This piece was also published by offGuardian:

They say there’s no “magic money tree”…well there is! But…

In Britain, if it wasn’t for BREXIT we would be discussing (among other things) Labour’s proposed economic policies, including an expansion of public sector spending. There would be a storm of media led disparagement about plans to stimulate the economy through borrowing and increased taxation and concerns raised about not paying down the national debt. As Theresa May said whilst campaigning for the last general election “There is no magic money tree.”

Well there so is ……………….. but ……………………

I find it particularly disheartening that many well informed, left leaning people buy this criticism, worrying whether the country can afford improved public services and whether this will make Labour unelectable. The stock response of the Left to this would normally go along the lines of:

  • The Tories are in disarray and deeply split over BREXIT and thus just might be even more unelectable than a slightly radical Labour Party.
  • Britain is a rich country; surely it can afford better public services than it currently has?
  • Labour’s proposals are, in truth, underwhelming! They represent such a modest step in a process required to reverse a decade of austerity and cuts.
  • Revenue from taxation in Britain has become wholly inadequate to the task of ensuring a fair, equitable society. Increased progressive taxation would begin to re-establish a common, shared responsibility for all citizens and fund the necessary increase in public spending.
  • The current focus on ensuring a balanced national budget and paying down the National Debt is misplaced and thwarts economic regeneration and development. Britain, with its well established capital markets, has had no trouble borrowing funds to finance the public sector deficit since the financial crisis of 2008[1] and thus could fund public sector programmes in this way in the future. At current, low, levels of interest, it would be foolish not to do so! Moreover, provided that interest and repayments are in Sterling (hence avoiding the risk of exchange rate fluctuations), borrowing essentially represents a transfer of funds from savers to the Government – the country as a whole is neither richer nor poorer. A large proportion of the national debt is money that we owe to ourselves. However, the payment of interest does represent a transfer of funds from taxpayers to savers; individuals and commercial organisations profit from the need for the Government to borrow.
  • An economic stimulus focussed on improving public services could be used to re-establish secure, full time jobs and help to reverse the current trend towards precarious short term zero hours contracts[2]. The wages would almost entirely be spent by the workers (as opposed to being hoarded / used for speculation by richer people) and thus would serve to stimulate the economy further through the multiplier effect. Spending wages will stimulate other parts of the economy; you get a bigger bang for your buck as well as progress towards a better society!

It was with considerable interest therefore that I read a recent article by Jim Kavanagh on Modern Monetary Theory[3], which suggested that the Left needs to update and refine the way it promotes the credibility of a an economic stimulus approach that focusses on investing in public services.

Jim provides an excellent summary of Modern Monetary Theory (MMT) and I will attempt a rather briefer one here in order to provide the context for a discussion about the chances for implementation in Britain and its possible consequences.

Current state financial structures in capitalist countries include a central bank, which sits uneasily between the government and commercial banks. It is commercial banks which digitally create the vast majority of the money supply, loosely regulated by central banks, through loans to customers and of course to the government. As pointed out above, this is an income generating process for those with capital and is portrayed by governments, banks and much of the mainstream media as a natural state of affairs. Whilst this is indeed central to the development of capitalism as we know it, it doesn’t need to be this way – governments, if they have a sovereign currency that is not linked to precious metals etc, could create money themselves in order to pay for increased public expenditure without incurring the interest costs that borrowing would incur.

If governments can create money then it follows that what they spend doesn’t have to be constrained by revenue from taxation. MMT posits that taxing and spending are separate processes that shouldn’t be linked in this deterministic way and argues that central banks understand this only too well. Whilst democratic institutions wrangle over how much to raise or lower taxes in order to ensure a balanced budget, central banks adjust interest rates and bank regulation (in order to control the money supply)  on their judgement as to how close to capacity a country’s economy is. The same type of judgement could be used to ensure that any economic stimulus based on government created money is tailored to producing a maximal utilisation of labour, capital and raw materials to meet democratically sanctioned policy objectives.

Now I can hear the clamour – ‘What no need for taxes? – this really is a magical money tree!’ and, more ominously – ‘What about the threat of inflation as the economy moves beyond maximum capacity?’

This is the really neat thing about MMT – progressive taxation is used not to fund public expenditure but to constrain demand and thus manage inflationary pressures. This has the added bonus for the Left as it limits the income of wealthy people – it actively reduces inequality.

It challenges that received wisdom on the Left that in order to run a decent state apparatus with good inclusive services you have to either i) borrow and/or ii) increase taxes. Over the last 50 years Neo Liberalism has learnt how to deal with this approach. It’s no longer working for the Left, for social democratic parties, or for the vast majority of people.

MMT correctly identifies the smoke and mirrors of modern money, not fixed to a scarce precious metal but the digital creation of private banks. Sometimes they lend too much (and to the wrong people) then it goes badly for a bit and then, when they’ve taken advantage of the public sector lifeboat, they don’t lend enough – or at least not to the right people or businesses. If the state took direct control of the money supply through its central bank[4], it could, guided by the democratic process, develop better services, have full (and securer) employment as a legitimate goal and move gradually to a more equal society.

