Money Matters: Who Issues Money? In this paper, I explore ways in which the ability of Central Banks to issue money can make public decision-making fundamentally different from business or household decision-making. I contend that this insight could reduce roadblocks to policy implementation. The approach in this paper sits broadly within the intellectual tradition of Modern Monetary Theory (MMT). MMT is a heterodox approach to economics, popularised since the 1990’s by economists such as William Mitchell of the University of Newcastle, Australia.

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IntroductionSome economists argue that a country which operates its own fiat currency system, such as Iceland or New Zealand, is not operationally constrained by debt accumulation in its national currency. This paper seeks to elucidate the capacities intrinsic to currency issuers like the European Central Bank (ECB) or governments of individual countries, to stimulate debate about the institutional changes required and to discuss the relative merits of a country controlling its own currency. The possible policy implications of this debate are varied. Modern Monetary Theory (MMT) holds that a country which operates its own fiat currency system should not be operationally hindered by concerns about excessive debt accumulation because they can always issue more money as the monopoly issuers of their national currency.

What follows is a reflection on policy debates that have involved the Irish economy, and a counterfactual consideration of these policy choices in a scenario where a country controlled its own currency.

Government SpendingEconomic activity can be measured in spending. It is prudent

for a country to have at its disposal the means to increase spending, i.e., the ability to “print” money, when it dips below the level that corresponds to a bustling economy. It is possible to divide spending in

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an economy into three broad sectors–public, private and external.

MMT argues that one sector’s surplus has to be matched by a deficit in at least one other sector. If the rest of the world is running a surplus in the currency in question and accumulating savings in that currency and the domestic private sector also desires to run a surplus, to save or pay-down debt, then the public sector must run a deficit to allow the other two sectors to save. MMT highlights that such a public deficit is sustainable indefinitely for a monetarily sovereign government i.e. a government that issues its own currency with a floating exchange rate. With its own currency, a country has the option to evaluate the state of domestic private-sector demand, evaluate the state of export demand and then fill any remaining gap by appropriately sizing public spending.

A government bond in the currency operated by the government may be understood as money which pays interest to the holder. For a government which operates a currency, issuing debt to match a deficit is a voluntary policy choice. Government spending adds money to the economy, while debt issuance removes it and leaves a bond in its place.

In a country or federal system that issues money, additional taxes are not required for additional public spending to take place. Taxes function to reduce private spending in order to make space for the government to spend without pushing total spending beyond the capacity of the economy to meet demand, as a means of preventing the economy from overheating.

CompetitivenessWithout its own currency, a country is dependent on competitiveness for aggregate demand. Public policy decisions may start to be approached as if the country were a business. Competitiveness helps it to make sales externally which can fill a shortfall in total spending below the full-employment level. However, if the country can finance its own spending directly, competitiveness is not a requirement for a sufficient level of spending.

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It has been argued that having the ability to devalue the domestic currency is a reason to leave the euro for a given Member State. The supposed benefit of a devaluation is increased demand in the form of exports. However, a country operating its own currency would be in a position to set domestic demand through deficit spending, independent of export demand.

Constraints on InvestmentJohn FitzGerald, writing in The Irish Times, has highlighted the constraints on investment inherent in linking deficit spending to government borrowing:

‘Because Irish Water is largely reliant on payments from the exchequer, the borrowing needed to fund the very large investment programme is classified as government borrowing. As a result, the company is limited in how much it can invest in fixing and developing the very seriously inadequate network which it has inherited.’

In this particular example, Professor FitzGerald’s proposal is to separate the management of the water and gas networks in Ireland into two different companies. Another option might be to de-link spending and borrowing by operating an independent currency. MMT allows us to see that not being in a position to issue money risks decisions being influenced by a consideration of how to pay for a policy or programme.

