From LVT to MMT and back again
How Georgists should approach the rise of MMT
June 7, 2021
A few years back as MMT (Modern monetary theory) began to move into the mainstream spotlight (something which probably began in earnest following Stephanie Kelton's appointment to Bernie Sanders in the 2016 campaign) I noted in a forum it was likely to see a further victory in the next economic crisis, but at the same time I warned this could easily become a pyrrhic one.
Whilst the global economy slowed in 2019, notably in line with the Harrison/Hoyt 18 year model projections (not considered by MMT) and some economies entered a technical recession it looked as if this might be the mildest 'mid cycle' in living memory, then in early 2020 - well, the rest we all know. What is unique about the response to this crisis has been the size of not only the monetary response but also the fiscal, more so than in response to the 2008 GFC. As the doom mongers now will keenly tell you 22% of all dollars in existence ever were created in 2020, surely we would see much higher inflation or even hyperinflation as a result? Today as I write this US CPI inflation has risen to it's highest level since 2008 of 5%, a taste of things to come? Well, in my opinion no, not really. But why not?
To some of it's detractors MMT is an inflationary charter, an excuse for perpetual government largesse, 'Keynesianism on steroids'. But what really is MMT and how might we relate it to Georgism? Take a listen to the majority of financial gurus and podcasts online, who I think it is fair to say are disproportionally Gold bugs and Austrian leaning, and you will hear the complaint that central banks are now adopting MMT, and through gritted teeth that MMT is currently 'winning'. This despite not a single central banker or major government voicing support for MMT. And despite the widespread use of QE, an unconventional monetary policy which MMT roundly rejects. The validity of the claim then rests on the increased use of fiscal support which undoubtedly has been faster and larger than to any previous crisis post WW2.
Rather than any direct influence, necessity is the mother of invention - both the unique nature of the crisis and the lower bound is causing central banks and governments to resort to ever more unconventional monetary policies and fiscal support.
Some context here as to how my understanding of MMT and Georgism inform my opinion that despite this we are not in for a period of hyperinflation, stagflation or a massive reversal in monetary policy despite the unprecedented 'money printing'. It is probably getting on for a decade now since I began to learn about and embrace the Georgist ideology and the stress on centrality of the land question. George himself of course did not restrict his analysis of the economy to land and considered all four of the monopolies Benjamin Tucker identified, namely - Money, Land, Tariffs, and Patents. I think it is fair to said there is a good deal of unanimity amongst Georgists not only on how we might deal with land (natch) but on the broad approach to tariffs and patents also. Less so however regarding money, and this is somewhat reflective of the less well defined position of George himself. That is not to say he did not have a position at all, George was a 'Greenbacker', a supporter of the direct issuance of money by the government and a disparager of the credit issuance of banks. He also had no time for hard money. This has been interpreted by Stephen Zarlanga, not unreasonably as consistent with the 'Full reserve' monetary system, however he acknowledged that
'Clearly George was still wrestling with these questions in his own mind. While he accurately identified the monetary system that was needed in practice, he died before fully identifying its theoretical basis.'
Yet despite this, as well as full reserve 'Georgists' we also can today find free banking, Gold standard, and indeed MMT Georgists. After wrestling myself with the issue for some time I would put myself broadly into that latter category, though not without caveat. That is to say my understanding of the remedies of Georgism fully achievable within the paradigm where use of free floating fiat money is not only the norm but considered the ideal. Unsurprisingly given this diversity of views, the response to the rise of MMT's popularity has been equally mixed.
The most important thing to note about MMT is it identifies as description of the monetary system as it is, particularly focussing on economies which have adopted free floating fiat currencies. Despite it's claim to be an apolitical description, MMT is without doubt anti-austerity, that is we never need to cut spending merely for the sake of cutting spending if we are using a free floating fiat currency. We may wish to adjust welfare payments or any other type of spending on efficiency grounds, but that is a different argument.
I am reminded of the note left for the incoming Tory administration in 2010 by the UK Labour parties Liam Byrne , chief secretary to the Treasury under Gordon Brown wrote simply ‘I’m afraid there is no money.’ Whilst the note was intended as a dark joke, following the often timid response to the GFC based on the belief we partly needed to pay for our way out of the crisis by cutting benefits to the most vulnerable, when MMT tells us money is not a finite resource, it is little wonder it has gained traction. But beyond it's popular appeal, what does it actually say?
