Economics: Modern Monetary Theory or Marxism?

Winning the Green New Deal and Medicare for All

Tony Gong, Socialist Alternative (ISA US)

The global economic crisis has made clearer than ever the need for social spending. Workers, students, and youth in the U.S. are rallying behind Medicare for All (M4A), cancellation of student debt, and a Green New Deal (GND). Yet whenever these proposals are raised, corporate Democrats and Republicans always ask, “who’s going to pay for it?” This question, though disingenuous, deserves an honest answer from socialists.

Modern Monetary Theory (MMT) — a school of thought that is enjoying rising popularity on the left — says that social spending can be fully funded through monetary policy (i.e. “printing money”) without fear of inflation. As evidence, MMT proponents point to the trillions in government stimulus spending on COVID-19 relief as proof that the capitalist state can fully fund employment and social programs. It is striking that Rep. Alexandria Ocasio-Cortez believes MMT “absolutely” needs to be “a larger part of our conversation,” and that Bernie Sanders had MMT champion economist Stephanie Kelton serving as senior economic advisor to both his presidential campaigns.

But capitalism has never achieved long-term full employment, and gains for working people are never permanent and always reversible. Capitalists have always used the threat of unemployment to drive down wages and keep workers in line. Bosses resist social spending tooth-and-nail in order to lower the share of wealth going to working people, and to keep workers from developing the confidence to fight for more gains. Will MMT really be able to both uphold the capitalist system and cure the ills it generates?

Unfortunately, MMT’s reliance on capitalism hobbles it at every step. MMT does not look to the working class, which is the only force that can lead the fight for serious change, to win the GND and M4A. Instead, it believes these programs can be won through technocratic compromises with big business, which would water down these programs and weaken the movement. As a bourgeois theory, MMT ultimately sees social spending as a way to pull U.S. businesses out of the current depression, not as a good in itself. But printing money, as the past decade of quantitative easing has shown, does not mean that capitalists will fruitfully invest that money to “fix” the depression. Moreover, printing money is really an option for only a few rich imperialist countries. In the current crisis that grips the entire world, MMT is an insufficient answer for working people all around the globe looking for a way out.

What is Modern Monetary Theory?

MMT is both a heterodox (non-mainstream) view of how a capitalist economy works, and a slate of policy recommendations. According to MMT, money did not originate from bartering but from the state, which uses its authority to issue currency and dictate demand for it. Anything, whether gold or digital bits, would be made into money when the state accepts that thing as payment for obligations (taxes, debt, fines) to itself. All of the state’s subjects (e.g. taxpayers) are compelled to use this money by force of law, and so it becomes the most acceptable money for commerce. Those outside the state will also accept this money because they know the state’s subjects will accept it.

MMT economists bolster their case that money originated from obligations to the state with their interpretation of anthropological research into a wide range of monies, from the development of Sumerian currency in tax collection, to the ancient Germanic tribes’ practice of weregild (restitution for injury or death), to the monetization of colonial African economies through British imperial taxation.

If money begins with the state, MMT reasons, then the national government can create and destroy money at will. This assertion contradicts the idea that government spending is funded by tax collection. Instead, MMT argues that the government effectively creates money at the moment of spending — and tax collection comes months later. Stephanie Kelton explains in a seminal MMT paper “Can Taxes and Bonds Finance Government Spending?” that “it is not money but bridges, armies, satellites, etc. that the government wants and that it acquires them by encouraging the population to provide them in exchange for government money.” In other words, the state uses compulsory tax collection to impart value to newly printed money, which in turn is exchanged for private sector production.

This analysis has an intellectual history rooted in Chartalism, an early 20th century economic theory that “taxes drive money.” Chartalism influenced John Maynard Keynes in the development of his theory, which in turn influenced MMT in both economic and political conclusions. MMT itself was born in the 1990s out of a post-Keynesian online forum discussion between hedge fund millionaire Warren Mosler and a group of economists.

