Alan Austin explores the place of modern monetary theory in economic reporting today.

NOW the footy season is underway, let’s imagine a quantum physicist invited into the commentary box at the MCG to offer his expert analysis.

COMMENTATOR: Ohhhh! Dusty has dropped the ball! PHYSICIST: Sorry, Tim. He didn’t drop the ball. You are perpetuating Newtonian myths saying that. It lost contact with his hands as the coefficient of friction approached zero, and the two ellipsoids – the football and the Earth – accelerated towards each other under gravitational attraction. COMMENTATOR: Kennedy will take his shot for goal from right on the 50 metre line ... PHYSICIST: Please, Tim, it’s only 50 metres if the player is stationary, which he isn’t. You are completely ignoring length contraction and encouraging ignorance among spectators of spacetime curvature. COMMENTATOR: With just three minutes until the siren ... PHYSICIST: Look, Tim. That is not accurate. It is three minutes until the timekeeper presses the button. Players in the forward pocket near the loudspeaker will certainly hear it immediately. But because of the speed of sound, the backline won’t hear it for three minutes and 0.297 seconds.

Point made? Good. Overdone? Okay, sorry.

Everything modern monetary theorists (MMT) say about the nature of money in the economy is arguably correct. As are the physicist’s observations above. But they are also irrelevant to commentary upon a fascinating game — whether it is Aussie Rules football or political economics. And after a while, they become irritating.

"Modern Monetary Theory Makes Sense, Up to a Point" by ROBERT J. SHILLER via NYT https://t.co/uUwvwXRubz pic.twitter.com/a15mBIHu6m — Flame Boy (@FlameBo29923928) March 29, 2019

Relativity

The parallel with the theory of general relativity in physics is actually apt. Because how we understand the workings of the economy depends on our relative position. Theoretical economists see MMT as a satisfying way to describe macroeconomic changes. Householders just see the economy as providing them with an income and loan funds, but also exacting various payments from them. Governments still keep the national accounts according to the traditional rules.

These rules include:

revenue equals taxation plus interest, plus dividends, plus sale of goods and services; revenue minus spending equals surplus or deficit; and deficits accumulate into government debt.

So, quite reasonably, how we understand the economy and the language we use to describe it depends on where we are and how we are travelling — it’s relative.

Analysts who regard social justice as a high government priority find MMT language unhelpful. They prefer the traditional concepts of taxes, other revenue, government spending, debt and interest payments.

This does not mean these writers reject MMT precepts. Like quantum physics at the footy, they are correct. But extraneous and annoying.

Former Federal Reserve chief Janet Yellen admits she's not a fan of modern monetary theory, saying its proponents are “confused” about what can fuel inflation in the economy https://t.co/9tdXao75A3 — Bloomberg Economics (@economics) March 30, 2019

The real world

Australia’s Treasury, Finance Department and Tax Office all still use the language and logic of conventional debit and credit accounting in their published data. So it is quite reasonable for those tasked with monitoring the performance of these departments to do so with the same logic and language. In fact, every economy in the world – all 229 of them – still use conventional accounting. Hence criticising those who report outcomes in terms consistent with convention is unwarranted.

Worse, some MMT commentary serves to blunt the political impact of critical analyses of governments such as those in Australia and the USA which currently serve the interests of the rich and powerful over those of the majority.

A recent IA article sought to expose the hypocrisy of Australia’s Coalition Government, which arguably stole the 2013 election on promises to reduce government debt, to generate budget surpluses every year and manage a fairer economy.

As detailed in IA, the Coalition Government did the opposite after the election. It ran deep deficits every year, despite the end of the global financial crisis. It doubled all debt taken on since before Federation. It increased the burden of taxes and costs on the majority, while making company tax virtually optional for the big, highly-profitable corporations. It shifted wealth and income dramatically from the poor to the rich.

Many comments on that IA piece from MMTers sought not to bolster the condemnation of political bastardry and media hypocrisy but to attack the article for not embracing MMT concepts:

'You are the Libs' useful idiot. I am not. Wake up to yourself and stop polluting the anti-Lib discourse with your pro-Lib macroeconomics.' 'Your work is mealy mouthed. You claim to understand MMT, then are overtly pro surplus. You claim to be Anti-LNP, yet espouse positions that work towards LNP goals.'

Intentionally or not, those comments comfort and protect the predators now grasping more and more income, and wealth unearned.

It will be intriguing to see this week how firmly and how effectively MMTers critique Tuesday’s Federal Budget and the Opposition’s alternative plans.

Challenges to the MMTers

The task ahead for MMT proponents is to come up with a national accounting system using their concepts and persuade some governments to switch. If this works out well, it will be adopted more widely.

As MMTers support deeper government deficits, they may have to reckon more realistically with the real impact of interest paid on Commonwealth Government securities, or the gross debt. Effectively, this shifts wealth from the poor to the rich and transfers real assets from Australians to foreigners.

Australia’s total interest bill is $17.3 billion this year. Under current national accounting, that is real money not available for real hospitals, schools, infrastructure and the environment. About 60 per cent of this is paid to non-residents. Some of that $10 billion buys up agricultural land and other real assets as they come to auction.

The cost of the debt in the USA this year is a staggering US$591.4 billion (A$833 billion) paid to foreign governments and other wealthy investors in interest. If that was zero, or close to, then that quantum would also be available for education or health care. Or maybe a big beautiful wall.

MMT proponents also must explain more convincingly why private debt is more of a problem than government debt, given their postulate that if one goes up the other must go down. There is an argument that the more private debt the better when interest rates are low, incomes are high, and the borrowings are used to build houses, businesses and other productive assets.

There are other critiques of MMT more erudite than these. Perhaps we shall come back to these later.

Until then, let’s chill, open another beer and enjoy the game.

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