Along with chartalism before it, MMT maintains the reason the currency has value is taxes effectively create unemployment in the private sector which the government then directs to the public purpose via spending. This reverses the orthodoxy that governments tax to spend, this does not discount the need for taxes but rather their function which is to create demand for the currency, limit inflation and correct market failures/incentives only after the money has already been spent into existence.
We must use pounds in the UK to pay UK taxes, dollars in the US for the same. If we do not like the taxes in one jurisdiction we can, though often at considerable expense, move to another. The power to create money by spending it into the economy and destroy/remove money via taxation is inextricable to the power and function to govern itself. As Hyman Minsky put it, everyone can create money; the problem is to get it accepted. That is we can create any additional system of exchange we like (such as crypto currency or a local one), but the government can always demand we pay our taxes in a given currency and if we lack it we must exchange at least a portion of our other money/goods to do so, thus money has a hierarchy. As Milton Friedman presciently noted in 1999 crypto may create increased opportunity for tax evasion, but as long as governments can find a tax base which people cannot generally avoid (ie -land, his and our favoured base), they can maintain this hierarchy.
This is not an endorsement of any particular make up or size of government/country. For example if every single US state seceded, to achieve real economic independence each state would need it's own currency and then should only accept payment of taxes in that currency, if it chooses a free floating fiat currency FX markets will determine the price of exchange of currencies between the states just as they do today between the dollar and Euro etc. Conversely this is a freedom which most EU nations have ceded by adopting the Euro in the hope that it would limit currency fluctuations and imported inflation, but which via a lack of fiscal union lacks the cohesion the US at least relatively maintains, and this has led to imposed austerity as mostly southern nations have been unable to devalue their currency to drive up exports to revive economic activity.
But given governments have this monopoly over net money creation, how should this be utilised? The next key axiom is that the limit to fiat currency creation to consider is inflation/currency debasement. That is, though we cannot run out of money - the government via fiat can always create more, we can certainly create too much of it (without taxing enough away) that it loses value, which will occur particularly if the economy is at full capacity/full employment. Roughly translated, with great freedom comes great responsibility.
But what then is a public debt, and should we worry about it beyond inflation? Excluding the external trade sector, it is the amount of currency the government puts into the economy which it doesn't remove/destroy via taxation. A public debt is the private sectors assets or savings. As Stephanie Kelton puts it '“Their red ink is our black ink”. The most important thing to note is the issuance of bonds is secondary to the creation, the government spends the money into the economy first - it does not sell bonds to finance it, that is a policy choice and market convention, creating a passive income stream which many consider a superfluous artefact from the Gold standard. Nor does the Fed/central bank 'lend' to the treasury, it buys already purchased securities to manipulate the interest rate.
As the interest rate has fallen to zero, central banks have adopted quantitative easing and are now considering yield curve control in an effort to preserve the use of monetary policy in the hope it stimulates demand. MMT rejects the use monetary policy as largely ineffective, instead it advocates for rates to remain at zero, aka ZIRP and stimulate demand entirely use of fiscal policy (spend and tax, in that order) which is not bound by the issuance or demand for treasuries. Dr John Tippet is part of the Australian based Georgist investment group Propertysharemarketeconomics along with Phil J Anderson and Akil Patel, here in a video considering MMT he explains the shell game, it does not make sense to say the government 'borrows' from the reserve bank when you understand the reserve bank IS simply an arm of the government.
'Who is paying whom? The government is paying back itself'
The precedent for all this is Japan. Following the 97 Asian crisis, Japan, already weak after the collapse of it's real estate bubble just a few years prior began to adopt QE as well as employ much higher deficit spending. Their economy has remained stagnant. Public debt to GDP has soared to 256% of GDP in 2020, around double that of the US, whilst few envy Japan's endless lost decade status, inflation has remained subdued and the currency has not collapsed, and despite the stagnation living standards remain high. But are, like the Vapours song, we all 'Turning Japanese' as deficits soar, QE becomes the norm and populations slow? Well if that is the trend, the US in particular is still quite different to Japan, it has more dynamic demographics with a decent bump of millennial prime age labour force (2020-2024), and notably it's property market is reflective of the dynamism, you cannot have a bust without the boom. Japan's property market has barely moved since the early 90's bubble burst, with the population set to fall further that seems unlikely to reverse in a major way, yet so big was the bubble even after the fall Tokyo house prices still remain some of the highest in the world, further propped up as the shrinking population convenes on the city leaving houses abandoned in rural areas. The conclusion to draw is not Japan's economy is an exemplar nor that policy has been otherwise well directed, but that without fiscal support it would have descended into a deep depression.
