Hot new economic theory is just one piece of the puzzle

At the core of MMT is an accurate observation of how money works that any serious economist has been aware of since the end of the gold standard: the creation of free-floating currencies. This basis gives MMT credibility.

The premise of MMT is that a sovereign government with its own free-floating currency and central bank can never go bust as it can produce new money and spend as it likes. Wouldn’t it be great if I could end this column here? Unfortunately, I can’t because even though this is correct there are many real-life practical restrictions on spending and significant negative side effects with its use.

Firstly, if a government can spend what it wants there is no restriction on unhinged leaders spending in a way that kills the planet.

For example, Trump could build that wall without the need for a deeply damaging government shutdown. In the short term, this would boost the US economy and create jobs. However, all economic activity comes with an environmental cost and a building project of that size would significantly increase the carbon output of the USA at a time when it needs to radically reduce it.

If every country behaved that way the world would further deplete it’s finite natural resources, driving us to the CO2 tipping point disastrously quickly.

Politicians throughout history have been deeply flawed when it comes to understanding complex cause and effect systems. So what is to stop bad leaders spending trillions on white elephant projects just to get elected, triggering those huge environmental costs.

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Secondly, right-wing populist leaders, observing that the public sector has unlimited ability to fund the government’s socioeconomic agenda, might not bother taxing business at all.

The UK’s Conservative government has been trying to gradually transfer the balance of taxation from business onto the individual for years – this would allow them to do it in one fell swoop. Likewise, a socialist populist could cut income tax but maintain business taxes. If the economy failed under either of these scenarios, then the electoral swings from left to right would become massively polarising.

Thirdly, MMT means no limit on military spending and effectively guarantees a new global arms race. The fact that nuclear weapons are expensive to develop is one of the key reasons we are still breathing, making this cheaper will have disastrous consequences. Any government with a large military complex will eventually use that military might when the global economy collapses, as it must do when competition for natural resources intensifies and when the planet overheats.

Fourthly, if a nation were to utilise MMT to replace taxation the value of its currency would sink like a stone. Brexit has demonstrated how dependent the UK is on imports of food, medicines and industrial components. The value of the pound sets the cost of those imports.

If the supply of money becomes high enough to dilute the value of currencies held by individuals, corporations and countries they will disinvest: the pound will rapidly lose value and purchase less than it did before. “No problem, we just print more money,” said one MMT evangelist to me recently. Yes, but then you end up paying a thousand pounds for bread, it’s called hyperinflation.

In the case of the pound, it would lose its international reserve currency status, whereby nations all over the world hold stocks of reserve currencies to settle international debts because it has traditionally been a strong and stable currency.

If governments can spend whatever they want and know that they can always print money to get out of trouble then banks would behave recklessly as they can just be bailed out.

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Finally, MMT removes all discipline in the economy – from individuals, corporations and politicians, which would impact negatively on inflation, the environment and the supply of labour. An economic bubble would inflate – and this would be the bubble not just to end all bubbles but to end all civilisation when it crashes.

There are six reasons why MMT is a good theory but a bad iconic mantra and it’s certainly not the answer for an independent Scotland once it launches its own currency.

It’s true that when the banking system collapsed, governments all over the world printed new money. Indeed the UK Government’s £375bn money-printing exercise saved the UK economy from collapse. The popularity of MMT comes from observing that this injection of new money didn’t instantly create hyperinflation and crash the economy.

The reason it worked was that everyone did it at the same time and the UK Government gave that new money to the banks, not the people. This meant falsely inflated stock prices and the value of the assets of the rich and widening inequality but it didn’t stimulate the real economy and cause inflation.

For years I have been in favour of controlled quantitative easing (new money creation) for special infrastructure projects where there is a market failure. Creating a citizen’s bank to maintain banking services to rural areas, upgrading broadband and communications infrastructure, debt forgiveness for the people who were damaged by the banking crisis and austerity because it wasn’t fair to just bail out the rich.

Working in unison with the rest of the world and in a controlled way, we could boost carbon reduction in time to save the planet with a massive cash injection that didn’t take from other spending areas.

So, in rejecting MMT as a replacement overarching economic theory, we must still accept that at its core there is an idea we can utilise as an ingredient in the new economic mix required to replace neoliberalism. What MMT offers us is not an approach to money creation that solves the world’s problems but rather support for an observation that I have made many times in this column: that there is far more monetary policy flexibility available than politicians and economists have traditionally believed.

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