This coming week a film arguing government deficits are good rather than bad, and the American economist who’s its key protagonist, embark on a tour of Australia.
The feature film, Finding the Money, and Modern Monetary Theory (MMT) economist Stephanie Kelton, won’t be visiting New Zealand. It’s interesting to consider, however, how Kelton and the film might be received if they did visit these shores.
Certainly much of the economic establishment, plus some politicians and pundits in NZ would probably dismiss Kelton and co as dangerous kooks, whose ideas would see the Government throwing money around like drunken sailors, turning our economy into some sort of Zimbabwean-style basket case with rampant inflation.
That’s not a narrative Kelton & Co are unfamiliar with facing in their native United States. They certainly turn conventional thinking on government debt and deficits on its head and have plenty of high profile critics, some of whom appear in the film labeling MMT "voodoo economics" and "a hare brained theory that basically says there’s a free lunch."
But a key argument in Finding the Money is they’re not actually proposing a radical new paradigm. Nor printing money and spraying it around for the sake of it.
Rather, they argue what they’re striving to do is explain accurately how the monetary system actually works. A key plank of this is that government deficits in countries where the Government issues its own currency, such as the US and New Zealand, are actually a good rather than a bad thing. Government debt is the private sector's savings.
“People don’t make the connection that the national debt is nothing but all these safe assets. It’s just our savings,” Kelton, a professor of economics and public policy at Stony Brook University, says. “You could take the [US] national debt clock that scares everyone and rename it ‘the US dollar savings clock.’ And I think everybody would have a very different kind of reaction.”
Or as Peter Coy, a New York Times opinion writer puts it; “The sectoral balances approach means every time you say the government should run a surplus, you are saying that everybody else should collectively run a deficit.”
And Randall Wray, a professor of Economics at Bard College and Senior Scholar at the Levy Economics Institute; "The budget deficit that increases the private sector’s savings, dollar for dollar."
And then there’s this from Pavlina Tcherneva, associate professor of economics at Bard College;
“Money, it’s not something we dig out from the ground, we create it. It’s an accounting devise and money always has two sides.”
Opening both eyes
Kelton says looking through a conventional economist's lens means much of the public discourse is like going through life with one eye shut and one eye open, only getting half the picture.
"And then somebody like me comes in and says ‘let’s make sure we see the full picture’," she says.
The group telling the MMT story in the film largely comprises academics, pointing to former bond trader Warren Mosler as the instigator of their key ideas in the 1990s via a post-Keynesian economic group. It feels a bit like a ginger group, with Finding the Money’s website even asking for donations to help distribute and share the film.
However, Kelton’s certainly had some influence in the corridors of power. She was an advisor to Bernie Sanders' 2016 presidential campaign and worked for the Senate Budget Committee under his chairmanship. She was also one of eight members of an economic working group for incoming President Joe Biden in 2020. And Kelton's 2020 book, The Deficit Myth, Modern Monetary Theory and How to Build a Better Economy, gained wide publicity.
The US-centric film argues some key points including; as the Government's the issuer of the currency it can’t run out of money, for a currency issuer finding the money is never the problem, rather finding the real resources and managing inflation is, currency issuers don’t tax first, they spend first, and; taxes drive demand for a currency. Because of all this the Government's budget isn't viewed like that of a household.
The household analogy, however, is a simple one for voters to understand and often used by politicians. For example, in a recent speech to the NZ Economics Forum it was made by Finance Minister Nicola Willis. After noting the "government books have deteriorated, with deficits since 2019/20 and a return to a wafer-thin surplus not forecast until 2026/27," Willis said what the new government's doing is; "no different to what any household or business does when its finances come under strain."
The thinking's not too different at our other major party, Labour. Whilst NZ government debt increased dramatically during the Covid-19 pandemic under Labour, as it did under conservative governments in Australia and the United Kingdom and under both US presidents Donald Trump and Biden, the ultimate fiscal goal still remains a return to surplus and debt reduction, just in a different way and probably at a slower pace.
And you can expect questions from Labour's new Finance Spokeswoman Barbara Edmonds over whether the Government's promised tax cuts will be fully funded and/or affordable.
Think about this. https://t.co/bR8VIrvd1Z
— Stephanie Kelton (@StephanieKelton) February 21, 2024
Money creation
A key point of Finding the Money is governments, and banks for that matter, create money. Governments by spending, banks by lending. Additionally it argues government taxes "destroy money," which is probably something those of a libertarian bent could agree with.
We certainly witnessed money creation in the Reserve Bank's efforts to prop the economy up during the pandemic.
