I have received several E-mails over the last few weeks that suggest that the economics…
The demise of social democratic parties – they are all neo-liberals now
There was an article in this morning’s Melbourne Age (September 26, 2012) by former Australian Federal Finance Minister Lindsay Tanner, which talked about the structural decline of social democratic parties around the world. Recently I was in the Netherlands for the Dutch national election and the Labor Party could not gain office and is likely to go into coalition with the Conservatives (what?) – the common bond – their support for the Euro and fiscal austerity. What set of circumstances would see what should be polar opposite political forces in coalition? And then there are the LDP and the Tories in the UK. And the debate in the US is not about a deficit versus a surplus but how quickly to get into surplus. The same goes in Australia. The policy debate is marked by claims from both major parties that they will generate bigger budget surpluses quicker than their opponents. The social democratic political tradition is fading because the parties have become indistinguishable from the conservatives in economic policy. They are all neo-liberals now and that is an ugly option for those with a progressive bent who have traditionally supported the social democratic parties.
The Melbourne Age article in question – A cynical Labor has lost its soul – is a full-frontal attack on the party that Lindsay Tanner served for all his political life.
For overseas readers, the Labor Party (now in government) began as the political arm of the trade union movement after severe attacks on union rights by employers in the big strikes in the late C19th. It was a classic social democrat party with socialism as a key national policy platform. It opposed state aid for private education, promoted full employment with liberal social transfers and guaranteed trade union rights (freedom of association etc).
The ALP describes its beginnings on this page – Our Foundations. You can also see its version of its history on this page – Labor History. This Wikipedia page is also interesting.
The early roots of the party come out of the development of trade union in the 1860s before federation. The problem was that the power elites controlled the legislature and thwarted the attempts by unions to improve the circumstances of the workers.
Then came the 1890 maritime and shearers’ strikes which were dealt with harshly by the employers. As a response to the industrial defeat at the hands of capital, the striking shearers formed the Australian Labor Party in 1891.
By 1899, the first Labor government took office in the State of Queensland. The federal organisation formed in 1901 and ran a platform of democratic socialism although the substance of that ideology has always been questionable despite the popularism.
The commitment to socialism was not very well defined though and the party was not dominated by left-leaning trade unionists. It is often thought that trade unions provide most of the funds for the ALP while the corporate sector funds the conservatives. Examining the data will give you a very different picture of the funding sources and distribution of the major parties.
While a few years old now (2006) this study – Political finance in Australia: a skewed and secret system – will realign perceptions of these matters.
The fact is that the corporate sector provide a higher proportion of the ALP funds than the unions and only slightly less in absolute terms than what it contributes to the conservatives.
Vladimir Lenin made the following observation about Australia in 1913 (In Australia, Collected Works, Progress Publishers, Moscow, Vol. 19):
What sort of peculiar capitalist country is this, in which the workers’ representatives predominate in the upper house, and until recently did so in the lower house as well, and yet the capitalist system is in no danger?
The Australian Labor Party does not even call itself a socialist party. Actually it is a liberal bourgeois party, while the so-called Liberals in Australia are really conservatives.
Capitalism in Australia is still quite youthful. The country is only just taking shape as an independent state. The workers are for the most part emigrants from Britain. They left when the masses of British workers were Liberals …
The leaders of the Australian Labor Party are trade union officials, everywhere the most moderate and capital-serving element, and in Australia altogether peaceable, purely liberal.
That assessment resonates today.
But the links between the trade union movement and the ALP via the factions and paths for union leaders to move into Parliament are well-defined.
The reality is that the trade union movement has been losing its way for years now and it is not only because it has been seen as a blokey club with racist, sexist and homophobic overtones. The unions have lost support because they haven’t been doing what their principle raison d’etre calls for – to protect workers and their families.
Instead, trade unions have allowed the party that is meant to represent their interests – the ALP – to govern as if it is an agent of capital.
History tells us that the periods when the ALP have been in government workers endure real wage cuts, loss of wage share and entrenched unemployment.
Please read my blog – A new agenda for our union movement – for more discussion of this point.
The other point is that the Labor Party has traditionally been accused by the conservatives (Liberals aided in coalition by the National Party, a rural interests party) of being poor economic managers – spendthrifts with no fiscal discipline. This was of-course just a way of attacking their social policy which was considered as important as economic policy.
In the 1980s, the Labor Party changed direction dramatically – as did many social democratic parties around the world. It responded to these criticisms by becoming more neo-liberal in intent than even the conservatives. In the 1980s it led the way in privatising public enterprises, promising a new world of lower prices and higher employment. The opposite occurred.
It wasted billions of public money on private-public partnerships which only allowed the private property developers to dictate the direction, location and form of public infrastructure development. Please read my blog – Public infrastructure 101 – Part 1 – for more discussion on this point.
It also cemented as part of its national policy psyche the neo-liberal myth that federal governments have to run budget surpluses to maintain confidence with the amorphous “international investors”.
Two years ago it promised to deliver a budget surplus this year – because it considered that would allow them to wear the “badge of fiscal responsibility”. It is fair to say that the Government has become obsessive about their desire to deliver a budget surplus at all costs.
The Federal Labor government is caught up in the fiscal austerity narrative that the neo-liberals had imposed on failing economies everywhere.
It thinks that if it maintains its pursuit of a budget surplus the electorate will reward it for being a responsible fiscal manager. However, the electorate is more concerned about real income growth and employment opportunities and the government’s current strategy is undermining both.
I will come back to that discussion after considering Tanner’s thesis. Remember he only recently retired as the Federal Finance Minister.
