governments spend
through digital credits.
§ Creation of base money does not increase inflation risk.

Fiscal deficits and crowding out§ Erroneous supply-side view of banking.
§ Saving is not finite and is positively related to deficits.
§ Fiscal deficits add to reserves and create downward
pressure on overnight rates.

Policy effectiveness …
§ Monetary policy is largely ineffective.
§ Central banks have failed to create inflation.
§ Fiscal policy is direct and more predictable.
§ More consistent with concepts of accountability anddemocracy.
§ We are entering a period of fiscal dominance.

Buffer stock options …
§ A currency-issuing government which aims to stabilise
prices has two available buffer stock options:⁃ Unemployment buffer stocks (NAIRU approach).
⁃ Employment buffer stocks (Job Guarantee approach).

Policy Issue – The ageing population

Policy Issue – Japan’s ageing population
Japan - Population (000s)
140000120000

80000
60000
40000
20000
0

1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
20
10
20
15

000's

100000Japan’s rising dependency ratio
Japan - Standard Dependency Ratio 1920-2018
80
7060
50
40
30
20101920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
20
1020
150

Japan’s rising dependency ratio and retirement age
Japan - Standard Dependency Ratio 1920-2018
8070
60
50
40
30
20
10

1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
20
1020
150

Retirement age 65

Retirement age 70

Japan - workers per dependent persons
Japan - Inverse standard dependency ratio 1920-2018
2.5

2.0

1.5

1.00.51920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
20
1020
150.0

Japan - workers per dependent persons
Japan - Inverse standard dependency ratio 1920-2018
2.5

2.0

1.5

1.0

0.5

1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
20
10
20
150.0

Japan and Australia – participation rates
Participation rates total - Japan and Australia
858075Per cent7065
60
55
50
45
40
1980

1985
Japan males

19901995Australia males

2000

2005

Japan females

2010

2015

Australia females

What is the issue?
§ Mainstream use it as a basis for austerity.
§ Erroneous but also likely to exacerbate the true problem.
§ An MMT understanding tells us that the true problem istwo-fold.
§ First, a nation has to ensure its productive resources are
fully utilized – full employment.
§ Second, the next generation will have to be moreproductive than the last.
§ Austerity undermines both aspects.

Japan – Real GDP per person of working age
Japan - Real GDP per person in working age population
170160150

130120
110
100
90

20
1820
1620
1420
1220
102008

2006

2004

2002

2000

1998

1996

1994

1992801990

1990 = 100

140

Japan and USA – Real GDP per person of working age
Real GDP per person in working age population - Japan and the US
170
160
150

130
120
110
100
90

USA

Japan

20
18

20
1620
1420
1220
10

2008

2006

2004

2002

2000

1998

1996

1994

1992

80

1990

1990 = 100

140

Other issues …
§ Mandatory retirement age.
§ Dualism in labour market – precarious work, undermines
incentives for training and education.
§ Gender biases.
§ Child-care.

Policy Issue – Climate change

MMT and the Green New Deal
§ FDR New Deal was a cyclical program designed to deal
with a collapse in non-government spending.
§ It was not a structural revolution.
§ GND is a structural program designed to significantly
change the patterns of industry output, employment andthe consumption patterns of households and firms.
§ Will fundamentally alter the line between government
and market responsibility for resource allocation.
§ Will require a fundamental reconfiguration of theconcept of government.

Central role of government§ The government will thus have to play a central role.
§ This is appropriate because it brings the responsibility foraction and the currency-issuing capacity together.

Why not rely on the market?

Neo-liberal reliance on market-based
solutions.
Emission trading schemes amount to
privatisation of the commons asset
which we call the atmosphere.
Offset credits have disastrous effects inpoor countries and regions.
Market-based systems are insensitive toequity issues.

Markets are insensitive to biological systems.

If the science is right major changes are required nowand thus require a regulative, rules-based approach.

Governments should
impose sunset conditions– industry closure
regulation on pollutingindustries.

Cannot construct theclimate and social
damage separately fromneoliberalism

Identifying failure ofneoliberalism helps todefine the scope of theinitiative

ClimatedamageSocialdamageNeoliberalism

GND Elements …
§ Social and economic equity.
§ Well-paying and secure jobs for everyone who wants to work.
§ First-class education and training, health and aged care.
§ Government take back control of natural monopolies,
strategic public assets etc.
§ Community resilience and well-being for all regions.
§ Stable and ethical financial system.
§ 1st-class public infrastructure – transport, communications,utilities, etc.
§ Sustainable energy security.
§ Meaningful and sustainable climate action.

JustTransition

ClimateAction

Save theWorld!

Dealing with the winners
and losers

A cost sharing framework

Need to ensure that costs do not fall on
workers in targeted industries and theircommunities.

Genesis of Just Transition
Brian Kohler (Communications, Energy and Paperworkers Unionof Canada)

The real choice is not jobs or environment. It isboth or neither.

December 5, 1996

The Just Transition architecture1. Transparency and Planning 2. Funding & logistic support

3. Redressing FinancialBarriers

4. Public banks & pensions

5. Removing price distortions 6. R&D

7. Redeployment, Relocation

8. Skill development

9. Public infrastructuredevelopment

10. Public sector job creation

11. Public sector
partnerships

12. Job Guarantee

More doughnuts neededHow are we going to pay for it?

MMT

END OF TALK