Enough SpendingThe global financial crisis and the crash that began in September 2007 led to high unemployment rates, climbing to 16% in Ireland in January and February 2012. As spending dropped, employers required fewer and fewer workers to meet the reduced demand for the output of goods and services. Much of this climb could have been avoided by replacing withheld private spending with a mix of increased government spending and private spending,

or stimulated by a reduction in taxation. The ratio of spending increases and tax reductions would have been a matter for the government of the day and

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would also have been influenced by the operation of the automatic stabilisers.

In this counter-factual scenario, private spending, especially when financed by a build-up of borrowing, has the potential to fall to a lower level, as households and businesses become over-extended. The debt servicing costs of the private sector gradually climb relative to income, and the sector may pull back its spending. If at that point the public sector of the economy is unconstrained by a need to finance its spending, as in the

case of a government that issues its own currency, it will be in a position to offset the fall in private spending.

MultipliersWhen operating its own currency, a government can potentially purchase anything which is for sale with a price in that currency. But this does not mean that it should spend without limit. Spending which pushes the economy past capacity will lead to prices increasing rather than production increasing. Any proposed increases in public spending would need to be considered in relation to the space in the economy for more spending. The

government’s spending may increase but there will also be follow-on effects, as the recipients of that income spend some of it again. The recipients of that secondary spending will, in turn, spend some of that and so on. The amount by which this follow-on spending magnifies the government’s initial spending can be understood as a ‘multiplier’.

The ‘propensity to save’ describes how much of any new income is saved versus spent. If more is saved, the follow-on spending after the government spending will be less. This means that the spending multiplier applying to government spending differs from case to case depending on the recipients. However policy makers would not be able to escape the requirement to consider

‘MMT allows us to see that not

being in a position to issue money risks decisions

being influenced by a consideration

of how to pay for a policy or programme.’

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the spending multiplier. In some situations it might be decided that the economy was operating at capacity and therefore new government spending would require reductions in other government spending or increased taxes to reduce private spending.

Such alterations need not necessarily be of an identical size to the proposed new spending depending on the state of slack in the economy. The mechanical matching of spending with “pay-fors” is known as pay-go (i.e. pay as you go) in the United States and takes no account of the prevailing conditions in an economy.

Competing Uses of FundsOne might understand access to a state’s own currency as an unlimited rainy day fund, in terms of the ability to support demand. Such access would permit simultaneously maintaining funds for existing areas so that they would not compete against each other.

Pro-cyclicalityIn a pre-budget letter to the Minister for Finance, Central Bank of Ireland Governor, Philip Lane, stated “there is a risk of repeating the costly experience of past episodes by which economic downturns were amplified by pro-cyclical fiscal austerity.” This is indeed the case and the Governor’s insistence to the Minister was for the build-up of fiscal buffers, i.e. “the running of budget surpluses that fund some combination of reducing the stock of public debt and building up a rainy day fund of liquid assets.”

However, when the euro is the currency of a state, building a fiscal buffer requires a tighter fiscal policy in the period when the buffer is being built, than would be chosen if the buffer was not being built. Removing the funding constraint on government by leaving the euro enables

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a state to separate future fiscal policy from current fiscal policy. When a state spends by crediting reserve accounts at the Central Bank as countries which operate independent currencies do now, running a surplus or a deficit in the current year leaves that state with no more nor less capacity to spend in the future. This obviates the need to distort fiscal policy away from that which is judged most appropriate for the current year.

Corporation TaxThere is some fear about the vulnerability of tax receipts for multinational corporations. This has been highlighted by the Irish Fiscal Advisory Council. The worry is that tax policy changes in the United States or tax harmonisation in the EU might reduce tax revenues in Ireland. Under the present arrangements, where government spending is dependent on revenue raising and borrowing, any reductions in revenue could jeopardise spending. Switching to an independent floating currency, with the consequent ability for the Central Bank to directly fund the government, would greatly increase resilience to changes in the international tax environment.

