Modern Monetary Theory

A degrowth world would require a new economic model.

Photo by Giorgio Trovato on Unsplash

Degrowth, like every idea that might change the world, has the same problem as all those other ideas. “How do you pay for it?”

This kind of discussion isn’t often found in degrowth literature. But it needs to be. The kind of cultural change we talk about when we talk about degrowth is an economic one as well. That means priorities and funding need to change. How does that work? Who does the changing? When? And to what degree?

These are all fair questions.

Will a carbon tax pay for these transitions? Any carbon tax probably won’t be sufficient in and of themselves. As it is now, most nations that have a carbon tax keep it artificially low so that they don’t anger their public too much.

This means that public deficits will likely increase to pay for some of these changes. This is problematic because many advanced economies already have historically high debt levels. The debt-to-GDP ratio compares what a country owes with what it produces. The debt-to-GDP ratio reflects a country’s ability to pay back its debts. At the end of 2022, here are some of the debt-to-GDP ratios of some G20 countries at the end of 2022:

Canada: 107

Spain: 112

United States: 129

Singapore: 168

Japan: 264

Good God Japan! What are you doing?!

Yes, Japan’s debt to GDP ratio is very high, they have almost three times as much debt as they produce in GDP in a year. Isn’t that a problem? Well, maybe not. Japan has a very high savings rate, most of its debt is held domestically and the interest rates are very low. If those three things were the opposite, you would have a much bigger problem.

One way to pay for this is to raise taxes, but few politicians like doing this and no one likes paying taxes.

This is quite a conundrum. Degrowth policies such as universal basic income, job guarantees, and universal basic services (more on this next week) are all huge changes that need to be paid for. You need more money, but no one wants to give you that money, so do you just throw up your hands and give up?

Maybe not.

Here’s the economic picture.

Let’s start with a basic feature of capitalism that we don’t often think about, but once we do, we recognize it and realize something to the effect of “Yeah, that’s not cool capitalism. Bad capitalism!”

That feature is artificial scarcity.

Artificial scarcity makes the essentials in life like food, shelter, healthcare, transit, etc., scarce when they don’t need to be. To access these essentials, we all need to work and produce more and more goods and services, many of which are not essential. I’m looking at you, social media influencer.

This leads to a system that is dependent on growing that GDP pie to keep things going. To get those essential services that are scarce in our society we need to work more and produce more. Our economic system and our cultures have developed to assume that GDP growth is the default setting of economic man.

It isn’t.

I’m not saying degrowth is either. Capitalism is just a system that we’ve developed. We can change it. Let’s change it.

This is a choice we are making.

We can house everyone, but that would require changing or dismantling the housing system in many developed countries which is a major source of wealth and tax collection.

We can feed everyone, but that would cut into the profits of giant agriculture and food companies around the world.

You can see the pattern here.

I’m not talking about communism. I’m talking about focusing our economy and culture on reaching sufficiency and then pausing there. We can have sufficient housing for everyone, sufficient food for everyone, and sufficient healthcare for everyone. If you have to have a yacht or a private plane, go for it, but in a degrowth world, those lifestyle choices may be taxed at a much higher rate because they are recognized as detrimental to the health of the biosphere. As things are now, we don’t capture those negative externalities. We probably should.

Norman Pagett and Josephine Smit sum up the idea behind this well in the title of their 2013 book, The End of More. We generally don’t need more. In the developed world, we have enough thank you. Leaning further into an economic model that demands the production of more and more each year on a planet with finite resources makes no sense if we want to have a healthy biosphere – because we kind of need that. That’s where we live.

Universal public services (education, housing, transport, food, healthcare, etc.) take the teeth of artificial scarcity away from capitalism. In the capitalist economy you are likely to live in if you are reading this, how much do you have to work to get the best education, housing, transport, food, and healthcare? It’s the basic reason you work. If the artificial scarcity was removed from these – again buy that yacht if you want to – we wouldn’t have to kill ourselves in the short run working like dogs just to kill ourselves in the long run through the destruction of our environment.

Read the last four Thursdays on this blog to see what that looks like; bullshit jobs, the four-day workweek, universal basic income, and a job guarantee.

This isn’t swapping out a capitalist paradise for some socialist paradise, neither of those is a real thing.

This is simply about valuing human outcomes over economic ones.

That’s great on paper. But how do you pay for this?

MMT to the rescue?

It’s not just new programs such as UBI, Job Guarantees, and universal public services that are needed. Huge investments are needed in climate change mitigation, investment in carbon removal, and a rapid ramp-up of green energy. Addressing the breaching of planetary boundaries would necessitate reshaping agriculture, land use, and ocean use. Private capital isn’t going to invest in those if they don’t see a significant return on investment. Governments have to shoulder that burden, at least initially until technologies are proven. That’s how it worked with things like funding World War II, the space race, and creating the internet. That shit is expensive.

Here is the argument of those who say degrowth isn’t economically viable:

Degrowth leads to lower GDP, which leads to collecting less taxes from the population, which means countries have to borrow more to pay for degrowth programs, and the energy transition, which drives up interest rates, which necessitates more borrowing, which can get ugly pretty fast. This could be an insurmountable problem for degrowth. How do you adopt a degrowth economy that would depend on growth to pay for it? That math just doesn’t work.

Modern Monetary Theory (MMT) argues that this is a false concern. MMT argues that as long as the debt is denominated in the sovereign country's currency, they can always pay that debt by printing more money. This, dear reader, is where you start screaming INFLATION! And you are right, in the classical economic sense.

MMT brushes these inflation fears aside. One way to do this is to decrease demand. Prices go up (inflation) because there is excess demand driving up prices. Degrowth argues that one way we decrease demand is to wind down some industries that are destructive to our biosphere. If we are going to cut the supply of some energy and raw materials, demand for them must fall at about the same rate.

This means higher taxes on wealthy households so that they can’t demand more, as the consumption of the wealthy has disproportionately caused most of the environmental and climate damage we face.  

A jobs guarantee is a tool that helps MMT work. With full employment, there is a coterie of workers that sets the floor for the cost of labor and serves somewhat as a check on labor demanding higher and higher (inflationary) wages. During economic expansion, the pool of workers in a jobs guarantee program would contract, helping to keep a lid on inflation.

It won’t work as neatly as all that.

I’m not an economist, so don’t think you know all about MMT just by reading this. You don’t. I’m giving you the basics so that you can understand how MMT fits into the degrowth argument.  If you are interested in the topic, go out and read more from multiple sources.  

In the real world economics are never as simple as they are in a textbook. Economics 101 logic doesn’t do so well as soon as you apply it to the real world. However the basic concepts of supply and demand, opportunity costs, and scarcity work well to explain the world we live in.

But as I’ve pointed out, the scarcity you read about in econ 101 is largely artificial or manufactured. We could feed everyone, house everyone, and give everyone a job, but the system that we live in doesn’t work that way. That’s a choice we are collectively making.  

MMT has its problems.

Good luck taxing people at sufficient levels when the people you are taxing often own the media and the companies you are looking to wind down.

You can say debt doesn’t matter all you want, but very few countries can just pile on debt forever with no consequence. Japan is a special case. The United States could do that, but without the proper programs, like a jobs guarantee and others, the result could be very high inflation.

A national economy and a global economy are very complicated things that never work as intended on paper.

MMT’s day may come, but it won’t be a smooth ride. We have had capitalism for a few hundred years, and we are still waiting to get that right.