A radical alternative to macro policy?

Last Friday, an outfit called Strategy2040 New Zealand, together with Victoria University’s School of Government, hosted a lunchtime address by an Australian academic, Professor Bill Mitchell of the University of Newcastle.   He is a proponent of something calling itself Modern Monetary Theory, but which is perhaps better thought of as old-school fiscal practice, with rhetoric and work schemes thrown into the mix.

Mitchell attracted some interest on his trip to New Zealand.  He apparently did two substantial interviews on Radio New Zealand and attracted perhaps 150 people to the lunchtime address –  a pretty left-liberal crowd mostly, to judge from the murmurs of approval each time he inveighed against the “neo-liberals”.    In fact, the presence of former Prime Minister Jim Bolger was noted –  he who, without apparently recanting any specific reforms his government had put in place, now believes that “neo-liberalism has failed New Zealand”.     Following the open lecture, 20 or so invitees (academics, journalists and economists –  mostly of a fairly leftish persuasion) joined Mitchell for a roundtable discussion of his ideas.   Perhaps a little surprisingly, I didn’t recognise anyone from The Treasury or the Reserve Bank at either event.

Mitchell has it in for mainstream academic economics.   Quite probably there is something in what he says about that.  Between the sort of internal incentives (“groupthink”) that shape any discipline, and the inevitable simplifications that teaching and textbooks require, it seems highly likely there is room for improvement.   If textbooks are, for example, really still teaching the money multiplier as the dominant approach to money, so much the worse for them.   But as I pointed out to him, that was his problem (as an academic working among academics): I wasn’t aware of any floating exchange rate central banks that worked on any basis other than that, for the banking system as a whole, credit and deposits are created simultaneously.  He quoted the Bank of England to that effect: I matched him with the Reserve Bank of New Zealand.    And if very few people correctly diagnosed what was going on just prior to the financial crises in some countries in 2008/09, that should be a little troubling.  But it doesn’t shed much (any, I would argue) light on the best regular approach to macroeconomic management and cyclical stabilisation.  Perhaps especially so as (to us) he was talking about policy in Australia and New Zealand, and neither country had a US-style financial crisis.

He seemed to regard his key insight as being that in an economy with a fiat currency, there is no technical limit to how much governments can spend.  They can simply print (or –  since he doesn’t like that word – create) the money, by spending funded from Reserve Bank credit.     But he isn’t as crazy as that might sound. He isn’t, for example, a Social Crediter.    First, he is obviously technically correct –  it is simply the flipside of the line you hear all the time from conventional economists, that a government with a fiat currency need never default on its domestic currency debt.     And he isn’t arguing for a world of no taxes and all money-creating spending.  In fact, with his political cards on the table, I’m pretty sure he’d be arguing for higher taxes than New Zealand or Australia currently have (but quite a lot more spending).  Taxes make space for the spending priorities (claims over real resources) of politicians.  And he isn ‘t even arguing for a much higher inflation rate –  although I doubt he ever have signed up for a 2 per cent inflation target in the first place.

In listening to him, and challenging him in the course of the roundtable discussion, it seemed that what his argument boiled down to was two things:

  • monetary policy isn’t a very effective tool, and fiscal policy should be favoured as a stabilisation policy lever,
  • that involuntary unemployment (or indeed underemployment) is a societal scandal, that can quite readily be fixed through some combination of the general (increased aggregate demand), and the specific (a government job guarantee programme).

Views about monetary policy come and go.   As he notes, in much academic thinking for much of the post-war period, a big role was seen for fiscal policy in cyclical stabilisation.  It was never anywhere near that dominant in practice –  check out the use of credit restrictions or (in New Zealand) playing around with exchange controls or import licenses –  but in the literature it was once very important, and then passed almost completely out of fashion.  For the last 30+ years, monetary policy has been seen as most appropriate, and effective, cyclical stabilisation tool.  And one could, and did, note that in the Great Depression it was monetary action –  devaluing or going off gold, often rather belatedly – that was critical to various countries’ economic revivals.

