Why Labour doesn’t support Modern Monetary Theory

05/04/2020

By Jonathan Reynolds
June 4, 2019

If you were asked what the Daily Telegraph and the Morning Star had in common recently, you’d probably struggle to find an answer. But the response is that both have published inaccurate articles about Labour’s economic policy, attacking us from both sides of a flawed argument. Whilst recognising articles on monetary and fiscal policy don’t tend to produce much internet traffic, I’d appreciate a few minutes of your time to set the record straight.

The subject matter of both the Telegraph and Morning Star articles was Modern Monetary Theory (MMT), a term describing a fairly wide body of theory. It is widely understood to hold that 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.

In the Telegraph, Antony Mueller claimed Labour is in favour of this thinking: we aren’t. In the Morning Star, my colleague Chris Williamson MP claimed Labour’s failure to support it is a “throwback to neoliberalism”. Other proponents of MMT have claimed Labour (and indeed anyone else who disagrees) is in fact committed to austerity because we do not support it. This is simply untrue and, in my view, MMT is both deeply flawed and a dangerous distraction for people on the left.

Nobody should be in any doubt that Labour is opposed to austerity. We have set out an agenda to end spending cuts, increase day-to-day spending on public services by nearly £50bn (with fully costed revenue rises to pay for this). We have produced detailed work on a National Investment Bank and a transformational £250bn programme of public investment to address the UK’s poor productivity and regional inequality. Our proposals to bring public utilities like the water industry into public ownership are not only popular with the public, they have also found support in the pages of the Financial Times. Claiming John McDonnell, Jeremy Corbyn or anyone else in the Labour Party are closet neoliberals is, with respect, absurd.

All of Labour’s plans are underpinned by our fiscal credibility rule, an overarching economic policy drawn up in conjunction with Nobel Prize-winning economists including some who have spent much time attacking neoliberalism. It states that a Labour government would plan to 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. Borrowing should be to invest, increasing growth and tax revenues, and allowing us to meet the first two conditions of the rule. Most importantly, unlike the Conservatives, we recognise the importance of suspending these targets in the case of an economic shock that stops monetary policy dealing with the problem.

Advocates of MMT instead claim governments with sovereign currencies like the UK can simply spend whatever they like, and taxes only exist to deliver other public policy goals, like controlling inflation or reducing inequality. Aside from the valid concern that printing additional money nearly always leads to higher inflation, outside exceptional circumstances like the global financial crisis, currencies need to maintain value to trade internationally. There will always be an exchange rate and many businesses and individuals need access to foreign currencies as part of their essential business activities, not to mention the fact that the UK is dependent on imports for any number of life’s essentials.

International demand for a currency can affect domestic conditions for that currency’s use, with changes in demand and supply for a currency affecting domestic economies. Specifically, over issuance of a currency, particularly in a country like the UK, would almost certainly lead to dramatic international consequences in the form of a currency crisis and capital flight. Far from allowing a radical domestic programme, MMT would quickly result in the UK facing conditions even worse than the austerity inflicted by the Conservatives and Lib Dems since 2010. If a devalued pound led to higher inflation, under MMT it could mean higher taxes to reduce nominal demand.

And for what? A faith in taxation to deal with inflation issues that – if followed to its logical conclusion – would lead to very similar policy outcomes. It’s true that the situation is somewhat different in the US, where the dollar’s status as the world’s principal reserve currency alleviates it from some of these pressures, and that since 2008 many countries have experimented with radical monetary policy, including quantitative easing here in the UK (creating more money when interest rates couldn’t go any lower to stimulate spending). But these do not solve the central problems outlined above and rely on exceptional circumstances rather than the normal functioning of a normal economy. Crucially, quantitative easing was pursued in the UK in response to extraordinary economic conditions. It is not a policy that would be expanded today.

It should also be noted that there is nothing inherently left-wing about MMT – it supporters include members of the Tea Party and Trump supporters in the US. Rather, MMT is a glib, “silver bullet” solution to the major economic problems we face. This accounts for some of its appeal, but in my view it is a direct barrier to winning the battle of ideas about transforming the economy and taking on the establishment with higher taxation. That will need to go even further: more than simply spending more money.

Labour’s current policies allow us to oppose austerity whilst credibly proposing an alternative, giving the Labour movement the confidence that we can deliver a better future for the UK. MMT is a barrier to both.