Regular readers will know that I have spent quite a lot of time reading the…
Printing money does not cause inflation
A number of readers have written to me asking me to explain why the US government (and any sovereign government) should not learn the lesson of the inflation that was caused by the spending policies of the Confederacy during the 1860s in the US. They have tied this query variously in with the rising budget deficits, the quantitative easing policies of the Bank of England and the US Federal Reserve Bank, and more recently the “injection of liquidity” by the Bank of Japan as a reaction to their devastating crisis. The proposition presented is simple – the Confederacy funded their War effort increasingly by printing paper notes (and ratifying counterfeit notes from the North) and saw runaway inflation as a result. This blog examines that point. What you will learn is that the experience of the Confederate states during the Civil War does not provide an case against the use of fiscal policy or the proposition that sovereign governments should run deficits without issuing debt. The fact is that “printing paper notes” does not cause inflation per se. It might under certain circumstances. Those circumstances were in evidence in the Civil Wars years in America.
It just happens that the topic was covered in a recent New York Times feature (March 14, 2011) – Money for Nothing by Ben Tarnoff.
The article focuses on the events that followed the establishment of the ephemeral “Southern nation”, which began with the secession of South Carolina in December 1860. Six other southern states had joined the rebellion by February 1861.
On February 8, 1861, the Provisional Constitution for the Confederate States of America was agreed unanimously. It was based on the existing US Constitution with some key differences not germane to our interest here.
On February 18, 1861, Jefferson Davis becomes the provisional president of the Confederate States of America.
Article I, Section 6 of the provisional Constitution gave the new “country” the rights of a sovereign government with currency issuing authority – with the relevant clauses being:
(1) The Congress shall have power to lay and collect taxes, duties, imposts, and excises for the revenue necessary to pay the debts and carry on the Government of the Confederacy, and all duties, imposts, and excises shall be uniform throughout the States of the Confederacy.
(2) To borrow money on the credit of the Confederacy …
(5) To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.
On April 12, 1861 the new “country” attacks Fort Sumter and the Civil War formally begins – it was all down hill from there for the South.
Earlier (March 9, 1861), as Tarnoff notes:
… the congressmen passed a bill that gave the Confederate treasury the power to print notes. The amount they authorized was relatively small: only $1 million. In the coming months, however, that number would increase dramatically. Over time, Confederate paper currency would outgrow its modest origins in Montgomery and become the South’s single most important source of revenue – the financial fuel without which the machinery of its government would cease to function. It would both help and hinder the Confederate war effort, sustaining the South in the short term at the cost of future disaster.
So the Confederacy in a few short months had established themselves as a sovereign government with monopoly powers to issue the currency and tax in that currency (thus generating a demand for it). The problem which emerged, however, was that unlike the Union states which could enforce its taxing powers, the Southern government had great trouble raising revenue from taxation.
Its public spending was more substantially matched by printing currency notes than in the Northern states. A definitive research work on the public finances of the era is the book by Donald R. Stabile and Jeffrey A. Cantor (1991) The Public Debt of the United States: An Historical Perspective 1775-1990, Praeger: New York.
While it established a currency-issuing monopoly the Confederacy had to immediately use that power to fight a war with its northern neighbours. Wars always challenge the inflation barrier because of the supply-side constraints that emerge as a nation gears for and then prosecutes the war effort. Rationing of real goods and services (that is, a non-market allocative system) is a typically used device to overcome the supply shortages.
A famous reference about this period is the work by Eugene M. Lerner (1954) ‘The Monetary and Fiscal Programs of the Confederate Government, 1861-65’, Journal of Political Economy, Vol. 62, No. 6, pp.506-522.
If you have access to JSTOR the article can be located HERE.
Lerner notes that Milton Friedman considered the Civil War to:
… provide precisely the kind of evidence that we would like to get by ‘critical’ experiments if we could conduct them …
Mainstream economists have used the Civil War period as a demonstration of their case against budget deficits.
The Southern government tried to exercise their tax authority by collecting in-kind taxes from farmers and businesses. They were easily avoided who as Lerner says:
… sold their goods (or hid them) before collection time …
There were other problems with the in-kind impost including rotting, damage and theft of the goods.
I liked Lerner’s account of the way the farmers would avoid the “impressments” who were lying in wait as the farmers went to market:
Frequently, impressment agents waited along well-traveled roads and seized the goods of unlucky farmers who happened along, instead of leaving the highways and impressing more equitably the goods of all producers. Farmers who anticipated impressment soon stopped bringing their goods to market and were discouraged from producing more than enough for their own immediate needs.
So not a very sensible revenue-raising strategy.
Lerner notes that:
Up to October, 1864, almost 60 per cent of all the money received by the Confederacy had come from the printing press. Less than 5 per cent of its revenue came from taxes. Approximately 30 per cent came from bonds sold to banks, institutions, and private persons and 5 per cent from miscellaneous sources.
Lerner reports on a struggle between the Southern nation’s first Treasury Secretary one Christopher Gustavus Memminger and the politicians. The New York Times article noted above has some nice narrative description of Memminger. He wanted to raise property taxes but the Congress declined to support the suggestion.
For those with access to the University of North Carolina you can read all of C.G. Memminger Papers at the library there.
The New York Times article says that:
Memminger wanted slave-owners to bear the brunt of the taxes … After much foot-dragging, the legislators finally complied in August. They didn’t tax one kind of property more than another, however. Instead, they adopted a uniform rate – of one-half of one percent.
The tax turned out to be a fiasco. Sentiment against it ran high, contributing to delays in collection and resistance among the states.
Lerner provided the answer to this impasse in his 1954 article. The Southern states were not only hostile to centralisation and that was one of the reasons for the secession, but more pragmatically they:
… believed that large tax payments were not necessary. Cotton was to be king; England would soon recognize the new nation and intervene actively; the Yankees would not fight; and military battles would go well for the South.
The early stages of the War reinforced these expectations.
Memminger is often held out by the mainstream as being aware that printing too much currency is inflationary. There is a famous quotation in Lerner’s article that is repeatedly used to make this case:
Secretary Memminger saw two immediate and indispensable benefits from levying taxes payable in government notes. First, taxes created a demand for the paper issued by the government and gave it value. Since all taxpayers needed the paper, they were willing to exchange goods for it, and the notes circulated as money. Second, to the extent that taxation raised revenue, it reduced the number of new notes that had to be issued. Memminger’s numerous public statements during the war show that he clearly realized that increasing a country’s stock of money much faster than its real income leads to runaway prices. They also show that he believed that a strong tax program lessens the possibility of inflation.
My colleague Randy Wray in his “Understanding Modern Money” book provides his view on this quote. He says that “it is clear that Memminger’s understanding went far beyond” the simple quantity theory of money approach – too much money chasing too few goods.
Randy Wray says that Memminger understood that the nation needed “to impose sufficient tax liabilities to create a demand for the notes so that goods and services would be offered at relatively stable prices”.
I won’t try to interpret what Memminger understood at the time. There is an additional point however. There has to be the capacity as well as the willingness to supply real goods and services in return for government spending. I will come back to that point soon.
It is clear that a significant role of taxation – and a central proposition of Modern Monetary Theory (MMT) – is to create a demand for the currency. In a fiat currency system, taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.
The orthodox conception is that taxation provides revenue to the government which it requires in order to spend. In fact, the reverse is the truth. Government spending provides revenue to the non-government sector which then allows them to extinguish their taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.
It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector which allows the government to pursue its economic and social policy program.
This insight allows us to see another dimension of taxation which is lost in orthodox analysis. Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector.
The unemployed or idle non-government resources can then be utilised through demand injections via government spending which amounts to a transfer of real goods and services from the non-government to the government sector.
In turn, this transfer facilitates the government’s socio-economics program. While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.
Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue. Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.
In my reading of Memmminger’s documents I have never found this level of understanding expressed. But he clearly did realise that “taxes created a demand for the paper issued by the government and gave it value” (as Lerner notes) so it is possible that he did think in the way that Randy Wray describes.
At any rate, the ability to collect the tax revenue was severely constrained by a myriad of factors.
