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January 29, 2023

Why is Modern Monetary Theory important?

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Unemployment is a political choice, not an economic imperative. Photo Jeff Dawson

In a previous article I explained the rudiments of modern monetary theory (MMT).

Before I explain why it is important, I need to correct and clarify two essential points which came to my attention from some respondents. The first is that, provided the sovereign currency criteria are met, federal government debt is not bad, but necessary, so that people are able to pay the taxes governments impose, since the government’s debt is everyone else’s credit.

The second is that MMT should be thought of as having essentially two parts: a purely factual, descriptive part, which is what the previous article was about, and a second normative, value-based part, where judgements and policy prescriptions are made based on the former.

It is like comparing: ‘capitalism is destroying the Earth’, versus: ‘capitalism should destroy the Earth’. Clearly describing the first is in no way equivalent to supporting the second. Now to the important implications of MMT.

No government limit on spending

Since the federal government has no nominal limitations on spending, it means that it can always afford to buy anything for sale in its own currency, including labour. As such, unemployment is a political choice, not an economic imperative.

Yet one of the defining characteristics of the neoliberal period has been high and growing un- and underemployment, which has hit young people especially hard. According to the ABS, about one in three young Australians (those 15–24) either has no job or they have a job and want more work but cannot find it (ie. they are underemployed).

Unemployment choices of government.

Increase in unemployment a political choice

This trend has increased since the 1970s and is not a COVID-related artefact. Furthermore, this says nothing about people’s wages and working conditions, which have been stagnating or declining for decades. This political choice follows from government combatting inflation and the inverse relationship (called the Phillips curve) between inflation and unemployment.

The explanation for this relationship is that when the economy is operating at full employment, workers can demand higher wages, confident that they will not be fired, or if they are, they can simply find work elsewhere. This demand for greater wages causes businesses to raise their prices, creating a wage-price spiral leading to inflation. The solution to this problem is to keep a large and growing number of people un- and underemployed, which is just what has occurred. Former Federal Reserve Chairman Alan Greenspan infamously cited ‘worker insecurity’ for low inflation in the US in 1997.

Greater happiness for the employed

For those who have always been able to find enough decent work, such a diatribe may seem abstract and irrelevant, but the evidence of the day-to-day experience of the ever-growing pool of people shut out from paid work is clear.

The World Happiness Reports demonstrate that people who are employed report greater happiness and life satisfaction than those who are unemployed. What this means is what many of us already understand: the neoliberal era is a politics of immiseration, and un- and underemployment is being used as a weapon against working people.

The job guarantee

A viable solution to this issue is to do what every western government did following World War II, until the onset of neoliberalism in the 1970s and ’80s: use their unlimited spending power to achieve full employment.

The job guarantee (JG) is now one way to do it by creating a JG program, administered democratically at the local level, rather than fixating on growth, which is ecologically unsustainable.

The JG is supported by many MMT people, including Pavlina Tcherneva. Her webpage provides answers for all aspects of the JG’s characteristics, viability, and real-world examples. Here I focus on two implications.

Liberate learning

The first is education. Under neoliberalism, education has been increasingly geared toward preparation for employment in a competitive labour market at both high school and university levels.

There is nothing ‘normal’ or ‘natural’ about this. With the JG in place, this would liberate learning from the assault on students that induces them to study for a job, much as teachers often need to teach to the test.

Instead, with every graduate guaranteed a job with wages and benefits sufficient for a decent and dignified life, education can fulfil its role much more easily of developing the unique capacities of each student.

Your vote counts

The second is about democracy and politics more generally. What makes MMT so dangerous to the ‘masters of mankind,’ to borrow Adam Smith’s phrase, is that it lays bare what is politically possible.

While austerity programs are working effectively to enrich the few and to foreshorten and immiserate everyone else’s lives, none of this is necessary.

A federal election is approaching. Those running for office should know, much as we should know, that government cannot claim it does not have the finances for anything for sale in Australian dollars.

What sort of society would you like to live in? Interested and respectful readers are invited to participate in a discussion of these and related matters. Please email [email protected] for time and venue.


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2 COMMENTS

  1. Everything said here is perfectly obvious, yet still needs to be said in spades because it seems to be invisible to most people, and the opposite argument is constantly put forward by politicians, media and all those influenced by them. In particular there cannot be shortage of work for centuries because it will take all hands on deck to fix the climate, plastic, agriculture, food, transport, building health, mental health, poverty, malnutrition, migration, extinction debacles created as if we were desperate to destroy as much as possible in our lifetime. The faster we fix it, within reason, the less suffering, the more happiness, the more avoided cost, and the more wealth. Therefore everyone can be employed in repairing this mess, there is no shortage of money to do it in a well thought out stages, and no shortage of return on the investment in it. That is in fact how wealth is created. Finding problems (needs) and fixing (provisioning) them. Australia has excelled in creating the problems, way more than our fair share, and ought to excel in doing our fair share in fixing them. We can employ a whole other swathe of people in doing the thinking and calculations to make sure we do it in efficient ways, with good price signals, that regenerate the world and society and individuals as we go rather than degenerate them and transfer more wealth to the 1%. Or better still retrain our tax accountants in this useful job instead of how to rort the tax system, which ought to be largely replaced by a simple fee on consumption in proportion to the damage to the common-wealth. That all this is possible is evident by opening eyes and seeing that nature accomplished this by trail and error over billions of years, operates a massive fair trade system in all sorts of commodities like sugar, minerals, C, water etc., and built us in the process.

  2. The way I see it is that suppose Modern Monetary Theory hypothetically is not true – just for the sake of argument. Well, any monetary system in which bringing unutilised / underutilised resources into productive economic use is at the mercy of the means of exchange of those resources (not that I’m implying that currency is merely just an ‘abstraction’ of barter) is the ultimate act of putting the cart before the horse.

    We as individuals etc need to be financially constrained such that we don’t have the spending power to take too great of a slice of the economic pie. However, on the level of society, growing the economic pie (in an environmentally and ‘work-life balance’ sustainable manner of course) should never be at the mercy of ‘finding the money’ – if it is then something is very very back-to-front.

    I do however in fact believe that Modern Monetary Theory is indeed true – that the Australian federal government, while it faces spending constraints (the productive capacity of the economy and inflation) does not face any purely financial constraints with respect to its own currency. That the Australian federal government is in effect the monopoly issuer of its own currency – the Australian dollar (commercial banks lend money into existence denominated in Australian dollars but I’m talking about the currency itself – not money in general). That the federal government spends Australian dollars into existence (out of thin air) and then deletes some of these dollars out of existence through federal taxation. That federal taxes don’t literally fund the federal government – that federal tax money (unlike state taxes) doesn’t ultimately ‘go anywhere’ or fund anything, but is instead literally deleted out of existence never to bounce around in the economy again, with this helping to ensure that total spending in the economy won’t overheat the economy and cause an inflation problem.

    I believe also, as the article points out, that the national ‘debt’ is really everyone elses credit. The Australian national debt is really just all the Australian dollars the federal government has spent into existence that hasn’t been taxed out of existence. The issuance and sale of federal government bonds really just converts one type of financial asset into another type of financial asset – and given that the Australian federal government meets the requirements of a monetary sovereign government (including that the Australian dollar is not fixed to any commodity or foreign currency) then this ‘debt’ is already effectively functioning as if it has been monetised.

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