I have received several E-mails over the last few weeks that suggest that the economics…
The assault on workers’ rights continues
I have been trying to maintain a theme focusing on the absurdity of our economic systems and the way in which governments allow themselves to be held to ransom by a small group of largely unproductive financial traders and the associated institutions (credit rating agencies). I was reminded of this again today when I read a report on growing murders of trade union officials and the purging of working conditions in various countries as the economic crisis worsened. When you juxtapose this sort of news – about things that really matter – with the nonsensical antics of the financial markets in Europe you realise we have totally lost any notion of priority.
In finance, they refer to bond trading as investing but I prefer the definition of investment that you find in economics – the augmentation of productive capacity. It reflects my view that financial markets are mostly unproductive and that what we should be focusing on are real things – employment, productivity, social protection etc.
While it is clear that the fiscal policy interventions stopped the recession becoming a recession, the policies could have been much more focused on employment and social protection and less focused on handouts to the top-end-of-town. That might have prevented some of the now hysterical claims that fiscal policy is dead. For more on that, you can read this ridiculous article – Crisis puts nails back in Keynesian coffin – from News Limited hack Michael Stutchbury, which really just paraphrases the article claims by Jeffrey Sachs the other day. Please read my blog – Who should be sac(k)ed? – for my critique of the Sachs article.
The news that Moody’s had downgraded Greek government debt to junk status (that is, non-investment grade) was predictable but demonstrates the absurdity I am talking about. The decision will “further undermine demand for the debt-strapped nation’s assets as it struggles to rein in its budget deficit”. Bloomberg reports that Moody’s identified:
… “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” Moody’s said in a statement yesterday in London. The outlook is stable, it said.
Can you believe the circularity that is going on? First, Greece suffers a massive negative demand shock which drives its budget deficit up as a result of the automatic stabilisers and some discretionary bailout efforts.
Second, the conservatives scream that the Stability and Growth Pact rules, which bear no relation to the reality these nations are in, have to be met.
Third, the bond markets start to screw Greek debt issues.
Fourth, a bailout package is implemented to ease the reliance on the bond markets but a nasty austerity package is imposed on the Greek government.
Fifth, the austerity package is designed to damage economic growth.
Sixth, Moody’s seeing the “substantial” risks to growth put the boot in.
Seventh, stay tuned for the budget deficit rising, the bond markets getting nastier, the bailouts getting larger, although Moody’s and the other criminal rating agencies can’t downgrade Greek public debt much more.
Another aspect of this absurdity is the increasing evidence that countries that have been mired in recession since 2008 are now facing diminished future growth paths. So not only have they failed to deal with the collapse in aggregate demand but, in failing to run large enough deficits, they have now damaged their supply capacity.
For example, in the UK, the Office of Budget Responsibility has just released the Pre-Budget Estimates and they say that:
Our best estimate is that the output gap was around -4 per cent at the end of 2009 … and that the current level of trend output is also lower than was estimated at the time of the March Budget. We also judge that the financial crisis will have a persistent effect on trend growth over the medium term. We estimate that trend output will grow at just over 2¼ per cent over the next three years, slowing to just over 2 per cent from 2014 as demographic changes reduce the growth of the potential labour supply. Taken together with the judgement that the output gap was around -4 per cent at the end of 2009, the projected level of trend output at the start of 2015 is around 3¾ per cent below that implied by the assumption used for the March Budget economic forecast and around 2½ per cent below that implied by the assumption used for the March Budget public finances forecast.
This is the point I discussed in the blog – My Sunday media nightmare. The mainstream economists – central bankers etc – typically assume that the evolution of the “long-run” growth path of the economy is independent of how you get there. The hysteresis notion (upon which my PhD and early academic articles were based) tells us clearly that the future is path dependent. Where you are now is where you have been.
To think that the evolution of aggregate spending has no impact on what our economy will look like in say 40 years time is ridiculous. A protracted recession such as we are experiencing now typically reduces the growth path and it takes years to work through the persistence and hysteresis that accompanies a recession.
Investment falls and this in turn lowers the potential growth path. That is exactly what is happening at present.
Then when the number crunchers start estimating structural deficits (which are based on estimates of potential output) they suddenly discover the deficits are “higher” than previously thought because the potential output is lower.
Then the deficit terrorists go for broke and force the governments into more austerity and things get worse by the day! This is another aspect of the absurdity that is going on at present.
But there is a real world out there …
So it is salutory to try to keep focusing on real things.
The latest ILO Global Employment Trends (careful: the file is 11.3 mbs) fully apprises us of how the crisis has undermined conditions in labour markets around the world.
The public debate typically focuses on some summary labour market statistics – the official unemployment rate – the employment-population ratio – as indicators of the state of the labour market. The crisis has clearly led to significant increases in unemployment (particularly among the youth) – around 45 million workers have been pushed into unemployment since 2007. The employment-population ratios have plummetted by more than 1 per cent (which is huge when you consider the base). Labour force participation rates have fallen and hidden unemployment has risen.
But the trends in the quality of employment are not often discussed in the financial news. The ILO define vulnerable employment as:
Vulnerable employment is often characterized by inadequate earnings, low productivity and difficult conditions of work that undermine workers’ fundamental rights …
Workers in vulnerable employment, defined as the sum of own-account workers and contributing family workers, are less likely to have formal work arrangements, and are therefore more likely to lack elements associated with decent employment such as adequate social security and recourse to effective social dialogue mechanisms.
The ILO note that before the crisis “there were large deficits reflected in high rates of vulnerable employment and working poverty in most of the developing world.” But the trend was downward.
The economic crisis has reversed the improvements made and:
At the global level, on the basis of currently available labour market information and the most recent revisions in GDP growth, the vulnerable employment rate ranges from 49.4 … to 52.8 per cent … in 2009, which is equivalent to between 1.48 and 1.59 billion vulnerable workers worldwide
It is likely that an extra 109.5 million workers have now been forced into vulnerable work which “implies a reversal to the year 2000”. So a decade of gain has been wiped out.
Part of this increase is the result of an absence of social protection schemes for the unemployment in many developing economies. So when a worker becomes unemployed they take on “various forms of employment” which typically deny basic rights.
The ILO also note that the working poverty rate – working below an accepted poverty line – has increased dramatically. This rate had also been declining prior to the crisis. But that estimates of the share of workers in extreme poverty, that is, on USD 1 a day:
… suggest that up to an additional 7.0 per cent of workers were at risk of falling into poverty between 2008 and 2009 … This would translate into an additional 215 million workers, which is an alarming increase and would represent a setback of many years in reducing decent work deficits … At the USD 2 a day poverty line, it is estimated that up to 5.9 per cent of workers (185 million workers) were at risk of falling into poverty between 2008 and 2009.
The ILO conclude that economic growth “remains fragile and labour markets around the world remain distressed”. They note that the “the positive effects of government stimulus measures are counteracting the depressing effects of a still large problem of bad debts in the financial system, weak consumer demand and low levels of investment.”
