Kohler’s MMT on the ABC

From the ABC:

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. I might have missed the answer to my question the other day, but if this works, why do we need to levy taxes at all?

      • To keep us the serfs under control. Wouldn’t want us to start living the high life on MMT would they?

    • Professor DemographyMEMBER

      MMT makes it clear that inflation and currency issues are important even when deficits are fine in themselves.

      Tax is useful to be able to control inflation, make currency more valuable and I think also to help make sure that money is used productively. Land tax for example could ensure that people are encouraged to use land versus just hold it.

      • So tax isn’t necessary at all then.
        It may be ‘helpful’ and an incentive for this or that ( which as we know will be taken advantage of by any eager junior investment banker!) but tax …is not necessary under MMT. So. Let’s just do the right thing and scrap it completely.

        • Tax is needed but only to control inflation – taxes take money out of circulation so that it can’t put pressure on prices

          • Really?! How many of the Top Companies in Australia pay tax at anything other than what they decide to pay? Or top business people? Tax is as variable as anyone wants to make it, even now.
            Tax doesn’t control inflation! That’s not it’s purpose after all. Public Expenditure Revenue Raising is. And if that’s’ no longer necessary, taxation under MMT is irrelevant.

          • You’re asking what MMT theory says and this is it. The government doesn’t actually control the money supply – private banks create most of it. So if you take away taxes you don’t have any way to control the money supply. In an MMT world taxes are a key tool to make sure economies don’t become runaway engines.

          • So if you’re paid $10,000 per month after tax, and you’re still paid $10,000 per month tax-free, what’s the difference?
            The tax paid would have gone to General Revenue; you’d have the same disposable income and the State would get on with it’s distribution of your tax money.
            Under MMT the same applies! You have the same disposable income and the State conjures up ‘income’ to apply to the same endeavours that it previously would.
            Taxation – makes no difference.
            Your payslip may say other things, but the reality? The same. Tax is not needed under MMT.

          • PaperRooDogMEMBER

            I’d say tax is still needed as it enables greater control of where the money ends up, least it would if we have a proper progressive tax system were wealthy people got taxed more (and didn’t get excessive government welfare via favourably tax, investment, propriety policies etc). Without a progressive tax inequality would likely rise faster.

        • DreadnotMEMBER

          Tax from an authorities or government perspective is a punitive measure for the majority in a monetized economy to accept the currency and to force the majority to find work to pay the tax. It creates a cohort of unemployed looking for employment for money and maintains a pool of unemployed to discipline the demands (price) of labor. Subsistence societies who only need money for purchase of external goods (eg. telecoms and clothes) and services (eg. education, health) are nearly always fully employed in subsistence activities (growing food, build houses from local owned materials) and only perform activity/employment for money to the extent that satisfies the need for the external goods and services.

      • Stewie GriffinMEMBER

        The problem is MMT won’t be used to help the economy – it will simply be used to preserve the status quo. It is all about ensuring that enslaving debts continue to be serviced.

    • drsmithyMEMBER

      Giving money value
      Controlling inflation
      Reducing wealth and income inequality
      Incentivising behaviour

    • It does not work. But it seems to work if you strategically ignore asset price inflation out of the basket of stuff you use to measure inflation.

      Practically, central bank largesse goes to those with the best connections in place to receive said largesse, i.e. banks and other rich people.

      This drives up speculative assets first (stocks, paintings, houses), and then every other kind of perceived asset (education, healthcare, anything actually useful), and finally stuff we measure in the ‘basket of goods’.

      By the time said inflation gets to stuff we do measure, like food etc, you are looking at the end of the cycle and nothing will stop default.

    • surfbeach2536

      IMHO – Taxes properly applied take assets from the rich to distribute to the poor, that is the reason for tax.

      MMT works up to the point that there is no productivity gain otherwise it is inflationary and gives gain to those who hold non cash assets. If there is inflation usually the poor lose.

