I read Jonathan Portes' attack on modern monetary theory in Prospect with some bemusement. Firstly that is because many in the UK modern monetary theory community will be quite surprised to know that I am, as Portes suggests, its main proponent. I have in fact for some time been quite critical of some of its leading exponents. Second, I was surprised that if Portes did not understand any of my comments, as he suggested, that he had not get in touch to check them. I am not hard to find. And third, the article did in fact seem rather more a defence of Jonathan Portes than it was an attack on MMT. But nonetheless, I would like to set the record straight.
That's largely because Portes presents a series of straw man arguments that he must know to be false representation of what MMT says in his article. The reality of its position is easy to explain, and entirely clear. Portes should not be denying it.
In the first instance MMT says all money is created by either government central banks or other banks acting under state licence.
Second it says that money only has value because the government promises to back it.
Third, it suggests that this backing is evidenced: the requirement that tax be paid in government created money guarantees state created currency a value in exchange, most especially if there is no other currency in circulation in an economy.
And fourth, this necessarily means government spending must come before tax is raised in our macroeconomy or there would be no money created to settle the tax bill. This cannot be issued as semantics: it is fundamental to understanding the role and nature of deficits.
Which fifthly means government deficits are a necessary and good thing because without them the means to make settlement would not exist in our economy. This is especially true since a government cannot default on its debt denominated in its own currency but escalating private debt suggests private debt default is a real risk at present. The choice between how to create credit in the economy is not, then, neutral.
And sixth, and most important of all, knowing this liberates us to think entirely afresh about fiscal policy, which Portes rightly says is prioritised by MMT over monetary policy, which I would happen to argue is now largely redundant anyway because in a world of low interest rates monetary policy is wholly ineffective, and I believe low interest rates are here to stay.
The resulting approach to fiscal policy emphasises three areas. Essentially, MMT says the primary task of any government is to deliver full employment, for social, economic and sustainability reasons (because labour wasted is a non-renewable resource). Second, it says it is the job of government to ensure that there is sufficient money (or credit) in the economy to meet the needs of a modern economy and when banks will not provide this then government must do so by spending it into existence, in contrast to private banks lending it into existence. This means governments are spenders of last resort, which is the necessary corollary of MMT's suggestion of the government's third role in this fiscal policy area, which is to be borrower of last resort, which may be critical, sometime soon.
As a result MMT suggests that a government can and should run deficits until effective full employment is achieved. But what, crucially, it says when claiming this is that this capacity is not constrained by the level of private sector activity. GDP is in this sense just a number, rather like the willingness of banks to lend to government is just a numerical indicator of no real consequence. Instead, the constraint on government activity is the physical capacity of the economy. Falling GDP or a lack of willingness to lend to the government is not then to be seen as a constraint on government action, but is instead an indication that there is a need for action, in the first instance, and a need for government money creation (or deficit funding) in the second.
Saying this, thereafter it is an obligation of any government to tax enough to withdraw from circulation sufficient of the currency it has created to control inflation. This is done by taxing, and gives tax its primary purpose, which is not then revenue raising but inflation control within a fiscal policy framework.
It so happens that viewing tax in this way also liberates tax to be a tool for the effective tackling of inequality, market failure and the delivery of those incentives really required to create long term sustainable well-being, all within a framework managed to deliver full employment and stable, low inflation.
Now, of course there will be external shocks to the system. And no government using this policy may overspend beyond the capacity limit of its economy or inflation will arise and a threat to the value of its currency might result. But those are real risks in any economic management framework and are not peculiar to MMT. But to suggest this means MMT undesirable, or wishful thinking, appears bizarre. It also shows a lack of understanding of what inflation can be controlled with which mechanisms by suggesting all types are the same, when plainly they are not.
There is a consequence of this thinking, however. It does expose the flaws in the Portes / Wren-Lewis written Labour fiscal credibility rule.
Now let me say straightaway that this rule is anything but what it claims to be. It is largely a game of political theatre seeking to appease the right by pretending that the conventions of monetary policy are respected when I think neither author believes that they will really apply. I think Labour believes that a price worth paying. I disagree.
