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What critics get wrong about MMT - or modern monetary theory — Transcript

by Richard J Murphy · 2,912 words · 420 segments · language en · Watch on YouTube

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0:00In my opinion, modern monetary theory
0:03provides the best explanation of how
0:05money works in a modern economy that is
0:08currently available to us anywhere.
0:11Warren Mosler, who created modern
0:13monetary theory in the 1990s, reckons I
0:16am its biggest and most widely noted
0:19exponent in the world. And I'm surprised
0:22to note that. But if it is, well, I'm
0:24happy to be in that position because
0:26understanding matters if we're looking
0:28at our economy. But the point is, modern
0:31monetary theory or MMT for short has
0:35many critics. Many people who don't want
0:38to understand what it says. And so, in
0:39this video, I want to talk about what
0:41those criticisms are after I've briefly
0:45explained what MMT is. MMT explains how
0:49money works. That's it. It doesn't do
0:52anything else. It's not a manifesto.
0:54It's not a description of a political
0:56policy. It is not an explanation for the
0:59choices that economists and politicians
1:01should make. It just says how money
1:04works. Nothing more or less than that.
1:06And the description it supplies is of
1:10the way in which the system works. Now,
1:13you don't have to imagine that we're
1:15going to adopt it because we're doing
1:17it. And let's explain what we do. The UK
1:21government creates the pounds it uses
1:24when it spends. It asks the Bank of
1:27England to make a payment and so long as
1:29the Bank of England is satisfied that
1:31there's a budget to cover the cost of
1:33the spending in question, it is legally
1:36obliged to make the payment whether the
1:37government has any money in its bank
1:39account or not. And as a matter of fact,
1:41it quite often hasn't. And the Bank of
1:43England simply marks up an overdraft for
1:46it. It can do that whether or not tax or
1:50borrowing has come in because tax or
1:52borrowing do not fund government
1:55spending. They can't because until the
1:58government created money by spending,
2:01there would be no money available to tax
2:03or to lend to the government. So
2:05spending must come first. That is a
2:08critical insight that modern monetary
2:11theory provides. But that does not mean
2:14any government can spend without limit.
2:16There are limits in the economy. But
2:19money is not the one that imposes the
2:22constraint. The constraints are created
2:24by the availability of people, skills,
2:27energy and materials that are available
2:29to buy to make the things that we want.
2:32The real world imposes the constraint on
2:34the economy and money doesn't. Now this
2:37sounds radical, but as a matter of fact,
2:40it's true. And that's why I talk about
2:41MMT. But now let's talk about the
2:44critics because the critics have a
2:46series of arguments which I will run
2:48through and try to make these brief
2:50because the arguments actually make no
2:51sense. The critics say that modern
2:54monetary theory or MMT says governments
2:57can print money forever. And the fact is
3:00I've just said that MMT does not say
3:02that. MMT does never say that. That is
3:06the exact opposite of what MMT says
3:09because MMT is obsessed with inflation
3:12and its control. An MMT realizes that
3:15spending more money does not create more
3:17doctors if there are no doctors
3:19available. It doesn't build houses if
3:22they're needed because builders have to
3:25do that. It doesn't grow crops. It
3:27doesn't create energy. Money cannot do
3:30any of those things. If they are
3:32available, we can buy them. If they
3:34aren't available, we can't. And so MMT
3:38says when the resources run out, stop
3:41spending. If you don't, you will get
3:44inflation. And that is the whole point
3:47of inflation policy within MMT. It
3:51provides a perfect explanation of how we
3:53get inflation and what is more, how we
3:56can manage it. We can manage it by the
3:58government spending less or by taxing
4:01people more. And that is the way in
4:03which when those resources aren't
4:04available but there is excess demand we
4:07can reduce that demand within the
4:09economy and therefore bring inflation
4:11under control. The country can run out
4:14of things to buy even if the government
4:16cannot run out of pounds and that is
4:19perhaps the most important lesson that
4:22MMT supplies. We have to manage the real
4:26economy. Our obsession with money is
4:29completely false. Even though MMT does
4:31in fact spend much of its time
4:34explaining how money works and that
4:36relationship between the real economy
4:38and money is vital.