The New York Times article said that:
Relatively little revenue came into Memminger’s coffers … The Confederacy had been founded on the principle of the sovereignty of the states; any attempt by the central government to assert itself, even to support a war fought for its survival, would be met with mistrust.
This antipathy to taxation and the inefficiency of the Southern tax collection system is very well described in Lerner’s article cited above. He reports that:
Sixty-one million dollars entered the Treasury in the first year of the war, and $1.2 billions by September 30, 1863. Absolutely nothing came from property taxes in the first year, and only $20.8 millions by September 30, 1863. The property tax accounted for only 1.7 per cent of the total revenue received.
The first point then is that the Confederacy is not an ideal example to use when challenging the basic precepts of MMT. Yes, it did form a government with a provisional constitution giving it taxing and currency-issuing powers as outlined above.
But, the essential characteristic of a modern monetary state (that is, a sovereign government) is that its tax borders are not porous. They must be able to effectively enforce the law which requires all tax liabilities to the state being extinguished in the currency of issue. It is one thing to invoke a law (based on a constitution) giving the state those rights but another thing to effectively enforce the rights.
Lerner says that for many reasons – poor design, recalcitrant member states, invasion from the North etc:
… it became impossible for the South to collect large amounts of revenue through taxation.
It would be wrong to think the problem was a lack of revenue. The problem was that the tax system could not be used as an effective vehicle to transfer private resources into the public domain in return for government spending.
Further, it seemed that the tax system undermined the supply of real goods and services.
Lerner recounts that Memminger’s:
The Secretary’s real alternatives for raising revenue were floating bonds or printing money. He, therefore, recommended that Congress authorize an 8 per cent bond issue of $50 million payable “in any resource which can be made available.” On May 16, 1861, Congress authorized bonds to be sold for “specie, military stores, or for the proceeds of sales of raw products and manufactured articles.
Which meant that the farmers would provide the loan funds upon sale of their produce (for example).
The problem was – as the NYT’s article notes – that as the war proceeded unexpected difficulties arose. Lerner wrote:
At harvest time, however, the market for exported goods was smaller than had been expected. Southern ports were blockaded. Trading with the enemy was discouraged. A grand design forcing Europe to recognize the Confederacy was afoot, and southerners themselves prevented the export of King Cotton. Consequently, the price of cotton was almost 25 per cent lower in September than it had been in June when the pledges were made. Since the general price index for all commodities rose 27 per cent during this period, the real income of the cotton planters fell sharply. Many who planned to buy bonds when they sold their crops became discontented and, instead of buying bonds, demanded immediate government aid.
The pledges were the bond commitments.
The NYT’s artile says that the “Southern economy was agricultural, illiquid … The South did have “white gold” – cotton. But the cotton trade fell sharply with the Union naval blockade, proclaimed by Lincoln in April 1861. A self-imposed embargo, devised by Southern leaders in an effort to force Britain to support the Confederacy, further curtailed cotton exports”.
The obvious fact that emerged (and there is a very interesting discussion of the to and fro with respect to the bond issuance in Lerner) was that the Confederacy had unpaid bills piling up.
Unpaid bills began accumulating on Secretary Memminger’s desk before revenue could be raised through tax collections or bond sales. Printing notes was the most expedient way of meeting these obligations, and on March 9, 1861, Congress authorized the issue of treasury notes “for such sum or sums as the exigencies of the public service may require, but not to exceed at any one time one million of dollars.” During the next four years the Treasury printed over fifteen hundred times this amount.
The NYT’s article notes that “(p)aper money had several advantages. It didn’t infringe on the sovereignty of the states. It provided a way to avoid taxes and to compensate for the Confederacy’s lack of capital … And it spared the South the more painful task of building a sound financing structure – a task that might require difficult decisions about the Confederate system’s shortcomings”.
The NYTs article concludes that:
The value these notes generated couldn’t be sustained forever, though. As their quantity grew, so would inflation. As paper came to shoulder the bulk of the Confederacy’s costs, its inevitable depreciation greatly undermined the Southern effort. The war couldn’t be funded on faith alone. It required real revenue, something the deliberately decentralized Confederacy wasn’t designed to deliver.
It is clear that inflation accelerated in this period (in both the North and the South) – and was particulary robust in the South.
But this conclusion misses the essential point. It was not a lack of revenue that caused the inflation. It was the inability to control aggregate demand through spending and taxation that was the problem.
Confused? It is a subtle but important distinction.
As explained above, the levying of the taxes would normally generate a demand for the currency of issue which would manifest in the form of a supply of real goods and services to the state from the private sector in return for spending (to get the currency to pay the taxes). This has nothing to do with the Confederacy needing revenue to spend.
They constitutionally gave themselves the right to spend by establishing a fiat currency monetary system. But having an infinite capacity to spend is only part of the capacity to exercise appropriate fiscal policy interventions (which might include prosecuting a war effort).
However, to elicit that supply of real goods and services, the government must be able to effectively impose the tax obligations. It is clear that the Confederacy was unable to do that.
The problem was further compounded because even if they could have imposed the obligation effectively there was also the impact of the War on the capacity of the Southern states to produce real goods and services.
It wasn’t the printing of the currency notes that was the problem. It was the fact that there were not enough real goods and services available for sale in relation to the rate of growth of nominal spending (on the war effort) that was the problem.
There were additional issues – such as counterfeit notes pushed into the Southern economy by the North and ultimately accepted by the Confederacy as legitimate tender.
But the supply problems were endemic.
When we teach macroeconomics the development of understandings of both the demand-side (spending) and the supply-side (output) is important. The pre-Keynesian macroeconomics largely considered the demand-side to be reactive (Say’s Law) to supply. This was consistent with the denial that an economy could oversupply and thus experience a demand-deficient slump.
You will be familiar with the regular statements that “printing money” causes it to lose value – which is another way of saying causes inflation.
Once you understand the components of aggregate demand (spending) – household consumption, private investment, government spending, and net exports (exports minus imports) – the question to explore is how will the economy react to that nominal spending (that is, money value).
So statements like increased budget deficits or an expansion of money will cause inflation have to be analysed in terms of how the supply-side of the economy responds to the increased nominal demand.
Any nominal demand acceleration coming up against a supply constraint will be inflationary – it is not a unique characteristic of public spending.
To explore that question you need to know how the supply-side of the economy responds. There are only three options when the economy receives an increase in nominal aggregate demand (spending):
- Increase real output – that is, increase production of real goods and services.
- Increase prices – that is, push up the price level.
- A mixture of both real output increases and price increases.
If nominal demand expansion continues to be met by the second supply response then we get inflation occurring.
The point is that the Confederate states experienced a sharp decline in output during the Civil War – for various reasons.
There was a severe drought that damaged agricultural production in 1862. Large losses via waste also plagued farmers because there was not enough labour left behind to harvest the crops or bring them to market. Transportation was severely disrupted by the War (as the Southern railway system was attacked and left in ruin). So food shortages led to price rises.
The South also lost its textile manufacturing regions to the North early in the War.
Additionally, the South was more backward in terms of industrial development at the onset of the War, partly because of its heavy reliance on slave labour which gave agriculture a bias when investment funds were being allocated. So the capacity to produce non-agricultural goods and services was very limited as the War began.
I could further document the supply-side problems of the South, which were particularly acute. The War destroyed capacity yet demanded ever-increasing supplies of real goods and services – an inconsistency that led to the inflation.
The point is that the economy was not capable of absorbing the rate of growth of nominal demand that was required to prosecute the War effort.
This is a common problem in war-torn nations. The problem is not the route that the nominal public demand (spending) enters the economy but the rate of growth of that demand in relation to the capacity of the economy to meet it in real terms (that is, via output increases).
The experiences of the Confederacy are not evidence that rising budget deficits (or quantitative easing) will be inflationary. They might be but when there are idle resources that want to work and are willing to pay taxes then public spending should always elicit a real response (increased output) rather than a nominal response (increased prices).
Please read my blog – Zimbabwe for hyperventilators 101 – for more discussion on the role that the supply-side plays in an inflationary experience.
