When the ubiquitous Green party leader Zack Polanksi was on the BBC’s Sunday with Laura Kuenssberg show singing the praises of wealth taxes last month, he said something that got my spider-sense tingling:
‘This isn’t about creating public investment, we can do that anyway, we don’t need to tax the wealthy to do that.’
On the face of it, this is a slightly odd thing to say. Other lefties, such as Richard Burgon MP, have argued that a wealth tax could be used to give more money to Our Precious NHS or remove the two child benefit cap. Polanksi is right to say that we can have more ‘public investment’ without a wealth tax – we can tax other things – but why he is so eager to divorce tax revenue from public spending? He must know that voters are more likely to support tax rises if the revenue is earmarked for nice things, so why not flag up all the lovely public spending that the money could be used for?
The appeal of MMT to the ‘anti-bedtime left’ is even simpler. They want more money spent on public services but they don’t want to pay for it
My suspicion was that Polanksi had fallen down the rabbit hole of Modern Monetary Theory (MMT). One of the hallmarks of an MMT disciple is the strange belief that taxes do not pay for public spending. Other red flags include an eagerness to point out that the government’s finances are not like a household budget and that money owed by the government to the Bank of England is money ‘we owe to ourselves’. It is not that these claims are untrue. It is just that nobody else feels the need the say them all the time. And that is because nobody else thinks they mean what MMT advocates think they mean.
Polanksi was on the same show again at the weekend and this time he left me in no doubt. After making the case for a large increase in public borrowing, it was pointed out that we are at the upper limits of what the bond markets are prepared to tolerate and that we already owe £3 trillion. Polanksi’s reply was telling. He said that loans from the Bank of England are ‘money we owe to ourselves, it’s not borrowing or a debt in any real sense’ and that ‘a household economy is nothing like a national budget’.
Nothing angers MMT believers more than the national debt being compared to credit card debt or household debt. Politicians and economists often make such analogies because public understanding of fiscal policy is so woeful that it needs to be put in terms that everyone can understand. When even politicians don’t know the difference between the deficit and the debt, it is useful to talk in terms of overdrafts and credit cards. The analogies are not perfect – no analogy is – but the important point is that, like a household, governments that borrow money have to pay it back with interest and if they start to look like a credit risk, the interest rates will go higher.
One difference between a household and a government is that a household cannot print money. This is why MMTers hate the analogy. They believe that many of the problems governments face can be solved by issuing new currency and that the national debt is not a problem because the government owes the money to itself and could print three trillion pounds to pay it off if it wanted to. Strangely enough, mainstream economists do not think this would be a good idea.
At heart, Modern Monetary Theory stems from a question that young children often ask: if there are so many poor people in the world, why can’t we print lots of money and give it to them? The answer is, obviously, that printing money won’t increase the number of goods and services. It will only make them more expensive.
MMT is not quite as silly as this sounds. MMT theorists accept that inflation is a risk, they just don’t think it is much of a risk. They believe that there can be no inflation unless there is full employment and that the economy can be hosed with a great deal of freshly minted cash before that happens. And if it does happen, they say, the government can simply raise taxes to take some money out of circulation, thereby reducing inflation and perhaps even creating deflation.
This is not completely barmy because it could work in theory. The problem is twofold. Firstly, it is vanishingly unlikely that the kind of politician who would apply MMT to the nation’s finances would be willing to make the kind of spending cuts required to slash inflation. I do not recall any MMT advocates calling for higher taxes to deal with the inflation that followed the quantitative easing splurge of 2020-21. Moreover, as Tim Worstall points out, to get inflation down you would have to focus the tax rises on the poor because they have the greatest marginal propensity to consume.
Secondly, there is not just a risk that swamping the economy with printed money will lead to high inflation. It is a certainty. Expanding the money supply inevitably leads to prices rising – or, to be more precise, to prices being higher than they otherwise would have been. The price rises might be small and they might manifest themselves in higher property prices or an inflated stock market rather than on the supermarket shelves, but they will occur, and the more money you issue, the higher the prices.
The story of economic growth is the story of things getting cheaper. If the money supply had not grown since 1750, goods and services would be vastly cheaper than they are today, although wages would also be much lower. In other words, there would have been an enormous amount of deflation. Central banks don’t like deflation because, amongst other things, it encourages people to hide their money under the mattress, and so it steadily increases the money supply. If the economy is growing at 2 per cent and the money supply grows at 3 per cent, the economy ticks along with modest inflation. But if the money supply grows by 15 per cent, as it did in 2020, or by 25 per cent, as it did in 1972, the cost of living will soar. The idea that a country can’t have high inflation without full employment is completely without foundation. That is exactly what happened with ‘stagflation’ in the 1970s.
As for owing money to ourselves, the government’s interest payments to the Bank of England make up less than 20 per cent of the total. On Planet MMT, this figure would presumably be 100 per cent because there would be no point borrowing from the bond markets when we could borrow new money from the Bank of England, but that’s not where we are. The only conceivable reason for MMTers to keep repeating the line about owing money to ourselves is that they think we should default on this debt. That would be extremely unwise because, in the world as it actually is, the ‘bond vigilantes’ (boo!) would rightly see this as the UK failing to honour its obligations and demand much higher interest rates. The rate on gilts rose sharply last month because Andy Burnham said that the government shouldn’t be ‘in hock to the bond markets’. And he’s only the mayor of Manchester.
Much of the appeal of MMT is similar to the appeal of conspiracy theories. It makes ignorant people feel that they are cleverer than experts and allows them to believe that they are privy to wisdom and insights that are hidden from others. In the final analysis, MMT does require a kind of conspiracy. Why would the political and economic establishment refuse to acknowledge such a simple way of creating prosperity and abundance unless they had sinister motives?
The appeal of MMT to the ‘anti-bedtime left’ is even simpler. They want more money spent on public services but they don’t want to pay for it. Rather than accept that economics involves trade-offs, they prefer to believe that everything is a ‘political choice’ and that anything is possible if you will it into existence. The savvier members of the far-left understand that their spending plans cannot be funded by ‘the rich’ because there aren’t enough of them and they don’t have enough money. But no one dares to raise taxes on the general public, except through various sin taxes and stealth taxes that still don’t raise enough revenue. Hence the appeal of the Magic Money Tree.
The Green party is not going to win the next election, although there is a chance that it could feature in a left-wing coalition. Regardless of its electoral prospects, it is worrying that the leader of any party can swallow such snake oil. A wealth tax would be a bad policy for several reasons, but it is within the normal range of bad policymaking. MMT is simply nonsense and the policies that are derived from it are insane.
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