I had this article in the most recent edition of The Chartist (no, I had not heard of it either). They commissioned in response to an article that criticised modern monetary theory. It as written before latest lockdowns and responses happened:
This autumn the UK faces an epic economic crisis. As relatively generous government support comes to an end it is likely that the UK economy is heading for collapse. The government now suggests there may be four million unemployed people when the current furlough scheme ends. The National Audit Office has suggested that up to 80% of the loans made to more than 1.3 million small businesses to help them through the crisis might not be repaid, suggesting that these businesses may, in turn, fail.
There are obvious consequences to a crisis of this scale. Tax revenues will collapse; the cost of universal credit and other benefits will increase; many households will be unable to meet their basic liabilities; the likelihood that homelessness will increase is high; mortgage and other loan defaults are very likely and could create a banking crisis; house prices are likely to fall; demand in the private sector is unlikely to return to anything near last year's level, whilst demand for public services will increase. Unless that demand is met there will be health, education, housing, justice, and other crises. Meanwhile, the environmental crisis is continuing, and Brexit creates significant risk of disruption in the economy, including to food supply chains, whilst creating the risk of inflation that would have a particularly serious impact on those on low incomes. To describe the economic outlook as torrid is to be kind.
I have, since 2007, been a member of the Green New Deal group, which suggested in 2008 that a programme of job creation, financial and tax reform, and a focus on green issues that would create jobs in every constituency of the UK, would deliver the recovery required at that time. I remain confident that we were right.
However, things are now very different from 2008. That crisis had an identifiable, and potentially correctable, source that was endogenous to the financial system. The risk that we now face is exogenous, out of control, and beyond correction within that financial system. The risk now is much higher, and after a further decade of neoliberalism the public services are in a weaker state. On top of that, a decade of neoliberal thinking has led to a focus on the extraction of shareholder value from business rather than on investment in tangible assets and productivity increases, let alone adaptation to long term environmental demands 1. This has left much of the UK business sector ill-equipped to face an economic downturn, and exceptionally vulnerable to it. So a different response is required. I suggest that first the UK needs a New Deal before this can be transformed into a Green New Deal, the difference being a matter of focus. The Green New Deal focuses on longer term economic transformation to tackle the climate and biodiversity crises. A New Deal has the more basic objective of keeping the structures of the economy, the state and everyone in the country going until the immediate crisis is overcome.
To comprehend the scale of the issue, we should remember that the New Deal, flawed as it was, succeeded to the extent that it did because it was based upon a new understanding of economics. Roosevelt explicitly rejected the prevailing economic narratives dictated by the gold standard and the resulting philosophy of austerity. Before Keynes formalised the principle, Roosevelt accepted the need for deficit funding to get the USA back to work again. At the core of this transformation was a rejection of the prevailing narrative of monetary constraint on the actions available to government.
We are, of course, suffering the consequences of a similar narrative. Covid-19 cannot be blamed on neoliberalism, as far as I know. Our lack of preparedness for it can be. That philosophy has at its core a belief that inflation is the great curse. This narrative has been promoted to prevent deflation in the value of debt, in the interests of the wealthy who own that debt. In pursuit of low inflation, interest rates were allowed to float, creating crushing debt burdens. At the same time unemployment was considered the buffer stock for risk: if it rose as a consequence of the floating interest rates, so be it.
To reinforce this profoundly anti-working people narrative, independence was granted to central bankers, who were given the power to run the economy in the interests of capital, including the bond markets who, it was believed, could always constrain governments. Socialists and social democrats alike went along with this policy — including, to its discredit, the last Labour leadership team. So it is hardly surprising that the left has appeared irrelevant to economic debate.
The New Deal that we need must begin with a similar rejection of the prevailing monetary framework to that of Roosevelt to have a chance of addressing this crisis. The monetary system now is nothing like that of the 1930s. The gold standard was finally consigned to history in 1971, by the USA. Since then we have had only fiat money, backed solely by the government's promise to pay, which is in turn solely backed by its legal right to impose taxes, which is all that gives our money its value.
