MMT and socialism

It's always depressing to read "socialist" polemics against Modern Monetary Theory, and Doug Henwood's essay, Modern Monetary Theory Isn’t Helping in "socialist" Jacobin magazine follows the trope: nothing but bad faith and a Gish gallup of ridiculous capitalist propaanda.

It's clear Henwood is arguing in bad faith. With suitable elisions, Hemwood more or less accurately presents a core concept of MMT:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” . . . Since there is a risk that too much government spending would spark inflation, the government might need to cool things down . . . by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

This seems like a straightforward presentation of an idea that is admitted as true by most economists, even if they don't really want the general public to know about. Let me add back the elisions in bold:

As Wray put it, “The government does not ‘need’ the ‘public’s money’ in order to spend; rather the public needs the ‘government’s money’ in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds ‘finance’ government spending.” You might be wondering where income earned on the job fits into all of this, but the world of production doesn’t play a large role in the theory.

But having tempted us into thinking that taxes were dispensable, Wray pulls a bait and switch. Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as “funding” government. To think that would be to indulge in an orthodox superstition.

I don't know what is more depressing, Henwood's shameless hatchet job, or how transparently he tries to manipulate his readers. Henwood seems to think that Jacobin readers are as gullible as Fox News viewers. I hope he's wrong.

It's not really useful to go into Henwood's article point by point; instead, I want to highlight a specific capitalist talking point Henwood reproduces, which implies that a popular government — i.e. a socialist government — cannot responsibly manage a fiat currency. The idea starts with the half-truth that MMT theorists think government creating money will magically cure all our problems. According to Henwood, MMT theorists claim, "A few computer keystrokes and everyone gets health insurance, student debt disappears, and we can save the climate too, without all that messy class conflict." The most obvious problem, of course, is inflation. MMT's answer is that taxation (fiscal policy), rather than central bank manipulation of the Federal Funds rate* (monetary policy), is the correct way to curb inflation. The question is, will taxes rather than interest rate manipulation work to control taxes?

*The rate banks charge each other to borrow reserves overnight.

On the one hand, Henwood appears to like taxes: "Taxation may not be full expropriation but it’s the next best thing in this fallen world. It is a form, however mild, of socialization — transforming private investment and consumption into public expenditures. [link original]" I concur, as do many notable MMT scholars. However, Henwood casually insults the "naïve belief in the curative powers of fiscal policy" (i.e. taxes). And Henwood claims the government is far too cumbersome to manage an economy with fiscal policy, "Anyone who’s watched Congress struggle with tax and spending policy has to wonder how anyone could believe that fiscal policy could be fine-tuned with requisite speed and precision." Henwood doesn't answer the question about who should fine-tune the economy. The central bank? The capitalist class? A socialist drum circle? I dunno.

The dead giveaway, however, is the considerable ink Henwood spends on the dreaded bugaboo of hyperinflation, invoking "[t]he extreme inflation of Weimar Germany in the 1920s." He also condemns the fiscal policies of many peripheral states, including Venezuela (!), Chile under Allende (!!), Venezuela, Turkey, and Greece. (Henwood has at least enough sophistication to talk about Greece before the euro.) Hyperinflation is one of the favorite monsters-under-the-bed unsophisticated capitalist propagandist love to invoke. Only the capitalist class can prevent the government from handing free stuff out to everyone. If the capitalist class does not impose the illusion of government fiscal discipline, a socialist government will eventually spend its way into hyperinflation and economic collapse.

Now very economist knows this illusion, this superstition, for what it is: the government does not have a real fiscal constraint. Paul Samuelson himself admits on camera (long before MMT) that the idea that taxes fund government is a superstition. A useful superstition, to be sure, but a superstition nonetheless.

An ordinary person such as myself has a fiscal constraint: I must obtain money through revenue (my paycheck) or borrowing (a bank loan) before I can spend it. Thus, I must persuade someone who already has the social permission to spend — my employer, my bank, or my friends — to give that permission to me before I can actually draw on the social product. The same is true for firms: they must persuade someone to buy their product (generating revenue), lend, or invest before they can spend money.

We like to pretend that the government is the same: it must obtain money by taxes (revenue) or by issuing bonds (borrowing) to obtain the money before it spends that money on public goods and services, and if the government cannot get the money, they cannot spend it. But this constraint is nothing more than pretense. The government can, if it chooses, spend money before it obtains it from others. For me, spending money I don't yet have is impossible; for a government, it might or might not be wise, but but it is possible.

Fiscal constraints differ from real constraints. If there are no cars available (real constraint), I can't get a car, no matter how much money I have. However, if I can't get money (fiscal constraint), I can't get a car, even if there are a thousand sitting on the lot. The trick is to get all these individual fiscal constraints to match up with the overall real constraints.

