With government deficits and government borrowing reaching levels not experienced since the second world war, debate grows about how it will be paid for. Stephanie Kelton argues that it does not have to be. Kelton is a leading promoter of Modern Monetary Theory. Its central argument is that because countries like the UK issue their own currencies, they should never need to worry about the amount they spend. MMT is the polar opposite to neo-liberal arguments that still dominate economics – and which demand budgets should be balanced, deficits reduced and that all spending should be ‘costed’.
You do not have to sign up to MMT in its entirety to recognise its usefulness. I am not convinced about the implications of ignoring international trade deficits let alone a potential ‘run on the pound’, or that inflation is only a risk when the economy is running at full – capacity and can be regulated by a instant ‘job guarantee’ scheme as Kelton argues. But in the present climate and with governments racing to assure their populations that there is no going back to ‘austerity, Kelton’s and MMT arguments for radical fiscal measures, rather than a restrictive monetary policy, deserve to be taken seriously.
Accepting that large budget deficits are necessary to get economies out of recessions is not new and was central to Keynes’s thinking, yet MMT allows us to take this much further. In recent times, governments have been doing some of the very things that MMT encourages. For example, after the 2008 financial crash, central banks, not able to cut interest rates any further, used ‘quantitative easing’ (QE) buying up their own government’s debt in exchange for injecting electronic money into the banking system in the (largely mistaken) hope that it would be lent to consumers and businesses.
Likewise during the Covid crisis, with the government seeking to finance its additional spending, the Bank of England has bought large amounts of treasury ‘gilts’ either via the bond markets– therefore being able to keep interest rates virtually rock bottom; or through direct purchases, in otherwords ‘monetarising’ the debt. It is farcical to consider this a financial burden for future generations as neo-liberals do. Instead, rather than there being any external creditor, one state agency merely ‘owes’ money to another.
While most associated with right-wing economic liberals like George Osborne, social democratic parties have also espoused the need for ‘sound finance’, even if they have called for taxes on the rich, rather than public spending cuts – though Jeremy Corbyn’s Labour initially backed a form of ‘People’s QE’ where ‘new’ money would be used for public works.
Marxist writers have berated MMT, reminding us about the real nature of ‘value’ and the centrality of the production to proper analysis. Yet as Kelton herself emphasises, MMT primarily allows us to a recognise that expansionary economic policies need not be undermined by self-imposed constraints. ‘Coming up with the money is the easy part. The real challenge lies in managing your available resources -labor, equipment technology, natural resources and so on….’ (260). There is no reason why the two approaches should be mutually exclusive.
Stephanie Kelton, The Deficit Myth, Modern Monetary Theory and How to Build a Better Economy, Published by John Murray 2020