In many countries around the world, the routine cooperation of the Treasury and Central Bank provides the government with tremendous financial flexibility to mobilize and organize domestic resources. The latest dramatic example of that was the response to the COVID pandemic, but the usual year-in, year-out budgeting process illustrates that more readily. The essential question is not if a monetarily sovereign government can find the domestic money but rather what the budget should be, where should the government intervene? How should it do so? For whom? Are the necessary resources available? In short, defining the public purpose and setting the public policy agenda are the core questions a society must answer; such questions ought to set the way policy discussions are framed and debated. 

Answering these questions should involve as wide a constituency as possible because democracy is not just “one person, one vote;” democracy is about the ability to decide what is voted on. Unfortunately, today, the majority of voters has no influence on selecting the issues to be debated, framing the debates around those issues, or proposing solutions to deal with them. Very few members of the US Congress are workers and the opinion of the majority of the population has virtually no influence on policy adoption. On the other hand, through an extensive institutional network (lobbying, frequent congressional testimonies, key positions in government, advisory committees, think tanks, etc.), corporations have been extremely effective at setting the economic content of the political agenda. They have achieved major deregulatory victories, busted and tamed unions, shrunk the welfare state, and won major legal victories to increase their influence on electoral outcomes. This influence of corporations, and wealth more generally, on US politics is old. The results of this influence have not necessarily been bad for the rest of the population, but only as long as the resulting policy is in line with the economic interests of corporations, the rise of the welfare state is an example of a corporate-driven policy agenda. 

Several tactics have been used to marginalize political participation, such as making political participation costly, fighting unionization, and increasing the difficulty of voting, among others. This piece focuses on one major tactic that has been used to prevent vigorous debates and discussions about the public purpose, namely the taxpayer narrative. Such a narrative strongly influences the policy agenda; it frames issues and debates in a particular way, it restricts possible solutions and it marginalizes the voice of a significant portion of the population. Removing the taxpayers’ money narrative is one step toward improving the inclusivity of the democratic process. 

 

Neoliberalism and government policy: “How will you pay for it?”

The taxpayer narrative is pervasive. It is present in the budgeting process, in the framing of government policies and in daily political life. Issues and debates about the public purpose are all cast in terms of the financials. The first thing asked about a proposed spending policy is “how are we going to pay for it?” and the first question for a proposed tax policy is “how much money will it raise?” A spending proposal that is not budget neutral is dead in Congress. A tax policy that is not expected to generate much revenue is irrelevant, one that generates less revenues than expected is a failure.

Examples abound. Senator Warren’s Ultra-Millionaire Tax proposal starts with the correct premise that there is a very high and growing wealth inequality in the United States. She proposes to set a 2% tax on the wealth of households with $50 million or more in net worth. However, the effectiveness of the policy is not judged in terms of its ability to reduce wealth inequality but rather in terms of its revenue generating capacity: “this small tax on roughly 75,000 households will bring in $3.75 trillion in revenue over a ten-year period.” 

The impending Social Security insolvency is relentlessly pounded on the population, with proposed financial solutions to “save it” ranging from putting money in a lockbox, lowering benefits, to replacing it with private retirement saving accounts. 

In the middle of the 2008 financial crisis, President Obama argued, at a time of a rising fiscal deficit because of plummeting tax revenues, that “small businesses and families are tightening their belts. The government should too” and proceeded to freeze the salaries of government employees. The lack of tax revenues supposedly prevented the government from doing more to help the economy recover. And the pattern repeats for the major policies that most of the US population sees favorably; “We simply don’t have the money, sorry.” 

Fiscal deficits of various sizes have been a normal and sustained state of affairs for decades across the developed world with no obvious negative impact on interest rates, tax rates, future generations, or inflation

Besides shaping and constraining policy proposals in a particular way, the taxpayer narrative is also used to marginalize some voters, to aggravate racist tensions, and to shame welfare recipients. Taxpayers are the responsible, hardworking, reliable members of the population while the others are lazy, dependent and not worthy of participation in political life. The taxpayer narrative frames the government as a Robin Hood who steals from the rich and productive to give to the poor and lazy. It claims that wealthy individuals are more entitled to set the political agenda because they pay for the government’s programs. Utah Senator Mitt Romney expressed that viewpoint during a Republican fundraiser in 2012. It is argued that too much participation of the population in the political process leads to a crisis of democracy, so some portion of the population ought to be excluded. The fiscal deficit myth is a noble lie enabling us to have a civilized society. This is an enduring argument of American politics that can be traced back to the drafting of the US constitution. 

The taxpayer-driven narrative is not only politically reactionary and mentally stifling, but also does not reflect a correct understanding of federal government finances, economic facts, and logic. Household finances is not the correct metaphor to help the public understand the finances of a monetarily sovereign government, and fiscal deficits of various sizes have been a normal and sustained state of affairs for decades across the developed world with no obvious negative impact on interest rates, tax rates, future generations, or inflation despite the widespread doom-and-gloom predictions regurgitated almost daily for decades. Understanding monetary sovereignty means reframing economic debates and policymaking away from the impoverished view of government’s ability to finance its spending  financials and toward concrete societal goals and economic possibilities. Taxpayers and bond buyers are not in a privileged position to set the policy agenda and the government does not depend on them financially to fulfill that agenda. 

 

Reorienting policymaking away from the taxpayer narrative

When the implications of monetary sovereignty are understood, it is pointless to seek to put funds in a locked box for later use, to modify existing programs or to conceive new programs to help save money in order to avoid insolvency. The funds needed are created quickly, as emergency spending to fight wars or to deal with pandemics shows, and insolvency is not financially possible. Finding the money is simply achieved by the routine cooperation of the national Treasury and the (possibly independent) central bank that ensures smooth government financial operations. 

Taking monetary sovereignty into consideration morphs the meaning of fiscal discipline, it does not eliminate the need for such discipline. Instead of an all-consuming concern with balancing the budget, fiscal discipline is focused on meeting the public purpose while dealing with political constraints (finding the votes) and economic constraints finding the non-financial resources).