That's partly because this concedes power to the right and suggests that the left accepts it must play by their rules. If this is the manifestation of the political economy of power at play then the clearest indication given is that the left knows it is not in control. That, for me, is a mistake. As is the language of the maxed out credit card that the rule uses, which I hope Portes and Wren-Lewis did not write. In terms of political framing this is to accept that economic debate will take place on the right's terms before the game even commences.
To move on from this failing, I also have considerable difficulty with the planned promised balanced budgets, albeit over a five year rolling period, when these have always been the excuse for austerity. Now I accept, once again, that opt outs are included in the plan. The question I have to ask in that case is why? This can only, once again, be to appease the right and make pretence to the electorate of something that is not true.
If Labour wants to secure power on the basis of misleading people as to the true nature of its plans then the Portes / Wren-Lewis rule is excellent. Because it is in effect a giant political con-trick. I suspect no one in Labour really believes it will be used as superficially read. Instead there will always be conditions requiring it be abandoned, assuming (rather bizarrely) that the Bank if England would give an elected government the power to do so, which clause is itself another unnecessary concession to neoliberal thinking.
But my question is, again, simple. James Meadway has said the fault in MMT is that it has no theory of power. My response is to ask whether this plan is Labour's manifestation of what it sees as post-Keynesian power relationships? If it is I am worried because in it all power is conceded to the right and the left is claiming none for itself, its ideas and, most importantly, for a state that is, as a matter of fact, able to intervene in a faltering or misdirected economy using the power it alone really possesses to create money at will, subject to the real physical and potential inflation risks I have already noted. If this is the post-Keynesian theory of power to which it subscribes then, I suggest, Labour needs to rethink, rapidly.
To spell out why (and I think this necessary) that's because the Portes / Wren-Lewis plan suggests fiscal policy within a bank imposed financing constraint. To put this another way, it suggests that it is the willingness of those banks to lend to the government that at least to some degree, and maybe always, limits government capacity to act. I find it hard to see how it can be argued otherwise.
MMT, on the other hand, suggests fiscal policy that recognises that the constraint on government capacity to act is available spare resources, coupled with investment driven potential productivity growth within the economy, with the government having the capacity to create necessary funding until such time as this limit is reached without the need to borrow (although it might) or fearing inflation or exchange rate risk for this reason.
I happen to think a fiscal policy based in belief in the power of the people in an economy to work to best effect is substantially more left wing and likely to lead to fundamentally different outcomes to a policy based on fear of the City and bankers and which accepts the fundamental austerity constraints of a wholly unnecessarily balanced budget, which, excepting investment spending, is the long term goal of the Portes /Wren-Lewis plan.
For Portes to suggest MMT has nothing new to offer, or different to say is, in that case, fundamentally misleading. The understanding it offers is fundamentally different from that he presents. And the price of the deception he offers would, I suggest, be paid by those left out of work or suffering the impact of continuing cuts because his policy prescription was followed. That's a price I hope many, including Labour in due course, might think is not worth paying when there's a better alternative is available. That, as I have outlined, is what the core elements of MMT offers.
And, incidentally, this policy could help fund the Green New Deal, and i think that absolutely fundamental to the left's future.
So can I make three please?
The first is let's debate the issues. There is too much rancour around MMT, fuelled in part by some within it and Bill Mitchell in particular. Let's leave that aside and debate the issues. When the left has been bereft of ideas I think I we have a duty to do that.
Second, let's also leave aside the policy prescriptions that some say flow from MMT, like the job guarantee. I suggest that they are not core to the argument even if Mosler and others suggest that they are. No one who creates an economic idea has the sole right to say how it might then be interpreted for policy use, and those who say they have are simply wrong.
Third, let's get this done soon. We have no more time to conceded economic ground to neoliberal thinking.
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Not the main proponent of MMT in the UK? Sorry this piece more or less proves you are. Very well said Richard! And a pleasure to read.
Thanks
Yes.
