Originally published at the Australian Independent Media Network
Modern Monetary Theory (MMT) is not a trap but it is radical.
It shows us how to construct democracy in favour of the people and foster a better political discourse and shows that the policy space available is wider than usually assumed. This piece is a direct response to John Quiggin’s
and in its place Leia Organa’s distress message to Obi-Wan Kenobi that MMT is a new hope, writes Darren Quinn
In my recent piece at the Australian Independent Media Network, there was a section I was not able to put succinctly and thus left it out altogether. Joe Weisenthal from Bloomberg publishing as @TheStalwart on Twitter has managed to do what I was unable to do.
Joe Weisenthal writes:
When people think “x pays for y” what they think about is sales at a company (cash coming in) paying for employee wages (cash going out)
People love pointing out the math how if we taxed the rich more we could solve homelessness or some other societal ill. MMT points out we do not need higher taxes on the rich to get more homes. What we need is for Congress to allocate the money to spend on more homes, and we need the supply-side capacity to build those homes.
Ameliorating inequality by taxing the rich might be a social good, but strictly speaking, the government can do plenty more than it does even without a wealth tax or a change to the highest marginal rate on income.
If you point this out though – taxes don’t directly fund spending – you get accused of word games. The logic is that taxes diminish domestic demand for goods and services. This creates idle goods and services. Then when the government spends money, that money can be used to employ those idle goods and services. Ergo taxes *do* fund spending, in a kind of roundabout way.
Cash-in, cash-out is clearly not what’s described above
Joe Weisenthal did write all the above for Bloomberg but I have somewhat re-ordered it. I do not think it takes away from the context in any way.
Australian Real Progressives has mentioned this piece previously as a parry and riposte to nominal progressives in this piece but it deserves a full treatment of its own.
Modern Monetary Theory (MMT) is an incredibly complex body of work that studies macroeconomics. At its most elemental level, it says a currency is a social and legal construct. Currency issuers spend via an appropriation bill and are not financially constrained, though they are constrained by real resources. A monopolist of a currency can purchase whatever is for sale in the currency it issues, including idle labour. Thus unemployment is a political choice.
Within the body of work that is MMT it uses a Job Guarantee (JG) as a macroeconomic price anchor and stabiliser which I will explain below.
There have been claims that the Job Guarantee is workfare. It is not. It is a voluntary offer of a job to anyone, anywhere paid at a living wage with access to all the National Employment Standards just like every other worker.
The social policy setting of the JG is the policy manifestation of a technical concept to eliminate the tradeoff between unemployment and inflation. Current orthodox economists identify a link between rising employment and rising inflation and use unemployment to discipline the inflation rate. MMT economists say you can achieve the same end by using a ‘buffer stock of employed’ rather than a ‘buffer stock of unemployed’. This is what the Job Guarantee is.
The reason for the fixed-wage is the anchor. It sets the general price level. All prices within an economy are a function of government spending. The JG chooses to use employment as the anchor for the general price level. In the event of accelerating inflation, the cause of inflation can never be the wages of the JG workers because by definition they are purchased from the bottom and released from the pool when a better offer is made.
The JG is a small part of a broader full-employment agenda. Ideally, you want the pool to be as small as possible. It is not there to replace existing skills-based employment. It is there to sit alongside a national skills development framework to assist those that need it in finding future employment.
It ensures ’loose’ full employment as workers are drawn in and out of the JG pool rather than ending up unemployed. The automatic spending triggered by those entering the JG mean the government’s spending is directed when and where it is needed most – the unemployed.
The advantage workers have particularly those at the bottom who often hold little, if any, bargaining power is that the JG sets the floor for wages. Private employers would be forced to compete with what we as a society determine to be the absolute minimum socially inclusive wage.
A Job Guarantee is designed to create work to suit the individual. It is administered at the local level but funded by the federal government. The workers within this program are free to unionise and advocate whether something should be classed as a JG job. They are free to take part in determining what the living wage should be.
The work would be of public benefit and assist the JG worker in upskilling and finding work in the private or public sector. It is there to enhance the individual’s well-being and provide a public purpose. It is not used as a punitive system of punishment.
In a similar way to how the Commonwealth Employment Service worked, the unemployed person would have a case manager that held their CV and attempted to match that person to a job but rather than having that individual lay idle, they have the opportunity to maintain and enhance their skillset while seeking better employment working actively with their case manager to match them with an appropriate job.
The types of work that can be done are limited only by our imaginations. We could pay musicians to give workshops on band dynamics, pay them to create and assist in the organisation of community festivals, we can have arts programs where artists can paint murals in public spaces and aid others in their own skill development. Surfers could be paid to pass on surf life safety skills and teach others how to identify and avoid rips. They could take part in sand dune rehabilitation. There is massive potential to enlist thousands of unemployed in ecological restoration and plant trees along with other flora to mitigate against climate change while they undergo study in a related area.