Lindsay Tanner identifies the “Labor oligarchs” (the so-called “party machine men”) for stopping grass roots democracy in the party structure – for example, they have prevented the right of “party members to directly elect national conference delegates and administrative committee members”.
The Labor party machine is extremely right-wing in persuasion.
Lindsay Tanner considers that this is a world trend:
Over the past couple of years we have seen traditionally strong social democratic parties in Germany, New Zealand and Spain, as well as in New South Wales and Queensland, poll about a quarter of the vote in general elections. Even the mighty Swedish Social Democratic Party is now polling in the 20s. Federal Labor’s primary polling numbers have been in the 20s for a fair bit of the past year. The structural trend is obvious. Social democratic parties are slowly unravelling. While circumstances inevitably vary around the world, there is an underlying common factor: loss of purpose.
I have no trouble accepting this point. But where the rub occurs is in defining the “loss of purpose”.
Lindsay Tanner says that, historically, the Labor Party was “driven by purposes and beliefs”. which was exemplified, for example, in “Chifley’s attempt to nationalise the banks” (in the late 1940s).
He now thinks that:
… if the current political indicators are confirmed over the next couple of years, we could be entering a period of unprecedented bleakness. It would be a grave mistake to treat this threat as merely cyclical. There are structural and cyclical factors in play, but ultimately the structural determines the impact of the cyclical.
The reason for this demise? He thinks that in government the Party has been usurped by “cynical manipulators massaging polls and focus groups”.
That is clearly true. I had a (secret) meeting with a former minister soon after they lost an election in early 2000s. He told me that the day after the election (on the Sunday morning) the Labor party was out in Western Sydney polling to see why they lost. I said that he might have reflected on the fact that leadership is about shaping polls not reacting continuously to them. He stared at me with a blank expression as if I was speaking Dutch.
Lindsay Tanner thinks that all the major policy initiatives of the current “federal Labor government … [are] … have mostly been in response to external political circumstances … at the behest of random external forces”.
He says this “delivers some electoral success, but it is inevitably fleeting and, meanwhile, the political capital on which longer-term electoral competitiveness depends is melting away”.
He says that Labor Party has moved from being “a party of initiative to a party that seeks power on the basis of managerial competence and arbitrating the competing claims of economic and social interest groups”.
Why?
1. “Labor’s historic mission – redistributing wealth and income to ordinary working people” is being undermined by “affluence”.
2. The Greens are now more relevant on the “left of the political spectrum” because the “the focus has shifted from material concerns to more abstract issues of environmental degradation, international co-operation and human rights”. Yet the Greens gained no traction in the Dutch election recently.
3. There has been an “emergence of a distinct class of political professionals, who now heavily influence the Labor Party” – they are “extremely adept at the mechanics of politics, but largely uninterested in its purpose”.
I haven’t any problems with that except Tanner, when he was Finance Minister, was a major part of the problem. He embodied the neo-liberal macroeconmomics paradigm with all its myths and biases towards unnecessary unemployment as much as anyone did.
Take for example this – Meet the Press – interview that he did on August 24, 2008. The discussion centred on the “need” for a budget surplus in Australia, even though the economy was slowing and unemployment was rising.
The conversation went like this:
Interviewer One: Minister … the Reserve Bank now realises that the economy is slowing dramatically. It’s changing its rhetoric – we all are expecting a boost to economic activity with an interest-rate cut next month. Doesn’t the Government, too, need to change its rhetoric? Do we still need a $20 billion surplus?
LINDSAY TANNER: We do need a strong surplus still, Paul. And I don’t believe the economy is slowing dramatically. It’s slowing somewhat … It’s really important that the Government is doing its bit to take the pressure off inflation and interest rates. And the Opposition is trying to punch big holes in the Budget’s surplus. One of the reasons why it’s possible the Reserve Bank may reduce interest rates in a week or two – it’s possible, we don’t know whether they will or not – is because the Budget is very strong, because the surplus is very substantial – that puts downward pressure on inflation and interest rates …
Interviewer Two: Mr Tanner, if the economy is not slowing dramatically, how do you account for the job losses, major job losses …
LINDSAY TANNER: Alison, the overall employment figures are still very robust … [then after a qualifying question] … But I can tell you this – if we weren’t putting downward inflation, a strong Budget surplus to put downward pressure on inflation and interest rates, over the course of the next year or two, you would see inflation ramp up, and that ultimately would lead to a serious crunch in the economy, and very substantial job losses …
Interviewer One: But Mr Tanner, you can’t both be right. The Reserve Bank can’t be right that inflation is significantly in check that it can start cutting rates, and you at the same time insisting it’s still a persistent problem.
LINDSAY TANNER: … The Reserve Bank did say of the Government’s Budget that it was mildly contractionary. That’s technical speak for “putting downward pressure on inflation and interest rates.” If the Reserve Bank does decide to cut interest rates, one of the factors will be that the Government has put in place a strong Budget surplus …
And so the dreadful interview went.
In this blog – A new progressive agenda? – I discussed in detail how social democratic and conservative governments became trapped by the neo-liberal economic myths that the mainstream of my profession perpetuate.
We also outlined the trend in our 2008 book – Full Employment abandoned.
We outlined what we called the full employment framework and its traced its demise under neo-liberalism and its ultimate replacement with the diminished full employability framework. We noted that under the former framework, everybody who wanted to earn an income was able to find employment. Maintaining full employment was an overriding goal of economic policy which governments of all political persuasions took seriously.
In Australia, for example, unemployment rates below two per cent were considered normal and when unemployment threatened to increase, government intervened by stimulating aggregate demand. Even conservative governments acted in this way, if only because they feared the electoral backlash that was associated with unemployment in excess of 2 per cent.