MMT’s political program, the job guarantee, and inflation

MMT proponents, who are generally left-leaning, have eagerly taken up the cause of programs like the Green New Deal. They are right to compare fighting climate change, ending mass incarceration, and universal healthcare to the desperate challenges of the Great Depression and World War II.

Drawing parallels to the New Deal, MMT economists see the GND as providing social value and as counter-cyclical, i.e. able to counteract the economic downturn by boosting investment and spending. While the cost of social programs will be tremendous, Kelton argues that funding is not an issue because “[i]f Congress authorizes… a few hundred billion dollars, then the Fed’s job is to make sure that those checks don’t bounce.” MMT sidesteps the question of who pays for the Green New Deal by pointing out the Federal Reserve (Fed) can simply print money for the program.

To answer concerns around the inflationary effect of increasing the money supply, MMT builds on Keynes’s ideas around full employment. MMT proponents claim that as long as money creation is matched with increased production, there will be no inflation. A country at full employment would be at maximum output, beyond which additional money creation would cause inflation. At anything less than full employment, however, MMT proponents argue that money creation would not lead to inflation, and also that the government itself should sign up to full employment through a program called the Job Guarantee. This way, during downturns, the economy can maintain consumer spending, continue producing at maximum output, and reduce the social pain of unemployment.

This theory of inflation is heavily colored by the experience of the past decade. The Fed has effectively printed a lot of money through “quantitative easing,” but inflation remained low because the 2008 financial crisis laid bare a long-running crisis of profitability. Without good avenues for investment, capitalists refused to spend the newly-created money on offices, wages, plants, and so on — but instead poured it into speculative assets. For the past two decades, the general economy also faced deflationary pressures due to overproduction and the decreasing share of wealth going to the working class while certain assets, like housing and stocks, became speculative and inflated to sky-high prices. Prominent bourgeois economist Larry Summers begrudgingly describes this phenomenon as “secular stagnation.” It is not economic laws discovered by MMT, but the lack of profitable investments combined with deflationary pressure in the capitalist economy, that has held down general inflation in the previous period of money-printing.

True to its Keynesian roots, MMT proposes to make up for the ongoing lack of private investment with large-scale public spending through programs like the Job Guarantee (JG). The JG would create $15-an-hour living-wage jobs for anyone who wants work, which is an excellent starting point. However, according to prominent JG advocate Pavlina Tcherneva in “The Job Guarantee: Design, Jobs, and Implementation,” these jobs are intended for ”transitioning to private sector employment opportunities,” “without competing with the private sector.” The JG is meant to bring the private sector back to profitability, so the jobs it offers are intentionally worse than private sector employment to avoid competition.

The JG wage would be fixed to $15 an hour and not be indexed to inflation. MMT economists argue this is necessary to prevent more inflation. Taking a JG job would mean leaving behind other welfare assistance. If the private sector expands, the JG program will shrink in response so as to keep capitalists as the primary employers. The jobs are designed to be low-skill and labor-intensive with minimal use of capital. All this adds up to a program where the initial decent wage will be eroded through inflation, just like the minimum wage, and where business interests take precedence over the welfare of workers. The JG is not a government program for good jobs — it is closer to a form of welfare that requires work.

The reason MMT theorists are compelled to weaken the JG is that as bourgeois theorists, they cannot threaten the power of the bosses, who they believe should be the primary employers in an economy. The unemployed form what Marx called a “reserve army of labor” that capitalists can call upon to replace those who are currently working. This threat of unemployment and replaceability acts as downward pressure on wages, and helps capitalists to make profits. If MMT removes the threat of unemployment, then it must offer another way to cut costs — such as dooming JG jobs to eventually be undesirable, with wages eroded by inflation — to protect the interests of the capitalists. Without strong social pressure defending the JG program and making it better, corporate lobbies can easily twist the JG into workfare.

