Eskozia independentea

MMT Scotland is an advocacy group which looks to expand the understanding of Modern Monetary Theory 


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Can Scotland afford independence?

Scotland could use any currency it wanted, however using a foreign currency like the pound or the euro would mean we would give up monetary sovereignty.

In a sense Scotland would be in a similar situation to what it is now where our economic and political decisions are constrained by the economic policy of another government.

Why does Scotland need an independent currency?

Whilst the Sustainable Growth Commission has chosen Sterlingisation on the basis that it offers stability of pricing, continuity and familiarity whilst protecting savings and liabilities such as cross-border pensions and mortgages. They also state that, in their view, the country could transition to an independent Scottish currency in due time and subject to the meeting of “six tests” regarding the Scottish economy and fiscal policies. The ‘six tests’ are extremely difficult for any country to meet all at the same time, especially one that is a currency user as opposed to a currency issuer and the Sustainable Growth Commission has given no examples of any country tha has ever met them.

Sterlingising Scotland in this way risks preventing the country from using key macroeconomic powers in the early days of independence at a time where their use would be extremely important. Tying the Sterlingisation process to the “six tests” would, in particular, shackle the Scottish economy to the economy of the rest of the UK and puts the Scottish government at significant risk of having Austerity imposed on it – regardless of the intentions of the Scottish Government – by a combination of the application of the fiscal restraints mandated by the “six tests” and on the instruction of City of London financiers who may be a significant source of the Sterling that Scotland would have to borrow in lieu of having the power to create its own currency as required. If an independent Scotland wants the greatest possible set of fiscal and macroeconomic tools available to it at the point of independence then it needs to launch an independent Scottish currency.

Will Scotland have large deficits and growing debts?

There are no financial constraints. So it would be good jettison all the macroeconomic theory that construes the government budget constraint as an ex ante financial constraint instead of seeing it as an ex post accounting statement, with no operational relevance.

Then we could also agree that the public perception of rising public debt arising from the fact that we have been erroneously conditioned (relentlessly) to equate the household budget with the sovereign government’s budget presents a problem to a government who wanted to increase spending. It is a political problem rather than an economic problem.
MMT makes that distinction because we do not accept the relevance of the Ricardian equivalence theorem. For non-economists – this piece of neo-liberal dogma says that the non-government sector (consumers explicitly) having internalised the government budget constraint will negate any government spending increase whether the government “finances” its spending via taxes or borrowing. So if the government spends and borrows, consumers will anticipate higher future taxes and spend less now offsetting the stimulus.

MMT also rejects the Policy ineffectiveness proposition from Sargent and Wallace which says that because private agents have rational expectations (RATEX) and truly understand the exact nature of the economic model, the government is powerless to influence real output levels. Private agents will anticipate perfectly what is going on and adjust their behaviour to offset the public policy. Arthur Okun once said that if we all knew the exact structure of the economy then there would be no need for economists – we would all be forecasters with 100 per cent accuracy! None of the RATEX exponents ever turned in their highly paid cosy academic or other positions in response to Okun’s challenge.

Modern Monetary Theory (MMT) shows that in a technical sense (after understanding how the operational matters work) that deficits will drive down interest rates unless there is some offsetting central bank action.

The fact that the UK government voluntary decides to constrain itself by issuing debt £-for-£ into private markets using auction systems which allow the final bidder to determine the bond yield for that issue doesn’t alter that fact. The rising yields might reflect the perceptions of the markets that the deficits are too large – conditioned by the mainstream economics – just as they may reflect a desire to diversify investment portfolios towards higher risk positions. Whatever, the rising yields have nothing to do with the deficits in an intrinsic sense.

That is the problem though. The mis-education on these matters and the dominance of the mainstream profession in the public debate allows us all to be hoodwinked and see rising yields and rising deficits as in some way substantiating the loanable funds doctrine of classical thought. All the rest of the spurious conclusions follow from these voluntary (neo-liberal) structures that the government erects to obscure their real capacity to advance public purpose.

