There is now a great deal of discussion of modern monetary theory going on, precisely because it appears that the UK government (and others around the world) are now behaving in the way that it suggests is, and has always been, possible. What MMT says, as far as I am concerned, is as follows.
First, in a country with a fiat currency, which means that there is no asset backing to the money in circulation, which money does as a result only get value as a consequence of a government's promise to pay, there is, at least in theory, no limit to the amount of money that a government can create.
Second, a government creates money every time it spends because it instructs its central bank to extend it the credit to do so on every such occasion. It is not constrained by the availability of taxation funds when doing so: money can always be created by a bank on demand and at will, and central banks will always do this when instructed to do so by the governments that own them.
Third, to prevent this new money creating excess inflation a government has to tax to withdraw currency from circulation. This is the primary fiscal purpose of taxation, although tax also has other, as significant, purposes as noted below.
Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, at least in theory, simply run an overdraft at its central bank, on which no interest may be charged. This negates the need for borrowing. Second, government borrowing actually makes little apparent economic sense in an economy using the fiat money of the national government because the money that is supposedly borrowed has already been created by the government when injecting cash into the economy through its spending. But, and I stress the point very strongly, that does not mean that a government should not appear to borrow. A government has a social duty to be the borrower of last resort to its population and financial system. That is the function of government borrowing, and it is vital to the efficient operation of any fiat currency using economy.
Fifth, the same social obligation means the government is not indifferent to the way in which taxation is levied, or to non-payment of tax, even if sufficient tax is collected to secure the fiscal balance that it desires. Tax might have a primary goal of controlling inflation, with the secondary advantage that the tax charged for this reason provides the currency with value, but tax also has the other deeply significant social purposes of correcting income and wealth inequality; repricing market failure; delivering fiscal policy by incentivising or penalising certain activities and by reinforcing the social contract that exists between a government and its electorate. Tax is a reflection of the values of the society we live in and is the primary mechanism any government has for reinforcing them. For MMT to be indifferent to taxation is, therefore, completely incorrect. It would also mean that MMT was indifferent to the distribution of impact of taxation, both nationally and internationally, and I cannot accept that this is its intention.
Sixth, the fact that the government spends first, and taxes second, means that the answer to the question 'how are you going to pay for it?' is always available to anybody who understands this process. A government decision can always be paid for, presuming the actual resources required to deliver it exist within the economy, simply by commanding the central bank to pay for it and then arranging, if necessary, for the additional tax due on the income that has been generated (because all government expenditure is, by definition, somebody else's income) to be collected.
Seventh, the realisation that a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled, is also of considerable advantage. Such a government should never be beholden to financial markets if they do not overheat their economies.
And that's it. That is modern monetary theory in a nutshell. In essence: the sectoral balances balance. Government debt is private wealth. If you want government created money the government has to run a deficit. There is nothing to worry about in this policy so as long as the economy is not overheated as a result. And the art is not over-heating. But the risk of doing that is much smaller than the risk from putting the economy in the fridge to avoid the chance of doing so. This is a universal truth wherever the conditions for the use of MMT understanding apply.
By saying so I make clear a great many other things.
The first is that modern monetary theory does not fully apply, and cannot be as a result usually be used, when the government does not have a fiat currency, or has to borrow in the currency of another country, or lets the currency of another country be used in common circulation within its economy; then the preconditions for modern monetary theory to work do not necessarily exist. There is no point pretending that they do when they do not. A failing tax system also prevents MMT functioning in practice.