Noting the deterioration in unemployment, and, while “reflective of governments’ efforts around the world to mitigate the impact of the economic crisis on labour markets”, the ILO says:
Nevertheless, this rate represents an unprecedented increase in the number of unemployed. At the same time, the potential increases in vulnerable employment and working poverty are even more alarming, and are likely to affect larger numbers of workers, particularly in view of the decent work deficits that were
already evident prior to the economic crisis.
So a pretty bleak picture being portrayed.
In terms of policy issues, the ILO Report prescribes remedies which are in stark contradistinction to the policies that are now being implemented by governments around the world. At the time the Report was published (January 2010) they were supportive of the G-20 push for:
… measures that protect the most vulnerable by expanding social protection, investing more in education and training and applying stronger labour market policies.
At that time, the G-20 overall was pushing for the continuation of the stimulus to underwrite growth. Times have moved on and the most recent G-20 meeting of finance ministers radically shifted their position and are now promoting full-on austerity as the way forward. In this blog – Amazing reversals – democratic repression – I document this shift in G-20 sentiment.
The ILO believe that it:
It is imperative to continue with stimulus measures to avoid a further deterioration of social and employment conditions, and increased precarious work, especially since true economic recovery will not be achieved without healthy job growth … A sustainable growth beyond recovery must be achieved by including social and environmental dimensions that encourage job creation. Furthermore, gender equality should be a key principle in any policy response, as the effects of the crisis go beyond the scope of women in the world of work, but impact on the overall stability of society considering the various roles that women play. Maintaining acceptable wage levels is also a concern since consumers need adequate purchasing power in order to support consumption.
So you match that policy perspective with the reality at present and you can guess that things are going to get much worse for workers in the coming years. It is clear that the imposition of austerity programs will damage the bottom end of the income distribution significantly while the top-end-of-town will be spared. In fact the latter will be able to buy up (steal) valuable public assets at bargain prices as the governments are forced by the IMF, the EU and their own stupidity to privatise them.
As a result there will massive wealth shifts from the public to the wealthy end of the private sector.
And, employment crisis undermining workers’ rights
In yesterday’s blog – The poet and the economist – I suggested that the neo-liberals are using the crisis to advance their own agenda. In particular, I focused on the conservative push for austerity for which would make huge inroads into the welfare state and reduce the size of the public sector.
But the neo-liberal agenda has also been on-going during the crisis. The International Confederation of Trade Unions (ITUC) has just released its Annual Survey of violations of trade union rights.
The Survey reveals:
… a dramatic increase in the number of trade unionists murdered in 2009, with 101 killings – an increase of 30% over the previous year … [and] … growing pressure on fundamental workers’ rights around the world as the impact of the global economic crisis on employment deepened.
While the murders were in Colombia (48), Guatemala (16), Honduras (12), Mexico (6), Bangladesh (6), Brazil (4), Dominican Republic (3), Philippines (3), and one in India, Iraq and Nigeria; the Survey documents an “extensive list of violations suffered by trade unionists struggling to defend workers’ interests” across 140 countries.
They also note that many “violations remain unreported, as working women and men are deprived of the means to have their voices heard, or fear to speak out due to the consequences to their jobs or even to their physical safety”.
The Survey documents in excruciating detail a litany of “harassment, intimidation and other forms of anti-union persecution” in all the nations surveyed.
While the worst atrocities occurred in the poor nations as you would expect, there are also extensive breaches of workers’ rights in advanced nations like the US. For example, the Survey says of the US:
The law does not adequately protect workers’ trade union rights, and provides the employers with vast freedoms. Union busting, anti-union campaigning and resistance to collective bargaining and bad-faith bargaining remain common practice amongst employers, this leading to double standards in foreign multinational companies such as Deutsche Telekom.
The Deutsche Telekom case is interesting. T-Mobile USA has been running a “systematic campaign to prevent employees from forming a union”. You can read all about they way the German company behaves in an excellent report – Lowering the Bar or Setting the Standard? – published by the American Rights at Work Education Fund. This organisation does great work in documentation atrocities against workers.
This Report:
presents overwhelming evidence that DT is guilty of operating by a double standard: The company respects workers’ rights in Germany, where it cooperates closely with unions, but mistreats workers in the United States and interferes with their right to organize.
You might also like to read this recent article (June 14, 2010) – New Outrage Exposes Obama’s Failure To Help Unions – from the San Francisco alternative daily, Beyond Chron. It documents how Obama’s claim to be supportive of unionisation has not been delivered upon and that anti-union activities continue unabated in the US.
Conclusion
These trends are consistent with my hypothesis that the neo-liberals are working hard to make this crisis count in their favour.
I expect the workers to come out of this crisis in much worse shape than before and a high proportion will never recover the wealth and work entitlements that they had built up and fought hard for over the years.
And a significant proportion of the next generation of adults will be poorer because we have allowed them to wallow in unemployment or inactivity when we could have easily provided all of them with Job Guarantee position and kept them connected with the labour market.
It is all very depressing really.
That is enough for today!
Any chance of comments on the merits of a Job guarantee vs a subsidised worker arrangement (such as the tax credits system). This would be where the minimum wage is effectively abolished and replaced with an income guarantee. It would be paid to an individual based on the certified hours from their employer, with that subsidy withdrawn slowly between the guarantee level and some fraction of median wage. The public sector could then still create work – providing a guarantee of work, but would it would be on a ‘volunteer’ basis so that the public sector doesn’t accidentally out-compete charities, the voluntary sector and other social enterprises.
One of the problems with it is that it makes the rate of income tax about 70% up to median wage, only then dropping to normal. This doesn’t look ‘fair’ (unless you hide it with arithmetic complexity like they have in the British system).
Off topic: HugeHedon has just drawn my attention to a pro-MMT Nobel laureate, William Vickrey:
http://www.cfeps.org/pubs/wp-pdf/WP2-Vickery.pdf
Neil Wilson: I think the “Job guarantee vs a subsidised worker arrangement” question is far too complicated to be dealt with in comments on blogs. I wrote a paper on the subject here:
http://mpra.ub.uni-muenchen.de/19094/
“Third, the bond markets start to screw Greek debt issues”
– As in no one believes they are going to pay their current obligations (AKA, default) no one wants to invest in any future obligations either. Wow, those bond guys are really f*cking Greece – why don’t they just give them money? Why don’t you personally invest in Greece? I mean, if you really feel Moody’s opinion of Greece is incorrect, play with your own cash. Go on a road show, build a consortium to help Greece. Good luck.
“Fifth, the austerity package is designed to damage economic growth”
– Perhaps. Creative destruction is a part of capitalism – some industries need to contract and worker “friction” is the result. What do you expect them to do? They have maneuvered into an untenable position via the Euro. They can default, go back to their own currency and watch the cost of their imported goods soar or they can try to right their fiscal house. Its a terrible spot, but they have no one to blame but themselves for uncollected taxes, large social promises, heavy reliance on tourism and a lack of real industry.
“While it is clear that the fiscal policy interventions stopped the recession becoming a recession (depression?).”
