ECB should start funding government infrastructure and cash handouts

I was a signatory to a letter published in the Financial Times on Thursday (March 26, 2015) – Better ways to boost eurozone economy and employment – which called for a major fiscal stimulus from the European Central Bank (given it is the only body in the Eurozone that can introduce such a stimulus). The fiscal stimulus would take the form of a cash injection using the ECB’s currency monopoly powers. A co-signatory was Robert Skidelsky, Emeritus Professor, Warwick University, renowned Keynesian historian and Keynes’ biographer. Amazingly, Skidelsky wrote an article in the UK Guardian two days before the FT Letter was published (March 24, 2015) – Fiscal virtue and fiscal vice – macroeconomics at a crossroads – which would appear to contradict the policy proposal we advocated in the FT Letter. The Guardian article is surrender-monkey territory and I disagree with most of it. It puts the progressive case on the back foot. What the hell is going on?

For those who do not have access to the Financial Times, here is the text of the letter:

Sir, The European Central Bank forecasts unemployment in the eurozone to remain at 10 per cent even after €1.1tn of quantitative easing. (FT View, March 25). This is hardly surprising: the evidence suggests that conventional QE is an unreliable tool for boosting GDP or employment.

Bank of England research shows that it benefits the well-off, who gain from increasing asset prices, much more than the poorest. In the eurozone, where interest rates are at rock bottom and bond yields have already turned negative, injecting even more liquidity into the markets will do little to help the real economy.

There is an alternative. Rather than being injected into the financial markets, the new money created by eurozone central banks could be used to finance government spending (such as investing in much needed infrastructure projects); alternatively each eurozone citizen could be given €175 per month, for 19 months, which they could use to pay down existing debts or spend as they please. By directly boosting spending and employment, either approach would be far more effective than the ECB’s plans for conventional QE.

The ECB will argue that this approach breaks the taboo of mixing monetary and fiscal policy. But traditional monetary policy no longer works. Failure to consider new approaches will unnecessarily prolong stagnation and high unemployment. It is time for the ECB and eurozone central banks to bypass the financial system and work with governments to inject newly created money directly into the real economy.

The Bank of England research we referred to in the letter was published on July 12, 2012 – The Distributional Effects of Asset Purchases.

The intent expressed in the FT Letter is straightforward.

I wrote about Overt Monetary Financing (OMT), which is the latest terminology for central bank fiscal action in this blog – OMF – paranoia for many but a solution for all – and it features in my soon to be published book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale.

OMF recognises that the usual monetary policy changes which involve variations in interest rates are relatively ineffective in stimulating a recessed economy.

When households are worried about losing their jobs and firms declining to invest in new productive capital because the sales outlook is depressed, cutting interest rates will not stimulate a large demand for credit.

Further, those who rely on fixed incomes are disadvantaged by a reduction in interest rates.

It is also clear that fiscal policy is very effective – it introduces spending capacity directly into the economy, which stimulates sales, employment and allows households to save more if they are exposed to large debt levels.

OMF breaks the link between fiscal deficits and the common voluntary practice in the neo-liberal era where governments match their deficits with debt issuance to the non-government sector.

It is clear that there is a significant misunderstanding of the debt issuance process. But even though increased public debt levels are of little relevance to the health of the economy, given that a currency issuing government can always meet its liabilities denominated in the currency it issues and that debt issuance is just tantamount to the government borrowing back past deficits, there is still massive public hysteria surrounding this matching process.

The Eurozone is different, in the sense that at the Member State level, the matching of fiscal deficits to debt issuance is not voluntary but a required outcome of surrendering their currency sovereignty.

Further, a Member State of the Eurozone can clearly become bankrupt if it cannot issue debt at times they are running fiscal deficits. The corollary of that observation is that any debt they issue is subject to credit (default) risk, which is not a problem besetting nations that maintain their own currencies.

So, within the logic of the Eurozone, there is some sense to the debt hysteria. Too much debt will stampede the bond markets, which will then not be prepared to absorb any further credit risk at going yields and the debt issuance process for the single Member State becomes problematic.

That is, as long as the central bank (the ECB) refuses to take on the responsibilities that a central bank in a currency-issuing state assumes in order to ensure the economy is not subject to entrenched stagnation and the financial sector (banks etc) are not at risk of insolvency.

But the ECB, like any central bank, can create currency units (in this case, euros) at zero marginal costs – that is, out of thin air – and can never go broke, not even if all its ‘assets’ were degraded in value to some negative value.

Please read my blogs – The US Federal Reserve is on the brink of insolvency (not!) and The ECB cannot go broke – get over it – for more discussion on this point.