Second, modern monetary theory does not eliminate exchange rate risk. It still exists. That is in large part because most exchange rate risk has nothing whatsoever to do with government economic action. It is created by political risk, as has been the case with the substantial down-rating of sterling since the Brexit referendum took place; or it is created by external price shocks, as for example are commonplace with regard to energy and other raw material prices; or it can arise because of short-term speculation, which is only sustainable if economic fundamentals of the type previously noted have changed. But, and I do make this clear, if a government that thinks it believes in modern monetary theory believes as a consequence that it can create money without limit, then it is fundamentally wrong. Likewise, if it thinks it can spend without taking into consideration the limit of available resources within the economy itself and ignores entirely the impact upon imports then the use of MMT can, and usually will, have a downward impact upon the balance of payments and the long-term value of the currency. This may not be a problem if the process of change is gradual: many economies have and will sustain themselves despite such long-term declines in value, but it is pointless to pretend that the risk does not exist.
Third, there is absolutely no necessary relationship between modern monetary theory and a jobs guarantee, or any other left of centre economic policy come to that. These issues are related, in the sense that it is obvious that modern monetary theory does permit the government to pursue a policy of full employment at fair wages if that is its wish. But the last words are critical: this may not be a government's wish, although few parties are honest enough to say so. To presume MMT requires a left-wing agenda is just wrong: it is a description of actions, not an agenda for left-wing governments, albeit that it can usefully inform the decision making of those who want such a thing.
Fourth, there is also no relationship between modern monetary theory and anti-neoliberalism. Modern monetary theory is not a theory or a philosophy, which is why it was unfortunately named. It is simply a description of a process that, as a matter of fact, happens, even if that is not widely appreciated. In that case there is no conflict between modern monetary theory and neoliberalism and the neoliberal could, in my opinion, as readily prescribe to this idea as anyone of left of centre persuasion. That may not be what people want to hear, but I think it's true: the case for social concern has to be made separately.
Many MMT do not now seem to appreciate these points, which I think are facts.
The job is then to work out how to use this understanding. And that is a different issue altogether.
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QED! 🙂
“That is in large part because most exchange rate risk has nothing whatsoever to do with government economic action”
How can you possibly say this??..i am not sure if it is hilarious or scary that you say this. Probably the former as you are so far removed from meaningful influence. Having said that you teach students and that is scary..
With respect, the UK government has no control over OPEC
Or most other resource prices
Including much food
You are simply wrong
If Govt economic policy feeds more money into the system and cant match it with a rise in productivity then you feed inflation..so the currency can buy less which means it is less accepting for international counterparts so it has less relative relative with other currencies and so it depreciates in value thereby feeding more inflation as we have the propensity to consume inelastic goods from overseas..all very basic stuff. No doubt you will cover the age old multiplier argument which is not productivity.
MMT never recommends spending beyond physical constraints
That is the last thing it does
You are making up otherwise
Don’t, I suggest. It makes you look foolish
For goodness sake Floyd – injecting cash into the economy now is not about increasing productivity – it’s about maintaining the little we already have!
And tax in such situations can be used to take the edge of inflation surely? Or Government bond issuance?
MMT doesn’t blindly argue that when a country runs a persistent current account deficit its government shouldn’t attempt to target any government deficit spending by concentrating that spending on goods and services that use as many domestic resources as possible, particularly labour. Neither does it necessarily as part of its targetting have to ignore clearing bank creation of money particularly consumer debt because it sucks in exports. Randy Wray wrote a paper recently on this targetting aspect but can’t locate it right now after quick search.
Found the article where Randy Wray unequivocally states MMT has always argued for targetted government spending:-
“… MMT has always recognized that “too much spending” or spending that is poorly targeted can cause inflation — resources can be scarce but sovereign finance is not. Further, the size of government spending, the size of the budget deficit, and the size of the outstanding debt stock are all poor measures of the inflation potential of additional government spending —even if measured relative to GDP. There are no magic ratios that indicate that government spending is excessive.”