I have read through your article. I also looked up Portes and Wren-Lewis. I listened to a Q&A session on utube involving Portes – I guess he did not appear to claim he knew everything and that there were a great many things occurring in our economy that were a mystery. Your response here does appear the opposite and closed to alternative ideas. I know that will evoke an angry response. But reading through, I wonder if the average person on the street would understand what you have written. I got lost part way down. You can call me dumb but you would probably have the dismiss the whole population the same way. Unless you can convert what you are saying to something understandable by the whole population, succinct and that will get through the information blackout maintained by those with a lot to loose by any change in course – all these discussions will not impact on life down here. I detect discontent down here for sure – my colleagues can see the wealth flaunted by those in management whilst they are expected to work longer and harder for the same pay. My experience is of business plans which involve gobbling up competitors and rapid expansion to an exit in five years and vast gains for management and investors and in other places, accounts functions transferring to cheaper labour sources in India despite evidence that this failed previously in the effort to cut costs so that management can claim a bonus based on increased profits. Will your theories get a grip on management greed and the inequity delivered to everyone else?
So tell me
Can you explain any economic theory?
Or is it just me explanation you object to
As example, do you know the theory of fractional reserve banking?
Has the fact many people do not understand it prevented people voting for people who have believed in it?
If not, please say why not?
“I wonder if the average person on the street would understand what you have written.”
I mean really? None of this (Portes, Wren-Lewis or Murphy) was “written” for the “average person on the street”. By and large its not going to reach them. If it did, under different circumstances, it would be written differently.
You are right
This was written for Jonathan Portes, Simon Wren-Lewis and James Meadway, all of whom will, I am sure, read it
Richard,
Good stuff, thanks for this.
Any chance you and Bill Mitchell could talk directly and see if you can resolve your differences?
Bill has had his own confrontations with Labour and it’s advisers on this issue so I really think it would all be for the good if you guys were able to pull together on this.
http://bilbo.economicoutlook.net/blog/?p=40562
I think there is very little chance Bill and I will find common ground
Does Bill reconcile with almost anyone who disagrees with him in anyway?
He’s welcome to become tolerant. Then there is a chance. I am always open.
Hi Richard, I had a quick search on Bill Mitchell’s blog, but his last two posts where he refers to you, were not condemning you (e.g. http://bilbo.economicoutlook.net/blog/?p=40035). Did he attack or criticize you on Twitter or some other forum?
Selective quoting is always just that
I think the MSM and a whole lot of neoliberal economists are terrified of MMT. I say that on the basis of the number of articles I’ve read recently that tell me it’s absolute rubbish. Some of the articles are totally incomprehensible. MMT is starting to ruffle a few feathers so I expect to see a further increase in these so-called debunking exercises.
Rod White says:
“MMT is starting to ruffle a few feathers ”
Yes, Rod, I think that’s right. Quite a lot of people can put two and two together if you show them the two twos.
Both sides of the pond. Business as usual is no longer an option and they were, I suspect, agreed on that at Davos, even if it is not being trumpeted abroad. There are too many cracks appearing. Team Trump rattling sabres will not paper over all of them.
I am not sure about that., I don’t think anybody is really that bothered about MMT it is very much on the fringes. I do find it interesting that QE was accepted and was successful in lowering long term interest rates. Going forward QE is likely to become a feature of monetary policy going forward..Money creation to spend on other things whether it be infrastructure the NHS or whatever is interesting. One problem though is Trade Union pressure on pay demands if they know a Labour Government can create money at will. I doubt Government would have the stomach to resist populist demands.
Out of interest which countries have publically created money to spend on heath care, infrrastructure etc
And you know the UK does need a pay rise?
And that might be one of the best ways to solve its problems, don’t you?
Tilly says:
” I don’t think anybody is really that bothered about MMT it is very much on the fringes. ”
You are right. MMT IS still very much on the fringes …of sensible discussion. But it is so basic to the understanding of the fiat money system that we cannot allow it to remain on the fringes.
We are effectively being hoodwinked by the orthodox economic debate because it is not grounded in reality.
The way QE was used in the aftermath of the GFC implies the belief in trickle down was alive and well and still persists. We have a political class which still thinks in gold standard economic terms.
