Last week I wrote a column for The National newspaper which was critical of Modern Monetary Theory (MMT) and it caused a bit of a stooshie. There was the usual internet troll nonsense but the key complaint was that I was misrepresenting what MMT really was when I stated that: “The premise of MMT is that a sovereign government with its own free-floating currency and a central bank can never go bust as it can produce new money and spend as it likes.”
It’s an appealing concept and I understand why it’s catching on but it’s severely limited as an practical economic theory. Every single MMT fan I have spoken to has explained their epiphany of realising that sovereign governments can produce new money, end austerity and that deficits are not a problem because we can spend as much as we like. Well, austerity is fundamentally stupid and has cut off the lifeblood of the economy just when it needed more public spending. Deficits are not a problem, they are a good thing as Government spending is essential in stimulating new economic growth. However, Governments can’t spend as they like because – wait for it – a Government with a sovereign currency can indeed go bust especially if it introduces too much new money in the economy.
The comments came thick and fast; “Gordon needs to do more research’, “he clearly doesn’t understand MMT”, “he should listen to Stephanie Kelton”, “he thinks we need deficits and is a standard neo-liberal economist.” Wait, what? Me a neo-liberal – I don’t know whether to laugh or cry.
I have indeed read up on MMT and Stephanie Kelton, Professor of Economics & Public Policy Stony Brook University (New York) and Chief Economist for the Democrats on the U.S. Senate Budget Committee. She is one of the key and highly respected people behind the MMT movement so let’s see if she defines MMT any differently to me?
When introduced by no less than Mariana Mazzucato at a UCL Institute for Innovation and Public Purpose talk to showcase MMT, Kelton introduces her presentation thus:
“When it comes to the British Government money is no object”.
“Rather than looking for money to pay for Government spending the approach we should take to budgeting is to ask:
– What is it we would like to do?
– What type of economy would we like to build?
– What are the missions you are trying to achieve with the economy?
– What is the budget you need to carry out those missions, you can just fit the budget you need to fit those goals?”
No object means: “The availability of money is not taken into account and therefore presents no obstacle to spending.”
She then goes on to make the entirely correct points that Governments like the UK can create new money, spend it and deficits can be a good thing. She also correctly says things such as Government budgets don’t work the same way as household budgets. The video, which you can watch here, is over an hour long but unfortunately the questions at the end are unspecific and disappointing for a talk at such a revered institute.
Not that its the source of all knowledge but Wikipedia is a starting piont for a lot of people and it has a decent MMT page where it states:
“The key assertion of MMT is that sovereign governments that are the sole supplier of national currency can issue currency of any denomination, and in physical or non-physical forms. Consequently, these governments have an unlimited financial ability to pay for the things they wish to purchase and to fulfil promised future payments.”
“The real limits to a currency-issuing government’s spending are the availability of natural resources, goods, assets, workers and services in the real world” (I will deal with those very real limits later in this article).
Wikipedia also says: “MMT claims that these governments also have an unlimited ability to provide funds to other sectors and that because of this, it is not possible for a government that issues its own currency to be bankrupt.”
And there it is again the core belief at the centre of MMT is falsehood when they say: “it is not possible for a government that issues its own currency to be bankrupt.”
This is at odds with the truth at the core of MMT thinking which is an accurate observation of how money works, that any serious economist has been aware of since the end of the gold standard: the creation of free-floating currencies. That truth is that Governments with a sovereign currency such as the UK’s have massively more monetary policy flexibility that most economists believe. Indeed here is an article I wrote over three years ago making that very point. I am in favour of using money creation to increase spending in certain ways but it’s mainly the idea that MMT can be used in the extreme to fund socialist spending wish lists, which is what is being presented to me by Scottish MMT fans, that I want to address.
First, though this might surprise you – the political right already know how to use the creation of new money to fund their agenda. The bank bailout was a case in point: they bailed out the banks and then created £375 billion in new money and effectively used it to make the rich richer whilst introducing austerity for everyone else.
The biggest problem for anyone who thinks MMT stands for magic-money-tree is that there are many real-life practical restrictions on spending and significant negative side effects with its use.
All economic activity comes with an environmental cost and I would argue that our addiction to economic growth is killing the planet, so if every capable country increased spending significantly that would further deplete the planets finite natural resources, driving us to the CO2 tipping point disastrously quickly.