Governmental bodies such as the Congressional Budget Office (CBO) should score policy proposals based on their inflationary potential and the ability of a proposal to achieve the intended goal.

On the political side, a society must decide for itself, hopefully as democratically as possible, what the public purpose is. It should be evident that, once the financial question is made irrelevant, setting the public purpose becomes a heightened point of contention. The political debate must be oriented toward the intrinsic merits and drawbacks of a proposed policy and on the type of society one wants to build. This does not mean that a government will be overwhelmed with demands. As the diverse experiences of developed democratic societies show, many policymakers and citizens, for a variety of reasons, want less government involvement in the economy or want a narrow involvement. Finding the money is not the hard part; the hard part is defining the “goods” and “bads,” determining what the government should do to deal with them, how it should do it, ensuring broad participation in such discussions, and finding the votes needed. 

As was mentioned above, a major hurdle for policymaking is the availability of non-financial resources to implement the public purpose. A policy proposal needs to be judged not only on the basis of its political merits but also according to its economic feasibility. That means that advisory governmental bodies such as the Congressional Budget Office (CBO) should score policy proposals based on their inflationary potential and the ability of a proposal to achieve the intended goal. The CBO must make an estimate of what is possible given the available human, natural, and physical resources, and determine the pace at which a proposal can be implemented realistically given the current and expected state of domestic resources. 

 

Implementing MMT policymaking: Functional Finance

A monetarily sovereign government must tax, but a tax policy should be set independently from a spending policy. What that means in practice is that tax rates should not be set with the aim of balancing the budget, they should be structured to achieve the public purpose. 

In terms of inflation fighting, the most effective tax structure is one that automatically removes purchasing power when inflationary pressure comes from private spending. Most countries already have strong enough automatic stabilizers on the tax side; they actually tend to be too strong because tax revenues rise very quickly when economic activity picks up. On the demand side, MMT proposes employment stabilizers, such as the Job Guarantee. If a sudden large increase in spending is needed, such as in a major war, taxes are one of the tools that can be used to help limit inflation. 

In terms of reduction in income or wealth inequalities, the first step is to anchor the policy around a well-defined objective; what does “reducing inequalities” mean practically? A targeted percentage fall in the Gini index? Something else? Once this is defined, a tax policy ought to be set with the purpose of having confiscatory taxation not a revenue-generating taxation. At no point is the tax policy approached from the view point of balancing the budget or linked to a proposed spending policy. It is probable that if tax rates are high enough they will not generate much revenue because wealthy individuals are skilled at evading taxation. However, taxation has done its job of fulfilling a public purpose of reducing inequalities as long as taxation on wealthy individuals destroys enough of their income and wealth, leads them to shelter their wealth in a way that is difficult to use, or incentivizes them to increase donations that help those at the bottom of the distribution. If the tax policy does end up generating significant revenues, it is not a valid reason to revise it because tax rates are tied to achieving an inequality reduction target not a revenue target. They should be raised more as long as the inequality-reduction goal has not been achieved, they should be lowered if the inequalities have decreased by more than targeted.

At no point should the setting of tax rates be discussed in terms of, or constrained by, a necessity to balance the budget and paying for other programs.

In terms of limiting climate change by reducing CO2 emission, the first step should be to define precisely what “reduction” means. Climate scientists have provided many reports that estimate the needed pace and size of reduction in CO2 emissions to limit the rise in average global temperature to a given target, say +1.5c. Once the reduction in emission is chosen, the next step is to study what is the most effective type of tax to achieve that goal and what the tax rate should be. Maybe taxing CO2 emissions by the major corporations is the way to go, may be providing tax subsidies to encourage the retrofitting of buildings or the installation of solar panels is a better policy, maybe a combination of these and others tax policies is the most effective to achieve the emission reduction goal, maybe none of them are enough to achieve the desired reduction and other policies should be implemented. The Congressional Budget Office should perform the necessary analysis to determine if a specific tax proposal significantly helps or not in achieving the CO2 emission reduction goal. At no point should the setting of tax rates be discussed in terms of, or constrained by, a necessity to balance the budget and paying for other programs. Once the analysis is done, implementing the policy requires getting the necessary political capital. If that can’t be done, the project must either be shelved or reduced in scope (and the desired emission reduction cannot be achieved). 

A similar logic applies to all government spending, a proposal should be evaluated in relation to the available domestic resources now and in the future. As such, the proper metric is not the financial costs (billions of dollars, trillions of dollars, or otherwise), but rather the percentage of domestic resources that is expected to be allocated to a proposal every year. For example, a Green New Deal proposal may cost one trillion dollars, but using that number to frame the debate as “the Green New Deal is unaffordable,” or “Green New Deal is the road to ruin” is disingenuous because the annual quantity of domestic resources required to implement the proposal turns out to be small at the moment (the longer we wait, the larger the use of resources will be).

Finding the money is the easy part

Another example is the framing of the Social Security problem. As Chairman Greenspan’s response to Representative Paul Ryan makes it clear, Social Security does not have a solvency problem because “there is nothing preventing the federal government from creating as much money as it wants and paying it to somebody.” Social security faces a demographic problem, not a financial problem. Finding the money is the easy part, finding means to raise the productivity of the labor force, having a well-defined immigration policy, and repurposing and building infrastructure to meet the needs of an aging society are the hard parts. This framework ought to guide discussions and debates about Social Security. Representative John Yarmuth said the same thing for policies to deal childcare and housing access and correctly framed policymaking: “Historically, what we have done is said what can we afford to do? The right question is, what do the American people need us to do? That becomes the first question. Once you answer that, you say how do you resource that need? […] The constraint on us is rampant inflation.”

