Could John McDonnell, the shadow chancellor, be too right-wing? That’s probably not a possibility that has crossed the mind of many MoneyWeek readers, but some proponents of “modern monetary theory” (MMT) have gone through the looking glass and are sending back strange reports.
Back in 2015-2016, the Labour Party rounded up a panel of experts to advise it on economic policies that could lead the way out of austerity without indulging in profligacy. As a result, Labour adopted a “fiscal credibility rule”, based on the work of academics Jonathan Portes and Simon Wren-Lewis. This meant committing to balancing day-to-day expenditure with revenue from taxes, to borrowing only to invest for the long term, and to reducing debt over a five-year period. Sounds sensible. But for MMTers, this is exactly the same kind of wrong-headed thinking that led to austerity in the first place.
As Portes explains in Prospect magazine, MMT has become popular on the left, both in the UK and abroad. (Wags say that it stands for “magic money tree”, giving a flavour of what it’s all about and its appeal for the left.) There are supporters of the idea close to the Labour leadership. One of MMT’s leading theorists is an adviser to US presidential candidate Bernie Sanders. One of the Democrats’ rising stars, Alexandria Ocasio-Cortez, has expressed an interest and suggested it might help fund her ambitious spending plans.
The governor of the Federal Reserve, Jerome Powell, recently weighed in on the debate. His assessment was that MMT is “just wrong”, but the fact that he felt obliged to address the idea at all is a sign in itself of MMT’s rapid rise to prominence. So what does MMT say, exactly?
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