BusinessJuly 12, 2020

Pipe dream or quick fix? On the post-Covid allure of modern monetary theory


It’s an economic theory that advocates tout as a solution to governments’ debt crises, but critics warn is a recipe for hyperinflation. Either way, modern monetary theory is getting a lot more attention in the era of Covid-19.

Two big economic ideas have captured the popular imagination during the Covid-19 pandemic: the universal basic income and modern monetary theory.

But Bill Mitchell, professor of economics at the University of Newcastle and the man who coined the term MMT, isn’t a fan of the UBI, which he dismisses as an unnecessary surrender to neoliberalism.

The spectre of rising unemployment in the 1970s saw Mitchell – a guitarist in Melbourne reggae dub band Pressure Drop – enrol in an economics course. His conviction that work was a human right saw him take an interest in the monetary system and ultimately come up with the term modern monetary theory, and his proposal for a government job guarantee.

The Australia of Mitchell’s youth was one where jobs were taken for granted. In 1945, the Labour government in Australia issued a white paper on full employment that guaranteed every Australian a job.

Anyone who wanted a job, Mitchell says, could easily find one.

Anyone? Surely that only applied to white men, right? “Yeah, I’m not talking about nirvana here,” he says. “I’m not saying that the 1950s, for example, was a utopian stage in our western world; far from it. We had racist attitudes, we had xenophobia.”

But Mitchell says governments were remarkably successful at providing jobs to people who needed them and there’s nothing stopping them from doing so again. The key to doing it then, and in the future, he says, is having a public sector “buffer stock” of jobs.

“In Australia – and I’m pretty sure the same sort of structure operated in New Zealand – you could always get a job in some public sector area,” he says.

He’s not wrong. In 1952 in New Zealand, there were just two people receiving the unemployment benefit and 50 registered as unemployed.

The full employment era for Australia came to an end in the 1970s when its government responded to the OPEC oil crises with austerity measures, creating the first significant unemployment in decades.

By then the full employment consensus was breaking down and what would become known as neoliberal economics was gaining favour. Reforms over the following decade in both Australia and New Zealand would see large swathes of the economy privatised and the adoption of monetary policies targeting low inflation over full employment.

The idea that there was a natural rate of unemployment that was required to keep inflation in check became received wisdom – but it wasn’t a view that Mitchell shared.

Bill Mitchell says governments can find jobs for anyone who needs them (Image: Youtube)

The lightbulb moment on how a government could guarantee jobs for everyone came to Mitchell during his fourth year at Melbourne University, while studying a course on agricultural economics and the policy of wool price stabilisation.

The wool price scheme came about in response to lobbying from the country’s farmers, who were sick of fluctuations in the price of wool that caused a bounty one year and a drought the next.

“The government agreed that when the wool clip was very strong and there was an excess supply into the market – relative to the demand that was being produced – the government would buy that excess supply and therefore keep the price stable,” Mitchell says.

“I had this idea that if the government can do that for wool and stabilise the price and effectively stop the farmers from losing income, why can’t they do it for labour? Why can’t they, when there’s excess supply of labour, which is unemployment – and there’s no bid for labour in the private market – why can’t the government make the bid and buy those labour services and put that labour to productive work?”

Well, most people would probably say the government could do that, but if there’s no one willing to pay for whatever services or goods are being produced by those workers, then it would simply create more debt.

And that’s where modern monetary theory comes in. In essence MMT – which Mitchell describes as a lens through which to look at the monetary system – says a currency-issuing government can create as much money as it needs to up until the point that it exceeds the productive capacity of the economy: at which point inflation kicks in.

In other words, as long as the government is creating jobs and isn’t bidding up the price of labour or resources, it can create as much money as it needs to pay for goods and services within the economy it’s operating in.

With crippling effects of Covid-19 pushing governments to embark on vast spending sprees and create frightening fiscal deficits, MMT is enjoying increasing time in the sun. The theory is the subject of the New York Times bestselling The Deficit Myth – written by Stephanie Kelton, a former US Senate Budget Committee chief economist and an advisor to presidential candidate Bernie Sanders.

“An understanding of modern monetary theory matters greatly,” wrote Kelton for The New York Times, because “it could free policymakers not only to act boldly amid crises but also to invest boldly in times of more stability.”

Other articles explaining and critiquing MMT are regularly featured in leading newspapers and magazines. US democratic representative Alexandria Ocasio-Cortez is a prominent advocate, while Robert Greifield – a former chair of the Nasdaq stock market board of directors – went as far as to claim, in an op-ed for CNBC back in April, that in the US it was already being put into practice.

Alexandria Ocasio-Cortez is an advocate of MMT (Photo: Getty Images/Scott Heins/Stringer

The interest is increasing, but most mainstream economists remain sceptical. While the arguments for and against are manifold and quickly enter the realm of advanced economics, the main reservation boils down to one thing: inflation.

Former IMF chief economist Olivier Blanchard – who is supportive of large-scale quantitive easing programmes – last year said a theory that suggests the US Federal Reserve could print money to pay for increased spending was a recipe for hyperinflation.

“The notion that you can finance this [spending] by money is wrong, is plain wrong,” he said. “If [the Fed] issued money at zero rate, then we’d have hyperinflation. But we’re basically issuing a new form of debt, which is bank reserves.”

On the other hand, supporters of MMT point to Japan as a working example of a country with huge deficits and massive public debt that has avoided inflation. They argue against viewing the economy as a household or business that needs to balance every bit of expenditure with income – be it from taxes or borrowing, in the government’s case – and start thinking more like an engineer or general figuring out the best use of idle resources.