One point that MMT scholars make is that the present capitalist-managerialist system has already abandoned fiscal constraints in reality, but the system tries its best to bury this fact and make sure that deviations benefit the only capitalist class. One reason MMT scholars dig deep into the accounting is to try to uncover this buried truth. Again the capitalist story is clear: the government can deviate from its fiscal constraint for the benefit of the capitalist class without causing (too much) economic chaos, but do it for the people and bam! we're in Venezuela.

Abandoning even the pretense of a government fiscal constraint does make life more difficult. If we pretend that government has a fiscal constraint, it's easy to put an upper bound on how much the government should spend: only as much as it can convince the citizens to cough up in taxes or are willing to lend. If we drop the pretense, then the upper bound is much more difficult to determine. If we abandon the imaginary fiscal constraint, we have look at what the spending does rather than just ensuring expenditure does not exceed revenue. We want to spend — and spend appropriately — until we have full employment and are at potential output. One way of determining whether we're at full employment is by looking at inflation. If the price level starts rising, either stop spending or increase taxes. Henwood has a point: the above task is much easier said than done. Then again, so is the task of transforming a capitalist-managerialist country such as the United States to socialism.

Socialists face two main dangers. The first danger is that it might not be possible to run a socialist economy with anywhere near the level of comfort and convenience afforded by a capitalist economy. This danger is mitigated by the fact that capitalism-managerialism is lowering standards of living for all but the rich at an accelerating pace. The second danger is that capitalists, who will certainly fight back, will defeat socialism. We cannot avoid these dangers except to abandon the struggle. Socialism is not a Sure Thing: if we fight, we have to accept the possibility that we will fail. We can either admit defeat before we start, or bit the bullet and proceed despite the dangers. Fundamentally if someone believes a government not controlled by the capitalist class cannot effectively manage the economy, then they have no business calling themselves a socialist.

It would be nice to have an economy that doesn't use money, where we had so much that no reasonable person would want more than social product could afford them, where everyone contributed to the social product not to have more of the social product but out of a spirit of self-actualization, altruism, and civic duty. I don't think such an economy is utopian, or at least not impossibly utopian. But we're also not there today, and we won't get there tomorrow. We have a money-mediated market economy today, so we have to start pushing that economy towards our utopian ideal. And MMT is a good place to start pushing.

The objections against MMT are important, but not dispositive. MMT economists (Kelton, Wray, et al.) are not socialists, and MMT is thoroughly left-managerialist, not socialist. Just putting Kelton in charge of the Fed and Wray in charge of the Treasury will not usher in a socialist utopia. So what? Either MMT ideas are true or false; socialists should use the true ideas, regardless of the political orientation of their proponents. MMT scholars make errors, some grievous, and disagree on important points. So what? No one should propose making prophets of Kelton, Wray, etc. following to the letter the dictates of a nonexistent MMT scripture. We should not treat anyone (not even Marx!) as a transcendent authority; we should subject all ideas to ruthless critical scrutiny, not calumny. Like everything else, some of MMT is bullshit, but much of MMT really is true, admitted even by mainstream economists.

MMT is better-developed than Henwood would have us believe: MMT even has its own textbook. If MMT scholars are sometimes vague, well, the details really are complicated. How high should taxes be? How much inflation is acceptable? Where should we spend our money? The answer is the same as any economist would give: it depends. How fast should you go? It depends: are you in a car? a plane? A rocket ship to the Moon? Are you driving a Mercedes on the autobahn or a dynamite truck on an icy mountain road? The details are very different, but the framework, physics, is the same. MMT scholars are first and foremost proposing a framework for answering these questions.

The United States has no reason to worry much about hyperinflation. Wiemar Germany, Chile, Venezuela, Turkey, even Zimbabwe, are very different from use, and facile comparisons have no value. We do have the real capacity to make everything we want in the United States. We can and should worry about countries on the periphery, countries without our economic, social, and military privilege, but that's a different issue, and one we cannot even begin to address without first further advancing the cause of socialism.

The above notwithstanding, MMT gives us important weapons in the fight against capitalism. The first is that we do not need the money of the rich. We should definitely take their money, because they're the enemy, and money is their weapon, but we don't need it. As long as we hold on to the superstition that we need their money to fund socialism, we give the rich leverage: we must appease them, at least to some degree, to get their money. Why give that power away? Don't give the rich the power to hoard their money and crash the economy; instead, create our money to spend on what we need while we're clawing their money away. It's a subtle distinction, but one that is crucial to advancement of socialism.

The other big advantage of MMT is the job guarantee. Sure, a job guarantee (JG) could be implemented poorly, or the capitalist class could force it to be implemented poorly, but it can also be implemented well. The JG is straightforward, has theoretical and empirical support, and can act as a powerful automatic macroeconomic stabilizer. As Henwood admits, it begins to erode the most important tool to maintain capitalist power, the threat of the sack. The JG is not perfect, it does not solve every or even most of the problems facing the working class. But in this case, the perfect is the enemy of the good. The JG is not the end of the journey, but a step in the right direction.