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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Keynesianism Is No long-Term Solution To The Economic Crisis

Lisbeth Latham

The current COVID pandemic has caused massive financial damage to the global economy, damage which has been felt viscerally by working people in the form of dramatically reduced incomes and the loss of millions of jobs. As we progress through the pandemic and look hopefully towards its ending and eventual recovery, minds have begun to look towards what the eventual rebuilding of the economy might look like. Whilst capital, and its representatives in governments, are already looking towards an, even more, deregulated labour market and a general deepening of the neoliberal model, on the other hand, alternative models for recovery are being forward, most particularly that proposed the by the Australian Council of Trade Unions which draws its inspiration from the post-war recovery globally and most particularly in Australia post the Second World War. While this example has understandable appeal, it is well known, it refers to a period of massive and sustained economic growth. It is a deeply problematic model for recovery to the current period of crisis as it fails to understand the roots of the recovery post Second World War which will not be easily replicated but more importantly fails to recognise the broader reality of the global climate crisis that also confronts us, and which should mean we are wary of productivist solutions to this crisis.

The current moment of twin crises of the COVID pandemic and climate change makes it both opportune and vital that progressive forces put forward a vision of a potential course of action. A course which not only facilitates economic recovery but also addresses key questions economic justice. Specifically, this means charting both a course to enable the global transitioning of the economy away from its reliance on fossil fuels and build ever-higher profits. At the same time, this process must also focus on reducing economic inequality both intra- and internationally.

In the wake of the war, the Australian government engaged in a large scale and ongoing social spending which included the building of infrastructure, such as the Snowy River Scheme and helped the Australian economy and society for an extended period of prosperity and helped the Australian economy and society for an extended period of prosperity. This spending and development played a significant part in creating employment in a context which risked mass unemployment. With demobilising armed forces and the waves of refugees that found homes in Australia in the wake of mass displacement caused by the Second World War and reconfiguring of post-war Europe. However, while it is undoubtedly the case that significant government spending was a major factor in this growth; it is not the only story.

It is important to remember that the post-war boom, which was a global phenomenon, occurred in the wake both the destruction and stagnation caused by the great depression and then shattering of the global economy and destruction of capital goods which occurred during the Second World War. This was a period of extended destruction of capital, which resulted in mass immiseration, destruction, and loss of life. This created an opportunity for an extended period of growth - which would not have been possible without this previous destruction. It lay the foundation for extended capital accumulation as countries like Australia were able to profit from the rebuilding much of Europe and East Asia. The ability to experience extended periods of growth was also expanded and extended by the ongoing arms build-up and destruction associated with the Cold War and the imperialist interventions in Korea and Vietnam. In addition, there was an opening up of a wide range of markets to international competition, markets which had previously been closed due to colonial relationships.

The current economic crisis, as devastating and destructive as it is, has not recreated the circumstances of the post-war period in any way. While COVID has unleashed a significant economic crisis as a consequence of a long run over-accumulation of capital, the COVID crisis has primarily stalled the global economy, disrupted in supply chains, and reduced demand and spending power as millions of people have either seen their hours reduced or lost employment entirely. It has not, at least not currently, substantially damaged or reduced the volume of capital goods in the real economy. Particularly not at the level of destruction which would be necessary to enable an extended period of acceleration and growth in profitable investment in the real economy. Which means that it is highly unlikely for the current crisis to reproduce a similar period of growth post the current crisis to that of the post-war boom. 

The significance of this difference can be seen in the what happened to the economies of the advanced capitalist countries at the end of the long-boom, where government stimulus spending was no longer able to smooth the business cycle and enable ongoing growth, but instead resulted in a prolonged period of stagflation, which is characterised by low growth, high unemployment, and high inflation. Any extended attempt at smoothing the business cycle now is likely to result in a similar outcome, particularly, as I will discuss later, as capital is flush with surplus capital.
This is not to say that there should not be an effort to stimulate the economy. Instead, the object of any stimulus should not be modelled on the post-war recovery other than to say it is possible to carry out large scale government spending - just as the government spending of the second world war demonstrated the possibility of massive government spending in the post-war period.

Many small and medium, and some large, businesses will go bankrupt during the current crisis. Any government stimulus should be aimed at supporting these businesses to minimise the impact of any such collapse on the hundreds of thousands of workers employed by them. However, we can see the problem of excess capital in the system even now, where the stock markets globally continue to rise despite being the global economy being in a massive down-turn (admittedly much of this rise isolated to those sections of the stock market that have been seen as a “safe bet”, particularly tech stocks). So government spending in the post-COVID recovery would be best focused on either establishing worker cooperatives or state-run initiatives. Where spending does flow to the private sector it should be tied to the shifting of ownership in part or whole to the state and to establishment and expansion of workplace democracy in those organisations. With a focus then being on a discussion on refocusing these enterprises to meet the needs of society, the workers, their communities rather than achieving private profits.


Chart: All Ordinaries Index 2000 - 2020, source: Market Watch.

