Why MMT is not the answer

Some US Democrats have been talking in recent years about ‘modern monetary theory’, or MMT, as a way of funding their plans for a Green New Deal. In my book I compare MMT to another monetary system generally known as ‘sovereign money’, which I think is better, for reasons I explain below in this edited extract. 

Although MMT might superficially resemble the concept of sovereign money, it is not the same thing: there are differences that make it less suited to our needs. The common ground between the two ideas can be summed up briefly: they both acknowledge that a nation that issues its own currency cannot ‘run out of money’, because the central bank can create as much as it needs, within reason. There is a limit, of course, after which point the currency becomes devalued and inflation becomes a problem. That much is generally agreed. The differences are in the detail and, in particular, what MMT misses out altogether.

One significant difference is that MMT is not really an alternative to the current situation. It is, rather, a theory that supposedly explains how money actually works in the modern economy; not so much a new idea, but a description of today’s reality. That might be correct, as far as it goes, but the main problem with MMT is that it fails to address one of the key requirements of sovereign money reform. While acknowledging that commercial banks create new money when they issue credit, MMT ignores the critical point that this practice is incompatible with a fully-functioning sovereign money system, and thus sees no need to change it. This oversight might be linked to the fact that modern monetary theory, despite its name, is not very modern, being based on ideas that long predate the financialization of recent decades. (MMT has its roots in the State Theory of Money, first expounded by the German economist Georg Knapp in 1905.) 

Another difference is that proponents of MMT see all non-commodity money as a form of debt, and therefore treat government borrowing via bond issues as equal in effect to central-bank money creation (ie, they imply that both represent public debt). But then they also seem to imply that the level of public debt doesn’t matter. 

Sovereign-money theory disputes this on both counts: debts always matter (for reasons I’ve already explained), but government (or central bank) issued money is not a form of debt, it is a legal construct that takes the form of tokens representing the economic wealth of the state. A £20 banknote is not an ‘IOU’ for twenty pounds, or an obligation of any kind, as MMT implies; it is a means of settling payment, pure and simple. There is, rather, a general obligation for the nation as a whole to produce the wealth that the money represents. 

No need for debt 

The state doesn’t need to borrow money from the people, as a debt that must be repaid from future earnings: it can issue debt-free tokens, just as long as it ensures that the wealth is created to back them. The primary role of the state is to facilitate the production process, because this is ultimately what we all depend on, and this role includes the issuing, through the central bank, of the money tokens that we all use as payment. The state can actually create the jobs and pay the workers directly, if necessary, in productive industry as well as in the service sector. 

As already explained, each worker is paid in money tokens that, in theory at least, represent his or her share of the wealth being produced nationally. It follows therefore that these earnings ought to be linked in some way to the value that their work contributes. Whether such work comes under public or private control is not important (it is the quality of management that matters) but some portion of the industrial wealth must go towards the running of the state, if not directly through the public ownership of resources, then indirectly through tax revenues. 

The main concern is that enough industrial production takes place to ensure that everyone can satisfy their primary needs, preferably by earning money through their work, and also, from the monetary aspect, that enough wealth is created to back the currency (ie, to maintain the value of our money tokens). This has not been happening under the present system, which increasingly relies on the issue of unproductive debt that must be repaid from future earnings that are bound to fall short (because the debt is not boosting real earnings). 

Advocates of MMT, then, by implying that all fiat money must be a form of debt, ignore the fact that the current situation, in which nearly all new money is issued as commercial bank credit, can be improved upon simply by insisting that banks only lend existing deposits, and that all new money creation takes the form of central-bank issued, debt-free sovereign money. 

The crucial point, for the sake of investing in our future (be it through a Green New Deal or anything else), is that sovereign money can be spent into the economy free of debt: we don’t need to rely on bank lending for money creation, or indeed for investment. (This latter point is one of the big advantages of a sovereign money system: we can raise taxes on high incomes without worrying about the threats of the rich to take their money elsewhere: let them go, we don’t need their money.)

MMT also tends to downplay the generally acknowledged fact that too much money in circulation will lead to price inflation. It implies instead that governments of nations that issue their own currency can print as much money as they like, as long as they spend it in ways that promote employment, at least until full employment is reached. 

This idea seems rather simplistic to me, and ignores several important factors, in particular the fundamental nature of the link between money and industrial production, but also the difficulty of establishing when the economy has reached ‘full employment’ and what this really means, bearing in mind that robots are doing more and more of the productive work. 

MMT, in other words, sees no particular need for ‘sound’ money. It also ignores the need to ensure the independence of the monetary authority from the legislative body (ie, that the central bank must not be influenced by the whims of politicians). 

So yes, any serious attempt at introducing a Green New Deal should start with monetary reform, so that public investment can be undertaken without the need for excessive borrowing, debt levels generally can be reduced and wealth spread more evenly. But this reform should be along the lines I describe in my book (in Chapter 10), not the outdated and somewhat simplistic ideas of MMT. 

Another disagreement I have with some American Green New Deal proposals is the inclusion of universal medical coverage as part of the package, when logically it should be treated as a separate thing entirely. New money can be created for spending on projects that will boost productive employment, such as ‘green’ infrastructure and renewable or nuclear power generation, because these will bring long-term economic benefits and increase the wealth of society, whereas spending on non-productive social provisions such as healthcare needs to be paid for out of current earnings, through taxation. 

It might well be the case that improved medical coverage would benefit society generally. But even so, that would be an indirect consequence of a more efficient system, not of greater wealth creation. It is important that we understand the difference, because spending newly-created money on non-productive services will increase the money supply relative to resources, and will therefore be more inflationary than spending on productive industry. 

(This is an extract from my book, ‘From Brexit to Fixit: Why Britain is Getting Poorer and What We Should Do About It’. Please see ‘about’ page for details.)