In many countries, the 2008/09 recession challenged the exclusive assignment of stabilisation responsibilities to monetary policy.  It did so for a simple reason –  conventional monetary policy largely ran out of room in most countries when policy interest rates got to around zero.   Some see a big role for quantitative easing in such a world.  Like Mitchell – although for different reasons –  I doubt that.    Standard theory allows for a possible, perhaps quite large, role for stimulatory fiscal policy when interest rates can’t be cut any further.

But, of course, in neither New Zealand nor Australia did interest rates get anywhere near zero in the 2008/09 period, and they haven’t done so since.    Monetary policy could have been  –  could be –  used more aggressively, but wasn’t.

As exhibit A in his argument for a much more aggresive use of fiscal policy was the Kevin Rudd stimulus packages put in place in Australia in 2008/09.   According to Mitchell, this was why New Zealand had a nasty damaging recession and Australia didn’t.  Perhaps he just didn’t have time to elaborate, but citing the Australian Treasury as evidence of the vital importance of fiscal policy –  when they were the key advocates of the policy –  isn’t very convincing.   And I’ve illustrated previously how, by chance more than anything else, New Zealand and Australian fiscal policies were reamrkably similar during that period.   And although unemployment is one of his key concerns –  in many respects rightly I think –  he never mentioned that Australia’s unemployment rate rose quite considerably during the 2008/09 episode (in which Australian national income fell quite considerably, even if the volume of stuff produced –  GDP –  didn’t).

On the basis of what he presented on Friday, it is difficult to tell how different macro policy would look in either country if he was given charge.   He didn’t say so, but the logic of what he said would be to remove operational autonomy from the Reserve Bank, and have macroeconomic stabilisation policy conducted by the Minister of Finance, using whichever tools looked best at the time.  As a model it isn’t without precedent –  it is more or less how New Zealand, Australia, the UK (and various other countries) operated in the 1950s and 1960s.  It isn’t necessarily disastrous either.  But in many ways, it also isn’t terribly radical either.

Mitchell claimed to be committed to keeping inflation in check, and only wanting to use fiscal policy to boost demand where there are underemployed resources.    And he was quite explicit that the full employment he was talking about wasn’t necessarily a world of zero (private) unemployment  –  he said it might be 2 per cent unemployment, or even 4 per cent unemployment.     He sees a tight nexus between unemployment and inflation, at least under the current system  (at one point he argued that monetary policy had played little or no role in getting inflation down in the 1980s and 1990s, it was all down the unemployment.  I bit my tongue and forebore from asking “and who do you think it was that generated the unemployment?” –  sure some of it was about microeconomic resource reallocation and restructuring, but much it was about monetary policy).   But as I noted, in the both the 1990s growth phase and the 2000s growth phase, inflation had begun to pick up quite a bit, and by late in the 2000s boom, fiscal policy was being run in a quite expansionary way.

I came away from his presentation with a sense that he has a burning passion for people to have jobs when they want them, and a recognition that involuntary unemployment can be a searing and soul-destroying experience (as well as corroding human capital).  And, as he sees things, all too many of the political and elites don’t share  that view –  perhaps don’t even care much.

In that respect, I largely share his view.

Nonetheless, it was all a bit puzzling.  On the one hand, he stressed how important it was that people have the dignity of work, and that children grow up seeing parents getting up and going out to work.   But then, when he talked about New Zealand and Australia, he talked about labour underutilisation rates (unemployment rate plus people wanting more work, or people wanting a job but not quite meeting the narrow definition of actively seeking and available now to start work).   That rate for New Zealand at present is apparently 12.7 per cent –  Australia’s is higher again.     Those should be, constantly, sobering numbers: one in eight people.      But some of them are people who are already working –  part-time –  but would like more hours.  That isn’t a great situation, but it is very different from having no role, no job, at all.  And many of the unemployed haven’t been unemployed for very long.  As even Mitchell noted, in a market economy, some people will always be between jobs, and not too bothered by the fact.  Others will have been out of work for months, or even years.   But in New Zealand those numbers are relatively small: only around a quarter of the people captured as unemployed in the HLFS have been out of work for more than six months (that is around 1.5 per cent of the labour force).       We should never trivialise the difficulties of someone on a modest income being out of work for even a few months, but it is a very different thing from someone who has simply never had paid employment.  In our sort of country, if that was one’s worry one might look first to problems with the design of the welfare system.