Overall, MMT fiscal policy recommendations do not favor out of control spending and limited to no taxation. Monetary sovereignty reorients the policymaking process toward a more systematic analysis of the intrinsic relevance and merits of tax and spending proposals. The current policy making praxis promoted by deficit hawks and deficit doves misleads policymakers and the public by mis-specifying the nature of problems in terms of financials, it channels the public debate toward futile discussions about the ability or inability to find enough domestic currency, and so it generates the incorrect responses to the very real problems a society faces. While it may serve as a convenient and effective rhetorical tool and strategy for those who oppose government involvement and want an out from uncomfortable conversations, it is deceitful and dangerous. Government has the power of the purse, this disqualifies all the “how to find the domestic money”-related questions.

 

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Eric Tymoigne is an associate professor of economics at Lewis & Clark College and a research associate at the Levy Economics Institute who specializes in the fields of money and banking, monetary theory, and financial macroeconomics. His most recent book, coauthored with L. Randall Wray, is The Rise and Fall of Money Manager Capitalism: Minsky’s Half Century from World War Two to the Great Recession.

The Labour party’s emphatic victory in the UK election of July 4th is a cause for celebration for progressives around the world. It was a rejection of fourteen years of failed neoliberal policies that have left Britain’s public services stretched to breaking point, the largest drop in household living standards on record and shameful levels of poverty and homelessness. 

Keir Starmer’s new government faces enormous challenges but it has made an ambitious start. Eye-catching policies in the King’s speech include the creation of a new, publicly owned national energy company (Great British Energy) and a National Wealth Fund (NWF) to invest in major decarbonisation projects, the lifting of a ban on on-shore wind, the phased in nationalisation of the railways, ambitious plans on home building and major improvements to workers’ and renters’ rights. The state interventionism on display goes beyond the ‘third way’ of Tony Blair’s New Labour that the Labour leadership appeared sometimes to be modelling itself upon.

But there is a catch. Whilst it has broken with the neoliberal consensus on industrial policy (or lack of), Labour remains captured by defunct neoliberal thinking on fiscal policy. Rachel Reeves has adopted two ‘fiscal rules’: first, that it should borrow only for investment and not for day-to-day spending; and, secondly, inherited the Conservatives’ widely criticised rule that overall debt should be falling as a percentage of GDP over a rolling 5-year cycle. 

So determined are Labour to embed in the electorate’s mind the idea that they are the fiscal ‘grown-ups in the room’ that they have tabled a new ‘fiscal lock’ rule

Labour has put these rules at the centre of their effort to recast itself as the party of ‘fiscal credibility’, in contrast with the Liz Truss ‘mini-budget’ of September 2022 that led to a temporary collapse in sterling and sharp rise in government bond yields. So determined are Labour to embed in the electorate’s mind the idea that they are the fiscal ‘grown-ups in the room’ that they have tabled a new ‘fiscal lock’ rule that will ensure any major and long-term change in tax or spending policies will be evaluated by the independent Office of Budget Responsibility (OBR). This is the spending watchdog introduced by the previous Conservative Chancellor George Osborne in 2010 when the Tories were playing the same fiscal credibility card against Labour after the 2007-08 Global Financial Crisis.

This strategy may have helped Labour win the third biggest majority in British political history. But it leaves Labour in a difficult position now that they are in power. The combination of sluggish growth and the higher interest rates on government debt that followed the inflation of the last few years mean the 5-year falling debt-to-GDP target will be unobtainable unless the economy grows at around 3 times this year’s expected rate according to a recent IMF analysis.

If that is not achieved, the only option is further painful cuts to public investment and public services or to engage in major tax rises. On the latter, Labour have ruled out any rise in income tax, Value Added Taxation (consumption tax), and National Insurance which together make up 75% of the tax intake.

Only one country has achieved anywhere near the 2.5% per annum levels of growth Labour needs to hit its debt-stock fiscal rule since the Covid pandemic: the United States. And the US pushed through by far the largest fiscal expansion of any high-income country over the past few years. Its government deficit for 2021 was almost 9.4 per cent of GDP, more than double the level of the UK and Eurozone, and included a $2.2trn of stimulus for households that led to swift recovery in consumer spending. This was followed up by massive investment in industrial policy, including Joe Biden’s $369bn Inflation Reduction Act and $40bn Chips Act which have led to investment booms. 

The new Chancellor Rachel Reeves’ first major pronouncement on fiscal policy at the end of July claimed that there is a £22bn “black hole” in the public finances. This was caused by the previous government deliberately understating its spending and by the fact that Labour has, wisely, agreed to above inflation pay rises for public sector workers. In response to this ‘emergency’, Labour announced plans to cut investment in long planned infrastructure, reduce winter fuel payments to better-off pensioners and abandon a planned cap on social care payments, alongside hints at tax rises further down the road.

Gambling on private-sector driven growth

These cuts and tax plans suggest Labour is very serious about hitting its debt-to-gdp rule, even if this may dampen long-term growth. This would be another step in the wrong direction after the party abandoned its most ambitious fiscal policy – its £28bn-a-year borrowing plan to fund green investment plan – which was dropped months before the election under pressure from the Conservatives. In fact, its manifesto committed to just £3.5bn in additional borrowing to finance the National Wealth Fund and Great British Energy, alongside an additional £8.5bn in tax rises and reforms.

Labour has argued it can achieve much higher levels of growth by leveraging private finance for capital investment. Indeed, this is the primary aim of the NWF which aims to crowd in £3 for each £1 it invests. But the UK has been near the bottom of the capital investment league tables in high-income economies for the last two decades. It is not realistic to expect a huge short-term shift, particularly given that high interest rates mean investors will expect higher returns from potentially risky green infrastructure projects. When it comes to homebuilding, as the previous government’s own investigation discovered, the UK’s oligopolistic private development sector has no incentives to build out a rate that would depress house prices – and thus profits – in the regions they operate within. 

Even if private finance is more effectively levered in, a ‘de-risking’ strategy which outsources the pace and direction of green transition infrastructure or home-building to the private sector carries with it its own set of risks, including democratic ones if large swatches of vital public infrastructure end up being owned by asset managers. Previous UK governments’ experiences with the failed Private Finance Initiative have shown the limits to such an approach. 

Labour needs tens of billions of pounds now for investment in education, health, social care, prisons and local councils after 14 years of austerity.

