I have Stephanie Kelton’s new book, “The Deficit Myth” on pre-order, partly because I continue to be interested in Modern Monetary Theory (MMT), and partly because MMT proponents are worse than Marxists in insisting that one ‘does the reading’. While I wait, I watched Kelton’s talk yesterday at the Australia Institute, a progressive Canberra-based think tank (video embedded below). Kelton said little I disagree with, and I continue to sympathise with Richard Dennis, who long ago influenced my thinking on fiscal policy. Dennis has been pushing this particular anti-deficit hawk cart for so long it feels all he has left is (like a a good lib) to gesture towards the imagined hypocrisy of the conservatives. But for conservatives, the hypocrisy is the point. They discovered long ago that combining deficit hawkery with reckless giveaways while in power is a winning electoral formula.
One of the most frustrating things about MMT advocates, including Kelton, is they they claim, on the one hand, to merely be describing the monetary system (where they make some valid points), and on the other, to advocate for expansive progressive policies like a job guarantee, UBI or green new deal (which are good and desirable). But when a critic points out that using monetary financing (i.e. having the central bank directly fund government expenditure) for these programs is economically reckless and less equitable than using traditional tax-and-transfer, we’re told that these are totally separate spheres of activity and the validity of one does not affect the other. So why not just raise taxes to fund social programs and study the banking sector in obscure economic journals without engaging in high profile public advocacy? Kelton at least is honest - it’ll be simpler to get what we want if convince people deficits don’t matter. But my greatest fear is that some future social democratic government will be blamed for hyperinflation in the same way that UK Labour was in the 1970s, Australian Labor was in the 1980s, or many Latin American left-wing governments have been over the years. MMT is not a good leftist project, and yes, I recognise I’m engaging in in-group cringe when I say that.
Living in Hume’s gap
The best way I’ve found to call out and identify this conceptual jump is to ask MMT advocates a simple question: should governments issue bonds (i.e. obtain loans from private capital) equivalent in value to their fiscal deficit? The question sidesteps any debate over specific policies, while at the same time identifying a practice so at odds with how governments have financed themselves since the invention of the Bank of England that the answer can be shocking and revealing. Kelton’s answer is here, at 28:00.
Kelton’s analogy draws upon one of the key [and insightful] analytical tools of the MMT movement. When a government is in surplus, it has taken more money out of the economy than it has put in - and it’s unclear why any government or politicians would ever want to do this. This is termed ‘sectoral accounting’, and it’s just a way of seeing the economy as a closed system in which one agent’s deficits must necessarily represent a surplus for some other agent. In Kelton’s analogy, the government cannot - or should not - ‘borrow’ from the private sector because private sector surpluses have necessarily been first created by government spending.
The flaw in this reasoning is plain. Sectoral accounting is a powerful tool for helping us think about how resources circulate in the economy. But it’s not obvious why we should privilege the government and lump the rest of the economy together as a single conceptual unit. By the same logic, any private company - or individual - who borrows funds is putting money in everyone else’s pocket. In a sectoral accounting sense, this is true. But that doesn’t mean that any private company or individual debtor is creating money, or even creating value, by doing so. Kelton argues that when the government goes into debt and borrows $10, sectoral accounting suggests that the $10 it borrows was given to the private sector by government spending. But if I go to the bank and ask for a $35,000 car loan, I can’t just say “well, I’m spending $35,000 into the economy-that-is-not-me, and since you [the bank] are part of the economy-that-is-not-me, I have given you the funds you’ll use to give me the loan. So we’re even.” Money circulates in the private economy too, not just between private actors and the state.