What is more, even the Bank of England has now recognised since 2014 2 that all money is created by bank lending, and destroyed on loan repayment. What those authors forgot to note was that this process extends to the loans that the Bank of England extends to its owner, HM Treasury, to fund the latter's activities: loans that can be made at will and are only cancelled by tax payment. So taxes do not actually fund government spending at all — they are simply a tool in fiscal policy, used to control inflation by constraining the money supply.
This has, of course, been proved by quantitative easing (QE) over the last decade. As the Bank of England has said, this is a money creation programme. It has not delivered inflation. It has, however, neutered the mythical power of bond markets: not only can they no longer influence interest rates, but if they try to do so the government can (and does) repurchase government debt to remove the threat.
Government debt is also cancelled in the QE process, though the Office for National Statistics falsely claim otherwise. The debt is replaced by bank reserve accounts at the Bank of England maintained by UK High Street banks and building societies which they cannot effectively withdraw without another bank or building society immediately redepositing the withdrawn funds back with the Bank of England. In other words, the QE process replaces debt with money that keeps our banking system solvent.
Yet many on the left still dismiss the reality of this process, which is described by modern monetary theory (MMT). MMT is best explained by Stephanie Kelton in her 2020 book, The Deficit Myth. Those on the left who criticise MMT seek to do three things: first, to maintain the power of independent central bankers; second, to maintain the myth of money market constraints on governments, including by the threat of interest rate rises; and third, they want unemployment to remain a mechanism for controlling the economy. Why they should want these things baffles me, but that's the consequence of what they say.
Modern monetary theorists reject this. They do not argue for money creation, as such, despite what some claim. What MMT says is really quite simple. Firstly, using the logic already noted, it points out that governments cannot go broke because they can always create the money required to pay their debts. In turn this means that they can always control interest rates. Then MMT suggests that the proper role of money is to serve the economy, and not wealth, so full employment should be the objective of an economy; until this is reached inflation cannot be created within an economy, except as a result of political or external shock that economic policy cannot control. Spending should, therefore, always have this goal. That would, for example mean that the QE we have known to date would be replaced by what Colin Hines and I have called Green QE 3.
Finally, MMT suggests that because all government spending is created by debt, tax can take on a role in social as well as economic and fiscal policy to deliver wealth and income distribution, irrespective of so-called revenue costs. MMT is, then, the perfect economic tool to tackle the crisis that we face. What baffles me is why so many on the left are in denial on this issue, and remain wedded to neoliberal constructs. We will have hope when the left leaves its neoliberal past behind.
- Leaver et al, 2020: Against hollow firms: repurposing the corporation for a more resilient economy[↩]
- Macleay et al, 2014: Money creation in the modern economy, Bank of England Quarterly Bulletin, 2014 Q1[↩]
- Murphy and Hines 2010: Green Quantitative Easing: Paying for the economy we need[↩]
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Another excellent piece sadly not having been written by a progressive politician.
The Left as it is has a morality that is only skin deep; they profess to care, to want better for people but lack the imagination and technocratic skill to deliver something deeper and more concrete.
This is why the ‘established’ Left will not be riding to our aid anytime soon.
Poor us.
Seeing your headline reminded me that I was glancing at an article the other day which was rubbishing Modern Monetary Theory. My eyes saw MMT, but I read Magic Money Tree!
Too much coffee me thinks.
I agree with this analysis almost completely. Although I’m not sure that blaming “the left” is helpful, I see objections to MMT across the political spectrum.
With some trepidation, I must also take issue with the statement: “.. Bank of England has now recognised since 2014Â that all money is created by bank lending, and destroyed on loan repayment.” When I first raised this matter here, your response was a little peremptory and sent me scuttling back to my research.