Moreover, even if it happens, capital investment generates growth in the medium-to-long term. Labour needs tens of billions of pounds now for investment in education, health, social care, prisons and local councils after 14 years of austerity. A well-educated and healthy workforce is, rather obviously, fundamental to economic growth. More than half a million people left the UK workforce between 2018 and 2022, mainly due to the effects of the pandemic, which overwhelmed the health sector. Labour is missing a strategy for rebuilding not just the physical, but also the social and health infrastructure of the country. 

Institutional realities 

Labour’s fiscal rules are based on flawed economics and a wrongheaded understanding of the UK’s public financing institutional arrangements. The government does not need to raise money from either taxes or borrowing prior to spending. As myself and co-authors have demonstrated in our ‘Self-Financing state’ paper, whenever the UK government spends it creates new money. The government has what is akin to an interest free overdraft at the Bank of England with no technical limits. When the government “spends”, this account is debited and the same amount of new money is credited to government departments by the Bank, appearing as new deposits in government departments’ commercial bank accounts. These arrangements are codified in law that goes back to 1866.

Taxes are an important tool for ensuring the State’s monopoly control over the currency, for reallocating resources and dampening inflation, but they do not directly finance government spending.

What then is the role of taxation and public borrowing? Revenues from taxation accumulate into the same government accounts and reduce the size of the Consolidated Fund overdraft. Taxation reduces the government’s liabilities to the Bank of England, reversing the money-creation process and reducing the money supply. Taxes are an important tool for ensuring the State’s monopoly control over the currency, for reallocating resources and dampening inflation, but they do not directly finance government spending.

Borrowing is equally poorly understood. Prior to the programme of quantitative easing (QE) that began in 2009, bond issuance was designed primarily to support monetary policy. Government spending creates new money and liquidity (reserves) in the banking system which can affect the ability of the central bank to pass through its target interest rate. By issuing bonds, the state withdraws liquidity from the banking system, neutralising this impact. Indeed, the UK’s Debt Management Office has in place a “full-funding” rule which means that any outstanding balances in the Consolidated Fund are cancelled out by debt issuance or selling bonds into financial markets.

However, the QE programmes of the past 14 years have seen the banking system flooded with liquidity. This led the Bank of England to pay interest on reserves held by banks to help target the interest rate effectively and made changes in government spending less important to monetary policy. The FFR thus looks somewhat anachronistic. The main function of government debt today is arguably to provide the non-bank financial sector with a secure store of value and source of collateral, with government debt instruments being the most desirable, safe, interest-bearing assets available due to the state’s inherent creditworthiness. 

Targeting real resources and managing inflation

Britain thus does not face solvency, liquidity or market risks in the way a household (or indeed a firm) does. The government can always finance its own spending and indeed always pay interest on borrowing in its own currency as in both cases it creates money. Rather, the main constraint on UK government spending is the availability and mobilisation of real resources. Inflation will result if new money is spent on already fully utilised resources which cannot absorb it. 

Sudden announcements of increases in government spending without a plan for how such spending will be absorbed into the economy will be perceived as inflationary by investors. This is exactly what happened during the mini-budget when, with inflation at 10% and rising and the Bank of England ramping up Quantitative Tightening (selling bonds into the market), the Truss government proposed £45bn worth of tax cuts funded by bond issuance. Investors feared the real value of their bonds would fall and sold them off, setting in motion a self-fulfilling cycle of currency depreciation and further falls in yields. This had nothing to do with investors’ fears about the government’s solvency or capacity to repay its debts and everything to do with fears about the future value of their assets. As it turned out, once the Bank of England stepped in with more QE to rescue the flailing pensions sector most exposed to the volatility in long-term bond yields, sterling and the UK’s bond ratings quickly returned to normal. 

In contrast, a targeted fiscal expansion aimed at boosting healthcare to bring back into the workforce some of the hundreds of thousands of people who left it during Covid as well as investing in green infrastructure, including scaling up clean energy production but also energy efficiency home retrofit, are clearly policies that would increase the country’s productive capacity and resilience to future inflationary shocks. Furthermore, with inflation now back down to 2% and the bank of England finally cutting interest rates, Labour is in a strong position to embark on such an expansion. 

Labour needs to shift people out of less important or damaging sectors of the economy and into its priority areas to enable the structural economic change required to meet the UK’s ambitious climate targets.

Further real resources could and should be freed up by much more ambitious reforms to current tax and subsidies. Labour needs to shift people out of less important or damaging sectors of the economy and into its priority areas to enable the structural economic change required to meet the UK’s ambitious climate targets. Reducing subsidies for fossil fuel sectors and raising taxes on them to speed up their retirement and the transfer of workers into green sectors – for instance offshore oil to offshore (and onshore) wind – is one obvious requirement. Taxes on environmental bads like private jets, environmentally and health-damaging foods, and on wealth more generally could also help reorient investment in a more productive direction and stimulate sustainable growth. 

With its huge majority, Labour has a massive opportunity to become a leading light of 21st century social democracy and provide an alternative to the populist far right movements gathering steam in both Europe and the US. It has five years to demonstrate the potential of the state to transition to a fairer and sustainable economy. To do so, it must abandon its self-imposed fiscal straight jacket in the same way it has rightly abandoned much of the rest of the policy framework inherited from the Conservatives. 

 

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Josh Ryan–Collins is Professor in Economics and Finance at University College London Institute for Innovation and Public Purpose. His books include Why Can’t You Afford a Home (Polity: 2018), Rethinking the Economics of Land and Housing (Zed: 2017), and Where Does Money Come From? (NEF: 2012).

In her piece, Pavlina Tcherneva proposes a taxonomy for thinking about macroeconomic policy over the last decade and a half, examining the “big three” policies deployed in the aftermath of the Global Financial Crisis: Big Money, Big Government, and Big Industrial. All three require use of the policy space afforded by sovereign currency. She examines the policy responses to the Global Financial Crisis and the COVID pandemic. What I take up here are the questions: 1) Why did the “whatever it takes” approaches yield such dramatically different outcomes to these crises, and 2) What, if any, was MMT’s role in those episodes.

