Modern Monetary Theory and Value Capture

I live in a Federation where the national government has the currency-issuing capacity and the states rely on their taxation and borrowing capacities to fund their spending. Our system is subject to significant vertical fiscal imbalances in that the Australian Constitution and subsequent decisions gives the major taxing capacity to the federal government but the large spending responsibilities remain at the state level. There are also significant ‘horizontal fiscal imbalances’ between the states and territories due their different capacities to exploit their own tax bases. As a result, there is a complicated system of federal-to-state transfers to ensure that all states have the capacity to deliver infrastructure and services of an ‘equal’ standard to all citizens. In particular, state governments face problems in providing adequate infrastructure while many of their decision deliver windfall gains to land owners where major infrastructure projects are adjacent (such a train or road system). While Modern Monetary Theory (MMT) considers such national infrastructure projects are best funded at the national level where the national government faces no financial constraints (given it is the currency issuer), the reality is that state governments also engage in infrastructure development. As a second-best technique to ensure that states do not play the austerity card and deprive their regions of essential infrastructure development, a system of Value Capture can be beneficial. It is a progressive tax system that can also reduce the tendency to real estate asset price bubbles.

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European Commission forecasts – a denial of their only effective policy tool

In Greece, the national unemployment rate has been around (or higher) than 25 per cent since 2013 so it is little surprise that mortgage defaults has spiralled and people are selling of family heirlooms to wealth antique dealers in Switzerland to cover daily costs. A Geneva-based dealer told the Financial Times in June (Source) that “For buyers there are opportunities that only come along when there’s a real economic upheaval . . . in Greece it hasn’t happened since the second world war”. So the vultures are enriching themselves as a result of peoples’ misery. Its the market! No it isn’t. Its an incompetent government looking after themselves and allowing their citizens to go down the drain. Just yesterday, the Greeks have agreed to tougher foreclosure measures (as part of the bailouts) which will see impoverished Greeks lose their last vestige of dignity – their homes. And the latest European Commission – Autumn Economic Forecasts – (released November 5, 2015) portend a very sorry future for Greece and the Eurozone generally.

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European Left face a Dystopia of their own making

Last week, I re-read an article from May 1, 2012 by Abraham Newman – Austerity and the End of the European Model – that was published in Foreign Affairs. The article carried the sub-title “How Neoliberals Captured the Continent”. The author is a US political scientist and observed that given the unprecedented austerity that the European politicians have inflicted on their nations with such damaging consequences, the “Tea Party loyalists in the United States should be green with envy”, The hard-line US Republicans don’t go close to their European brethren. The thrust of the article was that independent of the short-term effects of the austerity it “will transform Europe’s political economy in the long term, lending credence to neo-liberal ideas of limited government and loosely regulated markets. The irony of this transformation is that it reinvigorates the very ideas that helped cause the financial crisis in the first place …” This is a theme that I share. It is also a starting point for a very interesting essay I read last week by Slovenian lawyer Bojan Bugaric – Europe Against the Left? On Legal Limits to Progressive Politics – published May 2013. I have been seeking to understand these perspectives more deeply as part of my larger book project concerning the demise of the European left.

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Saturday Quiz – November 7, 2015 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Friday lay day – a mini-Job Guarantee proves beneficial in the US

Its my Friday lay day blog and I am working on various projects today so I will cut this blog relatively short. Two things came up this week that I thought were interesting but only require a noting by way of blog entry. The first was a report about a mini-Job Guarantee type program in the New Mexico city of Albuquerque, which is demonstrating that public job creation programs can change peoples’ lives for the better when there is no hope and no other opportunities. The second story I read that was interesting was the Wolf Street Report (October 24, 2015) – Barcelona Threatens to Print Parallel Currency, Madrid Seethes – which discussed the plan by “Barcelona’s left-wing city council plans to roll out a cash-less local currency that has the potential to become the largest of its kind in the world”. The austerity-mavens in Madrid and their puppet masters in Brussels will be having conniptions at the prospect.

