It would appear that in the eyes of left and right the biggest problem to implementing the Green New Deal is the link made between it and modern monetary theory.
Paul Mason has done it on the left.
Numerous people have done it on the right. I have picked one at almost random, from here, but this will also do.
So, apparently, saving the planet is now to be prevented by the fact that in a fiat money system a government can create new credit money at will, and prevent it having an inflationary impact by taxing it back out of existence, which is all modern monetary theory really says. I think that's absurd, largely because that's exactly what happens day in, and day out in the modern economy. But then, you might say I would say that, because according to Jonathan Portes I am the major exponent of modern monetary theory in the UK.
But let's be clear, the Green New Deal was created before I'd heard of MMT. And let me also be abundantly clear that others in the Green New Deal group do not share my interest in MMT. I think it fair to say that Ann Pettifor and Geoff Tily are not at all persuaded, for example.
So, in that case, the issue needs to be tackled head-on. And the issue is whether or not the Green New Deal is dependent on modern monetary theory. I can answer straight away: it is not. To suggest that it might be is false.
I can say that for three reasons. I think I have a fair grounding in both is the first reason. I think that I understand the alternatives is the second one. And third, we have to do the Green New Deal come what may, and I'm damned if an argument on which may money and tax flow around the economy is going to stop something so important.
What then does the Green New Deal say. I'd summarise it like this: the Green New Deal is a programme to:
- Manage the rapid transition of the UK to become a sustainable economy
- Invest in the new businesses, technologies and skills that will be needed to achieve this goal;
- Invest in the new infrastructure that will be required to manage a sustainable economy, including new power generation and supply networks, transformed transport systems and buildings that have low or no carbon footprint
- Create long term, well-paid employment to deliver this programme in, quite literally, every constituency in the UK
- Reform the UK's finances to make this possible. This will require change to banking, financial markets, our tax system, the ways we save and the role of government in making this work
- To build a fairer society where we can all coalesce around these goals which we all must share if we are to survive in the long term
I do not deny for a moment deny that this is economically radical. The government will lead a rapid transition of the economy because markets cannot do that. In the process they will direct the use of resources through their power to spend. They will target full employment. The aim is that the employment must be spread right across the country as a result. It so happens that the Green New Deal is ideal suited to deliver that. And in the process a national infrastructure bank will be created to fund much of this investment. It will be capitalised by the government but the evidence is that a gearing ratio of around 8:1 or 9:1 is optimal so £50bn or so of government money could underpin £500bn of spend. But it may take up to a decade to spend that. So the actual spend, and so borrowing, will be around £50bn a year. And so the question is whether or not we can afford to invest such a sum a year to transform our economy.
We're talking 2.5% or so of GDP - our national income. Which is neither here, nor there.
We are in that context talking much less than the overall difference in the level of annual investment in the UK and that in many other economies. If they can afford higher levels of investment, so can we.
In government spending terms, and presuming the capital injection was spread over a decade, we're talking about less than 1% of total government spending a year. If the figure had to be raised in tax less than 1p on income tax would do it, to save the planet.
But let's ignore paying for this with tax right now. Because, as I will note below, in tax terms the Green New Deal should more than pay for itself. Let's talk about other funding mechanisms instead. Take pensions, for example.
The cost of tax reliefs alone on pension fund contributions now amounts to at least £38.6 billion a year. Now, admittedly, this is spread across income tax and corporation tax, and this makes estimating the gross contributions paid from the tax relief given a little difficult, but presuming that some are lower income tax rates, and sum are at higher rates, and allowing for the fact that corporation tax biases this towards the lower level, to assume an overall tax relief rate of 30% is probably too high. This, then implies that £130bn a year is contributed to UK pension funds. Suppose that in exchange for this relief it was required that 25% of all new pension funds contributions now be invested in projects linked to the Green New Deal. This need not mean the National Investment Bank and its bonds, although it might. It could be linked to equity or bonds issued by companies undertaking projects directly related to the Green New Deal. But, either way, that would release £32bn for Green New Deal investment. I can see no reason why this cannot be done, and cannot see how it would breach state aid rules if written carefully.
