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MMT and GND walk into a bar…
The cryptic acronyms in the title refer to terms that we should further introduce to the reader. The first one, MMT, is an abbreviation from the term “modern monetary theory”. It is a topic that has caused the biggest storm in the financial world and that does not leave any economic ornithologist indifferent, and the same applies to the author of this piece. The birth story of the theory takes us back to the beginning of the 20th century when it was established by the writings of Georg F. Knapp and Alfred Mitchell-Innes and their later synthesis. Recently, the best new montage idea of all left-wingers has made it to the top of public finance thanks to American economist Stephanie Kelton, who in 2016, was the Economic Advisor to Bernie Sanders’ presidential campaign for the left-wing US democrats. Lately, the idea has been politically leveraged by the 30-year-old charismatic Alexandria Ocasio-Cortez, who was elected to Congress from New York and who is one of the leading figures of the ongoing cultural revolution. Naturally, the British Labourites, led by the neo-communist Jeremy Corbyn, find the idea more than likeable. On both sides of the Atlantic Ocean, the left-wingers see it as their secret weapon to cover their utopian spending plans financially.
In brief, the idea can be described as follows: as long as we do not have a long-term inflation problem, the central government may freely withdraw money from the central bank to cover their current expenses, and this can be done in any form. The national currency resembles a national monopoly that belongs to the people, i.e. the government chosen by the people, claim the proponents of the idea. Thanks to the special status of the dollar, the US is in an especially favourable position that the Euro cannot enjoy due to its structure of a monetary union. Unquestionably, people who received their financial education in the previous century are quickly angered by such an idea – how could anyone even consider adjoining the central bank and the central government?
However, people do think like this. For generation Y, born between 1982-1994, the idea is much clearer than to a generation who is older than them. Why? Because they have not experienced the inflation crisis that shook the US in the 1970s and the actual cause of which was not an oil crisis, currency speculations or greedy businessmen, but the good old overspending of the country. The crisis back then developed after president JFK’s death, from president Lyndon Johnson’s Great Society programme, and the expenses of the Vietnam War. If you read the financial programme of Elizabeth Warren, aspiring to become the presidential candidate of the Democrats in next year’s presidential elections in the USA, you can find lots of similarities with Johnson’s programme, the idealistic goal of which is reducing inequality through greater redistribution.
Taxes cannot be counted on
Unfortunately, MMT promoters are right about one thing – public spending cannot be financed solely by tax income. Firstly, the demographic situation is bad and the number of active taxpayers is decreasing in developed economies, while the number of beneficiaries is increasing. It even applies to China, who thanks to its one child policy that was valid from 1979-2015, has a population that on average grows old before becoming rich. Another main cause is the recognition that taxes are paid by the poor because the rich optimise. Primarily, this applies to large international corporations. For instance, tech giant Amazon, which is admired by everyone, earned a profit of 11.2 billion dollars in 2018 but paid exactly zero dollars in US federal taxes. During the period of 2009-2018, Amazon earned a total profit of 26.5 billion dollars and the efficient federal tax rate for them was on average 3% per year, while the official tax rate was 35%. However, the tax board cannot reach into the pockets of large corporations, which in today’s extremely connected world could move their funds exactly where they need them, as quickly as required, and even quicker than that. The country-based tax codes are like huge boulders, around which water – in this case, the profits of large corporations – shall always find a way, flowing in the direction determined by the owners of the capital. In modern times, tax evasion is definitely a taboo, especially after the case of the Panama Papers, but it is still an extremely popular practice which is in no way illegal. The statute of any company that strives for profit does not include a clause that says that national taxes should be paid to the maximum. Optimising is not illegal but could be immoral. The compass of moral tax behaviour is definitely largely so personal that it is difficult to find a transnational consensus, illustrating the complexity of the entire private limited company business of Estonia.
