Some appalled economists – just missing the boat

In January 2011, 44 per cent of Spanish working people below the age of 25 were unemployed. A year later Eurostat report (in its March 1, 2012 publication) – Euro Indicators – that the rate has climbed to 49.9. For the overall labour force in Spain, the unemployment rate rose from 21.7 per cent to 23.3 per cent over the same period. That is Great Depression-type magnitudes. At the other end of the unemployment spectrum, currently, is The Netherlands. Their overall unemployment rate has risen from 4.3 per cent in January 2011 to 5 per cent in January 2012. Notwithstanding the massive underemployment in The Netherlands (almost 50 per cent of the working age population work part-time – average is less than 20 per cent for EU) and the large proportion of workers hidden from unemployment by disability support pensions – this is a low unemployment rate. And therein lies the rub. The Dutch Centraal Planning Bureau released its latest – Short-term forecast yesterday (March 1, 2012) which showed that over the next 4 years it will violate the current Stability and Growth Pact (SGP) and face fines under the Excessive Deficit Procedure. And to put a finer point on this – the Dutch government has been one of the more rabid proponents of fiscal austerity and one of the first to heel-click in line to sign Germany’s … sorry the EU’s fiscal compact. All of that should tell you that the current leadership in Europe has no viable solution to its crisis. Some French economists have come up with a solution. This blog considers their work and concludes they are on the right track but haven’t penetrated all the neo-liberal myths that they seek to highlight.

In this context, I read an interesting “manifesto” from a group of French economists this week – Manifesto of the appalled economists – the title of which might reflect a clumsy translation. They hail from an organisation – Les économistes atterrés and say that “Nous sommes économistes et nous sommes atterrés” (We are economists and we are appalled).

The manifesto was titled – “Crisis and Debt in Europe: 10 Pseudo Obvious Facts, 22 measures to drive the debate out of the dead end” (which, although the English isn’t perfect is comprehensible enough.

The first observation I would make is that while the intent of these economists is probably sound they fall into the same sort of traps that the mainstream economists fall into and which have led to this debacle.

For example, they say:

In the European Union, these deficits are certainly high – 7% on average in 2010 – but this is much less than the 11% in the United States.

To which a proponent of Modern Monetary Theory (MMT) would simply say – yes, historically high in both cases, but the comparison between the EMU nations and the US is invalid. The latter issues its own currency while the former use a foreign currency.

Which is why – as the Manifesto notes – “financial markets have decided to speculate on the sovereign debt of European countries, especially those of the South” rather than the US. While the Manifesto seems surprised by that choice – given that 11 per cent is higher than 7 per cent and in their logic must pose a greater risk of insolvency – the explanation is simply expressed in terms of currency sovereignty.

So bear that in mind as you read on. These economists clearly understand that something is deeply wrong in Europe but cannot quite grasp the entire picture because they are still locked into mainstream notions of public finance and fiscal sustainabilty.

They certainly understand a point that is now becoming clear – that the disastrous economic consequences of imposing harsh fiscal austerity onto an already flawed monetary system will:

threaten the European construction itself, which is much more than an economic project. The economy is supposed to serve the construction of a democratic continent, peaceful and united. Instead, a form of dictatorship of the market is being imposed everywhere, and especially today in Portugal, Spain and Greece, three countries that were still dictatorships in the early 1970s, only forty years ago.

In public presentations about the EMU I make the same point. The “European Project” being principally designed to stop France and Germany engaging in on-going wars and roping other nations into intermnible conflicts was sound and produced major gains in the region since the disastrous World War 2 ended.

But the economic project went one step too far and now is undermining the political gains that were made. Evidence of this is the increasing rancour between Germany (the “ugly German”) and the South etc. It might end up that as the economic project falls apart completely, the remaining political accords are severely compromised.

The Manifesto also is correct in noting that “(m)ost of the economists who participate in public debates do so in order to justify or rationalize the submission of policies to the demands of financial markets” and willingly are used by political leaders to give authority to policies that are impoverishing millions through unemployment and social security retrenchment.

