Borrow and Hope – for the Planet?

Guest post by Barry Brill,

If the Earth is cooking, does it really matter how much money we borrow or print to cool it down? If we fail, we won’t even be here to pay it back. If it works, there will be plenty of profits and taxes to get the economy back in balance.

Modern Monetary Theory (MMT) is the Holy Grail for those well-intentioned folk on the left of politics who look at our world through dark-tinted glasses.

They blame a heartless capitalist system for poverty, joblessness, inequality and other economic, social and environmental ills. They give very scant credit to that system for the sharp global improvement in all these areas over recent decades. 

The left grieve that so many worthwhile projects are binned because sympathetic governments just don’t have enough money. Their long-standing reputation for “borrow and hope” policies is well earned.

This might all change with a 2020 bestseller from MTT high-priestess, Stephanie Kelton: The Deficit Myth : Modern Monetary Theory and the Birth of the People’s Economy.   As explained in its Amazon blurb:

Kelton busts through the myths that prevent us from taking action: that the federal government should budget like a household, that deficits will harm the next generation, that deficits crowd-out private investment and undermine long-term growth, that entitlements are propelling us toward a grave fiscal crisis.

MMT, as Kelton shows, shifts the terrain from narrow budgetary questions to one of broader economic and social benefits. With its important new ways of understanding money, taxes, and the critical role of deficit spending, MMT redefines how to responsibly use our resources so that we can maximize our potential as a society. MMT gives us the power to imagine a new politics and a new economy and move from a narrative of scarcity to one of opportunity.

Sounds wonderful – but, there’s a catch. It’s the curse of inflation.

Keynes v Friedman

A handful of economists (chartalists) have long argued that government debt need not cause inflation, so long as governments have the sovereign power to raise future taxes large enough to repay that debt. These thinkers influenced Keynesian ideas on the role of the state in the economy.

The view that “whatever is physically possible and desirable should be financially possible” has obvious attractions. In the 1930s, it was taken up politically as Social Credit, a cult that still has its followers.

By the 1970s, decades of Keynesian policies in the developed word had culminated in global inflation. The figurehead opponent of those policies, Milton Friedman, famously contended that: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” 

The long-running debate between Keynesians and Friedmanites was eventually won by the latter. Friedman was awarded the Nobel prize for economic sciences in 1976. His ‘Chicago School’ view of macroeconomics was adopted by Reagan in the USA and Thatcher in the UK, and soon followed by others. Understandably, it came to be associated with centre-right politics.    

Economic Transformation

But the centre-left has now come roaring back. Keynes was too timid, say the modern left, who have now signed up to neo-chartalist theory. They demand an “economic transformation” that uses government credit to revamp and reform every single aspect of the economy, replacing them all with planned systems that are more equal and just.

MM Theorists say a really ambitious acceleration of government borrowing would uncover hidden slack in the economy. Added demand can create its own added supply, so that output keeps pace with the rapidly increasing money supply.

More convincingly, MMTers also say it’s been tried and it worked. The template is FDR’s war economy of 1941-44, as per this graph:

US Debt as a percentage of GDP

The MTT is nowadays better known as the “Green New Deal”, on the fudged  premise that the previous peak in government borrowing facilitated Roosevelt’s New Deal in the 1930s. The graph belies that date-shifting euphemism. In reality, the prior peak was curated for the the bloodiest of wars.

Ambrose Evans-Pritchard in The Telegraph Economic Intelligence newsletter points out that, during WWII: “Roosevelt’s military-industrial expansion tightened the labour market and lifted wages, leading to the most dramatic fall in income inequality in US history. It ushered in the ‘social democrat’ era of the American Dream”.

This is the effect that President Biden now seeks to emulate – with his $1,900 billion ‘extra stimulus package’ along with the $2,000 billion ‘renewables’ package that energized his election platform.

And these elephantine figures come atop an estimated overhang of $1.6 trillion of extra household savings built up during the pandemic. If this gets spent as life returns to normal, America is heading for an explosive burst of growth. Goldman Sachs has pencilled in 6.8pc this year, Oxford Economics 7pc, and Moody’s Analytics 8pc.

“Today the mobilisation is against carbon rather than fascism. But the economic effects are comparable [to World War II]. That at least is the theory,” says Evans-Pritchard.

Risks and Taxes

The detail of MMT turns traditional macroeconomic theory on its head in multiple ways. While some academic economists engage in arcane debates, most say they can’t even follow the theory and point to its lack of either empirical or mathematical underpinning.

A 2019 survey of leading economists showed a unanimous rejection of assertions attributed to MMT. Leading leftist Paul Krugman says MMT devotees change the rules at whim, while Larry Summers called it the new “voodoo economics”.

Says the Economist:

“This strangeness is partly a result of MMT scholars’ unconventional idiom. Speaking with MMT’s adherents is sometimes like watching a football match with friends who insist the ball remains stationary while every other element in the game, including the pitch and goalposts, moves around it.”

