I first got acquainted with Chartalism because two regular commenters of Nick Rowe’s posts, Winterspeak , Scott Fullwiler, and JKH, constantly to pertain to this (to me) seemingly coherent and consistent system of thought in their reasoning on certain discussions. I encountered it again in this discussion thread at Interfluidity.
I’ve been doing a bit of research on it in the last few days and I’ve discovered that Neo-Chartalists’ central ideas seem to converge around the contributions of L. Randall Wray, Warren Mosler, and Bill Mitchell. The system they advocate has a different starting point as the conventionally held beliefs in economics, or what they call ‘Neo-liberal’ ideology. To illustrate briefly what Chartalism is, let me explain what Neo-liberal is to them. The main difference in systems seems to be in how money is created, or how its use comes about in an economy.
Neo-liberals believe that money is created by economic trades by private sector participants in the market. Money arises because it is a more efficient to use a commonly accepted currency rather than engaging in barter for all of one’s basic needs. This money is then what the private sector uses to pay its debts, taxes and other obligations. When there is an economic dislocation, such as what recently happened, because private participants find themselves highly indebted, they engage in less trades, and this leads to a general decrease in aggregate demand. In this instance, the government should step in and stimulate the economy, by filling in the deficient demand.
Chartalists believe that money is created, so that government can induce its citizens to work and pay their taxes. Government, as the issuing authority, makes use of money as a way to get its citizens to defend its borders, police its citizens, teach its children, and the various other duties that need to be done in running a state. Because money is what the government, in turn, will accept as payment for taxes, people will willingly work for money. And because everybody is subjected to taxes, money then becomes a useful medium of currency among the citizens when they trade with one another, because the recipient can also use it to pay his own taxes. In short, the starting point of Chartalism is the issuance of fiat money by government. This fiat can be anything, and need not be backed by any real commodity. The mere fact that it is backed by government, and will be accepted by government, is enough.
In this view of the economy, when an economic dislocation happens, Chartalists also believe that government should step in. in fact, for Chartalists, whenever there is a dislocation, the ultimate cause can always be traced back to government. Because money is created by government issuing money and using it to spend for government’s needs, when the government decides to scale back money in circulation, either by spending less or taxing more, less money circulating leads to less money to fund for everybody’s work. Companies that used to get more from the government now scale back their operations. This leads to less income for its workers who then decrease their demand for goods and services in the private sector. Hence, even more so for Chartalists than it is for what they call the Neo-Liberals, the solution for our current economic problem is more government spending.
This line of thought is not that hard to accept for me. Whether money in fact arises from private sector trades or because government wants to give its citizens the means to pay their taxes, they’re both believable for me. And the Chartalist implications, that government needs to step in and help whenever there is deficient private sector demand, is something that I have also advocated here several times.
However, before I am willing to revise my ‘Neo-liberal’ framework for the Chartalist one, I’d like to ask a few questions. If given acceptable answers, I will embrace Chartalism with all its ramifications. These are my questions:
1. If currently circulating government fiat is the lower constraint to generating demand, then the inevitable conclusion is that all the government needs to do is to spend more, up to infinity, to pick up any slack. How do Chartalists determine what is the upper constraint to issuing more currency?
2. How does government ensure that fiat issued to generate demand goes to every person that needs to spend more, rather than this amount just being hijacked by rentseekers? (i.e,m monopolists, certain types of bankers, asset speculators)?
3. How does Chartalism account for leakages in an economy? i.e., fiat going towards spending abroad, or towards imports, or buying assets abroad? Will the government just issue more and spend more to compensate? When does it stop? When all citizens of the world are employed?
4. In the Chartalist view, banks are used by the government as sort of monetary boosters. When they loan out funds, they merely debit their accounts with the central bank, which can, for intents and purposes, ‘print the money’ by crediting their reserve. How do you control so that banks (fiat boosters) don’t create more fiat than what is needed? (This assumes that there is indeed an upper constraint to money issued/what can be spent by government) After all, if we take the ultimate implication of Chartalist view (I could be mistaken) more loans leads to more demand. This way, banks did what the government could have otherwise done itself, by spending more in the real economy.
5. What is the absolute scale of what the government is allowed to do/spend on to stimulate the economy? i.e., Can it start up manufacturing firms, to make up for all those lost to offshoring? Or start banks, start daycare centers, dogwalking companies, for as long as it creates employment?
6. What is the limit (if any) to the government backstopping any declines in aggregate demand? i.e., If businesses in aggregate experience a levelling off of sales, do we expect government to step in to maintain previous levels of aggregate employment?
7. How does this system incorporate market competition if everyone is backstopped? Ex. You have 99% employment, 90% of whom are employed by Microsoft, while 9% is employed by an upstart Google. If Google starts growing, it’s going to destroy jobs at Microsoft. Will the government step in and hire those laid off at Microsoft?
If I get answers to this, I’m will shed off my ‘Neo-liberal’ framework right this minute in favour of Chartalism. (I have a feeling that reality is actually a hybrid of both systems) All the same, government needs to help pick up the slack.
UPDATE: This today from Marshall Auerback is a good summary of the Chartalism view.