So even though the flawed design of the Eurozone places restrictions on the Member State governments with respect to fiscal policy latitude, which are compounded by the voluntary fiscal rules known as the Stability and Growth Pact (SGP), the central bank (the ECB) has all the latitude it needs to issue currency (and buy as much government debt as it likes in the secondary bond markets).

Even though the Treaty governing the common currency prohibits so-called ‘direct’ bailouts of struggling governments, there is nothing in the Treaty that says the ECB cannot issue currency and make it available to whomsoever it chooses.

Of course the idea that the central bank would just create liquidity which could be used to purchase goods and services is considered taboo by most nearly everyone. All of which who do not fully understand what would be involved anyway – and if they did the taboo would be gone immediately.

I raised the following question in my forthcoming book: how can a relatively simple monetary operation between a central bank and its corresponding treasury department (both part of what we can call the ‘consolidated’ government sector) possibly be considered a taboo?

‘Overt Monetary Financing’ (OMF), simply means that in some form or another, the treasury arm of government tells the central bank it wants to spend a particular amount and the latter then ensures those funds are available in the government’s bank account for us.

Various accounting arrangements might accompany that action. For example, the treasury might sell the central bank debt some government bonds which match the value of the funds put in the government’s bank account.

In the FT Letter we propose OMF in this form as well as just giving out a demogrant (a payment of a certain sum to every citizen) for a period. No holds bars. Just get the credit in the bank account and spend it if you like.

Almost certainly a significant portion would be spent. Governments could also use the funding to offer job creation programs (human infrastructure development) and fix degraded public infrastructure.

It is a win-win.

Abba Lerner clearly understood this. Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.

His second law of Functional Finance advocated the central bank using OMF to match government deficit spending sufficient to achieve and sustain full employment. The idea is very simple and does not involve any printing presses at all.

While the exact institutional detail can vary from nation to nation, stylistically, governments spend by drawing on a bank account they have with the central bank. An instruction is sent to the central bank from treasury to transfer some funds out of this account into an account in the private sector, which is held by the recipient of the spending.

A similar operation might occur when a government cheque is posted to a private citizen who then deposits the cheque with their bank. That bank seeks the funds from the central bank, which writes down the government’s account and the private bank writes up the private citizens account.

All these transactions are done electronically through computer systems. So government spending can really be simplified down to typing in numbers to various accounts in the banking system.

When economists talk of printing money they are referring to the process whereby the central bank adds some numbers treasury’s bank account to match its spending plans and in return is given treasury bonds to an equivalent amount in value.

That is where the term ‘debt monetisation’ comes from. Instead of selling debt to the private sector, the treasury simply sells it to the central bank who creates new funds (or financial assets) in return.

This accounting smokescreen is, of-course, unnecessary. The central bank doesn’t need the offsetting asset (government debt) to function given that it creates the currency ‘out of thin air’.

So the swapping of public debt for account credits is just a convention.

The taboo element relates to what Lerner said is an “almost instinctive revulsion … to the idea of printing money, and the tendency to identify it with inflation” but that:

… we calm ourselves and take note that this printing does not affect the amount of money spent. That is regulated by the first law of Functional Finance, which refers to inflation and unemployment.

In other words, it is spending that creates the inflation risk. And as long as total spending is at the appropriate level specified above, then “printing money” will be an appropriate accompaniment to total government spending.

The point to note is that the inflation risk lies in the spending not the monetary operations (debt-issuance etc) that might or might not accompany the spending.

All spending (private or public) is inflationary if it drives nominal aggregate demand faster than the real capacity of the economy to absorb it.

Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use (for example, unemployment).

Related propositions include the claims that issuing bonds to the central bank, the so-called ‘printing money’ option, devalues the currency whereas issuing bonds to the private sector reduces the inflation risk of deficits. Neither claim is true.

First, there is no difference in the inflation risk attached to a particular level of net public spending when the government matches its deficit with bond issuance relative to a situation where it issues no debt, that is, invests directly.

Bond purchases reflect portfolio decisions regarding how private wealth is held. If the funds that we used for bond purchases were spent on goods and services as an alternative, then the budget deficit would be lower as a result.

Second, the provision of credit by the central bank (in return for treasury bonds) will only be inflationary if there is no fiscal space.

Fiscal space is not defined in terms of some given financial ratios (such as a public debt ratio).

Rather, it refers to the extent of the available real resources that the government is able to utilise in pursuit of its socio-economic program.

