MMT is a theory that people love to love, and love to hate.
The idea, which stands for Modern Monetary Theory, is frequently cited by academics and politicians on the left as evidence that the state has further capacity to spend without serious consequences to the economy (yet!). On the right, meanwhile, it’s lampooned as a muddle-headed idea that at best, will deter private sector investment and, at worst, takes us back to the cash-carted-in-wheelbarrows era of the Weimar Republic.
(We realise this is a reductive view, and people on both the left and right also disagree with some of the principles of the theory, so don’t get uppity in the comments if you’re one of those types.)
This FTAV writer is no expert in the nuances of the debate, but having followed it for the best part of five years, we know the fundamentals.
Which is why this morning we were interested to see HSBC’s Senior Economic Adviser Richard King come out against the theory in the hallowed pink pages of the FT.
Here are the opening two paragraphs of the piece, but do read it all:
In a world in which government debt is rapidly rising, it’s hardly surprising that there’s growing interest among investors in Modern Monetary Theory. After all, one of its central claims is that budget deficits are, from a financing perspective, an irrelevance. So long as increased government borrowing doesn’t lead to inflation — and, at the moment, there really isn’t much of it around — we can all afford to relax.
As Stephanie Kelton notes in her book The Deficit Myth, governments with access to a printing press are “currency issuers” (exceptions include, most obviously, members of the eurozone). As such, all their spending could, in principle, be financed via the creation of cash. Taxes may serve other purposes — the redistribution of income and wealth, the discouragement of “sinful” behaviour — but, in the world of MMT, they serve no useful macroeconomic role.
To absolutely no-one’s surprise, the great and the good of MMT have kicked off about the article on Twitter. Fellow financial blogger and tax injustice crusader Richard Murphy has been the first to respond in blog form, so here’s part of his take: King starts by suggesting that:
“In a world in which government debt is rapidly rising, it’s hardly surprising that there’s growing interest among investors in Modern Monetary Theory. After all, one of its central claims is that budget deficits are, from a financing perspective, an irrelevance. So long as increased government borrowing doesn’t lead to inflation — and, at the moment, there really isn’t much of it around — we can all afford to relax.”
That’s not what MMT says, of course. What MMT says is not that we can be relaxed about financing, because financing is not its focus. What it actually says is that if there is unemployment that a government wishes to address, then assuming that government spending is appropriately directed to achieve that goal then financing is not a constraint until full employment is achieved. Then it says three further things.
The first is that if spending is continued without any further action when full employment has been achieved then inflation will result.
Alternatively, and somewhat overlooked, more tax at that moment can limit that inflation risk.
But, third and more important still, if the government still thinks its programmes more important than additional private sector growth at that point then a bit more tax reduces private sector demand for labour, so releasing it for publish sector use without inflation arising.
FT Alphaville has to say that we find Murphy’s arguments far more convincing.
Of course they are more convincing. Because they don’t distort the underlying facts, as so many MMT critics do.
The weird thing about it is that MMT is drawn from the same basic understanding of sectoral balances of GDP that underpins monetarism.
One does not have to take MMT principles to the exteme to criticise the usefulness in such underttakings as direct currency transfers to boost demand and promote delevergaing, which can still be contained by central banks with independent inflation-targeting regimes.
I mean, do we want to give captialism back a cost of capital to promote productive investment and advancing living standards for all or not?
Because without MMT, the only other way to do it is a debt jubilee that comes with the joyous accesory of a gallows for the elite.