Modern Monetary Theory

Keynesianism Warmed Over

TML Weekly is providing a critique of Modern Monetary Theory (MMT) as put forward in an article titled "Fiscal Deficit, Modern Monetary Theory and Progressive Economic Policy" by Andrew Jackson (July 14, 2020). Andrew Jackson is the former Chief Economist at the Canadian Labour Congress and is a Senior Policy Advisor at the Broadbent Institute.

MMT is in vogue today as arguments are found to back up changes to fiscal policy to rescue the rich from the crisis which results from the tendency for the rate of profit to fall.

The critique provides selected excerpts from the item by Jackson on "Modern Monetary Theory" with comments in double parentheses. The complete item is available here.


MMT is something of a misnomer. Far from being "modern," it draws heavily on monetary theories developed in the 1930s by John Maynard Keynes, and since that time, by left Keynesian economists rejecting orthodox finance and the view that government budgets should (almost) always be balanced, that deficits crowd out private investment which should be driving the economy, that monetary policy (changes in interest rates) as opposed to fiscal policies (changes in public spending) should be the key policy tool for managing fluctuations in the economy, and that private investment is much more productive than government spending.

The central proposition of MMT is that a state controlling its own currency can readily finance fiscal deficits (resulting from spending increases or tax cuts) at low or no cost through money creation and direct funding of government spending by the central bank.

((The "central proposition" eliminates all but the most powerful countries from consideration. Even those without their own currency within a common currency such as the Euro zone are treated unequally. Compare the situation of Greece with that of Germany or France. Greece was unable to "readily finance fiscal deficits" using the Euro and suffered terribly. Greece is under the domination of the big European powers and U.S. imperialism and does not have the ability to act independently in its own interest.

Even a large and developed country such as Argentina with its own currency is constantly under attack because its huge public debt is in a foreign currency (mainly the U.S. dollar but also the Euro and Yen).

The "central proposition" ignores the real world of U.S. dollar hegemony backed by the U.S. military, which gives U.S. imperialism a powerful weapon to bring others under its control.))

Unlike households or businesses, governments with their own currency and their own central bank can never go broke because they can always create money to fund deficits or to pay off debts.

((This statement wanders into the world of idealism bordering on mysticism. It conjures up the idea that something which is not produced can be consumed. Without workers producing new value as goods and services, the country has no new value to consume unless it steals from others. The concept that a "central bank can never go broke because they can always create money to fund deficits or to pay off debts" denies the reality that the human factor, the working class, must be set in motion on means of production if any good or service is to be produced and consumed. How does a nation or people organize that reality and with what aim are crucial issues.

Money can represent social product that has been produced. It can represent potential production but the potential must become actual or the relationship collapses.]

Assertions such as "can never go broke" are used to divert people away from facing the problems as they pose themselves.))

The only real constraint on public spending for countries with monetary sovereignty is real productive capacity. Too much additional deficit financing of public spending or tax cuts in an economy with full employment will push up inflation.

((No imperialist economy has ever had "full employment." The closest an imperialist country comes to full employment is through full military mobilization to fight a major war. In that case, many from the working class are not engaged in creating social product but destroying it through warfare and many of those that are working are producing war materiel.

According to the imperialists, full employment would give too much power to the working class to increase its claims on the new value it produces. Full employment would destroy the imperialist labour market or at least render it powerless to control the working class.

As well, "monetary sovereignty" can only exist within a sovereign country. No country, including Canada, within the U.S.-controlled imperialist system of states is independent or a sovereign state. This lack of sovereignty includes lack of control over its money supply or currency.

These terms "full employment" and "monetary sovereignty" are bandied about to dull the mind and render it incapable of analyzing the concrete conditions.))

Canada and many other countries do have "fiat" money that can be created by central banks "at the stroke of a pen."

((Yes, Canada does have a fiat currency but that fiat currency serves the ruling global oligarchs in control. If it serves the oligarchs to create money "at the stroke of a pen," they will do it, as Trudeau has demonstrated with his $350 billion plus deficit for this fiscal year.))

Central banks can and do expand the monetary base.