Are you implying that there is no depression? Are you serious? We are in a worst state than the thirties, without question. How would fiscal policy possibly rectify/employ the majority of the industries of the unemployed: financial services, housing and hospitality? An old mortgage banker doesnt appear to want to take multiple part time jobs, will he suddenly want to help build highways? How will stimulus allow for these workers to be employed in industries that are in demand/are to be in demand? How is stimulus created work not “vulnerable work” if it relies upon cascading levels of debt, debasement and fiscal imprudence? How do we ensure that our stimulus dollars are not directed towards political ends? How will we wean ourselves off of stimulus?
If industries like farming, housing and health care have not been able to wean themselves off of stimulus, subsidies and tax incentives, how can we expect the rest of the economy??
If there is any empirical evidence to prove that stimulus works, please point it out to me.
RPB
“Are you implying that there is no depression? Are you serious? We are in a worst state than the thirties, without question”
Oh really?? There is now unemployment insurance (until the conservatives gut it), SS and FDIC which are supporting aggregate demand and PREVENTING bank runs. Want to see a real crisis? Tell folks their deposits arent insured anymore because we’ve run out of money to insure them. Its certainly bad now and likely to get worse, thanks to idiots like McConnell, Boehnor and Kyl but we have a lot of supports that were lacking in the 30s
————————
. “How would fiscal policy possibly rectify/employ the majority of the industries of the unemployed: financial services, housing and hospitality? An old mortgage banker doesnt appear to want to take multiple part time jobs, will he suddenly want to help build highways? How will stimulus allow for these workers to be employed in industries that are in demand/are to be in demand? ”
How does proposed policy rectify/employ the majority of the industries of the unemployed? If an old mortgage banker has a savings he can draw down and unemployment insurance provides the rest then fine. The JG policies are not necessarily directed at these cases. lower wage workers that have been laid off and are living off 250/week will probably view a $10/hr job (with health benefits) a significant improvement. You seem to be worried that they be placed in productive jobs. How “productive” is their current unemployed status?
Forced austerity is not “creative” destruction! Its simply destruction. Creative destruction is when something withers because it has been replaced by something better. That is a positive.
RPD: “How do we ensure that our stimulus dollars are not directed towards political ends?”
MMT shows us that politicians with a monopoly over the money supply must be responsible. This is not delusion; it’s economic theory. MMT requires responsible politicians. This again shows why economic theory, like MMT, is a fiction, and should be read/enjoyed as such.
An old mortgage banker doesnt appear to want to take multiple part time jobs, will he suddenly want to help build highways?
He may not want to but at some point, if there isn’t enough stimulus to raise demand for his services as a banker or re-educate him to perform a more useful task, he might well have to.
How will stimulus allow for these workers to be employed in industries that are in demand/are to be in demand?
By re-educating them, for example.
How is stimulus created work not “vulnerable work” if it relies upon cascading levels of debt, debasement and fiscal imprudence?
Cascading levels of debt, debasement and fiscal imprudence are vacuous concepts in sovereign fiat regimes if the work increases employment, skills, employability and general welfare while NOT causing inflation. This ‘sound money’ business is really deflation in fancy dress.
How do we ensure that our stimulus dollars are not directed towards political ends?
Political ends are the voters’ will. You mean politician’s ends? By voting those politicians out of office!
How will we wean ourselves off of stimulus? If industries like farming, housing and health care have not been able to wean themselves off of stimulus, subsidies and tax incentives, how can we expect the rest of the economy??
Once growth picks up and people find employment in the private sector, automatic stabilisers will push the budget towards surplus. Discretionary spending and subsidies can be stopped at the polls / politically. Subsidies are political decisions to support industries / individuals who voters feel are more valuable than the markets tell us they are. It can also be a form of currency manipulation when aimed at supporting exports (e.g. in farming). Better than importing food from China, I guess…
Reality may be messy but the theory shows us some possibilities quite clearly. It’s worth looking into.
Jaw-dropper from conservative Bruce Barlett. He gets the basics of MMT and observes that even though the US cannot “run out of money” as currency issuer, there is a rising force in the GOP – Bartlett calls them “crackpots” – that is actually pushing for US default on ideological grounds.
Debt Default: It Can Happen Here
@ R.W. Gordon
Politicians are as good as voters allow them to be which is usually about as good as they themselves are. There is no economic theory or practise that can change that. And precisely because it’s so true you can be certain that no amount of fiscal ‘prudence’ will ever come at the expense of politicians and their cronies first.
Interesting critique from the left related to MMT from Stirling Newberry at Corrente. Stirling is a broad and deep thinker who has evolved an overarching worldview based on history, geopolitics, and economics, and he has been rather prescient over several years. He doesn’t have a blog and his writing is scattered around the net. Recently, he has been posting at Corrente, where MMT has been a topic of discussion of late. I have consistently found Stirling’s views to be out of the box thinking that challenges one to think through one’s own position in terms of a bigger picture. Many interesting comments, too.
This is one of the very few critiques of MMT from the left that I have run across that isn’t knee-jerk deficit dovish. If you are into the geopolitics of it, this is an interesting read, although Stirling presents an interesting economic take, too.
Sorry People, the Government Can Run Out of Money, In Fact, It Already Has.
Seems like Newberry is saying that the gov’t has run out of money because it doesn’t really want to stimulate the economy now, because it wants ordinary people to be miserable. He defines money as “the total amount of exchangeable goods and services in an economy.” OC, the gov’t doesn’t have that. So he is not exactly being coherent.
RPD: “Creative destruction is when something withers because it has been replaced by something better. That is a positive.”
Replacing malinvestment with no investment is an improvement.
We need to end the stimulus, bailouts, and government intervention in pricing and interest rates. Housing needs to be allowed to crash to market-clearing prices. Pensioners and bondholders will need to take haircuts. And we will need to reduce our standards of living unless we are willing to increase our productivity. Ironically, we have the capacity to spare but not the will to use it.
Hello. I find Dr. Mitchell’s reasoning to be solid and convincing. Given that understanding MMT is a minority position, I have to ask why it isn’t the common wisdom. It doesn’t seem feasible that the only reason is that the U.S and other economic advisors espouse conventional macroeconomic perspectives is that they learned from the same books. Every U.S., AU, and other major economy government economic advisors and politicians are convinced that sovereign government’s with fiat currency systems believe that their budgets are funded by taxes and must be balanced. (Sorry for the run-on sentence)
Can someone point me to scholarly articles that specifically challenge MMT principles? So far I only find blogs and articles written by journalists with no visible experience studying macroeconomics. National accounting flows with vertical and horizontal dimensions as described by MMT make sense to me and resolve questions I had in my econ studies.
Thanks!
Ok, I read the Stirling Newberry blog post … “The reason Galbraith is wrong, is the same reason that Bush, Greenspan, Bernanke and their crowd was wrong. The printer of fiat money hopes to gain position by the inflation or devaluation tax. It prints the money, gets people to do what it wants, say kill some other group of people, and then hopes that by the time the money has spread far and wide and reduced in value, that they have gotten some gain. Say, the oil that those other people had before they were blasted into pink powder.”