Then consider ISA accounts. Here the data is readily available: the government publishes it. There is around £600 billion saved in ISAs right now. Almost half of that is in cash. The rest is almost entirely in shares. About £70 billion a year is saved this way. Now suppose that in exchange for your tax-free return the government required that 25% of all ISA deposits were put in Green New Deal linked funds. That could be a deposit account run by the National Investment Bank. It could, again, be investment in companies taking part in the Green New Deal. I stress, I am not saying all funds must be deposited this way; only some. And the National Investment Bank should be required to pay a competitive rate. That would bring a further £15bn or more a year into the Green New Deal.
And this is before the fact that there would be an appetite for National Investment Bank bonds is even considered, and of this I have not a shadow of a doubt.
In other words, funding £50 billion looks rather tame as an objective.
And remember when noting this that much of the GND spend will be on labour in the UK, which will all be subject to tax, with consequent and significant multiplier effects in both the economy and the tax yield. In other words, in tax terms the Green New Deal will more than pay its way because if I was to suggest that one third of the Green New Deal could be funded by additional taxes paid as a result of the new employment created I am understating my case.
In that case simple, and I think necessary, tax reforms could provide much of the required funding for the Green New Deal.
And I believe the bond market would be queuing up to buy National Investment Bank bonds, as investors do in many other countries.
The Green New Deal can, then, be conventionally funded.
So where's the link with MMT? There's only one possible one in this scenario. I think now, but I stress that not all in the Green New Deal Group agree, that in the event of a downturn the government could instruct the Bank of England to buy National Investment Bank bonds if the supply of money to this Bank would otherwise dry up. Actually, that drying up of funds is unlikely: in downturns people save in the safest place possible and GND related funds will be amongst the best on that score and so the need for Green (or People's) Quantitative Easing (QE) might never arise at all. But I think it's an option worth having in the mix. I stress, not all agree, and that's fine with me, and this is a personal and not a Green New Deal Group blog.
What I should note is that those committed to MMT could replace much of what I suggest with MMT logic. But then I have to ask, why do that? Why not intervene to prevent the state subsidised distortions we now have in the savings market and to redirect the funds to a socially essential activity?
And why not recognise that people might very well be happy to save in the way I suggest?
And why deny the existence of the bond market?
Why too ignore the vital role that tax can play in sociuety? This is not a job destroyer as some in MMT like to claim. It is a powerful force for effecting social change. As I argue it has six purposes, only the first two of which can be said to be MMT related:
- Reclaiming money the government has spent into the economy
- Ratifying the value of money
- Redistributing income and wealth
- Repricing market failure
- Reorganising the economy
- Raising representation in a democracy
The rest are about the delivery if enlightened social policy - and they require that tax be paid to work.
So by all means recognise that MMT might be a backstop to the Green New Deal. And that therefore the availability of credit money is not a constraint on the Green New Deal happening, because it is not since the government can always overcome it, and I would argue that it must do so when required.
But let's not make MMT a constraint on the Green New Deal, let alone a supposed condition for it happening. It is not. As I have shown, there is money for this task that could be easily redirected to it with a twist to existing tax rules. Let's not let dogma get in the way. The Green New Deal requires action now, MMT or not. And I think that in order of priority the Green New Deal is many, many times more important than any economic theory. So shall we drop the argument, now?
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Great debunking and a good simple set of arguments.
We really do need a simpler message to kill off the “how do we pay for it” dis-information that is so embedded in everyone. Worse this “tax pays for…..” starts in school. If you [not Richard you already know it] have time have a look at school business-studies textbooks. No wonder a large majority grows up thinking this is the way money works.
The GND and MMT really need to avoid EGO (eyes glazing over) phenomena. Okay to get technical and dirty on this board, however.
M
I wish I had the time
I have 100,000 words I am committed to write at present
RM: Does the Green New Deal need modern monetary theory?
MA: We really do need a simpler message.
I should have perhaps said your post in of itself is a good example of simplification.