      Population increase puts pressure on scarce assets such as land

      Productivity reduces the cost of goods supplied

      example in he 1970’s the average wage was about $7,200pa now it is $72,000pa the cost of a parcel of land then say 10,000 would be worth 200,00 – 400,000 now yet something like a rangehood was $150 in 1970 and is the same price now. Population growth has put the pressure on land but no effect on non real assets

      • drsmithyMEMBER

        Worth pointing out, given your example, that the “shortage” of land is entirely arbitrary and artificial.

        Every household in Australia on a quarter acre block is equivalent to about 1/8th of Tasmania.

        You do, however, highlight a key point – inflation requires supply shortages.

        • surfbeach2536

          Sorry Dr Smithy I cannot agree that land is abundant as we are finding out there is a value in retaining land for agriculture, water supply, forestry, nature,etc, not just urban development. There is a finite amount of land and the constraint on supply has increased the cost of the land beyond the growth in wages due to population growth. If the supply of land was as elastic as a rangehood then the value of a parcel of land would still be only 10K and the increase in productivity would be shown as an increase in our purchasing power and standard of living.

          • drsmithyMEMBER

            Sorry Dr Smithy I cannot agree that land is abundant as we are finding out there is a value in retaining land for agriculture, water supply, forestry, nature,etc, not just urban development. There is a finite amount of land and the constraint on supply has increased the cost of the land beyond the growth in wages due to population growth.

            There is no *actual* shortage of land for residential use, which represents less than half a percent of land use in Australia. The supply of land that is legally usable is artificially and arbitrarily constrained.

            Pull up a map of Australia. Look at Tasmania. You could fit every single household in the country on a 1/4-acre block in the land eastwards of Launceston and Hobart.

            If the supply of land was as elastic as a rangehood then the value of a parcel of land would still be only 10K and the increase in productivity would be shown as an increase in our purchasing power and standard of living.

            Yes, that’s the point. The supply of land is only inelastic so a bunch of really rich people can get even richer, and if those artificial constraints were removed, it would most definitely appear as a massive increase in our purchasing power and standards of living (eventually, after the massive property crash it would trigger).

            A 400m^2 postage stamp of land at Springfield doesn’t cost $300k because there’s any *actual* shortage of land anywhere nearby – thirty seconds with Google maps will demonstrate that – it’s because that nearby land is arbitrarily unavailable.

            You need to go back to old-school Macrobusiness (early 2010s), but there used to be regular and frequent articles explaining all of this in detail.

        • surfbeach2536

          Thanks Dr for the detailed reply, I have been reading the articles here for quite a while and I think I read the articles you are referring to but I still cannot agree with the premise that there is abundant land. In my lifetime world population has risen from 2.9B to nearly 8B. There is considerably less land per person and in my little part of the world over the same time population has gone from 1,100 to about 16,000 people. I used to enjoy the beach to myself and a forest for the backyard as a kid.

          Sure we can spread out over all the farmland or knock down all the forests but is that what is good for the world? and it is the same wherever you look, Byron Bay, the Gold Coast, South East Asia. The first time I went to Phuket there were a couple of hundred people on the island and Kata Beach was rice paddies now there are buildings and people everywhere.

          If there wasn’t population grown the rich people that want to get even richer withholding supply would have nothing to look forward to.

          • drsmithyMEMBER

            There are two separate issues here being conflated.

            The first is inflation in property (land) prices.

            The second is loss of amenity due to densification.

            The inflation in land prices is due to shortage of available land to legally use. It is not due to a shortage of land, nor even a shortage in land that could be built on. It is – outside of a relatively tiny proportion adjacent to CBDs and similar – a wholly artificial and arbitrary shortage.

            The loss of amenity due to densification is separate, but related. The arbitrary limits on legally available land means that existing legally available land has to be used more intensely. Again, this problem is easily resolved by removing the arbitrary limits on land usage.

            The key points here are that there is no (meaningful) fundamental limit on land in Australia (like there is in, say, Hong Kong or even Singapore) driving inflation and/or densification, and that we aren’t knocking down “all the forests or farmland” because the amount of land used for people is so utterly insignificant. Even at double or triple the land used for residential purposes, it would still be insignificant.