I am attracted to the concept – it seems a much better way of doing things: create money to fully utilise our resources (labour + capital + natural resources) to produce a more sustainable, supportive and enabling society and then use taxation of the rich! to choke back demand, manage inflation and maintain a much, much more equitable distribution of wealth and income. It’s a better model of capitalism than we have at the moment, why wouldn’t you like it?

But can it work?[5]

On the face of it the current world economic order is less than conducive to a MMT approach:

  • Globalisation has made it increasingly difficult for elected governments to have meaningful effect on their own economies.
  • Western capitalism is struggling to find, develop and exploit new markets, and is in the process of commoditising many personal, individual behaviours and actions. It is prepared to fund and on occasion participate in wars to defend or create markets. Automation and artificial intelligence are driving profit margins down as there are fewer workers required in production and thus less to exploit. Capitalists feel they need even greater efficiencies (aka increased exploitation) – not a state wanting to tax them much, much more and look after people better. Where’s all that going to lead eh?
  • Finance capital has grown significantly as a proportion of overall capital – always a sign that the current capitalist iteration is running out of steam – and there is no obvious successor at the moment. The current new technology is information technology – electronic communication and co-ordination – but it doesn’t make that much money and it doesn’t employ that many people. You don’t get the stimulus of huge engineering plants, factories, with their paid employees etc – the sort of advances that have bailed capitalism in the past (Paul Mason)[6]. It‘s easier today to make a profit by lending to someone who can’t afford to pay it back than investing in a factory to employ  them to make something useful (and contribute, through their wages to the wider economy).

OK, given this not very encouraging context, how would a left of centre Labour Party in Britain fare trying to implement a MMT approach? There are likely to be a number of specific economic consequences:

  • Inflation is difficult to control in an overheating economy – currently a distant memory in Britain. The risk of hyperinflation is real and, as central banks know, it is difficult to judge when an economy is reaching full capacity and to determine the scale of measures required to manage this.
  • Capital will consider moving abroad to less regulated, less taxed countries. Their taxes will be lost (although that might not add up to much of a loss given current levels of tax avoidance) and some jobs will go too, although many will have been created in the public sector.
  • ‘Confidence may be lost’ in the state of the economy (affecting inward and domestic investment).
  • The value of Sterling would probably begin to fall in the currency markets and is likely to result in a downward trend as it is increasingly (and more desperately) traded for other currencies in an attempt to ‘get out’ before the spiral really begins and significant losses are accrued. Speculators will exacerbate this process, selling sterling with the intention of buying it back later, at a much lower value and thus realising a profit from the country’s misfortune.
  • The cost of imports will rise and so will the cost of living (which will impact disproportionately on poorer people).

The development of this economic scenario will have political consequences:

  • The centre (well maybe a little bit radical) left party presiding over this will be facing a run on Sterling. They are not going to have time to implement their positive programme of job creation and services and are going to have to buy sterling back at a lower value to try and stabilise the market.
  • I know that investors who sell Sterling are only doing so out of rational (self) interest but it is difficult not to be irritated with them! Whilst the government will be ‘personning the pumps’, trying the ‘steady as she goes’ approach, the lot who have withdrawn their engagement with the economy will be telling everyone who will listen that the Government was to blame – ‘Incompetent management of the economy’, ‘inevitable with a high spending left of centre administration,’ ‘Undermining us all, the children, the old ……. There is no magic money tree!’
  • A Sterling crisis may provoke a general election where the centre right (and a bit) are returned to power … to unpick the reforms based on MMT. Austerity will be the inevitable prescription. Public confidence in a left of centre approach will be eroded and may result in a lengthy period of government by the centre right.
  • There may not be a general election, the government may feel it has no choice to push the MMT reforms further, faster than planned – to buy their way out on the basis of their democratic mandate. This, I would envisage, will require a move further to the left and will be highly dependent on maintaining popular support in the country.
  • Should a centre left government be successful in establishing a MMT approach to the management of the economy and inequality begin to be seriously tackled, those who own most of the stuff will have to decide whether it is better to go along with it in order to maintain relative privilege or to challenge it head on through right wing populism (and worse).
  • In a global economy Britain will find itself isolated, pressurised and bullied by powerful capitalist countries and it will need to form alliances and trading agreements with other, non-aligned ones, although it is difficult to see who these would be.

So, implementation of a MMT approach in current circumstances is likely to be very hard going indeed. I asked above ‘why wouldn’t you like it?’ and the obvious response to this is that a small group of people (the 1% who own such a disproportionately large share of the world’s wealth and income[7]) will not like it at all and though small in number they wield disproportionate power through governments, institutions, business and of course the media. They are unlikely to acquiesce without a fight to the loss of privilege and wealth that would result, unless they feel that it is their only option.

It is tempting to sigh and say ‘Of course MMT won’t work – it’s not in the interests of the 1% and they will act accordingly’ …. but hey! it is self-evident that defeatism will not aid the development of more progressive political and economic policies.

