Why the left needs to understand Modern Monetary Theory

Peter Allen opens a debate on a controversial theory that allows greater government spending, free from the constraints of ’balancing the books’

When I came to accept the essential truth of Modern Monetary Theory (MMT) – that governments which control their own currency are not constrained in their spending decisions by any need to tax or borrow – it amounted to a Damascene Conversion, “an important moment of insight, typically one that leads to a dramatic transformation of attitude or belief.” (Oxford Lexico).

Suddenly the worry about how to fund public expenditure – how much we could or should tax the rich or ‘middle England’ and whether the ‘money markets’ would provide funds to a radical reforming government – could be set aside. Sovereign governments, such as the UK, could simply create money as if out of thin air. There were limits to how much such a government could spend, but these limits were set by real resource constraints, crucially the availability of labour, rather than any spurious notion of affordability. 

Armed with this new knowledge, I confidently set out to convert fellow socialists, and eco-socialists in particular who, like me, understood the real ecological constraints on spending and growth and who could now focus on spreading the word about planetary boundaries rather than financial ones.  

My failure to convince many since my ‘conversion’ has no doubt been partly my fault. I have failed to communicate the essential message in language which friends and comrades can understand.

I suspect my lack of success also reflects a genuine and understandable reluctance on the part of many people to give up beliefs which they have long held to be true, and which underpin their political practice. Like the wider population, many socialists say that they’ don’t do economics’ but are happy to accept that

  • there is a war between the rich and poor, often defined these days as the 1% versus the rest of us, and the more ‘they’ have, the less that is left over for the rest of us and the public services and welfare state that ‘we’, unlike ‘ they’ depend on.
  • Decades of ‘neoliberalism’ have destroyed public services and increased inequality. The former can only be restored by a huge public spending programme, paid for by increased taxation of rich individuals and large companies.
  • While, as most economists agree, the government can borrow money in the short to medium term, particularly with interest rates currently being at historically low levels, eventually this money will have to be paid back. There is no such thing as ‘ free money’. 

MMT rejects these ideas.

There is a growing amount of accessible information about Modern Monetary Theory. I would recommend this short video as an introduction, as well as Richard Murphy’s Tax Research blog and the GIMMS website.

In a recent blog post, Murphy provides an analysis of recent government spending, and, in particular, the phenomenon of Quantitative Easing. Pointing out that QE has amounted to £845 billion since 2009 (half of it in 2020) he argues that “Modern Monetary Theory explains what is happening. A government with its own currency can fund its spending using new money creation.” 

Between 2009 and 2012, a first round of Quantitative Easing (QE1) was used to rescue the banks which were effectively given money. The government at the time claimed that QE would enable banks to lend more to businesses, to boost the economy. This didn’t happen. Instead the money was invested in shares, creating a stock market bubble. As Murphy says, this was “great for the city but almost no-one else.”

The recent and ongoing second round, QE2, is being used to cover the deficit caused by COVID-19. The government has essentially, as during QE1, “bought its own debt and then cancelled it”, whilst pretending that the debt still exists, to justify austerity. 

Murphy suggests that the deception was and is wilful: “The pretence that there is a debt to repay, and an interest cost to settle, is used as an excuse to cut government spending even though no such excuse exists.” Even if we give government and bankers every benefit of the doubt and concede that they, like most of the left, didn’t and still don’t really understand what was and is happening – because they don’t get MMT – then the fact remains that austerity didn’t need to happen and doesn’t need to happen now.

According to Murphy, a further round of QE could and should be used to fund economic recovery and, crucially, the Green Transformation that we so desperately need.  A third round, QE3, would invest in green jobs and infrastructure and would encourage private savings to do the same. “What is necessary is that the power of QE be understood. Few have tried to do that. There are few politicians in that number. But it’s time QE – or the power to create money – was understood. Because this is how we can control and deliver the economy of the future.”

He provides further detail about QE3 here.

I was disappointed that John McDonnell didn’t advocate MMT’s essential  truth during his time as Shadow Chancellor and hope that he might do so now, free from the responsibility of his central role in helping lead Corbyn’s Labour Party in extremely hostile terrain. His adviser James Meadway was very dismissive of MMT in a Tribune article in June 2019, to which Murphy subsequently responded. 

I was persuaded by Murphy’s argument that Meadway was misrepresenting what MMT says and objecting to its conclusions for political rather than economic reasons.  There may be a case against MMT but, in my opinion at least, Meadway doesn’t make it. 

I hope the MMT advocates are right, not least because an acceptance of MMT might even allow a chronically divided Labour Party to unite. All of us are in favour of targeted public spending and regard an interventionist government as a good thing, don’t we? Discussions about tax and spending would still take place, but the debate would focus on reducing inequality, influencing consumer behaviour and prioritising the use of finite resources rather than on raising and spending scarce funds. If the challenge became less of a ‘class struggle’ and more a struggle to explain what may be a challenging concept for many voters – that government spending is not like household or business spending and that there is no limit to how much the government can spend except resource constraints – then maybe it is a struggle which will be easier to win.

Peter Allen was a Green Party activist for years and stood for election in unwinnable seats before campaigning for the Greens not to stand against Labour in the first Corbyn-led election. High Peak was the only constituency in which the local Green candidate agreed to stand down and as a result it was won by Ruth George for Labour. Peter subsequently joined Labour, having failed to persuade the Green Party Conference to seek an alliance with Labour and the trade unions to campaign for a Green New Deal.

Image: Pixabay. Licence: Pixabay License

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