Thanks
Thank you
Couldn’t agree more Richard.
As I see it our choices now are limited to:
1) some form of Green New Deal
2) civilization collapse and possible extinction
That’s assuming there’s still time to actually do anything of substance to save ourselves. Maybe there’s an outside chance of some technological miracle salvaging something from the wreck in the absence of a concerted Green New Deal but I doubt it’s a significant chance.
If the likes of Paul Mason and others across the political spectrum want to engage in intellectual battle for the sake of their pet economic theory then they ought to be made aware that they’re part of the continuing problem of fatal inaction.
We’re staring disaster in the face. It’s time for action not words and theories.
Agreed
I’d add that I believe there’s very little chance the majority of people are going to start seeing things through the MMT prism before our activities push the climate and ecosystem beyond the point of no return and doom us to our fate.
The action to save ourselves has to happen before any major intellectual paradigm shift occurs and that means persuading the powers that be to do what needs to be done.
Hence the need to show it is possible, come what may
Paul Mason’s argument is surprisingly poor and seems to be stuck in what (I think) is the Marxist idea that value is created by the workers surplus (which is usually captured by capital) and this ‘value’ is how money is created. There is a lucid debunking of that idea where I quote extensively from a self-confessed Marxist who argues that MMT principles are how money is created, money isn’t value, but just the scoring system, and how this could be helpful both for Marxist aims and also for everyone who wants to arrest destruction of the planet:
http://www.progressivepulse.org/economics/a-communist-manifesto-for-money
There is a theory of value in MMT
It is that gives money its value
What P{Atul gets wrong is in equating money with value in a broader sense
Peter,
You’re right, and I’ve come across this Marxist problem with understanding the nature of money numerous times before.
I don’t understand why it’s difficult to see that “value” and “money” are different things. It’s also interesting that both some Marxists and some right-wingers seem to conflate the two in similar fashion – though in the right-wing paradigm it’s the capitalists who are primarily responsible for creating value.
It seems simple enough to me: money is effectively a record of promises to provide things of REAL value, not value in and of itself. Surely we’re all familiar with this idea from numerous sayings and truisms?
“The best things in life are free.” – value without money.
“Knowing the cost of everything and the value of nothing” – money without value.
“Money is for spending.” “Richest corpse in the cemetery” – and other castigations against miserly behaviour which hint at the value of money being in its use not it’s mere existence.
Agreed
Including on Marxist confusion
Ok… lets remove MMT. for the next few moments, MMT is banished from our universe.
Our economy is dragging along, near enough stalled. GDP is flatlined (due to brexit….nothing at all do to austerity!) If you tax any more to raise the funds for anything, you will put us into recession. Also, Moving ISA’s from savings accounts, to green new deal bank. Those ISA’s were supporting government debt. Are you going to cancel government debt to allow people to move money…that’ll cause hyperinflation don’t you know!! – or are you going to increase tax to fill the gap that ISA’s left thus slowing the economy/crashing the economy?
If you tax pension funds….then, really, why would people want to save for a pension… the tax relief is the reason why people put money away. So, those pension pots will end up much smaller, and the city will suffer with lack of money, and there will be a pensions crises in 40 years time. Its the city that keeps the value of the £ high, and if they suffer we all suffer.
etc etc etc…. As soon as you come away from MMT…..then all the reasons to why the government cant mess with the economy appear.
Richard…getting back to real world. But the way I see things, the economy can work in two ways
1) The government needs to raise funds, in order to spend. and those funds removed, whatever reason GND or otherwise, means that there is less for economic activity (crowding out).
2) The government just needs to spend, and claw back the spending minus that is taxed later on. (and maybe adjust tax if things start overheating).
One of these is Mainstream. One of these is MMT.
Green new deal can’t work with mainstream. But saying that, neither can tax cuts for the rich / corps work – but the tories do it anyway….which, is kind of MMT anyway. We are already have politicians who are MMT aware when it comes to tax cuts.