((The U.S. central bank, the U.S. Fed, is a cartel of private banks doing their bidding. Canada's central bank is an institution of the state under the control of the oligarchs with the leadership carefully chosen to serve their private interests and pay the rich.))

[I]n normal times, the great majority of new money is created by the private banking system as loans rather than directly by the central bank to finance the government's operations.

((The recurring economic crises could also be called "normal" as they normally occur with regularity. During a crisis, the competing oligarchs are at each other's throat with even more ferocity than usual, and "normal" lending and borrowing become frozen. The central bank intervenes with "liquidity" "at the stroke of a pen" to rescue the situation for the oligarchs, at least those best positioned to weather the storm or even increase their strength and wealth such as certain oligarchs have done during this crisis, i.e. the dirty dozen -- the 12 uber rich individuals in the U.S. who have increased their personal wealth many times over during the COVID pandemic.))

MMT rightly challenges the orthodox idea that government budgets should be balanced and that deficits should be incurred only to fight deep depressions when low interest rates no longer work. As argued by Keynes in the 1930s, deficits will not crowd out savings and private investment if the economy is operating below capacity.

((Why should a Canadian be concerned about crowding out private investment even at the best of times? What problem facing society has private investment solved? Has it solved the housing question including homelessness, poverty, inequality etc? Has it solved the question of war and peace? If problems are to be solved then people have to have the control, power and means to do so and under imperialism it means claiming what belongs to the people by right despite possibly crowding out savings and private investment of the oligarchs.

For the working class it means solving the problem of its unequal oppressive social relation with those who buy its capacity to work, and creating a new social relation among workers themselves. It means striking out on a new pro-social direction for the economy and democratic renewal where members of the polity are truly equal and can exercise control over those economic, political and social affairs that affect their lives.))

[P]ublic investments financed through deficits and debt can create a more robust economy and infrastructure, leaving future generations with greater wealth and opportunities.

((But under imperialist control the "robust public economy and infrastructure" becomes a prime target for privatization especially when other private investment opportunities are few, the rate of profit has shrunk with productivity and pay-the-rich schemes using public funds have become a "necessity" for any private investment of any size.))

Keynes, unlike the "bastard Keynesian" wing of mainstream economics, looked forward to the day when the economy would be driven by productive public investment with no need for the state to borrow from the rentiers living off interest income.

((Obviously Keynesians disagree among themselves whether Keynes ever looked forward to such a day or maybe it was simply propaganda to fool the gullible. An economy "driven by productive public investment" would have to be under the control of the actual producers and capable of defending itself from imperialist marauders or it would not last long. Many in Latin America and the Caribbean dream of an economy "driven by productive public investment" but are faced with the harsh reality of defending themselves against imperialist aggression if their dream is to come true.

The other aspect of this is the fact that the imperialist economy has long been recognized as having fallen into parasitism and decay. The economy is more characterized by unproductive investments and war than anything else. The author even acknowledges this when he speaks of the extra cash coming the way of the imperialists from tax cuts and other pay-the-rich schemes being used unproductively in such things as stock market buybacks and increased dividends.

Some people refuse to see the world as it presents itself because they do not want to face the necessity of a new direction and being part of sorting out what that direction looks like or should be, which means confronting the imperialists and facing down their anger and counter attacks.))

[T]he key ideas of MMT are not so much modern as a return to the radical Keynes and the left Keynesian tradition.

Both hold that conventional policy results in economies running well below capacity much of the time, and both reject the mainstream view that the macro-economy should be primarily managed through monetary rather than fiscal policy.

Today ... the Bank of Canada is printing billions of dollars to buy government bonds in order to lower interest rates.

For the first time they have moved beyond "quantitative easing" -- buying up government bonds in the secondary market to lower interest rates -- to direct purchases of government bonds.

They are supporting massive federal and provincial government deficit spending. The Bank may not loudly endorse MMT, per se, but they are acting on that basis and demonstrating that the state can indeed always pay for what must be done.

[A]ll kinds of orthodox economists and policy makers have temporarily accepted that a massive increase in public spending can and should be undertaken without raising taxes and almost irrespective of the deficit and debt.