Earlier in the post, Newberry addressed the need to include productive capacity in a macroeconomics discussion. Then he ignores it to say that we the people will always live under the thumb of the rich and that the relative wealth balance will never change. That isn’t the well reasoned article that I’m seeking. The private sector currency “sinks” change from time to time. In my understanding the shifts are triggered by technological change affecting production capacity. After WWII, a middle class developed that did not exist before the war. It also appears that Newberry reduced Galbraith’s perspective to “we just need to print money.” In the last few interviews I heard, Galbraith always made the point that deficit spending can only buy available productive capacity. Next … //smile
Thisson @ 7:28
Why doesn’t this risk deflation? Seems to me that you are confusing creative destruction with liquidation/depression. Perhaps you are thinking of something I don’t see?
Actually, that’s a very telling comment about creative destruction and the consequences of globalization. In the past, an industry sector or group of individual companies might go through “creative” destruction. Now, it’s an entire country. WWII was a great example of creative destruction – see how the US rose to become the world superpower – can’t you see the logic of why we need to break a few eggs to make someone else an omelet?
“MMT shows us that politicians with a monopoly over the money supply must be responsible. This is not delusion; it’s economic theory. MMT requires responsible politicians. This again shows why economic theory, like MMT, is a fiction, and should be read/enjoyed as such.”
MMT is already working with automatic deficits – lower taxes and higher unemployment payouts drive the government into deficit and this helps the economy recover. These are systems put into place long ago and are only fiddled with, not scrapped. The only problem is they aren’t big enough. Bill actually answers your concern by suggesting that the job guarantee is just another automatic stabilizer, but far more effective, because it’s larger and more productive.
In other words, you could still have the current hysteria over debt levels, spending etc (which you seem to imply is beneficial because it puts brakes on spending), but with a politically untouchable (popular) job guarantee that prevents recessions and therefore prevents huge frightening deficits.
Of course, your underlying fear of democracy and worries over electorates voting for hyper-inflationary policies is really the issue here. You may believe the “government running out of money” is a necessary myth to keep things stable – I believe it’s a necessary myth for corporations to keep treating the labour force like a battered wife.
pebird: “WWII was a great example of creative destruction – see how the US rose to become the world superpower – can’t you see the logic of why we need to break a few eggs to make someone else an omelet?”
Got it. That’s why the US has the world’s most daunting war machine ever assembled and is not reticent about using it. Gotta love that creative destruction.
@Oliver/Greg
The whole premise of stimulus relies upon the fact that it will increase aggregate demand and thus encourage private growth once again. Having stimulated growth in the private sector, the automatic stabilizers and tax receipts allow the government to draw down its deficit. Ok.
Why do we assume growth will pick up? Japan has pursued similar monetary and fiscal policies to no avail. Despite stimulating and depreciating their currency to encourage exports while their largest trade partner simultaneously incurred substantial import imbalances they have still yet been unable to grow out of their debt. They are still undergoing stimulus and they are still monetizing debt. Where is the end for the JG? All they have left now is a pile of malinvestment that their aging population needs to draw on but cannot because nothing productive came of their policies. We are approaching the same demographic problem. How is our outcome going to be any different than that of Japan? Do we assume unexpected/unprecedented productivity growth in the next 10 years?
Furthermore, the Keynesian aggregate demand stimulus ignores the bulk of our problem: an economy hinged on debt creation that has resulted in high percentages of insolvency. A large part of the unemployed actors in our economy worked in industries that would not exist without large amounts of private debt. The industries existed based upon insane assumptions about future earnings/productivity growth that did not happen. In this case we are essentially swapping private debt for public debt without addressing the root of the problem. Structurally, nothing has changed other than we have lifted the burden from the individual and placed it onto the state. These industries will still rely upon debt – now it is public debt.
Who will buy all this debt? Will we monetize to infinity? Oliver notes the that monetary run around does not matter so long as it does not ignite inflation. But this is almost a certainty based upon our vast reliance on imported goods; especially oil. How can further monetization (read interest rate massage) not punish savors and lead us to a serious demographic-primed retirement crisis?
RPB, the MMT/heterodox view is that the debt constitutes assets. It’s not a question of there being a shortage of money to buy the debt, as money is not destroyed when it is used to make a purchase. The only question is of the debt being mis-priced.
So if you were to just slightly adjust your views to consistent with credit-based money creation, then we would find common ground.
Instead of talking about “real” malinvestment, in terms of their being too few or too many goods, or the goods being of too low a quality, talk about false price signals, in the sense that firms based investment plans on having customers with a certain amount of asset-enhanced income.
Now you can say that either the total income must drop, or that wages must increase. Both would allow the same level of “real” demand to be maintained. In Japan, wages continue to fall, and eternally increasing levels of government stimulus are needed. But this does not need to happen in the U.S.
If the deflation were to happen, the result would be a sharp increase in real wages — i.e. in purchasing power. The amount of goods that we consume does not need to decrease — no one benefits from excess capacity and idle resources — what needs to adjust are relative prices of those goods, so that nominal incomes are high enough to purchase the goods, or so that deflation is sharp enough so that real incomes are high enough to purchase the goods. Either way, one of these two adjustments needs to happen to get us back to a sustainable level.
In other words, the adjustment we need is financial in nature. Real capital — e.g. factories — do not need to be destroyed. What needs to be destroyed are the financial assets — the debts — that were piled up during the growing period of inequality. We should be able to produce the same amount of goods, and to consume the same amount of goods — possibly barring adjustments in the current account, which are minor — but we need to be able to afford to produce and consume these goods. That means the inequality orgy must end. Real unit labor costs have been falling behind real productivity growth over the last 30 years. We have been producing more and more, but wages have been stagnant. No wonder that you see an overhang of household debt, record corporate profits, and an unsustainable pattern of prices. But the solution is not to produce in a masochistic orgy. We need a financial liquidation, not a real one.
Ironically, one was to liquidate excess private debt is to increase government spending, increasing incomes – a significant portion of increased income is used to de-leverage excess private debt. Asset prices are more or less stabilized, but ownership ends up in the hands of households, not finance. Can’t understand why the bond markets don’t want this.
“Can’t understand why the bond markets don’t want this.”
That’s because they do want it. Problem solved 🙂
” Japan has pursued similar monetary and fiscal policies to no avail”
Japan has engaged in nothing like what Bill, Warren ,Randall or Marshall would advocate if they ran their treasuries. Japan has tried Bernankian stimulus, which looking at the USA has shown to be weak, and mostly ineffective.
“Despite stimulating and depreciating their currency to encourage exports while their largest trade partner simultaneously incurred substantial import imbalances they have still yet been unable to grow out of their debt.”
Youve not really been paying attention the relative strength of Japans currency. What makes you think they are trying to grow OUT of their debt??
” Do we assume unexpected/unprecedented productivity growth in the next 10 years?”
Not if we continue with the austerity packages.
“Furthermore, the Keynesian aggregate demand stimulus ignores the bulk of our problem: an economy hinged on debt creation that has resulted in high percentages of insolvency. A large part of the unemployed actors in our economy worked in industries that would not exist without large amounts of private debt”
Ignores?? Are you kidding? You can make many claims about MMT and its advocates, but claiming they ignore private debt creation/ insolvencies
and their effects on the economy and aggregate demand only shows you’ve never understood what has been written here.
