Modern Monetary Theory could pay for a Green New Deal in the UK, but Labour is stuck in the past and wants to try to appease finance and neo-liberal economists instead:
First a quick definition of MMT in two paragraphs:
There is no limit to the amount of money a government can borrow to undertake government projects. The only constraint are real resources available to the government, such as workers, raw materials. And if you try to use too many of these limited resources all at once, there might be inflation.
Rather than controlling inflation through interest rates (monetary policy), MMT suggests, if other measures (such as price controls, resource planning) do not work, to ultimately use taxes. Raising taxes will kill inflation. Short term interest rates could then be pretty much kept at 0%, with only slightly higher rates for borrowing for longer periods.
The main reason Labour does not want to sign up to this is because
(a) this theory, as a coherent set of thoughts, is completely new (especially the tax to control inflation bit) – and opposed to everything neoclassical (and certainly neoliberal) economics says, which aims for balanced budgets. Labour does not want to alienate economists that are supporting the status quo and their right wing propaganda think tanks and newspapers
(d) foreigners might not buy UK government bonds (they now buy about 30% of them)
(e) we end up in a crisis worse than the 2008 financial crisis
The main advantage of MMT is that now we have no financial constraints to save the planet. Any Green New Deal for the UK could be financed, even if it costs £1 trillion or more. It could be done within a ten-year time frame, even.
Clearly the MMT policies would need to be credible. How would we know how many resources do we need, how do we plan for that, and what are the fiscal rules to deal with inflation, should it arise? That still needs to be determined. It is astonishing that no economists (beyond the proponents of MMT) have argued to use taxes or other measures to control inflation in the past. Even though just these inflation controls were successfully implemented in times of war, for example.
(A comparison of fiscal and monetary measures to can be found here, though.)
How valid are the above criticisms in an MMT fuelled economy?
(a) Anything a left wing Labour government does will be taken apart by the right wing press or think tanks – so trying to appease (by issuing a fiscal credibility rule, for example), might prove to be futile.
(b) taxes have been raised by governments in the past (even VAT) and they were re-elected – because the economy was booming
(c) the pound might rise in a booming economy – us generating our own energy rather than importing it will help with our external trade position
(d) Foreign buyers of UK government bonds (now owning 30% of UK debt) could boycott them, but on the other hand if the UK has high economic growth, UK bonds could be very attractive. Should there be a “buyers strike”, however, then Quantitative Easing would kick in, where the Bank of England would buy unsold bonds, adding to the quarter of outstanding UK bonds it already holds.
(e) there is no reason to end up in a crisis – why would that be in an economy which is growing sustainably?
A MMT financed economy – nobody has ever tried it before, explicitly. Arguably China (with their state-owned banks providing huge domestic credit) and Japan (with their huge Japanese bond buying programme) have come closest. There is no excessive inflation in China, and Japan even has a deflation problem. But nobody has tried to use taxation to suppress inflation before – outside a war economy.
Could Labour do a Green New Deal without MMT – just within the confines of the existing rules? Difficult to say, because there are no official estimates what this GND would entail. (Labour are useless in planning anything in detail – and remember, a Green New Deal or a Green Industrial Revolution was only announced after Greta Thunberg and Extinction rebellion forced the issue last month.)
If Labour aims to decarbonise the economy by 2050, perhaps financing under the Labour Fiscal Rule might suffice. If Labour will want to do it by 2030 or 2035 the money needs to be spent sooner, then Labour will break its fiscal rules.
What are the advantages using MMT? They are really threefold.
First, currently the government pays about £39 bn a year to bond holders. That money could be saved when issuing government bonds at 0% under MMT. These £39bn are about 2% of GDP. The Green New Deal costs 2% to 5% of GDP (depending on how quickly we want to implement it). So MMT could finance up most of the Green New Deal, just by issuing bonds at 0%.
Secondly, Monetary Policy to control the economy has been highly regressive, hurting poor people more and relatively helping richer people. A Green New Deal boost to the economy could drive inflation higher. Interest rate rises will again hit the poorer part of the population more, unless we use MMT to control inflation. Taxes could in turn spread the pain of inflation busting tax rises between all parts of the population, and not just the working population and the poor borrowers, as under current monetary policies.
Thirdly, a Job Guarantee (MMT proponents see it as an integral part of MMT) should be part of the implementation of MMT in the UK. It would provide a job to the unemployed (or a sub-set of them) who would otherwise have difficulty finding work. In a recession, which is likely to come at some time, such a Job Guarantee infrastructure would provide a valuable tool to fight against the scourge of unemployment. That last benefit is, of course, not directly linked to a Green New Deal.
So any strategy trying to sell MMT should concentrate on these three benefits.
Or in other words, unless Labour implements MMT, while trying to finance the Green New Deal,
- taxes or borrowing will rise by 39bn a year,
- higher interest rates will benefit the rich holders of savings and hurt poor borrowers,
- we will not have a job guarantee to cope with persistent unemployment and a potential recession.