Jim rightly highlights the need for political will and for the overwhelming support of the population for the implementation of MMT and, as with any attempt to build a popular base for more progressive policies, this is a particular challenge. Having listened on a number of occasions to shadow chancellor John McDonnell being interviewed by John Humphreys on BBC Radio 4’s Today programme about current Labour proposals, I can already hear the disparaging incredulity ‘What … you are proposing to spend vast amounts of money without even attempting to raise the revenue to cover the ensuing deficit !!!!!’  Mainstream media will quickly be on the hunt with the usual tales of Labour incompetence, the danger to the economy  .. if not the fabric of society itself!

The challenges are significant – but they always have been for progressive politics and at times, in certain circumstances, progress has been made, inequality reduced and more of the 99% have been empowered. MMT provides a fresh  way of looking at how capitalist economics works, it asks different questions and exposes different contradictions and unfairnesses. Can it provide opportunities for the Left now?

  • There is an increasing awareness in mainstream economics (and even mainstream media) that the current carry-on is not sustainable – that rising inequality is a threat to the current order and that ‘trickle down’ theories of income and wealth are becoming discredited. These insights can inform and underpin a more confident Left.
  • The result of the last general election in Britain suggests that mainstream media may have a declining influence on public opinion as many, particularly younger people, access social media and alternative sites for news and opinion. Sites like The Canary offer an alternative, more progressive perspective.
  • There are signs that scraps may be offered to try and head off at the pass any revolt being considered by those who have lost most through globalisation and those who will lose through increasing automation and the introduction of artificial intelligence. A universal wage would not only offer a (low) safety net for the population at large but also maintain some semblance of demand for goods and services outside of the elite and their managers. As unemployment rises this may detach large sections of the middle class from the 1% and support the Left in arguing and agitating for the highest level of universal wage possible.
  • Despite current received political and economic wisdom there are examples where money has indeed been created to meet a perceived need eg the QE initiatives post the 2008 crisis (currently amounting to around £435 bn in Britain). The Left can argue that such an approach could and should be used for the benefit of the majority rather than acting as an asset protection scheme for the upper and, it has to be said, middle classes (the top 10%).
  • As one would expect, it seems that there are tensions and conflicts within an elite that has become more individualised and less able to act in concert as a class (Aeron Davis)[8]. Although this has potential for exploitation by the Left it also highlights that the elite may be unable to  collectively sanction the sort of social democratic redistribution of income and wealth that it was able to do in the past  in the West (e.g. the post-world war 2 ‘consensus’).

It seems that MMT has a logic and a coherent rationale that could be made to work, but once you consider the issue of power : who has it, how it is maintained, and how it is used, the difficulties of implementation can seem insurmountable. Nevertheless, the current capitalist iteration in the west is struggling to maintain profit levels for the 1% and to keep the other 99% sufficiently on board to maintain social stability. This provides an opportunity for the Left to promote an alternative way forward, but (as ever) to be successful it has, at a minimum, to gain the support of a significant majority of the 99% and has to engage with the 1%; either to persuade it that ground has to be given, or to force it to accept change (and all that goes with that).

So there is a Magic Money Tree and (helpfully) it has the same initials as the economic theory that underpins it; Modern Monetary Theory! It is an approach that could help to deliver a more equitable, supportive and inclusive capitalist society ………but…… like all progressive politics, its implementation would be dependent on tackling the power and privilege of the minority who benefit so much from the current state of affairs.

Perhaps the more modest potential of MMT is to reveal a key set of processes that are central to the current economic system and to help promote an alternative; as Jim says ‘It raises the curtain’. Can the Left use this to debunk a range of self-serving myths pedalled by the elite, further discredit what is becoming an increasingly dysfunctional capitalism and begin to suggest a more equitable and workable alternative?

[1] UK Government debt rose from around 49% of GDP in 2007 to about 85% currently. There was never a concern in the capital or foreign exchange markets about raising these large sums of money.

[2] Economic stimuli work best where there is under capacity in an economy. Mainstream economic advice would hold that such a stimulus is likely to result currently in inflation due to current low levels of unemployment and poor productivity.

[3] Jim Kavanagh – ‘Behind the Money Curtain: A Left Take on Taxes, Spending, and Modern Monetary Theory’ Counterpunch (January 2018)

[4] Public ownership of the larger Banks could be a component of this approach; which would obviate the need for the Government to direct (and micro manage) all investment decisions towards its policy goals. Public ownership of some (failing) Banks did take place following the 2008 crisis, so it is a credible approach, but no attempt was made to give them different lending objectives that might, for example, have focused on improving productivity.

[5] I am indebted to my friend Peter Lawne for providing me with much contextual information and analysis and helping me to think through the implications of MMT in a British context. Thank you Peter!

[6] Paul Mason – ‘Post Capitalism’ (2015)

[7] Thomas Piketty – ‘Capital in the Twenty First Century’ (2014). Evidence is provided that in Britain:  the top 1% of people receive around 15% of all income and own around 30% of all wealth and that the top 10% receive around 35% of all income and own around 70% of all wealth.

[8] Aeron Davis – ‘Is the establishment finally finished?’ – The Guardian (27.02.18.)