Both the Fed under Benjamin Bernanke, and the ECB under Mario Draghi pursued a “whatever it takes” strategy to save the financial system. Both lowered interest rates effectively to zero, while the Fed lent and spent $29 trillion, rescuing not only the US financial system, but, indeed, the global financial system (Felkerson, 2011). Affordability was never a question—central banks cannot run out reserves. However, the problem was two fold: the bail-out came with few strings attached and with no significant reforms of the financial system (Wray et al., 2013). And while the Fed saved “Wall Street”, the lack of a proper fiscal response meant that “Main Street” suffered for a decade. 

When the COVID crisis hit, the ECB stood ready to do “whatever it takes”—and it worked, again—up to a point (Ehnts and Wray, 2023). By contrast, in the US Big Fiscal took the stage—under both President Trump and President Biden, for a total spending boost of about $5 trillion. While the economy had literally fallen off a cliff, with the biggest and quickest job losses the US had ever seen, recovery was the swiftest ever, aided by the trillions of dollars of relief. For a variety of reasons—including mixed messaging about vaccinations—the pandemic hit the US economy harder than Europe, but the Big Fiscal response meant a quicker recovery.

What the two episodes have in common is that they did not threaten the Neoliberal regime. Both rescues continued the long-term trend of rising inequality. And while MMT was invoked in both cases, the policy responses did not follow MMT’s recommendations. 

In the case of the GFC we recommended reform of the financial system as well as resolution—not rescue—of the insolvent financial institutions. We also advocated fiscal policy targeted to job creation. We opposed the main policy used by both the Fed and the ECB, Quantitative Easing, arguing that it would not boost lending (nor would that be recommended as a solution to excessive indebtedness). Furthermore, filling banks with excess reserves would only make them less profitable. And, finally, if the goal was to lower longer-term interest rates, all the central bank had to do was to announce a target rate for bonds. 

While the US did adopt Big Fiscal to deal with the COVID pandemic, it was not the policy we recommended because the spending was not well-targeted (Nersisyan and Wray, 2020). Still, the lesson that should have been learned is that just as Big Monetary policy can always be afforded, Big Fiscal policy is affordable.

What about Big Industrial policy? President Biden came into office with big plans to put the US on course toward environmental sustainability. Unlike the COVID fiscal response, there was no “whatever it takes”. This time, the big plans were whittled down by “pay-fors”: finding tax revenues to pay for the spending. Tying good policy to tax hikes is like throwing barbells to a drowning swimmer. Unlike the previous examples, Build Back Better seemed to contain unquestionably good policy—well-targeted, and socially, economically and environmentally beneficial. But all we got were some tweaks around the edges. Most of Biden’s proposals now sit at the bottom of the ocean. 

Is neoliberal policy dead? No. Indeed, it has been boosted again, this time by the inflation that followed the COVID downturn.

The Role of MMT

MMT is getting much of the blame for rightly pointing out that affordability is not the question! How could that be the case?

The interpretation by pundits, politicians, and many economists runs something like this: 

MMT has found a new way to finance government spending: “just print money”. Deficits don’t matter. Japan had been doing MMT for the past quarter century—running up record deficits and debt ratios. The US followed MMT when it just “printed up money” to pay for COVID relief. MMT says that there is no reason to worry about inflation, because once it appears all you have to do is raise taxes. No reason to worry about government debt because the central bank can just buy it all up. 

And of course, none of this has anything to do with MMT, which is a description of the monetary system, not a proposal of new financing methods.

Still, critics insist that MMT was wrong all along because it caused massive inflation. We cannot raise taxes to fight inflation because that is too difficult. Instead, the Fed had to fight the inflation with high interest rates. Now the deficit is exploding because of interest on the debt. Banks are failing because they are holding assets whose prices are cratering because of those high rates and because commercial real estate is underwater. And we are back to the orthodox refrain “We must get our fiscal house in order”. 

Though MMT has typically confined its analysis to describing how governments already spend, its policy proposals have yet to be tried. So, what policy approach does MMT actually take? 

1. Affordability. Yes, MMT does say that affordability is not in question, but what matters is resources, institutions, and political will. If we want to transition to green energy, the problem is not the dollar cost but rather whether we have the resources, technology, integrated grid for delivery, and political will to work toward the desired result. Further, all projects should be evaluated for inflationary impact—closely related to resource availability—rather than for budgetary impact. 

2. Inflation. Targeted spending along with careful analysis of resource availability can help to prevent inflation. In addition, the overall budget (including spending and taxing) should be formulated to ensure strong countercyclical movement. What this means is that government spending should go up when private spending is falling, and taxes should go up when private spending is rising. This ensures the budget is an automatic stabilizer. In the US, spending used to be countercyclical but it is much less so since we’ve largely dismantled the social safety net. Taxes remain highly procyclical, doing their job to take demand out of the economy when it is booming (Wray, 2019). 

3. Job Guarantee. How can we make Big Fiscal policy more anti-inflationary? The Job Guarantee: it automatically hires workers when the private sector downsizes, and sheds workers when the private sector hiring increases. It is a tremendously powerful stabilizer.

4. COVID Response. Sending checks to everyone was opposed by MMT proponents as the wrong policy. The COVID recession began as a collapse on the supply side (people couldn’t go to work), created a demand side problem (wages and profits were lost), morphed into a longer-term supply chain disruptions, and provided the opportunity for firms to exercise market power to raise mark-ups and monopoly profits. The right policies would have included: target spending to those who lost jobs so that they could pay bills; create public jobs to deal with the crisis (expanded meals-on-wheels, etc, to serve those in quarantine), eventually leading to creation of a universal JG program; spending to relieve supply chain problems (as was done in the case of some of the nation’s docks); and confronting price gougers (as President Biden has finally started to do).