While unemployment was seen as a waste of resources and a loss of national income which together restrained the growth of living standards, it was also constructed in terms of social and philosophical objectives pertaining to dignity, well-being and the quest for sophistication. It was also clearly understood that the maintenance of full employment was the collective responsibility of society, expressed through the macroeconomic policy settings. Governments had to ensure that there were jobs available that were accessible to the most disadvantaged workers in the economy. We called this collective enterprise the Full Employment framework.
This framework has been systematically abandoned in most OECD countries over the last 30 years. The overriding priority of macroeconomic policy has shifted towards keeping inflation low and suppressing the stabilisation functions of fiscal policy. Concerted political campaigns by neo-liberal governments aided and abetted by a capitalist class intent on regaining total control of workplaces, have hectored communities into accepting that mass unemployment and rising underemployment is no longer the responsibility of government.
As a consequence, the insights gained from the writings of Keynes, Marx and Kalecki into how deficient demand in macroeconomic systems constrains employment opportunities and forces some individuals into involuntary unemployment have been discarded. The concept of systemic failure has been replaced by sheeting the responsibility for economic outcomes onto the individual.
Accordingly, anyone who is unemployed has chosen to be in that state either because they didn’t invest in appropriate skills; haven’t searched for available opportunities with sufficient effort or rigour; or have become either “work shy” or too selective in the jobs they would accept.
Governments are seen to have bolstered this individual lethargy through providing excessively generous income support payments and restrictive hiring and firing regulations. The prevailing view held by economists and policy makers is that individuals should be willing to adapt to changing circumstances and individuals should not be prevented in doing so by outdated regulations and institutions. The role of government is then prescribed as one of ensuring individuals reach states where they are employable.
This involves reducing the ease of access to income support payments via pernicious work tests and compliance programs; reducing or eliminating other “barriers” to employment (for example, unfair dismissal regulations); and forcing unemployed individuals into a relentless succession of training programs designed to address deficiencies in skills and character. We called this new paradigm the Full Employability framework.
The framework is exemplified in the 1994 Jobs Study published by the Organisation of Economic Cooperation and Development (OECD). Its main message (OECD, 1994, vii) accurately summarises the current state-of-the-art in policy thinking:
… it is an inability of OECD economies and societies to adapt rapidly and innovatively to a world of rapid structural change that is the principal cause of high and persistent unemployment … Consequently, the main thrust of the study was directed towards identifying the institutions, rules and regulations, and practices and policies which have weakened the capacity of OECD countries to adapt and to innovate, and to search for appropriate policy responses in all these areas … Action is required in all areas simultaneously for several reasons. First, the roots of structural unemployment have penetrated many if not all areas of the socioeconomic fabric; second, the political difficulties of implementing several of these policies call for a comprehensive strategy … third, there are synergies to exploit if various microeconomic polices are pursued in a co-ordinated way, both with regard to each other and the macroeconomic policy stance.
The OECD Jobs Study (1994: 74) also ratified the growing macroeconomic conservatism by articulating that the major task for macroeconomic policy was to allow governments to ‘work towards creating a healthy, stable and predictable environment allowing sustained growth of investment, output and employment. This implies a reduction in structural budget deficits and public sector debt over the medium term … [together with] … low inflation.
In the midst of the on-going debates about labour market deregulation, scrapping minimum wages, and the necessity of reforms to the taxation and welfare systems, the most salient, empirically robust fact of the last three or more decades – that actual GDP growth has rarely reached the rate required to maintain, let alone achieve, full employment – has been ignored.
The common element is that both sides of politics have followed the world trend and embraced neo-liberalism as their economic approach. While Labour and the Conservatives differ on social policy (even those differences are narrowing) they share almost lock-step the same economic mantra – run surpluses at all costs.
Think back to Lindsay Tanner’s view of budgets – that running budget surpluses allows interest rates to be lower. The problem is that this assumes that budget deficits are inflationary. Why then has Japan not experienced accelerating inflation for the last 20 years.
Why during the full employment era, when budget deficits were the norm, was inflation largely moderate?
The Reserve Bank of Australia has cut interest rates in the last several years because it fears the economy is diving into recession – in part, because of the contractionary fiscal stance of the federal government.
There is no virtue in driving the economy towards recession, which forces the central bank to lower rates, and then saying – see our fiscal policy is good because it results in lower interest rates. Meanwhile unemployment and underemployment has risen. That is the moronic position that Lindsay Tanner represented vigorously during his time as Minister of Finance.
He also failed to understand that in trying to achieve a budget surplus at a time when the economy is slowing is a self-defeating goal. The reality is always that the automatic stabilisers (that is, the plunging tax revenue growth) will likely see the budget in deficit anyway and there will be nothing positive to show for it.
Pro-cyclical fiscal policy at a time when private spending is weak overall is very irresponsible fiscal management. That was a legacy that is associated with Lindsay Tanner as much as any of this new era of neo-liberal politicians – Conservative or Labor.
Further, in his speeches and public statements, Lindsay Tanner regularly rehearsed all the usual myths – the primacy of a AAA rating even though the government doesn’t intend borrowing anymore (so on their own logic the claim is odd); the need to take pressure of the inflation rate (even though inflation is falling and well within the RBA’s upper bound for policy); the praise the IMF has bestowed on the Government (even though the IMF is deeply implicated in advocating policies that created and have extended the crisis).
The lesson has not been learned by these governments and that is why they are “purposeless”.
The conservative Australian government was only able to run surpluses for 10 years out of 11 (1996-2007) because private credit growth was so strong. This was a characteristic of the neo-liberal period.