That is enough for today!
This Post Has 64 Comments
The fact that the state’s money is needed by citizens in order to pay taxes certainly gives the state’s money some clout. But what would happen in a hypothetical country where public spending, instead of being 20% to 40% of GDP as per modern developed economies, was 1% or 0.5% or 0.1%? The claim that taxes underpinned the currency would then be doubtful.
I suggest a second factor underpins the value of currencies, and that is the simple desire by citizens and businesses to have a currency (because money provides a more efficient way doing business than barter). Thus absent a currency, any entity (public or private) can issue a currency, and as long as that currency is administered in a responsible manner, it will gain general acceptance.
In fact, given a shortage of the state’s money, citizens very quickly invent their own form of money. E.g. during the Irish bank strikes during 1966-76 this shortage arose, and people started exchanging uncrossed cheques. Same story during the recent unrest in Egypt: people started exchanging I.O.U.s.
Ralph – yes, taxes underpin currency to a lesser extent if tax is very low; in such countries, the “desire by citizens and businesses to have a currency” is often fulfilled by other countries’ currencies – such as the US dollar.
Ralph I think a danger with relying on convention to instill use of a currency is that conventions can change. Presumably when cowerie shells fell out of favour as a medium of exchange in Africa, the effect was essentially currency slide hyperinflation in terms of cowerie shells despite there obviously being no “printing” of cowerie shells. Remember hyperinflations provide an asset grab bonanza and so there is always the potential for people to try and use persuasion and political influence to induce them. I’m totally in agreement with the necessity of a sturdy tax regime as a way of enforcing use of gov money.
J. K. Galbraith made some notices of the issue in one of his books. Not an investigation but in short, from the confederations perspective they managed well from a poor position, very limited amount of hard currency to import stuff. They managed to keep their case going for four years and had an standing army of 600 to a million man. Probably did the paper money created out of thin air aid their cause and if they have succeeded to the price of inflation would it have mattered to them.
Also the American revolutions paper money was plagued with inflation, should they have abandoned the revolution because of this? Sort of, the price is to high with our paper money losing value.
Wars and revolutions is for sure special circumstances.
Hong Kong has low tax. Most citizens pay zero income tax. I wonder if the HK$ is pegged to the US$ partly to stop the US$ becoming the de-facto currency.
I’m inclined to agree with Ralph. I don’t think the point is that conventions are the basis for the demand for some currency any more than taxation is the single factor underpinning the currency’s value. Rather, a combination of motivational forces or incentives act at the same time to support (or alter) the exchange value of any currency, and the simple desire that there be an agreed upon currency would appear to be one of them.
@Bill: there is an unclosed italics at the end of the title: The Public Debt of the United States: An Historical Perspective 1775-1990.
@Ralph, the “simple desire to have a currency” seems to be rather the existence of economic institutions developed in a monetary economy that require some form of money to continue functioning, with people trying to find ways to keep those institutions functioning in the face of a liquidity crisis or change in sovereignty ~ since “the simple desire to have a currency” is only observed to be operative where money already exists among those accustomed to its use, and there is no evidence that it ever on its own brings local money into existence in the first place.
Ralph must be correct about the “simple desire” in very basic terms. Money has a very important utility when I have chickens to barter and want a goat, but the person who wants chickens only has a cow …
1) Show me a hyperinflation and I’ll show you a severe slashing of economic capacity caused by war and/or bad public policy that is wholly independent of monetary issues (kicking productive farmers off their land and replacing them with slash and burn squatters). Whether it’s the collapse of the assignats, the Bank of England note unable to convert because of Napoleon’s war, Confederate and U.S. dollars losing value because increasing amounts of resources are being spent of killing Americans coupled with uncertainty about the future of either government, German Marks or Zimbabwean currency, printing money is never the problem.
2) Government money did not start out as high powered money. Government money has always been just a credit (the government’s debt), like all money (money, i.e. dollars, euros, yen or shillings, is just the metric for counting value, like miles or inches for distance). As governments became more powerful, their credit became more valuable relative to other credits. To stop counterfeiting, governments invested in anti-counterfeiting technology: they minted their money in extremely rare metals, such as gold and silver (this is the only reason that societies that often starved in the winter, like middle ages Western Europe, considered gold or silver valuable – the use of gold at the mint to prevent counterfeiting government tax credits made it valuable, not some magical property of gold). But still, government money was not even a fraction of the total money supply, the endogenously created and ever fluctuating stock of debts (credits) that facilitated commerce. It was only in the 19th Century with the emergence of government regulated banks and robust modern taxation that Chartalism became fully accurate as a way of describing the total stock (or vast majority) of money. We evolved into Chartalism… but there is no sense in denying it now that we’ve used the system for well over a century.
3) Bill Mitchell writes maybe the best economics blog on the internet. Thanks, Bill.
As tax rates decrease, you do see the rise in private currencies. In the US as tax rates declined, there was rise in retail point schemes, loyalty programs, targeted vouchers – all consumption-based currencies – which are designed to create relative competitive advantages between businesses acting as currency issuers. These are of course restricted currencies, you can only use them for certain transactions – it is also a strategy to control/monopolize a market.
Citizens can only create money to the extent they can handle redemption into a universal form of settlement – which is how banks started – citizen money is kind of half a money – it functions as medium of circulation within a restricted area.
I remember in the US when frequent flier miles were first introduced after the airlines were deregulated, the IRS floated an idea to tax flier miles as income (airline tickets were considered cash, as rates were regulated and pricing changed frequently). How quaint.
An important reason the Confederacy has such problems collecting taxes is one of the great hidden facts of American history: entire sections of the south were in open and violent insurrection against the Confederacy by the end of 1863. It’s well known that 200,000 slaves from the South joined the Union Army; buried under the myth of the “Lost Cause” is the fact that there weree also 300,000 Southern whites who joined the Union Army. That means fully a quarter of all Union troops actually came from the South. In October 1862, the Confederate Congress passed the Twenty Negro Law, exempting “One white man on every plantation with twenty or more slaves” from military service. The law caused great discontent among the soldiers, and fixed the idea that it was “a rich man’s war and a poor man’s fight.” Then, the Confederacy passed a “tax in kind law” under which authorities could seize almost any property at will. Reports began to reach Confederate soldiers that their wives and children had been left destitute and were literally starving. By late 1864, nearly half of the Confederate army was absent without leave.
There were entire counties and areas of the South that were in open revolt against Confederate authorities by the end of 1862, with these deserters from the Confederate Army banding together and often affiliating with slaves in their area, to create paramilitary forces that literally shot Confederate authorities and officers on sight. There was one such group in Jones County, Mississippi, which grew to exercise its power over a wide region stretching from the Alabama line just north of the coast, all the way west into eastern Louisiana. After this group seized a large wagon train of supplies bound for the Confederate Army in 1864, the Confederate government was forced to deploy an entire veteran regiment to kill and suppress the “Yankee southerners.” As soon as the regiment was redeployed to the front lines, the Jones County group reimposed its control over the area.
One book that has a lot of material is Bitterly Divided: The South’s Inner Civil War, by David Williams, The New Press, New York, NY, 2008.
Stone, I certainly wouldn’t advocate a form of money other than the state’s money where the state collects a significant amount of tax. My point was a bit of a theoretical one. But I think it needs making because MMTers often go on about taxes underpinning the value of money without any mention of the fact that money exists in economies (past and present) where the state plays a very small role. I.e. in a typical modern state, taxes are much the most important factor underpinning the value of money, but we should not totally lose sight of the “desire for a currency” factor.
Bruce McF, Re your claim that there is no evidence of the desire for a currency bringing a currency into existence, what about cigarettes which were used as currency by Allied inmates in German prisoner of war camps?
Finally, I stumbled across a good article on the history of money recently here:
“The experiences of the Confederacy are not evidence that rising budget deficits (or quantitative easing) will be inflationary. They might be but when there are idle resources that want to work and are willing to pay taxes then public spending should always elicit a real response (increased output) rather than a nominal response (increased prices).”