Tom Hickey: “Gotta love that creative destruction.”
Om Namah Shivaya
(Shiva is the Destroyer. :))
“Of course, your underlying fear of democracy and worries over electorates voting for hyper-inflationary policies is really the issue here.”
I suppose that since the electorate seeks political office primarily to enrich themselves and their friends in both the public and private sector and accomplishes this by putting on a well-scripted facade about caring about the public interest would give anyone pause about entrusting these mere mortals with a monopoly over the supply of money and therefore the entire economy. I fear a dysfunctional government. Especially after reading this bit from the author of this very blog:
“Zimbabwe is the new Weimar Republic. Not! Zimbabwe is the front-line evidence that shows that government deficits will generate hyper-inflation. Not! Zimbabwe is the demonstration of the folly of a fiat monetary system. Not! Zimbabwe is an African country with a dysfunctional government. Yes!”
Yes indeed!
Do I fear the electorate voting for hyper-inflationary policies? Indeed not, after all the “responsible government” will surely manage the supply side appropriately! This simply requires “responsible fiscal management.” Who is responsible for managing fiscal matters of the state responsibly? Right, bought-and-paid-for gangster politicians.
Using the “fiscal capacity provided to it by a fiat monetary system” to “engender full employment and equity yet also sustain price stability” is a beautiful fiction that is economic theory. But I do enjoy reading it.
R.W. Gordon:
I’m not sure what your alternative is. The status quo? Corruption already exists, it’s not some magical byproduct of a fiat currency (or perception of ‘fiat-ness’). One of the reasons corruption can exist is because of huge concentrations of wealth/power. One of the main advantages of running a MMT-aware government would be a much more equitable distribution of wealth due to empowerment of the labor force and rise of real wages. It sounds like you are worried more about giving politicians extra power.
Governments already can (and do) give handouts to their cronies. Budget deficits don’t worry them enough to stop that. Look at Reagan and Bush’s deficits – they ran on fiscal responsibility platforms and still spent like they had (they did) a fiat currency. The only difference was that deficit worries gave them an excuse to simultaneously cut education/arts/welfare. Governments will do awful things when they can hide what they do or find a good excuse for it. Will an MMT system stop keeping track of government spending? No. Will the electorate accept governments giving handouts to the top end of town just because they are now aware of MMT? No. In fact, most corporate welfare is excused by saying “we need to save jobs by giving the rich a break”. With a JG that becomes moot.
No one is saying things will be perfect under an MMT system. But they certainly will be better than the status quo! If you have a third, better alternative, please tell us!
R. W. Gordon: “I suppose that since the electorate seeks political office primarily to enrich themselves and their friends in both the public and private sector and accomplishes this by putting on a well-scripted facade about caring about the public interest would give anyone pause about entrusting these mere mortals with a monopoly over the supply of money and therefore the entire economy. I fear a dysfunctional government.”
Giving the monopoly to the rich, or to the bankers is better?
Or what about no monopoly? Then you or I could just write a check, which the bank would cover even if we have no money.
@Greg
Yes, as a matter of fact I do trade the Japanese currency professionally, but its strength has obviously been more a barometer, of peer weakness rather than internal strength. The Japanese currency appreciation is also largely due to carry trade unwind between it, the Aussie, the Yen, the CAD, the dollar and the EUR. Watch the Yen trade and it moves in near lock-step with the USTs and inversely to the EUR/S&P/Stoxx/Dax. Low interest rates breed this type of speculative mania – by both citizens with no internal investment alternatives and foreigners (some of whom have gotten neutron bombed by these moves). Its the bond vigilantes covering (like me), not a sign of confidence in their swath of obligations/govt programs. But your statement still ignores twenty years of stagnation. Is that the price we must pay for the insanity of the last 30 years?
“You can make many claims about MMT and its advocates, but claiming they ignore private debt creation/ insolvencies
and their effects on the economy and aggregate demand only shows you’ve never understood what has been written here.”
– Correct, I do not understand it. I never studied it – I am trying to understand. Perhaps I should use more question marks and make less statements. Maybe I will agree. Maybe I will stick to UChicago neoclassical. I’m giving it a chance.
@RSJ
“What needs to be destroyed are the financial assets – the debts – that were piled up during the growing period of inequality. ”
What, then, happens to savors, pension funds, bond funds, etc that have socked away large sums of capital for retirement in the form of these debts? You destroy them; you create an even greater crisis. You do not just penalize savors, you fundamentally change the rest of the world’s perception of our financial markets. Capital will flee elsewhere – permanently. The dollar hegemony will be broken and the balance of world power will shift elsewhere. A lot of steps there, sure, but that is the end result. Are you comfortable with more mercantilistly inclined, less ethically motivated nations filling the breech? This may be occurring anyways, but why hasten collapse?
Furthermore, this destruction of debt, through whatever mechanism would constitute a massive confiscation of wealth and would likely be unconstitutional. Perhaps you view the current situation as a confiscation of workers’ current and future labor. But this talk sounds of seriously altering the last century of capital markets. We would need other countries to simultaneously do the same so that capital would not flee elsewhere. But we know that someone would opt out of the scenario, then others would too until we arrive again at a Nash Eq.
Please explain if I am off.
RPB,
capital… capital… capital… capital… capital… waaaay too much capital. So what is capital?
What you mean by capital is a certain amount of (most often) money which jumps around trying to create a feeling of doing something productive. You seem to have a strong feeling that capital is important because it does something important. Like funds investments. You will be surprised but this is not the case. Loans create deposits which are then spent and therefore become income which is then saved. So loans fund savings and to makes loans banks need REAL capital. The one that any business owner puts to start a business – idea, experience and know-how. And not the one that you refer to. So given your definition of capital I am perfectly fine if it flees somewhere. And I will be even happier if it flees there PERMANENTLY.
As for savings, then why don’t we start with the actual problem which is why people save? Because they need medical insurance. Then give it to them! Because education is expensive. Then give it to them! Because retirement age is coming and stock market crashed. Then kill private pension system and give them guaranteed pension. Nobody will accumulate any wealth if they can safely spend today all their income without risking anything in the future compared to what they have now. So give it all to them! And ALL people start spending ALL their income there will be no budget deficit. Problem is solved.
Sergei
That statement assumes people are happy with an absolute level of welfare. It assumes all people have some absolute level of spending that would allow them to be happy. It also assumes that all people would be happy with the same amount of absolute welfare. Moreover, it also assumes there are enough goods to satisfy what everyone would deem as a “reasonable retirement.” It also assumes there would be no conflict with those paying for it. Furthermore, it precludes the overly likely possibility that people derive happiness not on an absolute basis but on a relative basis; ie, I am happy only so much as I have it better than others.
