Professor John Quiggin ruffled a few MMT feathers with his recent blog entitled “MMT and Russia”
Does he have a point? Well, yes and no. He’d have been on safer ground if he’d challenged MMT advocates to suggest a suitable policy for Russia which has both double figure inflation and unemployment rates. Or soon will have, if they aren’t quite there at the moment.
Sometimes there is tendency, in MMT circles, to make glib comments along the lines of “sovereign currency issuing governments don’t need taxation to finance expenditure” which while technically correct, perhaps don’t give quite the right impression. They suggest we are irresponsible about creating high inflation.
There is that danger in Russia. The MMT fix for Russia wouldn’t simply be about letting their public sector deficit increase as it might be in America, the Eurozone or the UK. Deficits in the UK and the USA are only possible because there are willing international buyers for government securities denominated in the currencies of those countries. The demand for Russian securites denominated in rubles is much lower.
There would have to be a JG in Russia, with possibly strict wage and price controls, and those on that JG would have to work very hard to replace imported goods, previously made affordable by relatively high oil revenues, with domestically produced ones. Those JG jobs wouldn’t be an easy option for the currently unemployed.
Instead, JQ gets quite a lot wrong about MMT. Saying , for example:
“To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes.”
What’s the long run? As Keynes famously remarked we are all dead in the “long run”. See Bill Mitchell’s blog: http://bilbo.economicoutlook.net/blog/?p=29761
for a more comprehensive discussion of just why MMT isn’t wrong.
According to the principle of sectoral balances its is easy to show that:
Govt Deficit = Private Saving + Net Imports.
In other words, all money spent by the Government will be returned in taxation, as that money is spent and respent in the economy. Where else can it go? That is unless someone saves it. Either in a piggy bank or in a bank account. Or if it is spent on net imports. That means that money gets saved in the central bank of the big exporters. Then, and only then, it becomes unavailable to the taxman.
We see that countries like the UK, the USA can happily go on running deficit after deficit for year after year. These governments aren’t just funded by taxation. They are funded by these deficits too.
So can it continue? Will they have to repay it in the “long run”? Are these deficits a burden to British children and grandchildren?
Could a job guarantee work in Russia and other less affluent countries? Well, yes it could. The idea has worked in the few cases where it has been tried. Notably in Argentina and India in recent times. In addition, though, the taxation system would need to be improved considerably to ensure taxes were collected as required and, equally importantly, on time and before the receipts weren’t eroded in value by inflation. The lack of decent taxation system is a common factor found in many countries which are still suffering from high levels of inflation and which does indeed blight those economies. It isn’t being neoliberal to say that.
All Governments should also think in resource terms rather than solely in monetary terms. That includes especially human resources. Having a high percentage of the workforce hanging around doing nothing is wasteful in the extreme. Incidentally, and to that extent MMT is badly named. It is not really even about money per se. Neither is it even that modern! Is it a theory? Maybe. But then so is gravitation. So, if we do think in resource terms we can see that if, say, food production, for whatever reason, doesn’t keep up with food demand then, all other things being equal, there will be less to go around that is required and it will rise in price. Price being the mechanism by which scarce resources are rationed. Neither MMT nor any other economic theory can change the reality of that.
Modern Monetary Theory: Real Economics 