If resources are idle, it is because consumers prefer them less than the resources that are not idle. What does willingness to pay taxes matter? Government spending may stimulate the idle resources, but when that spending stops the resource will be idle again (assuming consumer preferences have not changed). I don’t think there is a long-term welfare benefit that would allow true recovery. As for quantitative easing, it is hard to see how it is useful – does it enable any entrepreneurial activity that could not have taken place before?
“So statements like increased budget deficits or an expansion of money will cause inflation have to be analysed in terms of how the supply-side of the economy responds to the increased nominal demand.”
Would it be possible to junk the term “money” and replace it with medium of exchange?
Is it really the other way around? If positive productivity growth, cheap labor, and maybe other things cause the amount of goods and services to expand, then does the amount of medium of exchange need to increase?
From an accounting, budget, and time perspective, is it possible to have too little currency with no bond attached and too many demand deposits created from debt, whether gov’t or private?
Ralph Musgrave said: “I suggest a second factor underpins the value of currencies, and that is the simple desire by citizens and businesses to have a currency (because money provides a more efficient way doing business than barter). Thus absent a currency, any entity (public or private) can issue a currency, and as long as that currency is administered in a responsible manner, it will gain general acceptance.”
Ralph takes the fallacy of composition to an entirely new level with this quote:
“what about cigarettes which were used as currency by Allied inmates in German prisoner of war camps?”
No matter how much good material and evidence Bill puts on this site the majority of people here are still thinking in terms of gold standards and fixed exchange rates.
Ben Kennedy said:
“If resources are idle, it is because consumers prefer them less than the resources that are not idle.”
Absolutely ridiculous statement.
Lack of a Job or insufficient income to purchase the goods they desire is probably more correct.
If the government spends more, the private sector will have more income to spend (Jobs created, investment, saving…. and so on)
If the government spends less then the private sector has to either run down their savings from previous govt deficits or seek credit.
When credit runs out it will be a case of people being forced to accept a lower standard of living.
(A sufficient rise in net exports is so unlikely that it’s not even worth detailing into the equation.
personally i think that mmt’s proposition of a tax driven currency, is not a sufficient standard to hang ones currency value hat on.
i think a broader set of legal conditions must apply,
and that is justice must not only be done, but seen to be done,
the belief that we can all have our day in court, and the legal framework is sufficiently independent of state or corporate co ersion, is essential for establishing a tax driven currency.
the state can compel through taxation, but the belief ,rightly or wrongly that the citizenry have the right to challenge that compulsion when we think it is unjust, adds true legitimacy to the currency.
trust is based not on oppression, but in the belief we can be held accountable for our actions.
one party states, without an independent judiciary, can never have a reserve currency.
“Lack of a Job or insufficient income to purchase the goods they desire is probably more correct.
If the government spends more, the private sector will have more income to spend (Jobs created, investment, saving…. and so on)
If the government spends less then the private sector has to either run down their savings from previous govt deficits or seek credit.
When credit runs out it will be a case of people being forced to accept a lower standard of living.”
Is the current housing bust because people don’t have the money to spend on housing? Or is it because there is a lack of consumer demand for housing, so sellers are lowering their prices to change the economic calculus in the minds of potential buyers? True consumer preference did not square with the housing boom, and the bust is the inevitable consequence of that. As people are laid off in the housing industry, it seems clear to me that the solution for these newly-jobless is not for government to start spending in the housing sector so that they remain employed.
I am not thinking in terms of gold standards or exchange rates, I am thinking in terms of how consumers actually behave. I am also thinking in terms of real world resources. Prosperity or standard of living, is determined by real capital goods and productive capacity – not fiat currency. How does a society determine which capital goods to renew and which to re-purpose or stop maintaining? It would be helpful to me to hear how a MMT proponent addresses the problem of economic calculation.
Ben Kennedy, I struggle with some of MMT but I do follow the concept that real capital goods and productive capacity can sit idle despite the fact that many people would make use of them if only they had the fiat money to do so. The recent housing bubble was clearly an aberration and much of my anxiety with MMT is that it doesn’t always seem sufficiently wary of ponzi effects. To me a more striking fact is that the proportion of the world’s population who are starving has not decreased for decades. If a starving person had access to fiat money then they would buy food leading to currently fallow land being cultivated. If someone owns all of the productive capacity and everyone else owns nothing then the owner of the productive capacity will not have any customers who are able to pay for the goods so the owners productive capacity will sit idle.
Thanks for the reply, stone. Zimbabwe is the classic example of fiat money not being particularly helpful to an economy. I think if you gave the poor farmer some US dollars instead of local currency, he could by a plow – but in that context, the dollar is actually functioning as a commodity currency, as Zimbabwe does not issue the currency themselves. My understanding so far us that MMT places high value on a sovereign’s ability to issue currency, so that Greece’s relationship with the Euro is quite different from the US’s relationship to the dollar. I get the sense though that the barriers that prevent investing in poor countries are more political than currency related
Ben Kennedy, I think that the critical point is that MMTers aren’t saying that flooding the country with Fiat money would help. Instead of such a monetary policy they advocate directed fiscal policy where money is put in the hands of those who spend it on what is needed. Zimbabwe gov did not provide fiat money to farmers who needed to buy seed and who probably also needed to re-employ the dispossessed previous farmers who had the required expertise. The printed Zimbabwe dollars paid the police etc. The police etc needed to buy food immediately. The police and army were not in the job of lending their pay to the “war veterans” who had newly aquired land but no seed nor farming equipment or know how. Giving farms that have huge running costs to penniless people with no farming competence was a disaster. Zimbabwe was a calamity but I don’t think the MMT policy bears much similarity with what was done in Zimbabwe.
When you say that their are political barriers to investing in poor countries my impression is that the principle of MMT is that poor countries do not need the money of outsiders. They potentially can use their own money to mobilize their own people and resources to create what they need and to trade with the rest of the world on an equal footing. Congo is one of the poorest countries in the world but is a treasure chest of natural resources. The problem is that the country has been continuously looted by its own elite and outsiders.
“It wasn’t the printing of the currency notes that was the problem. It was the fact that there were not enough real goods and services available for sale in relation to the rate of growth of nominal spending (on the war effort) that was the problem.”
Well, the problem was government printing too much money for the goods and services available. So in a way printing of the currency notes is the problem. That is something the government can control but it can control the production of goods and services by the private sector in a free market.
Supply side problems when the country it’s at war or there is political turmoil will contribute to creating inflation in case of a budget deficit.
But I still have not seen what the supply problems were in Brazil and Argentina when they faced hyperinflation in the early 90s.
I agree with your points. I’m not saying MMT advocates helicopter drops of money, I just struggle with the notion that government intervention into fiat money can be productive, as it will distort economic calculation. I think voters intrinsically get this. MMT tell us not to whine about deficits, because national debt is the inverse of national savings. Yet, when actual people see where government spends, they get frustrated. They say, “my taxes are going to WHAT?” This outrage is completely universal. The Left gets upset at bloated military budgets, the Right is upset at bloated ineffective social programs, and Libertarians are upset at everything. Everyone agrees there is such a thing as “wasteful spending”. So what is “non-wasteful” spending? Who defines it when one man’s trash is another man’s treasure?
Ben Kennedy, I think you have a point about people’s expectations and beliefs having a powerful influence. Like MamMoTh I’d love to see an MMT analysis of what happened in Brazil. A momentary googling comes up with stuff saying that in Brazil rampant inflation was driven by inflation expectations (search for how-fake-money-saved-brazil). Perhaps in Brazil no one trusted the old currency for a moment so the turnover rate was very high as any one with the old currency immediately exchanged it for USD. Is it right that Brazil used to import oil so a constant currency slide could have caused inflation a bit like that in the UK at the minute but on a grander scale?. According to that site, when they invented the Brazilian Real, people trusted it for no rational reason anymore than they distrusted the old currency for any rational reason. People in Japan seem to have total trust in the Yen and the more that gets printed the lower the turnover rate so slow deflation occurs come what may.
