The limits of Modern Monetary Theory as a solution to neoliberalism

Lisbeth Latham

The application by some governments of quantitative easing (the printing of more money) in response to both the Global Financial Crisis and the economic crisis unleashed by the COVID Pandemic has helped to raise interest in the heterodox economics approach of Modern Monetary Theory (MMT) as the appropriate approach economic development in countries such as Australia. While there are definitely important insights that can be drawn from MMT to inform appropriate budgetary responses, particularly in times of economic crisis, advocates of MMT tend to oversimplify the budgetary problems facing sovereign states during crisis, particularly those states which unlike Australia are not imperialist powers, even if a relatively weak one, and are instead in a dependent position within the global economy, but more importantly, mistakes where the real political struggle around budget priorities exist within the context of neoliberal politics.

MMT is a heterodox macroeconomic approach that focuses on the role of the government in the creation of money/currency and how, with the ending of the Bretton Woods Agreement in 1971 and the end of the convertibility of US dollars to gold, governments gained greater freedom in their monetary policy due to not being bound by the need to be able to honour their currency with gold.

Central to MMT is the idea that no government which is a sovereign issuer of its own currency can ever go bankrupt as they are able to create more money, and that doing so is preferable to a government borrowing money as it avoids the need to pay interest on such a debt. Some advocates of MMT argue that this glimpse of the true nature of the economy fundamentally unravels the core premise of neoliberal austerity which has seen the deprioritisation of spending public services across the globe.

However, the reason we have seen aggressive attempts globally to wind back social spending is not that the neoliberals genuinely believe there just isn’t enough money to spend on public services. Instead, neoliberal austerity is driven by a desire to transfer as much of the wealth being produced into the hands of capitalists, a process that is driving unprecedented levels of wealth concentration. Everything else is simply verbiage to prettify and obfuscate this drive to boost and concentrate profits. In this context, the answer of “printing more money” is still the question of “how do you maintain a sufficient level of profit growth to maintain the capitalist system?”. Shifting this priority will take a struggle against capital and its governments, and all too often MMT tends to push its advocates away from this conclusion into a tangential argument about whether there is genuinely a limit to the money supply.

By shifting the terms of debate to the question of “is there a limit to money”, advocates accept what are really false arguments of capital and their representatives in government as having been given in good faith. While the neoliberal drive has relied heavily on the appearance of a lack of alternative choices, Thatcher’s insistence that “There is No Alternative” being one of the greatest examples, the reality is that in the midst of arguing for the need for surplus budgets, most advanced capitalist countries have happily racked up deficits but at the same time they have been shifting spending priorities, so simply arguing “there are no limits to the spending” is unlikely to address the reality that these governments want to prioritise spending on subsidising business profits rather than on social spending.

This reality can be seen in the examples which MMT advocates point to as proving their point. For many MMTers the increase in government spending, as if from nowhere, in response to the COVID pandemic and in response to the Global Financial Crisis of the late 2000s, is evidence of the truth and power of MMT as a solution. Whilst this does show that governments can spend more, we need to also recognise that spending has also primarily been focused not on meeting the needs of the general population but on maintaining company profits and avoiding mass defaults - indeed the US government’s bailout of US automakers was tied to workers accepting cuts in their working conditions. Moreover, this spending has not been sustained, not because it “cannot be”, instead it has been intentionally wound back and the previous rounds of spending used as a justification of future austerity. This is not to say that the creation of money cannot be a solution to government finances. However, it does highlight that it is necessary to see the questions of how much money the state spends and on what as being primarily political.

Related to this problem is a tendency of MMT advocates to dismiss the question of taxing the rich as not important, as the government can meet its budgetary needs via money creation, and thus from an MMT perspective taxation only really plays a role in the currency circulation which can include, if a government so chooses, wealth redistribution via social spending. There are a number of problems with these positions. It tends to detach money from the real economy and part of the reason we are seeing unprecedented levels of market capitalisation and accompanying individual concentrations of wealth, is that money is not circulating and is instead being drawn from the real economy into speculation in the stock market. More importantly, there is a tendency to reduce the question challenging the concentration of wealth to an at best secondary question - when in reality it should be the primary one of moving to a point of contestation as to who should control the means of production and not just the means of creating money. This problem is highlighted by John Christensen and Nicholas Shaxson regarding how to respond to the massive tax avoidance highlighted in the Panama Papers. “To illustrate this clash, take the words of UK Shadow Chancellor John McDonnell during the Panama Papers tax haven scandal that “every pound avoided in tax by the super-rich is a pound desperately needed by our National Health Service, our schools and our caring services.” We’d strongly agree with this statement — though Bill Mitchell, a prominent MMT economist, attacked it as a “dangerous and misguided narrative for progressives to engage in,” because it “fuels damaging myths” about how the tax and spending system works”.

An easy and ready dismissal of MMT is that its application would simply result in a repetition of the hyperinflation of the Weimar Republic in the early 1920s or Zimbabwe in the late 2000s. However, as Mitchell and Fazi point out there were other factors at play here that triggered hyperinflation most notably disruptions in the supply of goods, not simply the creation of additional money, moreover, they point the example of the creation of additional currency during in Germany between 1933 and 1937, which enabled the Nazi government to rebuild the German economy.

The MMT discussion of the potential risk of inflation, which partly relies on the accurate assertion that creating more money will be no more inflationary than any other stimulus effort such as borrowing more money. They tend to treat the impact of increased money supply in the economy as not just felt via inflationary pressures within a national economy - because most economies are in trade relationships with other economies, changes in volume on money can impact on exchange rates which in turn impacts on trade in those goods being sold internationally will experience a reduction in price on international markets, whilst imported goods will cost more. This can be beneficial to both exporters and manufacturers reliant primarily or exclusively on internal markets - as with the falling value of the currency both become more competitive - if it goes too far it can cause considerable dislocation in the internal economy of a country.

Moreover, if we accept that hyperinflation is a potential problem, even if not primarily driven by the creation of money, then we have to also recognise that MMT’s focus on money as being the solution to modern problems of the economy - particularly where shortages are caused not by a lack of money, but a lack of goods - which we have begun to see during the COVID pandemic due to dramatic shifts in consumption patterns of certain goods, most notably personal protective equipment and vaccines, and as a result of disruption in manufacturing and supply chains due to the virus and accidents such as the blocking of the Suez Canal in March by the Ever Given.

In these circumstances simply creating more money or giving more money to people will not solve these supply issues, indeed it will potentially exacerbate the problems and give rise to Inflation at least in part of, if not the whole of the economy.

While MMT focuses on the ability of governments to simply create money in order to overcome problems with either needing to stimulate the economy or to enable necessary and vital government programmes. These are not the only challenges facing the global economy. Moreover, by articulating an almost evangelical view of having unlocked the secrets of the economy its advocates tend to forget that primarily the issue of spending and consumption in national and international economies are not primarily driven by economics, but instead by politics - with economics being a justifier for political positions.

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