[T]he key question is how long this can go on.

((Why is this the key question? Should the key question not be the issue of who controls the economy, and in whose interest and with what aim? The imperialists are desperate to save their bacon and they are throwing tons of money at doing just that. Already the imperialist think tanks and media are full of dire predictions of tax increases and a tightening of the belt for the people.

Why not simply admit that the crisis has increased the striving of each oligopoly working as part of a cartel and of coalitions to control everything, beginning with state institutions of each country and their governments? They will do anything to protect their private interests.

They are at each other's throats over how to proceed, most decidedly or openly in the U.S. and internationally with China and Russia. How do the established imperialists and centres deal with the upstarts and competitors that are rising in Asia and to a lesser extent in Russia? World war is a grave danger if people do not build an anti-war government. Refusing to recognize the dangers is not helpful to the people organizing to defend the rights of all by humanizing the natural and social environment and making Canada a zone for peace.))

Stephanie Kelton [the main U.S. economist/professor promoting MMT, or rather being promoted as such, was an advisor to Bernie Sanders and is now with the Biden gang -- TML Ed. Note] calls for much higher levels of public investment and spending to deal with a wide range of social ills, funded directly by the central bank, on a continuing rather than one-time emergency basis. This has understandably appealed to progressives.

So long as we have low inflation and a very depressed economy, the Bank of Canada is unlikely to change course and will backstop massive government spending to deal with the crisis.

They will give fiscal policy the latitude to drive recovery in full recognition of the fact that even near-zero interest rates are not enough to deal with the slump. But, as things stand, they still basically control monetary policy.

MMT is rather silent on this, just saying that governments can set the interest rate. It begs the question of who actually controls interest rates, and in whose interests.

Dating back to at least the 1970s, the Bank of Canada ... has generally chosen to accept some slack in the economy so as to discipline labour and to maintain low and stable inflation.

((To say the Bank of Canada has generally chosen to accept some slack in the economy is an over generously benign way of describing unemployment, insecurity, poverty, war, the refusal to address and resolve social problems and the direct onslaught on workers' rights with the anti-social offensive. The working class movement has long been in retreat suffering attacks on their rights, pensions and other social programs, the deterioration of conditions of work through contract work, part-time work and now the gig sector, privatization, the expanding pay-the-rich and war economy and destruction of any semblance of independence of the country through multiple free trade agreements and imperialist globalization as well as the integration of state bodies/structures and regulations with those of the United States war economy and Homeland Security.))

Conventional thinking has emphasized setting low interest rates in an economy operating below capacity, as has been the case in the slow recovery from the global financial crisis.

But this, as Kelton argues, has starved public spending, while fuelling the destructive and unsustainable growth of household and corporate debt, and fuelling the asset price inflation that has greatly increased inequality of income and wealth.

((Note: Imperialist economics describes asset price inflation as a rise in the price of assets, as opposed to consumer goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and means of production, especially raw material or commodities as the imperialists like to call them. All these assets are bought and sold multiple times. This is the continuous exchange of already-produced value and in many instances such as commodity futures and the stock market no production at all, which could be termed fictitious value. The imperialist economy does not attend to its overall health but rather to the health of the individual competitors within it who hold power. Economic crises are regular occurrences because the human factor/social consciousness and aim to meet the needs of the people and society are blocked from playing their decisive and necessary role.))

[C]orporations have borrowed at low rates to ramp up unproductive activities such as share buy backs and increases in dividends.

MMT rightly emphasizes that priority should be given to fiscal policy over monetary policy, while taking no single position on what governments should spend on.

Proponents such as Stephanie Kelton generally support big increases in public investment – the green economy, education, infrastructure, etc., as well as a federal job guarantee.

They also argue that if and when inflation becomes a problem, it could be tackled through selective tax increases on households and business, as opposed to an increase in interest rates which would limit government investment and drive up the carrying costs of the public debt.

((The public debt is to private investors and in the case of the U.S. many foreign state investors. U.S. public debt is unique in that it can borrow to pay for whatever it has already borrowed and more, such as its military because it dominates the world. Countries and people are hesitant to challenge U.S. authority because the U.S. will destroy whatever it cannot control.