4:41What else do the opponents of MMT say?
4:44Well, they say MMT would let inflation
4:46run out of control. But as you've just
4:48heard me say, that is not what MMT does.
4:52In fact, MMT makes it clear how we can
4:56control inflation. But what it also says
4:58is that the way in which we try to
5:00control inflation is wrong. There are
5:02two causes of inflation. One arises
5:06because of external price shocks. That
5:09is oil price increases. That is price
5:11increases because of reopening too
5:13quickly from COVID. That is a price
5:15increase of wheat and fertilizer as a
5:17consequence of war in Ukraine and so on.
5:21That is the consequence of Donald
5:22Trump's tariffs. Now all of those things
5:25change prices over which we have no
5:28control at all. So therefore MMT says
5:33don't try to control them. You can't.
5:34You're wasting your time. You're hitting
5:36head against a brick wall if you try to
5:37change something which is beyond your
5:39limits to control. Instead let your
5:42exchange rate float. Let that absorb the
5:46shock. And that's the only thing we can
5:48do. Let's be clear about that. We can't
5:51do anything else. So let's not pretend
5:53otherwise. But the second thing that we
5:56can do and which is inflationary is have
5:58excess demand. I've already talked about
6:00this in the previous section. And the
6:02government in that case has to take
6:04action to reduce demand. Now there are
6:06people who say that the government won't
6:08take that action and therefore MMT is at
6:10fault and can't work. But MMT has been
6:14operating for decades now. So, let's not
6:16pretend that that's the case because by
6:18and large, we've been quite successful
6:20at keeping inflation under control. And
6:22we've done it through taxation and not
6:24interest rates because interest rates
6:25don't work. And good fiscal rules, if we
6:28wrote them properly, would require
6:30governments to act when inflation became
6:32a problem and we would therefore take
6:34control of it. But that's what a fiscal
6:36rule should be about and not limiting
6:39the normal role of action by government
6:41because there's supposedly too little
6:43money available when that is never the
6:45case. So all of the arguments made
6:48against MMT on this issue just deny what
6:50MMT says. They are strawman arguments.
6:54They do not deal with the reality of
6:56what MMT talks about and it makes
6:59inflation control the very center of its
7:02thinking which is unsurprising because
7:04it talks about money and that therefore
7:07means inflation is always a matter of
7:09concern to it. Let's look at another
7:12criticism. this is that if the
7:15government creates money, why do we need
7:17tax? And the critic will point out we do
7:20need tax and they'll say therefore that
7:22because the government doesn't need tax
7:24to spend, the argument for MMT must be
7:27wrong. But that's nonsense. MMT talks
7:31about tax. It makes it clear that tax is
7:34fundamental to the government's economic
7:37cycle. The government spends money into
7:40the economy and of course that would be
7:43inflationary if we left it there. But we
7:46don't. Tax exists to take the money that
7:50the government has created out of the
7:52economy. And the primary goal for doing
7:54so is to control inflation. We're back
7:57to that point yet again. But at the same
7:59time and because tax does not fund
8:02government spending which is a critical
8:04point tax can be used as an instrument
8:06of social policy. It can be used to
8:09reduce inequality. It can be used to
8:11discourage those things we do not want
8:13to happen such as pollution. It can be
8:15used to correct market failures and we
8:18do that with regard to things like
8:20carbon and we do it with regard to
8:21things like education which is lowly
8:23taxed when it comes to VAT and so on.
