In part 2 of an interview with RT, John Quiggin addresses MMT, Market Monetarism and BitCoin. I have previously highlighted where Quiggin and MMT disagree, I wont revisit that. Below I have highlighted the areas where Quiggin and MMT are in complete agreement in bold. Also in blue is a question Quiggin proposes for those advocating MMT.
Harrison: What about the opposite claim by some that a government with a sovereign currency doesn’t need to have taxation in order to finance public expenditure. Do you think that is a valid claim?
Quiggin: It is a misleading presentation of a result that is associated with modern monetary theory. Correctly understood I don’t think modern monetary theory says much different from what Keynesian says. Namely it is certainly true in a liquidity type trap situation, the kind of situation the US and Europe has. The government can essentially spend money without limit until the economy recovers because what matters is resource constraints. The idea isn’t that governments can spend as much as they want or the correct version of the idea isn’t that the governments can spend as much as they want without constraint – it is that rather than focusing on the budget balances as the measure it should be determined as a residual. The claim is that what you should do is set your fiscal policy to push the economy to full employment and not beyond. And whatever the balance budget rises from that is the balance you should have. But you often see this pocket arise is this notion that we can have everything we want for nothing and that just isn’t true.
Harrison: Understood. Now lets take a look at some of the things you said about Hard Keynesianism in respect to this particular issue. Let me give the 5 points here. You said that:
- Except during the period since the GFC, money creation has not been an important source of finance for developed countries
- Except under extreme conditions like those of the GFC, money creation cannot be used as a significant source of finance for public expenditure without giving rise to inflation and (if persisted with) hyperinflation
- Government deficits must be financed primarily by the issue of public debt
- The ratio of public debt to GDP cannot rise indefinitely, since governments will ultimately find it impossible to borrow
- The larger the deficits governments want to run during deficits, the larger the surpluses they must run in booms
Now you explained this as sort of as the modern monetary theory people, the people that are using modern monetary theory in the way you were just claiming to go against those issues. Can you explain your points of view here and why that’s relevant to the issue of Modern Monetary Theory?
Quiggin: Sure. Well I suppose the obvious question for people advocating Modern Monetary Theory is what they, what policy they advocate when the economy is at full employment? Of course that’s not relevant for the US and Europe right now and looks like it wont be for quite some time. It is broadly speaking relevant to a country like Australia; we’re certainly relatively close to full employment or at least close to full employment by the standard of the past 30 odd years so the question really is in the Australian context could the government spend as much as it wants without raising the danger of inflation. I have to point out again that the whole point of the standard of the correct presentations of modern monetary theory by people like Kalecki is precisely that the government should be making the decision of keeping the economy at full employment without inflation. Not that it can spend as much money as it wants.
Harrison: Right. Understood. Now lets move to a different view of economics. There is a group called the Market Monetarists and that’s a school of economic thought that has gained a lot of currency since the Great Financial Crisis and as I understand it Market Monetarists believe that even at the Zero Lower Bound when interest rates are zero monetary policy is so effective that fiscal policy is unnecessary. What do you make of that view?
Quiggin: Well it seems, it has some plausible arguments in its favour, but it simply hasn’t been validated by experience. We have seen attempts where in the US for example where monetary policy has been strongly expansionist where fiscal policy has been contractionary and the results have been very disappointing. As the stimulus wound down we have seen low rates of economic growth, no real catchup of the output gap and while the measured unemployment rate has fallen – that is essentially because in the US context once you exhaust your Unemployment benefits there is no point in remaining qualified for UE benefits. Indeed the best thing to do is go on to Disability. So if you look at the employment-population ratio in the US there has been no discovery despite pretty extensive use of stimulatory monetary policy. So I think the obvious point is fiscal policy is what we need here.
Harrison: You know market monetarists counter that by arguing monetary policy in the US by definition was contractionary because it failed to keep nominal GDP growth up. Do you think that is actually a good way at looking at monetary policy, or fiscal policy for that matter?
Quiggin: No. And indeed the only difference between the market monetarists and ordinary old keynesians as I see it is that they precisely treat nominal GDP as if it is a policy instrument when of course it is the target.
Quiggin: This just seems to be confused.
Harrison: Right. Well you know we are going to speak to both Scott Sumner and David Beckworth at some point later on in the week. So I definitely interested in getting their view. I am going to put the same question to them.
Harrison: Let me end on a different note because I notice you had a quote that was attributed to you about you said that: “It is the most demonstrably valueless financial asset ever created”. Now that is a pretty bold statement. Can you explain what your thinking about bitcoin is and why you don’t see any value in bitcoin?
Quiggin: Sure. Essentially bitcoin is a certificate saying that somebody has performed a bunch of very complicated computations on a computer. It is not an entitlement to the computer time that you need which would be valuable. It is a statement that this calculation has been performed. So there is no venue outside of bitcoin that you can cash it in for. Now if you compare for example, the US Dollar, it is a piece of paper with a picture of a president on it but the important point about the US Dollar is that the US Govt guarantees to accept it as a discharge of tax liability. So to the extent that you have faith in the US government, not to print too many of the things and so forth, there is an inherent value in US government currency and of course there is an inherent value of some kind in commodity currencies. So bitcoin differs from these things as there is no external value. If no one wants your bitcoins then there is nothing you can do with them. You can’t go and get the computer time that was used to create them, that’s gone, so it really is valueless.