The deficit myth: modern monetary theory and how to build a better economy. Stephanie Kelton, John Murray Publishers, 2020
You may have read or heard about Modern Monetary Theory (MMT), which has become popular in some left-wing circles as a means for justifying government spending programmes. In essence, it affirms that any state that can issue its own inconvertible (fiat) currency, cannot go bankrupt (so long as it only borrows in its own currency).
This leads to a model of the state in which it is not reliant on taxation nor borrowing to spend. Taxes, for MMT, are merely a means for driving demand for the state-issued currency, and any money paid in tax is effectively destroyed. All state spending is simply the issuing of newly created money. The national debt is simply a different form of money that attracts interest in the normal money the state issues. The national debt, in this model, is merely a means to regulate interest rates.
The only limit to state spending, for MMT, is the availability of resources in the real economy. These limits only become evident through the appearance of inflation: prices would begin to rise as demand from government spending outstripped supply. The method that Kelton promotes to regulate this spending is a government jobs guarantee scheme, so that full employment is maintained at all times. If private sector employment drops, the government jobs scheme kicks in to offer employment, at a minimum rate. As the economy recovers, people leave the job scheme, attracted by private sector wages.
This is, then, unlike the Keynsian prescription, in that MMT encourages government spending at any stage of the business cycle, rather than cutting spending during the upswing and borrowing during the recession.
The core premise of MMT is banally true: the state can always issue more money in its own currency. There is a question of just how much scope there is for increasing state spending before inflation kicks in, and Kelton certainly seems to write a lot of cheques against that spending capacity: healthcare, university education, pensions, etc.
She seems to imply that the current models, wherein the state is assumed to be funded through taxation and borrowing, are simply an error, rather than representing the ideological form of the interests of the owners of money and capital.
Before 1971 other currencies had a fixed rate of exchange with the dollar and the dollar was convertible into gold at the fixed rate of $35 an ounce. This provided an indirect link between a currency and gold. The currencies themselves, however, were not convertible into gold and states could issue as much as they wanted. To the extent that they over-issued them this led to inflation and in the end to a formal devaluation of their exchange rate with the dollar.
When this ‘gold exchange standard’ was abandoned by the US in 1971 the commodity origin of currencies was completely disguised, giving rise to the illusion on which MMT is based that money is entirely a creation of a state. Since then currencies have floated up and down against each other in accordance with the demand for them, for instance to pay for imports. An increase in their supply was still liable, if excessive, to cause inflation. The result wasn’t a formal devaluation, simply a downwards float vis-à-vis other currencies.
To an extent, the commodity origin is still relevant because the state monopoly of fiat currency is not absolute. People can abandon pounds or dollars by buying foreign currencies or value-bearing commodities (in a crisis, the price of gold shoots up, as people buy gold to try and protect the value of their assets). Contrary to Kelton’s assertion, the banks do not have to buy the national debt, they have other options, but it has to remain attractive, and the currency has to retain confidence.
Further, her dismissal of ‘crowding out’ theory only goes so far. The usual idea of crowding out is that government borrowing attracts investable capital and pushes up interest rates, making it harder for private sector businesses to find investment and thus damping down overall economic growth. Kelton argues that the state can effectively set its own interest rates for borrowing, and can thus borrow and hold down interest rates at the same time.
To an extent that is true, but only within broad limits governed by general confidence in the security of the government debt. With international money markets, setting the interest rate too low or too high would make the currency a target for speculation, as people would move their assets into or out of the country. Further, leaving interest rates to one side, as the state can only consume resources (as a state) all the resources employed by the state cannot be employed by private capital to produce profits. Whether this transfer really comes from borrowing, taxation or from creating money is moot, the fact remains that from a capitalist’s perspective, state spending is a threat to their profitability. This means less wealth overall is created for the state to commandeer.
The same can be said for a jobs guarantee. It is useful for Kelton to tell us that the US Federal Reserve sees it as part of its role to deliberately sustain a certain level of unemployment in order to control inflation. While she sees this as the result of mistaken theory, we would see it as part of the essential features of capitalism. Capitalism relies on the lash of the threat of poverty and unemployment in order to sustain its profitability for the capitalists, as well as having a buffer of laid-off workers in reserve for the next boom.
A job guarantee scheme would see wages pushed up to the point where they cut into the profits the capitalists make (and this would happen without causing inflation, since the demand would simply be transferring effective demand from one pocket to another). This would likely result in a capital strike occasioning a form of economic crisis. Just as likely, the state might be called in, as it was under the Keynesian nostrums, to regulate wages and use its job guarantee to control wage levels.
To the extent that Kelton talks about looking past money to think about real economic resources and how they can be commanded for the interests of the whole community, she is on the right path. The lever of state-issued money is insufficient. The distortion of money markets would get in the way of that. Likewise, simply seeing the problem as a misunderstanding of theory, rather than actual contesting class interests, is a greater barrier than any theory of how the state is financed.