I share your concern that gov can find it hard to impossible to sensibly run the economy. The Soviet Union demonstrated how state control is only fine if you want to have a Space program, Olympic records and famines. I thought that the Job G scheme Bill advocates is supposed to only ever employ a small proportion of the workforce. The idea being that when those on the scheme are earning, then their spending will stimulate the private sector and so create real jobs. Personally I’d prefer just to have a very arms length gov program of moving the tax burden to an asset tax and away from the existing taxes and also to have a citizens’ dividend paid out to everyone. Then it is up to each individual what is trash and what is treasure and no one is imposing their values on anyone else.
To me much of our problems stem from the global economy constantly being sidetracked into Ponzi asset bubbles and away from providing genuine goods and services. Ponzi effects seem to me symptomatic of wealth inequalities.
much of my anxiety with MMT is that it doesn’t always seem sufficiently wary of ponzi effects.
stone, you do realize that MMT is based as much on Minsky as Lerner and Godley, don’t you? If you don’t realize this, you need to read more broadly in MMT.
After all, Randy Wray was a PhD student of Minsky and The Kansas City School is thoroughly Minskian. MMT’ers, specifically Wray, were warning of Ponzi finance developing long before the crisis hit. Have you read Warren Mosler’s proposals to reform the financial sector along MMT lines?
Tom Hickey, my anxiety stems from my impression that MMTers seem to talk out of both sides of their mouths on this. The focus is so much more on the spending than on reigning in asset bubbles. Personally I think if they reiterated some of what they have said about asset bubbles as much as they reiterate what they say about lack of spending constraint, then MMT would have far more widespread acceptance. Bill’s statement that Banks should not be able to make secured loans (and so should only lend on the basis of cash flow) is to me crucial but seems so seldom made. I also think MMT has a blind spot when it comes to the dangers (as I see them) of some people accumulating levels of wealth (as denoted in terms of say “median wage years”) that would simply be an accounting impossibility under other systems. If people are sufficiently wealthy then they will be able to corner markets without any need for leverage. I get the impression that MMTers cross their fingers and hope that so long as the gov is not revenue constrained, then the gov will be able to direct things appropriately however wealthy the oligarchy becomes. Personally I think that oligarchs will simply take over the gov.
The UK has used ponzi effects to enable our trade deficit ever since Thatcher. Personally I’m very ashamed of that. I think it is as shameful as what my great grandparents did as colonialists.
” If people are sufficiently wealthy then they will be able to corner markets without any need for leverage. ”
That’s a tax policy issue, not an operational one.
Vote for the politician with the widest definition of price stability and a wealth tax on the manifesto.
Neil Wilson, I guess I find it hard to fathom that sentiment that spending is economics but tax is just a political add on. To me the whole system is integrated and whether or not the global economy ends up providing most people with food, sanitation etc depends as much on tax (so as to prevent ponzi effects from sidetracking economic activity) as it does on spending.
Ben Kennedy: “when actual people see where government spends, they get frustrated. They say, “my taxes are going to WHAT?” This outrage is completely universal.”
No disrespect, but to me that apparently universal outrage indicates civic immaturity. A large country incorporates varied and contradictory views and desires. To attempt to prevent gov’t spending that you do not want but what other citizens want is to attempt to disenfranchise them. Sure, you fight for and vote for what you want and think is best, but the votes decide. Not to accept the results of voting is not to accept democracy.
Hi Min – my point is related to economic calculation. I agree that a society should support varied and contradictory desires, of course. The issue is whether government spending actually does this. or if government spending inevitably leads to socially suboptimal levels of expenditure. Right now, I have head it estimated that the US spends $800 billion per year on the military (including military-related expenditures in other departments like energy and vet affairs). I think this is above the socially optimal level of military spending. Sometimes government can underspend as well if they have a monopoly in an area and don’t choose to maintain it (think roads). This is why I question how any government central planner can actually make a decision that makes more people better off than had each person made their own decision and acted accordingly.
Ben Kennedy: “if government spending inevitably leads to socially suboptimal levels of expenditure.”
Of course it does. Nothing is perfect.
“This is why I question how any government central planner can actually make a decision that makes more people better off than had each person made their own decision and acted accordingly.”
Your examples, which I happen to agree with, are not the result of gov’t central planning, but of politics. Would things be better with a weaker gov’t? I doubt it, since the examples you give are the result of the political power of those who advocate weaker gov’t.
We learned in the 19th century, or should have, that laissez faire allows the concentration of economic and political power at the expense of the common good.
“Your examples, which I happen to agree with, are not the result of gov’t central planning, but of politics. Would things be better with a weaker gov’t? I doubt it, since the examples you give are the result of the political power of those who advocate weaker gov’t.
We learned in the 19th century, or should have, that laissez faire allows the concentration of economic and political power at the expense of the common good.”
I think you need to take a closer look at how government interacts with business. Business essentially uses government as a hammer to increase monopoly power and chase away potential competitors. Ask banks if they would prefer a world with or without FDIC and the federal reserve. Ask the AMA if they would prefer a world with or without strict medical licensure requirements. Ask teacher unions if they would prefer a world with or without mandatory public schooling. Ask any media company if they would prefer a world with or without copyright law. Ask any pharma company if they would prefer a world with or without patent law. Anti-pollution laws tell business exactly how much they may pollute with no legal consequences. Financial regulation lets businesses engage in risky-but-legal behavior knowing they are to big to fail. At every turn, government is in fact the very tool that allows for increased concentration of economic and political power which you oppose. Across the board, established businesses always prefer the existence of government to restrict competition.
By contrast, the free market brings innovation into society. It increases productive capacity and standard of living. It disseminates creativity and invention throughout the world. The 19th century proved that an unplanned, free society can transform itself from an agrarian nation of farmers the most advanced industrial society in the world. Meanwhile, government takes credit for all human progress, and quickly blames the free market for it’s own failures. Just look at the recent financial crisis, which had absolutely nothing to do with free markets and everything to do with the close relationships between businesses and government.
We’re not a democracy; we’re a Republic whose government has limited powers. “The will of the people” is not a sufficient answer to the question, “Quo warranto?”
Ben Kennedy, ask yourself who created internet that you use to socialize. And then ask business, banks, AMA, teacher unions, media companies, pharma and everybody else whether they would prefer a world with or without internet.
You can not blame the government for doing something wrong. Government is a tool of modern society and you can not blame the tool for what it does. If government does something wrong according to *your* view, then it is *your* fault. By blaming the government you either avoid your personal responsibility for your own happiness or reject basic democratic principles. Such behaviour (shifting responsibility) is well understood by psychologists. It is also very common and happens on all levels. And obviously much more so with the government.
You can always find anecdotes to prove the point *you* want to make or disprove the point of the other side. But none of this makes any point to be a valid one. You need to abstract from reality first, before you can proceed to real life arguments and use them to prove or disprove your idea.
The precursors of the modern Internet were dial-up services like CompuServ, which had hundreds of thousands of users before even connecting to the Internet for e-mail and 1989. Similarly there were Prodigy, GEnie, AOL, and thousands of individual dial-up bulletin board services. Note that they were dial-up, piggybacking on existing phone services, not on academic “internet” technology. Only after these services have millions of subscribers do we see the internet “upgrade” itself so support increased demand. But because government happened to fund DARPA in the 60s, the Internet is a government success story? I guess I have to disagree with that one. When demand increased, the market quickly found new ways to provide content over copper wire, existing cable wires TV, the airwaves, etc.
With regard to “government as a tool”, I should be more precise in my terminology. There are ultimately two, and only two, modes humans can interact with each other. They can cooperate, where they do no force their will upon each other, and thus mutually satisfy their needs. Or they can war with each other, attempting to take what they need from each other. That’s it, cooperation or coercion. In my estimation, cooperation is an infinitely superior way of doing things because cooperation entails division of labor, specialization, and the modern society we have today. Coercion leads to war and death, and in our modern society it leads to moral hazard, perverse incentives, and a net loss to human welfare as a whole.
I object to “government” to the extent that it uses coercion. Consequently, I have little regard for “basic democratic principles” that say that 51% of people can push the other 49% around. It may democratic, but it certainly isn’t a moral principle I find particularly compelling. What if 51% of people want to steal or kill? I certainly reject that.
