During my recent trip to Japan, where I made several presentations to various groups, including a large gathering in the Japanese Diet (Parliament), I received a lot of press interest, which is a good sign. I am slowly putting together the translated versions of some of the print media articles. Today, I provide a translation (with my annotations) of an interview I did with the centre-left newspaper – Asahi Shimbun – on November 6, 2019 in Tokyo. This is a daily newspaper and is one of the largest of five national newspapers in Japan. It has an interesting historical past but that is not the topic of the blog post today. The article opened with a statement introducing Modern Monetary Theory (MMT) and then followed a Q&A format. I have expanded the answers reported in the paper to reflect the actual answers I gave to the two journalists during the interview and to a wider press gathering at an official press conference the day before in Tokyo.
The article (November 20, 2019) – 消費増税「信じがたい」 異端「MMT」の名付け親語る (“Consumption tax hike ‘It’s hard to believe’) – records the conversation I had with the two journalists, Tetsuya Kasai and Kazuo Teranishi, at the Japanese Parliament on November 6, 2019.
This was the day after my formal presentation to the Diet. The face-to-face interview lasted about an hour and was in English.
The article also uses material from the main press conference on November 5, 2019, which followed the formal presentation. The open press conference also lasted about an hour but was interpreted.
I am also just reporting the English-translation, rather than the original Japanese version, but you can check it against the article linked above if you can read Japanese.
The photos were published in the Asahi article and came from the interview (November 6, 2019) and the press conference (where I am wearing translation earphones) (November 5, 2019). The photo effects (colouring etc) were their doing.
The article opened with a statement introducing Modern Monetary Theory (MMT).
Countries that can issue government bonds in their own currency, such as Japan and the United States, will not face the need to default, so they should expand their net public spending to increase their income growth and employment if they have real resources available.
Inflation can also be controlled through a range of policy levers.
Modern Monetary Theory (MMT) is a theory that is considered to be heretical by the mainstream macroeconomics. But interest in MMT has grown in many countries as the reliance on moentary policy to stimulate growth has failed and central bank governors are calling for a change in policy emphasis.
The former President of the European Central Bank (ECB), Mario Draghi, who recently retired, said, that policy makers should be open to MMT.
So, why should we be considering MMT now?
We asked Professor Bill Mitchell from Newcastle University in Australia, who is one of the original developers of MMT and who is visiting Japan at the moment, for his view on the growing popularity of MMT.
Why do you think MMT is attracting attention now?
Mainstream macroeconomics advocates an economic policy which relies on monetary policy to stabilise growth and prevent recessions.
The problem is that it has reached a point where almost everyone can see that it has not been able to answer the challenges it has set itself. In many countries, real wages have fallen and/or nominal wages growth has been flat.
Inflation is low despite the massive injections of bank reserves via QE and negative interest rates in various nations.
We are starting to reach a consensus that the way we are organising our socio-economic system is invoking damaging climate change, which will have to be addressed with a massive transformation in the way we produce and consume, which, in turn, will require a substantially greater role for government intervention and fiscal policy.
When governments engage in war, they spend a lot of money on the military. During the global financial crisis, even though the banks had behaved in an irresponsible and often criminal manner, the governments bailed them out immediately with vast sums to prevent a financial collapse.
We didn’t ask then: Where is the money coming from? We instinctively knew it came from the currency-issuer, the government.
But, when the government is pressured to allocate spending to improve the lives of the socially vulnerable, the unemployed or the poor, or to provide outlays to protect our environment, the first question that is asked is ‘where is the money coming from’.
And that question is often asked by conservative interests that, in one way or another, benefit from military expenditure or financial bailouts.
But the issue that is highlighted is this: Why can the government use its currency to benefit the military or the financial sector but cannot use it to build and maintain first-class public infrastructure?
Once we see the hypocrisy in that dichotomy, then we can move on to understand that the currency-issuing government is not financially constrained at all. Rather, it is constrained by real resources, and, ultimately, by what the natural environment can sustain in terms of economic activity and consumption.
And that revelation, at the heart of MMT, opens up the policy debate in ways we have not considered, while operating in the mainstream austerity-bias environment.
There is a growing understanding now, that fiscal policy has to dominate into the future.
And the only economists who were unambiguously advocating that position when it was not popular, were the MMT economists.
The former ECB President Draghi has recently started talking about the need for fiscal policy. At the recent G20 meeting, at meetings of Finance Ministers and Central Bank Governors, there is an opinion that monetary policy has reached its limit, and that if the global economy is susceptible to recession in the future, then fiscal policy will have to become more important.
What is your view on that?
In his farewell speech to mark his retirement, Mario Draghi indicated that monetary policy has reached its limits.
He also said that policy makers should be open “to ideas such as Modern Monetary Theory (MMT)”.