Before the neo-liberal era, we witnessed:
1. Relatively continuous use of fiscal deficits.
2. Stable personal saving ratio of around 7-8 per cent of personal disposable income.
3. A consumption share of around 65 per cent of GDP.
4. Real wages growing in line with labour productivity – so that consumption could be driven by real wages growth rather than credit.
The neo-liberal period is in fact the outlier – an atypical period. Which makes the claims by those who hold out that governments should return to surplus as a demonstration of fiscal responsibility rather difficult to understand.
During the neo-liberal period, where actual budget surpluses were recorded, the economies typically went into recession soon after. The important point though is that the surpluses were made possible by the unsustainable growth in private credit which drove private spending and boosted tax revenue.
So it is highly likely that we are returning to a more normal environment now where the private sector are attempting to save more out of disposable income and reduce its reliance on credit.
Two implications arise if that if the private consumption is returning to more normal levels then two things follow:
1. The government will more likely have to run budget deficits of some magnitude indefinitely – as in the past.
2. Real wages growth will have to be more closely aligned with productivity growth to break the reliance on credit growth.
And when the nature of the balance sheet adjustments that are going on at present are included in the assessment these two points become amplified.
So waiting for a private consumption boom to save the economy is probably going to be a long wait. But it is also a trend that we don’t want to see revived under the previous circumstances – noted above.
This also makes the quest for fiscal austerity to be mindless and very destructive. Where will growth ever come from if consumers are returning to higher saving ratios, firms are very cautious, all countries are eroding the export markets of the others, and governments are adding tot he malaise?
An understanding of Modern Monetary Theory (MMT) allows one to lay most of the blame for this labour underutilisation across OECD countries lies with the policy failures of national governments. At a time when budget deficits should have been used to stimulate the demand needed to generate jobs for all those wanting work, various restrictions have been placed on fiscal policy by governments influenced by orthodox macroeconomic theory.
Social democratic parties are losing support because they have become indistinguishable from the conservatives in the important area of economic policy. Adopting austerity reduces the capacity of such parties to deliver a differentiated social policy when in government.
The Labor Party in the Netherlands, exemplifies this – they are pro-Euro and pro-austerity – which means they are pro unemployment, pro increased inequality and pro increased poverty. Left supporters will always desert parties that represent these things.
Social democratic parties have been eager to adopt the goal of full employability, significantly diminishing their responsibility for the optimum use of the nation’s labour resources. Accordingly, the aim of labour market policy has become limited to ensuring that individuals are employable. This new ambition became exemplified in the 1994 OECD Jobs Study.
As a result, successive governments in many countries began the relentless imposition of active labour market programs. These were designed to churn the unemployed through training programs and/or force participation in workfare compliance programs. The absurdity of requiring people to relentlessly search for work, and to engage in on-going training divorced of a paid-work context, seemed lost on government and their policy advisers. That the NAIRU approach seduced them at all is more difficult to understand given stark evidence that since 1975 there have never been enough jobs available to match the willing labour supply.
The abandonment of full employment has also presented neo-liberal governments with a new problem. With unemployment persisting at high levels due to the deliberate constraints imposed on the economy by restrictive fiscal (and monetary) policy, rising welfare payments placed pressures on the the traditional redistributive efforts of the welfare state. These pressures were erroneously seen as a threat to the fiscal position of government.
The neo-liberals managed to convince policy makers that fiscal conservatism was necessary and that the only way to resolve these pressures was to reduce the public commitment to income support and the pursuit of equity. Accompanying the neo-liberal attacks on macroeconomic policy have been concerted attacks on the supplementary institutions such as the industrial relations system and the Welfare State. For these attacks to be effective required a major recasting of the concept of citizenship.
Governments, aided by the urgings of the neo-liberal intellectuals in the media and in conservative think tanks, have undermined the notion of citizenship – the right to public services, which had been an essential part of the rationale for the system of social security.
The hallmark of the neo-liberal era is that individuals have to accept responsibility, be self-reliant, and fulfill their obligations to society.
Unemployment is couched as a problem of welfare dependence rather than a deficiency of jobs. To break this welfare dependency required responsibility to be shifted from government to the individual. To force individuals to become accountable for their own outcomes, governments embraced a shift from active to passive welfare and the introduction of alleged responsibilities to counter-balance existing rights.
Conclusion
When Lindsay Tanner was Finance Minister he stood as a senior representative of a government – a Labor Party government – that adopted all these attacks on welfare and income security.
It is telling that his essay discusses none of these issues. He is silent on the major reason why the Labor Party is becoming unelectable – their zealous grasp of neo-liberal economics – which stipulates a policy agenda that is the anathema of why the party formed in the first place
As Finance Minister, he perpetuated the neo-liberal myths about budgets and so helped significantly to seal the fate of his own party. He should own up to that rather than seek to maintain public relevance by invoking peripheral issues.
I am off to Perth soon (flight to catch) where I am addressing a major public sector union conference tomorrow morning. So ….
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.
Tanner is just another in a long line of politicians and others of the heirarchy who think it is safe to make a few out of order comments when they are on the verge of retirement.Gutless behaviour to put it politely.
The Labor Party has been largely a bunch of no hopers since 1972 when Witless and Barnyard tipped the equally hopeless Big Ears McMahon out.I haven’t seen the Tories improve much since then either.
The Greens,while they have a few decent policies,are divorced from reality just as much as the terrible twosome. The bureaucracy and probably a majority of the management class have no clue.
So,folks,it’s just TINA and more TINA. Things will have to get much worse before the pitchforks are produced and by then it may well be too late.