But would they? Well, politicians throughout history have been shown to be deeply flawed when it comes to understanding complex cause and effect systems. So, what is to stop bad leaders spending trillions on white elephant projects just to get elected, triggering huge environmental costs? Trump could build a wall, Prime Minister Johnson or Reese-Mogg could decide they need to double the Trident fleet, make the UK a great military power again. One blogger said my point was moot as we would just not elect idiots – wow why didn’t I think of that? Half of America doesn’t even know it has alreday elected one!
Right-wing populist leaders observing that the public sector has unlimited ability to fund the government’s agenda, might not bother taxing business at all. This is a common theme I hear in conversation with right-wing lobbyists and economists – they say tax workers earnings, not businesses.
It is my observation that UK’s Conservative government has been trying to gradually lower overall taxation whilst simultaneously transferring the balance of taxation from business onto the individual for years. It’s a small step for those inclined to that way of thinking to say let’s stop taxing businesses and cover the reduced revenues with an increased supply of money if they thought they could get away with it. Likewise, a socialist populist could cut income tax but maintain business taxes. No problem there some would say but if the economy failed under either of these scenarios, then the electoral swings from left to right would become massively polarising in policy terms.
Thirdly, MMT taken to the extreme (and it would be) could be seen to offer no limit on military spending and effectively guarantees a new global arms race. The fact that nuclear weapons are expensive to develop is one of the key reasons we are still breathing, making them affordable for all could have disastrous consequences. Any government with a large military complex must eventually use that military might if the global economy collapses, as it must do if competition for natural resources intensifies and when the planet overheats.
Fourthly, if a nation were to overuse MMT the value of its currency would sink like a stone. Brexit has demonstrated how dependent the UK is on imports of food, medicines and industrial components. The value of the pound is key to setting the cost of those imports.
If the supply of money becomes volumous enough to dilute the value of currencies held by individuals, corporations and countries they will disinvest: the pound will rapidly lose value and purchase less than it did before. “No problem, we just print more money,” said one MMT evangelist to me recently. Yes, but then you end up paying a thousand pounds for a loaf of bread, it’s called hyperinflation. The UK Government’s QE exercise didn’t cause inflation because the money created didn’t reach the real economy. They did it in a way that increased the assets of the wealthy and the money didn’t trickle down – go figure.
Fifthly, in the case of the pound, a significant fall in value due to looser monetary policy would mean it would likely lose its international reserve currency status, whereby nations all over the world hold stocks of Sterling to settle international debts because it has traditionally been a strong and stable currency.
Finally, MMT removes all discipline in the economy – from individuals, corporations and politicians, which would impact negatively on inflation, the environment and the supply of labour. An economic bubble would inflate – and this would be the bubble not just to end all bubbles but possibly to end all civilisation when it crashes.
There are six reasons why MMT is a nice theory but a bad economic mantra and it’s certainly not the panacea for an independent Scotland once it launches its own currency.
Richard Murphy, a well-known accountant and economic commentator, published a kneejerk reaction piece that led the charge on the accusation that I was misrepresenting what advocates of MMT believed. He invited me to comment on his blog and when I did so he refused to answer my questions and basically spat-the-dummy. This is not how a credible economic commentator should behave. Sure, in the short term, he will gain fans from the MMT supporters club. However, what is quite ironic is that he is not a full-blown MMT advocate and admits some take it too far and draw conclusions that the theory does not require. Indeed I believe his approach to utilising sovereign money creation is closer to mine than to the most vocal champions of the MMT movement.
For many years I have been in favour of controlled quantitative easing (new money creation) for:
- Special infrastructure projects where there is a market failure (within sustainability limits)
- Creating a Citizen’s Bank to maintain banking services to rural areas,
- Upgrading broadband and communications infrastructure
- Debt forgiveness” for the people” who were damaged by the banking crisis and austerity because it wasn’t fair to just bail out the rich
- Launching a new currency is also a key place to use money creation – you just issue enough extra to cover the costs
- Working in unison with the rest of the world and in a controlled way, we could boost carbon reduction in time to save the planet with a massive cash injection that didn’t take from other spending areas but that would require a coordinated effert and global politcal will
So, in rejecting MMT as a replacement overarching economic theory, we must still accept that at its core is an idea we can utilise as an ingredient in the new economic mix required to replace neoliberalism. What MMT offers us is not an approach to money creation that solves the world’s problems but rather support for an observation that I have made many times in my columns over the years: that there is far more monetary policy flexibility available than politicians and economists have traditionally believed.