If the theory doesn’t pan out in practice, most sceptics think runaway inflation can be the only outcome.  Not so, say the MMTers – the financial imbalance can be fixed by higher taxation – ie new carbon and wealth taxes and unprecedented high rates for existing taxes.

Stephanie Kelton likens the economy to a sink basin, with Congress as the tap and money as the water – if the basin overflows, Congress has only to loosen the plug with new taxes to lower the water level.

There is a massive risk that the entire ‘economic transformation’ welter of words will build down to raising unprecedented levels of taxation in the hope of extinguishing inequality. Meet the new socialism, same as the old socialism.

Induced Consent

Throughout the English-speaking world^[1] all centre-left parties have recently campaigned on the basis of “economic transformation” – but not on the basis of a new and unproven funny-money theory. Instead, the codewords are always used in tandem with climate change policies.

Poverty and racial/gender injustice would be overcome, and inequality would be eradicated – but all as a by-product of a “just transition” to a decarbonised economy. Every facet of the economy would have to be reinvented to track down all those pesky greenhouse gases.

‘There is no alternative (TINA)’ is a time-honored political technique. It is a sophisticated version of HL Mencken’s famous 1918 dictum: “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.”

If you believed that climate change was threatening the very existence of the human race (as leftist politicians claim) what would you do about it?  The only reasonable answer is “whatever it takes”.  Take huge risks? Well, of course – if the alternative is to be oblivion.

This unlikely story was made respectable by the UN’s Agenda for Sustainable Development : Transforming Our World. A by-product of that plan is the many-fold enlargement the UN’s role, and its perpetual goal of ever-closer union at the trans-national level.

For those who mistrusted the UN, there was support from multinational business leaders in the form of the “Great Reset of Capitalism” promoted vigorously by Davos Man^[2]. And this in turn was an outcome of relentless pressure from the worldwide finance and banking industry over several years.

A few views from the world’s foremost financiers:

• “The climate transition presents a historic investment opportunity,” says BlackRock’s Larry Fink.

• Net-zero investments are “one of the greatest commercial opportunities of our time,” ex-central banker Mark Carney declared.

• “ It would be a mistake to underestimate the size of the cleantech opportunity,” said venture capitalist John Doerr (who has appointed Al Gore as a partner).

• There’s a lot of money to be made in the creation of these new [green] jobs,” chimes in presidential climate envoy John Kerry.

Those heavyweights gave ample cover for the left-wing echo chamber of Hollywood, Silicon Valley and their trend-setting global media – such as The New York Times, the BBC and The Guardian.

Will It Work?

In the name of saving the planet, the USA, and probably most of the developed world, are embarking on the boldest monetary experiment in history. The declared objective is no less than the dismantling and replacement of “every aspect” of the economy.

The economy that is to be replaced is the outcome of evolution over many  generations – for the most part under the ‘invisible hand’ of free market policies.

The audacious intentions may be worthy but the stakes are mind-boggling. Could anything go wrong?

The grand project is based on a cascade of unprovable assumptions:

• if we continue to power the world with fossil fuels, the global average temperature will rise by 3°C+ within a few decades;

• this will cause extreme weather, reduce food production and flood coastal regions to an extent that will make the planet barely habitable;

• the most cost-effective solution to this global warming is the rapid erection of billions of windmills and solar panels at a cost of trillions of dollars;

• funding of this building boom can be subsidised from uncapped Government borrowing (printing of money) without crowding out private productive capital and without resulting in any material inflation;

• to the extent that inflation occurs, it can be cured by the Government withdrawing money from the economy with new and increased taxes. Doing that would help remove inequality and would improve the lives of the poor and vulnerable.

Every one of these assumptions is highly dubious. Each has a less than 50:50 chance of proving correct, and the cumulative prospects of a successful outcome  are vanishingly small.

There is a very high probability that the results of the cure will be materially worse than the results of the disease.

Climate Change Apotheosis

For years, perhaps decades, the over-hyping of climate change alarmism has been driving us all towards some such extreme outcome. This is no accident.

Using their own words, Dr Larry Bell has shown that climate policymakers have long  been concerned with redistributing the world’s wealth. He says –

“It is way past time to realize that none of this is really about protecting the planet from man-made climate change. It never was,”

The UN’s Christiana Figueres told a Yale audience in 2018:

“We are on the verge of the greatest transformation humanity has ever set itself. We never, as a collective people, all of humanity — we never have decided before with choice and intentionality to do this. We have the chance to re-create the economy, to re-create the world.”

Anxiety about the future weather was a means to an end:

“And instead of feeling despair about climate change, people should feel awe and gratitude at the incredible opportunity to shape humanity’s collective future.”

The combination of Covid 19 lockdowns and climate change hysteria, along with the 2020 US elections, have created the perfect storm. An experiment which would have seemed fanciful only a few months ago is now under way.

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^[1] I am referring to Labor and Green parties in Australia, New Zealand, and UK, the Liberal party in Canada, and Democratic party in USA.

^[2] Along with HRH Prince Charles. The World Economic Forum publishes the Davos Agenda in a series of ‘Transformation Maps’ for the guidance of national governments