Mitchell’s solution seemed to have two (related) strands:

  • more real purchases of good and services by government, increasing demand more generally.  He argues that fiscal policy offers a much more certain demand effect than monetary policy, and to the extent that is true it applies only when the government is purchasing directly (the effects of transfers or tax changes are no more certain than the effects of changing interest rates), and
  • a job guarantee.    Under the job guarantee, every working age adult would be entitled to full-time work, at a minimum wage (or sometimes, a living wage) doing “work of public benefit”.     I want to focus on this aspect of what he is talking about.

It might sound good, but the more one thinks about it the more deeply wrongheaded it seems.

One senior official present in the discussions attempted to argue that New Zealand was so close to full employment that there would be almost no takers for such an offer.   That seems simply seriously wrong.    Not only do we have 5 per cent of the labour force officially unemployed, but we have many others in the “underutilisation category”, all of whom would presumably welcome more money.     Perhaps there are a few malingerers among them, but the minimum wage –  let alone “the living wage” – is well above standard welfare benefit rates.   There would be plenty of takers.   (In fact, under some conceptions of the job guarantee, the guaranteed work would apparently replace income support from the current welfare system.)

But what was a bit puzzling was the nature of this work of public benefit.    It all risked sounding dangerously like the New Zealand approach to unemployment in the 1930s, in which support was available for people, but only if they would take up public works jobs.  Or the PEP schemes of the late 1970s.   Mitchell responded that it couldn’t just be “digging holes and filling them in again”.  But if it is to be “meaningful” work, it presumably also won’t all be able to involve picking up litter, or carving out roadways with nothing more advanced than shovels.  Modern jobs typically involve capital (machines, buildings, computers etc) –  it accompanies labour to enable us to earn reasonable incomes –  and putting in place the capital for all these workers will relatively quickly put pressure on real resources (ie boosting inflation).   If the work isn’t “meaningful”, where is the alleged “dignity of work”  –  people know artificial job creation schemes when they see them –  and if the work is meaningful, why would people want to come off these government jobs to take existing low wage jobs in the prviate market?

The motivation seems good, perhaps even noble.  I find quite deeply troubling the apparent indifference of policymakers to the inability of too many people to get work.   The idea of the dignity of work is real, and so too is the way in which people use starting jobs to establish a track record in the labour market, enabling them to move onto better jobs.

But do we really need all the infrastructure of a job guarantee scheme?  In countries where interest rates are still well above zero, give monetary policy more of a chance, and use it more aggressively.   For all his scepticism about monetary policy, it was noticeable that in Mitchell’s talks he gave very little (or no) weight to the expansionary possibilities of exchange rate.    But in a small open economy, a lower exchange rate is, over time, a significant source of boost to demand, activity, and employment.    And winding back high minimum wage rates for people starting out might also be a step in the right direction.

And curiously, when he was pushed Mitchell talked in terms of fiscal deficits averaging around 2 per cent of GDP.  I don’t see the case in New Zealand –  where monetary policy still has capacity –  but equally I couldn’t get too excited about average deficits at that level (in an economy with nominal GDP growth averaging perhaps 4 per cent).  Then again, it simply can’t be the answer either.    Most OECD countries –  including the UK, US and Australia –  have been running deficits at least that large for some time.

It is interesting to ponder why there has been such reluctance to use fiscal policy more aggressively in countries near the zero bound.   Some of it probably is the point Mitchell touches on –  a false belief that somehow countries were near to exhausting technical limits of what they could spend/borrow.      But much of it was probably also some mix of bad forecasts –  advisers who kept believing demand would rebound more strongly than it would –  and questionable assertions from central bankers about eg the potency of QE.