It doesn’t do. It won’t do. The hardest or softest Brexit Britain cannot be expected to survive with a Eurozone collapsing across the channel from us, and with no understanding of why it is happening, and the only game in town being to do more of what we did last time and which didn’t work. The Monetarist experiment is on its last gasp. Something has to give.
You’re right Andy
Well that reply to Portes was interesting. It was certainly comprehensive. Some might get a little lost in the complexity of it but that’s OK. You didn’t start the argument or mislead anyone and you’re entitled to reply on your own terms. Its all there, let them figure it out.
On balance you are right to suggest that the fiscal rule is wrong-headed politically because it puts Labour in a position of addressing the issue in defensive terms by using neo-liberal principles as the premise for a plan that then allows itself to opt out of them.
The “opt-outs” are shrewd in their own right (as I have said previously) but the premise, as you suggest, is unnecessarily weak because it accepts “that economic debate will take place on the right’s terms before the game even commences”. It does not take the lead or take pride in breaking with the past and that in 2019, would appear to be inappropriate.
If we look at the rising forces in US politics, the progressive Democrats, for example (that Jonathan Portes so dislikes) they don’t hedge. They are confronting. They take a point of pride in breaking with the past and that is key to their successes thus far. It makes them inspirational at a time when boldness and inspirational leadership works.
The mentality of the fiscal rule dates back to the internal Labour struggles of 2015 when the new leadership was yet to be firmly established and austerity was yet to be rejected nationally. As such I’m not so sure that the rule is “based on fear of the City and bankers”. It stems from the time when Corbynomics was quietly ditched as a result of McDonnell’s horse-trading with the Labour right. Which was also the time that Portes and Wren-Lewis emerged as part of that process. The rule could be used to snooker attempted Tory scare tactics and maybe pacify the City but first and foremost it is a concession to Labour centrists.
This, as I see it, explains why Portes has resurrected this argument currently. He is dismayed by the rise of progressive Democrats, their embrace of MMT and the relatively good press that MMT has received in certain mainstream quarters both in and outside of the US. He more or less makes that clear in his article. It also explains why he has targeted Richard Murphy (Mr Corbynomics) as the “The UK’s most prominent proponent”of MMT. It all dates back to a time 2 to 3 years ago when Portes and Wren-Lewis thought that they had this whole thing covered. But time and events are catching up with them.
The timing of Portes’ Prospect article reminds me of that Monty Python joke about “Lapp Goch, the secret Welsh art of self defence” where “the best way to protect yourself against any assailant is to attack him before he attacks you… or better… before the thought of doing so has even occurred to him”.
http://www.llapgoch.org.uk/
All in all, I am not that bothered by the fiscal rule, the opt-outs (a concession to Corbyn, Momentum and to the undeniable demise of monetary policy) are probably stronger than the rule and the presence of a useful hedge is arguably acceptable as long as it keeps the peace and that is all it is. It should never under any circumstances be a centre-piece of Labour economic policy. If it must be had it should be kept in the background where it belongs.
Second, let’s also leave aside the policy prescriptions that some say flow from MMT, like the job guarantee. I suggest that they are not core to the argument even if Mosler and others suggest that they are. No one who creates an economic idea has the sole right to say how it might then be interpreted for policy use, and those who say they have are simply wrong. Richard Murphy
Well said and perhaps you are the man to consider that de-privileging* the banks would increase the DEMAND for fiat (as opposed to bank deposits which the banks can also create via lending) and thus the amount of deficit spending for a given amount of price inflation.
*such as allowing all citizens to have accounts at the Central Bank itself and abolishing government-provided deposit insurance and all other privileges for the banks.
Good work, Richard.
My worry however is that your emphasis on how much fiscal freedom we have will translate into a lack of attention to ecological limits. This has been for years now my worry about the Green New Deal. See e.g. https://rupertread.net/writings/2014/progress-beyond-growth-fetish . And of course, this is no coincidence, as you are a key architect of the GND. It is far too easy for the Green New Deal to become in effect a pseudo-green Keynesianism that does not respect planetary etc limits. My worry is that the way you characterise MMT tends to repeat and underscore that dangerous slant.
