Time to dismantle the growth narrative. In our article series Responding to Degrowth Critics, Winne van Woerden, lead of our Degrowth and Caring Programme, looks at arguments for growth (and against degrowth).
In part one, she explained what growth is and what it isn’t, and argued that we should stop conflating growth with wellbeing. In part two, she explained why green growth is a dangerous illusion that is hampering efforts to bring economies back into balance with the living world. In part three, she discussed why degrowth does not lead to socio-economic hardship but would actually improve societal wellbeing and equality. In today’s article, she responds to those who claim we need growth to finance a social and ecological transformation.
The degrowth movement calls for an economy that is not centered around GDP growth but around meeting human needs within the means of the planet. Degrowth advocates specifically point out that being agnostic about growth will not be enough, given current power structures and vested corporate interests to preserve a growthist economy. Truly scaling down energy and resource use towards sustainable levels requires tackling the roots of the growth dependency of our current economic system.
Recently, we discussed the need to decouple livelihood security from wage labor by implementing a public job guarantee coupled with a shortening of the work week, a living wage policy, and a universal care income. However, such a discussion on reorganizing social security within a degrowth context often brings up the inevitable question: how do you propose to pay for all this when rich nations can’t grow anymore?
In this article, I will explore this question by walking you through some insights on deficit-financed state expenditure (or public debt) that a new macroeconomic theory called Modern Money Theory, or MMT, offers.
The MMT proposition
MMT has praisefully been described as a ‘macroeconomic theory profound enough in its implications to usher in a new societal paradigm’ and ‘macroeconomics done properly’.
MMT theorists begin with separating nations into those that are monetary sovereign and those that are not. For a nation to be monetary sovereign, it needs a) to issue its own currency, b) collect taxes in the same currency c) only issue bonds denominated in that same currency with no significant government borrowing in foreign currencies and d) not have a forcibly fixed exchange rate. Monetary sovereignty matters since whoever controls a currency gets to decide how labor and resources are used. MMT theorists point out that governments that control their own currencies are not like households. Contrary to what is argued by neoclassical economists, they do not have to “balance their budgets”, and do not have to tax, issue government bonds or sell assets before they can spend. In essence, a state that controls its own currency creates new money whenever it spends.
From the perspective of MMT, governmental spending is not limited by public debt but rather by inflation. Indeed, the topic of inflation is often brought up by MMT critics, who claim that printing money will inevitably cause inflation because ‘more money is chasing the same goods and services’. Nevertheless, mainstream neoliberal institutions, including the European Central Bank, have been notoriously bad at predicting inflation rates. The US federal reserve recently admitted that it does not actually understand what drives inflation. MMT as laid out by scholars like William Mitchell, Stephan Williams and Fadhel Kaboub offers a more comprehensive and empirically convincing theory of inflation.
According to MMT, inflation can be understood as a situation where demand surpasses a country’s real resource base (i.e. its productive capacity). As such, from an MMT perspective, government spending can be indeed a driver of inflation, since it will increase demand (there is more money circling around in the economy). However, if this public money is spent in a way that enhances or better utilizes the productive capacity of the country (creating solar panels, improving the health care system, insulated public housing etc.) inflation can be curtailed. In other words, there is more money chasing more (meaningful) goods and services. Furthermore, if a country’s productive capacity actually reaches its limits, inflation can be controlled by taxation, taking out excess demand from the economy.
There is, however, a second driver of inflation: concentrated economic power. There is substantial empirical evidence showing that inflation is driven by cartels and monopoly capital that disproportionately drive up their prices to increase their profits, therefore appropriating a larger share of income away from common people. We can see these dynamics at play right now, as people throughout the European Union are experiencing record high energy prices while the fossil fuel industry is recording record profits.
The solution for this problem is simple: to break up forms of elite economic power that can arbitrarily raise prices by taxing or regulating it away – either as a desirable policy in its own right, or to simultaneously alleviate excess demand from the economy. A less radical solution are price controls. Either way, monopoly pricing can be addressed directly by government policy.
Combining these insights, MMT shows that the government can spend how much it wants on desirable sectors of the economy (healthcare, education, green energy) and tax away any excess demand from undesirable sectors of the economy (luxury consumption, fossil industries, capital monopolies, military industries). From an MMT perspective, the purpose of taxation is not to fund government spending, but rather to reduce excess demand and break up the concentration of economic power.