Within Europe, we have our own “good” examples. A quick quiz question would go like this: which European Union member state has received as much foreign investments as the USA? The correct answer is Luxembourg – a small principality which has given Europe Jean-Claude Juncker and like they say, whose 460-head army cannot organise any cannon exercises without declaring a war on their neighbours. Luxembourg has the same number of people living there as Harju County – about 600,000 – and it has received direct foreign investments in the total amount of 4 trillion dollars, which means 6.6 million per citizen. Allegedly, half of the world’s direct phantom investments are in Luxembourg and the Netherlands and the direct goal of this is avoiding taxes in the home country. All the other usual suspects, such as Hong Kong, the British Virgin Islands, Bermuda, Singapore, Panama, and Switzerland are far behind these two leaders. Certainly, this irritates the home countries of international corporations or those countries where they earn the majority of their income. In this fight, the public sector shall always stay behind the private sector – the army of tax advisors shall find a new legal remedy or a loophole for the new tax distribution law. Not all loopholes can be patched up by the government – it never could in the past, nor can it do so in the future.
Financial utopias have become true
Generation Y cannot be blamed for adopting MMT. Liberal market fundamentalists must first take moral responsibility for the great financial crisis that crushed the illusion of the end of the historical organisation of society. If the central banks are not allowed to lend money to governments, then why have they been doing so for the entire previous decade with nothing happening – inflation cannot be detected anywhere in the developed world. I wrote about inflation, or the causes of the lack of it, in the previous issue of Edasi under the title “The Japanisation of Europe”. The author of this article finds it very difficult to accept the essence of MMT but has to remind himself that if he could have made a bet ten years ago on whether all that has actually happened in central banking within the last decade would have taken place, he would have considered it impossible and lost, and lost big. School education is not sufficient here – we are living in such an extraordinary financial period.
Maybe today we should be more humble about the ideas that seem utopian, as life taught us in the previous financial crisis that the unthinkable could become unavoidable over one weekend. Non-traditional opinion leaders have also supported the idea. Ray Dalio, the founder of Bridgewater, which is the world’s largest hedge fund manager, whose personal wealth is estimated to be 18.7 billion dollars, has publicly written that MMT is inevitable. Ray Dalio is certainly not a left-winger, and definitely not a stupid person, who sees MMT as inevitable. The question is: in which form? In their own way, all those people who say that the rich shall only start thinking about society tenderly after earning their billions, are right. Quickly, you start thinking about Bill Gates as well as Warren Buffet, but in this context Ray Dalio is important. By the end of his written discussion, he reaches the conclusion of the inevitability of MMT and thinks that the allocation of money should be decided by “a council of wise people”. If you look at who is striving for positions of public power in the developed world, an experienced fund manager could be accused of idealism and wishful thinking. However, the world is made for the optimists.
What happens in the bar?
A patient reader might already ask: fine, we understand what MMT is, but what is the GND? The Green New Deal, or put simply, all conscious actions with the purpose of reducing carbon dioxide emissions in the world. First, this programme was presented in 2007 by US journalist Thomas Friedman, but it did not gain significant public momentum. In modern times, the idea has many supporters, among whom we could also put the cautious new president of the European Central bank, Christine Lagarde. The people fighting against climate change and the proponents of MMT quickly find common ground, because they have a mutual enemy – the ruling neoliberal world order that started its victory march in the 1980s and the concurrent biggest change of which is China’s return and its likely future economic superiority over democratic public order. These steps do not need a longer description because everyone who follows the media today is more or less aware of the topic. We should definitely all worry about what kind of world we are leaving to Bernie Sanders and Keith Richards, for instance. The developed world is a trendsetter but it cannot escape the criticism of the developing world – you polluted yourself to become rich and now you are forbidding us, developing markets, from doing the same. Primarily, we are referring to the world’s largest environmental polluters in emerging markets, China and India.
In the end, the Green New Deal could become the excuse to widely adopt MMT. At least in the US, which is always the number one influencer of the financial world, but that would require the Democrats returning to the White House. If MMT and the GND do go to a bar together – the night could hide everything –, a hasty bar fight could bring about a physical reaction, in which MMT and the GND collide at high speed and create lots of cash on the bar floor. There will be enough for reasonable renewable energy as well as for the eco-charlatan at the other end.