            To use another example, every household could be on a 1/4-acre block within a five minute walk of the ocean and this would be a strip of land from about Rockhampton to Adelaide (from memory, it’s been a while since I did the maths – but it’s in that ballpark).

            Hopefully one of the positives to come out of Coronavirus is people realising they don’t need to live near the CBD anymore, which will help address many of the issues you are talking about (if policy is adjusted to allow that).

        • I can see we view the world in an entirely different way. Where you propose to have a Bondi strip running along the coast from North Qld to SA I like our National Parks and stand beside people like those in Manyana who oppose over development. https://www.theguardian.com/environment/2020/may/27/manyana-bushland-clearing-development-halted-as-protest-group-launches-federal-court-challenge

          The thing is once the natural environment is gone because of development it is gone. It is finite Bondi will remain a treeless concrete jungle.

          • drsmithyMEMBER

            If that’s your takeaway, clearly you ain’t reading a fvckin’ thing I’m writing.

        • surfbeach2536

          What was written is a view of undeveloped land being in abundant supply for new housing but there are restrictions on supply by profit takers. A lot of people who help determine what happens take your view as being correct that land is there to be developed.

          What my view is is that undeveloped land is not unused land but land that already has a purpose for something other than housing.

          Limit population growth and we also limit the need for additional land for development and preserve the country for future generations.

          Have a nice weekend.

          • drsmithyMEMBER

            Your original statement that I responded to was this:

            example in he 1970’s the average wage was about $7,200pa now it is $72,000pa the cost of a parcel of land then say 10,000 would be worth 200,00 – 400,000 now yet something like a rangehood was $150 in 1970 and is the same price now. Population growth has put the pressure on land but no effect on non real assets

            The point is that the supply of land is being arbitrarily constrained, but the supply of rangehoods is not. If the supply of rangehoods was arbitrarily constrained – say, by tariffs – then they would also be expensive today. This would have happened even without high population growth (ie: the inflation in land prices would be similar), because the arbitrary supply limits driving up prices would still be present.

            Saying there is no real land shortage (as I am) is a very different thing to saying all the land should be intensely developed (as you are projecting).

        • Thanks for the last post Dr, I agree that with your summary which I think shows where we agree and also differ. Our point of difference is that I consider that there is a land shortage and regardless of the reasons for the present (poorly) regulated constraints, the current un urbanised area should stay that way. This will help to sustain our environment (both natural and developed).
          Macrobusiness.com.au has had many articles about immigration being a Ponzi scheme and I am saying that world and Australian population grown is putting unsustainable pressure on limited resources. More people equals less square meters per person.
          I have read that there is 148,940,000,000,000M2 of land in the world which equates to 19,108M2 per person but as only 1/8 is thought to be habitable that means that there is only 2,388M2 per person. That is less than half of what was available when I was born and nearly a third of what was available previously.
          What we do with the land is arbitrary with those with more power influence the decisions made by the local council, state or federal governments. No matter what land is used for it is a finite resourse.

          • drsmithyMEMBER

            The other point that perhaps I am not properly highlighting, is that the same arbitrary shortages that exist today making land expensive, would exist even without our high immigration/population growth. I will concede it may not have been *as bad*, but there would certainly be far higher inflation in land prices that consumer goods, regardless of immigration/population growth.

            There is very little – within reasonable bounds of morality and ethics – that can be done to significantly slow population growth on a global level, and the things that can be done (increasing wealth and decreasing inequality, educating and empowering women, easy access to contraceptives and abortion) are, generally speaking, problematic to those with power and therefore difficult to advance. The growth rate *has* peaked though, and is slowing.

            There are many far more finite resources in the world than land to build houses on.

    • Reserve bank should just give everyone a million dollars. We’d all be rich then. What could go wrong?

  2. “Inflation fears don’t seem supported by the evidence. “
    WTF? Asset price inflation since money printers started at the GFC has gone crazy.

    Has Kohler never looked at Aussie house prices?