People derive different utility from different amounts of consumption over different periods time. That is why capital markets exist in the first place. But more importantly, humans gauge their happiness on a relative scale. They are, and always will be happy relative to others around them. People seek prestige because they want to be relatively better than others – therein they derive their happiness. People will still accumulate wealth – and need to accumulate wealth because they are always seeking to have it better than others. I would argue its a precept of human behavior to want it better than your peers.
RPB, you are mixing micro concepts with macro reality.
Whatever GDP is produced it is by definition always consumed in the same period in its entirety. So the question really is about distribution of GDP among population. This is what market is here for. Some people consume less of something in order for somebody else to consume more. You can attach any nominal price to any piece of real GDP but it will be irrelevant. And the task of the government is then to steer the distribution of real GDP in a long-term sustainable way using political consensus as a driving force.
” the Japanese currency professionally, but its strength has obviously been more a barometer, of peer weakness rather than internal strength.”
How can you tell the difference? Currency valuations are ALWAYS relative, not absolute. If Japans is relatively stronger, for whatever reason……ITS STRONGER!!
Tell me, what does an “absolutely” strong currency look like?
The people that study this sort of thing have known for a long time that “happiness” is relative to position. Here, “happiness” is used in the sense of personal satisfaction rather than abiding happiness, which is abiding fulfillment. Abiding fulfillment is spiritual, not material, the spiritual being that which does not change and the material, that which changes. The ancients were well aware of this distinction in experience. For example, the ancient Greeks distinguished between hedone and eudaimonia, and the ancient Indians between bhoga and yoga, sukha and ananda. One who has not discovered this difference in one’s own experience lives a life of only relative happiness, alternating between satisfaction and dissatisfaction, pleasure and pain. This is a key fundamental of perennial wisdom, found in the testimony and teaching of sages worldwide from time immemorial. To be satisfied with relative happiness is the booby prize.
One aspect of relative “happiness” is based on being better off than others. Some are not satisfied unless they have plenty and others of suffering. This is sadistic. This is totally puerile and displays itself for what it is. It is based on the infantile selfishness that the socialization process is supposed to get the growing child beyond through “good upbringing.” Even if one doesn’t feel it, one is supposed to at least make a credible show of it to be considered a mature person.
But I suppose that some people don’t teach their children to play nice and share their toys, but rather to hoard. This, of course, is at the bottom of the problem in that self-interest is really basically keeping up with the Joneses and in so far as possible getting ahead of them and staying ahead. And when nations play this game, devastation is the result.
BTW, this is the thrust of the Stirling Newberry’s post at Corrente, in case anyone missed the point.
Marshall Auerback weighs in on corporate rentier-ism aka financialization here.
“I’m not sure what your alternative is. The status quo?”
MMT claims to show how real economies work under real fiat currency regimes. The status quo is fiat currency controlled by politicans.
“One of the reasons corruption can exist is because of huge concentrations of wealth/power.”
What came first, corruption or fiat money? Corruption will always exist. The existance of fiat money created by government greatly increases the oppurtunity for corruption. Who are the most corrupt creatures on earth? Politicans. Who controls the money supply and issues currency? Politicans.
The concentration of wealth is excerbated by fiat money. People with some wealth can buy politicans to legeslate in their favor and therefore become richer. This happens all the time. Having political ties are a proxy to great wealth. MMT does not cut these ties because MMT requires politicans to control money.
“One of the main advantages of running a MMT-aware government would be a much more equitable distribution of wealth due to empowerment of the labor force and rise of real wages.”
Does this mean to infer that the government would be in charge of setting wages? The more I read more I read MMT the more it sounds like political theory and less like economic theory.
“f you have a third, better alternative, please tell us.”
Again, a question for a political argument.
R. W., you argument is not borne out by history. There was huge inequality under the gold standard, and terrible cyclical swings. “The yellow brick road” didn’t lead to utopia. And after all the shenanigans that we’ve seen and are seeing, perpetrated by both parties, I don’t buy the argument that policy could possibly be made worse by taking MMT into consideration, which is just saying “reality-based,”
Even with the voluntary restraints that mimic the gold standard day the pols imposed on themselves, it seems to make no real difference when it comes to interest politics – and the same interests are funding both parties. We need to get the money out of politics and shut the revolving door to fix this. Nothing short of that will work as a permanent solution. That would take a constitutional amendment.
Moreover, the first Great Depression (we are now in the second, judging from LT unemployment/underemployment, was a debt deflation that occurred under the gold standard. President Roosevelt abolished the gold standard to have more policy space to deal with the social effects, when actual revolution was a possibility, rather than the faux populist rhetoric of violence we hear bandied about now.
Please don’t judge MMT as a economic theory based on political views expressed here and elsewhere. MMT is partially descriptive and partially explanatory/predictive. It simply describes how the post-1971 monetary system works, what policy options this makes available, and what their anticipated outcomes, efficiency, and so forth are in economic terms.
While it is true that Bill and many of those that comment here, including me, have a particular political bias that seems to differ from yours, what MMT shows is that it is possible to achieve sustainable growth (keeping up with population) and full employment, along with price stability. Since failure to achieve this and maintain it through appropriate policy results in considerable foregone opportunity, MMT seems to be a more reasonable choice than alternatives that have been shown to fail. A reasonable approach to policy-making would utilize it if no better alternative can be advanced. If you have one, have at.
Thisson: “Ironically, we have the capacity to spare but not the will to use it.”
Whose will are you talking about? There are plenty of people who have the will. What they lack is the means.
If those who have the means have not the will, then we should empower those who do have the will, so that they can get on with it.
RayW: “Given that understanding MMT is a minority position, I have to ask why it isn’t the common wisdom.”
As a consumer of MMT, I think that it is useful to distinguish different aspects of it. The sector identities are common wisdom, because they are simple fact. Other aspects, such as questions of crowding out or the advisability of a jobs guarantee, are in dispute.
What is infuriating to this non-economist is that economists en masse do not jump up and down to deny patent nonsense, such as the statement that the U. S. has run out of money, or that social security is broken. The fact that they do not do so is, I am afraid, attributable to ideology. 🙁
R. W. Gordon: “The concentration of wealth is excerbated by fiat money.”
I am not so sure about that. Fiat money tends more to inflation than hard currency, and inflation favors debtors over creditors. With hard currency creditors are less inclined to lend. Today we think of gold and silver as inflation hedges, but in the days of the gold standard, the buying power of gold actually increased more under deflation than inflation. I suspect that a higher rate of inflation than 2.5% would help ward off the concentration of wealth.
I expect that there are several people here who understand the relation between fiat money and the concentration of wealth and can expound upon it. 🙂
Tom Hickey: “the first Great Depression (we are now in the second, judging from LT unemployment/underemployment”
AKA the Not-So-Great Depression.
😉
Regarding the downgrade of Greek debt because of Growth fears due to the austerity measures see my comment on the post of “Australian market data”, today at @7:51. It supports theview that the risk factor of this debt has increased by the austerity measures and even inverted the yield curve as the danger has been increased for the 3 year duration of the austerity program.
Dear Bill,
I hope that you continue to use the hysteresis concept which is very helpful as you also indicate. As you know I also use it in my work on occurrence.
