Modern Monetary Theory suggests scrapping what we thought we knew about currency and economics and having the government turn on the cash tap like never before. Glint asks whether such an idea holds water or just pours petrol on the fire…
The global financial crash was not merely a crisis of economy, but also one of economic thinking. While there is clear consensus on the problems, there has been little on the solutions as faith in the economic orthodoxy that has underpinned the world economy since the 1980s continues to evaporate.
In looking to address these systematic problems governments have turned to fiscal restraint, monetary policy and inflation targeting to manage their economies. Post-crash, this approach continues, with interest rates sitting at historic lows, an overall reluctance to increase state spending and a message of austerity still on the political agenda.
But the legitimacy of this plan remains debatable. Many of those advocating a less austere method have pointed to Modern Monetary Theory, or MMT. Less of a financial protocol and more of a philosophy of money, MMT draws upon insights from thinkers such as John Maynard Keynes and Karl Marx. Keynes was revolutionary in his theory that government expenditure was a counter-intuitive tool to heal public finances and macroeconomic activity. But MMT goes further than this, suggesting that, in line with more radical takes on Keynes and Marx, mainstream economic constructs such as public finances and their conception of currency are destructive and perpetuate an inherently flawed system. MMT asserts the nature of money means the government can be as loose with its purse strings as it likes as it can never go insolvent, and that debt and deficit are artificial barriers. By point of proof, Bill Mitchell, a notable MMT economist, has suggested that “gold standard thinking” was a “voluntary constraint”.
L. Randall Wray, professor of economics at the University of Missouri-Kansas City, began to formulate MMT with Mitchell and a group of other economists over the 1990s; the “modern” part of the name refers to the idea that the modern conception of money has existed for 4000-6000 years.
Wray described his paradigm to Glint: “MMT explains how sovereign currency systems actually work. [It is] opposed to all the silliness that views governments’ budgets as equivalent to a household budget and that claims governments could run out of money, go bankrupt, or be forced to default. All the other approaches got it wrong before the crisis, and they led to terrible policy post crisis. No one who understands sovereign currency would have proposed either austerity or quantitative easing as constructive policy.”
Proponents say MMT goes further than the mere “stabilisation” that Keynes offered, almost to the point of detaching the debtor from the system. Geoff Tily, senior economist at the Trades Union Congress and author of Keynes Betrayed, defines this distinction: “Keynes knew perfectly well that you could finance government spending through credit. You can’t improve the public finances through cutting spending, and to think the government is like a household is to completely ignore macroeconomics. The MMT logic, in part, seems to be the government is not like a household because it can spend as much as it likes.”
It is unsurprising that MMT’s heterodox position has found kinship with the more radical elements of modern politics. In the US the then budget committee ranking member, senator Bernie Sanders, hired a leading MMT contributor, and colleague of L. Randall Wray, in Stephanie Kelton as his chief economist. In the UK the ideas of Richard Murphy, author of The Joy of Tax and co-founder of the Tax Justice Network, started to crop up in Labour leader Jeremy Corbyn’s manifesto in September 2015.
Acknowledging that he essentially fitted into the MMT camp, Murphy spoke to Glint on the key distinctions the theory offers, noting that the concept of money has been grossly undervalued by economists. “MMT finally recognises the change in banking that happened after the gold standard was abandoned by the USA in 1971, after which all money has always, and only, been backed by a government promise to pay.”
Tax, therefore, is crucial says Murphy, as it does not fund government spending but instead cancels the money creation that government spending gives rise to. “It recognises that if all money is ultimately created by government promise then it follows that government has a central role to play in macroeconomic management.”
Unsurprisingly though, the tax and spend, or tax and print, route to economic Eden is lined with sceptics. “If it sounds too good to be true it probably is,” says Julian Jessop, chief economist at the Institute of Economic Affairs. “Of course the government can print money or get the central bank to create money to credit the accounts of government departments. Where it falls through is the assumption that the increase in government spending will result in a real increase in economic activity.”
Whilst Jessop admits that standard Keynesian fiscal stimulus financed by money printing may have been a good idea in the economic pits of 2009, he sees risk in wantonly turning on the cash tap. The amount of “spare capacity”, or underused resources, is seen as the key differentiator in whether extra spending will result in destructive inflation, and, according to Jessop, we are close to full employment already. This concept of limited “slack” in the economy was highlighted repeated by Bank of England governor Mark Carney at the recent interest rate announcement.
Even Keynesian economists considered to be on the Left, such as Paul Krugman, appreciate the limits of government spending as being situational and beneficial within a liberal capitalist system. Krugman has previously criticised MMT in his New York Times op-ed blog “The Conscience of a Liberal”, noting in 2011 that it “may literally be true that a government with its own currency can’t go bankrupt, [but] it can destroy that currency if it loses fiscal credibility”. Tim Worstall, fellow at the Adam Smith Institute and Forbes contributor, echoes this point, noting that “Henry VIII did this and it didn’t work out well. Zimbabwe did it: didn’t work out well. Venezuela is doing it: not working out well.”
Aside from inflation concerns, there may be other ensuing economic games of whack-a-mole from the unintended consequences of MMT says Jessop. “The currency may fall sharply. You may be able to force the central bank to create money by buying debt, but if the central bank has control over interest rates it’s likely to raise them, which will have an impact on borrowers. The pound may even rise in that situation.”
Other criticisms of MMT focus on its endorsement of state intervention via spending. Where the markets fail this is justified, but that is not a licence, says Jessop. “I think market failures are much less common than people think [and] there are lots of government failures too.”
Indeed, in addition to the potential institutional failures of government spending, the human element may be what holds MMT back most. Worstall suggests that statesmen’s economic rationality isn’t immune from public pressure when it comes to fiscal return. “They say, and they’re right to, that if inflation occurs because of this increase in spending financed purely by printing money, [then] taxation is the way to suck that inflation back out of the economy. True, that will work; but our historical evidence is that the politicians are never willing to tax at the rate which will kill the inflation.”
But the advocates of MMT remain as austerity and quantitative easing continue to suppress the welfare of so many. To MMT economists much of the weight behind their argument is drawn from their distance from the main as they dismiss established modelling, arguing the bulk of the economic problems we suffer, especially unemployment, could vanish if we simply abandoned orthodox thinking and radically overhauled the entire system. Wray suggests, system-wide benefits could be felt with the revision of key assumptions about macroeconomics: “Everything mainstream economic theory teaches about the sovereign currency system has to be rethought and must also include the sectoral balances approach [a relationship that suggests it is only possible for the non-government sector to accumulate a surplus if the government runs budget deficits]. There are many other things that mainstream theory gets wrong, but if they could adopt MMT’s approach on just these two aspects of macro theory, they’d be on the right track to revising all of macroeconomics.”
Wray’s critics remain though. Having spawned so many counter arguments, MMT has clearly earned the badge of academic, and arguably political, legitimacy, as opponents seek ideological gravity in their critique. Worstall cautions against state dominated economies even if MMT passes all the other checks, while Jessop says MMT reduces the idea of money, and thereby wealth: “The government can always produce more piece of paper, it can create nominal value, it just can’t create real value. It could put more zeros on the end of everything but it doesn’t make anybody better off. Unless it’s setting prices and incomes, the value of that money is not in its control.”
If Jessop’s assertions on illusory value are true then MMT looks set to remain an unverified chart rather than a bounteous harbour. Meanwhile, with or without MMT, the debate continues over who is best placed to provide economic well-being: monetary policy makers, or a more novel challenger.
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