    • Ronin8317MEMBER

      Wage inflation is bad, asset price inflation is good. We’re heading toward economic nirvana with wages to zero and asset price to infinity.

      • Jumping jack flash

        This. And then the only problem becomes debt eligibility.

        The whole problem we have now is debt eligibility. The banks have heaps of debt, never been cheaper, the problem is nobody is eligible for the correct amounts to keep the economy functioning.

    • Isn’t that the point – if printing money only increases asset prices then that can be solved by printing more money and/or writing off the attached debt.

    • PaperRooDogMEMBER

      We don’t measure that (at least properly) so it doesn’t have to be considered 😜

      • The90kwbeastMEMBER

        +1. Did you miss the memo Herman Milson about how the CPI calculation methodology was changed around 20 years ago to ignore house price inflation?

        The ABS has said it’s all good mate, nothing to worry about!

    • Chairman MeowMEMBER

      Because they gave the QE direct to the banks to keep asset prices inflated instead of spending it in to the real economy (infrastructure)

    • DingwallMEMBER

      One could argue house prices in Australia has had f all to do with money printing

      The government ensuring we have lots of demand ploughing into deliberate slow supply though ……….. oh and the advertising campaign via The Block etc has been insane

      • Jumping jack flash

        Its not “money printing” as we all know it, its debt. Debt is a different beast.

        Problems arise when people confuse debt with money, but our system isnt structured very well to make the distinction easy. In fact it depends pretty much entirely on people confusing debt for real money.

    • That’s right. MMT is happening right now with our version of QE and it shows exactly what the inflation problem is. If you pump money into a market that’s already at capacity (eg housing), prices will go up. If the market is not at capacity (eg. the real economy) there is no risk of inflation.

      The problem we have is that MMT has been deployed in the financial (fake) economy not the real economy where it is needed.

      The only other risk with MMT is with the balance of payments – budget deficits might not matter but trade deficits do

      • Jumping jack flash

        “The problem we have is that MMT has been deployed in the financial (fake) economy not the real economy where it is needed.”

        Aha! I like the way you think!

        The ONLY thing it does is create the potential for creating more and cheaper debt. One could argue that banks don’t need more debt creation potential, banks can already happily create as much debt as they could ever need to create, the problem becomes whether anyone is eligible for that debt.

        So why do the banks keep taking the money? Banks are greedy of course. If the government hands them a bucket of free (real) money they will never refuse it. The thing is that the banks don’t need it though. What we need is more people eligible for debt to get the party started again!

        The government should focus on making more people eligible for debt at the current prices instead of capitalising the banks in the hope that cheaper debt will make more people eligible. It surely does, but it is a less efficient process.

        It is kind of like importing 3rd world slaves to steal wages from, pay those wages to the business’ top tiers, and then hope those people take on larger amounts of debt. They do. But it would be far more efficient to pay the 3rd world slaves enough money so they could obtain the house-sized piles of debt for themselves.

        • BabundaMEMBER

          You need to remember that debt makes the world go ’round – not money. Debt itself is not the problem. The problem is when the returns on that debt are not sufficient to cover its cost. That is the world we are in. As you say, MMT ‘for the bankers’ merely sits idle in the financial system. MMT ‘for the people’ would raise wages and deflate the debt bubble back to healthy levels. The system resets, lending resumes and away we go again – hopefully this time using the debt productively rather than speculatively

          • Jumping jack flash

            Yes debt is the product of the banks, the thing they create and sell to make their money.

            I agree, if the returns aren’t enough to cover the cost then it all falls apart with massive deflation. Houses don’t create money. The way they’ve tried, and continue to try to get around that fact is to grow the debt faster than the loss of the interest. We kept up very well through the 00’s, but over the last couple of years it has really fallen over in a heap.

            “hopefully this time using the debt productively rather than speculatively”

            we can only hope.

  3. That is the result of privatising the creation of new money through banks. They blow huge asset bubbles. Obviously you don’t want the government to have that power but neither do you want private bank to either. I don’t know what the solution is.

    EDIT: In response to Herman’s post.

