A reply to Tribune’s ‘Against MMT’

James Meadway, former advisor to shadow chancellor, John McDonnell, has written an article in Tribune entitled ‘Against MMT’.

At least we know where he is coming from….

Actually, it is, I suggest, fairly well argued, and certainly concentrates on the ideas and not the people, which for MMT – particularly bearing in mind recent experiences, is a refreshing change! There is  also quite a bit to agree with. The subtitle ‘Modern Monetary Theory disorients the Left by peddling simplistic monetary solutions to complex problems of political power’, shows his gripe, which is, I’d suggest, essentially not with the actual ideas or ‘theory’, but the view that it offers any solutions. And he does demonstrate an understanding of MMT even if he does not, in my view, accord it sufficient weight.

He claims that MMT “provides a new way of looking at the economy“. Whereas, in fact it is the only factual way of looking at money creation in the economy. Although he suggests:

MMT’s belief that governments have the power to create valuable money virtually at a whim has the unfortunate effect of transforming online into One Weird Trick-style assertions about how the economy works. This is most obvious in the popular claim that MMT ‘proves’ governments don’t need taxes to spend money and, it is argued, can spend whatever they wish up to the point that ‘real resource constraints’ kick in.

Weird trick or not, Professor Stephanie Kelton has stated that this is how the money creation system works  – and even the Treasury now says this is true, too. The only way one can suggest that the current money system doesn’t work as MMT suggests is if you point out that in fact any ‘shortage’ in tax take is made up for by issuing gilts. But with the advent of Quantitative Easing we know that these can in turn be purchased by the government so the procedure is clearly a matter of tradition and common practice rather than any overt necessity.

If MMT is indeed a new way of looking at the economy, it is simply and nothing less than the actual – or truthful – way of looking at the economy.

Indeed Meadway reluctantly admits as much when he suggests that there is a “sliver of truth here”.  He states:

Modern governments do not have to collect taxes before they can spend: they can also borrow the money, or create and spend that money directly. On a day-to-day basis, these three things can (and often do) all happen at once.

So, more than a sliver, that makes him a basic MMTer.

He goes on:

Unfortunately, what holds as a technical description of how governments pay for their daily operations does not apply over the longer term. The grave danger from issuing money, in particular, is that it will lead to a general rise in prices, known as inflation, something readily acknowledged by academic MMT supporters. They often argue that governments should use taxes to deal with this problem: taxes take money out of wider circulation, and by reducing the amount of money chasing goods and services, you reduce the pressure on prices.

Nobody would dispute any of that.

He continues:

Mainstream economics also acknowledges that inflation is an issue, but instead of saying taxes should be used to control it, its adherents, known as neoclassical economists, propose interest rates as a remedy. When these go up, it becomes more expensive to borrow, people borrow less, and this in turn reduces the amount of money in circulation — so the theory goes. But as two left-wing economists sympathetic to MMT, Arjun Jayadev, and J. W. Mason, have recently argued, this means that the only meaningful difference in policy terms between MMT and the mainstream on the central issue of managing inflation is whether the government should use taxes or interest rates.

Here is where his ideas are, I feel, on more shakey ground. We know interest rates do not work and raising them can often lead to inflation rather than preventing it – and in any case interest rates have been so low for the last decade that they are practically irrelevant. In fact taxation is all that is left.

In maintaining that :

The implication of using taxes to control inflation is that governments will see prices rising and then choose to raise taxes as well.

He is in fact saying no more than this is actually the only way to prevent inflation currently, today. (Some might think  that a bit more inflation would in any case be nice to have.) He also ignores the ‘Multiplier Effect’, which is especially relevant as it works particularly in the areas where Labour is likely to boost spending. So his conclusion:

But only a government unconcerned with elections could possibly tell the public, ‘prices are rising so we are going to raise VAT too.’

is, I’m afraid, an unlikely and cheap shot.

Where he gains a little more traction is in ‘Foreign exposures’. He points out that trade matters – particularly to Britain, which runs a fairly large trade deficit. He suggests that currencies, just like states, have a hierarchy with the most powerful at the top. The US dollar dominates and is used in 60% of cross border trade. The dollar is backed ultimately, he says, ‘by the most powerful military on the planet’. Fair enough.

But none of this, of course, prevents Britain from having its own sovereign currency and using it for its own purposes. It is true that if we are unable to persuade foreign suppliers from whom we import, to buy things or bonds in £ sterling we may have a problem. But while Britain maintains the rule of law  this is unlikely to present any real difficulty. But here we see the reason why John McDonnell says that MMT is applicable only to the US.