The elevation of financial markets to the pinnacle of policy concern is one of the most obvious features of the neo-liberal era. Thirty years ago national news bulletins never carried a nightly “finance report”. Now they are compulsory and every night we are subjected to some presenter telling us about a plethora of financial data (usually with little economic content) that very few people understand beyond the most glib level. Presumably, the television and radio stations think this is information that is relevant.

I would prefer the news reports carried information each night about poverty indexes, unemployment, job loss etc. These are real things that are important for the majority of us.

A sovereign government can always render the impacts of financial market gyrations on the real economy benign. The fact that the Global Financial Crisis became a real crisis is largely because the governments didn’t use sufficient stimulus when it was obvious the property markets were collapsing in the US and Europe.

But as our French economists tell us the “neoliberal paradigm is still the only one that is acknowledged as legitimate, despite its obvious failures”:

The crisis has laid bare the dogmatic and unfounded nature of the alleged “obvious facts” repeated ad nauseam by policy makers and their advisers. Whether it is the efficiency and rationality of financial markets, or the need to cut spending to reduce debt or to strengthen the “stability pact”, these “obvious facts” have to be examined, and the plurality of choices of economic policies must be shown. Other choices are possible and desirable, provided that the financial industry’s noose on public policies is loosened.

There is a lot of work to be done in the area of the “sociology of knowledge” to explain how the dominant neo-liberal paradigm has been able, so far, to withstand the crisis it created, failed to predict, and made worse once it occurred.

This would be a very interesting exercise for a student in the philosophy of science who was keen on economics.

Anyway, the Manifesto then outline “ten premises that still inspire decisions of public authorities all over Europe every day” even though they run counter to the facts.

Here is a brief treatment of these “premises” (which they call “Pseudo obvious facts”).

Pseudo obvious fact 1 – Financial markets are efficient

They argue that one of the defining features of the neo-liberal era has been the growth of the financial markets under the guise that self-regulating markets are efficient – that is, allocate capital to its best use – and, as a result, will deliver optimal outcomes for all (that is, wealth maximisation).

The dominance of this thinking led to massive deregulation and an abandonment of financial oversight by authorities and the rest is history.

But while we were told to believe in the The Great Moderation myth which said that the “business cycle is dead” and governments should only focus on microeconomic reforms (that is, “freeing up” markets), the reality was that the self-regulating markets were incapable of acting out the perfectly competitive-perfect foresight narrative that the textbooks dish up to students of macroeconomics each day.

In the period leading up to the crisis, capital was badly allocated (for example, concentrated into real estate assets which blow up) and risk became impossible to assess, so oblique were the financial derivative products that the markets created to bamboozle unsuspecting investors.

So a theory that claims that prices in the market always reflect the “investors’ appraisals and synthesizes all available information” given that those investors have the “most reliable information” is deeply flawed. Then add in the fact that the ratings agencies were being paid by the originators of the products to give them ratings that both parties knew were invalid but would entice investors to make poor decisions.

As the Manifesto says the crisis has laid bare the myths of efficient markets. Feedback mechanisms that the Manifesto says operate in goods markets (like price rises rationing demand) and which bring some sense of stability are absent in financial markets. There “price increases … [often lead to] … an increase in demand!”

As a consequence, these markets are prone to instability and the price signals the “market” generates are not efficient at all.

They propose to:

Measure 1: To separate strictly financial markets and the activities of financial actors, prohibiting banks from speculating on their own account, in order to prevent the spread of bubbles and crashes.

Measure 2: To reduce liquidity and destabilizing speculation by controls on capital movements and taxation on financial transactions.

Measure 3: To restrict financial transactions to those meeting the needs of the real economy (e.g., CDS only to holders of insured securities, etc.).

Measure 4: Capping the earnings of traders.

All of which are consistent with proposals I have made in the past. Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.