If you do GND….keeping with mainstream ideas….you risk there being no GND, or a GND so weak that it amounts to nothing. And our world is burning.
Tony
I am not taxing ISAs or pensions
I am attaching conditions to the relief
There is no reason why the instruments can’t work – half of people opt for cash in ISAs anyway
And the fact is I show mainstream and MMT reconcile
Which is hardly surprising – we all know MMT happens already in practice
So I do not agree with you
Not for the first time in my life I’m confused! MMT is being discussed as ‘an idea’ that can be ‘applied’ to a policy. Surely MMT is a revelatory insight – hence explanation – as to how all fiat monetary systems function for a currency-issuing sovereign state. Or words to that effect. So you can’t ‘come away’ from MMT any more than you can come away from the weather. However, once understood, it offers a range of possibilities and opportunities that are not seen as feasible under now defunct economic ideologies and theories.
How it manifests itself within an economy is entirely a political decision. The ‘Right’ is committed to a concept of scarcity in order to maintain authority and control – exactly as the ‘Church’ set(s) itself up as the sole mediator between God and the population at large. Philosophically there is little difference. Hopefully one day voters will realise how they’ve been short-changed, manipulated and cheated out of what should’ve and could’ve been theirs for the past 40+ years.
The ecological threat to our very existence ought to be a global wake-up call and catalyst for radical change. If it isn’t then we’re all doomed. The GND is an economically viable policy garnering sufficient popular appeal (especially among Generations X, Y & Z) to accelerate the demise of neo-liberalism, committing it finally to the dustbin of history along with all previous ideological and toxic rubbish. Hope springs eternal.
In a very real sense you are right, of course
But the point is that the mainstream does not realise that MMT is happening all around them and need other narratives to explain what might happen
We have a choice: we delay the GND for an argument on MMT or offer alternative apparent ways of funding it to make progress possible
I will stand accused of being told I am a pragmatist. I can live with that
Where’s George Lakoff when you need him?
Hiding behind the framing somewhere
Richard – I appreciate your inclination towards pragmatism in order ‘not to frighten the horses’ but in the context of the GND especially I believe it is misplaced and I defer to Bill Mitchell’s comments in his blog today (thankfully he’s briefer on a Wednesday- lol) – http://bilbo.economicoutlook.net/blog/?p=41627#more-41627.
Maybe it is finally time to change its title since ‘MMT’ has become too emotive in UK and US media circles, hence an obstacle to reform and long-term progress. ‘A rose by any other name ….’.
With respect to Bill, he really does not understand politics and why compromise may be needed, does he?
So shall we ignore what he has to say as it is pretty irrelevant on this issue?
When he shows an iota of understanding of the human condition and what is required to make progress I will take note, but he never has
I’m with John D. This seems to get to the heart of your interaction with Portes and Wren-Lewis over MMT. For your argument over GND, can you substitute the whole of government spending? For if MMT is just a description of the status quo, then does it change little about policy, despite changing a lot about the way one might describe the macroeconomy? I guess the point of tying GND to MMT is that there is no need to wait to we can afford it, in the monetary sense. But we know we can always afford bank bailouts, mortgage write downs, QE, whatever. So as ever, no matter how compelling the MMT narrative, one that deserves to be widely understood, in terms of policy implications of MMT, I’m not convinced they are far reaching.
I would say everything you have said is MMT because what you have proposed is based on reality and MMT desribes reality.
But to say that MMT prescribes any specific policy is surely false. There is no such thing as ‘MMT policy.’ People with a superficial understanding think MMT means ‘create and spend what you like – there are no constraints.’ But that is also false there are no constraints in creating the money but there are still real constraints – is what you want to buy for sale in the currency you can create? Do the resources you wish to mobilise by that spending exist (unemployed workers? appropriate expertise? raw materials?) And there are also real consequences which need considering including financial and other effects. And of course the spending is only the half of it. How you combine the spending with taxes is just as important. MMT ought to stand for Modern Money and Taxes.
MMT is about what policies are possible not what may be desirable. Within that you can choose right or left leaning policies.