MMT highlights the political nature of the decisions taken and the way the options are presented. We think it is also important to provide as much detail as we can about the way the system actually should function from first-principles so that the public can make better conclusions about the way the political process deviates from the intrinsic.

In that regard, citizens should become more and more informed that they will actually engage in debate and ask questions of the politicians and commentators in general. The result might be that pressure is brought bear on these characters to really explain why they will not increase public employment, or why they are selling off excellent public enterprises at huge discounts only to see service delivery fall and private wealth more skewed than before.

That’s exactly the problem. Policy makers who don’t understand the monetary system and therefore fail to recognise the policy options that are wide open operationally.The policy limit is definitely a constraint of sorts. Those ‘practical constraints’ are public enemy #1.

The deficit always comes first unless the non-government sector borrows to get reserve balances to buy the Treasuries. You can’t buy a Treasury without reserve balances (that’s how they clear), and the reserve balances exist either because of a previous deficit, previous open market purchase (which purchased Treasuries from a previous deficit), or borrowing from the central bank. Our point is that a deficit for the currency issuer is NEVER about borrowing, and bond sales are NEVER finance operations.

Will Scotland face inevitable austerity?

Austerity is a choice, one which Scotland doesn’t have to make.

Decades of neoliberal framing by economists, politicians and the media has made us think of a country’s finances like we think of our own personal finances. In our own lives our income is separate from our spending. If we spend less then we save more and improve our financial situation.

A country’s finances are very different. This is because income and spending are related – one person’s spending is another persons income. If we take money out of our economy, we reduce it’s aggregate spending power and if we do that we also reduce aggregate income. This creates a spiral of diminishing economic activity which eventually leads to job losses and ultimately recession.

If unemployment rises, the government’s automatic stabiliser increases the welfare bill. Less people in employment results in a lower amount of income tax returnIng to the treasury. In it’s ignorance the government has managed to INCREASE its deficit. This might well explain why all UK governments NEVER meet their deficit targets!

The thing to remember is that the national economy doesn’t work like a household. Aggregate spending = aggregate income.

Should Scotland continue to use the pound?

If the economic cycles of the two nations start moving in different directions, then being forced to adopt interest rates that are designed for the current state of the UK economy will result in ‘pro-cyclical’ policies being implemented in Scotland.

So, for example, if the UK is facing an inflationary surge while Scotland was in recession and the Bank of England starts hiking interest rates, Scotland would have to endure higher interest rates even though the responsible direction for Scottish policy is to relax monetary policy.

Of course, this may not matter that much given that monetary policy is not a very effective policy tool for controlling aggregate spending patterns anyway.

But usually, fiscal policy is forced into passively supporting the monetary policy stance. And then the pro-cyclicality of the policy positions becomes deeply problematic.

Why does Scotland need its own currency and its own central bank?

A sovereign government in a fiat monetary system has specific capacities relating to the conduct of the sovereign currency. It is the only body that can issue this currency. It is a monopoly issuer, which means that the government can never be revenue-constrained in a technical sense (voluntary constraints ignored). This means exactly this – it can spend whenever it wants to and has no imperative to seeks funds to facilitate the spending.

This is in sharp contradistinction with a household (generalising to any non-government entity) which uses the currency of issue. Households have to fund every pound they spend either by earning income, running down saving, and/or borrowing. Clearly, a household cannot spend more than its revenue indefinitely because it would imply total asset liquidation then continuously increasing debt. A household cannot sustain permanently increasing debt.

So the budget choices facing a household are limited and prevent permanent deficits.
These household dynamics and constraints can never apply intrinsically to a sovereign government in a fiat monetary system.

There is also a sharp distinction between a state within a federal system (which uses the federal currency and has no central banking capacity) and a truly sovereign national government. A sovereign government does not need to save to spend – in fact, the concept of the currency issuer saving in the currency that it issues is nonsensical.

