Back to article index


If we treat whatever is government and whatever is not the government simply as two individuals entering into a financial relationship it becomes obvious that a government deficit is in the interests of everything that is not the government. It means that the government is paying out more than it is receiving in taxes. Which means that the non-government sector is receiving more than it is paying in taxes. A balanced budget means that the non-government sector is gaining nothing. A government surplus means that the non-government sector is losing money to the government. Of course the hope is that the government is redistributing the money, taking from the rich to give to the poor, or from profit-making projects to give to socially necessary but maybe unprofitable, or low profit projects. But the fact remains that the non-governmental sector taken as a macroeconomic whole gains from a government deficit and loses from a government surplus.

There is a third 'person' to be taken into account apart from government and non-government, and that is the external sector, foreign trade, and here again MMT gives a perspective that is counter-intuitive. This is a preference for imports over exports. The argument is that what we are exporting is a real resource while what we receive in return is only money. In their book Reclaiming the state, Bill Mitchell and Thomas Fazi comment on the supposed success of an export driven economy such as that of Germany:

'Even though the country is often touted as a success – and as a model for other countries to follow – for its massive current account surplus, in his book Die Deutschland Illusion, Marcel Fratzscher, head of the German Institute for Economic Research (DIW), writes that Germany’s obsession for trade surpluses has resulted in chronic private underinvestment in the country’s economy, as the whole system depends on German capital fuelling demand abroad ...

'Germany’s current account surplus is largely a result of the wage-compressing policies pursued by the government from the mid-2000s onwards, which led to a proliferation of precarious, low-paid, low-skilled jobs, and to the stifling of internal demand – and thus of imports. German citizens have therefore experienced – and continue to experience – considerably lower living standards than they would have enjoyed under conditions of trade equilibrium or surplus. As Philippe Legrain wrote, this demonstrates that Germany’s external surpluses, far from being an example of superior competitiveness, "are in fact symptomatic of an ailing economy"'.

And we might add of course that Germany's push for exports was a major cause of Greece importing more than it could afford and therefore plunging into a state of debt, which would have been impossible if it still had control of its own currency and hadn't ceded it to the European central Bank when it adopted the Euro. To quote Simon Wren Lewis, one of the architects of John McDonnell's 'fiscal credibility rule': 'The euro crisis happened because individual member countries did not have their own currency or central bank, and in addition the European Central Bank (ECB) initially refused to fill the gap when markets failed to lend more to Greece and other periphery countries. The crisis ended in September 2012 when the ECB changed its policy through its OMT programme. In this vital sense, the UK could never become like Greece.' (11)

(11) Simon Wren Lewis: 'Labour's fiscal credibility rule in context' in John McDonnell (ed): Economics for the Many, Verso Books, 2018. In this essay Wren Lewis appears to be well-disposed towards MMT, conceding its essential point: 'One of the merits of MMT is that it stresses that, for an economy like the UK with its own currency and central bank (and where the government borrows in its own currency), a government can always fund its spending by creating its own currency. It does not need to borrow from the markets, so the markets cannot exert some kind of veto power on the size of the government’s deficit ... So what stops a government increasing its spending by creating more money? MMT acknowledges that there is a constraint, which is inflation. If you create too much money during a recession, demand will exceed supply and prices will rise. But that will not happen when supply is greater than demand, as it is in a recession. In that situation there is no need to worry about printing too much money.' His main complaint is that this is well-known: 'their basic economic model is mainstream with just some different beliefs about the stability of reactions to monetary and fiscal policy.' But he suggests (rather like Keynes criticising Lerner) that this well-known fact shouldn't be blurted out too bluntly: 'That the Labour team chose not to present a manifesto that increased the current deficit was a sensible choice, even though they could have done otherwise and stayed within their FCR [fiscal credibility rule]. As I have already noted, the media generally has a blind spot on this issue, and a few weeks was not time for a serious re-education programme.'