The pandemic-induced disruption of the global economy of neoliberal capitalism has strengthened the appeal of Modern Monetary Theory (MMT). The fundamental idea of this policy prescription is that state spending, a national budget deficit, can be used to combat recession. Raising overall demand in a given country will facilitate a recovery insofar as there is the disposable productive capacity (unemployed workers, stocks of raw materials, machines working below capacity). These unused resources are mobilized by the additional purchasing power created by the budget deficit.
While governments generally fund their deficit spending by selling interest-bearing bonds and owing their debts to bondholders, MMT suggest that the central bank buy up these bonds with money that it has the power to create. In this way, the central bank becomes the one to whom the government owes money. Since no central bank has any need to insist on a government ever paying off a debt created with money it simply printed, the government debt to the central bank is of no real significance. Central bank money creation does not actually involve “printing money”; it involves an expansion of the figures in the electronically-recorded central bank balance sheet, and a corresponding growth in the bank account balances of the government.
A number of criticisms can be made of MMT. First, it is inapplicable to the poorer countries. MMT does not convincingly address the constraints upon fiscal deficit imposed by the financial markets, current account imbalances and exchange rates, thus making it mostly inapplicable in the context of a financially globalized, open economy. As Neville Spencer writes: “Printing money in countries with less favored currencies risks those currencies being dumped in preference to what are seen as more reliable currencies. This can potentially put the local currency into a hyperinflationary spiral. There are also governments that don’t have their own currency, such as members of the Eurozone. For them, MMT simply isn’t an option.”
Monetarily non-sovereign countries have open capital markets which are subject to the inflows and outflows of globally mobile “hot money” - financial capital that travels freely and quickly around the world looking to earn the best rate of return or to exploit interest rate differentials. Surges in hot money are associated with increased liabilities on the balance sheets of local borrowers, instability in exchange rates, and difficulties managing liquidity conditions. Such inflows can often lead to overvalued exchange rates, current account deficits, and rapid capital outflows, leaving local financial institutions and businesses with increasing debts that are hard to service and repay.
Within the confines of capitalism, a strong assertion of monetary independence by poorer countries would alarm the financial oligarchy, leading to an economic crisis. Capitalists would either move their money out of the country or carry out a strike of capital; the currency would become worthless, leading to rampant inflation - heavily impacting the real wages of workers. To bring an end to this turmoil, the government would be forced to hike up interest rates in order to attract investors, leading to a strong restriction on investments of capital in the productive economy. Now, most of the money the state would collect through the bonds would be used to repay the interest rather than to fund social welfare programs or public infrastructure. While proving to be catastrophic for the working class, this profit scheme would enrich bankers.
Even in the limited context of the US, which enjoys a great amount of latitude to pursue fiscally expansionary policies, thanks to the special status enjoyed by the dollar (“as good as gold”), there are institutional constraints on monetization of fiscal deficits imposed through the autonomy granted to the Federal Reserve vis-à-vis the Treasury. Second, while a sovereign state can generate simple fiat money in the domestic economy, this power is structurally circumscribed by the realities of production and exchange. While the state can create money, it cannot guarantee that this money has any value. Without a productive economy behind it, money is meaningless. Money, as the universal equivalent of the values of the commodities, is the counter-value of quantities of socially necessary labour.
This means that real value is created in production, as a result of the application of labour-power. As Fred Paterson - a popular Australian communist - succinctly put it:
“Some people think that all you have to do to solve the economic and money problem is to print money and keep on printing it, and everything will be satisfactory. I, for one, as a member of the Communist Party, suggest that is absurd…Everyone knows that no matter how much money you issue by the printing press you could not produce an extra gun or an extra tank, or an extra plane, or produce an extra bushel of wheat or maize, unless you have available resources of manpower and materials…On the basis of production we get the amount of goods and services at our disposal. Once we have the goods and services there is the question of the creation and issue of money: therefore, that is a secondary matter.”
The money that a state creates, therefore, will only be of any worth in so far as it reflects the value that is in circulation in the economy, in the form of the production and exchange of commodities. Where this is not the case, destabilizing inflation will set in. In other words, money-financed deficit spending is at best a temporary free lunch. Once the economy reaches full employment, taxes become necessary to restrain aggregate demand and prevent inflation. Even MMT proponents acknowledge this. In the words of Stephanie Kelton: “Can we just print our way to prosperity? Absolutely not! MMT is not a free lunch. There are very real limits, and failing to identify - and respect - those limits could bring great harm. MMT is about distinguishing the real limits from the self-imposed constraints that we have the power to change.”
Insofar government programs ultimately have to be paid for via taxes, an appropriate form of class politics needs to be developed for taxation. Tax outcomes are ultimately shaped by class conflict and depend on power relations, which in turn are determined by the economic mechanics of capitalism. Instead of paying adequate attention to these issues, prominent representatives of MMT spend their time convincing the rich that they don’t need to pay taxes. In 2019, Kelton wrote: “My wealthy friend doesn’t want to pay for your child care. He doesn’t want to help pay off your student loans. And he sure as heck doesn’t want to shell out the big bucks for a multi-trillion-dollar Green New Deal…consider what happens if we simply invest in programs to benefit the non-rich…without treating the super-rich as our piggy bank.”