http://www.paecon.net/PAEReview/issue89/Wray89.pdf
I think you are living in the past Floyd . I am old enough to remember your namesake , the one-time Heavyweight Champion of the World. Back in those days money in all its manifold forms was very limited in every possible way and certainly in terms of its exchangeability. Your emphasis on ‘ productivity ‘ is quaint, but naive. In those far off days of the early 1960’s when your namesake was doing his best to pummel Sonny Liston there were simple metrics to balance one thing with another in international finance . What was the biggest financial threat of the early Wilson years ( ’64 / ’65 ) the ‘ balance of payments ‘ problem. No-one has talked about ‘ balance of payments ‘ since then. Why ? Because its irrelevant. International finance for the last forty years has been a speculators ‘ paradise . We’ve been told over and over again the UK’s productivity lags behind other countries and blah di blah. This is all BS. Much of the UK’s ‘ productivity ‘ is in the hands of transnational corporations who owe no allegiance to the UK as is their want. What this beautiful , terrifying virus is revealing if we have eyes to see is the vast charade called ‘ economic realism ‘ . Tough though it may be , and it is ( my business is taking a clobbering ) we can’t kick this can down the road like we did in 2008.
Great stuff – this really needs to be said.
This is where the Left have a blind spot.
Let me try to sum up a story for you that Adam Curtis relates in his film ‘The Mayfair Set’.
Basically, it’s about what the asset strippers like Jim Slater, Tiny Rowland and James Goldsmith did to British industry in the late 60’s early 70’s. It’s a story that is not told enough. The asset strippers came in and using US legal principles got shareholders to back takeovers on the promise of higher profits. A lot of these British family firms were not owned by the families – but had majority non-family shareholders. The likes of Slater and Goldsmith appealed to these.
The asset strippers were apparently improving the performance of British industry. Oxford educated economist Harold Wilson – Labour PM! – was that impressed, he invited Jim Slater to advise his Labour Government!!
What was actually happening however, was that as R&D was cut, company assets were sold and like my father, jobs were being cut. So what you would see is a spike in financial performance as the companies essentially ate themselves and reported their savings and profits to shareholders. But all this was actually doing (as always with such financial sophistry) was moving existing money around – not actually creating new profit. Old money that was previously used to pay wages, repair plant and R&D was now recorded as profit.
Wilson thought that this unemployment was some form of adjustment but the welfare state would help the workers as industry became more efficient and hoped more jobs would come on stream eventually to soak up the unemployed. Or maybe Wilson wanted a pool of unemployed to bring down the cost of labour like the neo-libs advocate? The film depicts Anthony Wedgewood Benn addressing crowds of people outside factories telling them that the Government would look after them until they could get another job. The crowds were not enthusiastic.
The thing is, those jobs never returned in those numbers. The spikes created by the initial asset stripping would later flatline as the companies concerned ceased to be. These companies were not being improved: they were being destroyed. I think that Tony Benn realised this and that is what put him on a crash course with the Labour cabinet.
Why am I saying this in response to your excellent blog? Simply this – that Labour had forgot very quickly the lesson that Clem Attlee taught it when the NHS and other social security policies were created – that Government can spend money to improve the lives of its people.
From what I know as a working class person (that is my background) the majority of British people want to work – they want a job – they do not want to be on social security. I’d argue that Labour all to often want to sell themselves as the party of more generous benefits and support for those who are out of work – they would spend more money on such support like Surestart and tax credits which are useful in their own way.
I have seen it many times where people do not want hand outs from the Left – they want their need for a job to be met. They might appreciate their benefits initially but they do not want to be on them permanently. Added to that is that British benefits are very punitive in design even under Labour Governments – as soon as you earn a little of your own wages, the rate of benefit withdrawal is too high, too rapid. Benefits need to accommodate wage growth much better than they do. But what people really want is work – decently paid work and to stand on their own two feet. And that can be created by a Government too, spending on big regular improvement projects and sorting out the nations’ problems and staffing state institutions sufficiently.