What a superb article!
I enjoyed the history lesson.
For the third time, I encourage you to run for the Senate as an independent.
Give me a reason to vote!
Esp Ghia,
I reckon Bill’s time is too valuable for that! It probably would be much more efficient if he were to become an adviser on economic policy for a full time politician. 🙂
How damaging do you expect the cuts in next year’s budget to be in Australia?
It is a very odd state of affairs when a government promises austerity in its final year of office as proof of its commitment to the voters whose jobs it will destroy. Especially so for a Labor-Green coalition.
Isn’t a more sensible economic policy the reduction in reliance on external debt, which I imagine will only be exacerbated by this policy?
Fascinating article. A similar process has unfolded in Canada, where our once social-democratic party, the New Democratic Party (NDP), has over the last 12 years or so moved hard to the right, to supplant the Liberal Party in the centre as official opposition. The former Progressive-Conservative party was destroyed in favour of the now governing Conservative party, an extreme right-wing neo-Liberal party; so the NDP has sought to bring the non-liberal conservatives into its fold, with some success. The principle plank of the NDP’s economic policy is now strict adherence to balanced budget ideology and “sound” finance; and beyond that, to capture regional discontents and the Quebec separatist vote (basically a collection of cynical regional elites), the NDP has turned to campaigning against national health and social standards (in an apparent effort to make Canadian confederation into the Euro zone through an inter-provincial race to the bottom). The Liberal Party, which, in the post-Pierre Trudeau era, tended to campaign to the left and govern to the centre right, has much to answer for, but despite being liberals and neo-liberals themselves, may present the only hope for progressive politics, since its traditional commitment to national standards and resolute central government places it now, rather paradoxically, on the left of the spectrum.
Quote:
‘1. “Labor’s historic mission – redistributing wealth and income to ordinary working people” is being undermined by “affluence”.’
This is something I have believed is true. I don’t know how important it is, but it’s discouraging. It says if you don’t make workers miserable enough, they will just put up with a lot of inequality. There is a limit and I think we will see this in Europe soon. There is a large demonstration in Athens today, and a few Molotov cocktails on the sidelines.
It may be that Greece, and then likely Spain are going to educate people that this misery is not something from nature, but is a choice by the leadership of the country.
From the US perspective on the disappearance of a real choice. Here is an article worth reading:
http://www.rollingstone.com/politics/blogs/taibblog/this-presidential-race-should-never-have-been-this-close-20120925
Also has a good take on why Romney will get more than the 2% of the vote that should logically be his share.
Dear Professor Mitchell,
I agree with Esp Ghia, a very interesting history lesson. Speaking of history; if you have time, I wonder if you could take a look at this comment about how it was the monetary policy of the New Deal, and not fiscal policy in the U.S. that was responsible for the initial recovery during the Great Depression:
http://economistsview.typepad.com/economistsview/2012/09/fed-watch-plosser-opposes-the-1933-37-expansion.html#comment-6a00d83451b33869e2017ee3cbb59e970d
I’ve seen Romer’s paper linked to quite a bit in past debates about the effectiveness of monetary policy compared to fiscal policy. I tried to read the Romer paper myself, but I don’t really understand much of it on first glance and don’t have much time at the moment to devote a lot of time to studying it. I don’t suppose you’re already familiar with the Romer paper and have some ready made/easy to comprehend explanation for why the model she uses to decompose the contribution of fiscal and monetary policy to the recovery so strongly indicates that it was monetary policy that played the decisive role in supporting growth? Thanks and sorry if you’ve explained this somewhere before.
Bill’s analysis is good as far as it goes but he needs to take it further in my opinion. Whilst concentrating on macroeconomics (the economics part of Political Economy) Bill does not get past the descriptive part of the “Political”. Bill describes the situation (they are all neo-liberals now) but does not analyse why this is so. Why is neoliberalism so triumphant now? Why does it dominate political and public discourse entirely when it is so demonstrably fallacious? I admit I am nonplussed and frustrated myself. I would interested to see Bill provide his anlaysis on this topic.
Another topic Bill needs to explore more, in these blogs, is the real economy, real constraints and real limits. Bill’s macroeconomic analysis proceeds for the most part (so far as I can see) on the basis that the economy is more or less permanently in a condition of under-utilisation of labour, plant and potential resource inputs. Currently, this is true due to the grinding effects of neoliberalism and austerity. However, the bigger picture is that the world population and world economy are approaching natural and resource capacity limits.
Given the above fact, we also need an exploration of steady state economics. Bill’s MMT prescription explicitly prescribes greater near term growth and implicitly relies on endless growth. Until Bill can theoretically meld growth-to-capacity economics with transition to steady state sustainable economics he has not completed the economic project required by empirical reality. In short, Bill still appears to be doing macroeconomics as if endless growth is possible.
Some sort of defection withen the Irish “labour” party over health issues.
http://www.irishtimes.com/newspaper/breaking/2012/0926/breaking52.html
I have to say she never rocked my boat – a typical intrusive liberal who wants me to stop drinking beer and all so that I can become more productive Robot withen the modern market state of happy clappy IKEA people.
She did the right thing I guess but I greatly fear these Liberal Labour Gestapo people.
Same old ding dong on the Irish economy blog after a “stimulus” leftish pamphlet was published ( Nevin Institute: Quarterly Reports )
which completly avoids the core issues of sovereignty and its lack of although to be fair I had difficulty reading all of it.
