MMT is increasingly popular among left-wing economists. Unfortunately it is a mixture of the tautological and the tendentiousby Jonathan Portes / January 30, 2019 / Leave a comment
Is John McDonnell a neoliberal? This sounds almost too obvious for John Rentoul’s famous list of “Questions To Which The Answer Is No.” But for some proponents of “Modern Monetary Theory” (MMT), Labour’s adoption of a “fiscal credibility rule” (based in part on academic work by Simon Wren-Lewis and me), means that “Labour is committed to the thinking which will deliver more austerity.”
MMT has become increasingly popular in some quarters on the left, both in the UK and abroad. Here influential supporters close to the Labour leadership include Paul Mason and Chris Williamson MP; in the US, one of its leading theorists is Stephanie Kelton, who was an economic advisor to Bernie Sanders. Democratic rising star Alexandria Ocasio-Cortez has also expressed interest, suggesting it might help finance ambitious plans for healthcare and a “Green New Deal.” So, MMT has moved away from the fringes and into the centre of the debate amongst those who agree that we need to spend more—perhaps much more—on public services and public investment, but disagree on what that means for borrowing and taxes.
So what is MMT—and what would it actually mean in policy terms for the UK? The UK’s most prominent proponent, Richard Murphy, sets it out here.
“First it says governments can make money out of thin air, at will… MMT then says all government spending is in fact funded by money created in this way, created by central banks on the government’s behalf… MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.”
The problem with this is that it is either obvious or misleading. The first point—that (fiat) money is ultimately a governmental construct in modern capitalist economies, and central banks can indeed produce as much of it as they want—is not news, certainly not to “orthodox” economists, as MMT proponents might label Wren-Lewis and me.
But it’s the second point that matters. What does it mean to say that “there can only be spend and tax” rather than “tax and spend”? Both from an economic perspective and from a common sense one, taxing and (government) spending happen at the same time. It’s not much help to tell a chancellor trying to write a Budget—setting out her tax and spending plans—that reversing the order would magically solve all their problems.
Richard argues that what it means…