A sovereign government can sustain deficits indefinitely without destabilising itself or the economy and without establishing conditions which will ultimately undermine the aspiration to achieve public purpose. Further, the sovereign government is the sole source of net financial assets (created by deficit spending) for the non-government sector. All transactions between agents in the non-government sector net to zero. For every asset created in the non-government sector there is a corresponding liability created £-for-£. No net wealth can be created. It is only through transactions between the government and the non-government sector create (destroy) net financial assets in the non-government sector.

This accounting reality means that if the non-government sector wants to net save overall in the currency of issue then the government has to be in deficit £-for-£. The accumulated wealth in the currency of issue is also the accounting record of the accumulated deficits £-for-£.

So when the government runs a surplus, the non-government sector has to be in deficit. There are distributional possibilities between the foreign and domestic components of the non-government sector but overall that sector’s outcome is the mirror image of the government balance.

If Scotland wants to be truly independent it has to have its own currency to have complete control over both fiscal and monetary policy.

How would Scotland convert into a new currency?

If you are happy with an independent Scotland fiscal and monetary policies, there’s no reason to switch you can just convert when needed.

Scotland could sustain full employment and output, and a permanent 0 rate policy, but real terms of (external) trade can be problematic in any case. Scotland is not a special case and this will not stop Scotland from becoming independent many countries manage that risk successfully.

The Scottish central bank sets the policy rate at 0 and offers a state funded transition job to all takers to both facilitate the transition from unemployment to private sector employment and enhance price stability, and adjusts fiscal balance to minimize the number of transition workers. Sterling debt need be no worse with your own currency, and less of an issue if you have your own currency and sustain higher levels of real domestic output. Depreciation of your currency causes the burden of Sterling debt to increase. However, the higher levels of domestic output from having your own currency especially if you introduce a job guarantee works in your favor in support of your real wealth.

Contributing factor is, nations at full employment tend to attract FDI, which works to support the currency. With higher domestic GDP growth, and no new external debt being added, the external debt to GDP ratio is continuously declining. If you think of Greece returning to the drachma,then sustaining domestic full employment output levels, and then facing currency depreciation. GDP would be maybe 25% higher and growing. Or Italy going back to the Lira as another example.

How would Scotland settle its debt?

Scotland should adopt the model currently being used in the Brexit negotiations where Scotland’s outstanding liabilities (if they indeed exist, postnegotiation) are totalled and a single transferable amount is agreed, to be paid either as a lump sum or over time.

Under this “zero model” split, immovable public and state assets (such as government buildings and claims on mineral resources) would become the property of the state in which they reside whilst most mobile assets (such as military equipment) remain the property of the continuing state. Scotland’s asset negotiations would therefore be based not on obtaining a “proportional” level of assets but would recognise that many of the mobile assets to which Scotland potentially may have a claim would either be unnecessary (in the case of large military assets such as aircraft carriers or Trident) or unsuitable for Scotland’s needs (such as smaller navy vessels or aircraft which do not suit Scotland’s desired military stance or are nearing the end of their operational life). Assets which the UK holds that Scotland may need could be purchased from the UK at a fair price which would be added to the settlement sum.

Once agreed and settled, Scotland would (if necessary) borrow the amount required in its own name and would pay what is owed. Doing so by this method would allow Scotland to fulfil its obligations, moral and financial, to the citizens of the remaining UK but would no longer be indebted to the UK nor would there be any possibility of the payment being used by either nation to gain political leverage at a later date.

Would Scotland’s new currency dive?

There is a huge difference between introducing a new currency altogether, which has no volume in foreign exchange markets and breaking a peg of an existing currency or abandoning the use of a foreign currency which is already being bought and sold in the international currency markets.

In the case of Scotland, as long as the government could enforce local tax obligations in the new currency, there would be a demand for that currency.

Initially, the supply of the currency would be restricted by the government spending (given that this is the way the currency would enter the monetary system).

So massive excess supplies of the currency are not likely immediately, and that is the requirement for depreciation in a floating exchange rate system.