“But because government happened to fund DARPA in the 60s, the Internet is a government success story?”
I guess you will claim the same for nuclear power, solar power, mobile phones, navigation systems and so on. Whatever… I got your point but this is not my point.
“What if 51% of people want to steal or kill? I certainly reject that.”
Surely you can reject it. But at the same time you can not blame 51% for doing what they do. And obviously 51% shall not care about what you think. This is what the majority rules says. Do not like? Change it! My point is that regardless of per cents it is your responsibility to ensure your own happiness. You can not shift this responsibility onto anybody else. It is easy and very enticing to shift it in particular onto a speechless government and then blame it for not living or not delivering upto your *untold* expectations. And that is what most if not all people do. But be honest. It is not a government’s fault. Government is just a tool and it does what other *people* want it to do.
“My point is that regardless of per cents it is your responsibility to ensure your own happiness. You can not shift this responsibility onto anybody else. It is easy and very enticing to shift it in particular onto a speechless government and then blame it for not living or not delivering upto your *untold* expectations. And that is what most if not all people do. But be honest. It is not a government’s fault. Government is just a tool and it does what other *people* want it to do.”
Well, I certainly agree that people are responsible for their own happiness. I don’t want to give the impression that I have a problem with “government the tool”, but have no bad feelings toward the people that use government to evil ends. That is not my point at all. Rather, I would oppose *any* person or group people that use force to get what they want, whether it be a gang of muggers or a modern nation state. If there were a government that renounced the use of force, I would have no problem with it.
I guess I have to disagree with that one. When demand increased, the market quickly found new ways to provide content over copper wire, existing cable wires TV, the airwaves, etc.
That was not a market initiative, that was the government especially the defense/military. In the early 1980s RF was generally the domain of the military. It was used by the US as a weapons arsenal for things like radar and anti-jamming devices. It only changed when the FCC (Federal Communications Commission) made several bands of wireless spectrum, the Scientific, Industrial and Medical (ISM) bands available to the public on a license-free basis. Whether they realised it or not, they planted the seeds of what would one day be a multibillion-dollar industry.
Today it is driven by consumer demand for wireless applications ranging from Bluetooth, Wi-Fi (802.11WLAN), Wimax. 3G,4G mobile technologies like CDMA, EGPRS, GSM, but that was not always the case. You can’t just transmit your own radio channel without it interfering with other channels so it is tightly regulated. For christsake even paintballing was used in the military before it entered the public domain. I know you don’t like government use of force but unfortunatlely most of the technologies today are because of the threat of that force. Would the car industry in the US have taken off if Eisenhower hadn’t built the Interstate Highway System? “Free” shipping lanes?
“I know you don’t like government use of force but unfortunatlely most of the technologies today are because of the threat of that force. Would the car industry in the US have taken off if Eisenhower hadn’t built the Interstate Highway System? “Free” shipping lanes?”
If a particular social activity is indeed beneficial, it does not take too much imagination to see how private civil society can provide that service. With regard to roads, Walter Block wrote a whole book on it, available at http://mises.org/books/roads_web.pdf. I don’t have a “what if” machine, but I doubt that absent a public road system Americans would simply resort to giving up our cars and walking everywhere. Perhaps we would have seen more regional highways and less interstate highways, who knows.
As for the airwaves, Murray Rothbard has some useful points: http://murrayrothbard.com/Notes_on_Repression.html . He asserted that courts were well underway to establishing property rights for airwaves based on basic homesteading principles before the airwaves where nationalized in 1927, after which the issue become moot. Maybe we would have been better off had people had access to the airwaves claimed by the military.
Murray Rothbard wanted to privatize the oceans, too. Gimme a break. One this philosophy, we would have private armies. Oh, wait, we already do (formerly Blackwater, now Xe).
Google for ‘seasteading’, it is an interesting topic. I also suspect that if there were true competition in national defense, the US would be spending far less that $800 billion a year defending ourselves from Canada, Mexico, and Al Queda. Generally people cite – national defense and court systems as the areas where coercive government is necessary – but with an open mind and a little bit of thought on the subject it is pretty easy to see the virtue of private competition even in those areas.
Ben Kennedy, whether or not gov is best placed to carry out road building etc seems to me to be slightly separate from whether, in the absence of coercive redistribution, the economy slides to a non-productive stalemate with economically inactive, impoverished/indebted masses and an ever smaller “owning class” . To my mind even if you want the gov to do nothing else, it needs to constantly redistribute wealth if things are to function OK (unless the economy is small tribes that don’t use any form of money or debt and don’t have access to metal to cut each other up with :)). An asset tax and citizen’s dividend arrangement is coercive redistribution whilst leaving people to make their own minds up as to what to do.
stone, thanks for the reply. One consideration in wealth redistribution plans is the effect on the beneficiaries. It is full of moral hazard as it creates perverse incentives to be unproductive (though a lot of these issues were addressed in the US in the 90s). Note that I am no way against charity. I distinguish between charity that is relief (meeting an immediate need, for example tsunami survivors) and charity that ought to be developmental (lifting people out of poverty). You rightly use the phrase “economically inactive, impoverished/indebted masses”. They are poor because they are not involved in the economy on a continuous basis, and simply giving them wealth does not solve their fundamental. It can in fact worsen it. I think most people can agree that the very last thing you want is to create government dependents.
If I had to pick a tax for the purposes of wealth distribution, I’d probably pick a consumption tax – despite being coercive, at least people have the option of not paying it by saving less and investing more.
Ben Kennedy, I’m not sure when you state “simply giving them wealth does not solve their fundamental”. We have had a few TV series in the UK following people in slums around the world. A recent one was in Kibera in Kenya. People there seemed to spend all day looking for work doing washing etc. They would eventually find a couple of hours work and that would just about pay the rent for the awful shacks they lived in and keep them alive. I can not imagine how any imaginable pressure could make them more desperate to earn money. Surely simply giving wealth to such people would enable them start more productive enterprises etc etc? To my mind if everyone received exactly the same citizens’ dividend then that would not constitute a moral hazard. My guess is that such a system would actually result in fewer people not working rather than more even though in principle it would be possible to live as a gov dependent. If you wanted to stand out as being more wealthy then you could only do so by earning it. I realize economics is always tangled in politics.
Muhammad Yunus won the Nobel Peace Prize for his work with ‘microcredit’, which is the typically cited free-market approach to fighting poverty – though lately he has been under some political fire. Microloans are good because they create a very positive mentality for the recipient. Thinking of assistance as simply a gift can make people feel dependent and infantilized, which is not good. Similarly, thinking of assistance as an entitlement clearly creates a rift between the giver and the receiver, which is not constructive. Modeling assistance as a loan creates feelings of positive worth in the recipient, and creates an incentive structure that encourages people to invest.
Another problem with guaranteed assistance programs is that they will tend to distort wages – one study at http://www.dsausa.org/lowwage/walmart/2004/walmart%20study.html shows how the workers of one American chain often end up on public assistance. I don’t blame the workers, nor do I blame the retailer for having “sub-standard” wages – both are responding rationally to the incentives that exist. It shows how when government assistance programs exist, market forces will push people into those programs even if they don’t want to be there. Right now something like 42 millions people on the US are getting “food stamps”, a form of food assistance. I really doubt that if they program blinked out of existence, 42 million people would begin to starve. Rather, I think it is likely that wages and food prices have adjusted knowing that those programs exist, which unfortunately force even more people into those programs.
Ben Kennedy, I think the points you raise really get to the crux of everything. When you say “They are poor because they are not involved in the economy on a continuous basis” what do you think could be done to enable them to become involved ? To my mind wealth has a natural tendency to concentrate and as it does, more people become economically sidelined. People who own nothing provide and have scant money making opportunities. China is happy to give loss making loans to set up Chinese companies in Africa. Perhaps those will do a good job but to my mind it is a shame if the “Free World” is unable to come up with a system that reduces the proportion of the global population in starvation and without sanitation etc. Apparently in 1950s USA everyone said Marx was wrong about Capitalism being unsustainable because Marx hadn’t factored in the New Deal. People now seem happy to forget about all of that and just bask in “we have the least bad system” complacency.
