Modern Monetary Theory (MMT) continues to make inroads into the mainstream discourse with the appearance of an article by Youssef El-Gingihy in The Independent Online. The article features MMT in connection with the new book by Bill Mitchell and Thomas Fazi, Reclaiming the State. At its recent rate of dissemination, MMT may transition from heterodox to mainstream ahead of expectations.
Although the finer points of MMT can get quite involved, the most basic takeaway is very simple. For societies with currency-issuing governments:
If something can be done, it is “affordable”.
If we have access to the raw materials, the labor power, the skills, the equipment and the facilities needed to produce something, then we can afford to produce it. The cost of doing so is not financial. The cost is a real cost: the exertion of human effort and know-how, the wear and tear on facilities and equipment, and the depletion of natural resources.
On one level, it is bizarre that this basic takeaway of MMT is not already mainstream. If the idea is heterodox, it is only because we are currently living in a very topsy-turvy world, in which up is presented to us as down, black as white, with everything reversed. In reality, it should be much harder to believe the opposite: that what we are capable of is impossible.
A kind of collective dementia has developed, so much so that, as the linked article observes, MMT initially strikes many of us as:
one of those Alice in Wonderland, down the wormhole kind of concepts that neutralises every received wisdom … prepare to be blown away and forget what you think you knew about money.
But what did most of us think we knew about money before encountering MMT or related ideas? Chances are, money seemed confusing, its basic mechanics hazy. In the mental fog, all kinds of superstition could take hold. Fantasies of a currency somehow arising spontaneously out of nature.
It is obvious, once freed from the mental fog, that somebody has to create the currency. It does not grow in the ground or answer to the cycles of the moon. For a currency to exist, it must be issued by its issuer.
It is so obvious, the concept must be heterodox.
But perhaps this will not be the case for much longer. We may be witnessing the early stages of the obvious going mainstream.
From the article:
It therefore appears that Theresa May’s oft-repeated refrain attacking Corbyn on the grounds that there is no such thing as a magic money tree is not exactly true. So if money can basically be created with the press of a button, then suddenly our world appears to be (pace Panglossian disciples) the craziest of all possible worlds.
It is not crazy, of course. It just seems that way to minds conditioned by forty years of neoliberal thinking. The craziest of all possible worlds would be one in which a currency did not originate from its issuer.
In effect, the usual dictum of “tax and spend” is inverted to “spend and tax” with spending stimulating jobs and growth, which can later be taxed. … Taxation is not therefore a way of raising revenue …
Since taxes are settled only in the government’s currency, the settlement of taxes cannot occur before the currency has been issued. Something cannot be destroyed (taxed) before it has been created (issued). Accordingly, taxes cannot be a revenue source for a currency-issuing government. Government spending (or lending) creates the currency that is needed for taxes to be paid.
This in no way implies a reduced significance for taxes. To the contrary, taxes are crucial.
At the most fundamental level, imposition of a tax that can only finally be settled in the currency ensures a willingness, within the community, to accept the currency in exchange for goods and services. This is what makes it possible for government to hire staff or purchase goods and services with its own currency.
The effect is most obvious in the case of taxes unrelated to income. For example, a simple head tax of a fixed amount would require everybody to obtain the currency in order to pay the tax.
But the effect also works when taxes are imposed on income. This is because, for tax purposes, income is assessed in terms of the government’s currency. Income received by members of the community will be assessed in the currency and, above a certain threshold, be subject to tax. Since most people need an income to survive, or depend upon somebody who has an income, the imposition of an income tax ensures demand for the currency in much the same way as the imposition of other taxes.
Taxes also play an important role in moderating the overall level of spending in the economy and can be used to influence behavior.
At this point, you might understandably be asking why on earth we do not just spend our way out of the current mess. And while we are at it – give the NHS more money, shelter the homeless and feed the poor of the world. This is where we come up against the ideological edifice of neoliberalism.
Yes, the obstacle is political, partly due to a collective failure to comprehend the capacities of a currency issuer.
It is not spending, as such, that gets us out of our mess. It is the actual doing of what needs to be done that gets us out of the mess. Running the NHS, sheltering the homeless and feeding the poor are achieved through the employment of appropriately trained staff and use of real resources. But, in a monetary economy, at least in the monetized sectors, the doing fails to occur in the absence of an expenditure of money. A refusal to spend prevents the doing. It is not that the doing is impossible. It can be done, provided the necessary workers and resources are available, as soon as the expenditure is made.
Public spending cannot be unlimited and must be commensurate to the capacity of the economy…
The limit to public spending is the amount of useful things we are capable of doing with the resources we have. Spending beyond that point – the point where we are fully employing our productive capabilities – would be useless, because it would add nothing to production, and would also create excessive inflationary pressure. This is true of any spending, whether public or private. But inside this real constraint, there are no limits other than our capacity for clutching defeat from the jaws of victory (political obstacles).
In other words, a currency-issuing government can always purchase what is available for sale in its own currency. It may or may not be in a position to purchase goods and services available in some other currency. And, of course, things that are currently impossible to supply cannot be purchased in any currency.
But in any case, if we can do it, it is “affordable”.