I’d invite you to build in more eco-protection to the way you frame MMT, in future. At minimum, it ought to be plainly stated that, if your rendering of MMT is correct, and MMT is correct, then this INCREASES the premium upon Government’s (and international agreements) creating hard resources- and pollution- caps, or the like.
I’d welcome your thoughts on this. (Maybe we should meet and chat about it sometime. Or, what might be more fun: maybe we should do a public debate about it!)
Now replied to in a blog post
Although I know that you have a broad range of interests Richard (and thank goodness for that) I think that ironing out the wrinkles in MMT theory in readiness for practice is probably the most important and pressing issue on your plate. It needs to be prioritised as I think you say in your very last sentence of your very well written and argued post.
All I see – even in the Tory party – is a rising tide of fascism feeding off an economically engineered phenomenon known as inequality; a form of fascism enabling the minority rich to carry out their nationalist fantasies off the backs of the discontented multitudes whose ranks swell and will maybe swell again because of BREXIT – hard or soft.
MMT to me is important because it has the potential to rid us of the mental chains of orthodoxy that are still strangling genuine recovery of the economic world post 2008. The way in which these orthodoxies (such as austerity) have inculcated the EU and the resulting growth of discontent and the far-right (fascism) in the Eurozone are things we should be deeply concerned about.
In my view also, after watching Spike Lee’s ‘Black Klansman’ and reading Nancy MacLeans’ ‘Democracy in Chains’ (2017), The USA could do with a dose of well thought out state sponsored MMT too.
MMT is also in my view a major fiscal weapon in the fight against rising fascism.
I am re-reading R. M Douglas’ ‘Orderly & Humane: The Expulsion of the Germans after the Second World War’ (2012, Yale University Press) because it seems like a good time to do it.
Douglas’ account is very measured and erudite – with detailed analysis of policy decisions and bureaucratic failure under extreme conditions entwined with first hand accounts of the consequences upon real human beings.
For example, on one train leaving Poland to take ethnic German speaking people back to the British sector of Germany in December 1946, a Doctor Loch – who travelled on this transport voluntarily only because his sick wife had been made to go on it – gives a torrid account of a process that had been given birth to by economically derived fascism in Europe.
I reproduce his account here of him dealing with a pregnant German woman who had just gone into labour in a crowded cattle car in sub-zero conditions (p.194):
‘She was bleeding a great deal. When I tried to get her in a more comfortable position, I discovered that she was frozen to the floor with her own blood. Someone still had a little spirit lamp. With its help we prepared some hot water from pieces of ice. After sprinkling hot water for some time I managed to get the unfortunate woman free. With the exception of a hypodermic syringe and some blood stanching preparation that happened to be at hand, I had nothing of what was necessary for such an operation , not even cotton wool. By means of an injection , I managed to stop the bleeding. That is all I could do. During the task, my own feet all but froze. Whether the woman lived , I do not know. In view of the tremendous amount [of work] that fell upon we doctors, I lost sight of her’.
The account of just this one train is rather harrowing but serves to underpin what level fascism can bring human beings down to (and yes – the crimes done under the name of socialism and communism are equally abhorrent, but rightwing fascism is now our generation’s biggest threat) but also how fascism harms the weakest in society – women, children, pregnant women, the elderly and infirm.
I make no apology for making an emotional case for MMT that I am in the process of making. I am no expert on these matters. I have always believed in finding things out for myself as well as listening to other POV. I know as much as my busy life will allow me to, given my other responsibilities to my family and my job. I do my best to educate myself. Having been to university late on in life, I am now too clever for my working class hinterland and will never be clever enough for the more middle class world I find myself catapulted into as a ‘professional person’.
I find the thoughtless repeating of The Sun and Daily Mail headlines by working class people concerning issues like immigration, BREXIT and social security as equally abhorrent as the way in which the ‘professional classes’ moan about pot holes and the state pf parliament, read the Guardian even whilst they whittle away their cash off shore and use their sharp elbows to advance their own interests.