Pseudo obvious fact 2 – Financial markets contribute to economic growth

There is a literature in financial economics that says that the rise of financial markets would “replace the financing of investments by banks” and thus promote growth.

The reality has been that the financial markets grew on the back of massive redistributions of national income away from wages towards profits. As I have written elsewhere this broke the traditional link between real wages growth and consumption spending and required ever-increasing credit expansion to allow the latter to drive growth.

The redistribution was made possible by the deregulation of the labour markets that characterised the neo-liberal era – attacks on trade unions, etc that broke the traditional nexus between labour productivity and real wages growth.

It was an unsustainable growth model because the balance sheets of the private sector became unstable. Please read my blog – The origins of the economic crisis – for more discussion on this point.

The Manifesto proposes that:

Measure 5: To strengthen significantly counter-powers within firms, in order to force the management to take into account the interests of all the stakeholders.

Measure 6: To increase significantly the taxation of very high incomes to discourage the race towards unsustainable returns.

Measure 7: To reduce the dependency of firm’s vis-a-vis financial markets, and to develop a public policy of credit (preferential rates for priority activities on the social and environmental levels).

I would actually focus on a major redistribution of national income back towards wages by ensuring that real wages grow in line with productivity growth.

Major anti-union legislation has to be retrenched and wage determination processes designed to allow workers to participate in the productivity gains made by the economy.

Pseudo obvious fact 3 – Markets correctly assess the solvency of states

This claim is tied up with efficient markets theory. The Manifesto thinks that financial markets in this regard get it wrong:

Take the case of Greek debt: financial operators and policy makers rely exclusively on financial assessments in order to assess the situation. Thus, when the required interest rate for Greece rose to more than 10%, everyone concluded that the risk of default was high: if investors demanded such a risk premium, this meant that the danger was extreme. This is a profound mistake if one understands the true nature of the assessment by the financial market.

I disagree with them. I think the bond markets appraised the situation correctly. They knew that the Greek government was using a foreign currency and relied on its tax base and borrowing to cover its spending in the absence of major ECB intervention. In other words, as the tax base shrunk due to the recession then imposed austerity, the bond markets knew that the Greek government was approaching insolvency.

Now the Greek government has defaulted even though the International Swaps & Derivatives Association has concluded (strangely) that the PSI haircut associated with the bailout does not constitute a “credit event”.

Alternatively, Japan has run large deficits continuously and has the largest public debt ratio without its bond tendering process missing a beat. Why? Because the bond markets know that nations such as Japan, the US etc are fully sovereign and face no solvency risk. Even when the ratings agency – in typical grandstanding fashion – downgraded Japan sovereign debt to close to junk status, bond yields remained low. Just as they have in the US more recently after its sovereign ratings were downgraded.

The Manifesto wants to “reduce the influence of market’s psychology on the funding of the state”, which implies that they think the bond markets actually fund the state. Well they do in the EMU which is a result of the fact that those nations use a foreign currency.

The reliance on bond markets arises due to the flawed design of the monetary system. In that regard, the problem is the Euro itself. A progressive response should focus on eliminating that flaw.

Instead the Manifesto proposes:

Measure 8: Rating agencies should not be allowed to influence arbitrarily interest rates on bond markets by downgrading the rating of a State. The activities of agencies should be regulated in a way that requires that their ratings result from a transparent economic calculation.

Measure 8a: States should be freed from the threat of financial markets by guaranteeing the purchase of public securities by the European Central Bank
(ECB).

I agree with both of these solutions. The currency monopoly in the EMU is held by the ECB. Its arcane institutional creation makes it largely unaccountable to the member-state governments but it nonetheless can deal the bond markets out of the equation any time it chooses – as is evidenced by its Securities Market Program (SMP).

Please read my blog – The ECB is a major reason the Euro crisis is deepening – for more discussion on this point.

But a better option would be to restore the connection between the national central banks and the treasuries in the member states – that is, dissolve the Eurozone and scrap the ECB and turn its building in Frankfurt into a museum demonstrating the folly of neo-liberalism.