5. Big Monetary Policy. MMT does not support use of monetary policy to manage aggregate demand; Big Fiscal policy is far better suited to that purpose. The Fed has one tool it can use—the overnight interest rate target (Fed funds rate). While the Fed pursued the correct policy for many months (arguing the inflation was “transitory”), it eventually began a series of what became a huge increase of the interest rate target. Its stated goal was to lower expectations of inflation by slowing economic growth and significantly increasing unemployment. This made no sense for inflation driven mostly from the supply side—raising rates was not going to relieve supply chain issues or produce more construction to relieve a housing shortage. In any event, the high interest rates did not perceptibly slow growth or raise unemployment. But inflation fell anyway—as it certainly would have done without the rate hikes because it mostly came from supply side problems. But those high rates are creating cascading problems throughout the financial sector (as rate hikes always do!) and for indebted consumers. Another financial crisis is not out of the question. Moreover, the rate hikes have fueled government spending on interest, thus increase the budget deficit and debt ratios. That fuels more worry about government debt—with an ever rising chorus of pundits predicting government insolvency and default on debt. The solution: take interest rate setting away from the Fed. Congress should mandate a low and fixed interest rate target. 

While COVID opened a window of opportunity for bold public action, none of the above policies were embraced. So, where do we stand with respect to the question about whether neoliberalism is dead? The deficit hawks remain in control. Wall Street is still shoveling wealth to the one-percenters. While one lesson may have been learned—government can “find” the money—the consensus is that we should not make full use of our Big Fiscal, Big Monetary, and Big Industrial powers to obtain an economically, socially, and environmentally sustainable future. 

 

References

Ehnts, D. H., & Wray, L. Randall (2024). “Revisiting MMT, Sovereign Currencies and the Eurozone: A Reply to Marc Lavoie”. Review of Political Economy, 1–15. https://doi.org/10.1080/09538259.2023.2298448 

Felkerson, James Andrew. (2011). “$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient”. The Levy Economics Institute, Working Paper No. 698. https://www.levyinstitute.org/publications/29000000000000-a-detailed-look-at-the-feds-bailout-by-funding-facility-and-recipient

Nersisyan, Yeva & Wray, L. Randall. (March 2020). “The Economic Response to the Coronavirus Pandemic”. The Levy Economics Institute, One Pager No. 62. https://www.levyinstitute.org/publications/the-economic-response-to-the-coronavirus-pandemic

Wray, L. Randall et al. (April 2013). “The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007”. The Levy Economics Institute, Research Project Report. https://www.levyinstitute.org/publications/the-lender-of-last-resort-a-critical-analysis-of-the-federal-reserves-unprecedented-intervention-after-2007

Wray, L. Randall. (2019). “MMT and Two Paths to Big Deficits”. Challenge. https://doi.org/10.1080/05775132.2019.1668646

 

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L. Randall Wray is a Professor of Economics and a Senior Scholar at the Levy Economics Institute of Bard College and the 2022-2023 Teppola Distinguished Visiting Professor at Willamette University, Oregon. He is one of the developers of Modern Money Theory and his newest book on the topic is Making Money Work for Us (Polity, November 2022).

It was widely believed that the Great Financial Crisis damaged the core ideology of neoliberalism, and some hold that the response to Covid-19 finished the job. This view is mistaken. Instead, the extraordinary measures that pulled the global economy from the brink in both episodes not only revived neoliberalism, but also consolidated it. To see why, one needs to look at the nature of modern money and the use and abuse of public finance. 

The 2008 crisis did shake the economics profession. Mainstream equilibrium models do not account for the role of money and finance and had failed to predict it. Hamlet without the Prince is how Jan Kregel described this state of affairs a few decades earlier. Studying a market economy without its principal actor – money – was a farce. Meanwhile heterodox traditions, drawing on Keynes’s seminal work on money, were able to explain the crisis and the chronic failures of capitalism: mass unemployment, investment instability, financial crises and – as a result – pervasive and perennial economic insecurity. Worse, increasing financialization and global money manager capitalism only made insecurity more ubiquitous. As heterodox economists well understood, few if any modern households were insulated from the vagaries of high finance. 

But even in heterodox economic circles there was little understanding of public money and public debt as qualitatively distinct from private money and private debts. Insights into this distinction existed, but a coherent and accessible analysis emerged only with the development of the modern money approach, or MMT, which built upon Keynes’s Treatise on Money and the earlier doctrine called Chartalism, which understood money as a political entity (that is, as a creature of the state, and not only of the banking system).¹ MMT debunked the dangerous notion that the public purse is just a larger version of a household budget and should therefore be governed with the dictum of good husbandry: “thou shalt not spend beyond your income”. 

MMT debunked the dangerous notion that the public purse is just a larger version of a household budget and should therefore be governed with the dictum of good husbandry: “thou shalt not spend beyond your income”. 

Public money – the currency itself (in physical and electronic form) is the final means of settlement of all debts. It is fundamentally different from other forms of money such as bank deposits and private promissory notes. It is issued by public financing institutions (central banks, treasuries, and ministries of finance). It represents perhaps the purest form of monopoly and is necessarily a public good available to all members of society. Until recently, most economists had not explored the implications of the unique nature of government money.

Money as a Public Institution

MMT played a role in some seismic shifts in thinking about the economy and in policymaking post-2008. Understanding money as a public institution – as a political artefact – changes everything. Governments that are sovereign in the control of public money are self-financing. One of MMT’s signature contributions has been to clarify monetary operations: the technical and institutional processes by which sovereign governments are already self-financing (i.e. using their own resources independently from private creditors). This, in turn, brings to light the funding limitations that non-sovereign monetary regimes face. MMT laid out a framework for thinking about the spectrum of monetary sovereignty – why some governments enjoy full monetary sovereignty and others do not. Monetary sovereignty is predicated on an explicit or implicit coordination between monetary and fiscal authorities while non-sovereign states on institutional firewalls designed specifically to constrain public spending.

MMT also overturned the traditional understanding of government debts and deficits. Public debts denominated in sovereign currencies are sustainable and free of any risk of involuntary default. Government deficits are the accounting record of non-government sector surpluses, while government debt is the net private sector financial wealth. Any attempt to wipe out one is an attempt to wipe out the other – there are no winners from erasing public deficits or debts; to do so is to erase private savings and net financial wealth, dollar for dollar and bond for bond. 