    • The solution is to regulate the private banking system – I know that’s a dirty word but the post war Asian economies proved that window guidance, credit controls, macroprudential etc. can be very effective

      • drsmithyMEMBER

        I suspect just having a publicly owned bank that provided bare necessity services (savings, PPoR mortgages, debit/EFTPOS) and was the only bank with a deposit guarantee, would fix a sizeable chunk of the problems as the majority who need nothing more moved their money there.

  4. SamscoutMEMBER

    I agree with the RBA expanding the volume of money in the system but there needs to be checks and balances. Ideally an infrastructure bank that was funded through infrastructure bonds issued by treasury and bought by the RBA that built income producing assets for governments to fund schools and hospitals.

    Inflation is occurring- it’s in house prices which aren’t included in the ABS inflation basket, but the comment above about asset prices to infinity and wages to zero is spot on,

  5. You never hear about budget constraints when they want to bomb the crap out of some third world country. I don’t remember Costello screaming about spending billions on these foreign adventures. But if you want to alleviate suffering of citizens then there is no money we have a gold standard.

    • Because suffering and financial stress is what keeps us under control. Until it goes too far…then what????

  6. To be fair, I don’t think Kohler was explicitly advocating MMT in this piece. He was simply giving Peter Costello an opportunity to comment on whether it is likely.

  7. happy valleyMEMBER

    Kohler raised this “non-news” (it’s been done for years by the Fed now – with only the write-off yet to happen) in his discussion with Peter Costello last night in Kohler’s puerile 4-part (last part tonight thankfully) “special” investigation series on 7.30 this week – a truly padded-out waste of time. Costello made the point that yes, a central bank can buy government debt and write it off, but at some point the crunch will be when the currency is devalued in the eyes of foreigners and the purchasing power of the currency eventually decimated?

    • ErmingtonPlumbingMEMBER

      Sure it’s been done for years but now there is concern that it may, for the first time, have to be directly to the Plebs.
      The old, dearly loved, trickle down effect just isn’t sellable anymore.

    • Jumping jack flash

      Currency value is relative. If every other country does the same thing because they have to, then there’s no problem.

      Same as QE and all the IR manipulation that occurred over the last 20 years. Currencies are pretty much what they always were.

      • I would be interested to learn more about this. I heard that in some countries (Britain?) a large number of people have retired on some kind of index-linked pension, meaning that if the currency were to be devalued, their pensions would have to be increased, thus putting additional strain on pension funds and the taxpayer. I suppose the Government could introduce legislation voiding all such contracts, but, is that sort of thing likely to happen?

  8. Jumping jack flash

    And here we go…!

    Government debt for pretty much the sole purpose of making previously ineligible people eligible for larger amounts of debt.

    At the heart of all the buzzwords and clever acronyms is a very simple concept.

  9. Seeing an awful lot of aspirational, mega mortgage mug, debt peddling speculators calling for MMT lately. Deep down they’re hoping for more inflation to bail out their property seminar led investment balls ups.

  10. guess we (or more likely our kids and grand kids) will find out how this grand experiment turns out

  11. Australia has very high private but quite low public or state debt as a proportion of GDP, net 25% (?) versus most other nations, giving much room for taking on good debt, especially with rock bottom interest rates.

    However, the argument that future generations will need to take on insurmountable debt repayment assumes present generations should not (and continue to pay low or no taxes?) is nebulous as there needs to be a healthy productive economy to pay back debt, not a moribund nor depressed economy.

    Whatever the source, stimulating or creating money, good public/private investments and activity (within reasonable inflationary bounds) should be logical, but anathema for ideologues via the LNP, IPA, TaxPayers Alliance etc. following the imported Koch radical right libertarian line.

    In other words, feeds into to the latters’ demands for looking after number one, tax cuts, lower budgets or smaller government, fewer services, more difficult access and less investment in infrastructure, but dog whistling China and investing in defence; while ring fencing the oldies’ vote which they depend on.

    Presently the government appears to be cutting budgets but these cuts can also remain long term to the detriment of societal well being whether quantitative or qualitative.