So what of the current US inflation currently at 5%, does that mean the US has overdone it's deficits even if Japan has not? The explanation the Fed gives is that it is a mix of base level effects and supply bottlenecks. No one seriously disputes these factors exist to some extent, the question is where inflation will settle after.
MMT tells us when the economy has reached capacity increases in MS are more likely to engender inflation as opposed to drive productivity and aggregate demand, with real unemployment being as high as 10% in the US according to Jerome Powell, that limit is not likely for some time to come. This doesn't mean inflation will fall to pre pandemic levels, there are reasons to think the coming infrastructure boom will keep commodity prices somewhat elevated, but this is not a return to the 1970's energy crisis led stagflation.
MV=PT is not wrong but monetarists greatly underestimates 'V' (velocity), as Friedman latterly admitted 'The use of quantity of money as a target has not been a success. I'm not sure I would as of today push it as hard as I once did.'
The inference is once the unavoidable supply constraint inflation has faded, the increase in MS is largely going to be absorbed by under capacity in the labour and capital goods market until such time as that nears capacity, the pandemic in creating high unemployment was a highly deflationary event even as damaged supply chains have created some temporary inflation.
The US also has the reserve currency, that means it is not only 'printing' for the US but global demand for the dollar. Globalisation, whatever you think of the de-industrialisation of the rust belt, also means the increase in demand from deficits is also absorbed by slack in global labour markets , not just domestic labour markets.
But, and here my caveats begin, there is an area where the absorption and inflation has already taken place which is particularly problematic, real estate/land prices.
Whilst housing (rents and imputed rents) not unreasonably represents 42% of US core inflation, house prices themselves are not included in inflation measures. There is a fair rationale for this for the basis of measuring general inflation, we don't need to own real estate to occupy it, therefore rents and mortgage debt service costs are a better measure of inflation. But, to preach to the choir, that doesn't mean rising land prices are not a problem, both in terms of wealth transfer and financial stability. Returning to Kelton's “Their red ink is our black ink”, yes but 'our' black ink does not appear to flow very evenly. Is this a gotcha for MMT?
In trying answering that it is important to note the role of private debt and banks. Banks do not lend money from deposits, not is lending tangibly restrained by reserves (the fractional reserve myth), really they create currency via lending it into existence, and most bank lending is to real estate (50-60%). The Cantillon effect means this is currently the primary source of land price inflation in most economies. Banks do this under government licence, but the crucial thing to note is this credit money lent into existence also cancels itself out because must be paid back, it is what might be called 'sideways money'. So despite making up the vast majority of money in circulation this bank credit counter intuitively a net drain over the long term given it is paid back at interest. (With the complication that when it cannot be paid in a financial crisis loans are written of and the banks are instead bailed out, private banks enjoy a debt jubilee as they are deemed 'Too big to fail')
But given MMT favours ZIRP (zero interest rate policy)and given land prices are particularly sensitive and all other things remaining equal inversely related to interest rates (the cost of credit) what tax should be used to target this land price inflation? Yes, that is a rhetorical question.
Michael Hudson, a familiar 'frenemy' to Georgists and long term advocate of LVT expresses frustration with the line of argument that because MMT describes the system, it somehow then condones every single policy choice that expands deficit spending merely because it is an increase in deficits.
'Modern Monetary Theory (MMT) was developed to explain the logic of running government budget deficits to increase demand in the economy’s consumption and capital investment sectors so as to maintain full employment. But the enormous U.S. federal budget deficits from the Obama bank bailout after the 2008 crash through the Trump tax cuts and Coronavirus financial bailout have not pumped money into the economy to finance new direct investment, employment, rising wages and living standards. Instead, government money creation and Quantitative Easing have been directed to the finance, insurance and real estate (FIRE) sectors. The result is a travesty of MMT, not its original aim.'