Eventually, as the currency volumes increased in the foreign exchange markets, buying and selling on international markets would determine its value.

There is no reason to assert that the new currency would then collapse.

Would Scotland end up like Turkey?

Turkey is not using their fiscal policy to sustain domestic output at full employment levels. Their high interest policy rate is basic income for those who already have Lira so it has created distributional issues. Are Turkish govt payments indexed to “inflation”? How’s banking regulation and supervision in Turkey.? What’s the situation with Turkish state owned enterprise? Lending to SOE’s? Do Turkey Index wages? They are not following the MMT paradigm.

Turkey’s high interest rate policy is causing lenders to sell their interest payments for FX and that drives down the lira. The inflation looks at lot more like cost push than demand pull inflation. Their high policy rates means equality high forward prices for non perishable goods that con0tinually increase with forward delivery dates. Turkey’s high policy rate is supporting their inflation rate and depreciating the currency continuously over time. They need to drop it to 0%. Turkey isn’t maintaining high aggregate demand or using under ulitilised resources. It’s increasing the money supply largely from bank lending. Debt to GDP is low so it is not an excessive fiscal expansion story. They have a high number of FX reserves which means the government has directly or indirectly been selling Lira to buy FX which is driving the currency down also probably to drive wages down to support exporters with political clout.

In general the private sector borrowing has been climbing rapidly probably supported by state controlled banks. So Turkey’s FX depreciation is not coming from attempts to sustain full employment but from issues in the banking system and their high interest rate policy.
So you can’t compare Turkey with its own sovereign currency with foreign debt and an Independent Scotland with Sterling debt it is comparing apples and pears due to their political choices. Scotland’s sterling debt under current institutional arrangements is a drag on its economy and will continue to be a drag with it’s own currency, though it would both be a lesser drag and diminish over time.

Using MMT understanding of the monetary system and functional finance, ZIRP and introducing a job guarantee. Scotland would be able to keep the population fully employed and sustain a 0% policy rate all of which would promote low inflation, a stable currency, and real GDP growth that would cause the FX debt to GDP to diminish over time all with a higher standard of living.

Would Scotland end up like Venezuela?

For the same reason it wouldn’t end up like Turkey.

Venezuela is a $ zombie country. What is a $ zombie country ? You normally need two requirements first is you have one main export and in Venezuela case it is oil. They decided to concentrate on oil and send it out to other countries to consume. Second is the vast majority of its debt is in a foreign currency which in Venezuela’s case is in the $. So when oil prices were high it could manage the debt it had in $’s.

However, when oil prices fell it didn’t have the $’s to pay off their $ debts. So it started printing its own currency and exchanging them into $’s until it became worthless.

Like Turkey, Argentina, Venezuela didn’t pursue any MMT type policies whatsoever
You forget about the numbers they are irrelevant. You look at what skills you have and what real resources you have and then you decide what you are going to do with them.

Then you look at what’s the best way to do that. Sound finance or functional finance.

Functional finance ( MMT proposals) MMT economists have provided the most valuable economic lens to allow countries to do what needs to be done.

Unfortunately, What you are going to do with your skills and real resources are always a political choice and MMT can’t do anything about that.

Can Scotland follow MMT and use Sterling?

Countries which can issue their own currency cannot go bankrupt in that currency. With control over monetary policy, Scotland would be able to mitigate the impact of debt interest payments on government finances. This is not possible in a Sterlingised Scotland. If the Government deficit is constrained & ability to issue money blocked then the private deficit MUST increase. This fiscal target with Sterlingisation would result in a consumer credit bubble which the Scottish Government would be unable to bail out when the bubble inevitably burst.

What the Sustainable Growth Commission calls a central bank is more like a monetary institute. The fact that Scotland would not have a full central bank may have implications for other policies and decisions such as the one to join the European Union due to Maastricht treaty rules. The fact of Brexit will be that an independent Scotland which sought to join the EU may be attempting to join a political union whilst unilaterally using a currency controlled by a country which has recently left the EU.

