You don’t need to be an economist to realise that things are bad for the economy. When the Bank of England not only declares that we are in recession but that it could last for up to two years, something is seriously wrong. In such a situation we need bold plans to move us into recovery. One theory receiving a lot of attention, not to mention support, from large sections of the left is Modern Monetary Theory (MMT). What does it propose, and will it work?
Boom and Slump
Let’s start by identifying the problem that MMT seeks to solve. What does a recession mean? First of all, it is nothing new. Capitalism has always suffered from periods of boom and slump. During the boom the economy grows. Then the market reaches saturation point. Companies that are saddled with high costs and falling demand go bust and default on their debts. The banking system suffers a shock and starts calling in its loans. There is a domino effect as more firms go bust and workers are laid off, pushing the economy into recession.
For the last forty years governments and central banks have tried to use the money supply to control the economic cycle. By raising interest rates, they hope to reduce credit and slow the economy down enough to avoid a crash. Some firms will still go bust and workers lose their jobs, but it is supposed to be better than all-out recession.
For a while it seemed to be working. In 2006 the Labour Chancellor of the Exchequer, Gordon Brown, declared that there would be “no return to boom and bust.” Two years later the world was in the grip of the deepest recession since the Wall Street Crash of 1929.
Governments around the world doubled and tripled their national debt to stop the banks from going bankrupt. And to pay for it they imposed austerity on the working class. There were cuts to welfare, health and education. Real wages were effectively frozen or fell. Meanwhile the rich got richer.
MMT and the left
Left opposition to austerity led to an explosion of support for politicians like Bernie Sanders and Jeremy Corbyn, who argued that instead of handing billions to the rich, governments should spend that money themselves to stimulate growth and rebuild the economy. This is where MMT comes in.
Proponents of MMT argue that sovereign powers like the US and the UK which issue their own currencies have got it all wrong. If they can print money to bail out the banks, or to prop up the economy during a COVID pandemic, or subsidise the energy companies during a cost-of-living crisis, what is to stop governments printing money to pay for the things we want and need like schools, hospitals and green energy?
MMT appears to be radical partly because its proponents say it is. They claim to have discovered something that governments have kept hidden from us for decades. Stephanie Kelton, former advisor to Bernie Sanders, compares it to Copernicus discovering that the earth revolved around the sun. No sign of hubris there! Another key figure is Bill Mitchell, an Australian economist who claims to have been influenced by Marx but also claims that Marx is now outdated. The leading British proponent of MMT is Richard Murphy, one time adviser to the Shadow Chancellor, John McDonnell. However, it is worth remembering that Labour’s manifesto commitments in 2017 and 2019 were fully costed and did not rely on MMT’s promise of free money.
It would be more accurate to say that MMT theorists have rediscovered the ideas of Keynes, who argued for government investment to stimulate the economy in the aftermath of the Great Depression of 1929. Keynesianism was mainstream economic thought until it was replaced by the monetarist doctrines of the Reagan/Thatcher years. Governments, whether Labour or Tory, have not hidden this theory. They have openly rejected it.
Simply put, MMT states that:
- Sovereign nations can create money, and we have recent examples with Quantitative Easing (QE).
- If that money is put to good use, it circulates within the economy, promoting economic growth.
- Much if not all of it eventually returns to the government via increased tax revenues arising from economic growth.
- Therefore, it is free money that does not have to be repaid to balance the books.
It is easy to see the appeal, especially for the left. MMT takes on the myths of the free market and offers a simple answer. But if it was so simple why aren’t governments queuing up to implement it? Are we in danger of exchanging one set of myths for another?
There is no reason why spending on health and education and social care is inherently good for the economy, while spending on war and imperialism is inherently bad. The UK experienced massive growth in the Victorian era by ignoring the former and spending massively on the latter. One explanation of the long post war boom when a Conservative Prime Minister could tell us “you have never had it so good,” was the stimulus to growth from the arms race during the Cold War with Soviet Russia.
That boom ended in the inflationary surge in the 1970s. Inflation is once more a priority. What does MMT have to say about that?