However, the fact is that since 1995 the money supply figures show that some £1.8 trillion has been created by UK banks and that figure does not include the £875 billion of QE created by the Bank of England. This observation is simply irreconcilable with the above statement that “created money is destroyed on loan repayment.”
I think I have the answer, but research in this area is very difficult for an outsider. I can readily see that when a bank loan is repaid, money is drawn from the existing money supply and this appears to offset the money created. However, the loan repayments are not cancelled, as is the case with tax payments, they go into an individual bank’s reserve account from where it cannot be loaned.
But a bank does not need to make loans from its reserve account, any loan repayments actually increase a bank’s total reserves and so with a current multiplier of 12% the bank can simply create money for lending of some eight time all loan repayments.
It seems to me that there is then nothing – at a later date – to prevent the bank moving some loans repayments out of the reserve account and into a more flexible asset account, because they were never destroyed.
This is not what the Ba k of England says happens
I referred to their reasoning
Thank you, Richard. You clearly have access to BoE data that I have not yet located. In their “knowledgebase” they simply say a loan is deleted – just as I quote in my post. I have emailed the bank to see if they are able to explain how money, which has been deleted, manages to accrue to £1.8 trillion but I am not hopeful of a response. I have been surprised as how many organisations simply ignore requests for clarification.
This is an area of interest that makes the three wise monkeys look like a gossip column.
This is their April 2014 article
It could not be clearer
I came across this negative reaction to the concept that taxes do not pay for government spending in my ward when I joined the Labour party in 2015. The strength of the reaction surprised me. It reminded me of the strength of reaction of climate change deniers to evidence of man-made climate change. This tells me that the resistence to MMT has a psychological element. Challenging the notion that taxes pay for government spending attacks deeply held beliefs about how the world works and destabilizes people’s mental model of reality – existential stuff. On a less profound note, the left relies heavily on arguments around how governments misspend hard earned money of tax payers. They may be reluctant to give that argument up.
Re “acceptance” of MMT , I think personality plays a part. When I first heard that there was an economic theory that explained why tax does not fund government spending I thought “wow – that sounds fascinating and revelatory, I need to know more”.
Doesn’t misspending “government money” sound just as bad as “misspending taxpayers money” ?
I am about to rejoin the Labour Party after a 10 year hiatus primarily to proselytise for MMT and PR. Wish me luck!
I think personality also has an influence on the acceptance of a paradigm shift in one’s thinking. When I first heard that there was an economic theory which explained how taxation did not fund public spending, i thought “Wow – how fascinating and revelatory- I must know more!”.
Doesnt “misspending of government money” sound just as bad as misspending of “taxpayers money” ?
I am about to rejoin the LP after a long hiatus in order to proselytise for MMT and PR. Wish me luck!
Perhaps this is a good place to ask a general MMT question. Does MMT take a position on whether deficit spending should only be for one-off type investments eg for green infrastructure (the amount of which can be fairly easily adjusted one year to the next ) or is it OK to deficit fund ongoing obligations eg improved welfare payments , which would be very difficult to reduce if the deficit we went through the inflation trigger barrier?
I t5hink I answered another version of this
I have 7 comments to make which I will keep brief
1. The fundamental tenets of MMT are true
2. MMT provides a general description of our current banking and monetary system
3. MMT does not provide a fully detailed description of how it works and it cannot do so at the present time because the fine details of the internal workings and flow pathways of money within the bank/government nexus are a hall of smoke and mirrors.
4. The opacity of the system needs to be addressed to deliver transparency so that anyone who wants to understand the workings of the system can do so easily
5. The fundamental tenets of MMT can be applies to the design of a new system
6. The new system needs to be designed to end the domination of the economy by banks and the financial sector and close off all the avenues for wealth extraction which the present design facilitates
7. If MMT is content just to describe the existing system it cannot be said to be “politically neutral” as to do so leaves MMT complicit in the continued domination by the banks.
3 is wrong
That has been done
7 is wrong: no description is neutral
Where do I find the answers to 3?