Pseudo obvious fact 4 – The rise in Public Debts results from excessive spending

The Manifesto correctly points out that the rapid rise in public debt in Europe is the result of “the erosion of public revenue, due to weak economic growth over the period”, rather than excessive fiscal policy stances.

As, if often noted, Spain and Ireland had budget surpluses going into the crisis.

The fact is that budget outcomes are endogenous which is a fancy word to say that they are determined by the overall macroeconomic system – public and private spending – and are not strictly controllable by governments.

Once there is a $-for-$ link between net public spending and debt-issuance then if private spending growth wanes, deficits will rise automatically (as the tax revenue falls) and debt ratios will rise both because the numerator (public debt) rises and the denominator (GDP) falls.

Please read my blogs – Structural deficits and automatic stabilisers and Structural deficits – the great con job! – for more discussion on this point.

The upshot is that suggesting that public debt ratios should be a policy target is a fatal trap that dominates the current policy debate and is the reason budget outcomes in The Netherlands noted at the outset are falling foul of expectation.

The Manifesto proposes:

Measure 9: To conduct a public audit of public debts, in order to determine their origin and to identify the main holders of debt securities, as well as the amounts held.

Which suggests that public debt ratios matter. MMT demonstrates that public debt ratios should never be the target of economic policy. The correct focus of policy should be on sustainable growth and high levels of employment (commensurate with the desires of the available labour force) and then – the public debt ratios will be whatever they are.

A better approach is to concentrate on the real side as noted but take up the Measure 8a and stop issuing debt at all and thus bring the central bank and treasury into a single unit within the elected government.

Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.

Pseudo obvious fact 5 – : Public spending must be cut in order to reduce the public debt

The Manifesto correctly ties in the automatic stabilisers, fiscal austerity with deviant outcomes (rising budget deficits and public debt ratios), which apparently is evading the Euro bosses.

It says:

Even if the increase in debt was partly due to an increase in public spending, cutting public spending would not necessarily be part of the solution. This is because the dynamics of public debt have little in common with that of a household’s: macroeconomics is not reducible to the economy of the household. The dynamics of debt depends, in all generality, on several factors: the level of primary deficits, but also the spread between the interest rate and the nominal growth rate of the economy.

That is just an accounting statement where the change in the public debt ratio depends the starting ratio, the real rate of interest, the real GDP growth rate and the primary budget balance.

Please read the answer to Question 5 in my blog – Saturday Quiz – November 27, 2010 – answers and discussion – for more discussion on this point. You will find many similar discussions of this on my site if you search.

The obvious point is that “the rate of economic growth itself is not independent from public spending” and so as fiscal austerity undermines growth the primary surplus has to increase further to stabilise the debt ratio (at a constant real interest rate) and this, in turn, further undermines the objective, requiring even more austerity.

Modern Monetary Theory (MMT) places no particular importance in the public debt to GDP ratio for a sovereign government, given that insolvency is not an issue, the mainstream debate is dominated by the concept. The unnecessary practice of fiat currency-issuing governments of issuing public debt $-for-$ to match public net spending (deficits) ensures that the debt levels will rise when there are deficits.

Rising deficits usually mean declining economic activity (especially if there is no evidence of accelerating inflation) which suggests that the debt/GDP ratio may be rising because the denominator is also likely to be falling or rising below trend.

Further, historical experience tells us that when economic growth resumes after a major recession, during which the public debt ratio can rise sharply, the latter always declines again.

It is this endogenous nature of the ratio that suggests it is far more important to focus on the underlying economic problems which the public debt ratio just mirrors.

Almost all the media commentators that you read on this topic take it for granted that the only way to reduce the public debt ratio is to run primary surpluses. That is what the whole “credible exit strategy” narrative is about.

Further, there is no analytical definition ever provided of what safe is and fiscal rules such as those imposed on the Eurozone nations by the Stability and Growth Pact (a maximum public debt ratio of 60 per cent) are totally arbitrary and without any foundation at all. Just numbers plucked out of the air by those who do not understand the monetary system.