My last post is in the moderation queue because it has a link, but google for ‘microloan’ and ‘microcredit’, a concept for which Muhammad Yunus won the Nobel Peace Prize. I understand your concerns about wealth distribution. I will maintain though that coercion simply is not an effective social tool for this. Can the poor coerce the powerful into giving up their wealth? Clearly not, because the poor are powerless. Is it merely a coincidence that in every time and every place and every form of government, the political power elites are the wealthiest? Throughout history, in every form of government, it has always been the case that rulers use their power primarily to maintain the status quo and enrich themselves. This can happen even in capitalist societies, as the recent financial crisis shows. The common denominator is not the economic system, but the use of coercion. In a world without the use of force where all transactions are voluntary I don’t think you would see the poverty that afflicts so many.
Ben Kennedy, I was initially a great fan of microcredit but I heard a tragic program about how in India there had been a spate of suicides by people who had run up “unpayable” (ie $100) debts originating from well meaning microcredit projects. If the debts drain out to creditors outside the community then that will be an eternal drag. The initial Muhammad Yunus loans apparently only worked because they were not really commercial and so in effect were more “micro-helicopter money drops” rather than genuine microloans. The Chinese loss making African loans are a close equivalent but on a huge scale.
I do take your points about how money tends to capture gov. Potentially democracy “could” result in votes counting for more than money. To my mind people need to stand up against both excessive gov power and also excessive financial power. That is always going to be a delicate balancing act. It would be so nice if eroding gov power simply led to an evaporation of excessive financial power. My presumption is that the concentrated financial power holders would simply themselves morph into what was effectively a repressive gov. Isn’t Haiti an example of a country that has a very feeble gov and yet is under the strangle hold of its wealthy?
Like any market, there can be scrupulous and unscrupulous participants. Some people think that any attempt to “make money off the poor” is automatically exploitation. The way I see it, as long as you are not lying or committing fraud, the poor person has a choice to engage in the business or not. Over time, people will quickly discover which avenues are successful, and which ones are not. Microlenders who charge 90% interest and drive their customers to suicide will lose market share. Grameen in 2008 reported repayments rates of 98% and they only lent to groups of borrowers so help ensure repayment, so perhaps that model should be copied. People even in industrialized societies commit suicide when they get into unpayable debt, so that should be be surprising either.
I truly do think that eroding government power is the first key step in eroding financial power. In a real free market, all business in every industry in every place make the same amount of profit over time. This is because when somebody figures out a way to do something better, it is immediately copied and the competitive edge is gone. If one industry becomes more profitable, then more competition enters it, lowering the rate of profit to the general rate. Whenever a sensation hits the market, it is always followed by the knockoffs, whether they be teenage wizard books, teenage vampire books, or cheap portable music players. So atypically high “financial power” can only occur when something interferes with the natural profit-flattening process. Due to imperfect market conditions, even a natural flattening can take a lot of time. But when certain industries seem to remain highly profitable for a long time (US financial sector, clearly) we need to be suspicious. Artificially high profits imply someone is using coercion to restrict competition, which can usually be traced to some government activity – thus my skepticism of governments in general.
As for Haiti, a century of occupation by first the US military and later by 29 years under a Duvalier last that country in shambles, not to mention the US helping depose democratically elected Jean-Bertrand Aristide twice. I have no idea how to help Haiti, but I am hesitant to simply blame wealthy people on their troubles
Ben: Right now something like 42 millions people on the US are getting “food stamps”, a form of food assistance. I really doubt that if they program blinked out of existence, 42 million people would begin to starve. Rather, I think it is likely that wages and food prices have adjusted knowing that those programs exist, which unfortunately force even more people into those programs.
What is your version of what would happen instead? And what is your version of what would happen to the economy if those funds were not injected?
Wal-Mart workers earn less than non-subsidized workers, but the work is essentially the same – we must conclude that workers value the overall wages similarly. Substandard Wal-Mart wages plus the subsidy have the same economic value as standard non-subsidized wages that include benefits. However, the labor cost is less for Wal-Mart, specifically less the cost of the subsidy. Wal-Mart, being a rational competitor, will set their prices to just below the non-subsidized competition that uses non-subsidized workers. Wal-Mart then pockets the amount of the subsidy as profit. This allows Wal-Mart to expand market share, bringing more workers in and increasing the total number of subsidized workers.
If the subsidy goes away, workers will re-enter the labor pool seeking the same value they have before. The size of the labor pool will increase, but Wal-Mart will be forced to bid against the retailers that use non-subsidized workers, so wages will equalize to the original non-subsidized rate. Wal-mart will be forced to forgo the profit that had previously been collecting. At the end of the day it helps the consumers, as rather than paying the subsidy to the state they instead pay slightly higher pices to Wal-Mart. The workers receive the same economic value they had been receiving before via higher wages from Wal-Mart. The only loser is Wal-mart who does not receive its profit-via-subsidy-via-taxpayers, which is a good thing.
I’m sure that some of the 42+ million people on food stamps actually need them, but I really think it often ends up being another form of corporate welfare.
Ben Kennedy, I could follow your argument were it not for the fact that their is only so much land in the world. If someone owns the land and uses that ownership to extract any surplus production by the tennants, then new land can not just be conjured up so as to out-compete the landlord. “Land” can be viewed quite widely to include any limiting natural resource. In America the early settlers were each given a plot of land. It has been said that much of the success of America came from that widespread property ownership. Although land is the most clear cut case, I think ownership of other types of asset can also give the owners a similar strangle hold. To my mind an asset tax is required not so much to provide “revenue” but to ensure that concentrated ownership does not snowball as it has been doing for the last few decades. Please explain how a flat asset tax and a flat citizens’ dividend could slip into being corporate welfare (every citizen has to pay say 3% of their gross asset holdings as an annual tax and that tax is distributed as an equal dividend to every citizen).
Ben Kennedy “I really doubt that if they program blinked out of existence, 42 million people would begin to starve. Rather, I think it is likely that wages and food prices have adjusted knowing that those programs exist, which unfortunately force even more people into those programs.”
Saddly there are plenty of examples of sub-starvation wages without any foodstamp program in the background. The new minimum wage in Bangladesh is 21 US cents per hour. Before that minimum wage was introduced, jobs were massively over subscribed even though they paid much less. In a free market with concentrated ownership, the only floor to wage levels is if the workers starve to death to the extent that there are no workers remaining to do the work.
Ben Kennedy, whether or not people starve to death has minimal influence on food prices. If there are some people who can aford to throw away uneaten beef raised using grain and soya as feed then that will compensate for numerous people starving to death because they can not aford grain and soya to eat.
ouch, microfinance… I should try to keep quite because I am ready to explode…
Microfinance is another neoliberal lie pushed down on the least educated the least capable people in the least developed countries under the banner of development. There is probably hardly a bigger lie in the whole world of neoliberalism than this one. Why do we have this crisis and collapse of economic activities? It is because people can not carry all those debts. And you seem to believe that microfinance can solve all problems.
re the Nobel peace prize you can have a look here _http://www.upress.umn.edu/Books/K/karim_microfinance.html It is all same old neoliberal theoretical story burned down in the real world
And btw the Nobel prize winner was even in the news a couple of days ago _http://www.guardian.co.uk/global-development/poverty-matters/2011/mar/09/microfinance-neoliberal-fairytale
stone, I share your concern about land. I think that through time and natural market forces work to accomplish your goal. That is, absent an absolute king who has the legal title to the land and laws that enforce primogeniture, your result happens naturally. Even all the original plots of land given to early settlers in the US have been subdivided again and again. I would guess that the average size of a plot of land has fallen dramatically in the UK too over time. Yet how do we explain the recent accumulation of large sums of money by corporate executives and such? I think it is best explained by people using government to enrich themselves. In a truly free market (no FDIC or Federal Reserve), Wall Street executives have no ability to make their huge sums of money.