Re 7, I agree but I think MMT claims to be……..so it says it can be applied by authoritarian governments as well as by democratic ones. In my opinion it can only work in a truly democratic society if it specifies a new design of the workings (“rewiring”).
No 3 is the first quarterly report if the Bank of England, 2014
No 7 – MMT describes what happens. Policy lays over that. It always does. MMT does so by promoting full employment
Perhaps this is a good place to ask a general MMT question. If it is proposed to increase the deficit because there is spare capacity in the economy, is it wise to deficit-finance only one-off things like green infrastructure, where spending can be easily adjusted year to year (in case we hit the inflation trigger point) in preference to ongoing commitments such as , say, increasing disability allowances, that are very difficult to reduce if the (inflation) need arises. In other words, should welfare commitments always be matched (I use the term advisedly) by taxation rather than deficit funded?
Doesn’t it depend on what or who you mean by talking about “the left”? If you mean those who define themselves as Left wing as a sort of fundamentalist religion, then pretty much by definition they won’t listen to reason.
But actually I sense quite a ground swell of people who believe in decency, fairness, democracy, the rule of law – so a million miles to the left of the current Conservative Party and even further from the US Republican Party – who are very clearly saying that right now the government should find the money required and use it on policies that restore us to full (or near full) employment. And that austerity would be a disaster, the government has the ability to find the money and should do so.
Without intending to be discourteous, I don’t think many of the thinking public outside the profession give much credence to different claims for the theoretical underpinnings of economics – too many of those have fallen short over the years. So they will never use the label MMT. But in all important respects I think the message you are constantly repeating here seems to be being slowly assimilated. Don’t feel dispirited, you and your colleagues are having an impact.
I know we are
And repetition is key
Out of interest, what do you think about the theory of the monetary circuit? Parguez and Seccareccia define it as the notion
“that, in a monetary economy in which buyers and sellers engage in economic transactions, ‘money’ is the by-product of a balance sheet operation of a third agent who, in modern parlance, can be dubbed a ‘bank’. In particular, money always emerges as a debt (or liability) issued by this third agent on itself, which has as counterpart a credit simultaneously granted to buyers of goods and services within an economy.”
They also criticize MMTs (neo-chartalists, back then) concept of giving value to money via taxation:
“However, an important difference between the TMC and the neo-chartalist view relates to the emphasis that the latter places on taxes. As we have defended in our historical discussion, viable monetary systems existed during periods of economic history when taxes were quite insignificant. What matters, therefore, was not whether tax liabilities were of any significance but rather whether, largely through the legal system, the state endorsed existing banks by allowing them to issue debts on themselves. For very long historical periods, state money had been quite negligible in relation to the circulation of bank liabilities.
The state can endorse central and/or private bank liabilities, but it cannot impose the value of money. While the neo-chartalists seem to identify a positive relation between the value of money and the amount of tax liabilities in an economy, what actually matters is rather the nature or composition of state expenditure. In other words, what is consequential to the value of money is primarily the ability of state expenditure to increase the real wealth of society either directly, through the production of public goods, or indirectly, through their capacity to foster private investment expenditures. If state money is issued merely to finance wasteful expenditures that have no serious positive consequences on the private or collective wealth of a community, the effect in the long run would be to depreciate the value of money, regardless of the power of taxation of the state.”
Parguez, Alain, and Mario Seccareccia. “The credit theory of money: the monetary circuit approach.” What is money (2000): 101-123.
I don’t think much of it
Because I think they are failing to recognise the role of i government created money in the economy and refer to another era of money – the gold standard era – to support their argument in a fiat currency era, which makes no sense
I see. Thanks!
Orthodox MMT also leaves the banks in control….it’s basic tenets can be applied in a way to change that. I think it is more versatile than you give it credit for.
The difference between big ‘S’ and small ‘s’ socialism.