When Covid-19 hit in March 2020, tipping the world into massive economic disruption and uncertainty, the Reserve Bank embarked, for the first time, on quantitative easing, or QE. This saw the Reserve Bank buy about $53 billion worth of government and local government bonds from a range of banks with newly created money. Additionally home lending banks were able to access $19 billion of three-year money priced at the Official Cash Rate, just 0.25% for most of the period, through the Reserve Bank's Funding for Lending Programme.
The Government hadn't first raised taxes or embarked on bond issuing programmes to fund these central bank initiatives. So if money can be created, or printed, to buy government bonds or be provided for banks to lend, surely it can also be created to do other things?
From an MMT perspective it's important to note the NZ Government borrows in NZ dollar denominated bonds. This, as S&P Global Ratings' Martin Foo noted in an episode of interest.co.nz's Of Interest Podcast last year means; "They have a central bank that, to be frank, can print New Zealand dollars if needed in a stress scenario." S&P, of course, has a 'AAA' domestic currency (NZ dollar) sovereign credit rating on NZ with a stable outlook. That's its highest possible rating, and means the Government can borrow money cheaper than local government and the private sector.
Careful analysis required
Creaking infrastructure, whether it be water pipes, sewerage systems, Cook Strait ferries, housing supply and affordability, roads or public transport, is a major topic of discussion in NZ at the moment. Viewing government finances through an MMT lens, the Government could create the money to fund key infrastructure projects. However, that doesn't mean it should just charge ahead and do so, Kelton says. A careful analysis, including of the likely inflationary impact should be undertaken before a decision is made.
"If you want to do $2 trillion of infrastructure investment, what are the real resources that we’re going to need, where are we going to get the contractors, the architects and the engineers, the steel, the concrete, the machines? Show me that you have access to the real resources. Or are you going to have to compete for those, and that tells me that you’re going to be bidding up prices," Kelton says in the film.
"The best defence against inflation is a good offence. It’s to think about it ahead of time, it’s to consider before you allow a vote [in Congress]."
As for banks, the film argues private banks create money, rather than the conventional idea they lend other people’s money, and this can also add to inflationary pressure.
If banks lent other people’s money; "we wouldn’t get global financial crises, we would not get speculative bubbles in housing," Wray argues.
Harking back to the US response to the Great Depression and World War II, the film argues from an economic perspective the issue wasn’t finding the money to combat these challenges. Rather, it was reconfiguring the economy and acquiring the resources to do so. Moving on from here, there's subtle promotion of the Green New Deal, a US congressional resolution introduced by Representative Alexandria Ocasio-Cortez and Senator Edward Markey in 2019 that emphasizes environmental and social justice while calling for new job creation.
Climate change is labeled "the ultimate inflationary pressure in front of us," with the film's narrator noting; "we will need to very carefully manage our real resources while we decarbonise the economy if we want to keep prices stable in the future."
Whilst those promoting MMT tend to have progressive political leanings, Kelton noted in her book; "MMT can be used to defend policies that are traditionally more liberal (e.g. Medicare for all, free college, or middle class tax cuts) or more conservative (e.g. military spending or corporate tax cuts)."
Money an organising tool not a scarce resource
Towards the end of Finding the Money the narrator acknowledges being able to create money doesn’t solve all our problems.
"The real challenge revolves around how we can organise our collective resources to allow humanity and the rest of the living world to thrive, within planetary boundaries. If we have a vision for a better future money is not the scarce resource we need to go out and find before we can start building it. Money is the organising tool we can use to organise our people and real resources to make that vision a reality."
And Kelton adds even if the MMT view were to become the accepted norm, there'd still be disagreements about the best way to use the deficit.
"But at least we would be having the right debate…The question isn’t 'will it increase the deficit?' The question is 'will it increase inflationary pressures?'," she says.
What about MMT in NZ?
So what are the chances of any NZ politicians trying to change the conventional discourse around government deficits and debt to an MMT one? As we strive for a net-zero carbon emissions economy, against the backdrop of other challenges, there'll be more pressure on the Government's balance sheet. However a politician publicly championing MMT, and trying to change the narrative around government deficits and debt, wouldn't find the going easy.
It's much easier to keep telling voters the Government needs to tighten its collective belt, just as households have had to do. And that too much debt is a bad thing. Detailing why you believed new thinking was needed wouldn't be easy in an environment where some political journalists, who report politics like a sport, are want to say "explaining is losing." Then there's political opponents and the dire results they'd say your policies would lead to.
Ultimately governments make political choices. Whether it be a Covid-19 lockdown and rolling out a wage subsidy scheme, or offering tax cuts benefiting those on higher incomes and landlords, governments typically manage to find a way to fund what they really want, or believe they need, to do.
For her part, Kelton appears to be realistic about her and her allies' chances of moving the dial to a place where their world view becomes the dominant one.
"Do I think we’re going to win? I won’t say no, but it’s going to be a hell of a fight," she says.
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