Understanding the Modern Monetary System

Understanding the Modern Monetary System

THE PROSPECT OF A CORBYN-LED Labour government committed to a socialist programme is now a realistic proposition within the next three years. The hopes and expectations of millions will be invested in that Labour government, so it will be essential to deliver the anticipated change that people want.

But whenever progressive parties talk about ideas to improve public services, right wing opponents and media hacks always ask: “How are you going to pay for it”. The flippant answer should simply be “with money”.

We’ve seen how the Conservatives and mainstream media misrepresent our agenda. Those old enough to remember will never forget the Conservative Party’s ‘double whammy’ and ‘tax bombshell’ attack ads in the 1992 election, dishonestly claiming Labour would massively increase taxes to pay for its pledges.

Ever since then Labour has been obsessed with avoiding similar attacks - so, for instance, Gordon Brown committed Labour to the Tories’ spending plans in the 1997 election campaign. Twenty years later, John McDonnell went to great lengths to demonstrate how Labour would pay for its programme by measures like increasing corporation tax and reversing George Osborne’s decision to cut the top income tax rate. John generated much mirth when he said the only numbers in the Tory manifesto were the page numbers. But Theresa May still insisted “there isn’t a magic money tree".

Getting into an argument about how we’re going to pay for progressive policies is a trap we should avoid. That means changing the terms of the debate rather than reinforcing them. I once heard Tony Benn at a public meeting saying, “in wartime you do whatever is required,” adding we should adopt the same principle in peacetime.

So how we would pay for world class public services? To answer that question, the labour movement must understand how the monetary system operates. The financial crash in 2008 gave us a glimpse of this mysterious world when the Bank of England produced £375 billion out of thin air to bail out the banks.

The tragedy is the Labour government at the time flunked the opportunity to ditch the disastrous free market economics that caused the crash in the first place. Labour didn’t have an answer to neo-liberal hegemony until Jeremy Corbyn was elected to lead the party. But our ability to enact our plans is hampered because we still allow adherents of the status quo to set the parameters of the discussion. That is why we need a fundamental change in approach.

Modern Monetary Theory (MMT) offers a way of reframing the debate. It provides an understanding of the monetary system and enables us legitimately to reject the notion that progressive policies are unaffordable and unrealistic. The only limitation on our ability to act is the capacity of the economy, not our capacity to raise tax. But a major investment would be needed in training to limit any mismatch between idle capacity and required capacity.

As for taxation, it doesn’t fund public services anyway. It’s rather like the Monopoly board game, where the rules stipulate that to start the game the banker distributes cash and “never goes bankrupt”. The same is true of public spending where the government has to spend first before it can levy taxes.

This might seem counter-intuitive given the way the commentariat and the Tories never tire of telling us how Labour maxed out the credit card. But that is a myth. Pound sterling is a sovereign currency issued by the Bank of England alone, meaning we can never run out of money. Consequently a progressive Labour government could easily pay for its programme, without causing inflation, so long as spending was targeted on purchasing spare capacity available for sale in pound sterling. And Britain has plenty of spare capacity in terms of unemployed and underemployed people, together with the huge amount of unmet need for a variety of public services, infrastructure improvements and renewable energy.

Although taxation isn’t needed to fund public spending, it does drive behaviour change, tackle inflation, address inequality and create a value for an otherwise worthless currency. Accepting the narrative that we have to tax the rich to pay for a good society is not only factually inaccurate, it also implies we can’t manage without wealthy elites and encourages a lackey mentality.

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Member of Parliament for Derby North