Sterlingisation is a risk to our economy in the form of the UKs financial regulations, which failed to protect the UK from the 2008 Financial Crisis. It prevents Scotland from shaping its regulatory policies to prevent a crash which affected the UK from harming Scotland too. Scottish consumers & businesses will be affected by interest rates & other decisions taken by the UK which excludes their interests. If the UK raise rates to calm an overheating London economy whilst Scotland is in downturn, that decision may actively harm the Scottish economy.

Building up foreign currency reserves would be necessary for a new currency or Sterlingisation. If an independent currency required more reserves than needed for Sterlingisation then the act of Sterlingisation would be a barrier to creating an new currency. The fiscal constraints of Sterlingisation would make it extremely difficult to build up reserves, which could only be done through either a suppressing effect on Scottish economic growth or by adding an upwards pressure on the level of private debt.

SGC says a Scottish currency would have to fit Scottish trade and investment patterns, with the rest of UK currently Scotland’s biggest trading partner. Sterlingisation would make it extremely difficult for an independent Scotland to do anything other than double-down. The London markets would not look kindly upon any kind of independent Scottish trade or investment deal which did not benefit them or would act to harm them, which would also pressure an independent Scotland to act conservatively in pursuing new trading directions.

An opportunity of independence is breaking away from the UKs failed economic model. Sterlingisation would be bound to interest rate decisions of the Bank of England thus when the UK economy boomed and the Bank of England raised rates to suppress growth, this would suppress growth in Scotland too. Policy-makers & investors would base decisions on the needs of the UK economy, dominating monetary policy. Sterlingisation would harmonise rather than diverge our economic cycles. Diverging the cycles and attempting to create a Scottish currency would become much more difficult.

What will Scotland do with its share of the debt in Sterling?

One of the ways to launch a new Scottish currency is we don’t actually leave the £ we just start taxing in the new Scottish currency on a 1:1 basis. Then start government spending in the new currency. This gives the Scottish government independent fiscal policy and independent monetary policy.

The most important thing is not to convert bank deposits from £’s to the new Scottish currency. So let’s assume half the people in an independent Scotland want the £ and the other half need the new currency to make ends meet. If you convert everybody to the new Scottish currency now those people who want £’s are very unhappy.

So they have this new Scottish Currency that they don’t want and what they do is sell the new Scottish currency to buy the £’s they need. In this case the new Scottish currency can then drop by 60% and the new Scottish Central bank does not know what to do ( there’s a surprise) so they raise interest rates which pushes the price of imports up by 50% or more and then the government does not know how to deal with that ( there’s another surprise) then the government collapses.

On the other hand if you don’t convert bank deposits everybody is happy. The people who have £’s who need the new Scottish currency. They have to sell their £’s and buy the new Scottish currency. Where are they going to get the new Scottish currency from as it is the new currency ?

The Scottish government can sell them the new Scottish Currency at a slight premium to the £ say 1%.

So now people can sell the £ and get the new Scottish currency they need which creates a strong stable currency that does not go down.

It wants to go up but the government sells it keeping it constant. Which means the Scottish government is accumulating all of these £’s from people who want the new Scottish currency. The Scottish government over time uses those £’s to pay off its £ debt. That helps it to get through the difficult transition period without a collapse in the currency.

So it is important that you don’t force everybody to convert from £ to the new Scottish currency. All Bank Deposits including central bank deposits. You do not convert the sterling bonds. They stay as they are in Sterling.

In order for people to sell the new Scottish currency they have to have it to sell it. The monopoly issuer of the new Scottish currency will manage that process by monitoring how much it spends or by selling it at a premium.

Should Scotland restrict its deficit (such as 3% of GDP)?

There is no valid economic argument to justify the claim that a fiscal balance should be at any particular level over any particular time period.

Responsible fiscal practice indicates that the fiscal balance should be whatever it takes to support the non-government spending and saving decisions and ensure there is sufficient spending in the economy to achieve full employment.