But I suspect it is rather more than that –  issues that Mitchell simply didn’t grapple with.  For example, even if there is a place for more government spending on goods and services in some severe recessions, how do we (citizens) rein in that enthusiasm once the tough times pass?  And perhaps I might support the government spending on my projects, but not on yours.  And perhaps confidence in Western governments has drifted so low that big fiscal programmes are just seen to open up avenues for corruption and incompetent execution, corporate welfare and more opportunities for politicians once they leave public life.  Perhaps too, publics just don’t believe the story, and would (a) vote to reverse such policies, and (b) would save themselves, in a way that might largely offset the effects of increased spending.      They are all real world considerations that reform advocates need to grapple with –  it isn’t enough to simply assert (correctly) that a government with its own currency can never run out of money.

I don’t have much doubt that in the right circumstances expansionary fiscal policy can make a real difference: see, for example, the experience of countries like ours during World War Two.    A shared enemy, a fight for survival, and a willingness to subsume differences for a time makes a great deal of difference –  even if, in many respects, it comes at longer term costs.

But unlike Mitchell, I still think monetary policy is, and should be, better placed to do the cyclical stabilisation role.    That makes it vital that policymakers finally take steps to deal with the near-zero lower bound soon, or we will be left in the next recession with (a) no real options but fiscal policy, and (b) lots of real world constraints on the use of fiscal policy.  Like Mitchell, I think involuntary unemployment (or underemployment for that matter) is something that gets too little attention –  commands too little empathy –  from those holding the commanding heights of our system.  But I suspect that some mix of a more aggressive use of monetary policy, and welfare and labour market reforms that make it easier for people to get into work in the private economy,  are the rather better way to start tackling the issue.   How we can, or why we would, be content with one in twenty of our fellow citizens being unable to get work, despite actively looking –  or why we are relaxed that so many more, not meeting those narrow definitions, can’t get the volume of work they’d like  –  is beyond me.   Work is the path to a whole bunch of better family and social outcomes –  one reason I’m so opposed to UBI schemes –  and against that backdrop the indifference to the plight of the unemployed (or underemployed), largely across the political spectrum, is pretty deeply troubling.

But, whatever the rightness of his passion, I’m pretty sure Mitchell’s prescription isn’t the answer.




21 thoughts on “A radical alternative to macro policy?

    • He wouldn’t be pinned down on the central bank role – i don’t know that he was being evasive, just that the chair jumped from questioner to questionner – hence my observation that what seemed to be implicit was that the RB would no longer be independent and macro policy would be run jointly. Implicitly, he believes demand – in NZ and Aus – is too weak in NZ at present, and thus some further stimulus – fiscal in his case – woudn’t warrant offset at present.

      He seemed to think that his job guarantee scheme wouldn’t cost much – i think he is probably wrong.


  1. Sent with BlackBerry Work (www.blackberry.com)

    From: croaking cassandra <comment-reply@wordpress.com> Date: Monday, 31 Jul 2017, 10:48 AM To: Steve Bielby [DPMC] <Steve.Bielby@dpmc.govt.nz> Subject: [New post] A radical alternative to macro policy?

    Michael Reddell posted: “Last Friday, an outfit called Strategy2040 New Zealand, together with Victoria University’s School of Government, hosted a lunchtime address by an Australian academic, Professor Bill Mitchell of the University of Newcastle. He is a proponent of somethin”


    • I don’t disagree. Just about the elements of a better package:
      -markedly cut immigration
      -hire a Reserve Bank Governor serious about full employment,
      -markedly cut taxes on business income, and
      -dramatically free up rights to use urban and rural-periphery land

      Oh, and I’d lower the minimum wage (relative to the median wage) and eliminate remaining tariffs too.

      But some of the underclass/poverty issues are about culture – decline of marriage, decline of faith etc – and that is a great deal harder to fix.

      Liked by 1 person

      • Lowering the minimum wage seems problematic given that it’s already inadequate for a large percentage of the people on it. I wonder if the CPI would drop much due to lower demand, or would it be “sticky” which seems fairly likely to me?

        There would be strong demand for “top ups” via welfare. One objection to this is that it adds another distortion to the market by subsidizing employers. Would that be a problem?

        I wonder too if it would cause downward pressure on wages in general?