So what Mason and Roberts are claiming is MMT is also false. Whenever the say ‘MMT and Chartalists propose…’ what follows is policy so is not MMT.
They basically seem to say what many neo-liberals think – money created by banks is OK but money created by governments is risky. And the consequences will be loss of value. Now I accept (and so does MMT I think) that that is a possible (but not unavoidable) outcome of inflating the supply of money. But why is that different for money created by the government? Bank created credit surely has the same risks? And Roberts only mentions the inflationary effect of the money creation on the productive economy. But the well known problem we have now is that money created by banks doesn’t get spent in the real economy. It goes largely to inflate asset prices – mainly the housing market and so has a constraining effect on the productive economy. So it would make as much sense to say government spending would provide the investment needs of the real productive economy that the banks are not providing. And if Roberts is sayiing something he thinks is fundamental about how money operates in our economy he must consider the effects both on and of the finance sector as well. And then of course you have to consider how the two should/can work together. Roberts’ view is altogether too simplistic. His idea of ‘the policy of government spending through unlimited money creation’ may well fail. But that says nothing about MMT.
And I am very disappointed by Paul Mason saying:
‘MMT gives no account of where economic growth or profit comes from other than within the monetary system itself. Unlike Marxists, who believe value is created in the production process, the MMT crowd believe it can be created by the interplay of fiscal and monetary policy.’
I see no actual criticism of MMT implied in that. I certainly do not believe that value is created ‘by the interplay of fiscal and monetary policy.’ Real value is created by the productive economy. Fiscal and monetary policy can only help or hinder that process. MMT does not try to replace a Marxist or any other theory of value. It merely shows that the governent has both the tools to provide effective investment and promote economic growth and also has the tools to control that growth and inflation. MMT can’t be ‘wrong’ as Mason surmises. He still doesn’t really grasp MMT.
Possibly because MMT is in a real sense just obvious and apparently simple – simply trying to explain it is not the best way to promote it. Richard’s fulsome example above of policy which is possible if you understand MMT may well be more persuasive.
Well done again Richard!
Much to agree with here – especially on MMT not proposing and that Mason and many others who make that claim are wrong. Unfortunately, too many in MMT do say it is prescriptive
Thank you for clarifying this, I confess that because of your involvement Richard I had assumed a component of MMT in the GND, and have barely got past the song in trying to look at any detail of GND (how trusting am I?), and thank you to everyone commenting.
That conventional economics and MMT reconcile is important – one of the biggest criterion when developing quantum theory in physics was that it should be able to describe conventional physics, like the newtionian, so you can in fact, if you want, use Schrodingers Equation to calculate even macro laws of motion – they reconcile.
So if my fiscally deficit ridden brain has understood this, the GND does not involve MMT, because MMT is anathema to all conventional economists, so involves mechanisms for running the economy that properly uses fiat currency and progressive taxation to ensure its balance?
So maybe you could call this the Fiscal Fiat System (FFS)?
The Scottish government really is trying to get all renewable power generation as quickly as possible, but is restricted by not having fiscal autonomy and regularly gets funding drying up at the whim of Westminster. We probably have too many wind farms anyway. But it is frustrating not being able to push more public funding into the innovation needed – there is innovation happening, mainly focused on the sea, various tidal stuff. Some days Scotland has equivalent full renewable power generation (that is, the whole of Scotland could have been powered by renewables), but wind is too unreliable and the distribution grid,,, well, infrastructure investment is needed. They have managed to start up funding for the carbon capture research, which was closed down by Westminster a few years ago.
FFS
I like it
And yes, what I am showing is the systems reconcile
Which is hardly surprising. We have been using MMT for years…
FFS – I like it too.
For those of a sensitive disposition, I coined FMS (Fiat Money System) some time ago.
(no copyright applies)
I think FMS might be better
I will write a macro to use it
[…] (which is no surprise given the structure of Labour's fiscal rule, which he co-authored). As I showed yesterday, I can live with […]
Hello,
Thank you for a very helpful post.