The class realities of inflation
To be clear, MMT is a description of how the economy actually works, not necessarily a policy prescription. These very same insights can be used for reactionary agenda’s. The challenge, then, is to use MMT insights for eco-socialist ends, rather than for destruction, domination and private profits.
Clearly then, we also need to be skeptical of the centrist obsession with inflation, which is regularly used to argue against higher wages and social policies. Inflation itself matters much less than distribution. Income is in essence the obverse of prices. Therefore, there will always by definition be enough income to purchase all commodified goods and services and there will never be a deficit of purchasing power in the economy. What matters is distribution. More specifically, an equitable distribution of purchasing power. Who is actually able to purchase the goods and services within our economy?
Such a view reveals the class dynamics of inflation: without additional social arrangements, inflation will lead to a situation where the rich have more to spend, increasing their command over resources, leading to a cost-of-living crisis for ordinary people like we are seeing today.
In essence, inflation should be understood as a crisis of distribution, not of income or prices per se. Social policies, such as universal public services and taxing or regulating away capital monopolies, can address these inequalities at source, making inflation a secondary issue at best.
In fact, the very policies prescribed by the Washington consensus to tackle inflation only make matters worse. Raising interest rates across the board to tackle inflation only increases inequality, leading to higher profits in the financial sector and lower investments in the economy, which leads to lay-offs and unemployment and concurrent lower wages because of the worsening bargaining position of labour. Even mainstream establishment journals such as Foreign Policy Magazine openly call it ‘class war.’ Yet, this is exactly what the European Central Bank and the Federal Reserve are doing right now to combat the soaring inflation in the European Union and the United States.
All of this shows that the real limitations of an economy are physical, not fiscal. There are no excuses for governments to avoid social and ecological policies except for hard physical boundaries, such as the amount of resources available and the productive capacity to use them. This requires diligent planning and organization in the real world. ‘Balancing the budget’ and the poltergeist of inflation are nothing but a ruse.
MMT and degrowth
It goes without saying that degrowth requires addressing common perceptions that uphold our current economic growth dependency. Many of such beliefs are in fact related to national government debt and a state’s budget balances. The MMT perspective reveals that if countries are monetary sovereign, these concerns are ungrounded.
Rather, when acknowledging national governments’ massive power (in a situation of monetary sovereignty) to shape and control their economies using the levers of monetary and fiscal policy, ushering in a just degrowth transition becomes way more achievable than currently thought. By tomorrow, any monetary sovereign government could establish generous, high-quality universal basic services, a public job guarantee and a rapid roll out of renewable energy infrastructures while regenerating ecosystems. MMT shows us that it can never say it does not have the money to set up such policies.
Moreover, understanding inflation as a crisis of distribution that increases the cost of living for the majority of the population, reveals that key degrowth policies like strengthening the commons and introducing universal basic services would in fact have a deflationary effect for ordinary people since they reduce the cost of living. MMT’s perspective on income as the obverse of prices, shows that when we agree on which sectors of the economy we want to scale down and which goods and services we need to meet everyone’s needs, there will always be enough income to purchase everything that remains commodified. And of course, that which is not commodified, can be distributed as a society itself chooses to.
Moving on
Crucially, since MMT is descriptive, not prescriptive, MMT is neither inherently pro-growth nor post-growth. Yet, as Stephen Williams and Samuel Alexander have put it in MMT, post-growth economics, and avoiding collapse, “when MMT is understood, post-growth policy options expand dramatically and become more viable, while the dominant neoclassical model is seen to be a kind of ideological straitjacket”. This position was recently reiterated by Christopher Olk, Colleen Schneider and Jason Hickel in their recent article How to Pay for Saving the World: Modern Monetary Theory for a Degrowth Transition.
Degrowth needs a macroeconomic theory based on social and biophysical reality rather than myth. It necessitates a correct understanding of money and its creation. It seems to me that MMT offers exactly this. It allows us to move beyond endless discussions about fiscal constraints when discussing a degrowth agenda and shows that the true limit to usher in transformative policies is our capacity to organize and put the right arrangements in pace in the physical world. Let’s stop playing into the hands of bankers who make us believe otherwise.
This article was based on the article ‘Degrowth, Decolonization and Modern Monetary Theory’ published at Resilience.com, written by Chris de Ploeg and Winne van Woerden.