As the world watched the Big Monetary and Big Fiscal policies of 2008 and 2020 with bank bailouts and stimulus payments to households that appeared to defy then-prevailing economic wisdom, MMT easily made sense of government action: governments simply made free use of their monetary sovereignty. We are now witnessing the revival of Big Industrial policies in some corners of the world – a development engaging the same logic of financial sovereignty. And while these bold policies hold the key to a different economic paradigm, a post-neoliberal economic order if you will, far from undermining neoliberalism, the particular policies that were financed have instead thrown neoliberalism a lifeline. To understand why this is the case, we need to discern the constructive potential of big government spending and scrutinize the manner in which that spending is directed.

And while these bold policies hold the key to a different economic paradigm, a post-neoliberal economic order if you will, far from undermining neoliberalism, the particular policies that were financed have instead thrown neoliberalism a lifeline.

The big three (Big Monetary, Big Fiscal and Big Industrial) policies have demonstrated unambiguously that public finance is not scarce. The governments who responded most aggressively to the crises were self-financing and the extraordinary policy measures post-2008 did not diminish their capacity to respond to COVID. Far from it, the US, Canada, and Japan passed unprecedented postwar fiscal packages (26%, 20%, and 53% of GDP respectively) in just 2020.

To anyone who was looking, the crises were a lesson in the technical aspects of public finance: government spending does not depend on tax collections or private creditors, but on the legislative process and the coordination between public financing institutions to clear all payments. No wealthy households were asked to foot the bill, and no creditors were called upon to lend governments money. Governments created it, as they always do, by fiat, a process that is true in crises, as it is on any given day – no matter how small or large the expenditure. But COVID spending was large, large enough to concentrate the mind, bust economic dogma and reveal that money is fundamentally a public institution.

Areas like the Eurozone rediscovered, indeed reverse-engineered, temporary monetary sovereignty and a quasi-fiscal union to tackle COVID. The Maastricht criteria were suspended, public deficit and debt limits were lifted, and the ECB launched bond purchase programs that financed member states. Germany, Italy, France spent about 10% of GDP, which would have been impossible under the old rules.

Japan didn’t blink an eye. It had been using the big three policies for decades, all the while enjoying near zero interest rates and no possibility of government default, despite record debt-to-GDP ratios.

Let’s be very clear: 2008 and 2020 did not produce some fundamentally new paradigm in government financing. Whatever the political economy of money, and whatever laws, institutions, and power circumscribe government policies, there is a fundamental technical aspect of public finance that cannot be ignored: governments possess unparalleled spending firepower and those who have abdicated their monetary sovereignty scramble to rediscover it when faced with major crises. 

Governments possess unparalleled spending firepower and those who have abdicated their monetary sovereignty scramble to rediscover it when faced with major crises.

Meanwhile, the big three policies rarely reach the shores of the global south, where monetary sovereignty is often denied to countries already crippled by foreign denominated debt, fixed exchange rates, and all the legacy institutional trappings of colonialism. 

If 2008 and 2020 pointed to an existing monetary design that is most conducive to bold public action (a vital lesson for tackling the climate crisis), the next question then is, did the big three upend the neoliberal logic of the past decades and open the door to a more just and democratic social order. Here the answer is also ‘no’, even if the new “whatever-it-takes” financing paradigm provided a glimmer of what was possible.

“Whatever it Takes” Financing

“Whatever it takes” is how Mario Draghi described the new course he took in 2012 as President of the European Central Bank after four painful years of post-2008 austerity continued to rattle financial markets. It was a promise that the ECB would now act as a fiscal backstop to (most) member states, largely removing the fear of government default. But the goal of ECB lending and asset purchase programs was to lower bond yields and stabilize bank balance sheets, not to enable greater fiscal action geared to restarting growth, achieving full employment, and alleviating poverty.

Big Monetary

“Whatever it takes” was at the heart of the Big Monetary policy in the US. Since the Fed acts as market maker for government debt, risk of government default was never the problem. To stem widespread bank illiquidity and insolvency, the Fed lent against and purchased an unprecedented level of distressed financial assets. As I explain here and here, the success of these measures was largely due to the ‘fiscal components’ of monetary policy, meaning that the Fed has no unilateral ability to purchase assets (even if it has unlimited financing capacity) without the authorization of Congress and support of the Treasury. Meanwhile, Congress worked hard to constrain conventional fiscal policy. The logic of austerity ruled over government spending in a sovereign currency regime (US), just as it did in a non-sovereign one (Eurozone), even as public finance was abundant and flowing for the purposes of stabilizing financial markets. 

The difficulties with relying on Big Monetary policy were clearly understood by central bankers themselves. 

“Is this the best way to allocate liquidity”, Draghi asked “if you have in mind objectives like climate change or reduced inequality? Probably not. In fact, some of the new ideas like MMT… would suggest different ways of channeling money in the economy… so we should look at them.”

In his academic work, Ben Bernanke had also argued that monetary policy of the kind he himself pursued in 2008 would have muted effects on aggregate demand. Coordination between monetary and fiscal policy, a “Rooseveltian Resolve”, and a willingness to abandon failed paradigms are needed to “do whatever it [takes] to get the country moving again” (p. 165, 1999).

But the possibility of coordination between the Federal Reserve and the Treasury was clearly rejected by the mainstream as a radical new proposition – allegedly for fear of politicizing the purported neutrality of monetary policy. Only MMT zeroed in on how monetary and fiscal policies already coordinate, allowing for more aggressive fiscal action. What was required was for Congress to act.

The end result of Big Monetary policy was a far more consolidated and more difficult to regulate financial sector. Shadow banking continued to grow and now holds almost half of the world’s assets. The “whatever it takes” approach did not transform monetary policy in any fundamental way. If anything, it stands ready to roll out new forms of unprecedented support (e.g. SVB and Signature bank full deposit insurance and subsequent takeovers). A monetary policy approach based on “whatever-it-takes-to-rescue”, without “whatever-it-takes-to-regulate” has made the financial sector more unwieldy and more systemically dangerous.

