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There is a new economics kid on the block: Modern Monetary Theory (MMT). It has emerged from many years in academia, with papers published, peer-reviewed, attacked, defended, refined. Perhaps the most prominent advocate, if not High Priestess, of MMT is Professor Stephanie Kelton, formerly chief economist on the U.S. Senate Budget Committee and Professor of Economics and Public Policy at Stony Brook University (State University of New York). Her book The Deficit Myth is a New York Times bestseller and plays no small part in informing the $6 trillion budget recently unveiled by President Biden – she in fact advocates going much further. 

The key starting point for MMT is that governments are not like households. MMT posits that for a sovereign issuer of currency (e.g. the US, UK, Japan) the deficit alone is not a legitimate constraint on government spending because such nations have the power of the public purse, i.e. can issue more currency. It argues that desired national outcomes such as improved education, health, and infrastructure should be the driver of government spending decisions and inflation should be the restricting factor, not an obsession with avoiding ‘ballooning’ the deficit. 

Budget decisions should be based on detailed analysis that shows whether inflation would be increased and, if so, what mitigating factors should be employed. MMT further argues that a nation’s debt is merely a record of historic deficits or the input of money into the economy without taxing back. Involuntary bankruptcy is simply impossible for a country with its own currency. Note, however, that this only applies to nations with their own sovereign currency, and so none of the Eurozone countries (Greece, Italy etc.) can avail of it, nor can those who borrow in foreign currency, usually the dollar, such as Venezuela.

The question for Conservatives – centre-right ones in particular – is: does MMT offer solutions that we could usefully employ for delivering beneficial societal outcomes? There is a perhaps stomach-churning fact that Conservatives have to absorb first, that Margaret Thatcher’s 1983 speech was wrong, notwithstanding whether the purpose of that speech was to change behaviours rather than state a fact: 

“The state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you. There is no such thing as public money. There is only taxpayers’ money.” 

MMT points out that the state does indeed have a source of money and is, in fact, the sole entity that can produce money. This doesn’t apply to local government such as Councils or to corporations or to individuals. Only the nation state, through the agency of the state bank, for us the Bank of England, can produce money. The question is: how is this done without causing inflation beyond an agreed reasonable level, currently accepted as around 2% in most countries?

Let’s look at a practical example. Could the government increase the deficit to fund new infrastructure such as roads, bridges, rail, and ports as part of the levelling up agenda? And could they do it without borrowing or taxing first? MMT says Yes. Instead of Taxing And Borrowing to be able to Spend (TABS), the government creates money by Spending and then Taxes And Borrows (STAB) to control any resulting excessive inflation.

How did we fund the Furlough Scheme? Answer: borrowing, taxes and spending cuts. An MMT approach, however, would first ask: what is the outcome we want to achieve, and how many pounds need to be input to the economy to make that happen? In this case, the answer is avoiding mass unemployment, and £100 billion for all the relief schemes. Then an assessment is made on whether inflation wouldn’t exceed an agreed target. Taxation can be used subsequently to take currency out of circulation if required. 

This is obviously an over-simplification. And there have been detractors such as former US Treasury Secretary Larry Summers and Nobel Prize Economist Paul Krugman. But MMT’s proponents are no pushovers, with Prof. Kelton stoutly defending MMT against put-downs: interestingly the attacks on MMT are often unravelled at a very detailed level, as they refute with surgical precision.

We have big questions on how to fund social care, levelling up different parts of the country, helping young people catch up on missed education during the pandemic, and moving to more sustainable forms of energy. The recent resignation of the schools catch-up tsar was purely because of economics, and it prompted the former Conservative Education Secretary Justine Greening to criticise the Treasury for having models that focus too much on bridges but having little to support long term investments such as in education.

MMT is making a strong case for rethinking how we deliver on key commitments. Do Conservatives simply dismiss it, or would this be a missed opportunity?

Jeet Bains is a member of Bright Blue and a councillor in the London Borough of Croydon and was a parliamentary candidate in the 2019 general election. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Images George Rex]