This the problem with the Left and MMT. The Left are too timid. They think that as long as you have loads of benefits and Council housing that everything should be rosy and people should be grateful. They believe this because they believe taxes pay for these things (which they do – taxes are used to make transfer payments – benefits – redistributing income). But the Left are wrong in that taxes don’t pay for everything. And they are wrong in thinking that people are OK being perpetually on benefits. People do not want to be on benefits for ever – nothing makes people more ashamed in modern society than problems with money. And they do not want to be pigeonholed into being welfare claimants – which is what the Left all too often does – although it does not intend to do that.
The Left has to grasp what I am saying, because for one thing it will help them deal with and become more credible in a society that is still influenced by Thatcherism.
The Left has to be truly courageous and create jobs with MMT . Go outside onto your street, your local parks, the roads, ex-industrial land mouldering away, public buildings, bridges, the litter. All I’m saying is that there is LOADS of work to do out here – loads. It could keep people in decently paid work for years. And what about the tax revenue for God’s sake! And a brave British Government could do that – any British Government could do it as you say, but Labour could fit the bill if it got its head out of its arse once and for all.
All benefits might do really (the dark side of social security) is confirm that people are not needed for work; that the market is right not to want or need them; that some people exist for nothing and they might as well not exist; that they are not valued. That is horrible – just horrible. This is something that needs to be confronted by the Left. It is kinder to provide jobs for those who can work, than to pay them to sit around and do what exactly? MMT can solve that problem.
Are Labour up for it?
I wholeheartedly agree that the left us too timid
I do not mean it needs to be extreme
I mean it needs conviction and not ‘that would be nice’ sentiment
I hope that what I am suggesting is not seen as extreme either. You are certainly not advocating something that is extreme. And yes ‘conviction’ is what will see it through. If ever.
Here’s Bill Mitchell taking yet another a pop at John McDonnell not understanding MMT in the context of the Tory government being forced to use government to create massive sums of money to deal with the effects of the coronavirus pandemic:-
“…… in the recent Tribune article (March 20, 2020) — “They Haven’t Provided the Economic Security People Need to Stay Home” — the Shadow British Chancellor (still), commenting on the Sunak fiscal package wrote:
‘It would be wrong to cut taxes now, or to loosen regulation, at a time when we need all the revenue we can get for the Exchequer and careful action by all, including business. These kinds of moves could also endanger the funding of our public services in the future.’
Not even the mainstream are saying this at present John.
There is no danger to funding public services in the future as a result of the current fiscal interventions.”
http://bilbo.economicoutlook.net/blog/?p=44547
Pilgrim Slight – I 100% totally agree with you.
Its neoliberalism that has penetrated to the heart of labour. They truly believe that those who are unemployed, have zero value – rejected by the market the government must oblige them with a little bit of money because thats all they are truly worth. Horrible.
Maybe this is why so many who are poor, still vote tory. They don’t want free stuff, they want a job, respect, and to feel valued – they don’t see this in Labours message.
Novara media are the worst at this. They have quickly established themselves as the voice of the Left, for the UK, on youtube.
Many of us have asked them to acknowledge MMT and to at least cover it, in the chat.
We have either been ignored, or banned from chat. Michael Walker who fronts their regular shows on youtube, did acknowledge it in a broadcast last year and said he was looking for someone to come on and explain MMT, but felt that as they were in the middle of an election it would cloud their messaging of needing to tax the rich.
He then turned to his co-presenter, James Butler, who i think is one of the founders of Novara, who shrugged, smiled, and said “i’m not allowed to discuss it”. .
What a bizarre response that was – its in one of their broadcasts from last year.
You then had Paul Mason make one of the most stupid videos ever, via Novara media, around election time – talking about how Labour would be borrowing, like a mortgage with a cheap interest rate, to fund all the things they wanted to do. To most people watching that – it would have been interpreted as “so Labour will be borrowing from future generations to fund all these programmes? No thanks!”
This is the issue that the wonderful Bill Mitchell has brought up time and time again. By creating their arguments for a Left progressive agenda from a framework of “we use tax revenue to fund everything”, they don’t seem to recognise that it requires rich people who have the money, in order to tax, to then fund the public services.
