Zack Polanski’s public spending plans are pure fantasy
Advisors to the Green Party are advocating Modern Monetary Theory, It’s been tried before and proved a disaster, says Paul Ormerod
The Green Party is riding high in the polls – a recent survey puts them joint top, with Labour in fourth place.
On the economics front, this raises once again the spectre of Modern Monetary Theory (MMT). Several key advisors to the Greens seem to be enthusiasts.
MMT essentially asserts that governments which control their own currency can finance any level of spending simply by printing money.
Countries in the Eurozone cannot do this individually, because the European Central Bank (ECB) controls how much money can be created. But the UK in principle certainly can.
It is at one level a seductive argument. The NHS needs more expenditure? Benefits should be increased? According to MMT, just get the Bank of England to print more money.
A sharp increase in public spending almost always creates an increase in the public sector deficit – the difference between spending and the income the government gets from taxes.
The conventional way of financing the deficit is by issuing bonds. These both create a stream of interest payments to the lenders, and at some point, depending on the date of maturity, have to be repaid.
Zero coupon perpetual bond
MMT asserts that printing money instead removes these constraints. Money created by the government never needs to be repaid. A £10 note does carry the phrase “I promise to pay the bearer on demand the sum of ten pounds”. But if you present one to the cashier’s desk in the Bank of England, they will just give you another £10 note.
In addition, money carries no interest. In technical terms, we might think of money as a “zero coupon perpetual bond”, though MMT theorists do not seem to refer to it in this way.
It certainly appealed to Jeremy Corbyn during his tenure as Labour Leader. But his much more intelligent and thoughtful shadow chancellor, John McDonnell, was very careful to distance himself from it.
McDonnell, a radical politician throughout his career, understood the value of evidence. In the late 2010s, for example, the experience in government of the very left-wing party Syriza in Greece was fresh in the mind.
Both the level of public debt and the current public deficit in Greece had become critically high, and the European Commission, the ECB and the IMF demanded strict austerity measures to be brought in to rescue the country.
Prime Minister Tsipras called a referendum on the proposed bailout conditions at the end of June 2015. The Greek electorate duly rejected them by a margin of 61 to 39 per cent.
But the result, far from solving the problems of the deficit and the debt, resulted in further external pressure on the government. It was so intense that by early July Tsipras was forced to introduce austerity measures which were even harsher than those just rejected by the voters.
In the UK of course, post-Corbyn, we have witnessed the short-lived tenure of Liz Truss as Prime Minister. Her unfunded spending plans saw the yield on 10 year bonds rise from three per cent to 4.25 per cent in a month, precipitating a crisis which forced her out of office. (The current yield, since you ask, is just under five per cent).
The Greeks could not print their own money, the UK could. But it made no difference to the outcome. In both cases, a perception that the public finances were getting out of control led to the bond markets forcing a rapid reversal of policy.
The world of unlimited public spending is pure fantasy. Admittedly, it attracts voters who see wishful thinking as the basis for policy. The Greek experiment ended in tragedy. If the Greens were to repeat the mistake, it would end in pure farce.
Paul Ormerod is an Honorary Professor at the Alliance Business School at the University of Manchester. You can follow him on Instagram @profpaulormerod