Dear Tom,
As always a thoughtful comment baour elative happiness. Today I do not have the time as it is late for me and have some urgent presentation in the morning. However, tomorrow I plan to write a comment ON RELATIVITY AND OPTIMIZATION (THE ANCIENT GREEK CONCEPT OF ARISTON). maybe you will find it interesting and give me your views as it relates not only to Economics but also to Philosophy.
RPB,
The point is that there is no God given right for an asset to perform. Fannie’s bonds pay above the risk-free rate. Why? Because there is default risk. Moreover, when the markets have, for a period of time, consistently mis-priced assets, then the asset values need to be lowered. When people put their life savings into an over-priced house, and take a capital loss when the bubble bursts, then the declining asset values do not shake confidence in the markets. In exactly the same way, the holders of mortgage bonds, when the households default, should take a capital loss. If the government props up asset prices — that shakes confidence. Markets are prone to wild up and down swings, and we should let these swings happen, while providing a social safety net and counter-cyclical deficit spending.
In terms of constitutionality, all that would need to happen is lack of government support. Government is now paying money to the agencies, that they turn over to bondholders. It would not be unconstitutional to stop this. As soon we stop it, Fannie’s bondholders take a haircut, as they should.
It would not be unconstitutional to not pass TARP, and it would not be unconstitutional to enforce the prompt corrective action laws and close Citigroup as well as the other zombie banks. We can put them into receivership, convert bond claims to equity claims, and spin them out as smaller entities. The Comptroller of the Currency already has the legal right to to this.
The market would a good job of liquidating these assets if we stopped propping them up.
In the process, asset holders would become poorer. But they were always poorer — they just thought that they were richer. The danger is the sense of entitlement and wealth transfer that occurs when government steps in to supply asset holders with the returns they “feel” they should get. That is what leads to the Japan scenario, because there is no satiation of private sector profit “desires”.
In terms of dollar hegemony, that is a separate issue — treasuries are and continue to be risk-free, and if the rest of the world wants to accumulate treasuries, they can still do so. Government guaranteed assets perform well in these crisis scenarios.
The difference between the great depression and the current environment is that in a fiat world, our ability to provide a social safety net in the form of a JG, pension support, and other basic services is not in question. This gives us a unique opportunity — we can let asset prices adjust while maintaining full employment. We can encourage asset prices adjusting by enforcing the existing laws on the books, forcing banks to recognize losses, and putting those banks into receivership.
This means that someone who thought they were sitting on a 700K nest egg may only be sitting on a 350K nest egg. So what? They have no guaranteed nest egg other than the government social security guarantees, and these are not in question. That additional 350K was “real” only to the extent that households engaged in a ponzi-debt bubble. It should be fairly valued at 350K. If that risks throwing families into poverty, then we can increase social security payments to all families, rather than just the ones that were benefitting from the inequality growth. In the course of doing this, incomes reach a more sustainable pattern, one that is able to generate endogenous demand without the need for constant external stimulus.
In the process, asset holders would become poorer. But they were always poorer – they just thought that they were richer. The danger is the sense of entitlement and wealth transfer that occurs when government steps in to supply asset holders with the returns they “feel” they should get.
I have a friend who bought a house prior to the CA bubble. He paid 148K on an asking price of 108K, and put about 30K into improvements. In late 2006, it was a appraised at 425K and the bank, unrequested, issued upped his equity line of credit at a low rate to the same figure. Happily, he did not draw on it. Now the house is appraised at about 200K. Asset prices fluctuate and he is neither richer nor poorer, since no gain or loss has been realized. However, it had used up that line of credit, both he and the bank would be in trouble. A lot of people did draw on those ELOC’s and now they and a lot of financial institutions are in trouble. While “imprudent” families are put out into the street, the banks get bailed out, because they are too big to fail – without even a wrist slap. What’s that about?
Oops, should be “asking price of 180K.”
I’m afraid I didn’t find Stirling Newberry’s remarks on MMT persuasive. Indeed, I think that while many of the things he says in his post are admirably said and good descriptions of where we are, when he pursues criticisms of MMT he continually distorts MT positions. In addition, his conceptual approach has logical contradictions in it, and his presentation of cause and effect that would likely hamstring what in his view are MMT policies is very gross in the sense that his causal chains proceeding from cause to eventual effect, have great big gaps in them, that prevent one from taking his predictions too seriously. I have commented quite a lot on this post and/or comments on it, but my most substantial comments are here:
http://www.correntewire.com/sorry_people_government_can_run_out_money_fact_it_already_has#comment-173957
and here:
http://www.correntewire.com/sorry_people_government_can_run_out_money_fact_it_already_has#comment-173931
Min’s post said: “R. W. Gordon: “The concentration of wealth is excerbated by fiat money.”
I am not so sure about that. Fiat money tends more to inflation than hard currency, and inflation favors debtors over creditors. With hard currency creditors are less inclined to lend. Today we think of gold and silver as inflation hedges, but in the days of the gold standard, the buying power of gold actually increased more under deflation than inflation. I suspect that a higher rate of inflation than 2.5% would help ward off the concentration of wealth.
I expect that there are several people here who understand the relation between fiat money and the concentration of wealth and can expound upon it.”
I say it is more likely that the concentration of wealth is exacerbated by debt and a low but positive price inflation target.
I believe around the time of the Great Depression the USA was on the gold standard but debt levels rose to their highest in history up until that time (see Steve Keen’s blog) along with wealth/income inequality.
“(price) inflation favors debtors over creditors”
What if prices rise but wages don’t?
“I suspect that a higher rate of inflation than 2.5% would help ward off the concentration of wealth.”
If the higher rate of price inflation gets interest rates high enough so debt levels don’t rise, I would say probably.
Joe, I agree with your criticisms of Stirling’s Corrente post. LIke most original folks, Stirling has his own worldview. From his remarks about MMT, he seems to have only a superficial grasp of it. I don’t know how much he has read, but he only addresses his understanding of Jamie Galbraith’s preface to Warren’s forthcoming book. Judging from other comments I read around the net, that’s a whole lot more than a lot of people “critiquing” MMT though, where the discussion is abysmal, as Marshall complained recently in a comment at Yves’s place.
Good that you responded to him. There are many people at Corrente who are genuinely searching with an open mind, but I doubt Stirling will appreciate it. He has never taken kindly to criticism. Stirling is quite fixed on his own historical geopolitical model and that is is preoccupation. He is a thinker on a grand scale and often makes interesting and important points, in my view. He is really working hard to come up with a good economic theory that accords with his worldview. So it is a plus that he has at least engaged MMt.
As I read his “critique” of MMT, he views it from the faction of the left that sees a meltdown coming and welcomes it as the upending of a rotten system. I put “critique” in quotes to indicate that he is not doing so from inside MMT but outside, from his own viewpoint. In this view, MMT only offers a postponement of the inevitable and a prolongation of exploitation by an elite that is conducting class warfare on the rest of humanity, getting back to business as usual after having to make some compromises domestically while dealing the threat of international socialism. After the Berlin Wall came down, that necessity ended and we are now at the culmination of a rapacious financial cycle. In this view, MMT enables the continued co-optation of the workers by giving them a living that slightly above subsistence, while the elite funnels wealth (financial assets are claims on real resources) to itself, along with some bonuses to its minions in order to make them feel superior to the great unwashed aka hoi polloi and unashamed for their role in suppression.