Big Fiscal

As Bernanke and Draghi intimated, financing Big Monetary policies with fiscal components is not fundamentally different from financing conventional fiscal policy. The currency is a public monopoly, and the ECB and the Fed cannot run out to money. See Draghi and Bernanke’s unambiguous statements on this point. What MMT clarified is that public financing institutions create public money in the act of spending and lending, and extinguish it in the act of taxation and loan repayment. Spending and lending must come first, as the currency must be injected into the system before tax payments or bond purchases could take place. The large-scale asset purchases post-2008 and the large-scale fiscal policies during COVID were financed the same way. 

The return to fiscal policy was a welcome development and it delivered the fastest postwar recovery in the global north. In some ways, the experiment with Big Monetary policy unwittingly made the case for Big Fiscal policy during COVID. “Whatever it takes” is what the US government did to provide broad-based support to businesses (via tax credits, capital injections, firm loans), households (via generous income support and expanded healthcare) and industry (e.g., airline and other transportation services relief). Some European governments guaranteed the payroll of threatened workers and avoided mass layoffs. The US expanded unemployment insurance and healthcare coverage and passed universal child allowance in 2021.

For a brief moment in a highly uncertain time, for many families, economic security seemed possible. But all of that was temporary. In the US, as the policies expired, child poverty spiked, millions lost their healthcare eligibility, and work requirements for public assistance returned. In Europe, the most generous and equitable health system in the world faced an onslaught of problems and is further being threatened by the post-COVID budget crunch. Around the world, health systems are either nonexistent, weak, or have suffered legacy disinvestments.

Big Fiscal threw the global north a lifeline but never reached the global south. Neither did it address economic insecurity in any fundamental way. As it retreated from providing stronger safety-nets, it morphed into Big Industrial policy. While this turn is largely motivated by national security interests, many hope the strategy would deliver enough good jobs and the green transition. This too will be a dashed hope.

Big Industrial

Industrial policy is not new. China, Japan, and South Korea have long pursued successful industrialization strategies. What is new is the scale and scope of its revival in the US and Europe after decades of neglect and underinvestment. “Whatever it takes” is what produced COVID-19 vaccines on short order. Yet, companies which received public funds for their development and production refused to waive their patents. Vaccine apartheid blanketed the globe. The neoliberal market logic prevailed. A public health problem was being tackled by engineering a market mechanism and profit opportunities for a technology that was publicly funded and widely hailed as a global public good.

This is the fundamental logic of all industrial policies that followed, from the CHIPS and Science Act and Inflation Reduction Act in the US to the Green Deal Industrial Plan in Europe. It’s the Washington Consensus with a twist: rooted in free market principles but with fiscal guarantees.

This logic is nowhere more evident than in the de-risking approach to Big Industrial policy, which reifies the price signal as a solution to social and economic problems. Governments have enlisted large private capital, including institutional investors and private equity by way of devising risk/return profiles of investments in areas that were previously considered uninvestable (e.g., the green transition, healthcare, public utilities). The approach has ‘worked’ only insofar as public financing institutions (central banks, treasuries and ministries of finance) have stepped in to provide the necessary backstops to private finance thus shifting private risks onto public balance sheets.

This financing regime has created the appearance that the state needs private finance to pursue key policy objectives, whereas it is private finance that needs the assurances and guarantees that only the state and its public financing institutions can provide.

When the de-risking regime meets the “whatever-it-takes” public money regime, the New Industrial state is reproduced by the forces of financialization, consultification of government procurement, and mega contracts to price-setting firms. The planning system, as Galbraith put it, remains firmly in the hands of the big tech, big finance, and big multinational corporations. And all of it is underwritten by the public purse with devastating consequences for democratic governance.

This financing regime has created the appearance that the state needs private finance to pursue key policy objectives, whereas it is private finance that needs the assurances and guarantees that only the state and its public financing institutions can provide.

As MMT helped explain the financing operations behind the big three policies, it suffered a peculiar fate: it was held responsible for these policy experimentations and the subsequent inflation. MMT-informed policies of course were never tried. There was no consideration of an open-ended job guarantee policy, transition to Medicare for all, the downsizing of the financial sector, or permanently low and stable interest rates. What MMT did reveal is that the inflationary paradigm is the current one: the “whatever-it-takes” public-money-for-private-benefit paradigm; the very same paradigm that revives whole industries that depend on predatory pricing and labor practices.

What MMT did reveal is that the inflationary paradigm is the current one: the “whatever-it-takes” public-money-for-private-benefit paradigm; the very same paradigm that revives whole industries that depend on predatory pricing and labor practices.

Meanwhile, “whatever it takes” has never been the approach to economic development in the global south or to fighting economic insecurity in any corner of the world. There isn’t a single place in the world where investments for social or climate needs are fit for purpose. There is already a retreat from climate commitments, and the deficit and debt myths are again weaponized against essential public programs. 

And yet the “whatever-it-takes” paradigm has illustrated unequivocally that public finance is abundant for funding democratic priorities too. It has shown that we can stabilize labor markets, eradicate poverty, provide public goods and relative economic security. At bottom, we don’t need to find the money. We have it. What we need is a way of emancipating the public purse from the neoliberal logic and using it to finance a comprehensive framework for structural transformation. Because the question of “How will you pay for it?” has already been answered. With public money. 

 

Read L. Randall Wray’s response to this piece “Did We Do MMT During Covid?” at this link.

 

Footnotes

1. For the history of the articulation and development of this approach see Pavlina Tcherneva, “Chartalism and the Tax-Driven Approach to Money”, in A Handbook of Alternative Monetary Economics (Edward Elgar Publishing, 2007), Ch.5.

 

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Pavlina R. Tcherneva is Founding Director of OSUN-EDI, Professor of Economics at Bard College, and a Research Scholar at the Levy Economics Institute, NY. Learn more about her and this EDI symposium on our About page.