This extraordinarily blinkered view isn’t more apparent then when you have Bernie sanders saying he will fund tuition fee college education with a tax on wall street speculation……….thus implying that you would forever need wall street speculation to keep the tax revenue coming in. Absurd.
The left haven’t learnt anything, even after 5 years, have got destroyed in the UK, and even more so in the US.
What i find even more baffling is MMT is a perfect opportunity to completely change the landscape of the argument, from a political perspective, the opportunities that MMT gives for everything a progressive agenda want to achieve is monumental, a seismic shift in the counter revolution.
And for some reason, rather than embrace it, these peopel want to not only dismiss it, but make it taboo, to argue for a way of thinking that has been proven to lose, every time.
Utterly baffling.
Straight to the point – including pointing out the limitations of MMT. Useful and understandable to a non finance/economics person like me.
Many thanks.
So am I right in thinking that USA does MMT in practice, with ever increasing issuance of dollars/debt?
Or should the cynical side of me say that the dollar is worthless, but if anyone exposes the fiction, the whole world comes to a crunch?
We also do MMT in practice, and explicitly so now
The Dollar, The Pound, or any fiat currency is not worthless. This is because governments demand tax is paid with them. If not, you go to prison.
If you believe your freedom to be worth something, then you will be driven to seek out the tokens that will keep you out of prison.
Ive been on Gower but struggle to find an explicit answer to this.
When a government funds its day to day spending by requesting funds from the central bank, what are the terms attached? Is there an interest rate / obligation to repay (despite this being an apparent absurdity)?
In practice how often does this transaction between BoE and government happen? Once a year? daily?
Thank you Richard – your output is a fantastic and essential public resource.
Daily, hourly, by the minute, cleared by Treasury Bills by convention, issued very short term
No interest required between the two – quite explicitly, as on QE loans
The BoE is owned by the government
Thank you for a good account, but I worry that there are two blind spots associated with MMT.
Firstly, tax does NOT normally remove “thin air” money. In a country with functional tax collection, apparent creation of “thin air money” and its removal as tax largely cancel out. The amount of genuine new “thin air’ money is tiny.
Secondly, when you take out the noise, the fate of new “thin air” money becomes critical. It IS cancelled out, but in other ways. These other processes are what we need to concentrate on.
What is the main function of tax, if it is not to cancel out “thin air” money? I suggest:
(a) Governments do not spend, they invest. Tax can take money from where it is achieving little, and invest it more productively.
(b) The natural flow of money is from the poor to the rich. Tax can recirculate money back from the rich back to those who need it, so that it continues to flow round the system.
What processes other than tax cancel out “thin air” money? I suggest that every time a company or individual goes bankrupt, “thin air” money is cancelled out. Others may have better ideas.
As a biologist, I find two biological models helpful.
One is to compare the economy to the circulatory system. Money, like blood, only works when it moves.
Secondly, I find cancer a good model for the “efficient market”. The cancer thrives, but the patient dies.
There are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation – people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
Nicely clear and succinct.
My gripes are that the importance of point 2 is overestimated because of cancelling out and the importance of point 3 is underestimated.
It isn’t just a question of fairness. Using tax to take money from the top to the bottom is an essential component of a functional economic circulating system. If Tory economics fail to take money the whole way back to the start, they leave part of the economic body without an adequate blood supply.
Someone needs to help gather together in a big single thread, all the news articles and official announcements that governments have made around the world, that directly show MMT in action – pieces of evidence where we can come to no other conclusion.
Where we can show precisely that there is no way government borrowed the money from private sector, or used tax payer money, or borrowed money due to low interest rates – but that they actually created the money, from nothing, and injected it into the economy.
Can anyone help to collate all of this into one nice thread? maybe put it on reddit?
Not me…