159 comments

1. 

   Nick Rowe · January 27, 2012 - 7:36 am · Reply→

   I reckon we are all converging. Which is good.
   Alan T Thanks!
   “I find this issue fascinating because of its importance for public policy, and because the arguments on both sides, even the ones that are wrong, are so plausible (at least to someone like me with no particular training in economics).”
   And are equally (or even more?) plausible to us with economics training!

2. 

   Nick Rowe · January 27, 2012 - 7:42 am · Reply→

   anon: “On point #4, you have the government cut taxes at full employment, then not raise taxes when rates rise. If they do raise taxes, couldn’t they (roughly) keep interest equal to inflation over time. Or do interest rates have to always be above inflation rates to prevent accelerating inflation?”
   1. That’s not what I said. It’s the relation between interest rates and the growth rate (not inflation) that matters.
   2. I already explained it it the comment.

3. 

   Jos Laliberté · January 27, 2012 - 8:44 am · Reply→

   Nick Rowe, JKH:
   Ok, let’s forget about the difference in interest and yields. Let’s assume we have a super central bank that is able to set the interest so that quantity demanded for net financial assets in the non-government sector (i.e. government bonds) always match the quantity offered (so the Central Banks always adjust the interest so that Cohort(t+1) always find it appealing to buy bonds from Cohort(t)). And lets further assume that conditions as set out in point #4 of Nick Rowe’s comment @ January 26, 2012 at 03:21 PM holds (in a nuttshell I accept ALL Nick Rowe’s assumptions). Then this is what I think would be MMTers’ take on this scenario:
   MMTers: “this scenario demonstrates how bad a tool is monetary policy to control inflation even assuming that we have SUPER Central bank that is always able to set interest rate perfectly. By injecting ever more interest income into the private economy, the Central Bank keeps on increasing the size of the net financial assets of the non government sector, which means that ever increasing interest rate is necessary in the future to make sure that these “out of control” net financial assets do not become inflationnary. This is really a bad policy as the Central Bank IS BOTH THE SOURCE AND THE REMEDY TO THE PROBLEM! We need a definitive solution: tax (that is, confiscation of net financial assets from the non governmental sector through a budget surplus). And no need to wait at Cohort 5 to tax, as soon as government realises that interest rate needs to go higher to control inflation, government should tax! This would mean taxing Cohort 1 at the end of their life.”
   So the above is what I think would be MMTers’ response (again, this is accepting all Nick Rowe’s assumptions… but as Nick Rowe may have noticed, MMTers like me would first typically take a shot at his assumptions :-).
   I also agree with JKH’s last comment regarding the role of taxation although I prefer to say in typical MMT fashion that “net financial assets is not the burden” rather than government debt is not the burden. 🙂

4. 

   Mandos · January 27, 2012 - 8:46 am · Reply→

   “its importance for public policy”
   But IS it important for public policy? Everyone so far seems to have agreed that it is possible and even likely to have debt overmatched by the gains from the investment…

5. 

   JKH · January 27, 2012 - 9:33 am · Reply→

   Jos,
   I think MMT might be more closely in synch with Nick’s approach than appears on the surface.
   Nick describes taxation as a requirement to pay interest on the bonds, in the face of unsustainable debt math, where the interest rate exceeds the growth rate. Taxes are necessary to avoid default due to unsustainable interest rate/growth math
   The key is why this math relationship has emerged in the first place – inflation.
   MMT would say that the CB can control the interest rate – through the short term policy rate plus expectations – but that in order to ensure that control in all environments, it needs to have a fiscal policy option available in its hip pocket, in the event inflation risk become sufficiently severe.
   So MMT would explain such a tax as a firewall response to inflation risk rather than what is required to pay interest on the debt. Once inflation is tamed at the margin by fiscal policy, the debt math returns to a comfort zone, and the central bank can continue its interest rate control without fiscal policy.
   I think this gets you to roughly the same place as Nick’s argument, but with a slightly different nuance on the reason behind the decision to tax.
   The MMT “zero rate, zero bonds” policy option is an extreme case of this thinking. Rates are set permanently at zero, and the cumulative deficit is captured within the banking system balance sheet. That puts all the onus on fiscal policy to conduct what in essence is an indistinguishable fusion of fiscal and monetary policy. (Whether or not such a theory could ever work in practice is a different question; I think Nick believes strongly that it’s impossible.)

6. 

   Nick Rowe · January 27, 2012 - 10:17 am · Reply→

   JKH: “(Whether or not such a theory could ever work in practice is a different question; I think Nick believes strongly that it’s impossible.)”
   A zero real interest rate would, if a permanent policy, almost certainly require a very tight fiscal policy for a very long time. I think the national debt would have to go strongly negative. And it would almost certainly be dynamically inefficient, because it would mean the real interest rate would be less than the real growth rate. I would then bring in Samuelson 58 to argue for a looser fiscal policy and higher real interest rate.
   A zero nominal interest rate is possible. Milton Friedman argued for it in “The Optimum Quantity of Money”. But as I argued in that old post about a year back: it’s a recipe for communism. The central bank would have to own all the assets in the economy to make it feasible.
   Mandos: Here’s anothwer way of thinking about it: I’ve forgotten what it’s called, but there’s a way of doing the accounting that subtracts government assets (including real assets) from the government debt.

7. 

   anon · January 27, 2012 - 1:05 pm · Reply→

   Nick: “That’s not what I said. It’s the relation between interest rates and the growth rate (not inflation) that matters.
   I understand that. I’m asking when g is less than r can the government or central bank offset it. Could they do write downs? What about the Fed holding assets?
   “I already explained it it the comment.”
   I’ll assume you meant g must be less than r in the long run. Then aren’t cyclical burdens inevitable? (Are these similar to Minsky moments?) Are private sector interest payments a burden? Is there a difference between a government debt burden and a balance sheet recession?
   JKH: It’s not the principle that’s a burden, it’s the interest. Tax-financed transfers are “burdensome,” too.

8. 

   bigmac · January 27, 2012 - 2:00 pm · Reply→

   “I think the national debt would have to go strongly negative”.
   Unless you mean by this that the national debt would have to decrease substantially, isn’t this mathematically impossible?…

9. 

   Nick Rowe · January 27, 2012 - 2:03 pm · Reply→

   bigmac: the government could be a lender, not a borrower. It pays off all the debt, and then starts buying private bonds.