He said “These are objectively pretty new ideas … They have not been discussed by the Governing Council. We should look at them”.
In Australia, the RBA governor Philip Lowe has also almost begged the federal government to introduce fiscal stimulus given our economy is heading towards recession and unemployment is rising.
Now, the central bank governors around the world appear to be ‘singing off the same sheet’.
In other words, the promise that mainstream economists held out about the capacity of monetary policy to deliver benefits can no longer be sustained.
A reliance on monetary policy cannot be supported.
I think this is the beginning of a new era of fiscal policy dominance.
But, if you expand government deficits and increase the issuance of government bonds, won’t it lead to a rise in interest rates, and isn’t that a negative for economic growth?
That logic is just repeating the standard mainstream economics myths.
If the propositions were true, then there should have been a financial crisis in Japan by now, given the fiscal policy settings of the government.
For nearly 30 years, Japan has been running substantial fiscal deficits, it now has the world’s largest gross public debt ratio and the central bank now holds around 45 per cent of the outstanding government bonds.
No fiscal crisis has occurred.
Even the yields on 10-year government bonds have been negative recently.
The point is that there is not a finite pool of savings that the government competes with private investors over. Further, the private banks will always make loans to credit-worthy private borrowers. Loans create deposits or liquidity. There is no hard constraint operating.
And, ultimately, those deposits have transactional veracity, because the Bank of Japan will always ensure there are sufficient reserves in the banking system to allow the payments system to function effectively.
So there is no reason interest rates will rise in the future as a result of the ongoing deficits.
The danger of rising government bond yields will not be realized in Japan in the foreseeable future.
That means that the Japanese government should continue to have a relatively large fiscal deficit into the future to satisfy the saving preferences of the non-government sector and ensure there is full employment and first-class infrastructure to meet the challenges of the ageing society and the climate crisis.
What is the role of the central bank?
In MMT’s view, the central bank’s job is to set a policy interest rate and leave it as it is. Zero is zero, 2 per cent is 2 per cent. It’s just a matter of setting the policy rate and leaving it at that.
We prefer a zero interest rate, given that this is the level the system will move to if the government is running continuous deficits and the central bank doesn’t conduct open market operations or set a support rate on excess reserves.
The MMT economists consider monetary policy to be an ineffective policy tool for counter-stabilisation purposes – to adjust economic activity.
Its impact is unpredictable because it relies, in an indirect fashion, on differential distributional impacts of interest rates changes (on lenders and borrowers) which are hard to assess in any reliable manner.
We have also seen that the various QE (quantitative easing) measures taken by central banks over the last few decades have not succeeded in meeting their aims – which has been to increase the inflation rate.
Mainstream economists thought that if QE increased reserves in the system (through the asset-swap – bonds for reserves), then banks would increase loans and economic activity would rise.
But this ‘supply-side’ view of banking is wrong. Banks do not loan out their reserves to the retail market. Their lending is not reserve constrained. The reason that borrowing was weak after the GFC was because firms were uncertain of the future returns on new productive capacity and households became more risk-averse given the elevated risk of unemployment.
Fiscal policy is a direct form of spending intervention and more predictable in its impacts.
Further, the idea that the central bank should be independent from the political process is a myth. There are many reasons why central banks can never been independent from the Treasury functions of government.
Governments appoint the senior officials at the central bank.
But more importantly, the officials from the central bank and treasury (or Ministry of Finance in Japan’s case) have to meet regularly (daily) to ensure the impacts of fiscal policy on the liquidity are commensurate with the bank’s own policy operations.
There is a high level of coordination between the two arms of ‘government’ in all our countries.
The myth of central bank independence just plays in to the neoliberal trend towards depoliticisation of macroeconomic policy, where the elected government can divert the negative publicity associated with harsh economic policies by claiming the ‘central bank’ did it, not us!
I can sympathize with the idea of spending money on healthcare, education, and public infrastructure, but I think there are risks in the MMT concept. If the government increases the budget deficit, how will the financial market react? What will you do if inflation begins to rise? Who will take responsibility at all?
Why will inflation begin to rise? It hasn’t increased in Japan for 20 years ….
It has only been 20 years. No one knows when it will go up.
If you understand the inflationary process then you will conclude, as I do, that inflation will not accelerate in Japan in the foreseeable future.
20 years is a very long period. If the predictions of the mainstream economists had any veracity then we would have seen inflationary forces before now in Japan, given the scale of the fiscal intervention and the way the Bank of Japan has operated.
It is easy to pose, in the abstract, the “No one knows when it will go up”.
Eventually, if inflation was to accelerate, then the mainstream will say they were correct all along. But that would be a false conclusion. The causality that the mainstream suggest – that fiscal deficits and the Bank of Japan purchases of government bonds are pumping ‘too much’ yen into the economy which will cause inflation because there is too much money chasing too few goods is patently false.
