Kelton’s analogy draws upon one of the key [and insightful] analytical tools of the MMT movement. When a government is in surplus, it has taken more money out of the economy than it has put in – and it’s unclear why any government or politicians would ever want to do this. This is termed ‘sectoral accounting’, and it’s just a way of seeing the economy as a closed system in which one agent’s deficits must necessarily represent a surplus for some other agent. In Kelton’s analogy, the government cannot – or should not – ‘borrow’ from the private sector because private sector surpluses have necessarily been first created by government spending.

The flaw in this reasoning is plain. Sectoral accounting is a powerful tool for helping us think about how resources circulate in the economy. But it’s not obvious why we should privilege the government and lump the rest of the economy together as a single conceptual unit. By the same logic, any private company – or individual – who borrows funds is putting money in everyone else’s pocket. In a sectoral accounting sense, this is true. But that doesn’t mean that any private company or individual debtor is creating money, or even creating value, by doing so. Kelton argues that when the government goes into debt and borrows $10, sectoral accounting suggests that the $10 it borrows was given to the private sector by government spending. But if I go to the bank and ask for a $35,000 car loan, I can’t just say “well, I’m spending $35,000 into the economy-that-is-not-me, and since you [the bank] are part of the economy-that-is-not-me, I have given you the funds you’ll use to give me the loan. So we’re even.” Money circulates in the private economy too, not just between private actors and the state.

The state and distribution

MMT does not simply rely on sectoral accounting – it privileges the state as an economic actor in at least two ways. The first is to claim a unity between the central bank and the treasury, such that the state is seen as sovereign over the supply of money in the economy. The second is to rely on neo-chartalist arguments that the state’s power to tax (underpinned by its monopoly on force) is the basis on which money is given value through the creation of demand for its currency. The key theoretical claim of MMT – that the government is the engine room of the economy – is baked in to the sectoral balance approach. But the reality is that money is also created by private financial institutions when they make loans (unless MMT advocates want to move to positive money, in which case, yikes), and the value of currency is significantly influenced by its role as a stable unit of exchange, and a stable unit of account. Until we live in fully automated luxury space communism, non-state actors will continue to play a significant, perhaps even dominant, role in the economy.

Let’s look at Kelton’s analogy more closely. When I take out a car loan, the car dealership (perhaps a business with tight margins) receives funds, while banks (which either have or can call upon surplus capital) lose funds. The purchasing power of the car dealership increases, the liquidity of the bank decreases, and I enter a relationship with the bank that gives them power over me greater than their loss of liquidity. Government borrowing is the same way: surplus value (which, if invested in government bonds, was not otherwise doing anything productive) is mopped up, whereas the social power of individuals and institutions that receive government funds increases. In other words, the way that governments fund themselves has distributional consequences.

In most everyday circumstances, the government calling upon surplus private capital to fund social spending offers a net distributional benefit to the economy and society. Most government borrowing is not only equity-enhancing, but also pro-growth: capital that otherwise would be invested in offshore savings accounts or wasted on luxuries is instead used for productive purposes, or to increase aggregate supply and demand in the real economy. Kelton’s analogy only works if government spending is, in whole or in part, going directly into the pockets of the rich. There’s certainly an argument that the many trillions of dollars that governments have pumped into stock and debt markets since the start of the coronvirus pandemic meet this criterion, and there’s an argument that this kind of capital bubble can be financed through monetary creation without triggering inflation. Maybe defence spending is the same. But if you’re hoping to inject funds into the real economy (as you would be through a job guarantee, UBI or green new deal), doing so without mobilising those funds from capital surpluses is inequitable at best and inflationary at worst.

Finally, there’s the point Kelton makes – which she credits to Stiglitz – that a government’s debtors gain power over that government in a way that is deeply undemocratic. This is true. Government bonds are interest-bearing and increase private wealth in the long-run. Here’s how I put the issue in my first book, “Politics for the New Dark Age: Staying positive amidst disorder”:

“The rate of interest on government debt constitutes a long-term source of revenue for the holders of capital wealth. . . .[I]n the long term, government debt effectively contributes to an increase in private wealth. Because those who can afford to lend to governments typically have large asset holdings, government interest payments tend to accelerate the accumulation of private capital and increase inequality while depressing the incomes of those at the bottom of the socio-economic scale. Government debt, therefore, actually serves the interest of those at home and abroad who have surplus wealth to lend to governments. Whether debt should be used to enhance equality, therefore, depends on whether the net redistributive benefit of government spending outweighs the corresponding wealth transfer to elites over the lifetime of the debt. Furthermore, high levels of government debt may allow the holders of that debt to exert influence over governments and shape policies to their liking.”

In this then, Kelton and I are in agreement. We should avoid government borrowing as much as we can. But we diverge on the details. As a socialist, I’m all about tax-and-transfer – let’s get those resources out of the hands of those that hoard them and into the hands of those that need them. Kelton, who is an experienced political operator, has a different proscription. In her experience, raising taxes is politically impossible. So then we should just rely on monetary financing to get the good things we agree need to be done, done. That’s a valid theory of change. But I fear it’s been tried before, and with the disastrous political results. Kelton’s tactic is especially problematic when MMT theory relies on fine-tuning of tax rates in order to control inflation – which, if your politics is founded on a core experience of political deadlock over tax, suggests you might have a problem. In fact, this combination – expanding social welfare spending while being unable or unwilling to meaningfully redistribute social resources – lies at the root of many historical and ongoing inflation episodes, in the view of Marxian economics.

I’ll chime in with a review of Kelton’s book when I’ve had the time to digest it!