An end to austerity – Modern Monetary Theory

The Deficit Myth, book review

When Margaret Thatcher claimed that the UK’s economy could be compared with personal finance she tricked the public into believing an economic lie that snared politics for over a decade.

To suggest, as she did, that an autonomous economy, such as the UK’s, was just a bigger version of a simple bookkeeping exercise of money IN balancing money OUT was an epic lie.

What made it worse was that Labour timidly accepted it and went along with it making little attempt to disabuse the public.

The lie suited the Tories and the Blair/Brown regimes because it strangled government spending and left the field wide open for private enterprise to take over traditional government services such as health, water, power, education even prisons.

George Osborne took the Thatcher lie a stage further. What the government could not flog off it starved of cash making the private market so much more attractive to those who could pay the price, leaving a government rump for the ‘undeserving’ poor and desperate.

Yet a second’s thought it becomes clear that the housekeeping theory is bunkum. When a government wants to spend money it does.

Boris Johnson has caught on and abandoned austerity, the only game in town, without a comment or apology to the thousands it made to suffer. 

The only person casting a jaundiced eye over the current splurge is – Labour! Not because too much is going to the undeserving rich, which it is,  but that under Sir Keir Starmer the shadow front bench does not know if it is for or against increasing the taxes for the rich.

Rachel Reeve MP, promised in 2013 to slash benefits and be tougher on the unemployed than the Tories. She’s now back in the shadow cabinet!

But there is an alternative to austerity economics in Modern Monetary Theory, a long time favourite of former Labour MP Chris Williamson.

MMT is no Marxist madness but proposed by several mainstream economists including Professor Stephanie Kelton who has added The Deficit Myth to the growing body of work promoting the heretical new thinking.

Without government spending the country (the world) economy is in danger of total meltdown, with mass unemployment and bankruptcies.

It ought to be obvious that fiscal deficits, in and of themselves, are neither good nor bad. They should be used to save jobs and keep inflation low.

Yet the message from the chancellor, the government’s economic watchdog and thinktanks is that the current level of spending is unsustainable and needs to be brought down by raising tax revenues or reducing spending, or doing both.

This is not an economic argument but a political one. The public is being made anxious about the “debt” so that this fear can be weaponised.

By persuading voters that something must be done about national spending, politicians hope the public will once again fall for the austerity con that worked for Osborne, where the rich got disgustingly richer, the middle class became poorer and the poor became destitute, and blamed for it into the bargain!

The prospect of the state going bankrupt may help popularise tax rises. Taxes may reduce spending power and can help curb excessive accumulations of wealth.

But taxes should not be increased just to appear fiscally responsible.

The “austerian” argument has been comprehensively debunked in The Deficit Myth.

Prof Kelton correctly says governments like the US and UK should not be compared to households that can run out of money. This has been borne out by the Covid-19 crisis, where the state has spent astronomical sums without breaking a sweat.

As a Modern Monetarist she argues that there is no financial constraint on the government’s ability to spend because, through the Bank of England, it supplies its own currency and controls the rate at which the country borrows.

When the government runs up a debt, it is promising to pay back its creditors with money it can print at a rate it determines.

Throughout the coronavirus crisis, the state has not been borrowing from the private sector, but it has been digitally printing the money.

Critics argue that if there is no budget constraint it will make it impossible to manage an economy sensibly. People will start demanding all sorts of things, such as a properly funded NHS or cash to tackle climate change.

But shouldn’t we move from obsessing about budget outcomes and focus on human ones?

This is no free lunch. There are real limits to what the government can (and should) do. If it tries to spend too much in an economy that’s already running at full tilt, inflation will accelerate. The boundary for spending by a state is determined by the level of technological advance and resources available.

Rather than educate the public, politicians continue to serve up deficit hysteria. Economics too often resembles religion rather than science. Much of what counts as economic theory is doctrine, supported by a belief, not evidence.

Prof Kelton’s book does not peer deeply at how an economy expands capacity. But she has succeeded in instigating a round of heretical questioning politicians do not want to be asked.