Most importantly the JG allows the most disadvantaged in our society an opportunity to engage in paid employment which would lead to recognition in the community and vastly improved self-perceptions and a more prosperous society.
Jengis Osman is a union organiser based in the NT. He is a member of the NT- ALP Left and a research associate at the Centre of Full Employment and Equity. Twitter This first appeared in Challenge Magazine and is giving a fuller treatment on Jengis’s website Fighting Fish.
MODERN MONETARY THEORY (MMT) is a description or if you prefer, a systemic analysis of currency as it presently exists.
It reveals that taxation is important in driving demand for currency among other things, including the creation of unemployment. After all, there is no unemployment in a non-monetary economy.
Adam Triggs, a research fellow at the Brookings Institution and Crawford School of Public Policy at Australian National University (ANU) wrote back in 2019 that MMT ‘looks like a solution in search of a problem’. That is not the case. MMT shows that the new economic consensus on the monetary system is false and it also shows what tools are available in the modern money toolkit.
‘If its [MMT’s] stated objective is to achieve full employment, then it appears unnecessary.’
This simple sentence is misleading in the extreme. MMT is just what exists. It has a preference for sovereign currencies but can explain any monetary system.
The preference for sovereign currency is because it makes available more independent policy space, enhancing democracy. Triggs then defines full employment as an unemployment rate of five per cent. Oh, the horror! This relies on the mythical “non-accelerating inflation rate of unemployment” (NAIRU), which is sometimes transposed with the phrase “natural rate of unemployment”.
MMT defines full employment (as do all good economists) as frictional unemployment which is somewhere between one and three per cent with zero or next to zero underemployment. These are the people that are switching jobs or are ill. After all, there is no natural rate of unemployment, just as there is no natural rate of homelessness, no natural rate of poverty and no natural rate of illiteracy.
MMT shows that all spending is new spending and is effectively financed by “printing” money. However, the term “printing money” is pretty misleading in economic circles.
What economists usually mean, in fancy terms, is quantitative easing (QE) — the swapping of government bonds for cash. A plain and simple financial asset swap. Bonds are first bought with cash and when QE is implemented the bonds are swapped back for cash. The cash comes first. What MMT means is that all spending is new spending whether done electronically with keystrokes or with physical cash. So, no, QE is not MMT and nor did QE produce inflation anywhere as predicted.
MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.
Triggs talks about the world lending us our own currency which is just nonsensical. For that to be even plausible, lenders would have to get it from us first — the word “sovereign” does the heavy lifting here. Even then, unless in physical cash, it stays on accounts at the central bank. So how on earth is foreign savings in Australian dollars going to finance anything?
Triggs also delves into some new economic consensus falsehoods about rising inflation, interest rates and depreciating exchange rates — as if we do not have the tools to manage these. We do.
The closest thing to a genuine critique or critical analysis of MMT Triggs offers is an appeal to the authority of some “eminent” new economic consensus economists, including Olivier Blanchard, who is moving closer and closer to MMT.
Triggs tries again in 2020 to say MMT is just a rebranding of orthodox economics — what I have previously called the new economic consensus. This is simple to disprove as orthodox economics believes taxes and/or bonds finance government spending.
Stephanie Kelton, author of the bestseller The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, wrote a detailed operational paper that disproved that. The great irony is she was attempting to prove it.
In his 2020 article Triggs said:
For Kelton, the core propositions of MMT are that government budgets are fundamentally different from household budgets, that budget deficits are not necessarily bad, that governments should spend more when the economy is weak, and that governments should focus more on unemployment than budget deficits. She believes that the main constraint on government spending is inflation, that increasing the deficit need not make future generations poorer and that governments can’t run out of money if they have their own central bank, their own currency and no foreign debt.
If that all sounds right and logical to you, that’s because it is. Most mainstream economists have been making these points for close to one hundred years.
If Triggs accepts all this, he is approaching acceptance of MMT. However, to say most mainstream economists have been making these points for years is mistaken.
It is very strange – if all the major features of MMT were so widely shared and understood – how do we explain statements from politicians, central bankers, private executives, lobbyists, media commentators etcetera, etcetera that appear to not accept or understand the basic MMT claims?
Again, Triggs tries to counter with the inflation and/or hyperinflation argument against MMT — to which I repeat, MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.
‘If you get hyperinflation, then you didn’t follow the recipe. The recipe clearly defines the limits on spending.’
Kelton’s comment is a great counterpoint to relying on politicians to use the monetary system for anything beyond the public purpose. That is the reason we have democratic accountability and vote every electoral cycle.
This article was originally posted on Independent Australia on the 18th July 2021.
I improved the final paragraph.