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MODERN MONETARY THEORY - A MAGIC MONEY TREE?
It is this logic that is challenged by Modern Monetary Theory. MMT indeed contests the very notion of a 'deficit'. The government spends so much money and it receives so much in taxes. Someone adds up what is spent and someone else adds up how much is received and the difference between them is recorded (as it would be if this was an ordinary household budget) either as a deficit or a surplus. If it is deficit, so the argument goes, the difference must be made up by issuing government bonds (otherwise known as 'borrowing') on which interest is payable. We might remember that in the wake of the 2008 crash it was on the rates chargeable on their bond issues that the economic performance of different members of the Eurozone was judged.
The MMT argument is that, in the case of a government, these two sums - what is spent and what is received - are essentially unrelated. It may be an unfortunate coincidence that the initials MMT for Modern Monetary Theory could also stand for 'Magic Money Tree' but there is a sense in which government IS a magic money tree. Unlike an ordinary household, government spending is not constrained by what it receives in income.
This is not a policy prescription. It is a simple statement of fact. Governments may choose for one reason or another to impose on themselves constraints. The gold standard was a constraint. The 'balanced budget' is a constraint. I will be talking shortly about the constraints the main spokespersons for MMT believe need to be accepted. But these are a matter of choice, of consciously determined policy. When governments say there isn't the money to do such and such a desirable thing, it isn't true. If the government has full control of its own currency, then it can never lack money.
Of course the moment one says this people immediately have visions of overworked printing presses resulting in hyperinflation. Zimbabwe! Weimar Germany! Venezuela! But hyperinflation isn't the result of overworked printing presses. It would be more accurate to say that overworked printing presses are a result of hyperinflation. The hyperinflation is caused by shortages in the real economy, shortages of available goods and services, often exacerbated by foreign exchange problems. In Zimbabwe the collapse of agriculture owing to a poorly conceived agrarian reform led to massive shortages of food and an inability to pay for imports, not helped of course by international sanctions. In Germany the means of the economy were being sucked away in the post-war reparations and through the occupation of the Ruhr.
In Venezuela - let me pause for a moment. The BBC continually marvels that a country so rich in oil should be reduced to such a dreadful economic plight. But Venezuelan oil is very heavy and has to be refined. Successive governments - not just the Chavez government - have failed to invest in refineries so the oil is refined in the US. It is an expensive process so the profit margin on Venezuelan oil is very narrow. Chavez had the perhaps illusory good fortune that the international price of oil during his period in office was very high. Perhaps he should have used the windfall to invest in refineries and to wean Venezuela away from its dependence on imports paid for with oil. He instead made a priority of immediate relief for the terrible conditions of poverty so many people were living in. Subsequently the international price of oil crashed resulting in an inability to pay for imports hence a very high level of inflation. But this has been swollen into hyperinflation by the effect of US sanctions (amounting to a grand theft of Venezuelan assets). To quote the recent (April 2019) report Economic Sanctions as collective punishment: The case of Venezuela by Mark Weisbrot and Jeffrey Sachs: 'The loss of so many billions of dollars of foreign exchange and government revenues was very likely the main shock that pushed the economy from its high inflation when the August 2017 sanctions were implemented into the hyperinflation that followed.' (9)
(9) Published by the Centre for Economic and Policy research, Washington. For a useful account of Venezuela's problems see also Nafeez Ahmed: 'Venezuela’s Collapse Is A Window Into How The Oil Age Will Unravel', Oriental Review, 6th Feb 2019.
The main spokespersons for Modern Monetary Theory are not advocating that government simply throw money at the economy after the manner of the 'helicopter money' once proposed by Milton Friedman. Their suggestion is that the money should be spent - the constraint is that there should be things to spend it on. The constraint does not consist in any arbitrary definition of a permissible 'deficit' but in the capacities of the real economy - the ability to produce goods and services.
Perhaps a short digression might be in order at this point on the Great Depression of the 1930s, especially as it effected the US. Here we have the deeply amazing spectacle of an economy that was fabulously rich in resources grinding to a halt because of a collapse in the supply of money. Money was supplied through investment. Investment required a profit. Suddenly the financial markets lost confidence in the ability to generate profit. The prices and profit generating possibilities of shares crumbled. Great fortunes were wiped out. And the physical and human machinery that was more than capable of providing the whole population with a comfortable and pleasant life ground to a halt. With the 'New Deal' as an indication of what could be done - but could only be done - by an interventionist state.
The problem is - then as now - marrying the two worlds of the real resources of the country, including the labour force, with the means by which production, whether of goods or of services, can be financed. The socially useful function of the financial services industry is to facilitate this process. What we want is for the financial means to be directed to the most socially useful product. The expertise of the financial services industry however is to direct it to the most profitable product, which may be, and often is, a purely financial product, in which case the financial services tend to spin off into a world of their own. Maybe we can't complain about this. If you or I or the Church of England or a pension fund want to invest our money it is in hopes of securing a return. But the notion that this process by itself will guarantee efficiency in the market - that the criterion of profit will correspond to the criterion of human need - is absurd, even if it is the basic assumption of classical economics.