If that requires continuous fiscal deficits of 10 per cent of GDP then so be it. It is required permanent surpluses of 10 per cent of GDP then so be it.

There is no meaning in the statement that deficits are bad and larger deficits are worse and vice-versa.

It all depends on context.

For a nation with a very large external surplus (say a large energy exporter) that can support strong private domestic saving, high levels of employment and first-class provision of public services, then a fiscal surplus might be appropriate.

But most nations will have external deficits of varying magnitudes and then if the non-government domestic sector desires to save overal, the public balance has to be in deficit, or else a recession will ensue.

The only way around that is if the private domestic sector goes on a debt binge and maintains spending growth in that way. But that growth strategy is ephemeral and eventually the private sector stops the credit glut and tries to restore its balance sheet – at that point, fiscal drag kills growth.

So no standalone rule like a ‘balanced budget over a cycle’ makes any sense at all. It all depends on the spending and saving decisions of the non-governent sector and they can change.

Would Scotland peg its currency?

Like all nations that issue their own currencies, the newly independent Scotland would be advised to float its currency on international currency markets.

The float will settle at the level that matches its relative productivity and domestic costs.

It frees the central bank from having to compromise domestic policy to defend a peg and also means it does not have to accumulate foreign reserves.

The fear that a float would destroy the currency is neoliberal scaremongering.

In a situation of stress, the Scottish government could deploy capital controls to advantage though.

Could Scotland introduce capital controls?

Although not part of the EU, Iceland as an EEA member successfully implemented capital controls following the effects of the financial crisis in 2008. Should Scotland seek to become a member of the EEA, we could introduce capitals controls as per article 43 of the EEA agreement.

Can a new currency meet the on-going needs of the Scottish economy?

If we imposed all tax and other obligations to the state in the new currency then it would immediately meet the on-going needs because Scottish residents and businesses would have to acquire the currency.

Further, if the newly independent Scottish governments used its newly acquired currency-issuing capacity to bring idle resources into productive use (for example, via a national job creation scheme – Job Guarantee) then it would be hard to say that that the on-going needs of Scottish residents were not being met.

How long would it take to create a new currency?

A Scottish currency may be launched during a three year transition period between an independence referendum and formal political independence. This enables the currency and Central Bank to be set up whilst still under the support of the Bank of England.

Should Scotland’s central bank be independent?

The government is the central bank. The fact that the UK decides to split the treasury and the central bank up into two entities is misleading in terms of understanding the operational side of the government and non-government interaction. It has also been an ideological venture to claim that the central bank is independent and therefore somehow inflation-first monetary policy is above the political process. Which in our view means we degrade our democracies if the cabinet (whatever executive arrangement is in place) can avoid responsibility for stupid monetary policy by saying some non-elected officials have
forced this on the economy. An independent Scotland would consolidate both.

Would Scotland face inflation if it doesn’t hold debt as term bonds?

The Scottish government if it wanted to reduce its debt exposure could just stop issuing debt and keep net spending. What are the implications of that? It depends to some extent on what else the Scottish central bank does. Lets assume it pays no support rate on excess reserves although the tendency at present is for that those payments to be made which renders monetary policy (expressed as a desired short-term interest rate target) independent of the level of bank reserves.

If the government continued to net spend but didn’t issue debt to drain the resulting reserve add? Well the net spending would still occur. So it makes the point that the debt issuance doesn’t fund the spending but rather drains the reserves. That is, the funds that are “borrowed” by the government come from the government.

But moreover, the interbank interest rate would drop to zero as the banks competed to lend out the excess reserves. So monetary policy would be forced to reflect that.

And consumers might decide to spend the excess reserves on consumption goods (run down their bank deposits) and/or buy other financial assets available in the markets. The former choice will increase aggregate demand and the automatic stabilisers will reduce the budget deficit accordingly. Further, if nominal demand was pushing up against the inflation barrier the government could “ratify” this increase in consumption spending and reduce its own discretionary spending to balance nominal demand with the real productive capacity.