Money printers go brrrr

With the Reserve Bank of New Zealand committing itself to $60 billion of quantitative easing, the idea that the government can in times of crises pump huge amounts of money into the economy without creating inflation is no longer controversial. In fact, the idea has become so popular it’s earned its own meme.

(Image: Reddit)

In April, the Financial Times editorial argued printing money is a valid response to the coronavirus crisis. It reasoned that it made little difference whether that money was created by the Reserve Bank buying back government bonds on the secondary market from the private sector (QE) or buying bonds directly from the Treasury (direct monetary financing).

“The difference between QE and direct monetary financing is mostly one of presentation: whether asset purchases are deemed temporary or permanent,” it reported.

For critics of direct monetary financing, its permanency is a problem because it could see governments spending well beyond their means, leading to inflation.

But for Mitchell, QE is a form of corporate welfare. 

“When the government is spending, it spends by the Treasury instructing the Reserve Bank to type numbers into bank accounts on its behalf: for procurement contracts, for pensions and what have you. Numbers are just getting typed into bank accounts. No printing going on.

“Whether they match that with debt issuance or whether it reflects the expectation of tax receipts, it doesn’t matter at all.”

In other words, the government could just tell Treasury to borrow the money directly from the Reserve Bank (what is sometimes called overt monetary financing).

New Zealand Reserve Bank governor Adrian Orr confirmed that was an option in an interview in May, when he said wasn’t opposed to the RBNZ buying bonds directly from the Treasury to finance government policies. But finance minister Grant Robertson said he had no intention of doing it.

The “modern” in modern monetary theory relates to the idea that everything changed with the collapse of the Bretton Woods system of fixed exchange rates pegged to the gold standard.

Mitchell says the practice of issuing debt to match the deficits of spending beyond what is brought in through taxes is a legacy of that regime.

Net core crown debt is forecasted to rise above 50% of GDP by 2024. (Photo: The Treasury)

But now, Mitchell says, it just provides “the speculative investment community with a risk free asset, which they can use to speculate”.

The job guarantee scheme

Mitchell’s job guarantee proposal looks very different to the picture he paints of the fully employed Australia and New Zealand in the pre-oil shock days of the 1950s, 60s and early 70s. The days of the railways, post office and publicly owned electricity companies taking on surplus private sector workers are long gone.

“The idea of a job guarantee is that it’s an unconditional job offer at a socially inclusive minimum wage to anyone who wants a job… In normal times the pool of workers would be very small and in bad times, like now, the pool would be very large.”

It’s not a replacement for the benefit system, Mitchell says. He supports generous benefits for those who need them. And while the jobs are funded by central government, they should be allocated at the local level.

“The way in which these things have to work is for local communities to identify unmet needs in their regions. You don’t want top-down-type imposition of what’s good and what’s bad for a community. So it’s funded at the top and driven at the bottom.”

He says parent teacher associations and indigenous communities, for example, could be among those tasked with identifying jobs that would benefit the community – one important condition being that they aren’t jobs currently being done by someone in paid employment.

Mitchell enjoys provoking audiences by saying he’d give surfers a job under the scheme. “Who goes into the most dangerous parts of the water to get out quicker to the waves? It’s the surfers. They could offer water safety training to school children… it would reduce the strain on the emergency services, it would reduce the deaths during our summers. Who would oversee that? The surf lifesaving clubs could do that.”

He says the arts are a great example of the type of low-carbon industries we need to combat climate change. Artists, musicians and other creatives could be employed to work in schools and community centres. “Increasingly what we’re going to have to do in our societies is broaden our concept of productivity.”

Surfers being employed as surf rescue guards is an example of MMT’s job guarantee (Photo: Getty Images)

While the jobs being created should not replace jobs already being carried out in the private (or public) sectors, Mitchell says the wages being paid out to those on the job guarantee scheme would stimulate the overall economy and ultimately benefit private businesses.

But having created meaningful, stimulating work at a liveable wage, how will the private sector entice those workers back to minimum wage jobs in the fast food industry, for instance?

“If you go back to the true employment era, vacancies always outstripped unemployment. And that created what I’ve called a dynamically efficient labour market, because that forced the onus back on firms to produce interesting jobs, amenable working environments, good pay… capricious employers would find it very hard to attract labour.”

While Mitchell holds neoliberal policies responsible for New Zealand’s low productivity growth, he says the job guarantee is no panacea. In fact, he says it’s only a small part of creating a high-skilled, high-income society.


The most common criticism of the universal basic income – a proposal that everyone in society be guaranteed a basic income – is that it would require absurdly high taxes to make it possible.

But Mitchell doesn’t think that’s the problem at all. The government could create the money for a UBI, he says, but in the event of rising inflation, it would be forced to cut it back to a level that would defeat its main purpose: alleviating poverty.

The job guarantee, by contrast, has a built-in inflationary anchor that sees workers redistributed into the inflating private sector as demand for labour goes up.

“The UBI has no inflation anchor and essentially adopts the neoliberal inflation control mechanism, which is using unemployment as a policy tool rather than a policy target,” he says.

Mitchell says UBI proponents are, knowingly or not, buying into the neoliberal myths that there is a natural rate of unemployment and only the private sector can create jobs.

“Neoliberalism has been based on individualism… [it] breaks with the old concept of collectivism and idea that there was such a thing as society. And society was enriched by us working together in collective ways and understanding that occasionally the system would fail. The way the neoliberals have constructed unemployment is as an individual failure. It’s the failure of people to skill themselves up or look for jobs properly.

“My view of unemployment is it’s a systemic failure to create enough jobs. It’s a failure of policy, ultimately.”


A full transcript of this interview can be found on Jeremy Rose’s Substack toward democracy


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