If that was true, then nominal GDP growth should be high. It is not and hasn’t been.
But, moreover, we should understand what government debt is in the first place?
Who holds the government debt?
We do. Pension funds and investment funds hold it. It is one of the components of our financial wealth.
And the government’s so-called interest burden is, in fact, a component of our income flow.
Why do you think that increasing our wealth or income is a bad thing?
The government’s public debt is our financial asset and allows us to hold our stock of wealth in risk-free financial asset.
Isn’t it necessary to balance the fiscal balance? Will future generations be forced to pay the cost of the deficits the government runs now?
No, the future generations never have to repay past deficits.
When I was younger, the Australian government built up a large debt as a result of running deficits as part of the post-WW2 nation building exercise.
I didn’t repay it once I started working.
Rather, I benefited from the excellent education system that the government created when I was younger. My parents were poor and if I hadn’t had access to excellent public education and welfare support, I wouldn’t have been able to reach the position I am in now.
The deficits in the past stimulated social mobility in Australia and allowed children born into working class families to escape that poverty and gain material security through education.
In what sense, then have my generation paid back the deficits?
But, also, when considering what the appropriate fiscal position of the government should be, we have to consider the context, and by that I mean the relevant goals of government and the state of non-government spending and saving desires.
A fiscal deficit, in itself, is neither good nor bad. The only way we can make sense of the appropriateness of the fiscal position is to juxtapose it against the state of the economy and the aspirations of the non-government sector, as expressed through its spending behaviour.
What I mean by that is that the government should always take responsibility to achieve full employment as a starting position.
We know that spending equals income and output, which in turn generates employment. At any point in time, there is one level of spending that will create enough demand to fully employ the available productive resources, given productivity levels.
If the non-government sector’s spending is insufficient to generate that particular level of spending, then the economy will not achieve full employment unless the government sector fills the spending deficiency.
So if the non-government sector desires to save overall and implements a strategy aimed at achieving that goal, then the government sector will typically have to run fiscal deficits on a continuous basis to maintain its goal of full employment.
It’s highly unlikely that a fiscal balance, where government spending exactly equals tax revenue, will correspond to a overall spending level that maintains full employment.
In the case of a nation such as Norway, which generates a lot of spending from its external sector, the North Sea energy resources, the government may be forced to run a fiscal surplus to avoid pushing too much spending into the economy. But that situation is rare.
So before we can say that a 2 per cent of GDP deficit is appropriate, or, a 4 per cent deficit is appropriate, or even a 2 per cent surplus is appropriate, we have to understand the context and the position of the economy in relation to achieving full capacity.
The Japanese government raised the consumption tax rate to 10% from October this year. On the other hand, there are political parties advocating tax cuts and abolition of consumption tax.
What is your view on this debate?
History tells us that over the last three decades, when Japan has used fiscal stimulus to maintain growth and keep unemployment low, the government has eventually come under pressure from mainstream economists to reduce the deficit because the mainstream claim that accelerating inflation and rising interest rates are likely to occur.
The more extreme versions of these fear campaigns have predicted that the government will face insolvency.
Unfortunately, the government has succumbed to this fear mongering and, at various times, imposed austerity measures, which have halted the growth rate and pushed-up unemployment.
For example, a recession occurred after the first consumption tax hike in April 1997.
Anybody who understood economics would have predicted that the growth cycle would end once the impacts of the consumption tax hike were felt. It was obvious that household consumption expenditure would be adversely affected and that’s exactly what happened.
It took some years and a renewed fiscal stimulus to get growth back on track in Japan.
The same sort of pressure occurred in 2014, when the government further increased the consumption tax level, and, again this caused a dramatic decline in household consumption spending and the inevitable move into recession.
The attacks on government fiscal policy, which have formed the basis of these ill-conceived austerity policies, have no basis in reality.
The Japanese government never faces insolvency and is operating in environment where continuous fiscal deficits are necessary to maintain low unemployment in the face of high non-government sector saving.
And so the decision to further increase the consumption tax in October of this year, well, I can only say that the Japanese government is doing something that is incredible.
Incredible in the sense that it has no credibility.
The Japanese government is clearly aware that its recent consumption tax hike will damage spending, which is why, this time, it provided some short-term offsets, but eventually the negative consequences will be revealed.
There is no economic case that can be made for the consumption tax hike and I fully support the political groups, on both the Conservative and the progressive side of politics in Japan, that oppose this austerity.
Thanks to the interview team for an interesting time.
But, as you can see, even the centre-left media elements in Japan, have mainstream-type questions as the focus. The neo-liberal mindset is difficult to penetrate even among progressive forces.
Thanks to Akiko (😙) for the Japanese text (it was behind a paywall).
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.