Stephanie Kelton, in her book ‘The Deficit Myth’ which has become something of a bible for supporters of MMT, points out, “The only economic constraints currency-issuing states face are inﬂation and the availability of labor and other material resources in the real economy.” As economist Michael Roberts, in his excellent and highly recommended blog, comments,
“Two big constraints, it seems to me. How would inflation arise? According to MMT, it is when unused capacity in an economy is used up, so that there is full employment of the workforce and given technology.”
So MMT only promises ‘free’ money if we can control inflation at the same time. In order to print money and avoid inflation, the economy must not overheat. In other words, according to the leading exponent of MMT, the price of paying for all these social goodies is not quite free. It comes at a price and that price is ‘unused capacity’ or unemployment to the rest of us. It seems to us that MMT requires the reserve army of labour just as much as neo-classical economics for the self-same reason that it must hold down wages to avoid rampant inflation.
This is economic jargon for the idea that ‘what goes around comes around’ In other words, government spending is not funded by taxation. Instead, taxation is the return on government spending that stimulates the economy.
Hey presto! The fiscal multiplier means that no matter how much money you print it will come back to you. Bill Mitchell addresses this issue in a recent paper and shows that actually, in his model anyway, each $100 of investment via government spending generates both additional taxes and additional output, raising GDP by 79%. The point Mitchell makes is that “the initial rise in government spending has induced new consumption spending of $64. The workers who earned that income spend it and the production system responds.” Supporters of MMT are enthusiastically seeing this as evidence that government spending pays for itself. It is not exactly what Mitchell proposes, but, even if his figures were correct (he never claims they are by the way), extra productivity and additional taxation would bring back 79% of the government’s investment. Whilst cheaper than arguing that every pound spent must be accounted for by an increase in taxes, this is far from the ludicrous assertion that MMT comes at no cost at all.
MMT gets two things right.
- That, in striking a balance between inflation and unemployment, governments are making a political choice, not an economic choice. (Mainstream economists on the left like Krugman and Stiglitz in the US and Piketty in France have also made this point and argued for policies to end inequality, without endorsing MMT.)
- Just handing money to banks and big business and trusting them to do the right thing is never going to work. If governments are going to create money using QE, they need to control how it is spent.
In truth governments do not control the economy. Their political choices are constrained by the workings of international capitalism. That was graphically illustrated by the disastrous Truss/Kwarteng experiment in September. Britain is a special case in the sense that the disastrous terms of the Brexit deal agreed by Johnson meant a 4% decline in GDP, even before the equally incompetent COVID response added to our woes. But no country is immune from the workings of the market.
Another economist Brian Green has characterised QE in the following way:
“As money is the elixir of capitalism, central bankers believed it would accelerate economic activity. Instead this elixir turned out to be more antihistamine than stimulant, preventing the economy from sneezing but not boosting it. Instead of making society richer it made the speculators richer.”
When we look at the world today, we can see that it is very clearly the case that since 2008 the divide between the haves and the have-nots has increased. In April data from America, the global cheerleader of unfettered capitalism, revealed that,
“The top 1% owned a record 32.3% of the nation’s wealth as of the end of 2021, data show. The share of wealth held by the bottom 90% of Americans, likewise, has declined slightly since before the pandemic, from 30.5% to 30.2%.”
Advocates for MMT are right to expose the flaws in neoliberal economic theory and point out that governments’ so-called economic decisions are actually political choices made to satisfy the demands of capitalism. But we do not need to support MMT to argue for that. And the answer is not to print more money. The money is already there, in the hands of the super-rich.
MMT theorists have a thing about money. They believe that money is the source of economic activity, when it is in fact the product of economic activity. Money is first and foremost a medium of exchange. It represents the value of our labour power. Governments who print money, whether in accordance with Modern Monetary Theory or Quantitative Easing, are merely promising to give the banks and the speculators the value that we have yet to produce. It works so long as “the markets” trust in government promises to make them rich, but any government that tries to use MMT to finance social justice will quickly face the wrath of those markets.
We have to organise to force concessions from the ruling class and ultimately replace it with socialism. MMT actually undermines that struggle. It implies that we should rely instead on left leaning politicians and their economic advisors to do the right thing and hope that the speculators in the money markets do not move in to sabotage it. So, there you have it. MMT is just another flawed idea that asks us to abandon the struggle for socialism and put our faith in reformism.