Cue Irish Dork 1 : we need more taxes of the (internal) upper middle & rich
Irish Dork 2 : but look at the poor – most of the spending goes to benefits for the poor
Irish Dork 3 : our tax system is so progressive Dork 2 , Dork 1 wants it even more progressive with negative consequences for the remaining net tax contributors to the state.
Its so sad really……keep the debate orbiting the tax issue….but for God sake do not mention the MONEY SUPPLY.
No mention that the poor welfare drones are mere conduits for external capital and withen the current monetary system its best if they did not do much of anything thanks.
Of course now that its clear they cannot hyper inflate consumer bank credit again to pay the external interest on sov debt they need to slowly or not so slowly reduce the population via various more violent mechanisms of attrition.
Its typical propoganda really – its either or – give the poor bastards 2 false options
Lets not mention these figures shall we.
Irish national accounts….
Y2006 : National debt interest paid to
residents : 826 million
Rest of the world :990 million
Y2011 : national debt interest paid to
residents :1,101 million
rest of the world : 4,067 million……..
Could this have something with the loss of domestic demand ?
4 Billion may not seem like much but the Irish banks are creating almost zero credit which means the rest of the world is subtracting from Irish domestic demand.
We are a retarded people run into the ground by priests calling themselves economists.
Ireland is a embarrassing little fiefdom.
This has been going on all around the western world. Bill mentioned the UK and Holland and a commenter mentioned Canada. With recent events, Greece really stands out. PASOK is undistingushable from New Democracy. Andreas Papandreou must be spinning in his grave of what happened to his party just a few years after his death
NKlein,
I was struck by this statement in that link you provided, a statement by one Charles Prosser of the Philadelphia Federal Reserve:
Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation.
I was further “struck” that the author, Tim Duy (of Tim Duy’s Fed Watch) did not comment on the obvious, nor did any in the the stream of comments, the obvious being that reserves are never lent.
I would’ve thought a mistake like that from a Federal Reserve official would’ve attracted howls of derision.
Alan Kohler (prominent finance commentator/guru) was on ABC TV recently explaining that the high AUD was because traders could foresee a fall in the USD as all the newly printed money from QE3 floods the US economy.
Mindboggling.
Bill often talks about sustainability Ikonoclast.
As much as we’d all like to see an economics built on sustainability (before it’s painfully imposed by events) I think Bill has to prioritise, tackling what’s achievable first, that is, getting MMT up as the dominant paradigm. There’s no inherent incompatibility.
Having said that, I quite enjoy your occasional comments on sustainability issues and such. I’m quite sure our host wouldn’t mind us “chatting amongst ourselves”.
It has occurred to me that our economy must eventually run on ubiquitous, renewable resources where the limiting factors will be various finite flows and not finite stocks (which latter are the limiting factors for economies running largely on said finite stocks). I don’t imagine for a second I am the first person to think of this. It means that if we project forward we must consider how we can run the economy on ubiquitous recources rather than on naturally concentrated deposits of resources at limited sites. This will mean changing the very elements we rely on and consquently the type of compound and composite materials we use to make things. It will also mean getting power from solar energy and its derivatives like wind.
As I say, I don’t claim my initial point is unique or ground breaking but I haven’t actually seen anyone fully address the issue of the ubiquitous renewable resource economy as opposed to the incomplete concept of the merely renewable economy. The need for ubiquity of the basic resource supply implies profound changes to our materials and energy use and thus to mechanical, electrical and chemical enegineering and technological solutions in the long term.
Our global economy must eventually run solely on renewable and ubiquitous resources. In addition, the waste generation associated with resource use and production must be fully assimilable and degradable. All waste must be absorbed and recycled by the earth’s natural systems without significant damage to the biosphere or to ecosystems. Some resources, like fossil fuels, cannot be safely used up in their entirety due to the long term damage they will do to biosphere systems like the climate. All non-renewable or limited and non-ubiquitous resources will dwindle and peter out if their use continues. Recycling of materials can ameliorate this problem but recycling never recaptures 100% of the material in question. Some proportion is always lost and dispersed in unrecoverable quantities.
Only renewable and ubiquitous resources offer humanity any long term prospects for maintaining global civilization. This is whilst terrestrial and solar conditions remain sufficiently benign for human civilization to continue. A renewable resource is a natural resource with the ability to reproduce through biological processes or replenish through natural processes over time and in any reasonable terrestrial time scale. Resources which will eventually fail after vast periods of time, e.g. solar power when the sun fails or explodes, can be considered renewable resources for practical purposes.
Ubiquitous resources are found everywhere and in large quantities. Key examples of ubiquitous resources on earth are solar energy, visible light, air, water, oxygen, silicon (as silica), nitrogen, carbon, sodium, chlorine, calcium and some others. We might add items like cellulose, carbohydrates, starches etc. from plants. Useful bacteria might also be termed ubiquitous resources. Not all of these items (where they are elements) are available in their free state. The graph of elemental abundances in the biosphere and crust of earth is some guide to this. However, even some abundant elements (like iron) are not economically recoverable except at specific locations. All such elements along with the rarer elements are correctly termed localized resources.
http://en.wikipedia.org/wiki/File:Elemental_abundances.svg
Seawater is a good source of key ubiquitous resources if sufficient energy is available to extract them. “The four most concentrated metal ions, Na+, Mg2+, Ca2+, and K+, are the only ones commercially extractable today, with the least concentrated of the four being potassium (K) at 400 parts per million (ppm). Below potassium, we go down to lithium which has never been extracted in commercial amounts from seawater, with a concentration of 0.17 ppm. Other dissolved metal ions exist at lower concentrations, sometimes several orders of magnitude lower. None has ever been commercially extracted.” – Ugo Bardi, The Oildrum. Chlorine is also extracted from seawater or more precisely from treated brine. The ions Na+, Mg2+, Ca2+, and K+ can be economically extracted at that time.