Many of the left want big ‘S’ socialism. As in nothing more than a total abolishment of capitalism. Companies like Amazon forcibly sold to their employees. The wealth of millionaires seized and redistributed. Marxism. I think (though not 100% certain), that the likes of John McDonnell fall into this sect.
As such, MMT does not help their cause. MMT says we can have a fully funded NHS, strong safety net, secure jobs, good education and no student debt, strong competition in the private sector to keep prices low. All within a mixed economy such as our own. It just needs the government will to do it.
As such, they will fight MMT, even though many of them agree that it is just a description. In their minds, if the public understand what MMT is about, they will not be able to justify ending capitalism in favour of big ‘S’ socialism according to Marx’s Capital. They are probably right.
This is certainly the position of some like James Meadway
Here is an opinion piece from The Guardian yesterday…..an Editorial comment. Is The Guardian coming round to an MMT view? One can only hope……
https://www.theguardian.com/commentisfree/2020/nov/16/the-guardian-view-on-rishi-sunak-time-to-create-jobs-not-anxiety
One leader writer is…..
Richard Murphy wrote:
“Those on the left who criticise MMT seek to do three things: first, to maintain the power of independent central bankers; second, to maintain the myth of money market constraints on governments, including by the threat of interest rate rises; and third, they want unemployment to remain a mechanism for controlling the economy.”
It’s not clear to me who “on the left” you’re referring to. I am familiar with ‘leftist’ critiques of MMT here in the U.S., but those aren’t the specific critiques they’re making. Can you elaborate?
There is a strong body of criticism from the left in the Uk to which I refer – much of which is dedicated to maintaining independent central banking, which Labour introduced here
My recollection of the 20134 BoE report you refer to is that it does not give a detailed description of what the inner workings of the government/BoE nexus looks like – it is just a general description about money creation. My recollection correlates with someone else’s who I have been discussing these issues with as well. So I stand by my statement that the inner workings of the apex of our banking and monetary system is opaque and a hall of smoke and mirrors that nobody understands. If it is not a hall of smoke and mirrors then why did you say hat you did in this post on August 26th –
“What makes up the national debt? It’s a good question, precisely because there is no obvious answer”
Did you ever manage to get an explanation for the puzzle you were trying to unravel?
I seem to recall another post where you identified some other discrepancy amounting to about £195 billion if my memory serves me correctly. This research of yours is hardly reassuring that the accounting at the apex of our monetary system can be relied upon.
Try this then
https://ftalphaville.ft.com/2013/12/12/1721592/guest-post-the-helicopter-can-drop-money-gather-bonds-or-just-fly-away-3/
Its behind a paywall. The title does not suggest that the piece describes the inner workings in any detail…its sounds like another “view from space” – or in this case from a helicopter 😉
You can get two free articles a week by registering
And if you insist on denial – when this answers the question you raised – please do not waste my time
I don’t manage a blog to provide those who are not willing to engage with the opportunity to gripe
Perhaps this thread would be a good place to ask a general MMT question : does MMT have a preference as to what kinds of public expenditure could/should be deficit financed? Are finite one-off projects such as green infrastructure (which can be increased/decreased quite quickly and easily) more suitable than indefinitely ongoing commitments such as welfare payments (which cannot easily be reduced, once initiated).
What money is used for is political judgement
MMT suggests full employment is the goal
That does not preclude social security benefits, of course
But it does say infrastructure investment is likely to assist full employment more
And aid the sustainability of the planet
Tut tut Richard. That is just plain out of order. I would have expected a little more civility especially since I donate to Tax Research every month. I have been an avid follower of yours for about 6 years and that kind of response is just not acceptable.
Donations do not change my policy or comments. I am not bought and do not like the suggestion that I might be.
And I am struggling with your comments of late. I really cannot work our what you are trying to achieve, but it seems you have not mastered the basics of MMT but represent that you have.
I sent a fair link in response to your enquiry, which you could access. I did not expect your response. I am quite at liberty to say so, as you are to withdraw your support.
That would be a shame, but I think my comment was fair