MMT, Austerity and Defecit

Modern Monetary Theory

MMT is concerned with how money functions in the real modern economy.  It has a heritage going back to German economist Knapp’s ‘State Theory of Money’ published in 1895.

The function of money can be described by a variety of terms.  The most common of these views money as a ‘medium of exchange’.  The medium of exchange view is based on the erroneous assumption that money was initially created as an alternative to barter in a market economy.

MMT sees money as a standard of deferred payment; something that exists in order to pay off debt or denominate accumulated credit.  This corresponds with the true origin of money as a government generated artefact to facilitate taxation and resource re-distribution.

According to MMT there are two types of transactions ‘vertical’ (between the Government / Central bank and the banking sector) and ‘horizontal’ (within the private sector).

The current Government’s analogy of Government deficit to a maxed out credit card treats Government debt as ‘horizontal’ debt rather than ‘vertical’.  MMT regards Government deficit as investment in the private sector.  MMT is not the only school of economic thought that views Government deficit as investment.  There is danger that injecting too much additional money or making poor decisions about how to invest additional money can fuel inflation, but this is a qualitative rather than quantitative issue.  Fear of potential inflation led the last government to hand money created as quantitative easing directly to the banking sector rather than investing it in ‘the real economy’, e.g. using it to pay for services to government or public sector workers’ salaries.  Of course the banks are expected to repay the funds ‘invested’ by government QE at some point, though no mechanisms have yet been established to facilitate this.

There is a difference between states that have control over their own currency and those that have entered into a monetary or fiscal union and share a currency with other states, the prime, but not the only example being the Eurozone.   

Austerity

In 2010, Professors Carmen Reinhart and Kenneth Rogoff, Harvard University economists published a paper “Growth in a Time of Debt” that supported the warnings of the global austerity movement.  They concluded that countries with a debt exceeding 90% of their annual GDP experienced slower growth than their thriftier peers.

In 2013 this finding has been debunked by a graduate student at Amherst College in Massachusetts who examined the data used by Reinhart and Rogoff with their approval and found both that the excel spreadsheet they used contained calculation errors and that discounted evidence that contradicted their assertion, e.g. Canada, New Zealand and Australia have all experienced growth despite high government debt.  There is some correlation between high government debt and slow growth, but the correlation is not definitive as declared by Reinhart and Rogoff, nor is there a threshold beyond which a major decline in GDP is guaranteed.

Under the right conditions government deficit can contribute to recovery from recession.

Creating employment, creating confidence

The UK has a cocktail of issues to deal with; the answer for many of these is investment, to others it is government policy:

• An ageing population; research into how to mitigate the effects of age and providing care for those no longer able to care for themselves provide investment opportunities and employment
• Non-fossil fuel energy; wind, solar, algae that devour agricultural waste and produce fuel oil as a by-product or nuclear power provide investment opportunities and employment
• On-shoring services and manufacturing that can now be done better, more efficiently or at comparable cost here rather than abroad

This is different to the traditional Keynesian approach of stimulating the economy through construction and development of infrastructure, but this is not the 1930s and private investment needs to be attracted to addressing these problems as well as government investment.

The UK’s deficit, though undesirably high, is less a problem than lack of growth, high unemployment and lack of confidence.