Rather than weaken the Job Guarantee to accommodate capitalism, socialists fight for good jobs for everyone, even if that means changing the economic system. A strong working-class movement can win social spending without prematurely conceding to business interests. Social demands will always conflict with the demands of big business under capitalism, and economists have to choose which side they are on. Unfortunately, MMT proponents have backed down and yielded to the interests of profit — and not just on the JG.

Is MMT the right strategy for social spending?

MMT is concerned first and foremost with saving capitalism and sees the path to social welfare strictly through cooperation with business interests. Its central thesis is that social programs can be funded through money creation, and not additional taxation which would cut into profits. However, the fight for social spending is class warfare, while MMT is trying to appease the capitalist class with a shortcut to paying for social programs that avoids taxing the rich. But can the Federal Reserve really be turned into a radical left-wing institution that prints trillions of dollars for social welfare programs? How will MMT mobilize the forces that will carry out this transformation?

Marxists do not see the state as a neutral arbiter between classes, but as an instrument of the ruling class — the capitalist class. This does not mean workers can never win victories against the state, but there are serious limits to the ability to reform the system. If tomorrow the Fed were to start funding social programs, the corporate-controlled Congress could just rewrite the Fed’s charter. Just because financial markets skyrocketed in response to central banks printing money for corporations doesn’t mean they will stay friendly if central banks print money for social programs, which the markets broadly oppose. And if corporations find it unprofitable to invest in the GND or M4A, they will not produce the necessary numbers of turbines or medicines, and instead just pocket the newly printed money.

We already saw this when the coronavirus stimulus measures in 2020, which largely went to corporate cash hoards while only one-fifth went to workers, helped increase the wealth of U.S. billionaires by $1 trillion. At the same time, American workers lost $1.3 trillion in earnings in just the first two months of the pandemic. One in four households in the U.S. have experienced job loss and millions of people face evictions – all while the Fed printed an unprecedented $3.5 trillion for corporate shareholders. To guarantee the success of serious reforms like the GND or M4A, we can’t just give money to the big manufacturers and pharmaceutical companies. Even after receiving $2.5 billion in government funding for COVID-19 vaccine research and billions more for the first hundreds of millions of doses, U.S. big pharma delivered only 68 million of the 300 million vaccines promised by the end of January. While vaccine production is ramping up, its rollout has been a disaster. We need to take all major corporations under democratic public ownership so that competition and trade secrets don’t hamper cooperation, production can be directed toward necessary goods, and prices can be set affordably.

In the fight for social spending and real gains for working people, our opponent is not theories of inflation or money circulation but the capitalist class. The fight for social programs is part of the struggle over the social product — namely what share of the wealth produced by workers goes to the working class and what share goes to the capitalists. During the postwar boom, facing a powerful labor movement and the threat of the USSR, the capitalists in the West temporarily conceded to extensive social spending. The massive expansion of production after the destruction wrought by WWII allowed profitability to be maintained even while social welfare increased the share of wealth going to the working class. But as profitability declined and the capitalists turned to neoliberalism, social programs became a target of cost-cutting and privatization. Capitalists restored profitability by muscling into the workers’ share of the wealth and increasing the rate of exploitation.

The working class, with its strength in numbers and potential power in the workplace, is the force that can win social spending without concessions, not MMT technocrats working within the capitalist state machinery. To build the strongest possible movement, social spending demands must mobilize workers and squarely face our enemy. That means taxing the rich to pay for social programs and bringing key corporations into public ownership under workers’ control.

Unfortunately, taxing the rich is anathema to many MMT theorists. In the Levy Economics Institute working paper, “How to Pay for the Green New Deal,” MMT proponents state that they “do not agree with [Sanders’s] goal of raising revenue” through taxing employers and the rich to pay for M4A. Instead, they “propose to impose a surcharge of 4.6 percent on the employee portion of the payroll tax” to “allay fears of inflation” by “[reducing] consumption demand by the less fortunate bottom 90 percent of Americans.” Despite MMT’s rhetorical concern for ordinary people, this would shift the tax burden further to the working class! Such a tax would not only be regressive, but also give ammunition to the right wing to attack social programs. Founding MMT theorist Randall Wray recently co-authored a paper, “Is It Time to Eliminate Federal Corporate Income Taxes?” where he claims “corporate taxation… is inefficient and largely borne by consumers and employees, not shareholders” and “prefer[s] the elimination of the corporate profits tax.” This is a shocking rehash of the right-wing myth that corporate taxes get passed on to consumers and workers, so we shouldn’t tax them.