The state and distribution
MMT does not simply rely on sectoral accounting - it privileges the state as an economic actor in at least two ways. The first is to claim a unity between the central bank and the treasury, such that the state is seen as sovereign over the supply of money in the economy. The second is to rely on neo-chartalist arguments that the state’s power to tax (underpinned by its monopoly on force) is the basis on which money is given value through the creation of demand for its currency. The key theoretical claim of MMT - that the government is the engine room of the economy - is baked in to the sectoral balance approach. But the reality is that money is also created by private financial institutions when they make loans (unless MMT advocates want to move to positive money, in which case, yikes), and the value of currency is significantly influenced by its role as a stable unit of exchange, and a stable unit of account. Until we live in fully automated luxury space communism, non-state actors will continue to play a significant, perhaps even dominant, role in the economy.
Let’s look at Kelton’s analogy more closely. When I take out a car loan, the car dealership (perhaps a business with tight margins) receives funds, while banks (which either have or can call upon surplus capital) lose funds. The purchasing power of the car dealership increases, the liquidity of the bank decreases, and I enter a relationship with the bank that gives them power over me greater than their loss of liquidity. Government borrowing is the same way: surplus value (which, if invested in government bonds, was not otherwise doing anything productive) is mopped up, whereas the social power of individuals and institutions that receive government funds increases. In other words, the way that governments fund themselves has distributional consequences.
In most everyday circumstances, the government calling upon surplus private capital to fund social spending offers a net distributional benefit to the economy and society. Most government borrowing is not only equity-enhancing, but also pro-growth: capital that otherwise would be invested in offshore savings accounts or wasted on luxuries is instead used for productive purposes, or to increase aggregate supply and demand in the real economy. Kelton’s analogy only works if government spending is, in whole or in part, going directly into the pockets of the rich. There’s certainly an argument that the many trillions of dollars that governments have pumped into stock and debt markets since the start of the coronvirus pandemic meet this criterion, and there’s an argument that this kind of capital bubble can be financed through monetary creation without triggering inflation. Maybe defence spending is the same. But if you’re hoping to inject funds into the real economy (as you would be through a job guarantee, UBI or green new deal), doing so without mobilising those funds from capital surpluses is inequitable at best and inflationary at worst.
Finally, there’s the point Kelton makes - which she credits to Stiglitz - that a government’s debtors gain power over that government in a way that is deeply undemocratic. This is true. Government bonds are interest-bearing and increase private wealth in the long-run. Here’s how I put the issue in my first book, “Politics for the New Dark Age: Staying positive amidst disorder”:
“The rate of interest on government debt constitutes a long-term source of revenue for the holders of capital wealth. . . .[I]n the long term, government debt effectively contributes to an increase in private wealth. Because those who can afford to lend to governments typically have large asset holdings, government interest payments tend to accelerate the accumulation of private capital and increase inequality while depressing the incomes of those at the bottom of the socio-economic scale. Government debt, therefore, actually serves the interest of those at home and abroad who have surplus wealth to lend to governments. Whether debt should be used to enhance equality, therefore, depends on whether the net redistributive benefit of government spending outweighs the corresponding wealth transfer to elites over the lifetime of the debt. Furthermore, high levels of government debt may allow the holders of that debt to exert influence over governments and shape policies to their liking.”
In this then, Kelton and I are in agreement. We should avoid government borrowing as much as we can. But we diverge on the details. As a socialist, I’m all about tax-and-transfer - let’s get those resources out of the hands of those that hoard them and into the hands of those that need them. Kelton, who is an experienced political operator, has a different proscription. In her experience, raising taxes is politically impossible. So then we should just rely on monetary financing to get the good things we agree need to be done, done. That’s a valid theory of change. But I fear it’s been tried before, and with the disastrous political results. Kelton’s tactic is especially problematic when MMT theory relies on fine-tuning of tax rates in order to control inflation - which, if your politics is founded on a core experience of political deadlock over tax, suggests you might have a problem. In fact, this combination - expanding social welfare spending while being unable or unwilling to meaningfully redistribute social resources - lies at the root of many historical and ongoing inflation episodes, in the view of Marxian economics.
I’ll chime in with a review of Kelton’s book when I’ve had the time to digest it!