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Italian government is walking into the trap of its own making

On September 19, 2015, the Italian Prime Minister, Matteo Renzi and the Minister of the Economy and Finance, Pier Carlo Padoan presented to the Italian cabinet (Consiglio dei Ministri) an updated fiscal (‘budget’) document – Nota di Aggiornamento del Documento di Economia e Finanza 2015 – which has received widespread attention in the media. The response to the update can be summarised in two statements: (a) the Italian government is abandoning austerity in the coming year and running an expansionary fiscal policy; and (b) the European Commission through the Ecofin (Committee of Finance Ministers) is showing admirable flexibility in allowing the Italian government to ‘relax’ their previous fiscal adjustment plan in order to safeguard economic growth. However, some commentators have challenged the notion that the September changes are indeed expansionary, pointing out that the fiscal deficit projected for 2016 might be higher than the earlier projections but is still smaller than the 2015 outcome. What should we make of all that? Well, neither assessment conveys what is actually happening.

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The Eurozone – being ‘trapped in a dysfunctional monetary system’

On November 6, 2000, the Financial Times correspondent Wolfgang Münchau wrote in his article ‘Weak euro reflects uncertainty of euro-zone’ that “structural reforms alone will not determine whether the Emu is viable … The Europeans have no system of transfer payments and the EU budget is too small for this purpose … the euro-zone countries cannot remain as they are: they must move towards full economic union”. He also observed that the “current is clearly flowing in the opposite direction: EU governments increasingly emphasise inter-governmental co-operation as opposed to a wider role for supra-national institution”. I examined that ‘current’ extensively in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – as it was (and is) a major reason the monetary union has failed. And, further, the cultural and national barriers which prevented the creation of a system-wide fiscal union are still insurmountable. Münchau is one of several journalists and commentators who have shifted their positions on the desirability of the common currency yet remains wedded to the idea of retaining it – as if returning to national currency sovereignty would be a disaster. I opposed the Maastricht proposal when it was made public and remain opposed. Restoring national currencies, while initially disruptive will not in the long-term prove to be worse than what Münchau admits is a state where nations are “trapped in a dysfunctional monetary system”.

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With idle labour equal to 14.5 per cent, the fiscal deficit is too low

The fiscal position of a government that issues its own currency should never be a focus of attention other than to understand why it have evolved to its current level – whether it is reflecting mainly discretionary policy choices or cyclical effects (automatic stabilisers). If there was accelerating inflation and high GDP growth then one might be tempted to conclude the fiscal deficit is to expansionary and needs to be cut back. One might equally conclude that private spending is too strong and needs to be cut back. But when there is declining growth and very high and persistent labour underutilisation rates, it is hard to argue that the fiscal deficit needs to be cut. It is, in fact, lunacy!

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US economy slowdown – not likely to be a trend

Last week (October 27, 2015), the British Office of National Statistics published its – Gross Domestic Product Preliminary Estimate, Quarter 3 2015 – which revealed that the British economy is slowing and heading back into recession under current policy settings. The annual real GDP growth rate declined for the third successive quarter as the impacts of the world slowdown and domestic policy austerity start to take their toll. Later in the week (October 29, 2015), the US Bureau of Economic Analysis released their estimates of – Gross Domestic Product, 3rd quarter 2015 (advance estimate) – which showed that the US economy has also slowed rather appreciably in the third quarter and “increased at an annual rate of 1.5 percent” after having increased by 3.9 per cent in the second-quarter of 2015. We will have a better picture of the state of the US economy on November 24, 2015, when the estimates are revised based on updated data. The most obvious reason for the slowdown was the sharp drop in private inventory investment, a slowdown in exports and investment. Households maintained a relatively stable saving ratio – 4.7 per cent of disposable personal income compared to 4.6 per cent last quarter.

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