Winning social programs is an uphill battle and the political needs of the movement cannot be hindered by the economic theories that support them. MMT’s technocratic approach, which relies on bureaucratic maneuvers and shifts taxes from the rich to the working class, will demobilize workers and progressives fighting in their workplaces and the streets for social spending. The only way to defeat corporate opposition is through industrial actions and mass movements, united around a program of taxing the rich and taking major corporations into democratic public ownership.

MMT vs. Marxist economics

MMT’s weaknesses can be traced to a fundamental misunderstanding of money, value, and the sources of the crises of capitalism. Historically, the origin of money arises from one set of social conditions and its universal adoption arises from another. The state may invent and issue currency to quantify taxes, but it ultimately seeks to collect real value and not money. Feudal lords, for example, were more than happy to collect non-money taxes from their subjects in the form of corvée, or labor in lieu of money or crop payment. Yet the same fiefdom a few centuries prior might have been Roman lands that saw more ubiquitous use of money because of widespread trading and production of goods for sale. How much an economy uses money depends on the production of commodities, their exchange, and the need to quantify and build fortunes. Under capitalism — which Marx described as “generalized commodity production” — it is not the state’s taxes that drive demand for money, but commodity circulation and movement of capital.

Marxists understand that a commodity has a value based on how much labor, on average, is used to make it (the socially necessary labor time). For markets to function, the quantity of money and its circulation needs to reflect the socially necessary labor time of commodities, and can’t be determined arbitrarily by feudal kings or capitalist states without causing economic disruption. Excessive money supply, all things being equal, is inflationary. MMT, lacking a theory of value, struggles to explain the general movement of prices. Instead, it assumes the state can set prices (control inflation) by manipulating the amount of money in the economy. But the control over the quantity of money is not the same as control over the value of money. Under capitalism it is the capitalist market, not the state, that ultimately determines what and how much to produce and thereby what value money will have.

In this sense, MMT doesn’t account for the underlying objective tendencies towards crisis in capitalism: the tendency towards overaccumulation of capital and the tendency in the general economy for the rate of profit to fall as more is invested in technology and machines than in workers’ labour power, which is the only source of surplus value. This is a tendency and not a law, but it can be seen in the U.S.’s struggle with declining productivity growth. From 1991–2007, U.S. worker productivity grew an average of 2.2% per year. From 2010–2017, productivity growth fell to 0.9% despite the heavy use of quantitative easing. With capital investments barely improving output per worker, and low or negative real interest rates in all the advanced capitalist countries, capitalists are refusing to invest newly printed money because they can’t turn a profit. The growth of capital intensity — a ratio that roughly reflects capital consumed to labor power consumed in production — has in the past decade been near zero or even negative for the U.S. The seeds of the current economic crisis were sown long before COVID-19 emerged.

If the previous period of quantitative easing didn’t fix the dearth of profitable investments, then neither will printing even more money as MMT proposes to do. The combination of declining rates of profit and easy monetary policy led to “stagflation” in the 1970s, when economic growth in the advanced capitalist countries stagnated while inflation soared. That led the ruling class to reject Keynesianism in favor of neoliberalism, which promised to restore profitability through lowering the share of wealth going to the working class, including vicious cuts to social programs. MMT is a return to Keynesianism, except armed with the Job Guarantee so that state employment can soak up newly printed money.

The JG stops short of massive state employment, however. In the MMT vision for a GND, laid out in “How to Pay for the Green New Deal,” “JG workers would be used only in a subset of GND projects,” for “labor-intensive work” that does “not require expensive capital investment or materials,” and “not be used as skilled labor.” Skilled labor and capital-intensive goods and services would make up “a core component of the GND” but still be “undertaken by private contractors while paid for by [the state],” funded with money-printing.