Michael Hudson - The use and abuse of MMT
But do MMTers understand the full dangers of private debt and land speculation and if not does Hudson whose views are certainly more holistic then let them off somewhat lightly? It is correct that withdrawing public spending without an increase in productivity necessitates higher private debt to sustain the same level of growth ie Clinton's budget surplus by pulling money out of circulation plausibly increased the propensity to lower lending standards such as the now infamous sub-primes, but it does not follow from this that higher public debt can sufficiently limit private debt expansion nor land price speculation. MMT correctly points out public debt does not crowd out private investment but by the same token it cannot crowd out private debt bubbles either.
Steve Keen as a friendly critic of MMT frequently makes this point, but I think China here offers a further salutary warning. Lending in China for housing is counter intuitively fairly tight, deposit requirements on housing can be as high as 33%, and up to 70% for 2nd properties. Yet prices are sky high, land speculation is rife, cities are built and rebuilt to stimulate the economy whilst 1/10 properties nationally lay vacant. This is not only a household debt bubble, though that is rising, and no doubt their sizeable corporate debt contains a good deal of real estate, but much of the problem is multi generational pooled savings poured into real estate to build generational wealth, the public outcry if house prices fell would be risky for the CCP. Notably despite recent moves they still have no property tax and have put off imposing one lest it dent the remaining source of generational wealth since the stock market bubble burst in 2015.
This underlines the point that as long as the land rents remain privatised and can capitalise into a price, land speculation and monopolistic consolidation can take hold even without the accelerant of credit. And as far as non household debt is a factor, this shows how other forms of debt will find the path of least resistance into land unless we stop it at source.
Morally, regardless of financial bubbles the private collection of land rent is theft of others labour via externalities and government monopoly privilege, so the public collection/elimination of land rents remains essential. If private debt fuelled land speculation may be said to be a chief characteristic of western neo-feudalism as Hudson defines it, then we still should advocate LVT to negate another form more akin to the feudalism of old.
Given it's meteoric rise, it's worth knowing what MMTers make of LVT. Hudson again bridges the gap between worlds and is well known to many in the MMT world as well as Georgist movements, via his influence Steve Grumbine of the 'Real progressives' interviewed our own Joshua Vincent on the benefits of LVT. Recently James Galbraith, son of JK and writer of a forward to Warren Mosler's 2010 'The 7 Deadly Innocent Frauds of Economic Policy' wrote the following
'Whatever you may hear from your Chancellor on Budget day, therefore, the problem is not “how to pay for the pandemic.” It is how to restore the economy on just and sustainable terms.'
And on that
'tax land and other publicly created property rights, such as mineral rights, parts of the electromagnetic spectrum, corporate charters, licences, patents, copyrights and rights of way. Unlike financial wealth, land sits still. It can be measured, appraised and taxed each year on its market value. The result is efficient use of land and other rights, and abundant funds for urban reconstruction, development and maintenance—a virtuous cycle of public investment, land value and public purpose.'
A clear endorsement of the MMT framework followed by a Georgist solution which could have come direct from the pen of Mason Gaffney.
Marshall Auerback has also mentioned LVT favourably.
'A land tax could also help to prevent housing bubbles, thereby mitigating the significant affordability gap now prevalent in many of America's largest cities. And it also addresses the issue of tax avoidance, as land is an asset that can't be parked into an offshore bank account.'
Warren Mosler, generally seen as the originator of the MMT movement himself has expressed the view ideally starting from scratch all we would need is a property tax (which Kelton agreed makes sense in principle). I have in a brief discussion online I personally tried to persuade Warren the best way to limit environmental degradation risks (a noble aim) is not by trying to tax buildings smaller but by limiting sprawl via efficient use, something LVT with careful use of the planning system would better achieve than a property tax which also falls upon building values.
Bill Mitchell, bizarrely accused George of a 'Gold standard mentality' despite George's opposition to the gold standard and support of Greenbacks, still he later voiced moderate support for land value capture.