I see a lot on Twitter that MMT and/or its advocates don’t pay enough/any attention to political economy and focus on the descriptive mechanics of something that already takes place (so points 1 and 2 of your 6 important reasons to tax). I’m not sure if that is entirely fair, and I don’t think I often see MMT advocates claiming that you don’t need to tax, but just that you should not for them to enact your progressive agenda. But I definitely take the point that some MMT advocates don’t seem to discuss matters of political economy and reasons to tax 3-6 that much.
I understand that MMT itself (the actual theory) can’t have any political economic insights, because its just objective description.
However, for me, the most important political economy take-home from MMT’s insights (and probably the insights of other heterodox progressive economics – but I think MMT advocates have expressed it mostly forcefully and explicitly in my experience) – is that rich people do not personally fund the economy.
In my view this is hugely important, and I’m sure the reasons are obvious to you (not glorifying the rich, not creating legislation purposefully to placate them, not blaming individuals with little or no wealth for one’s own restricted economic agency). I think this can be articulated convincingly without losing the need to tax for reasons 3-6, or losing the public’s understanding of why you need points 3-6.
So whilst as you say the UK GND could be pulled off without ‘resorting’ to MMT prescriptions like Overt Monetary Financing, I was wondering whether you think that promoting a wholesale public understanding of MMT is not important for getting across that political economy insight (i.e. we don’t need to deify the rich), or do you think that part can be just as easily embedded into the public discourse without going ‘full-fat MMT’, as it were?
I suppose, you could make the public understand the need for a UK GND, and how it would be financed as per your proposals, without ever going into points 1-2 with the public, but I wonder if that might be a shame. (I’m not saying you’re advocating this, and via your work it seems you definitely don’t, but I feel that this might happen in practice when selling the idea to the electorate). I feel it would be majorly emancipatory and good for all human relationships for people to understand that we don’t need to deify the rich or companies.
Also the UK GND as set out by the GND group seems to not center permanent universal social programme as the US GND does (as far as I can tell – apologies if I’ve got this wrong). I suppose part of this is due to the fact that the NHS already exists, and free education is already on the political cards thanks to the 2017 manifesto, and the Job Guarantee isn’t really yet in the discourse at all, so I can see why it’s not been explicitly included.
However, if a UK GND were to include things such as permanent universal provision of social care, or the National Education Service (or were to include an MMT style Job Guarantee) – could these programmes be included in the “non-MMT” structure for funding a UK Green New Deal, in the ways you’ve suggest above? (I have no idea).
Thank you.
The GND is good, but it can’t be everything
Those issues have, in the UK, to be dealt with elsewhere
Thanks for this.
I appreciate that no one policy or suite of policies can do everything at once. I do strongly feel that it is the anti-austerity social side of the GND that is going to capture mass support in America, and enable the other parts of the GND to happen.
I think any UK GND is going to need a strong social offering to make it popular electorally. So it’s either going to come into being via the election of a party who is promising anti-austerity social programmes in any case, alongside a GND as part of a specific climate offering, or it will go down the American route of presenting climate and socio-economic justice as inextricable (which I feel, they are) in a explicit, non-negotiable way. All of the above in my estimation anyway, I might be wrong ofc.
If we’re talking about political economy and political messaging, I think it will be most effective to tie the two together explicitly, and I think there is appetite for it now.
Any move in the direction of a GND (UK GND Group style, or the US style) is to be welcomed.
This is our direction in the Green New Deal Group, and always has been
I thought that Modern Monetary Theory was a means by which the present economy could be stated. I don’t see how the statement of ‘needing MMT’ to achieve a Green New Deal is anything but a non sequitur. Can you help me on this point?
No
If you cannot see that viewing something in a different light results in a different understanding that leads to different policy approaches I can’t help
Seeing that policies from different perspectives can help achieve a common goal might be important when tha5 goal is vital
Again, if you cannot see that I am not sure how I can help
[…] right: she didn’t. But I have, over a long period. And I have done so again, in the last couple of days.  My argument is that debt can pay for the Green New Deal. This will be debt that might be funded by […]