Government borrowing from itself exists in tandem with government borrowing from private interests. A moratorium on servicing the public debt to private lenders and investigating its legitimacy and prohibiting any future such borrowing would be a positive reform but the people must be organized and mobilized to implement and defend such a reform.))

Kelton argues that support for MMT should exist across the political spectrum, but she neglects the role of real interests.

The banks want to retain their central role in money creation.

MMT also tends to minimize real structural constraints on government macro-economic policy in the context of global capital flows.

(("Global capital flows!" -- A rather genteel way of referring to imperialism and the brutal private interests of the oligarchs who scour the world in search of maximum profits and places to pillage. The imperialists have no sense of social responsibility because that would interfere with their aim of maximum private profit. Countries under the thumb of imperialism do not have all-sided self-reliant economies within nation-building projects. The country under control has to offer the imperialists something such as certain raw materials or cheap capacity to work from their working class. As soon as something negatively disturbs the return on investment, the imperialists will pull the plug and abandon the people or lash out at those it may accuse of causing trouble.))

MMT says that governments can control the interest rate through the central bank. This is true in the first instance but highly problematic in a world of capital mobility if investors fear too much inflation or currency devaluation.

The Bank of Canada can maintain low interest rates, but they face the possibility of capital flight on the part of both domestic and foreign capital, which would bring down the exchange rate and fuel inflation.

((These comments mean that fiscal or even overall government policies cannot prevent "capital flight" if the imperialists feel their interests are threatened. This means the central issue is one of control. Who controls the economy and in whose interests? To control the economy, the working class has to control the politics, as politics is the concentrated expression of economics. Controlling capital flight requires controlling the economy in the public interest and the value that comes into and out of the economy. It means building up the independence and self-reliance of the economy through extended reproduction. This requires control over the new value and how new value is distributed. This requires democratic renewal and the working people gaining political decision-making power for otherwise the imperialists will continue to dominate.))

This point is discounted by MMT proponents, who are mainly talking about the U.S. which controls the global reserve currency and is thus in a unique situation.

Many foreign central banks of surplus countries such as China and Japan own huge reserves of U.S. bonds that they would be reluctant to sell quickly since this would raise their own exchange rate, result in large paper asset losses, and cause a major disruption to the global financial system....

The ability of the bond markets to punish smaller countries with high levels of public debt and incipient inflation cannot be dismissed.

((Argentina comes to mind. Much of its massive public debt is in foreign currency (U.S., Euro and Yen) unlike Canada where only a small percentage is in a foreign currency. But Canada's public debt is held mostly by "institutional investors" that are linked with U.S. imperialism. Canada is just as vulnerable to "punishment" by the bond markets if the government does anything to annoy the imperialists and this cannot be discounted or dismissed and must be taken into account politically. The people have to be mobilized politically and organized to fight to defend their interests otherwise nothing will change and the imperialists will carry on anti-consciously leading us all to disaster.))

Keynes argued that countries could only control interest rates if currencies were managed and if there were controls on international flows of capital.

((Who controls these flows from where and to where? International investment of accumulated wealth is fundamental to imperialism, which is associated with the thirst for cheap raw materials, workers to exploit and places to pillage and control. When the young Soviet Union cut off one-fifth of the world from imperialist investment and theft this seriously weakened imperialism and was a key reason that imperialism was determined to destroy the Soviet Union through war and subversion.

Controls on international flows of capital are a pipedream without a determined political battle waged by an organized and politically conscious people determined to direct the economy in a new way that favours them and builds the nation and the new.))

Dismantling of the post-War Bretton Woods arrangements was intended to set the stage for a shift from nationally controlled economies to a world of international capital flows that constrain governments.

((Exactly, and this became U.S. global dollar hegemony and its position as the imperialist reserve currency that those in the U.S. imperialist controlled system of states were compelled to buy and hold in reserve. Dollar hegemony is a big factor favouring U.S.-controlled globalization and control of the international financial system allowing it to enforce sanctions and blockades and punish anyone who dares to resist U.S. control.))