8:26The government creates money when it
8:27spends and it takes that money back
8:29through tax. If it didn't, we'd have
8:31inflation. That's what tax is for. But
8:35critically, the spending comes first and
8:38the tax comes second. But most
8:40economists put the events the other way
8:42round. And that's why they're wrong. So,
8:45let's deal with another criticism and
8:47that is that modern monetary theory or
8:49MMT would make the value of the pound
8:52collapse. Well, as I pointed out, this
8:54is nonsense. We've had MMT in operation
8:59because it describes the way in which
9:01the economy actually works for decades
9:04and the value of the pound has not
9:06collapsed. In fact, we've seen only
9:08three significant falls in the value of
9:10the pound this century. One was after
9:132008 and that's because the city of
9:16London fell over and unsurprisingly
9:18because the UK economy is so focused
9:20upon activities in the city that gave
9:23rise to a fall in the value of the
9:24pound. The second occasion was when we
9:27had Brexit and that put real barriers to
9:30trade into the UK economy meaning that
9:32our pound was not worth so much. Blame
9:34Nigel Farage for that one. And the third
9:36one was in 2022 when Liz Truss put
9:40forward a stupid budget and the value of
9:42the pound fell for a short period of
9:43time and then recovered by the way
9:45because she departed the zen and that
9:47was also because of a political action.
9:51MMT has never caused the pound to
9:54collapse and by itself it can't because
9:56the value of the pound depends on many
10:00political and fundamentally economic
10:03factors including what Britain produces,
10:05what it buys and sells abroad and
10:07whether people want to hold pounds. And
10:10all of those things are external to MMT.
10:13It doesn't tell us what to make. It
10:15doesn't tell us what the interest rate
10:17should be. It explains how interest
10:18rates work. and it doesn't decide what
10:21Britain produces. So MMT cannot have an
10:25impact upon the value of the pound. Bad
10:27politics and poor economic management
10:30can do that and they have, but not MMT.
10:34So MMT does not say exchange rates do
10:36not matter. As I've noted, there are
10:38occasions when it says we should allow
10:40them to float and change because of
10:42external price shocks. But it says the
10:44normal processes of creating money very
10:47rarely and hardly ever make a currency
10:50collapse and the situations where they
10:52do are far beyond those which are
10:54experienced in the UK.
10:57Then critics say MMT is leftwing which
11:00is quite absurd because as many
11:03right-wing governments have operated
11:04systems which are described by MMT as
11:08have left-wing governments in fact in
11:09the UK because we normally have
11:11right-wing governments. That has very
11:14often been true of many governments
11:16including all those run by the Tories.
11:18MMT simply describes what is. It does
11:23not tell a government what policies to
11:25choose. A right-wing government might
11:26choose tax cuts or higher defense
11:28spending if it properly understood the
11:30way in which money works in our economy.
11:32And a leftwing government might choose
11:34more investment in public services. But
11:36MMT doesn't say one of those is better
11:38than the other. It says they might be
11:41possible if the resources are available
11:44to deliver them. Then the money will be.
11:47And that's the point where MMT becomes
11:49important. You can no more do MMT, which
11:54is the assumption implicit in this
11:56claim, than you can do gravity. MMT
12:00explains how money works. Gravity
12:03explains why we're stuck to this planet.
12:07You can either understand MMT or you can
12:10misunderstand it. But you can't do it
12:13because it is what is. So, are there any
12:17more objections? Yes, there are. Won't
12:19government debt become unsustainable is
12:21the next one. Government borrowing,
12:23however, is not a source of funding for
12:26the government. That is something that
12:28MMT makes clear. How do I know that?
12:31Because all government spending is
12:33funded by money creation through the
12:35Bank of England. Government borrowing,
12:37as it is called, is in fact a way in
12:40which people who have excess money to
12:42spare can deposit it with the government
12:44because the government provides the
12:46safest place for them to put their
12:48money. Government borrowing is a savings
12:51bank facility. If a bank borrows from
12:53the public, it owes those people back.
12:56If the government takes deposits from
12:58the public, it owes those people back.
