The MMT Trap: A Response to Daniel Wortel-London

The MMT Trap: A Response to Daniel Wortel-London

Rather than bypassing the problem of power by putting our faith in MMT’s printing press, we need a strategy to rebuild the tax state and move toward economic democracy.

People participate in a "March on Billionaires" event on July 17, 2020 in New York City (Spencer Platt/Getty Images)

This is a response to Daniel Wortel-London’s article “The Tax Trap.” You can read his reply here.

As President Biden begins to confront the enormous challenges ahead, even the wary among us want to be hopeful. How events actually unfold will depend on the administration’s ability and willingness to end a forty-year pattern in U.S. politics: Republican administrations combine profligate war spending with tax cuts for the wealthy and leave ensuing Democratic governments to clean up the mess. Deficits are strategically weaponized to slash already mutilated social welfare programs and discard progressive promises from the campaign trail.

Donald Trump has bequeathed Biden with the largest deficit since the Second World War. The national debt increased by $7.8 trillion during Trump’s tenure. Trump authorized over $2 trillion in defense spending from 2017 to 2019. The tax cuts he signed in 2017, a handout to the wealthy, are expected to cost Americans another $2.3 trillion over ten years. Out of the $5 trillion spent on bipartisan COVID-19 relief, $3 trillion lined the pockets of the wealthy and corporations. Only around $380 billion was spent on stimulus checks, much of which did not end up in the hands of the neediest. Frontline workers, undocumented workers, public-sector workers, the poor—all were largely left to fend for themselves.

The recent emergence of Modern Monetary Theory (MMT) has helped to steer the Democratic Party’s rhetoric away from clean-up duty and toward bold policies. Instead of bowing to fiscal discipline, mainstream Democrats are discussing a Green New Deal, a jobs guarantee program, and cancellation of student debt. The question “How will you pay for it?” is not stopping ambitious politics dead in their tracks.

In his article “The Tax Trap,” Daniel Wortel-London argues that the insights of MMT can work hand in hand with a left program of public ownership and cooperative economic development to create an alternative government system—one less beholden to the veto power of wealthy and corporate taxpayers, and more open to large-scale spending programs.

But while it is vital for the left to continue debunking deficit hawkery and fighting against austerity imposed on working people at the expense of transformative models of economic development, relying on MMT to make this case for us is a Faustian bargain.

As much as we may want a shortcut, we cannot simply spend our way to socialism. Rather than bypassing the problem of power by putting our faith in MMT’s printing press, we need a strategy to rebuild the tax state and move toward economic democracy.

 

For nearly a century, Keynesian economists have argued that governments can incur budget deficits to stimulate aggregate demand, while warning of the political and macroeconomic implications of sustained national debt. MMT largely dismisses these consequences. It claims sovereign governments that issue their own currency can print as much money as they need to service their debt.

If budgets do not matter, then there are precious few societal tradeoffs over resource allocation. Such rosy assumptions risk leaving existing power relations between capital and labor intact, repackaging the idea that a rising tide lifts all boats. It is no coincidence that MMT was cultivated, financed, and popularized by a hedge fund manager living in the U.S. Virgin Islands “for tax reasons.” MMT enables elites, who have historically embraced neoliberal ideology to shield their wealth, to concede the government’s role in footing the social welfare bill while continuing massive tax avoidance.

The circumspect promise of MMT serves to distract a resurgent left from critical fights around budget justice. By contrast, increasing taxes on the superrich—as well as other battles like raising the minimum wage, promoting worker ownership of enterprise, and taking banks, hospitals, and housing out of the hands of capitalists and into the commons—require power struggles over resource allocation.

Taxation also plays a critical macroeconomic role under MMT. Once full employment is theoretically reached, taxes would serve to drain excess money supply out of the system to quell inflation. MMT assumes the government has the full ability to tackle inflation when it comes, not acknowledging the fiscal and political limitations on increasing taxes in a high-inflationary environment. As the economist Thomas Palley pointed out in a working paper on MMT, taxes could be a “poorly timed” instrument that “could amplify the business cycle rather than dampen it.” Power struggles over taxation are also inescapable, whether the purpose of taxes is to finance spending or stabilize money supply. Further, the threat of inflation should not be dismissed simply because of recent history. Already in the first month of 2021, on the back of a soaring deficit, supply-chain bottlenecks, and anticipation of additional stimulus, inflation is starting to rear its head.

Beyond these macroeconomic problems, endless money printing and zero-interest rate policies lead to price inflation of many asset classes, which exacerbates rampant wealth accumulation at the top (and incidentally make political fights over taxation even more extreme). We have seen this in practice in the years since the global financial crisis, when the United States has become more unequal than any time in the last half century. Bank of America research shows that the difference between gains in financial assets and the health of the economy hit a record in 2020. Asset inflation has driven up housing prices, causing painful affordability crises in cities across the nation, while soaring wealth inequality exacerbates the horrific effects of moneyed influence on our democracy.

These are not the only potential negative effects of MMT on working people. As Palley argued, financial markets rest on expectations of how interest rates and inflation will move in the future. A governing MMT regime’s expected impact on long-term financial conditions could lead to an increase, or an increase in volatility, in long-term interest rates. Reverberations would be felt in the private credit markets working-class Americans are entwined with directly through consumer loans and indirectly through the effect of credit conditions on employment.