Privatisation for RevenueAny perceived or actual lack of access to funding independent of revenue and borrowing can also distort decisions about whether to privatise a state asset or service. For example, the Economist highlighted in August 2018 that, in the United Kingdom, “The utility privatisations were driven by a desire to raise money, rather than improve services”.

ConclusionMMT recognises the relationship between a country’s authority over its currency and its ability to enact policy. Using MMT as a broad theoretical framework, this paper has considered some possible implications of any currency, including the euro, being used to its full potential. The question of the legal feasibility of exiting the Eurozone is beyond the scope of this paper. Nevertheless, it is important to emphasise that there is no explicit provision for withdrawing from the Eurozone in the EU treaties, short of a unilateral withdrawal from the EU.

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The economic and political consequences of such a move would, of course, be extensive.

A more likely scenario is continued reform of the Economic and Monetary Union. Eurozone members might one day choose to enhance fiscal integration by creating a federal fiscal capacity that supports demand at times of asymmetrical economic downturns. This paper could help guide debates, when the architecture of such a fiscal capacity is being considered.

Support for the euro in Ireland is the highest in the EU, with 85% of Irish people viewing the euro as a good thing. However, this high level of support should not preclude critical reflection on the merits of Eurozone membership. I hope that this paper will stimulate debate about the future direction of the single currency, and each country’s relationship with it.

Simon Twist works for Grant Thornton’s Financial Services Advisory practice.

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ReferencesHuber, J., Robertson, J. (2000) Creating New Money: A Monetary Reform for the Information Age

Arestis, P., Sawyer, M. (eds.), (2006) A Handbook of Alternative Monetary Economics

Mitchell, W., Muysken, J. (2008) Full Employment Abandoned: Shifting Sands and Policy Failures

Wray, L.R. (2012) Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

Lucey, C. (2014) Plan B: How Leaving the Euro Can Save Ireland

Mitchell, W. (2015) Eurozone Dystopia: Groupthink and Denial on a Grand Scale

Mitchell, W., Wray, L.R., Watts, M. (2016) Modern Monetary Theory and Practice: An Introductory Text

Mitchell, W., Fazi, T. (2017) Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World

Mody, A. (2018) EuroTragedy: A Drama in Nine Acts

Lapavitsas, C. (2018) The Left Case Against the EU

Mitchell, W., Wray, L.R., Watts, M. (2019) Macroeconomics

Endnotes 1. John FitzGerald: ‘Irish Water split from Ervia inevitable to protect

Government accounts.’: on Shortages show why water utility should have followed ESB template. 20 July 2018. Available at: irishtimes.com/business/economy/irish-water-split-from-ervia-inevitable-to-protect-gov-ernment-accounts-1.3570472

2. Central Bank letter to the Minister: View at; https://centralbank.ie/docs/default-source/publications/correspondence/oireachtas-correspon-dence/03-august-2018-pre-budget-letter-to-minister-for-finance-pas-chal-donohoe.pdf

3. Cliff Taylor: Crash legacy will live on in your income tax bill. The politi-cal decision has been made to hike spending – so the tax burden will not fall. 26 September 2018. Available at: irishtimes.com/business/economy/cliff-taylor-crash-legacy-will-live-on-in-your-income-tax-bill-1.3641277

4. Eoin Burke-Kennedy, Pat Leahy; EU tax plan ‘is a bigger threat to Ireland than Brexit. State could lose €4bn in taxes if corporate tax harmonisa-tion is adopted, expert says. 14 Sep 2017. irishtimes.com/business/econo-my/eu-tax-plan-is-a-bigger-threat-to-ireland-than-brexit-1.3220094

5. Financial Times: ft.com/content/68c3d28a-d35e-11e8-a9f2-7574db66bcd56. Britain’s political centre of gravity is moving left: Available at: economist.

com/britain/2018/08/23/britains-political-centre-of-gravity-is-mov-ing-left

7. Eurobarometer: Support for the euro steady at all-time high levels: https://ec.europa.eu/info/news/eurobarometer-2018-nov-20_en