Bill Gates Implicitly Endorses "Crazy Talk" MMT

Published by Matthew Davidson on Mon, 18/02/2019 - 5:50pm in
MMT

On the one hand, I'm delighted that eminent self-made man William Henry Gates III has dismissed Modern Monetary Theory as "some crazy talk".

Gates worked his way up from practically nothing at Yale University (you've probably not heard of it) as the scion of a merely very wealthy family, to become an insanely wealthy entrepreneur. He did this upon realising that if you could copyright software (something legally uncertain at the time), you could then make an awful lot of money — from government-granted monopolies — over the wide use of the product of not an awful lot of work. His breakthrough insight was that one didn't have to wait for the establishment of legal precedent in order to begin exploiting it. Rather, you could do the two simultaneously. This proved to be his first and last history-changing innovation.

Since then Gates has been an unerring detector of, and proponent of, extraordinarily naff ideas destined for oblivion. The paradigmatic Gates bad idea came in 1995. The media famously dubbed 1995 "the Year of the Internet". In that year, Gates wrote a prophetic book full of naff ideas, and in passing he mused about the historical curiosity (nothing more than that) known as the Internet. It was, he thought, merely a signpost to the really significant online environment emerging, called the MicroSoft Network (MSN). Just as people were leaving proprietary, centralised online services like Compuserve and America OnLine in droves for the decentralised Internet, Gates was busily constructing his own new proprietary, centralised online service, because he knew a winning idea when he saw one.

So "crazy talk" is in effect a considerable endorsement of MMT by a man who will only begin to dimly perceive an undeniable truth after practically everybody else in the world has accepted it. First they ignore you, then they laugh at you, then they attack you, then Bill Gates ignores you and laughs at you, then you win.

On the other hand, the framing of MMT in this piece in the Verge is completely erroneous. It is misleading to say that MMT says (currency issuing) governments "need not worry about deficits because they can simply print their own currency" (emphasis mine). The scare word "print" here simply means "spend". A government spends its own money by issuing loose-leaf accounting records ("cash" to you and I), or by creating accounting entries on computers in the banking system. A currency issuing government must spend its own currency into the private sector before it can collect any of it back as taxes, fees, or fines. This "currency printing" is not novel, exceptional, radical, or crazy. It's a logical precondition of any sovereign monetary system.

Currency issuing governments cannot be said to spend any of the tax revenue they collect. Not one cent. When money is created, it is a financial liability for the government (an IOU, in effect), and a financial asset for the private sector. When the government collects money owing to it, it is merely cancelling out the liability against the asset (redeeming the IOU). Both the asset and the liability disappear in a puff of accounting. The government always spends newly created money. To claim that a currency issuing government normally uses "taxpayers' money", but in periods of wild abandon will resort to "printing money", is just flat-out wrong. Or worse, it is deliberate accounting fraud deployed for political purposes.

It is not that currency issuing governments can "print" money in order to spend; they cannot spend their own money any other way. As Warren Mosler says, the government neither has, nor does not have, any money. Or to put it another way, money isn't something a government has, it is something it does.

A further misrepresentation in the article is the claim that MMT proposes that governments should "manage inflation with interest rates". Not only do I not know of any major MMT scholar arguing any such thing, it would be hard to find any honest, knowledgable mainstream central banker who would endorse this position — and using interest rates to manage inflation is technically a major part of their job description!

Apologies for technobabble, but this is the short version: central banks (which implement monetary policy) can influence interest rates in the overnight market for funds required to settle the day's financial transactions between banks, and between banks and the government. This has a very, very weak, indirect, and unpredictable effect on private sector economic activity, and hence price stability. Much more direct and effective is the use of spending and taxation (fiscal policy) to ensure that there is neither too much money (inflationary) nor too little money (deflationary) for the goods available for sale in the economy as a whole, or in particular sectors of it.

The government uses money to achieve its (hopefully democratically determined) policy objectives. There is no alien thing out there called "the economy" which constrains how much money a government can create/spend or extinguish/tax. The limits on what we can achieve are the limits of our non-financial resources: raw materials, human beings, jam, etc.

As Modern Monetary Theory has hit so many radars that now even Bill Gates has heard of it, we can expect much more misrepresentation in future.