“Modern monetary theory (MMT) is dangerous nonsense.”
That line, or something very close to it, is now appearing with weary regularity from left-wing economists and commentators James Meadway, Grace Blakeley, and Paul Mason, and the circle of commentators around Novara Media. It is as if they are desperate to undermine all that Zack Polanski is saying and doing right now, even though some of those people have actually joined the Greens. Their tone is often not just dismissive, but derisive. And yet, when you examine what they say, it becomes very clear, very quickly, that they are attacking a version of modern monetary theory that exists only in their imagination.
They usually make five claims.
First, they suggest that MMT says governments can “print money without consequence”, but that is absurd. No MMT economist has ever said this. MMT quite specifically says printing money has very real consequences if there are no real resources for the government undertaking that exercise to buy. Then there is a very real inflation constraint on its behaviour, and it repeats that point to anyone who will listen as often as it can. This claim is, therefore, complete nonsense. All that MMT describes – accurately – is how money is created and who controls that process.
Second, MMT's opponents claim it ignores the role of tax. Again, they are arguing with a straw man. Taxation is absolutely central in MMT: not only does it explain the central role for a government's legally created currency, which is forced into use in a jurisdiction becase tax must be paid using it, but it also drains excess spending power, meaning tax is an essential tool in controlling inflation, and it is one of the primary tools for shaping the economy, whether by redistribution of income or wealth, or repricing market failure, or shaping fiscal stuimulus. What MMT says is that taxes do not fund spending, but that is a fact. But MMT never says tax is unimportant; in fact, it says the exact opposite.
Third, they say that MMT denies the need for bond markets, and so it is irresponsible. In fact, MMT explains – correctly – that bond issuance is a policy choice, not a funding necessity for a currency-issuing state. The government issues bonds to give pension funds, life assurance companies, banks, foreign governments, and others somewhere to park large sterling balances, to support interest-rate management, and because we have chosen to maintain the ritual of bond issuance established during the Gold Standard era, which ended, at the latest, in 1971. But the state does not need markets to lend it money denominated in its own currency because, first of all, it creates it in the first place, and second, if it wants more of it, then it can create more whenever it wants. Again, this is just an accurate description of reality.
Fourth, they argue that MMT would lead to runaway inflation, but there is no evidence to support this claim. Nothing in MMT recommends permanent fiscal expansion. All MMT says is that the appropriate level of government spending is the level required to deliver full employment and sustainable use of real resources within the economy. Saying so, the inflation constraint is explicit. When critics claim MMT denies inflation, they reveal that they have not read the literature. It would be argued that MMT is obsessed with controlling inflation, but never with promoting it.
Fifth, they insist MMT lets governments off the hook – that it tells politicians they can do everything without choices. In fact, MMT is all about choices. However, it requires those choices to be made honestly. You cannot, for example, blame the markets for austerity once you understand that a currency-issuing state is not revenue-constrained. You have to justify austerity as a political act. That is precisely why some on the left resist MMT: it forces them to own their politics.
So why this hostility from sections of the British left?
There are three reasons, sometimes overlapping.
First, some, and perhaps all, of these commentators have invested their entire political identity in the belief that “the markets” constrain Labour governments. This is their comfort blanket. MMT disrupts that narrative. It says Labour is free to act as it wishes, within available resource constraints. Markets cannot stop it from doing what it wants. The limits on what it does are, then, political, not financial. This has two consequences. First, it takes away the excuses. Secondly, it forces MMT's critics to say what they would do. That is, I suspect, deeply unsettling. This, after all, is much harder than blaming "the markets" for everything.
Second, many of these critics built their arguments during the Corbyn years on a very particular theory of Labour needing to invest to grow. That theory (once my idea of People's QE was rejected) was always based on the assumption that the state must borrow from private markets to fund investment. When MMT points out that borrowing is not the constraint, their entire framework begins to wobble. Rather than rethink their economics, it is easier to mock MMT.