MMT is right to argue that so long as the economy is operating below potential, we can and should run large deficits to fill the gap and to address public policy priorities such as the need for affordable housing, expanded public healthcare and building a green economy.

((The writer uses the expression "below potential." What is the potential of the imperialist economy? The potential lies in the modern socialized economy of industrial mass production but imperialist control carves it up into contending narrow private interests and their cartels and coalitions. Competing private individuals and groups obsessed with the aim of maximum profit for themselves are quite capable of tearing each other apart and blowing up the whole to serve their narrow private interests. The potential cannot become actual without the economy coming under the control of the actual producers, the working class, with a new aim to constitute the nation so that it serve the people and society.))

These deficits will have most impact in both social and economic terms if used to finance well-chosen public investments, as opposed to tax cuts. Inflation is not likely to be a problem.

((Why is inflation not likely to be a problem? Because the working class has been beaten down and its organizational strength decimated. Price inflation is a weapon to defeat wage increases and reduce the claims of workers on the social product they produce. Prices are not stable but under the control of the oligarchs and serve their interests. You could say with certainty that as the working class begins to reorganize and pull itself up and claim what belongs to it as it must, the imperialists will fight back with price inflation and other means to combat any widespread wage gains just as they did in the 1970s.

Control of prices in the people's interest can be achieved through public control of the wholesale market and an imposition on the major sectors and producers of a modern formula to determine prices of production of goods and services. A modern formula includes an average rate of profit and enough reproduced-value to meet the needs of the working people and society. This is coupled with all large businesses fully paying for the infrastructure they consume during the course of their activities (mass transportation, roads, bridges, electricity, water, sewer etc.))

We can run large fiscal deficits now, but not indefinitely, without major changes in fiscal and monetary policy and in political direction. In the longer run, we cannot have everything we want just by printing money.

((We cannot have everything we want when we, the working people, do not have control over the economic, political and social affairs of the country.))

If we want permanently higher public spending, we also need to raise taxes.

((What happened to the declaration of the importance of public funds from public enterprise? Public enterprise is the only sure source of public income. This can be coupled with public control of the wholesale sector and prices of production governed with a modern formula that guarantees a certain level of individual and social reproduced-value (wages, benefits and social programs serving the people). This requires determined political control of the economy by the working people. The imperialists always revert back to attacks on the people through taxes, in particular individual taxation, which they sometimes even call progressive.))

If we want much more public investment, we will also have to give less priority to private consumption, especially the luxury consumption of the rich.

((The issue is not private consumption but private expropriation of new value (profit) through private control of the socialized economy. The actual producers, the working class, have to bring to the fore their aim for the economy to serve the people and nation-building and exercise control over the economy so their aim is fulfilled.))

If we want greater control of our economy, we must confront the power of private financial interests.

((How this is to be done is not addressed. It requires building a political party which organizes the workers movement to take up its own nation-building based on democratic renewal. By constituting the nation, the working class must take practical measures to gain control over the economy and country.))

MMT, based on the theoretical legacy of left Keynesian economics, offers us a way forward, but it does not free us from the very real constraints of capitalism.

((The way forward is to free ourselves from the constraints of imperialism. Without freeing ourselves from the constraints of imperialism there is no way forward, only in this instance the empty policy objectives and words of warmed over Keynesian economics. Even when they were given rise to, Keynesian economics were designed to block the working class from freeing itself from the constraints of imperialism in organizing, thinking and theory. Today, they are promoted as a so-called already discredited "Third Way" to suggest that the "one percent" can be made to share their wealth with the "ninety-nine percent" so as to renew capitalism to make it work. It is the miracle the new Throne Speech and Finance Minister pledge to achieve. It is nothing but pie in the sky to hide the schemes to pay the rich and fool the gullible. Their problem is that the only gullible these days are the highest echelons of business unions whose own narrow private interests put them as out of touch with reality as the government and its ministers with whom they hope to align the working class.))

This article was published in

Volume 50 Number 34 - September 12, 2020

Article Link:
Modern Monetary Theory: Keynesianism Warmed Over - K.C. Adams


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