Localized Resources are only found in recoverable quantities in certain limited parts of the world (e.g., copper and iron ore). These localized resources are limited (though in some cases the limits are quite large) and non-renewable. Eventually all economically recoverable, limited and localised resources will be exhausted and scattered. Substitutions for many of these are feasible. For example iron (for steel) and also aluminium for construction can both be substituted with carbon fibre and glass fibre reinforced polymers. Carbon and silica are ubiquitous resources. Epoxy (the most common polymer) needs propene (also known as propylene or methyl ethylene) and chlorine as the basic feed stocks for manufacture.
We have already seen that chlorine is a ubiquitous resource given adequate energy for extraction. Propene is currently produced from fossil fuels-petroleum, natural gas, and, to a much lesser extent, coal. If these fossil fuels are conserved for industrial feed stocks rather than wasted by burning them, then propene production for epoxy is assured for a very long but not indefinite time. In the distant future, should all fossil fuels be used up for feed stocks, synthesis of propene from cellulose or pure charcoal from sustainable forests or from inorganic carbon sources like limestone, dolomites and carbon dioxide might be possible. Large quantities of energy would be required. Recycling of waste carbon fibre epoxies would have to occur probably through high temperature furnaces achieving complete combustion and producing useful energy.
Some metals would seem to be needed indefinitely for the maintenance of a high technology society. For example, iron, copper and aluminium would seem to be needed for as long as a high technology electrical economy would continue (not to mention lithium, zinc and neodymium). I am not sure how this supply of metals can be maintained indefinitely given the exhaustible nature of these resources, their non-ubiquitous nature in practical recovery terms and their slow dispersal given the impossibility of 100% effective recycling.
How do we eventually make electrical machinery (generators, motors, transformers, inverters, transmission lines etc.) without metals? That is a question to exercise our minds but it might be solvable in the future by advances in carbon, silicon and polymer technology along with nano-engineering applications. It’s hard to know at this stage. Alternatively can iron, copper and aluminium etc. be recovered indefinitely in a sustainable, renewable, ubiquitous fashion?
John Armour said:
I was further “struck” that the author, Tim Duy (of Tim Duy’s Fed Watch) did not comment on the obvious, nor did any in the the stream of comments, the obvious being that reserves are never lent. I would’ve thought a mistake like that from a Federal Reserve official would’ve attracted howls of derision.
The reason why there were not howls of derision John, is that neoclassical economists by and large do not understand banking. The economic models used by the neoclassicals mostly do not take into account banking, money or credit. They are basically barter models. They think banking involves borrowing money and relending it. Thus they have no concept of debt to the banking system and the creation of credit money contributing to aggregate demand. This fundamental flaw in their thinking is consistent with their espousal of equilibrium descriptions of how economies operate. However they do not even understand the nature of equilibria, because there is a widespread belief amongst neoclassicals that all equilibria are stable. Their lack of understanding of basic scientific concepts would be embarrassing in other circumstances, however they seem quite happy to dismiss anything which contradicts their a priori models as irrelevant, including well established empirical evidence. Until the situation changes, mainstream economics will never be a science.
Ikonoclast,
An interesting summary of the technical challenges. I’m sure they could be met given time.
If a pileup on the M4 can add to GDP, it’s not too hard to see that a sustainable economy could equally be modeled on a “growth” paradigm. Indeed, that would be seem to be a worthy goal.
Not sure about the political challenges but, like prohibiting the dumping of waste (including heat) in the biosphere. I say ‘prohibiting’ because I don’t think there’s time to wait for some market mechanism of pricing externalities to get us to a sustainable base.
I think you could add population control to that list (to add to the political problems)
“Why does it dominate political and public discourse entirely when it is so demonstrably fallacious?”
Simply because it is useful to those in power? Edward Bernays wrote, in 1928:
“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.”
We are exposed to propaganda (of course we call it “public relations”, “advertising”, or “news” these days) constantly throughout every day of our lives. It’s all-pervasive. Neoliberal propaganda is useful for the elites because it effectively mutes the claims of the great unwashed, and leaves them fighting amongst themselves for a greater share of a pie that’s being stolen from them by ravenous, psychopathic elites. Instead, people are left to exercise their rights to consume, and to feel fortunate enough to vote every few years for one of two corporate backed parties that fight over the best means to extract the surplus from them.
We’re so easy to manipulate as a species that it’s no wonder the world is as screwed up as it is. Unless human nature changes, I see no chance that this will improve. The corporatocracy has us right where it wants us – indebted, hence pliable and unlikely to revolt against the system – and completely dependent on the products of the corporatocracy for our survival. There is no way out of this for most people, lured into debt slavery by the false promises of a system that is sociopathic in nature. In a sick kind of Stockholm syndrome, the majority still aspires to acquire the material wealth produced by the very system that is destroying our communities, our humanity, and our planet. We will burn all the carbon that we are able to, and as we descend into the mire of global chaos that lies ahead, we will be shepherded by our good corporate masters until they can no longer do so.
Ikonoclast, there is enough nuclear energy, especially thorium to power humanity for rest of our days.
See this documetary: http://www.youtube.com/watch?v=GQ9Ll5EX1jc
And this lecture: http://www.youtube.com/watch?v=VgKfS74hVvQ
Bill has hit this problem square in the idea. I have already observed some of the things he notes here in the US. Indeed, if I didn’t know better, I might accuse Bill of plagiarizing a few of my older essays on the subject.