As I do not belong in reality to either group I see the other sides too.
The working class (or precariat) are many things – ignorant, easily led etc., but they also stick together, are loyal (but about the wrong things) and given the chance, want to work, and work hard. I’ve known many a white van man who might be a pain in the arse on the motorway but wants to make a living for his family. They [the precariat] are the backbone of the nation who are treated as expendable in a nation that is still obsessed with making money out of money instead of making things.
The professional classes are to my mind something the precariat aren’t: mostly hypocrites, who use British reserve to hide their mixed feelings about it all. But this group are also mercilessly plundered by under regulated markets that know their aspirations, and are willing to separate them from their money with over valued property, private school fees and defrauding them of their pensions and health care using the fear of state failure of these services to get them to part with their money into the profit gouging, investor prioritised private sector. Also, the pay difference between professional classes and the rest mean that they still potentially contribute more to the tax take as the precariat ‘s taxable wages get lower and lower.
Both classes are preyed upon to the point that after looking at what they have got left from either (1) not getting enough money or (2) having enough and being encouraged to spend it all to keep up, their attitudes to tax grow darker and more anti every day. A very bad trend in my view given how useful taxes have been in pulling nations out of swamps and creating assets to be used for the benefit of all as well as taxations other benefits, as teased out clearly in The Joy of Tax.
And now, back to fascism.
Fascism – and fascists – need to be killed in my view. They are the worst of the worst.
But that is a very strong word – especially for the professional classes who like to use imprecise terms like ‘tax efficiency’ or ‘credit default swaps’ to help them cope with things they know to be dubious but necessary to protect their economic standing.
No – instead of killing fascists and fascism (and we don’t want the precariat getting all carried away now do we?) we can use another term: Negate: nullify; invalidate.
So lets start by negating fascism – nullifying it, invalidating it by removing the fuel that fires it today – inequality. Negate fascism by investing the fucker out of existence. That is the only way I can see us being knocked off the trajectory we are on now in the UK and in Europe that could lead us right back into Dr Loch’s cattle truck above. And for those of you who think that is an extreme view, remember what happened in Yugoslavia in the 1990’s. And Windrush.
Fascism is like a persistent germ – it’s all around us waiting for us to forget it is there and becoming lax in our attitude to social hygiene because we are told that we don’t have the money. Lets keep the real enemy at the door. Don’t give it a chance. Kill it at birth. No mercy.
And the negating weapon of choice, the anti-bacterial agent, has got to be : MMT.
As a collateral benefit – the most useless part of Marxist economics and the neo-liberal tripe will also be rightly negated I feel.
So come on. Give MMT a chance. Let’s spend fascism out of existence.
I was shocked at one point by your language
Can I appeal for care?
I agree with your conclusion
Then please accept my apologies.
But my point remains the same: we must stop giving these social deviants (fascists) the opportunity to ruin our world and divide human society. I don’t mind if people are richer than me but if they want to use their cash to divide us and prevent us dealing with (say) the environment problems we are creating or shadily funding so called ‘stink tanks’ (sic) that hold back progress and debate then pouring on the merde is what they deserve.
And BTW if ever my contribution ever fails your standards you are welcome to cut or leave it unposted. I would not hold it against you.
You will see I decided not to do that
Richard
Good article.
As a pedant, I point out that I suspect this is not quite right:-
“Which fifthly means government deficits are a necessary and good thing because without them the means to make settlement [of taxes] would not exist in our economy.”
You don’t need to create net private sector financial assets to fund taxes.
You do need to spend first.
Government deficits are required if it is demanded that the private sector accumulates wealth in the form of net financial assets (not investments), for instance in advance of retirement. If sufficient investments were available to fill this need, currency could simply be used as a means of exchange and not a store of wealth. No deficits needed.
People have an inclination to save unprompted, I think you will find
[…] a response to the debate on MMT and the Labour Party fiscal rule which has so far been discussed in the context of Jonathan Portes' claims with regard to it and MMT, which latter idea Portes has described as […]