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How governments learned to stop worrying and love debt. At least for now.

MODERN Monetary Theory sounds like a pretty boring module in a university economics course. In fact, it is becoming the leading economic theory on the left and has largely replaced Marxism for this generation of radicals.

Advocates include Democrat Congresswoman Alexandria Ocasio-Cortez, the economist Stephanie Kelton and the Labour-supporting tax specialist Professor Richard Murphy. It may be that the Chancellor, Rishi Sunak, has also become a devotee of this theory, which says governments can spend public money without having to worry about debt.

He is in the hole for approaching £300 billion because of Covid and has seen the UK debt pile rise to nearly £2 trillion. He borrowed a record £62bn in April alone. But he doesn’t sound all that worried and will be adding to it in his forthcoming financial statement.

Modern monetarists believe that the traditional view of government finance – that it has to raise tax revenue to pay for services like the NHS – is wrong. Governments can spend on anything they want by printing money or borrowing. Just think of a number, print it and you’re off to the races. Rodger Malcolm Mitchell’s MMT 2005 book “Free Money” sums it up.

So what if Britain’s debt has rocketed to more than 100 per cent of GDP? Doesn’t matter. Japan has public debt of 250% of GDP and seems to be surviving. Governments can run big deficits indefinitely so long as the debts aren’t called in. Modern Monetary Theory has many advocates in the Scottish independence movement – though Nicola Sturgeon is leery of it. Let Yessers, say that an independent Scotland shouldn’t bother about debt either, so long as it has control of its currency, because it can just print Scottish pounds to pay for it.

It sounds crazy, like Zimbabwean economics. And ultimately Modern Monetary Theory is a reductio ad absurdam. Fiat money has no intrinsic value so if you just increase the volume of it, without generating equivalent wealth, then its value will tend to reduce to nothing – as in Weimar Germany where people needed wheelbarrows to collect wages.

However, there is method to MMT madness. It contains an important kernel of truth: that government spending, given low inflation, does not need to be directly financed by tax revenue. The traditional Thatcherite view, that you can only spend what you can afford, is back to front. If the state spends to get the economy moving in a recession the debt effectively finances itself by generating future taxation from the people newly employed.

This was what the British economist John Maynard Keynes – really the grandfather of MMT – argued during the Great Depression. If governments spend money on, say, arms production the people employed in these factories go on to pay for goods and services from elsewhere in the private sector – food, clothing, housing and so on. This creates more private sector jobs through the so-called “multiplier effect”.

Thus, a pound spent by the government generates more pounds in future by stimulating economic activity. So long as there is less than full employment, say modern day Keynesians, governments should spend whatever it takes to get people into work and get the economy running at full capacity. They could even pay people to dig holes and fill them in again.

Yes, it’s a kind of free lunch argument and has been much criticised by conventional economists – including the European Central Bank – who believe excessive government spending and money printing debases the currency, distorts the market and leads to financial collapse, Greek style. Certainly, if money is no object, there will be no reason to subject government spending programmes to any kind of scrutiny. Environmentalists don’t like the emphasis on growth in Modern Monetary Theory, but that’s another kettle of contradictions.

What has made Keynsianism, or MMT, so plausible recently is that many central banks have been printing money like there’s no tomorrow since 2010 and so far prices have remained stable and the roof has not fallen in. In the UK, the Bank of England has created an astonishing £645bn through Quantitative Easing – buying government debt. Two weeks ago announced another £150bn of funny money.

Conservatives like Boris Johnson, hardly radical leftists, are increasingly seeing debt as, if not a good thing in itself, at any rate nothing to worry about. In order to keep his “red wall” gains intact, Mr Johnson has promised to “build, build, build”. Instead of ordering a period of austerity and spending restraint to repaid the government finances following Covid-19, the Prime Minister fully intends to increase spending on everything from defence to climate change.

Right now, interest rates are near zero, so there seems little reason to forgo spending. And that’s precisely what Mr Sunak has been doing. In sheer volume terms he has spent more rapidly than any government in British history, mostly paying for furloughed employees. This Conservative government is paying half the adult population, if you take into account public sector workers and benefit claimants.

Paying private sector wages goes beyond what Modern Monetary Theorists advocate. It is more in the style of old-fashioned Marxists who wanted the state to take over the economy entirely. MMTers don’t want to nationalise the means of production. They aren’t really interested in workers control or punitive taxation. Instead of revolution, they just want to spend, spend, spend.

Of course, common sense says public spending can’t increase indefinitely. What about the interest on government debt? Surely that has to be paid. The UK currently spends £39bn a year on debt interest – more than on defence.

Modern monetarists like Richard Murphy say the government should simply print more money to pay this, which it can do up to a point. However most government debt is owned by private pension funds and institutional investors or by foreign banks and financiers. In the long term, if the government paid its debts in worthless printed pounds, they’d soon stop lending.

“But in the long run”, said Keynes, “we’re all dead.” The Bank of England has printed hundreds of billions in QE since 2010 and financiers are still falling over themselves to lend. Indeed, they’re effectively lending at zero interest and getting nothing for their money. There is even talk in Bank of England circles of introducing negative interest rates – that means paying people to borrow from you

Mr Sunak will promise that Britain’s debts will be paid – he has to say that because free money sounds irresponsible. But he is likely to keep borrowing and spending because it is politically the sensible thing to do avert a Covid depression.

People on the left are puzzled by this. Why is a Tory politician adopting the economics of Bernie Sanders? Well, it might be worth mentioning that one of the main founders of MMT was a hedge fund manager and tax exile, Warren Mosler, in the 1990s. MMT is not a particularly left wing idea, nor is public debt.

The former Republican Vice President, Dick Cheney, said in 2001 that “deficits don’t matter”. Republican Presidents like Ronald Reagan and George Bush massively increased US public debt. It has been Democrats like Bill Clinton who have sweated to reduce deficits. More fool them, say advocates of Modern Monetary Theory.

Donald Trump ramped up the highest debt pile in US government in US history, at a staggering $27 trillion. Strangely, this makes the Orange Man the unlikely king of Modern Monetarism. Once he is ousted from the White House, his successor, Joe Biden, sounds like he intends to keep the printing presses going to boost growth and pay for retooling America for the post-carbon age.

We seem to be witnessing a generational change, a paradigm shift, away from the old restrictive monetary dogmas of balanced public accounting and into a new dogma of unlimited accounting. Debt has been growing steadily since the early 2000s, and shows every sign of exploding in the wake of the pandemic. We can only hope they know what they’re doing


A version of this article appeared in the Herald.

About @iainmacwhirter

I'm a columnist for the Herald. Author of "Road to Referendum" and "Disunited Kingdom". Was a BBC TV and radio presenter for 25 years - "Westminster Live" and "Holyrood Live" mainly. Spent time as columnist for The Observer, Guardian, New Statesman. Former Rector of Edinburgh University. Live in Edinburgh and spend a lot of time in the French Pyrenees. Will that do?


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