' there is still a justifiable case for Value Capture taxes on equity grounds and to provide the government with an additional tool to stem real estate asset bubbles. Further, while the taxes would be unnecessary given the currency-issuing capacity of the federal government, they would allow the government to redistribute expenditure among different spending cohorts without compromising any inflation constraints.'
So, given this generally favourable stance towards LVT/property taxes what would the adoption of LVT and other such collection of economic rents as replacement for productivity taxes mean under the axioms of MMT? The increase in productivity via removal of malinvestments would drive down the amount of public debt needed to maintain full capacity in the economy, at least from what it would otherwise have been. A deficit hawk then may be pleased with LVT, albeit for the wrong reason. As Kelton stresses, the deficit is a 'result' not a primary aim in and of itself, but none the less we should clearly advocate for policies which do address productivity and malinvestments, what are often euphemistically referred to as 'structural issues'.
But, even if such an ideological synthesis were broadly put into practice, is that then enough or optimal? Private banks would be able to generate bubbles in sectors where rents emerge and are not addressed, though stripped of the positive feedback loop of land prices that capacity is greatly diminished, it could still be argued that robbed of the larger Ponzi will they seek and engender other smaller ones. In recent memory the dotcom bubble is an obvious example, yet behind the stock bubble was also a local land bubble in Silicon Valley as landowners absorbed as much of the technological boom as possible (as nascent and overblown as much of it was), and notably the two related stock and land bubbles burst in time with the expected 'mid cycle'. However, despite the stock market carnage the resulting recession in the real economy was both shallow and short lived when compared to the GFC. Land led recessions are almost always deeper and more prolonged, and let's not forget dig deeper a great deal of the stock markets value is land value - most obviously in REITs but also corporate land holdings, derivatives etc.
Still I have no doubt we need to address and watch for other rents and bubbles particularly in IP, and beyond that bank regulation,oversight, taxation of net bank assets, and even public banking options ala South Dakota seem to me worthy approaches with taxation of rents/removal of rent engendering privileges doing the heavy lifting. But I do not personally see the merit in pursuing the full restriction of private banks credit creation via full reserve entirely on this residual risk basis, nor any other restriction based on creating artificial scarcity such as a gold standard. As I stressed earlier, the privatisation of rents is the root issue, so my contention here is that excess bank profit aka usury is predominantly land and other rents transformed, a rent facilitator more than a primary rent in and of itself. Private banks, in apportioning risks can help allocate productive capital including mortgages for the remaining building value. Whilst there are pragmatic ways to limit banks largesse, LVT at a sufficient level would have very profound implications for how the banking sector would function.
As long as banks have to compete and rents are addressed and returned to the community, the lending neither need facilitate rent seekers nor should the interest and yield spreads that make up their profits need not become a rent/supernormal profit. Thus denuded, private banks role in the economy would I expect be forced to become largely, or a great deal more, benign. Notably the German banks primarily exposed themselves in the GFC due to foreign exposure, German real estate being at that time relatively bubble free, something which is sadly no longer the case. This illustrates both the centrality of land price speculation to banks misconduct but conversely the need for eternal vigilance.
The direct sharing of rents via a dividend, which many though not all Georgists favour would I think also allow pooling of savings towards productive endeavours, and support peer to peer lending further competitively driving down interest on loans.
The idea of a dividend from taxes may seem in direct conflict with MMT in that the limits of spending for a currency issuer are not determined by taxation but inflation/real resource constraints (though locally the Alaska permanent fund dividend does not have this contradiction as individual states are not currency issuers), but, and I hope this is not taken as mental gymnastics, as taxes become directly linked to the real economies communally generated surplus, it makes sense in that context to index the redeployment of a portion of that surplus as measured by taxation, something which cannot apply to our current tax regime which only taxes rents by proxy and therefore only partially reflects the real economic surplus to the same degree.
Perhaps though the major relevance of MMT to Georgists comes not in the final realisation of our goals, but in the period of implementation. Though LVT should reduce the amount of deficit spending necessary to maintain capacity in the economy compared to what it otherwise would need, we should not worry if it increases during a period of implementation as long as inflation , including land price inflation is under control.
Given the deflationary factors of slowing demographics, global trade, technology and the likely continued failure to adopt sensible tax policy we should expect deficits to rise significantly over the coming decades without inducing major inflationary episodes in most advanced economies.