But the question I have is – how is this even possible? How could the neo-libierals have such a hold over global politics in such a way? Has the economic/scientific itself failed? Are real economist simply shut out of policy discussions? Is the right science simply not being done?
Part of the answer might be found with biologists. No, not biology, but with the biologists them selves as they have been forced to deal with the public in order to defend the theory of evolution from creationists who are pushing a religious dogma. In other words, they learned the hard way that this is not an academic battle – but a public one. I submit that economists have not yet learned this lessen, that this is not an academic battle – but rather a public one.
Code Name D
“I submit that economists have not yet learned this lessen, that this is not an academic battle – but rather a public one.”
If you’re referring to heterodox economists (the good guys) you’re probably right, although Bill and his MMT colleagues are certainly now doing something about that.
It seems to me neo-liberal economists have always known how to engage with the public courtesy of an ignorant and compliant media, to tweak their phobias about debt and deficits using the flawed domestic household analogy, the fallacy of composition.
But I sense that’s all about to change. MMT’s penetration into the blogosphere over the last couple of years has been very encouraging. I’ve even seen it described as an internet phenomenon.
What would be popular (and just) would be an anti-bank party. But I doubt I’ll ever see the MMT folks lead or support such a party.
Where, for instance, is support for Steve Keen’s universal bailout?
Instead, MMT seems about saving banking from itself.
It always turns out that things promoted as near magical solutions, aren’t.
http://www.guardian.co.uk/environment/2011/jun/23/thorium-nuclear-uranium
John Armour
“If you’re referring to heterodox economists (the good guys) you’re probably right, although Bill and his MMT colleagues are certainly now doing something about that.”
Yes, and I applaud Bill and a hand full of others who are starting the process. But more must be done. A lot more. 1. To engage the public to explain in laymen’s language the basic principles of MMT and why it’s relevant for every day life. 2. To present and expand upon the evidence behind MMT as well as the evolution of the science itself. 3. Educate upon the basic principles of science and how they are applied to social sciences such as economics. 4. Address and debunk the counter arguments and why the evidence dose not support, or even disproves such positions. 5. Provide resources for activist who will to the lion’s share of public outreach and activism. 6. Conduct or assist in further research with ongoing debunking efforts.
“It seems to me neo-liberal economists have always known how to engage with the public courtesy of an ignorant and compliant media, to tweak their phobias about debt and deficits using the flawed domestic household analogy, the fallacy of composition.”
Of course they do, because that is what con-artists do. But do not come down too hard on the media or the public. A majority of people do not have the education or resources to understand the material at this level. Even of those who do have master’s degrees or doctorates, will still not have the required background in economics to make a truly informed evaluation against clever sounding logic.
The problem is made more complex that there doesn’t appear to be a coherent economic theory equivalent to the theory of evolution, which has earned an academic consensus. This makes it difficult for activist to know who to turn to for answers. We know neo-liberalism has it wrong, but that dose not make MMT correct by default, and I remain skeptical baring further understanding. And its difficult to debunk arguments without a solid alternative theory.
Code,
I hear your frustration but let me just say this:
Jessica Irvine, National Economics Editor of News Limited’s metropolitan daily newspapers, recently wrote this:
“With economic growth still at around trend, getting the budget back into surplus is the prudent thing to do. If the GFC taught us anything, it’s that governments are pretty bad at balancing the books.”
If that’s the lesson Ms Irvine took from the GFC I’d suggest she may have been somewhere else when it happened.
But this sort of stuff spews forth from mainstream media on a daily basis. And this is where the public learns its economics.
The foundations of macroeconomics are very simple. Not much different from childhood games of “shop” when mother gave us a few copper coins as a float so we could buy the kid sister’s mud pies.
It’s not that the new ideas are difficult, they aren’t. The problem is clearing your head of the old ones.
The corporate-controlled mainstream media cannot be trusted to tell the truth on matters that threaten the status quo. Naturally, they share the interests of corporate culture in keeping the public misinformed, and often act as little more than mouthpieces of the elites. We need media reform on an unprecedented scale before we can expect any sense to emanate from these bastions of disinformation. But as long as corporations have more rights than individuals, this isn’t likely to happen.
MMT has made truly impressive strides in the blogosphere, but I fear that unless it is co-opted by an elite subgroup who find it useful to challenge the neoliberal consensus, it may remain marginalised. Revolutionary change almost invariably requires the development of division within elite society – contrary to popular belief, it is rarely achieved solely with grassroots agitation. It may take a generation of re-education before things start to change – as Max Planck said, science advances one funeral at a time, and I see no reason why economics should be any different – I only hope it’s not too late.
“It always turns out that things promoted as near magical solutions, aren’t.”
Very true. Renewables aren’t going to deliver and we’re going to be Gas/Coal powering the world for a long time unless some significant non-vested resources is spent developing the alternatives – nuclear *and* renewables.
“The sheer arrogance of those who would close off extremely promising lines of energy research and development, based on nothing other than their faith and assurances that renewables can alone supplant fossil fuels is breathtaking. The pillars of any such renewables deployment must be solar and wind. I would remind these overly opinionated individuals that solar and wind constitute less than 3% of electricity generation world wide and no more than about 1% of world energy production.”
Coal and gas outputs are far more dangerous to humanity than nuclear waste. It really is about time that we started to take this problem seriously and ignored the zealots on both sides of the debate.
“It really is about time that we started to take this problem seriously and ignored the zealots on both sides of the debate.”
Absolutely, Neil.
Like, some clear-headed discussion of the differences between the obsolete technology that was Fukishima and Chernobyl and Generation 4 technology like the Integral Fast Reactor.