A nation running a growing primary deficit can reduce its public debt ratio over time as long as economic growth is strong enough.

Furthermore, depending on contributions from the external sector, a nation running a deficit will more likely create the conditions for a reduction in the public debt ratio than a nation that introduces an austerity plan aimed at running primary surpluses.

The Manifesto proposes:

Measure 10: The level of social protections (unemployment benefits, housing…) must be maintained, or even improved;

Measure 11: Public spending on education, research, investment in environmental conversion, etc., must be increased, in order to set up the conditions for sustainable growth and to bring about a sharp fall in unemployment.

All of which I agree with. But I would add that the public has to be better informed that the basic analogy that a government budget is like a household budget is flawed at its most elemental level. The household must work out the financing before it can spend. The household cannot spend first. The government can spend first and ultimately does not have to worry about financing such expenditure.

Pseudo obvious fact 6 – Public debt shifts the burden of our excesses onto our grandchildren

The Manifesto says:

There is another fallacious statement that confuses household economics with macroeconomics: that the public debt would be a transfer of wealth to the detriment of future generations. Public debt is a mechanism for transferring wealth, but mainly from ordinary taxpayers to shareholders.

Their focus is on the way that fiscal policy has been skewed in the neo-liberal era in favour of the high income groups. So changes in the tax structure in Europe and elsewhere have provided large benefits to high income earners but also led to higher structural deficits and hence (given institutional arrangements) higher public debt issuance.

I agree that the neo-liberal era has seen a perversion of fiscal policy where large tax concessions at the top of the income distribution combined with policies designed to suppress real wages growth (see above) have reinforced the shifts in the distribution of national income in favour of profits and the personal distribution of income in favour of high income earners.

But, while that has not been a productive strategy for governments to take, it doesn’t mean that there is a rising burden on our grandchildren.

Please read my blog – The rising future burden on our kids – for more discussion on this point.

A national sovereign government always has as much “money” now as it had yesterday and the same amount it will have tomorrow. That is, it has whatever it wants to spend. It always has that. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there had have been deficits in the past.

The EMU member-states do not enjoy this status because they use a foreign currency. That means the problem for them is the Euro.

Budget surpluses do not provide more capacity for future spending. It is a nonsensical notion to think that a sovereign government would “save” in its own currency. Government spending and taxation are flows – like a river – you don’t ask how much water has accumulated as it gushes out the tap. It is gone before you know it. Various metres can record the flow but unless there is a dam to store it as a stock it flows away.

I note however that most of my state (NSW) is currently flooded as heavy rains persist!!

But fiscal flows – spending and taxation – are accounted for but once they exit the economy – as a surplus (spending less than taxation) then they are gone for good. There is no storage shed in Canberra or Washington or anywhere else where the surpluses are saved up and available for the government to drive a truck down and pick up some dollars to spend.

Surpluses destroy financial assets that were previously in the hands of the non-government sector and these assets are gone forever.

Surpluses take money from the pockets of the households because the government spends less than they tax us.

The idea that borrowing “takes money from the pockets of future taxpayers” is equally nonsensical. The funds to pay for the bonds originate in the government net spending in the first place. The deficits add to bank reserves and non-government entities decide that it is in their best interests to hold the net increment in wealth in the form of government bonds rather than reserves. So the government is really borrowing their own spending back!

Once you understand that then the idea that there is a future burden will make you laugh. Further, the interest payments are incomes to the bond holders who presumably enjoy the return on their saving. Most will have children who will benefit from those payments.

When it is time for the government to relinquish a particular debt instrument and pay interest it just credits the relevant bank account and rips up the IOU record. The future generation has no less real options available to them as a consequence.