I haven’t thought that much about what citizen’s dividend would do, but it seems like it would avoid disincentives to work, which is good. The always controversial Charles Murray proposed something similar he called “The Plan” _http://old.nationalreview.com/interrogatory/qa200603270732.asp . If such a dividend would simply replace the current welfare state, I think it would be an improvement as you retain all the benefits of market-based economic calculation, and avoid stranglehold the special interests have on government. Giving government fewer knobs to turn is a good thing.
What turns sub-starvation wages into non-starvation wages are increases in productive capacity to create or purchase food – a minimum wage increase is good for some people, but it reduce employment in the marginally least productive workers, as it will no longer be economically viable to employ them. In the US, this has a huge impact on minorities, where over 50% of black males between 16 and 19 are unemployed. If raising the minimum wage is helpful, why not raise it to 24 cents and hour? or 27? Why are minimum wages laws favored by unions even though union members make substantially more? Because they know it disemploys the competition – lowered skilled workers.
Regarding microfinance, I never claimed it is a be-all-end-all solution, I just cite is an example of how market forces can work to reduce poverty and address the fundamental needs of the poor to get integrated into the economy. I’m happy to hear other ideas anybody has as well.
Ben Kennedy, actually the UK is a case in point where over time land has not become redistributed. A handfull of landlords still own much of the land in the UK and in many cases the same families have done so since they were given the land when the Normans invaded in 1066.
I favour a citizen’s dividend over a minimum wage or means tested benefits because I also see the problems you describe. The point of a citizens dividend is that everyone would get it irrespective of what work they did. Tiny wages would probably not tempt people to work if they were receiving a citizens dividend unless they themselves valued the work or if they were for instance offered an equity stake in the company and beleived it would work out.
Ben Kennedy I don’t understand “What turns sub-starvation wages into non-starvation wages are increases in productive capacity to create or purchase food”- The current global economic system has failed for the last few decades to reduce the proportion of the world’s population who are starving. In that time there have been massive improvements in productive capacity.
I looked around for statistics on land ownership but didn’t find any. However, I’m fairly confident that there are probably more distinct landowners today in England than there would have been in 1066. While I’m sure some families have owned land for generations and generations, the general trend is subdivision. Where I am in the US, nearly all the land is subdivided into single family plots from their original grants. I know of one arboretum that was created out of 1/3 of an original land grant, but that is it.
With regard to starvation, there is a lot of interventionism that gets in the way of getting food to hungry people. The regimes that are in charge of starving people tend to be some the most corrupt and exploitative on the planet, making it hard for NGOs and other people who care to help. So I think food is largely a political issue. By contract in 2006, Japan was able to self-produce only 39% of the calories it consumed (_http://search.japantimes.co.jp/cgi-bin/nn20080226i1.html), yet Japan does not starve because they have a relatively freer society and a functioning economy where citizens have access to international markets
Ben Kennedy, Japan is an interesting case in point. After WWII Douglas MacArthur forced the Japanese aristocrats to sell their land to the tennants at very reduced prices. Industrial workers were also encouraged to unionise by the American occupying regime. In the 1940s the “American way” was tied up with equality of ownership. To my mind it seems miraculous how far the popular perception of the “American way” has transformed in just a generation or two. Might Japan’s current prosperity partly stem from coercisive distribution of wealth forced through by the Americans in 1947 ?!?
I also think it important to view asset holdings more widely than just land titles. If a few people own an overwhelming level of bonds or stocks then that can also result in a similar stifling control over those without ownership.
To my mind the problem arises whenever holding assets is by itself a means to aquire more assets. If such aquisition of assets is simply a case of taking a larger slice of a fixed pie, then the system is clearly unstable. The process is worsened if concentrated ownership leads to less effective use of resources (and so a smaller pie) on the one hand and monopoly powers on the other hand (so facilitating grabbing an ever bigger slice). I totally agree that gov can be coopted into worsening that trend. However even if the only thing gov did was to enforce property law, then that trend would still be a core bug of capitalism. Historically wealth seems to become more and more concentrated during peace time and then the system gets rebooted by war. Gov enforced redistribution may be a less tragic way forward.
I’m not entirely sure that only repressive gov have starving populations. Although India has not had a full blown famine since independance and the introduction of democracy, nevertheless many Indians do starve. News reports don’t seem to blame active gov meddling or appropriation – rather it seems to be a lack of adequate gov intervention in what would otherwise be a worse situation.
“Might Japan’s current prosperity partly stem from coercisive distribution of wealth forced through by the Americans in 1947”
It is hard to pinpoint the exact causes, and I would be surprised if that was a contributing factor. That doesn’t mean that it was worth the cost of WW-II. Japan certainly didn’t have to work to maintain its military capability, which I’m sure was another big factor as well. I think recent history also shows that imposing democracy doesn’t always work (Iraq), and it is possibly to have economic liberalization without a regime change (China).
“I also think it important to view asset holdings more widely than just land titles. If a few people own an overwhelming level of bonds or stocks then that can also result in a similar stifling control over those without ownership.”
I just don’t see how this plays out in a truly free society where government is not protecting the wealthy. In such a society, one can only accumulate through free, voluntary trade with others who value what they receive more than what they have given up. So overall, society has given up something they value less for something they value more. That can’t be a bad thing by itself.
However, your criticism is that large accumulations of wealth in a free society someone enable the accumulator to have more power. Your first objection is “concentrated ownership leads to less effective use of resources”. This could very well be so, but their is a built-in solution for this – business failure and bankruptcy. If a large firm get big enough they begin to fail in the problem of economic calculation. Smaller, more efficient firms will bid up the price of resources or force prices lower to where the big firm can no longer earn a profit. Thus it fails, and through bankruptcy the assets are auctioned off to the smaller firms. I think “too big to fail” is one of the most deceitful phrases ever coined.
Your second objection is “monopoly powers”, where a large firm uses its market share to enter another line of business at a loss, driving out competition. The problem is that this strategy never works in the long run, as intentionally losing money is a poor way of doing business. Speculators may begin to buy the product of the would-be monopolist, further causing them to lose money. Existing competitors may simply go into hibernation until the would-be monopolist is inevitably forced to raise prices. Another form of supposed monopolist behavior is that he lulls everyone into a false sense of security with comfortably, then suddenly raises prices and starts reaping huge profits. Should any company actually do this, they will immediately be swamped with competition trying to exploit the new profit opportunity, not to mention that the price raising firm will be run out of business due to popular anger.
G’day Bill, what are your thoughts on a Sovereign Wealth Fund or the Future Fund. If your theory holds true then these are pointless wastes of time because the money could be created when needed at a later date rather than saving it now for a rainy day, is that correct? I was reading a discussion about it on the Australian Property Forum (see discussion below)
How can it the that saving for a rainy day is no longer a good idea? That’s what MMT seems to suggest!
“Here’s some thoughts on a SWF.
Just like Central Bank foreign reserves I see it as an absurdity in a world of floating exchange rates. It comes down to governments having a punt on the foreign exchange markets.
Firstly, why do the RBA hold foreign reserves. There can be only two reasons:
a) to make money
b) to control exchange rates.
The first is not admitted. Last year, I believe the loss on their foreign reserves due to the rising AUD was about AU$8 billion. A loss which is transferred to the government accounts artificially leaving the RBA accounts looking healthy. Any loss of the RBA is born by the gov and any profit by the RBA taken by the gov. That rules out (a).
It appears that the reason they hold foreign reserves is (b) enabling them to buy AU$ if the value falls. There have been examples of them doing this. But it can only be very short term fiddling. The RBA has no real power to hold up the AU$ in the global markets of today. Norman Lamont discovered the reality of that nearly 20 years ago and the markets are much more powerful nowadays.”
Now if that’s all true, where does our government stand today with a Future Fund and defecit at the same time, makes no sense??
There’s another discussion here about the fictitious “Bartonland”, an imagined world designed around MMT…… very interesting!
Introducing Bartonland, and it’s new monetary system
Great blog Bill, glad I found this (found it from a link on the Aussie property forum above).
All the best,
Here are a couple great articles from Forbes with great info in agreement with Prof. Mitchell.