It is important to note deflation itself is not always bad, if it is driven by global trade or increased productivity quite the opposite, but as Irving Fisher noted a 'debt deflation' where private debt obligations are fixed against a backdrop of falling wages or austerity induced unemployment is disastrous way to prolong recessions into depressions. In the context our dysfunctional economy, a mild level of inflation writing down the level of residual debt is a preferable 'Jubilee lite' so little surprise central banks target 2%.
Given the political hurdles to LVT and how progress can be reversed before the benefits are widely felt (Such as Denmark's promising but all too short experiment 1957-60) one approach advocated by Fred Foldvary (who sadly quite recently passed) to swift justice was to compensate current owners with bonds, as he noted this was adopted in Taiwan's highly successful land reform and 'Bloodless revolution' called 'Land to the tiller'
'landowners were compensated over a period of 10 years, receiving 70 percent of the purchase price in land bonds to be redeemed in kind'
But given land prices considerable growth in recent decades in particular, how can we possibly afford to pay such compensation? MMT tells us those bonds, under the condition of a free floating fiat currency can be 'funded' simply by creating them, the inflationary effects could be limited by staggering payments just as Taiwan did over a decade or any time period we wish. None of this makes such radical reform politically easy, but to reiterate James Galbraith's point, understanding the real resource limits of money creation opens up the scope of what is possible as we strive to 'restore the economy on just and sustainable terms.'
Returning to Keynes, he wrongly claimed that he could achieve the 'Euthanasia of the rentier' by lowering interest rates to hit bankers profits. Today as we are near ZIRP we can see this mostly just shifts the land rent transformed as mortgage interest back into higher land prices, banks may struggle with battered profits from the reduced margin spread and need more unconventional means of support but by hook or by crook land speculators still prosper. Keynes in focussing on the monetary system underestimated how it simply reconfigures around the original sin of facilitating the private collection of land rent, which he failed to address. As far as MMT advocates repeat his mistake with a lopsided focus, we should of course correct them. But those who claim raising interest rates or restraining deficit spending via austerity are a fix are the real panacea mongers deserving of our full rebuke,not MMT, they would instead only kill the parasitic rentiers by killing the host.
Moving from the descriptive to prescriptive, something indicative to me of the failure to grasp the land problem is the centrality in MMT circles of the 'Job guarantee' in fighting inflation. Pitting this against the other policy of the moment 'UBI' has taken up a fair deal of the internal debate. I can see the appeal, human labour is a valuable resource and creating a mechanism to pay people to increase capacity would surely limit inflationary pressures more than paying them a little less to do nothing at all which is what we generally do after a recession. Deliberately using excess capacity in the labour market to keep a lid on inflation aka NAIRU is characterised as a repressive class war, and imo justifiably so, but given that 42% of US CPI core inflation is 'housing' even before we consider prices and the interplay between the two, it is I think fair to say persistent inflation, at least endogenously derived inflation, is largely driven by the rising cost of access to land more so than a lack of enough consumer goods due to under capacity.
Rents rise with wages, generally following a tightening in labour markets. To temper this inflation central banks will employ monetary policy rate hikes, hitting productive and unproductive lending alike, the banks will not be able to keep driving up aggregate lending indefinitely as rental yields fall in relation to prices the bottom will eventually fall out of the market, and assuming the 18 year cycle trend, this will occur around 2026/7 when prices are some 30-50% above current levels.
Despite this, before we cry statism gone amok and dismiss the JG entirely, to mirror somewhat Mitchell's description of land value capture as a second best option, I think it is certainly possible to conceive of a viable federally funded but locally administered JG programme as a 'counter cyclical' instrument in response to a recession, and it's not without precedent, but I don't see that much anti inflationary potential compared to LVT.
If our current boom bust cycle economy requiring ever growing deficits to sustain it is highly dysfunctional it is still not the worst of all worlds, and if MMT like Keynes tries too hard to divorce itself from land and the Ricardian rent, we should not be diverted with the anti central bankers, monetarists, austerians, gold bugs and inflationistas who all misdiagnose the problems and propose cures worse than the disease, I hope we can move the debate further to our cause and that I have presented a reasonable case that the growth of MMT despite it's blind spots has provided an often receptive and sympathetic base from which to do so.
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