Kelton’s pro-rich proclivity raises the following question: who must give up portions of their incomes so that we can meet collective needs? If income is expropriated from the working masses of taxpayers, the efficacy of deficit-financed government spending would decline as the propensity to consume is much higher for those with lower incomes. To avoid the negative effects of a pattern of distribution skewed toward top earners, the government can tax companies. Capitalists will primarily react to it by postponing investment. Furthermore, disposable wages can drop even if the government taxes firms, since firms can offload taxes onto prices, thus negatively affecting real wages. Hence, it is the state’s dependence on the private sector which erodes its economic power. As Costas Lapavistas and Nicolas Aguilla argue:
“[T]he state does not produce output and value (nationalised industries aside) and merely claims those of others. It is true…that the state can boost aggregate demand through its own expenditures and thus support, and even expand, the overall production of output and value. Yet, the creation of output and value also follows its own internal logic summed up by the profits of private producers, which depend on far more than aggregate demand…capitalism is about accumulation through the extraction of surplus-value in production. The state can protect and support accumulation by boosting aggregate demand but cannot direct accumulation without radical supply reforms”.
If the government increases the workers’ wages to counteract price increases, a cost-push inflationary spiral would be initiated, with money wages and prices chasing one another; this would inevitably happen because any increase in the “relative wage” - defined by Rosa Luxemburg as “the share that the worker’s wage makes up out of the total product of his labor” - cuts into the capitalist’s share of profits. If deficit-driven inflation is to be decelerated through the taxation of the bourgeoisie, then pricing of products cannot be left to capitalist enterprises (for that would cause a wage-price spiral). There must then be state intervention in the form of an incomes and prices policy. The state in such an economy must then not only carry out demand management; it must also engage in distribution management.
As is evident, the maintenance of monetary financing and an economy at near-full employment requires increasing intervention by the state which undermines the social legitimacy of the capitalist system and which therefore is impossible to sustain within the barriers of the capitalist system. When the unutilized capacity has been eliminated, governments wanting to sustain a people-centered economy have no other choice than to resolve such problems through radical measures, such as prices and incomes policies, nationalizations, workers’ management of factories etc. As Michal Kalecki said, if capitalism cannot maintain full employment, “it will show itself as an outmoded system which must be scrapped”.
It is important to note that the employment policies envisioned by MMT - employer of last resort (ELR) - are not up to the mark. According to the ELR scheme, the government should “buy up” any excess stock of workers by offering employment to “surplus” labour during downturns, so that the government effectively acts as an employer of last resort. Government-employed “stocks” of workers are then released to the private sector on demand, whenever the economy picks up. The buffer stock employment wage must be less that the private sector employment wage in order to avoid incentivizing buffer stock employment and thus effectively converting the public sector into an employer of first resort.
Through the decoupling of the hiring process from productivity and skill, ELR creates a population that is distinct from both public and private sector workers. Whereas public and private sector workers face a competitive job market and need to match their skills to a relevant job, ELR workers get hired on-the-spot to do work that is by its nature temporary and low-skill. The poor nature of these jobs means that the ELR population is ready and waiting to be hired by capitalists. In this way, a “reserve army of the employed” is created, which is made up of workers who, occupying a position in the working class separate from those who are employed in the private and public sector, constitute a threat to the traditionally employed.
As David Sligar states, “compared to the regular unemployed, participants in a job guarantee are more likely to be the sort of compliant job-ready eager beavers that are attractive to employers. Thus they pose a greater threat to those in employment than the unemployed when wage bargaining is underway.” In addition, the job guarantee pay rate is fixed - participants have no right to collectively bargain in the manner of conventional employees - so its effect on labour markets is same as an unemployment benefit. Summarizing these contradictions, Hugh Sturgess writes of an “impossible quadrilateral” which “expects the JG [job guarantee] to eliminate involuntary unemployment through jobs that are accessible to all regardless of skill, but are of social value, yet not currently done by the private or public sectors, and can be started and stopped at any time”.
To conclude, MMT remains hesitant to take the decision-making on investment and jobs out of the hands of the capitalist sector. As long as the bulk of investment and employment remains under the control of capitalism, government expenditure can’t be raised permanently since deficit-financed spending ultimately meets its limits in the contradictions at work in the sphere of private production. In the long run, the concentrated dominance of big business and private monopolies needs to be broken down if the effects of monetary financing are to be sustainably continued even after the exhaustion of unused resources. In short, MMT provides an anti-neoliberal opening but does not reach the socialist conclusion that a radical reconstitution of the system is not only desirable but necessary. As Sam Gindin says:
“At bottom, how societies determine the allocation of their labour and resources - who is in charge, what the priorities are, who gets what - rests on considerations of social power and corresponding values/priorities. Transforming how this is done is conditional on developing and organizing popular support for challenging the private power of banks and corporations over our lives and with this, accepting the risks this entails. Controlling the money presses is certainly an element in this, but hardly the core challenge.”
Yanis Iqbal is an independent researcher and freelance writer based in Aligarh, India and can be contacted at firstname.lastname@example.org. His articles have been published in the USA, UK, Canada, Australia, New Zealand, India and several countries of Latin America.