James Meadway goes on to quote Adam Tooze, the ex Brit and now US professor, who says in “Crashed” that:

British banks faced huge demand for dollars — the result of their massive dollar liabilities — that not only could they not meet, the Bank of England itself could not meet. Instead, ‘swap lines’ were opened from the Federal Reserve in the US to supply dollars at rock-bottom (but still notably profitable) rates to financial systems in countries like the UK that were suddenly grossly overstretched.

(I’ve not read ‘Crashed’ – I must!) But why on earth is a British bank required to supply dollars? It is possible that American subsidiaries might have faced such a demand and they should surely have been allowed to go bust if either they could not or the Federal Reserve would not, meet the demand. Now maybe I’m being wise after the event and this may have not been apparent at the time – but if that is the case then there is no point in basing future policy on past misunderstandings. We clearly cannot have UK private banking industry asking the Bank of England for help in providing US dollars. Any UK bank wishing to so provide should clearly be a bank registered in the US – even if it is a subsidiary of a UK bank.  It should also have local currency financial independence. The UK should, if it now does not, completely forbid liabilities in foreign currency, other than, I suppose, local foreign exchange transactions, for any UK registered bank.

The fact that James Meadway thinks that general foreign currency liability is the way that life is, is pretty disheartening.

James Meadway is proud of Labour’s fiscal credibility rule, which he admits is not much more than a way of getting orthodox economists and civil servants on side:

First, a commitment to the Fiscal Credibility Rule allows Labour to put together a coalition of support for its programme from across the economics profession.

The second reason is that clarity and planning help cut through some of the more obvious challenges to Labour’s programme — from journalists demanding to know Labour’s plans for the debt and the deficit, and then, later on, as a guide for civil servants expected to implement its policies.

The third reason has to do with UK banks needing dollars (mentioned above).

This third reason is actually the nub of any problem and it has nothing to do with MMT.

Labour really need to control banking.





  1. Peter May -

    Thanks, Sean. I must take a look!

  2. Charles Adams -

    The Comment on TRUK by JKH: June 5 2019 at 9:13 pm is quite wise

    “All modern monetary systems are characterized by government treasury account(s) held at the central bank …. The very objective of such accounts is to tax/borrow first and then spend.” I would correct that to simply borrow as tax is income and comes after.

    But the essence is right. All money is just accounting, credit and debit. As JKH correctly comments later

    “Simple accounting illustrates why nominal “affordability” can’t be an issue”

    Or as Anne Pettifor puts it “we can afford what we can do”

    So for me the MMT debates do not get to the nub of the issue, which is really that it is all about the distribution of power. The state has real power but may chose not to use it in the way that would be most beneficial, and they may use fictional monetary constraints to justify their action or inaction.

  3. Peter May -

    I agree.
    But for me why MMT is important is that it does establish that the state/government has the power. That, it’s true gets you only so far – and I have come round to the belief that Osborne was an MMTer (look how he increased the deficit!) but he couches his politics in old terms of taxing and spending because it saves him having to explain that he wants a smaller state and doesn’t care if that impoverishes most of the British people.

    But if we could be straight and clear about how money was created surely it would make the job of Osborne and people like him much more tricky. My hope is that they’d would find it more difficult to mislead and it would be more apparent that they had utter contempt for most of the electorate and might have to justify why concentration of wealth was such a good idea.

    1. Charles Adams -

      Yes, I agree with that. We do need everyone to get beyond the ‘money is the constraint’ problem. Resources are the constraints and as human we can create more resource. So the only question is how can we maximise our potential?

      I see today that Hammond has written to PM saying zero carbon by 2050 would cost extra £1trn. So? Costs are, of course, someones income so that’s an extra £1trn on GDP. Hammond aught to be more worked up about the lost GDP from leaving the EU which his own Department has estimated to be of order £6trn by 2050! And that really is lost.

  4. MigT -

    Yep, Meadway doesn’t so much critique MMT as defend Labour’s fiscal rule from the MMT critique. Which he either doesn’t get or is determined not to get. It isn’t that “this rule supports austerity”, but that it bolsters the household budget mindset which induces people to vote for austerian govt. And it’s largely that which preserves the institutional power disparities Meadway wants to address.

    1. Peter May -

      Spot on, MigT!

  5. Pingback: Another reason to know where money comes from – Progressive Pulse

Comments are closed.