I think it’s time to talk Modern Monetary Theory (MMT) and the deficit myth, although I do not do this as an economist. There’s been a lot of relevant prompts in the media lately, from the outcome of the US election, to new announcements of furlough support packages and of quantitative easing by the Bank of England. Even the books I’ve been reading and the radio I’ve been listening to have been riddled with references to the tax payer paying for things.

And I get this. Up until a month ago, I thought in those terms: my taxes from my salary are redistributed into spending on the NHS, Defence, Welfare State, etc. The government is limited by the amount of tax it can levy from employees, employers and the self-employed. This is in-keeping with what I’ve come to understand is mainstream economic theory.

Then I got thrown a curve ball in the form of MMT: the tax payer does not pay for anything. All those blustering moments of ‘I pay for this!’ eradicated in a moment. It was a lot to try to unpack.

MMT was developed in the 1970s despite its name, yet until I read Stephanie Kelton’s ‘The Deficit Myth‘, I don’t remember hearing about it. This feels telling, because it’s the first time I’ve heard a good reason – other than tradition – that explained why the UK kept Sterling and didn’t adopt the Euro. (It may also reflect me being a child when those debates were going on.) In a nutshell: if Greece had still got the drachma, it wouldn’t have gone broke.

I’m going to start by strongly recommending Stephanie Kelton’s book – it’s just come out in June 2020 and it’s a highly accessible guide to MMT and its wider application. Her central premise is that deficits are not a bad thing. As an accountant, MMT has challenged my thinking.

MMT, as I’ve understood from my reading, focuses on the fact that governments like the UK, the USA and Japan have sovereign currencies that allow them to play by a different set of rules. A sovereign currency means that more of the currency can be created when needed for the government to meet any bills – the government cannot go broke, unlike you or I. (Critics to the theory do cite the separation between institutions like the Bank of England and the government as being overly simplified in this, and I need to do further reading on that!)

The balance to this notion is that the government cannot just spend without restraint because of inflation. If the government spends too much into the economy, it will push prices up. It is therefore important to only spend on things that will ultimately benefit the economy/economic well-being of the people, and that advancement is limited by capacity in the economy to deliver what the government wants to buy.

If I was trying to apply my understanding to the UK right now, I think it would go like this: the government can afford to spend as much as it needs to on the furlough scheme (and other measures). And, separation or not, the Bank of England waved the sovereign currency wand and supplied the needed funding through quantitative easing. The limit to the furlough scheme (and other support packages) is inflation: the government interventions to save jobs and support business need to be balanced just enough to protect the economy and sustain business without triggering excessive inflation.

MMT talks a lot about ‘real assets’ in relation to this – which is to say, government spending is only helpful and productive if the economy has the capacity to absorb the spending (without excessive inflation). A telling example of this for me is the NHS – we have a lot of criticism about it being underfunded in the media, but there is also a shortage of doctors and nurses. Whilst extra funding might help with upgrading IT, ‘fixing’ the NHS can’t be done by pouring in money alone. (I believe there is a whole separate debate about whether nurses and social care workers should be paid more for what they do.)

The ‘new skills’ agenda is a policy area that I imagine is trying to better align capacity in the economy’s workforce to the national needs. Higher unemployment rates under MMT are seen as evidence that the mix of fiscal policies aren’t getting it quite right – unemployment should be as low as it is possible to get without causing inflation. Obviously this may, and already has, created tension about what’s actually perceived as economically beneficial. We also have a problem – the care worker point above – where between pay rates and much else, some of the most important economic roles are not seen as prestigious career choices. I remember talking to one of my Portuguese volunteers about this when I did community engagement – he was baffled by the attitude to and strain put on social care workers because his experience at home was that this was a key role and the people doing it required a degree level qualification.

And so to taxes right? Why might taxes not be paying for anything? That’s because MMT doesn’t see taxes as revenue. Another plug for Stephanie Kelton’s book here on going into why this is okay – deficits are not bad or scary when it’s the government. Instead, tax is about re-balancing the economy. It is taking money back out of the economy to balance government spending (and so limit inflation), and it is taking more from individuals who are more wealthy and less likely to spend into the economy with the additional wealth they’re getting anyway.

Now as an accountant, this may well look like revenue into an account that gets spent again. But because it’s the government, spending is not dictated by tax collection – the spending happens first, every time, and future spending is not dependant on whether enough tax has been collected to pay for it. That’s why the deficit. Conceptually under MMT, government spending is just adding money into the economy and tax is deleting it back out again. It’s just a lot easier to talk about it as if the government had a household budget that needed to balance – it provides a more palatable explanation for choosing not to fund certain things. But with a sovereign currency, tax revenue is not the limit to government spending. Economic capacity and triggering excessive inflation are the limits.

I found all of this a fascinating way to think differently as a voter. Our current approach leaves more focus in elections on financial implications of taxes. In fact, Labour was routinely shredded in every interview I witnessed last election for being unable to explain how they’d fund their plans and balance the budget – was there a magic money tree? Now I have no idea if they were thinking of MMT in their approach, but what if these concepts do throw the notion of how to pay out of the window? I’m not advocating any political party here, but I wonder if I’d think differently in assessing what policies I agree with most if I wasn’t thinking that I was paying for it/would need to pay for it – if there was no longer a direct relationship.

So here are my parting reflections:

  • We’ve all hugely celebrated key workers and public servants in 2020; if we no longer think in terms of taxes paying for things, could that help shift some of the dynamic of ‘I pay your wages’ and elevate those professions?
  • As a voter, I want to focus more on what all of those policies are doing, what approach they represent and whether they’ll be effective in improving outcomes for everyone, not how they’ll be paid for.
  • If the government’s spending is intended to target gaps in the economy, such as supporting those who have-not, and tax is about capping the wealth of those who have, why not be a bit more conscious of what’s being spent where and invest in our communities? That good old: take what you need in order to give what you can.

Now although this blog post ends here, I am very aware right now that MMT is one theory and I have not studied economics and all the detailed support and criticisms for it. My application of the theory to practice might also be flawed because this is me learning. I still thought this is an idea that’s worth sharing though, and I’m encouraging others to explore because, if it is right, there’s a lot of us that all need to start considering things differently.

If you have any recommendations for me on further reading, please drop me a comment. I already have one book on my list.