If the media are to be believed, much of the debate in the coming UK general election will be about the approaches the various political parties will take to economic austerity should they form the next government. As I see it, their positions can be broadly characterised as follows: Tories – more austerity; Labour – less austerity; Lib Dems – not sure how much austerity; UKIP – who knows? – But probably austerity for foreigners.
So, it seems to be an accepted fact that austerity is needed and only the scale of it is contested. That means that the government must either spend less or tax more and as no one wants to pay more tax, spending will have to be cut. Basically, we have all been financially irresponsible and the reckoning has arrived. The country is broke. There is a massive deficit which contributes to an even bigger debt which, sorry to say must be paid back. You wouldn’t run your own household like this would you? And what is the country if not a household writ large?
Yet, do we really understand what the proposed scale of austerity, which means cuts in government spending, will actually mean? Various commentators have suggested it would result in a return to a level of state provision similar to that last seen in the 1930s. That would translate as smaller NHS, fewer police, reduced benefits for the most disadvantaged. Less public housing. More fee based services. Bigger class sizes for school children. Higher university fees. More unemployment.
What if none of that was actually true? What if there was legitimate debate to be had about how the economy actually worked and the source, purpose and function of the money we are apparently so short of? What if public expenditure deficits were neither good nor bad but merely a tool in the government’s tool kit. What if governments didn’t need to tax or borrow to raise funds? What if governments could guarantee full employment? What if this type of economic thinking was part of the mainstream debate? The debate would not just be about “crushing austerity” versus “austerity lite” but austerity versus a completely different economic approach. What if the electorate was offered a real choice?
That choice could be on offer and indeed it should be. To deny people that choice and let them vote for policies thinking that there is no alternative is a negation of democracy. I want to suggest that there is a real, robust, academically respectable alternative to the very limited economic choices our politicians currently offer us. It is called Modern Monetary Theory (MMTand has been developed over the past 20 years by Professors Bill Mitchell (University of Newcastle, New South Wales, Australia) and L. Randall Wray (University of Missouri-Kansas, US) and their respective research teams.
It is a rich, nuanced and sometimes counter-intuitive theory and is supported by substantial empirical research. It does not promise economic, far less social, Nirvana, but it does propose a different approach which puts human well-being and shared public purpose at the heart of economic policy. Private enterprise, individual initiative and personal autonomy and ambition are at the heart of its prescriptions. It is essentially about ensuring full employment so that the real resources or the economy – labour and materials – can be fully utilised to meet individual and collective needs. At the heart of the theory is the realisation that “money” in a fiat currency (which most countries have used since the end of the Bretton Woods gold standard system in 1971) is created solely by governments. Governments spend money into existence for the use of everyone else. Therefore governments are never revenue constrained, do not need to tax before they can spend and economic activity is only constrained by the level of skills people have and the type of materials they have to work with. Governments are emphatically not like households. Households, companies and individuals have to work to get money so they can spend it. That is a real constraint on them. Governments, as monopoly issuers of the currency, do not have that constraint and can spend as much as is necessary to ensure the real resources of an economy are fully employed.
Modern Monetary Theory directly and dramatically contradicts the received economic wisdom of the government, the opposition, most economic think tanks, almost all financial journalists and a majority of economists. But it is a real viable alternative to the neo-liberal economic consensus which has brought us austerity. MMT could be tried and it definitely should be talked about – vigorously, passionately and continuously. Otherwise we will accept one or other version of austerity, believing it to be the only option. When it absolutely is not.
There are many questions – what about inflation? Won’t it lead to the sort of things that happened in Zimbabwe and the Weimar Republic? What about public spending crowding out private investment? What happens to the debt we already have? What about the exchange rate? And many more. Rest assured – MMT comprehensively addresses these issues. But, of course, those and many other questions need to be asked, debated, contested and answered.
As it currently stands, the tragedy is that they won’t be. Not because people aren’t interested, but because the electorate aren’t ever told there is a robust and credible alternative to the ever present narrative of austerity. Austerity is the only game in town.
The attraction of MMT is that it clearly demonstrates that the economy is not a god to be appeased but a human invention. The economy should work for humans. It is a system to be managed. Why do our politicians fail to recognise this? The analogy of the economy as a household is simply wrong. Have you ever wondered where the Bank of England got all that money for “Quantitative Easing” (£375 billion) or where the US Fed got its QE funds ($1.7 trillion) from? Well, they just made it up because central bankers know that they can create the money from nowhere by typing into a spreadsheet and that’s about as far away from the way a normal household funds itself as you can get. MMT can tell you in detail why this is possible and it can offer a rigorous and consistent explanation of why these initiatives have only been partially successful because governments have failed to follow the most important prescriptions of the theory.
MMT is not a magic formula. In an MMT economy choices would still have to be made about what to do and when to do it. No economy has infinite, instant resources. There will still be political arguments aplenty. There will be winners and losers. The state would not wither away with the government of people being replaced by the administration of things. But wouldn’t it be better to be arguing about whether we should use our resources to build a road or a school rather than being told that, despite having unemployed construction workers and plenty of building materials, we somehow can’t afford either because we don’t have the money?
I believe that we should refuse to accept the economic debate as it is presented to us. The current discourse is far too narrow and conducted from a single perspective. There’s a saying that if you only have a hammer, every problem is a nail; unfortunately, if you think, as our politicians seem to, that the national economy is no different from a seriously indebted household then the answer will always be austerity.
As a community of scholars we should be committed to the search for what is true. We should know better than most – in fact, it is our job to know – that the popular and the obvious are often just a mask for half-truths, no truth and lazy thinking. Sometimes the unpopular – even the heretical -turns out to be true. Remember Galileo!
So, the next time a politician canvasses your vote with their favourite version of austerity, look them in the eye and ask “Is there really no alternative?” I know I will – it’s no less than my democratic duty!
Note; for those who may be interested in finding out more about MMT see Bill Mitchell’s regular blog: http://bilbo.economicoutlook.net/blog/
Also a good introductory text is:
Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems
Palgrave Macmillan (7 Aug. 2012)
Third Year PhD Student