13:01There is no difference between money
13:04being placed on deposit with the bank
13:06and money being placed on deposit with
13:08the government. But when we look at a
13:10bank and we say it's got lots of
13:11deposits, we say, "Isn't it doing well?"
13:13And when the government does exactly the
13:15same thing, we say, "Oh, we're in deep
13:16trouble." It's not true. MMT makes clear
13:19we are not in trouble when people choose
13:22to deposit money with the government
13:24because they know that the government
13:26can always pay them back and they do not
13:29know that banks can do that. And why can
13:31the government always pay them back?
13:33Well, that's because the government
13:35creates the money to ensure that the
13:37repayment can be made. So that is a sign
13:39of strength in the government's banking
13:42facilities. It is not a sign of weakness
13:44and the government will not as a result
13:47deliver unsustainable debt because of
13:49MMT. What we will do is properly
13:52understand the so-called government debt
13:55that the government has. And finally,
13:57and let's deal with this criticism
13:59because I've heard it so many times in
14:01my life now. MMT would turn us into
14:04Zimbabwe or the VHimar Republic in
14:06Germany that existed in the 1920s and we
14:09would have runaway inflation so bad that
14:12we would not survive the shock of having
14:15such a system in operation. Well, let me
14:17make it clear. First of all, MMT is in
14:20operation. We have not had inflation
14:23like Zimbabwe or the VHimar Republic or
14:26Greece when it had a meltdown after the
14:29collapse in 2008 or France which loops
14:32it could have a meltdown now or
14:34Argentina or Venezuela or anywhere else.
14:37In all of these countries there are
14:39constraints in countries like Greece and
14:42France the problem is they do not have
14:43their own currency but we do. In the
14:46case of Zimbabwe and the VHimar
14:48Republic, the underlying capacity of the
14:51economy was basically destroyed. In
14:53Zimbabwe by choice in the VHimar
14:55Republic in the aftermath of war and in
14:57both cases they had debts denominated in
15:00currencies other than their own. The
15:02Vimar Republic owed money back to the UK
15:05to France and the USA for war
15:08reparations. It couldn't earn the money
15:10in question. Zimbabwe, Venezuela, and
15:13other countries including Argentina all
15:15owed money in dollars and they had to
15:17earn it and they couldn't. So that's why
15:20they fail. But the UK only has debts in
15:24pounds. That is what our government has
15:26rather wisely done because to this
15:28extent it has learned the lessons of MMT
15:31and as a consequence comparison between
15:33the UK and those countries is observed.
15:35First of all, our economy is not being
15:38racked by war at this moment. We do have
15:40our own currency. We do have debts that
15:43are only payable in that currency. And
15:45so these comparisons are just absurd.
15:48They make no sense. They cannot happen
15:51here because our government can always
15:54pay its debts. We would not turn into
15:57these places as a result. So let's be
15:59clear. MMT describes what is. It
16:04describes what actually happens. It
16:06describes your lived experience.
16:08Although it's not been explained to you
16:10in the way that MMT does, the UK
16:13government creates the pounds it uses,
16:16but it cannot create unlimited skills,
16:19energy, material, or things to buy. And
16:21therefore, there are risks of inflation
16:24in our economy if we push those limits
16:27beyond what is reasonable. And that is
16:30why we need good government policies
16:32that understand the causes of inflation
16:35and the way in which money really works
16:37to control the risk that inflation might
16:39happen. MMT is the best explanation we
16:43have of how those risks arise and that's
16:46why it's important and what it does is
16:48help us to understand those limits and
16:51then use the resources that are
16:52available to us wisely so that people
16:55can thrive. MMT is not about telling
16:59politicians what to do, but it does let
17:02them decide what is best to do. And that
17:06is why it's so important. Now, that's
17:08what I think. Let me know if you
17:10disagree. Some of you will. I have no
17:13doubt about that. And please let us have
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