Workers desperately need higher wages and a huge expansion of social spending, but MMT’s watered-down program offers undesirable jobs while its money-printing approach risks further deepening the crisis under capitalism. In a capitalist economy already glutted with goods, printing money for additional production will exacerbate the crisis of overproduction. Only a rational, planned economy under democratic control can redirect production to rebuild infrastructure based on 100% renewable energy, universal healthcare, and good jobs for all.

Without a theory of value, MMT also underestimates the role of debt in capitalism. State debt is more than a number; it is a tool for capitalists to transfer wealth from other classes. Not only are capitalists the main benefactors of state spending, they are also the state’s creditors and will see their loans to the government repaid with interest through taxation of the working class and the middle class. In Volume 1 of Capital, Marx called “public debt… one of the most powerful levers of primitive accumulation” of capital.

But excessive state debt becomes a burden on capitalism. Bank assets that could have been invested in capitalist enterprise are instead tied up in non-productive government bonds, which become especially attractive in the current atmosphere of economic uncertainty and low profitability. New state debt ceases to be an instrument of capital accumulation as real interest rates drop to zero or negative. Addressing the national debt with money creation, which has already happened in a limited way through quantitative easing, caused skyrocketing prices in the real estate and financial markets. For capitalists, this meant rising capital costs: more expensive commercial real estate and higher costs to buy shares in startups and corporations. This further reduced profitability and discouraged investment. Printing money merely transforms, but does not negate, the problems of debt.

Additionally, state debt is not the only debt to be concerned about. In the last year zombie companies, which can’t earn enough profit to pay the interest on their debts and need to borrow more to avoid bankruptcy, have doubled their debts to $2 trillion. This explosion of debt was spurred on by the Federal Reserve, which printed money to buy up corporate bonds in a new precedent. Today there is so much speculative money competing to buy junk bonds that their yields have fallen and companies are told to issue even more junk debt. The corporate debt bubble is a powder keg, waiting to detonate a financial crisis if interest rates rise. There is no historical reason to believe that interest rates will remain indefinitely at the current low levels. If interest rates rise and threaten the mass of corporate zombies, the political establishment may even pick and choose elements of MMT’s logic to justify ever-larger corporate bailouts and thereby try to prevent the corporate debt bubble from exploding.

Meanwhile, no relief is coming for household debt. The federal government has passed loan forbearance for student loans and mortgages, and a weak moratorium on evictions, but workers still have to pay back enormous sums after the grace period ends. The empty recovery after 2008 and the current crisis have stretched ordinary people to their limits on debt. With almost 90% of people with student loans currently not repaying them during the pandemic forbearance, the specter of mass default looms over working people once repayment becomes mandatory. But the Fed will not rescue us like they did zombie corporations unless forced to by a mass movement. In the absence of such a movement, capitalists and the state will send debt collectors, lawyers, and police to extract the pound of flesh they believe they are owed. Debt is such an integral part of capitalism that the ruling class will never allow a technocratic money-printing solution to deprive it of such a useful tool. A socialist transformation of society is needed to end the burden of excessive personal debt and reset working people’s lives to be debt-free.

MMT depends on the power of U.S. imperialism

Much of MMT’s economic proposals rests on the special position of U.S. imperialism. MMT’s policies require “monetary sovereignty” — a list of sovereign privileges which includes full control over currency issuance, tax collection, debt issuance, and the ability to float exchange rates. While the U.S. fulfills that criteria, few countries around the world do. Individual Eurozone countries, for example, do not have full control over the issuance of the Euro. Many developing countries don’t have floating exchange rates because imperialism has straight-jacketed their economies for tourism or exporting commodities, forcing them to peg to the U.S. dollar. Attempts by neocolonial countries to exercise monetary sovereignty regardless of these constraints have triggered currency crises, such as the hyperinflation currently gripping Lebanon as the central bank prints liras to cover the debts of a government wracked by corruption and imperialist extraction. It is clear that MMT proposals only have a chance of working only in truly wealthy countries.

