Modern Monetary Theory; Overview Part 1

This is a multi part exposition of Modern Monetary Theory (MMT) & the closely associated topics of a Job Guarantee & deficit financing. It also along the way challenges the ideological political & economic project commonly referred to as neoliberalism. The topic may seem dry, esoteric or even boring, but its implications are profound, affecting every aspect of our lives & having far reaching consequences for the type of society we live in. As a kiwi I will be writing primarily from a New Zealand perspective but the monetary systems & principles apply all over the western world, especially the other Anglo Saxon countries which also share similar political institutions. However there no academic proponents for MMT that I am aware of in New Zealand so I am drawing heavily on foreign sources.

In the world of politics & economics, one of the most common refrains is “we cant afford it”. Intuitively this seems logical. Any government has a “Budget” from which it plans spending on a whole range of services from defence to social welfare. We think of our own personal situation or the company we own or work for and yes indeed, funds are not unlimited. We can only spend what we earn/save or borrow. Why would a sovereign state be any different? It can tax & it can borrow. End of story. MMT turns this and many other economic beliefs on its head. Its description of how the monetary system actually works challenges the constantly repeated mantras that have underpinned the economic philosophy of the last 5 decades.

Australian Professor Bill Mitchell is one of the best known proponents of MMT but it has a long history known as Chartalism and has also been advocated by a number of US academics in the last two decades with Stephanie Kelton being one of Bernie Sanders economic advisors during his presidential campaign. Mitchell suggests we regard it as a lens through which to view the current system, which is in effect a MMT system, but obfuscated by neoliberal economic & political agendas. At its core is the belief that a sovereign nation issuing its own currency, freely floating on foreign exchange markets, can never become insolvent & always pay for whatever it wants denominated in that currency, including labour. Taxes and government bond sales are regarded primarily as liquidity tools to control inflation & maintain the Reserve Bank’s interest rate/inflation targets. Neither taxes nor debt are required for the government to spend on current services or indeed to fund future spending like superannuation. As long as a country has under utilised resources it can spend freely but prudently up until the point that bottlenecks occur, without generating inflation.

What this means is that government spending on health, education, housing, welfare etc is constrained not by a limited supply of money but by availability of resources and political choices. To say the government cannot afford something is at best misleading, at worst a lie. Politicians, economists & other protagonists are free to make an ideological or moral argument for why spending in certain sectors should be constrained but don’t use the lack of money as one of them.

Nor, should it be made clear, do MMT proponents call for unrestrained spending. They recognise inflation as stemming from too much money chasing too few resources. But with labour in particular, believe in a government Job Guarantee at minimum wage whereby the government deficit spends right up the point where every person who wants a job is employed. How those people are deployed and whatever other resources are utilised is again a political issue, not a fiscal one.

To give an example of how this might change things, look at New Zealand’s housing crisis. There are three parts to it. The first is affordability, particularly for the young and low income. The second is resources: land, materials, labour. The third is political: entrenched interests in maintaining the status quo.

A government operating on MMT principles could address affordability easily. It could simply direct the RBNZ to provide low or zero interest loans to low income buyers. It could also tender for very modest fixed price designs from the private sector and pay them again with RB money via an existing or new government department. If these were not forthcoming it could build them itself, partially or fully utilising labour from a Job Guarantee (as NGO’s like Habitat for Humanity show, unskilled labour supervised by skilled labour can build uncomplicated housing) The important thing to remember is that all this has cost the “tax payer” nothing. No taxes are used, no borrowing is needed.

This flows into the second. An MMT government would assess the availability of human & physical resources to accomplish the task without creating inflationary bottlenecks. New Zealand governments have at their disposal a sledgehammer called the Public Works Act which allows the Finance Minister wide powers to compulsorily buy land (as it does for road projects) and allocate finance and resources to critical projects. If the raw materials were available it could finance and construct, or do so in conjunction with private sector, building material production lines. It could also fast track and if necessary override local body consents that make up such a large part of building costs, allocating the appropriate human resources to achieve this. It could also easily subsume the cost of development of rural fringe land to help affordability, again with the caveat that the resources are available. No doubt the argument would be made that this government spending crowds out more efficient private sector activity. In housing’s case it is creating activity for the private sector that currently does not exist as well as utilising human resources that are un/under employed and a pipeline of work and certainty for many years. As long as there are sufficient resources made available for both government funded and private sector activity, there will be no inflation. It is filling a void that is there because market forces have failed miserably.

This brings us to the third factor; politics. Given an MMT government has the unlimited financial resources of the RBNZ behind it and the draconian powers of the Public Works Act, the only true obstacle is political. No excuses of money. Political parties would be forced to state their support or opposition based on ideology. It may well be the case that a political party like National rejects the idea because their constituency contains many existing home owners who are afraid of the effects on their property values of mass produced low income housing and this overrides any concern for low income people. (this could be circumvented with a separate market for these houses with low income/first home buyer only covenants) They then need to be honest in this declaration not hide behind bogus arguments about lack of money or taxes. Ditto if they have a philosophical objection to government intervention like the ACT Party.

Historically NZ has been down this road before. The First Labour Government got money direct from the RBNZ to build state houses in the late 1930’s. It worked closely with a few private sector players like Fletchers to build low income subdivisions. It built joinery factories to supply standardised components as the right price and volume. It utilised a combination of unemployed labour and skilled migrant labour to avoid bottlenecks. There is absolutely no reason why it cannot do this again. The current Labour coalition government is on the right track with Kiwibuild but critically it is not taking enough steps to make them affordable to the low income/first home buyer and it is not using its full financial capabilities in an MMT sense.

MMT blows away many myths that stop governments from using all the tools at its disposal to dramatically improve the welfare of vast numbers of it citizens. It removes the ideological and fiscal straightjacket of orthodox neoliberal practice that we currently labour under.

For an illuminating and no punches talk by Bill Mitchell in New Zealand last year please view this link




One comment

  1. […] the state has the logistical and financial means to do this. It needs to keep on spending until every last person who wants a job, has one, be it in […]

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