There are inflation issues for excess demand from excessive deficit spending. That is you have to distinguish between the way in which aggregate demand enters the spending stream and the consequences of too much nominal spending relative to real capacity. Government net spending doesn’t have a monopoly on being able to push the economy into the inflation zone. Excessive private investment or burgeoning net exports will do the same.

Inflation consequences in the case a government/central bank keep their liabilities as excess broad money and bank reserves rather than term bond debt is a myth. Indeed, it is bond sales that are more inflationary, if anything, as they bring an additional interest payment that reserve balances (assuming here they are without interest payment) don’t.

Can Scotland issue debt without limit and without financial consequences?

MMT has never said there was complete policy freedom. We always say “the government is not revenue- constrained and can spend whatever it likes” with the next statement “but that doesn’t mean it should spend whatever it likes”. The point is obvious – there are definite economic limits on the ability of governments to spend and they are defined by the real resources that are available at any point for sale and are not being utilised (or purchased). Beyond that you get inflation. Note we use the term economic limits not financial limits. There are no financial limits on a sovereign government – only economic and political limits.

The problem is that the political limits that ideology imposes on government spending have in the past 30 or so years meant that net spending is well below these economic limits and the consequences of that are clear – persistently high labour under utilisation.

The problem is with the mainstream policy makers. The consequences are ‘inflation’ and distributional issues. But they never even get that far. In fact, they never get past the solvency issues and ‘inter generational’ issues that don’t exist operationally.

The only concern the government should have is working out how it can achieve full employment and price stability. Having bright minds calculating debt ratios and the rest of it is pointless. They should really get to understand how the inflation process operates and also the real capacity of the economy. They should invest in human skill development to improve productivity and make more room for inflation- free production and income generation.

The fact that the UK government have spent the last 30 or so years managing under utilised labour and running down our educational and training systems reflects a wrong set of priorities.

Would independence cause policy constraints for MMT?

MMT considers that what is held out as a financial constraint is usually not that at all. Typically, in macroeconomic policy the constraints are political and voluntarily imposed. The sophists then dress these political constraints up as financial constraints using gold standard type macroeconomic models which appear throughout the literature to avoid addressing the real issue.

Our assessment is that if the general populace was better educated in these matters – that is, understood the actual operational capabilities of the national government it would be very difficult for the politicians to conflate their own ideological desires with the concept of a financial constraint. In that context, telling us that we had to have 5 or 8 per cent unemployment and rising underemployment because the government cannot afford to purchase all the labour and even if it did it would be inflationary, takes on a different slant.

We would know that they could afford to fully employ the available workforce as long as their were sufficient real resources available to provide the extra food and other things the higher employment levels would invoke. This would then require a higher level of sophistication in the public debate. Are there the extra resources? How close to real capacity are we? That would then promote new research that focused on the nub of the problem rather than the array of dishonesty that parades as knowledge out there in the form of academic papers – which say the government has a financial constraint and will cause higher interest rates, higher taxes, higher inflation if it bucks against it.

Businesses would also have to justify their opposition to true full employment in more sophisticated ways because we would all know that the usual reasons they give – again relating to government budget constraints – are all deeply flawed.

The point is that the intellectual foundation of such restraints/constraints is most often either a misunderstanding of the operations OR the restraints actually do exist but only under different monetary regimes. Get rid of those foundations, and we can then have an honest discussion. Further, and related, we have ALWAYS and REPEATEDLY acknowledged the inflationary potential of either debt service burdens or just overly large deficits in general. Our point is that THIS should be the issue to debate in regard to macro policy, NOT the stuff that comes from a flawed understanding of operations or the monetary system. MMT points out that unless you get rid of the flawed intellectual foundations of current policy debates, you can’t have an appropriate discussion of policy or of the “practical constraints” that definitely do exist and which we acknowledge exist. Policy constraints are counterproductive in fact, that’s pretty much the entire problem!

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