As the pre-eminent global imperialist power, the U.S. also has the privilege of the dollar being the reserve currency of the world. This means countries trade with each other largely in dollars, even if neither country uses the dollar domestically. The dollar accounts for over 60% of foreign exchange reserves globally. Worldwide acceptance of the dollar lends credibility to MMT’s assertion that the U.S. can print as much of it as it wants. But that’s partly because the consequences of money-printing can be offloaded to other countries, with dollar-pegged countries being hit the hardest because they may need to match new dollars with money-printing of their own to maintain the currency peg.

A massive money-printing program, leading to devaluation, will test the reserve status of the dollar and the strength of U.S. imperialism that backs it. In this moment of worldwide crisis, capitalists of other countries will not easily allow the U.S. to export either inflation or cheaper dollar-priced goods to their home markets. Advanced capitalist countries would certainly retaliate against dollar devaluation. For the neocolonial world, dollar-driven inflation on top of the coronavirus crisis could trigger economic calamity and provoke popular uprisings that challenge imperialism.

For rising Chinese imperialism, this could present opportunities to wrest countries out of the U.S. sphere of influence and into their own. We might even see elements of MMT adopted by both right — and left-wing nationalists looking to combat U.S. hegemony with domestic monetary autonomy. With global trade tied to the dollar, creating a vast amount of dollars is in effect a protectionist measure, equivalent to exporting the U.S.’ way out of crisis, that will no doubt accelerate inter-imperialist rivalry, further decouple national economies, and deepen the economic crisis. Breaking with capitalism is a critical step for neocolonial countries to end imperialist domination, and for advanced economies to step back from mutually destructive economic competition.

How can workers win social spending?

Today’s social programs model themselves after President Roosevelt’s New Deal. The key social programs of the New Deal were not won with words and clever arguments, but by a titanic uprising of the working class. In the 1930s several strike waves swept across the country, through which millions of workers unionized under the Congress of Industrial Organizations. Socialists played a key role in this process, including leading the Minneapolis Teamsters strike in 1934 that squared off against the police, private militias, the National Guard, and a hostile labor bureaucracy to lay the foundations of a strong union.

That is the kind of class warfare approach we need today.

The coronavirus crisis and economic depression has worsened already extreme inequality. The answer to “who’s going to pay for social spending” needs to be “the rich.” Seattle showed the way when Socialist Alternative city councilmember Sawant led and won a militant campaign to tax Amazon. Now, workers and socialists over the country need to defend those gains from a right-wing attempt to recall her. If one city councilmember can do that, imagine if Bernie or AOC called for a mass movement to tax the rich and fund the GND and M4A. That kind of fighting movement, linked to building an independent workers’ party freed from Democratic Party interference, can translate the huge popularity of these social programs into actuality.

Massive spending is no longer the sole property of MMT economists. President Biden is planning a major stimulus that would provide $400/week in unemployment benefits, and a one-time check of $1,400 — all without any new taxes. However, this does not mean that Biden has been won over to the left or adopting permanent social spending. While Biden’s stimulus plan is the exact opposite of his very fiscally conservative stance during the primary and general elections, it is only the depth of the current crisis that is forcing him and the ruling class to spend on ordinary people in order to prop up the economy.

If passed, this top-down spending will engender illusions in lobbying the political establishment for extensive social spending, among both activists and technocrats like MMT’s proponents. Lasting social change, however, can only be won by an organized working class movement. MMT presents itself as a shortcut to the hard work of building a movement, a panacea of sorts to those who hunger for social change. Socialists should be friendly and understanding of MMT’s appeal, but firm in pointing out its weakness as a bourgeois theory which does not recognize the limitations of the capitalist system itself. Only a socialist transformation of society can guarantee high standards of living for all.