Whether future taxation is higher or lower is not conditioned by the deficits that the government has run in the past. It may be that the deficits will drive the economy into a solid growth path (they should if they are large enough and persistent enough). As incomes rise, tax revenue rises. The government may form the view that private spending is growing to quickly relative to the real capacity of the economy to meet that nominal spending growth with new goods and services. The government can then raise taxes to stifle demand and prevent inflation.

In doing so it is not providing itself with any extra revenue to help it pay its debt back. It is just adjusting aggregate demand to ensure the economy maintains price stability.

The Manifesto proposes:

Measure 12: To restore the strongly redistributive nature of direct taxation on income (suppressing tax breaks, creating new steps, and increasing the rates of income tax…)

Measure 13: To suppress tax exemptions granted to companies, which have insufficient effects on employment.

The design of tax policy should largely be driven by: (a) equity considerations – which groups do you want to deprive of purchasing power; (b) macroeconomic considerations – how much private spending do you want to stifle to keep total spending in line with the inflation constraint; and (c) resource allocation issues – do you want to stifle certain activities – such as alcohol, pollution.

It should never be based on false notions that taxation is required to fund government spending. While that applies in the EMU – once again that is because that monetary system is flawed.

Pseudo obvious fact 7 – We must reassure financial markets in order to fund the public debt

The Manifesto correctly point out that ideology dominated the design of the EMU such that the:

… result of this doctrinal choice is that the European Central Bank is no longer entitled to subscribe directly to the public bonds issued by European states. Deprived from the security of always being financed by the Central Bank, Southern European states have suffered from speculative attacks.

They note that “the ECB has bought government bonds at market interest rates to ease tensions on the European bond market” (the SMP) but fail to emphasise that this has come with a very large stick – the imposition of fiscal austerity.

It should be clear to everyone that the ECB intervention is now capable of eliminating the influence of bond markets. In that context, the correct policy response should be to encourage growth while the fiscal outlays are supported by the ECB.

The Manifesto proposes:

Measure 14: To authorize the European Central Bank to directly fund European states at low interest rates, thus loosening the straitjacket of financial markets (or to require commercial banks to subscribe to the issue of government bonds).

Measure 15: If necessary, to restructure the public debt, for example by capping the service of public debt to a certain percentage of GDP, and by discriminating between creditors according to the volume of shares they hold. In fact, very large stockholders (individuals or institutions) must accept a substantial lengthening of the debt profile, and even partial or total cancellation. We must also renegotiate the exorbitant interest rates paid on bonds issued by countries in trouble since the crisis.

I would not say “loosen the straitjacket”. The ECB can render the bond markets irrelevant.

Please read my blog – Who is in charge? – for more discussion on this point.

I generally do not favour governments “restructuring the public debt” – that is, deliberately telling bond holders that their investments are worth less. The better solution is to stop issuing debt (Measure 14) and honouring the commitments that were previous undertaken in good faith. Otherwise, the government becomes ethically bereft.

Pseudo obvious fact 8 – The European Union protects the European social model

I will leave this fact for another day due to time constraints.

Pseudo obvious fact 9 – The Euro is a shield against the crisis

This is one of the greatest myths that circulates. See for example this recent speech (February 27, 2012) – Sound money, sound finances, a competitive economy – principles of a european culture of stability – by ECB Board Member Peter Praet.

If you ever wanted a classic example of “German-style” dogma that speech is it.

For example, he says:

The financial crisis we are experiencing is not a “monetary crisis” in its essence. The ECB has secured price stability. It is also remarkable that inflation expectations have remained anchored throughout the crisis. Looking ahead they remain anchored even in the distant future. Yet, the ECB has to continue earning the confidence it has acquired.

Which just made me laugh. Inflation expectations are “anchored” because GDP gaps are so large. The ECB may have “secured price stability” but has been a partner in the fiscal austerity (which makes a mockery of its claim to be independent of fiscal processes).

The Manifesto says that “(s)ince 1999, the Euro area has experienced relatively poor growth and increased divergence between Member States in terms of growth, inflation, unemployment and external imbalances”.