Further, MMT’s inflationary effects would punish savers, especially government bond holders. There’s no need to defend the bondholder class, but the uncomfortable truth is that roughly $40 trillion in global assets belong to pension funds that provide retirement income for mostly public-sector workers, and another large share of assets are owned by 401(k) holders. Instead of devaluing this capital via MMT, the state could redirect pension fund capital from Wall Street to channel investment in affordable housing and green infrastructure for the public. This would unite the saver and the citizen, the pension fund and the public good, by matching the modest return needs of savers with long-term spending priorities.

MMT also glosses over the power relations between the United States and the rest of the world. When MMT claims national governments are masters of their own destiny, it is effectively referring only to the United States, which has used its imperial muscle to secure the dollar’s privilege as the world’s reserve currency, thereby financing debt-fueled consumption for decades.

Nations of the Global South are often unable to borrow in their own currencies or allow exchange rates to float freely, let alone execute massive MMT-like deficit financing. Even modest attempts to fund proto-socialist states after colonial independence fueled cruel backlash from Western powers and painful IMF structural-adjustment programs. In a world where capital flight has caused entire economies to collapse, try telling any developing nation that the only limits on the money supply are nature and imagination. Austerity may be an intellectual bogeyman, but it is our responsibility to be cautious of investors inflicting palpable suffering on the working poor when it suits them, whether in the United States or abroad, via market selloffs, investment flight, credit contraction, and exorbitant interest rate hikes. Furthermore, the prices of emerging market assets are strongly correlated with the relative strength of the dollar. The repercussions of massive U.S. spending on the volatility of markets (and thus the well-being of billions of people outside of our borders) are therefore enormous. Here, MMT betrays its own version of American exceptionalism. It is difficult to understand how a left that supports such a theory can also claim progressive internationalism.

All this suggests that MMT tells us very little about the leap from unlimited deficit financing to the wielding of power by working people.

 

By contrast, robust revenue generation via taxing the class that has enjoyed a shrinking tax burden over the last forty years can help build the material conditions and power required to collectivize ownership over productive resources. This is especially true if we aim to build power centers in progressive bastions like New York (as many already do), and in the absence of left influence over the federal government’s money creation powers.

States and cities cannot adopt MMT due to the legal obligation to balance annual budgets, a powerful disciplinary tool that has left them at the mercy of Senate Republicans in federal aid negotiations. Municipalism requires healthy local government finances. Democratically owned forms of public wealth creation cannot spring up spontaneously, but instead require some sort of capital to kickstart, whether via seed funding for a public bank or equity support to catalyze worker-owned enterprises.

Sustained tax revenue collected by the state can provide the very capital required to displace private investors from profiteering off basic human needs. We could, for example, use tax revenue to make New York City Housing Authority dwellings more livable, and then to expand the authority’s footprint. This would reduce the city’s reliance on private developers, who receive public subsidies to build “affordable housing,” in which the majority of units are market rate and drive further gentrification.

Cooperative models have many admirable qualities, but it is difficult to compete with capitalists and their banks. American worker cooperatives generate $500 million in annual revenue—a relatively small number. It is unsurprising that consumer cooperatives generate over 1,000 times that revenue ($650 billion per year), because consumer cooperatives do not share surplus value to build wealth for workers but instead serve to modestly reduce prices for customers. Seeding a public bank via tax revenues can help bridge that gap.

It’s true that a left dependent on taxation for public goods provision becomes reliant on the very class it seeks to defeat—at least to an extent. However, revenue generation via progressive taxation is a winnable campaign that can fund public goods like housing, healthcare, and government jobs that create a more equal society and lift incomes, thereby widening the base of taxation in the long run. This can be accomplished without fueling wealth inequality through an unchecked expansion of the money supply.

The challenges on the road ahead are daunting. In New York State, the original epicenter of the U.S. COVID-19 outbreak, 40,000 New Yorkers have died since the pandemic began, 60 percent are facing lost income, and 25 percent are confronting food insecurity. During this same period, New York’s billionaires saw their wealth increase by $81 billion. Due largely to COVID-19, New York is facing a $15 billion budget crisis in fiscal year 2022. Unless we act boldly, the current administration will balance the budget on the backs of the working class by cutting vital social services and public sector jobs, which would fall disproportionately on women and African Americans, as well as cripple economic recovery. Meanwhile, decades of tax cuts for the wealthy mean the richest New Yorkers currently have the lowest tax burden of all income groups. Corporations are paying the lowest federal and state tax rates in decades.

In response, a diverse coalition of New York community groups are spearheading the Invest In Our New York Act, a platform of six bills that aims to raise taxes on the wealthy to not only generate sufficient revenues to plug the state’s current budget deficit, but also to create a more equitable, durable tax base for the future.

Building a bottom-up, democratic economy will require both progressive taxation and judicious use of sovereign fiscal power. People-powered campaigns like Invest in Our New York can help us win the sustained revenue necessary to fund housing, healthcare, transportation, and education, among other priorities, to actually improve the material conditions of working people with the urgency they deserve.


Aashna Desai lives in New York City.


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