        Last, but most important. Is there any good evidence that Lowering the minimum has actually worked?


      • Re the min wage, it is high relative to the median wage, which makes it hard for people to get into the workforce.

        But in any case, remember that I’m proposing it as part of a package which i would expect would quite materially boost wages over time, so that lowering the min wage relative to the median might be largely be able to be done by holding the min wage steady.

        On the evidence, it is of course contested, but my reaf of the evidence is that it is mostly consistent with the theory. I still think the experiment a decade ago in markedly raising the min wage for young people here was a sobering experiment.


  2. Given the number of hair-trigger premature tightening we’ve seen from CBs in the past few years, it seems blindingly obvious to me at least that an ill-considered fiscal stimulus could make more such mistake more likely.


    • yes in our world…..but in his world, the law has no doubt been changed, and the RB simply minds the plumbing, while the courageous finance minister wisely parcels out stimulus to put things to right.

      now i am being a little unfair to him, but one thing he never mentioned was the role of (pretty universal) misforecasting in recent years. any policy will still need forecasters.


  3. Michael, Obviously too late for 100% reserve banking until we are allowed by bis to run a cryptocurrency or its forced by mercantile market use but in the interim to remove the complexity of over analysed academic theory on fiscal or monetary policy etc change the tax structure to a 1% transaction tax on all finacial transactions both sides. This will include all bank currency dealing derivatives transfers etc. Drop all other taxes. Govt tax take doubles and the m2 tripples. The only group preventing this is the bis controlled banking sector but as we see in india and assuming the brics shortly its coming. Thoughts Richard 

    Sent from my Samsung Galaxy smartphone.


    • Very brief thoughts (i’m on deadline):

      – your transactions tax wouldn’t raise much (most transactions would be done abroad instead, or not done at all)
      – the BIS itself has no power over anything or anyone. It is really just a club – where central banks meet to talk – and bit of a research house.


  4. roughly, looks like the government advanced $14.4bn in student loans between period end Jun-07 and Jun-16: not sure how that is accounted for in terms of calculating taxpayer support for employment prospects but it seems a hefty figure….; “throw money at it” doesn’t always work and agree, there are a variety of factors which influence the employment opportunities a person can pursue with confidence


    • I did offer my daughter 2 options. Pay off her student debt of $30k or take $10k instead and have a great time in Europe. She took the $10k and said to me she can pay off the $30k when she starts work after returning from her 6 months in Europe. Afterall it is interest free.


  5. “And one could, and did, note that in the Great Depression it was monetary action – devaluing or going off gold, often rather belatedly – that was critical to various countries’ economic revivals.”

    People have argued that it was Keynesian style fiscal policy, and even the WWII which finally caused the economies to start growing. I’ve never heard of this explanation, but am interested. Can you explain why you think going off gold cause the turn around?


    • The important role of monetary expansion, and particularly the end of the gold standard, is a pretty conventional explanation these days – see for example Eichengreen’s Golden Fetters. In most places. fiscal policy just wasn’t that important, for ideological reasons (both Hoover and Roosevelt campaigned for a balanced budget), size of govt reasons (govt was small so it was hard for increases in spending to make that much difference), and in countries like NZ because we couldn’t borrow any more (there is a great quote from Keynes to NZ’s 1930s MOF – “if I were you I would try to borrow, but if I were the market I wouldn’t lend to you”. In some places fiscal policy became more important later, and you are right that in the US it was only WW2 spending that really put them firmly back on the right track, but that was a story specific to the US). Even in the US, the decision to devalue and suspend gold convetibility made a really big and observable difference, as in the UK did the decision to leave gold quite early (in 1931), which left the UK with one of the least bad experiences of the Depression anywhere. Countries that went off gold first recovered first.


