Money for nothing

Book review of The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy

This somewhat overwritten book has a message from Modern Monetary Theory (MMT) for all governments that they will love like — to use Harry Belafonte’s immortal words — a pig loves a pool of mud.

The message is: Spend what it takes by printing notes, and if inflation comes to bite you in the backside, tax away the extra money in circulation to suck it out of the system. 

That’s what we have been doing in India since 1957. But then who cares about our ways?

The book, however, doesn’t say where all that money will go if you don’t burn it. No matter. The suggestion, even if not very novel, is a seductive one. 

This MMT theory on which it is based, if one can call it that, took shape in the US after the Lehman crisis of 2008. 

Credit had dried up. Businesses had folded. Unemployment had risen dramatically. There was distress all around.

Some very respectable economists came up with the idea of helicopter money. This literally meant dropping currency from helicopters so that people with no money would have some. 

They would spend. Demand would come back. The economy would revive. And people would get jobs.

If they had asked me — but with typical western arrogance they didn’t — I’d have pointed them to the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) where not even helicopters are needed. The money is just handed over. 

It was Keynes who fathered this idea back in 1936. He said one easy way of reviving aggregate demand would be to pay people for digging holes in the ground and covering it up. 

Fifty years later the rock band Dire Straits added a bonus to Keynes’ idea. They sang a song called “Money for Nothing and Chicks for Free”. 

Print on, McDuff: In 1966 Lyndon Johnson had tried a variation on the theme when he changed the name of the budget deficit essentially caused by the Vietnam War to “Great Society”. That was his equivalent of MNREGA. 

But at the time the US dollar was still pegged to gold. So the Johnson idea had some automatic checks. 

In 1971, however, his successor Richard Nixon kicked those checks aside. He simply reneged on the US promise to pay $35 for an ounce of gold. 

From that point on, the US became free to print its currency notes — as Mrs Thatcher might have said — on and on and on.

This book merely adds an infinite number of “ons” to that gem. Why let the gap between revenue and expenditure hobble you, it asks, when you can print on and on and on and on?

Forgers, by the way, think along similar lines except that, as this book argues, the business of printing notes is like violence: A monopoly of the state. If you have that monopoly, Stephanie Kelton asks, why not use it?

She starts by debunking the Thatcher notion that governments don’t have any money of their own. What they have belongs to the people, obtained by taxing them.

The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy
Author: Stephanie Kelton
Publisher: John Murray/Hachette
Price: Rs 800

Rubbish, says Ms Kelton. Governments are the sole producers of money and the whole lot of it belongs to them. They merely let people use it.

Viewed from that perspective, the idea of a deficit — expenditure minus revenue — is irrelevant. It is the duty of governments to produce as much money as is necessary to generate full employment.

The formal theory: It would be unwise to call the intellectual basis of this sort of thing a theory. Also, theories have to be tested, never mind that it is by algorithms that some economists learn. MMT meets neither criterion. Nevertheless it is useful to know where Ms Kelton has got her ideas from. 

And there is a real surprise here: She’s an adherent of a highly respected monetary British economist called Wynne Godley who, when he was not playing the oboe, was busy saying that there are only two sectors in any economy: The government and the rest.

What one pays, the other receives. That’s it. Simple. 

Ms Kelton recognises that this is not a theory but just the statement of an observable fact. You can’t say this is not true.

So what next, then? Another observation: That there’s no such thing as a deficit because the two sides of the balance sheet must necessarily balance. This becomes blindingly obvious, says Ms Kelton, when it is pointed out.

The key, it seems is not believing that it is the government’s budget that must balance. Instead, it is the economy that must balance. With this in view, she goes on to endorse the MMT view that governments keep their deficits way too small. 

So, go ahead and print off.