It is often said that ordinary people do not have sufficient understanding of complex issues to make important decisions. But it is seldom mentioned that this is what those who rule us have intended for us. This is especially true when it comes to the subject of economics.
Our current economic system is guarded by those who endeavour to keep the public ignorant and easily manipulated. But while it is true that ordinary people may not understand the intricate financial structures that govern their lives, they can certainly tell that there’s a problem with our current economic model: Neoliberalism.
The Labour Party movement endeavours to provide an alternative. But while most of its members enthusiastically promote it, it is rarely given a name. I would like to suggest one here.
Modern Monetary Theory (MMT) takes lessons from Keynesian theory, but it is primarily based on sound understanding of macroeconomics, that is, the relationship between government spending and the non-government sector.
In recent years, MMT has achieved a much higher public profile, as people seek alternatives to the neoliberal domination of the economic debate.
Initially, as a result of challenging the dominant view, MMT was largely ignored. Now, after successfully predicting the financial crash of 2008 and the Eurozone crisis, interest in it has skyrocketed.
Professor Bill Mitchell, one of the original developers of MMT has blogged on the subject for many years. His blog has a strong following from readers all around the world. Many within Labour, including myself, believe that this sound economic theory should form the basis of the alternative we propose.
Recently, I had the opportunity to discuss MMT at length with Professor Bill Mitchell himself. My objective was to find a way to explain its fundamentals in a way which could be easily understood by anyone, without the requirement of an academic background. He was kind enough to help me in this task.
To understand MMT, it is best to start by comparing it to Neoliberalism.
The Neoliberal Model
The Neoliberal model presents the economy as an entity whose needs are separate and above the needs of people and the planet. Within it, our individual success and that of our planet is considered separate from that of the economy.
Thus, the indicators used to measure economic success are remote to our personal needs and those of the environment. We speak of ‘GDP’ and not ‘well-being’, of ‘fiscal balance’ and not ‘happiness’. Moreover, economic success must be prioritised, even if it comes at the expense of leisure time, of air quality, of health and life expectancy.
The economy also acts as a sort of moral enforcer: issues such as personal debt and poverty are blamed on the individual rather than seen as a failure of the economic model. If poverty is rising, the conclusion is that those people are not doing enough for the economy and thus, cannot expect to be rewarded.
The Progressive model
Within the progressive vision offered by MMT, it is acknowledged that people have a reliance on the planet and thus the needs of the environment are our needs.
The economy is reduced to a tool which serves our interests and that of the planet. Targets in this model are based on specific goals related to well-being: reduce poverty, reduce carbon emissions, etc.
Policy interventions are appraised only in terms of how functional they are in relation to these goals. The economy is not a moral enforcer but a tool to achieve our collective objectives.
It should now be evident why the neoliberal model presents a destructive path. Immediate environmental and human concerns (namely climate change and destitution) are relegated to issues of secondary importance. But to replace this model with that proposed by MMT a number of challenges remain.
The neoliberal myths and how to challenge them
The reason why we have so readily accepted the neoliberal model, Is because powerful metaphors have been used to galvanise it.
The best example of these is the household analogy. We are encouraged to make parallels between government economics and household economics, as if government fiscal outcomes were comparable to personal budgets. This is as intuitive as it is dangerous: practices that are considered responsible in households can often be very destructive in governments.
Like Newton’s 3rd law of motion, government spending policies have an equal and opposite effect on us, the private sector. All government spending is our income, a government surplus is our deficit (debt) and a government deficit is our surplus (savings). Government spending isn’t just necessary to run our public services it also helps us to increase our wealth.
Unfortunately, during its long historical battle against egalitarianism, neoliberalism cemented myths in the public psyche that were designed to make people fear government spending. Phrases such as ‘living beyond our means’, ‘bankrupt the Nation’ and ‘budget black hole’, evoke the household analogy and make us project our personal financial fears onto the running of the economy.
The following are a few basic principles of MMT which must be understood in order to challenge the neoliberal myths:
The Government cannot run out of money
The Bank of England issues currency on behalf of the government. Much in the same way that a scoreboard in a cricket match can never run out of runs to post, the government can never run out of money. Therefore, government is not physically limited in its spending. The requirement that government needs to either collect taxes or ‘borrow’ before it spends is arbitrarily imposed, in the (false) neoliberal belief that fiscal balance is a desirable economic target.
There’s no such thing as ‘taxpayers’ money’
If the government has unlimited access to Pounds, why does it need to tax us? Put simply, taxes give value to the currency. It is the guarantee that government will honour currency as a means to pay for our tax liabilities which give the currency its worth. The way tax is distributed can also help achieve other outcomes such as reducing inequality, discouraging damaging behaviour (e.g. tax on cigarettes), amongst others.
Government ‘debt’ is not debt at all
What neoliberals call government debt is in fact savings to the private sector. This is composed of bonds and guilts which are purchased by the population at large (and often also by foreign investors).
The reason they are so popular is because they are seen as the safest form of investment. Unlike savings accounts in banks and shares, government bonds do not run the risk of default. Government can always pay its liabilities. These savings are merely a service the government provides, it is not a source of income as government does not need an income.
Government spending does not cause hyperinflation
This is one of the most difficult concepts to grasp, not least because mainstream economics has accepted as dogma the explanation that excessive spending caused crises in places like Zimbabwe and Venezuela.
The truth is, inflation and its more extreme counterpart, hyper-inflation, are the result of an inability to meet demand with supply. All spending, either from government, from private sector debt or other sources, results in higher incomes and is therefore likely to increase demand for goods and services.
If this demand can be met by an equivalent increase in supply then there is little risk of inflation. Therefore, as long as there is spare production capacity (namely, unemployment), the government can spend.
MMT and the Labour Party
Many of Labour’s anti-austerity policies already fall in line with the progressive economic vision that MMT offers. The full employment, Northern investment, National Education Service pledges can be easily justified with MMT because it does not require spending to be balanced with taxation or the issuing of government bonds.
Macroeconomics is a complex subject, and I would expect the issues discussed here to have raised many questions. I would very much like to explain other aspects of MMT in future, but my immediate aim is this:
We Labour members must endeavour to change our language around economics so that they do not reinforce neoliberal myths: the rich must be taxed to reduce inequality not to fund our spending, government money belongs to all of us not just the tax payers, and government issuing of bonds (‘debt’) is not an indicator of bad economic performance.
Ultimately, explaining left wing policies with right wing economic narrative will simply not do. Ordinary people can sense inconsistency, just as they can sense the chaos in our current economic structures.
MMT provides us with an economic model which ensures government can provide security for all its citizens in partnership with business enterprise and Labour. This is the positive anti-austerity vision the Labour Party needs to ensure unity and prosperity for all.