      • Your remark about UK not suffering from the depression as much as other countries is interesting. It echoed something I had read recently (maybe you?) about NZ having worse social deprivation during the 30s than the UK resulting in less immigration. Things must have been very very hard in NZ. My UK family lived in comparatively wealthy East Anglia and my grandparents could grow most of the food needed for their large families but they spoke of distress in those days. My mother told me about seeing pictures of the Jarrow hunger marchers and they were clearly hungry men. I also remember reading that the conservative mayor put on a generous feed for them when they went through Leeds.
        Makes we worry that the government may not be thinking enough about the resilience of our economy to a major shock and also to wonder if we still have the same degree of trust and willingness to support one another. This is the problem with identity being weakened by multiculturalism ~ it is easy to be generous to others when wealthy but difficult when times are hard and you have to share your own children’s food with others. Fortunately multiculturalism is barely in its infancy in NZ compared to Europe.


      • A 50% decline in Milk prices and zero impact on NZ GDP is not a resilient economy? National party has done very well in the context of 2 disastrous earthquakes and a decline in milk prices of more than 50%. In the past we would be in the depths of a recession over the last few years.


  6. Isn’t the type of monetary expansionism after coming off the gold standard, the same type as the Modern Money Theorists are talking about when it comes to “printing money”?

    Or is it the difference between private and public creation of money?


  7. Hi Michael,

    You say that there are no “shared enemy, a fight for survival” waiting in the wings to draw people together in adversity – and there are other examples in the comments above but the threat of climate change is exactly the kind of overwhelming challenge that will require the ability to do things in the public sphere that have never needed before to be considered. I would also argue that homelessness – estimated at 40,000 – nearly 1% of New Zealand’s population and growing is another example where a much bigger ceiling for public action is urgently needed.

    The exciting thing for me about the opportunities afforded by MMT is the opportunities that come in its wake. Your point about the moral hazard is a good one – but not one that is unmanageable with a sufficiently transparent public sector. However the skillful deployment of created money would probably need to be part of a public deliberative process (open budgeting). The ‘winner take all’ approach of our current representative democracy approach would clearly enable pocket lining of the kind you suggest.

    As far as the jobs guarantee I can think of a many government funded roles that would improve the public sphere for the good. But in any case the point of a jobs guarantee is not that people take a government job and then move into a meaningless poorly paid commercial role at the first opportunity – its impact would be to lift the quality of work available in the commercial sector at the bottom end.I imagine a jobs guarantee would see the failure of some “two-bit” minimum wage enterprises and in many cases this would be no bad thing. Being an buyer of someone’s productive labour should be a both a privilege and a responsibility. (This is the opposite of your idea that employing people on below minimum wage is expansionary.)

    Using the climate change example there are thousands of jobs in preparing for carbon use reduction from installing solar panels, to building an effective rail network as well as community resilience work of many different kinds. Another thought is that almost our entire NGO sector is under-resourced to do the valuable work it does both in public advocacy and service delivery.


  8. “They are all real world considerations that reform advocates need to grapple with – it isn’t enough to simply assert (correctly) that a government with its own currency can never run out of money.”

    While this may be true in policy circles its not at all true beyond these. Outside of policy circles its a complete revelation that governments can’t run out of money, can spend without matching it with debt, or that government policy can achieve effectively zero involuntary unemployment. Often these (arguably) highly desirable economic outcomes are understood to be impossible by the general public (and as far as I can observe also senior politicians) effectively taking them off the table. This eliminates the pressure needed on institutions such as the Reserve Bank and Parliament which might actually lead to outcomes such as employing a ‘Reserve Bank Governor serious about full employment’.

    There is also quite a lot more to Mitchell’s thinking than what is covered here. In particular a job-guarantee is a macro-stabilization policy. One of the main points being people in a job-guarantee job will find it easier to demonstrate they are work-ready and still develop their productivity during an economic downturn. At a micro-level this will make it easier for them to move into private sector work while at a macro-level this will make the economy more resilient against inflation. Its also likely to narrow the income gap between low and high end wage rates in the economy by keeping a more consistent level of pressure on near minimum wage jobs. Additionally in terms of cost, well its macro economics for a government which can never run out of money so interpreting government spending balances as an indicator of cost is pretty irrelevant. On the other hand as a policy it significantly increases the ability of automatic stabilizers to kick in in response to a recession, maintaining demand and so having a significant effect towards macro stabilization of the economy.


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