Third, some are not comfortable with MMT's political implications. If a government is not constrained by tax revenue, then the question becomes: who benefits from public spending? Who gains from austerity? Who holds power in the economy? That leads directly to the politics of class and distribution, which these critics of MMT say it lacks within its framework, when the exact opposite is true. MMT does very clearly require that the politics of power be confronted when financial constraints do not exist, because it then becomes clear that it is power (and power hierarchies) alone that prevents things from happening when MMT is properly understood. Many on the political left, in whichever party they currently reside, would seem to prefer to stay at the level of neoliberal accounting identities rather than confront the actual politics of power, which MMT would require them to do.
What are the counter-arguments?
These are straightforward.
First, MMT reflects operational reality:
- Every time the government spends, new money is created.
- Every time tax is paid, money is destroyed.
This is not a theory. It is, in fact, how the Bank of England says the system works.
Second, MMT offers a coherent explanation of inflation. Inflation arises when spending exceeds the capacity of the economy to supply real goods and services. The constraint is real resources, not the Treasury's bank balance. That is why the correct tools to manage inflation are directed at resources, not arbitrary financial targets, which is why interest rate policy can never be effective in tackling this issue. And it also has to be recognised that in practice, we are a small open economy with a floating exchange rate. Inflation, more often than not, is driven by external forces beyond national government control, and realising this is essential; otherwise, you end up with the wrong policy response. Sometimes the correct response is to let that exchange rate float and do nothing else, knowing that such pressures always pass, and usually quite quickly. Inaction can be the right policy choice.
Third, MMT restores democratic accountability. It says governments cannot hide behind markets. If they cut services, cap benefits, or impose austerity, they do so because they choose to and not because the bond markets made them. As we have seen repeatedly this year, markets are not the grown-ups in the room. They are institutions whose power exists because politicians choose to give it to them. MMT demands that this be admitted.
Fourth, MMT is the only framework on the left that takes the climate crisis seriously. The green transition cannot be financed by the private sector. It requires public direction on a scale never seen in peacetime. MMT explains how to mobilise those resources without pretending that taxes on the wealthy must be collected first. That does not mean those taxes should not be imposed; it just means they are not the precondition for action.
Finally, MMT forces the left to stop lying to itself. You cannot build a caring, sustainable economy while pretending that “there is no money left”. Nor can you do it while basing your economics on myths designed to protect the power of finance.
Conclusions
There is nothing radical about MMT once you clear away the caricatures. It describes how money works, it places the real constraints where they belong, and it asks politicians to take honest responsibility for the decisions they make.
That, I suspect, is why some on the left react so angrily. MMT removes their excuses.
And perhaps that is exactly why we need it.
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I think this is why it is important that MMT proponents have discussions with their critics.
Polanski is doing this with the results we see.
If ever there was a need for podcasts with the critics, the time is now.
Thank you Richard. This needs to be an article in a national newspaper.
How do those opposed to MMT think money is created?
They don’t want to know simply because you are taking away from them their raison d’etre. Rather like witch doctors confronted with real medical knowledge, they are clinging to the wreckage of their handed down wisdom from their ancestors. Their economic ‘knowledge’ doesn’t fit reality, and they have nowhere to go.
They remind me of T S Eliot’s magi who witnessed the birth of christianity, but realised it was also the death of their present beliefs. They journeyed home realising they would have to change and it wasn’t a pleasant prospect for them.
Agreed
A good post.
My only quibble is what you say about MMT as a “coherent explanation of inflation”…. or rather what you omit. Yes, it is a neat explanation but in practice we are a small open economy with a floating Exchange Rate. Inflation, more often than not, is driven by external forces beyond national government control…. and realising this is important otherwise you end up with the wrong policy response.
I have updated for that. Thank you.
Thanks Richard. Paul Mason’s recent article in the New World in which he denounced MMT really infuriated me. It was absolute nonsense. I am glad you have made the point about MMT reflecting operational reality. It is clearly acknowledged in the relevant legislation and is briefly highlighted in the current edition (June 2018) of the Bank of England’s own document “The Bank of England Act 1988 and the Charters of the Bank and related documents”. It would not surprise me if none of these commentators have read, let alone understood, these documents. I agree with your suggestion that they do not do so out of pure political cowardice.