Beyond this problem - there is a deeper existential one. Our planet is on the verge of environmental collapse, the biggest threat is climate change, but we have a significantly broader problem, which even if we could achieve a change in the carbon budget, we would be faced with the fact that the planet cannot sustain the need of capitalism to constantly expand and grow. This drive towards growth and expansion is not driven by a commitment to meet human consumption needs - it is entirely disconnected from them and puts human life at risk and threatens to accelerate the metabolic rift being experienced by the planet.

As such while there is space for:

• Expanding manufacturing for transitioning the Australian economy and those of other countries away from fossil fuel-based energy production;
• Growing local manufacturing to reduce our reliance on importing manufactured goods and the associated environmental impact of large scale transport;
• Supporting and funding the transition away from fossil fuels for countries of the global South supporting the development of their local manufacturing and agriculture;
• Construction of public housing with an emphasis on better quality and more sustainable housing stock;
• Expanding recycling industries as part of an effort to reduce our reliance on extractive industries for raw materials;
• Expanding the scope and frequency of public transport;
• Repairing and strengthening of public services, most notably health, education, and research which the crisis has demonstrated have been woefully under-resourced as a consequence of decades of neoliberalism;
• Growth in employment in counteracting the destruction that capitalist development has wrought on the environment;
• Shifting agricultural practices to more sustainable forms;
• Establishment of a conservation body aimed at direct remediation of the environment and ecosystems

There is no space for a drive for an extended period of growth in the output of either capital or consumer goods.

It remains unclear how much work the focuses above would create. Collectively we need to start to re-envision what full-time work is. The focus on a five-day 38-hour workweek has resulted in both problems of unemployment and underemployment which combined was more than 13% prior to the onset of the pandemic in Australia. At the same time, workers in Australia who are employed full-time worked some of the longest hours in the Organisation for Economic Co-operation and Development. This meant that work is extremely unevenly distributed across the labour market. Rather than pushing for full employment based on 38-hour week model, we should be exploring how to more effectively share employment, particularly in socially and environmentally useful ways that will both enable working people to actually benefit from the last three decades growth in labour productivity by evening the spread of working hours, reducing income inequality across the workforce and ensuring those individuals those who are unable to work have their incomes lifted to a liveable level.

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COVID-19 and why a rent strike is the wrong tactic

Lisbeth Latham

In the face of the economic havoc caused by the COVID-19 pandemic, it is not enough to call for a rent strike and moratorium on mortgage repayments. At best, it simply displaces the lack of income into other parts of the economy and, at worst, it could deepen the impact of the economic crisis on working people.

Despite widespread concern over housing affordability, as a stand-alone tactic such calls are insufficient. Instead, progressives should be campaigning for secure incomes for all working people, something that would not only allow them to pay rent and mortgages, but equally importantly it would allow them to eat.

As the pandemic deepens, many more industries and companies will close. That will mean many working people, although technically employed, will be without incomes.

Even with treasurer Josh Frydenberg’s announcement that job seekers will have their payments doubled for six months — a huge relief for the unemployed — for many this will fall far short of meeting their financial needs and obligations.

There are a number of immediate risks if people were to stop paying rent.

First, they risk being evicted from their home. While this may not happen immediately, it is a struggle that they may not be in a position to win.

Secondly, a rent strike runs a serious risk of displacing the income crisis to another part of the economy.

While many people will have limited sympathy for the plight of landlords, and many could wear a reduction in income, this is not going to be the case for all landlords, especially retirees, whose superannuation is tied up in a rental property and for whom the non-payment of rents could lead to their immiseration.

If there was to be a rent or mortgage strike, it should be limited to those whose incomes have been significantly reduced. Those who remain working, or whose employers continue to pay them during periods of shutdown, should continue to pay rent.

Doing so will help ensure the circulation of cash and allow those services that remain in operation to be paid for the goods and services being provided. Additionally, the payment of rents and mortgages will have a counter inflationary effect.

The key question should be how can we collectively maintain incomes in this unprecedented COVID-19 emergency. Governments should mandate employers to continue to pay the wages of all their employees, regardless of their contract status.

If this is no longer possible, the government should directly subsidise wages – rather than the Morrison government’s current plan to refund tax payments and underwrite loans.

By doing this, large corporations such as Qantas, should be partially or totally taken back either through formal nationalisation or via a share transfer. No worker should lose their job or income in the current crisis.

Right now, governments must fund jobs and incomes by creating more money to be released into the economy. By subsidising wages, the government would be able to position the economy not just for a more rapid recovery in the wake of the pandemic.

It would also be in a position to prioritise the expansion of sectors, such as manufacturing, which are necessary to boost sustainable energy to transform the country’s power supply to meet the equally vital challenge of climate change.

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This article is posted under copyleft, verbatim copying and distribution of the entire article is permitted in any medium without royalty provided this notice is preserved. If you reprint this article please email me at revitalisinglabour@gmail.com to let me know.

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