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EARLIER this week Jonathan Reynolds, Labour’s shadow economic secretary to the Treasury, set out what he said were the reasons “why Labour doesn’t support Modern Monetary Theory” (MMT). But Jonathan’s analysis is flawed, and although he might not support MMT, increasing numbers of grassroots Labour Party members do.
In a piece he wrote for Labour List earlier this week, he incorrectly suggested that people like me think: “…countries with a sovereign currency (such as our Pound Sterling) can print as much money as they like to meet spending commitments, without any adverse consequences occurring, because the central bank can always print more money.”
But that isn’t what I am saying at all, and I haven’t come across anyone else who supports MMT saying that either. MMT merely recognises that governments can use their sovereign currencies to pay for anything they want to do. Not by simply “printing money,” but by investing to utilise any spare capacity in the economy that is available for sale in that currency, including unemployed and under-employed workers.
By harnessing public spending in that way, it would avoid the inflationary pressures that are created when spending outstrips the capacity of the economy to absorb it.
Put simply, MMT would free an incoming Labour administration from the unnecessary economic shackles that have bedevilled previous Labour governments and it would help to facilitate Labour’s progressive programme.
Jonathan supports a fiscal credibility rule (FCR) on the grounds that it would “close the deficit on day-to-day spending at the end of a rolling five-year period, and make sure government debt is lower at the end of any five-year period.”
My question is why? Such a fiscal credibility rule would limit a future Labour government’s ability to manoeuvre.
We need to make a paradigm shift to escape the stultifying economic orthodoxies that have held Britain back over the last four decades
The notion that an FCR would be flexible is moot, to say the least. Although the FCR states that it could be suspended in the event of an economic shock, the decision to do so wouldn’t be taken by the democratically accountable Chancellor of the Exchequer. In fact, the FCR explicitly states that: “Only the [Bank of England’s] Monetary Policy Committee (MPC) can make this decision.” In other words, it would be the MPC who would determine whether the conditions were met for suspension, and their threshold on when to suspend could be very different to the threshold preferred by an elected Labour government.
It is that unnecessary straitjacket that could force a future Labour government to implement unpalatable austerity policies. If that happened, it would do lasting damage to Labour’s reputation, just as Denis Healey did when he needlessly went to the IMF in 1976, which paved the way for Thatcherism.
But Jonathan seems to think that because the fiscal credibility rule was drawn up in conjunction with “Nobel Prize-winning economists… who have spent much time attacking neoliberalism” it is beyond reproach.
But remember the godfathers of neoliberalism, Friedrich Hayek and Milton Friedman, were also Nobel Prize winners in 1974 and 1976 respectively. The wrecking ball they unleashed clearly illustrates that being a Nobel laureate is no guarantee of infallibility.
Claims that MMT would precipitate capital flight and a currency crisis leading to “the UK facing conditions even worse than the austerity inflicted by the Conservatives and Lib Dems since 2010” are fanciful, scaremongering hyperbole.
Japan gives the lie to such apocalyptic proclamations with its public debt-to-GDP ratio standing at around 250 per cent, together with its decades long substantial deficits. Yet Japan has maintained interest rates and bond yields at around zero, and in some cases bond yields have gone negative, without creating the kind of economic cataclysm the MMT critics predict.
The truth is that like Japan, the Bank of England would always be able to control yields in the bond markets.
As for a currency crisis, it is of course possible that speculators could dump the pound to create difficulties for a radical Labour goverment. But that is just as likely to happen with or without the fiscal credibility rule because, as Jonathan makes clear in his article: “nobody should be in any doubt that Labour is opposed to austerity.”
There is no evidence that adopting an MMT understanding and using fiscal deficits to advance the wellbeing of the British people would hasten a run on the pound. If anything, the evidence points in the opposite direction.
Australia for example has run large fiscal deficits nearly every year for half a century and its currency experiences substantial fluctuations, but the faceless currency speculators haven’t dumped the Australian dollar. In fact, using public spending to unleash latent economic capacity at home would mitigate the impact on the workforce of any speculative currency attacks.
It betrays a fundamental misunderstanding to suggest that MMT is just about spending more money. It’s actually about much more than that. It’s about using it to create an economic virtuous circle where nobody is left behind. It’s about establishing a job guarantee scheme where everyone can obtain gainful employment with wage rates that enable full participation in society. It’s about ensuring the myriad of essential tasks that don’t get done are thoroughly addressed so that, for example, everyone with social care needs are fully supported, where our infrastructure is world class, where a radical green new deal is rolled out and much more besides.
In my opinion we need to make a paradigm shift to escape the stultifying economic orthodoxies that have held Britain back over the last four decades and inflicted particular hardship on working-class communities.
As Henry Ford is reputed to have said: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
It should therefore be Labour’s mission to give the public the tools to understand the monetary system, instead of allowing it to be used to perpetuate inequality, as happened with quantitative easing following the financial crash.
Assisting people to achieve an MMT understanding will inevitably shift the Overton window and help to usher in a new era where the public insist that the economy works for the many not the few.
That’s why we need a political rather than a fiscal credibility rule to ensure we are always focused on serving the interests of the people rather than the elites.
Chris Williamson is MP for Derby North.
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