Thanks and much to agree with
It’s the old saying: “First they ignore you, then they laugh at you, then they fight you, then you win.”
Good to see that we have moved out of the first zone; however, there is still a long way to go. More power to you and ZP, there is clear progress!
I think we are in zone 3
Back in 1992 a colleague passed me a draft paper to read. It came from a Hedge Fund on headed note paper with the strapline…
“First they ignore you. Then they laugh at you. Then they attack you. Then you win.”
It was a primitive description of MMT but the thrust of the paper was that governments could never default in their own currency. Said hedge fund bought local currency debt debt hedged into US dollars earning large “risk-free” spreads.
At the time (1992) we government bond traders said – “of course this is the way money works – why the pompous paper?”
In 1998 after Russia defaulted on its ruble debt and the Hedge Fund took a massive loss some unkind soul found a copy of the paper and pinned it to the wall …. with a minor adjustment.
First they ignore you. Then they laugh at you. Then they attack you. Then…. they laugh at you again.
The author of the paper? Warren Mosler…. (self appointed) “high priest” of MMT.
🙂
While they are, obviously, hostile to MMT, isn’t it time they were called by their proper name? Liars?
Yes, was very disappointing with the analysis on the recent Novara video, I am normally a big fan. I was kind of shocked too when Michael Walker clearly had not bothered to do his homework
https://youtu.be/7X9b8xCVkTM?t=434
And again, it then descends into the usual “economic flat Earthism” (at least that’s how it looks to me) re “you can’t simply spend spend spend” etc (you might fall off the edge of the Earth)
Aaron Bastani from Novara media describes the budget as ‘surprisingly progressive’. He does not begin to explain how he arrived at this conclusion.
It just is not…
I was converted to MMT by the author some time ago and I accept the explanations he advances here. I believe the piece would have even greater authority if it were rewritten in academic language without the personal references and pejorative terms. When they go low, go high.
I have done both.
This is a not an academic site.
… and thank goodness for that.
Michael Obama no longer says when they go low, we go high. The Obama’s know what gets under the skin of Trump and those that are post-truth. Jokes. And there is nothing funnier than the truth. Trump can’t stop talking about birth certificates because he is emotionally out of control and full of rage 14 years on. We need more.
I don’t understand how those on the left who were massively in favour of borrowing a lot to money when interest rates were low look at MMT and dismiss it. They appear to me to be tone deaf and addicted to class politics.
MMT is not a good name. Maybe it will draw less flack if we say its how the BoE says money is created etc.
‘Lord’ Jim O’Neil – one of radio 4’s favourite gurus , aligned himself with your view that the budget does very little . But then said Reeves should have bitten the bullet this early in the terms to benefit later from…..getting rid of the triple lock, raising tax rates, and ‘reforming’ (cutting ) welfare. In other words – continue what the Tories were doing over the last decade – – continue the demolition of the NHS and raise inequality even higher
They all say that welfare spending and the tax system are in various kinds of contradictory messes . But they don’t point to the massive profits made by Tesco and other big business while half of their employees have to draw UC to make ends meet. So UC is a direct subsidy to big business. If there was a way of sorting this out while still protecting small business – that might be a good ‘welfare reform’
O’Neill served the Tories well…
“The individuals behind a new political movement must become economically literate, reject neoclassical orthodoxy, establish and widely disseminate a renewed economic discourse and accept the fact that the territory we should be allowed to love again – the sovereign nation-state – evolved as the optimal unit of political organisation [..] Cultural leftists are damaging politics in both a positive and negative mode, with what is present in its discourse and with what is absent – on one hand stirring up divisive cultural antagonisms, while on the other distracting attention away from the efficacy of exerting democratic control over currency issue and investment”
Source: The Death of the Left: Why We Must Begin from the Beginning Again (2022) by Simon Winlow and Steve Hall
https://amzn.eu/d/eNBZpoj
Apologies, I see you updated your post to mention imported inflation. I hadn’t seen that when I submitted my comment. I still feel I need a better understanding of the MMT view of imports and currency value, if you can help with that.
It has no view: it just says let the exchange rate float. That is what economic reality requires.