There are two major criticisms of MMT from the left, the deficit doves that hold that the budget should be balanced over a cycle, and the radical left that sees everything in terms of struggle for hegemony. Stirling is an articulate spokesperson for the latter view, and he is quite insightful about it historically and geopolitically.
To advance appreciation for MMT, I think that all sides need to be approached, and some are more open to understanding than others. Typically, those that have an ideologically-driven agenda are the most difficult to reach. Moreover, since they view the world in ideological terms, they view MMT as ideologically based. The right views MMT as challenging their dominance of their ideology, be it conservative, reactionary, or libertarian. The Democratic party spans center-right and center-left. The blue dogs side with the conservatives. The center-left views MMT as too radical, and the far left sees MMT as a tool of the system and therefore an obstacle to the system’s collapse, which is necessary for real change to take place.
While proponents of MMT should put forward the MMT position in a straightforward and clear fashion, we should also be aware of the bias of objections and meet them on that level, too. There is no MMT ideology or political position. MMT simply shows what is possible and what means are needed financially and economically to effect possible goals. For example, market traders are often quite reactionary. However, it is in their financial interest to understand and appreciate how the current monetary system works. They may want to change it back to “sound money,” but they have to deal with what the situation is now. If they are overly ideologically about this, they lose.
There really is something for everyone in MMT, although it will not be the same thing for all, since MMT offers a variety of policy options and addresses their consequences. For example, I don’t think for a minute that the best and brightest at GS don’t know exactly how the financial system works. They are using this knowledge for their own purposes, because having everything when no one else has much gives them an immense sense of satisfaction. Or maybe they are just sadists. Certainly, they aren’t ignorant. If they want “sound money,” it’s to the advantage of their class.
“The concentration of wealth is exacerbated by fiat money.”
Empirical evidence, please. That doesn’t seem to be the historical case. The elite has done very well under all forms of political systems, financial regimes, and economic structures. Occasionally there are popular revolts – even the Magna Charta was the result of a revolt of the feudal lords, who forced the king to grant them certain rights and privileges, but even the most populist revolts were soon do-opted by an elite, as evidenced in the Communist revolutions.
Thanks for your comment, Tom, and thanks for your perspective on Stirling. I’ve read some of his pieces at Corrente, and I really thought that the one before his MMT piece: http://www.correntewire.com/blog/sorry_people_government_can_run_out_money_fact_it_already_has
was a great one.
There were many and very striking paragraphs in this latest one too, and it elicited a very strong response at Corrente which is small blog site in membership and rarely gets posts that get more than 40 responses, while the comments on Stirling’s post have grown to more than 100. For this reason it was very important to develop an MMT reply to what he was saying. I agree that Stirling has an original world view and that part of what he does is certainly to be encouraged. However, he did owe it to MMT to give it an accurate construal and this he failed to do.
Finally, you’re correct in pointing out that MMT isn’t ideological. and I think that’s right if when we look at MMT as an abstraction or the group of MMT practitioners as a whole. But it’s also pretty clear that many MMT folks are certainly very concerned about matters of social justice and countering the worldwide trends away from democracy and towards plutocracy. Insofar as some MMT proponents favor economics for “the public purpose,” they have very little in common with conservative economists. Certainly Bill is strongly in the corner of working people and expresses his passion for greater equality in distributing the fruits of advances in economic productivity; and Randy Wray comes over that way to me too, as does Jamie Galbraith. I won’t go further down of list of MMT writers to guess at their political orientations. But I will say that I’m for “leftist” applications of MMT myself, and think that MMT can play a vital role in helping us to achieve thoroughgoing democracy. That’s why I’ve been spending so much time on it for the last eight months or so.
Two points, joe, both of a political nature. First, people like Stirling have a following on the left and so their attention on MMT spreads the word and makes MMT better known. Our job is to make sure that people get the correct info though, and your comments certainly set the recored straight.
Secondly, while many of us see the potential of MMT for a social agenda based on advancing public purpose, we still need allies on the right in order to make the political debate reality-based. Some conservatives understand the basics of MMT because they understand the nature of a fiat system. They are also realistic enough to know that this is the system that we have to use and therefore make the best use of. While we may disagree over policy prescriptions, we can agree on the basics of government finance relative to the economy. So we need to be engaging potential allies on all fronts, even though we may differ, too.
RPB:
Interest rates have nothing to do with controlling speculative behavior – this was proven during the 1930s.
I also trade FX – one very big reason is that I am allowed 50:1 leverage. The CFTC wanted to drop that to 10:1, and every FX trader went ballistic. What do they care if interest rates are 1% or 10% – leverage is their birthright. Why should I have to put up capital to speculate? From a trade perspective, interest rates between countries are of strategic interest – but the effect of interest rates on my positions with regard to interest earned/paid has no effect on my trading behavior.
Without regulation, interest rates lose their meaning – after all, over the last 30 years any public-provided piece of information has systematically lost value in terms of predictive potential. Interest rates are nominal – yes their relation to each other is important – but there are more important things going on.
I agree that debt destruction should be avoided, but that is different from debt extinguishment – accomplished by a general increase of income. Since firms don’t seem to be too interested in growth – the government should ensure that jobs are created. There is more than enough work that needs to be done – even if the private sector hasn’t figured out how to monetize it.
I agree that there is a basic human behavior to “want it better than your peers”, but I argue a more powerful instinct is to avoid “having it worse than your peers” – and the second causes resentment and is vastly more socially destructive. We have lost the balance between wealth accumulation and our responsibility to each other. Wealth means nothing if society is barren. I understand that those in gated communities may have a different view.
BTW, the only debt destruction that is unconstitutional is the US government’s debt – it is written into the Constitution, through the 14th Amendment. It is hard to imagine how the government could repudiate their debts – that is questioning them – without abrogating the Constitution, in essence formally ending the US. Here is the relevant section:
4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
Thanks, Tom. I agree that there are rightists who are beginning to understand MMT and to accept the facts of Government spending, and to the extent that they are honest about these facts it would be good to have their help in refuting the GBC paradigm. It is very clear that the fight to get MMT recognized is not a simple fight between right and left. And never more so when one looks at the America Speaks web site and note how many so-called progressive organizations have joined their effort at a nationwide discussion, a discussion based on the basic premise that, in the long run, we must get the nation on a trajectory toward balancing the budget because such a goal is a good in itself.
Right, Joe. Allies aren’t always friends, and friends aren’t always allies.
I share your disappointment with a lot of so-called progressives that are undercutting the progressive agenda by calling for policies that will diminish funding. They don’t seem to see the contradiction even when it is explained to them. It’s strange. The resistance seems to be visceral. That household-government analogy goes deep, and it’s difficult to eradicate. So we need to stay on message and find all the allies we can, wherever.