Does the Magic Money Tree Really Exist?

by Chelsea Liu

‘There is no magic money tree!’ A common phrase that I have found many politicians like to say and therefore believed in. To give a recent example, this is what Theresa May said, in response to a nurse who hadn’t been given a pay rise in 8 years, after being questioned about ongoing pay rise constraints. It is also what David Cameron said back in 2013, and furthermore Margaret Thatcher before that. However, maybe after listening to the BBC business Daily Podcast on ‘The Magic Money Tree’ you may, like I did, think twice. What if such a ‘magic money tree’ did exist?

More formally, the ‘magic money tree’ is known as the Modern Monetary Theory, MMT for short. MMT is an unconventional economic branch supported by economists such as Hyman Minsky and Wynne Godley that has recently gained some prominence. It has three key aspects to it. The most important yet the most misinterpreted is: The public sector of a country, which is a monetary monopoly, will never face a financial debt. Firstly, for a country to be a monetary monopoly, it must issue money, spend money and account for its debts in the same monetary currency that is only used by that country. For example, the UK is a monetary monopoly with its pounds, so is the USA with its dollars currency and Japan with its yen. Eurozone countries are distinctively not one, as many countries share the same currency and they do not issue it themselves. Then what it is meant by ‘never facing a financial debt’ is that the government will never run out of money because it can simply print its own money whenever it is needed.

‘But wait! Hang on!’ you might say, ‘wouldn’t that just mean that this government can spend all it likes?’ This leads me into my second idea that ‘all economies, and all governments, face real and ecological limits relating to what can be produced and consumed’.The government can print money, but only in consistence to its inflation objectives, which is what most economists and politicians willingly do. Say one printed too much money heavily overstepping the inflation objective line, then you would see an economy similar, but not as severe as post-war Germany’s economy. Additionally, this exposes a limitation of MMT where it shouldn’t be used when an economy is coming near to full employment as it is highly inflationary and financially destabilising. MMT advocates claim that many misunderstand the function of taxes. The role of tax in their eyes is not to collect tax revenue for public expenditure as emphasised by US Rep.congresswomen Alexandria Ocasio-Cortez ‘Taxes don't pay for 100% government expenditure’, but to add demand to the money and eject money out of the economy to stabilise inflation rates. In the words of American huge fund founder Warren Mosler: ‘unprinting money’ This can be backed up by the fact that one of the central bank’s, a department of the government, main roles is to issue notes and coins for the national currency. Therefore it is illogical to claim that tax revenues are required for the government to spend.

The final concept is that the government’s financial deficit is the consumer’s surplus. Nowadays, a lot of talk is about how the government should reduce its financial deficits. But it must be emphasised money can’t just disappear. Taking a proponent of MMT Stephanie Kelton’s example: say the government printed a 10 dollar note which is invested into the economy and then 9 dollars is collected back through taxation. Overall, we can not only say that the net result of money for the government is a 1 dollar deficit, but also that of the consumers’ is a 1 dollar surplus, in other words, an injection of money into the economy that can be used for further investment. To summarise, by going into a deficit, the government plays a supportive role in allowing consumers and private sectors to save and invest, as well as boost growth through investments in education and R&D.

Personally, I would agree with some of MMT’s proposals, like the fact that MMT removes the fear out of the phrase ‘financial deficit’, benefiting less developed or economically weak countries to worry less about being bound by debt when considering the implementation of expansive fiscal policies to boost employment and output and increase aggregate demand. On the other hand, there are some that I would not fully follow by: MMT focuses all on fiat money which, in the word’s of MMT, without taxation would just be invaluable pieces of paper. The basic topic of economics is resource allocation, so people must not get carried away with just analysing money, but the real value of resources and good and services which money measures. Also, any investment in this form into the economy tends to go into boosting asset and stock prices for the rich, making them richer, whilst having no major impact on increasing jobs or necessities. Lastly, fiscal policies are generally cumbersome to control, so MMT has the potential to ‘over heat’ the government by raising its inflation rates.