I like this emphasis on the real side of the economy. The obsession with price stability has come at the expense of the real economy. The key policy target variables of the past (for example, low unemployment) are now policy tools.

The massive costs in terms of sacrifice ratios and GDP gaps are ignored by the Euro bosses and the price stability is eulogised even though the evidence clearly indicates that there has been very little difference in performance between nations that embraced the ECB approach and those who didn’t target inflation.

Please read my blog – Inflation targeting spells bad fiscal policy – for more discussion on this point.

The Manifesto proposes:

Measure 18: To ensure effective coordination of macroeconomic policies and a concerted reduction of trade imbalances between European countries.

Measure 19: To offset payments imbalances in Europe by a Bank of Settlements (that would organize loans between European countries)

Measure 20: If the Euro crisis leads to the end of the Euro, and pending the reviving of the EU budget (see below), to establish an intra-European monetary system (with a common currency such as the “Bancor”) which would organize the unwinding of imbalances in trade balances in Europe.

I do not support any of these proposed measures.

Please read my blog – An international currency? Hopefully not! – for more discussion on this point.

Pseudo obvious fact 10 – The Greek crisis was a springboard towards and economic government and effective European solidarity

Finally, the Manifesto correctly notes that by design “Euro zone countries … are totally dependent on markets to finance their deficits” and as a consequence “speculation was triggered on the most vulnerable countries in the area, i.e. Greece, Spain, and Ireland.”

They note that the cost of the “bailouts” to date has been the enforced austerity, which is nonsensical given that there is “there is no excess demand in Europe”.

But then they claim that:

The fiscal situation is better than that of the U.S. or Great Britain, leaving room for fiscal manoeuvre.

Which discloses that they haven’t grasped the fact that the monetary system in the US, for example is not comparable to the EMU. The fiscal situation in the US is what it is – it is neither better or worse than in Britain.

We can talk about a fiscal stance being appropriate or not for a sovereign nation – when we compare the level of net public spending with the output gap.

But we cannot say a deficit “is better” than another if it is lower!

Within this confusion, however, the Manifesto correctly states that:

The crisis provides financial elites and European technocrats an opportunity to implement a “shock strategy”, by taking advantage of the crisis to push further for a radical neo-liberal agenda. But this policy has little chance of success.

That is now patently obvious.

The empirical evidence (see introduction) is that the much-vaunted financial ratios will not “improve” (in neo-liberal parlance) under the suffocating yoke of fiscal austerity.

The austerity is more realistically seen as being part of the neo-liberal agenda to demolish the welfare state and to redistribute real income in favour of the elites.

The Manifesto proposes;

Measure 21: To establish a European tax (for instance a carbon tax, or a tax on profits) and to create an effective European budget that would facilitate the convergence of economies, and to work towards equal conditions of access to public and social services in each Member State, on the basis of best practices.

Measure 22: To launch a broad European action plan, which would be funded by public subscription with low but guaranteed interest rates (and/or by money creation from the ECB), that would initiate the green conversion of the European economy.

The carbon tax proposal is probably sound but only because it will influence resource allocations. A tax should never be imposed to “raise revenue”. The correct path for Europe is to dismantle the EMU and then implement harmonised tax policies in areas that promote environmental sustainability.

Governments can provide hundreds of thousands of jobs by targetting green initiatives such as renewable energy etc.

Conclusion

The Manifesto is an interesting document. It reflects genuine concerns and an accurate depiction of the way in which neo-liberals have established a sequence of myths which parade as truths which then are used to prosecute damaging austerity as part of a broader agenda of hegemony.

But it also shows that progressive analysis is still often constrained by its failure to really see beyond the neo-liberal “myths”.

That is a major challenge in itself – to really re-write the narrative so that progressives can see through to the inner depths of the monetary system. That is what MMT seeks to offer.

Saturday Quiz

The Saturday Quiz will be available sometime tomorrow. I am assuming before long that everyone will soon get 5/5 each week and we can have our weekends free of this pedagogy!

That is enough for today!