In a recent Treasury video, Rishi Sunak declared: “The government is not some entity that has its own money, the government only has money because people pay taxes and we borrow money.”
To the US economist and former Bernie Sanders adviser Stephanie Kelton, who is one of the advocates of modern monetary theory (MMT), the Chancellor was exactly wrong. As she writes in her 2020 book The Deficit Myth, rather than taxing or borrowing to fund spending, governments spend money first and only then choose to tax or borrow.
Is this the “magic money tree” that, in 2017, Theresa May told a nurse did not exist? “If ‘there is no magic money tree’ is meant to be shorthand for ‘we can’t just come up with the money when we want to fund something’, well, then that’s wrong,” Kelton, 51, told me when we spoke by video call. “A sovereign currency-issuing government can always come up with the money to fund its priorities. There’s nothing magic about it; it’s just what it means to be a sovereign currency issuer.”
The popularity of MMT, whose ideas can be traced back to the early 20th century, surged in the aftermath of the 2008 financial crisis as governments spent to save national economies. The theory now enjoys an evangelical online following as well as an array of detractors from the left and right (James Meadway, a former economic adviser to John McDonnell, has accused MMT of “peddling simplistic monetary solutions to complex problems of political power”).
Kelton’s work is being studied at Westminster, including by intellectually curious Conservative MPs such as Steve Baker. In her view, the Covid-19 crisis is the ultimate proof of the theory’s validity. “What did we [the US] do? We spent trillions of dollars [to save the economy]. So do I feel vindicated? Hell yeah, I feel vindicated. It’s been apparent to anyone paying attention who has been getting this stuff right.”
Kelton, who served as chief economist to the Democrats on the Senate Budget Committee between 2015 and 2016 and is now a professor at Stony Brook University, New York, acknowledges constraints still exist. Countries that do not issue their own currencies, such as Greece and other eurozone members, lack the degree of freedom enjoyed by the US, the UK, Japan and others. For those with independent central banks, the true restriction, Kelton argues, is not the size of the budget deficit, but inflation.
Conservative critics of MMT, such as the former governor of the Bank of England Mervyn King, frequently point to the dystopian fate of economies such as Zimbabwe and Venezuela, where price surges over the past decade have rendered money worthless. But, once the illusion of significant budgetary constraints has been dispelled, how would governments resist the urge to splurge?
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“I’m giving you a framework that emphasises inflation risk, no other school of thought does that – Keynesian, neo-Keynesian, new classical, Austrian, Marxist,” Kelton replied. “MMT’s overriding concern is inflation risk, but your questions are always, ‘What happens when inflation accelerates out of control?’”
MMT proponents suggest governments could levy taxes to dampen inflation. But, at a time of price rises, would politicians be prepared to demand the public pay more? “I don’t think it’s correct to say that Congress wouldn’t act if inflation is as bad as your questions suggest… and something is hurting the nation and the people are upset about it.”
This could be dismissed as wishful thinking, but the inflationary spiral that some economists have warned of since 2008 has never arrived. I asked Kelton whether she believes Donald Trump has changed the terms of economic debate. “Absolutely. When he passed the $1.9trn tax cuts in 2018, which everybody knew were going to increase the deficit, I saw Senator Sanders, and he said to me, ‘Is this you? Did you do this?’ And I replied, ‘It’s a good thing. It’s a good thing in that it’s going to show you can make use of the budget when you have power to carry out your agenda.’”
Kelton may have served as an adviser to Sanders during both his presidential campaigns in 2016 and 2020, but she is encouraged by Joe Biden and believes he has learned from Barack Obama’s fiscal hesitancy. “He made the proposal for the $1.9trn stimulus programme unapologetically, saying that we have the ability to deficit spend. This administration understands that they have to show material improvements in people’s lives in the first two years because the margin in the Senate is already so slim.”
Confronting what the Swedish academic Andreas Malm calls an “age of chronic emergency”, Kelton believes Biden understands that “these intersecting crises aren’t going to be dealt with through incremental policy – you have to go big in this moment”. Before Covid-19, she noted, 40 per cent of US adults did not have $400 saved to cover an emergency expense. At a time when Sunak still speaks of a “sacred duty” to “balance the books” – despite the moral and economic case for government spending – MMT’s political appeal is likely to endure.
“So much of what I hope for is a better, more productive debate,” Kelton said. “We’re still going to have differences, but at least our debate won’t be bogged down by this threat of running out of money or bankrupting our children and grandchildren, all that stuff.”
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This article appears in the 17 Feb 2021 issue of the New Statesman, War against truth