Further, hyperinflation examples such as 1920s Germany and modern-day Zimbabwe do not support the claim that deficits cause inflation. In both cases, there were major reductions in the supply capacity of the economy prior to the inflation episode.

So if the ECB takes our advice, the Eurozone malaise would disappear very quickly and much of the current angst about Greece and other depressed economies would be over. Instead, there could be a genuine dialogue about growth and job creation and renewed prosperity.

What has this to do with Robert Skidelsky?

Well despite his name appearing on the FT Letter alongside my own (and others), just two days before our letter was published he wrote an extraordinary article in the UK Guardian – Fiscal virtue and fiscal vice – macroeconomics at a crossroads – claiming that:

Keynesians have to face the uncomfortable truth that the success of stabilisation policies may depend on the business community having Keynesian expectations. They need the confidence fairy to be on their side.

Which is an astounding retreat for Skidelsky, who in the sentence before admitted that he was as a “Keynesian”, he “firmly … [believes] … that market economies need to be stabilised by policy.”

The article’s logic is this:

1. “After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero.”

2. Then “they ran out of intellectual and political ammunition.”

3. Why? Because the “Keynesian remedy … ignored the effect of fiscal policy on expectations.”

4. Which means? “If public opinion believed that cutting the deficit was the right thing to do, then allowing the deficit to grow would annul any of its hoped-for stimulatory effect.”

Logic point 4 is referring to the mainstream notion called Ricardian Equivalence.

For more discussion on this point, please read my blogs:

1. Pushing the fantasy barrow

2. The fantasy Barro(w) is still being pushed

3. Ricardians in UK have a wonderful Xmas.

4. Ricardian agents (if there are any) steer clear of Australia

In a bizarre reversal of logic, neoliberals talk about an ‘expansionary fiscal contraction’ – that is, by cutting public spending, more private spending will occur.

This assertion comes with the fancy name of ‘Ricardian Equivalence’ but the idea is simple: consumers and firms are allegedly so terrified of higher future tax burdens (needed, the argument goes, to pay off those massive deficits) that they increase saving now so they can meet their future tax obligations.

Increased government spending is therefore met by reductions in private spending-stalemate.

But, neoliberals argue, if governments announce austerity measures, private spending will increase because of the collective relief that future tax obligations will be lower and economic growth will return.

In the literature, the economic models that make these bizarre predictions rely on some tight assumptions, which have to hold in entirety for the logical conclusions to follow.

Should any of these assumptions not hold (at any point in time), then the Ricardian models cannot generate the predictions and any assertions one might make based on this work are groundless – meagre ideological statements.

First, capital markets have to be ‘perfect’, which means that any household can borrow or save as much as they require at all times at a fixed rate which is the same for all households/individuals at any particular date. So totally equal access to finance for all.

Clearly this assumption does not hold across all individuals and time periods. Households have liquidity constraints and cannot borrow or invest whatever and whenever they desire. People who play around with these models show that if there are liquidity constraints then people are likely to spend more when there are tax cuts even if they know taxes will be higher in the future (assumed).

Second, the future time path of government spending is known and fixed. Households/individuals know this with perfect foresight. This assumption is clearly without any real-world correspondence. We do not have perfect foresight and we do not know what the government in 10 years time is going to spend to the last dollar (even if we knew what political flavour that government might be).

Third, there is infinite concern for the future generations. This point is crucial because even in the mainstream model the tax rises might come at some very distant time (even next century). There is no optimal prediction that can be derived from their models that tells us when the debt will be repaid. They introduce various stylised – read: arbitrary – time periods when debt is repaid in full but these are not derived in any way from the internal logic of the model nor are they ground in any empirical reality. Just ad hoc impositions.

So the tax increases in the future (remember I am just playing along with their claim that taxes will rise to pay back debt) may be paid back by someone 5 or 6 generations ahead of me. Is it realistic to assume I won’t just enjoy the increased consumption that the tax cuts now will bring (or increased government spending) and leave it to those hundreds or even thousands of years ahead to “pay for”.

Certainly our conduct towards the natural environment is not suggestive of a particular concern for the future generations other than our children and their children.

If we alter the assumptions to reflect more real world facts then the Ricardian models break down and deliver very different predictions. In that sense, we would not consider the framework to be reliable or very useful.

Further, in an empirical sense, the Ricardian Equivalence theorem has been shown to be a dismal failure regularly and should not be used as an authority to guide any policy design.

So what is Skidelsky thinking about?

He claims that after the initial fiscal stimulus packages in 2008-09:

Economic advisers assured their bosses that recovery would be rapid. And there was some revival; but then it stalled in 2010. Meanwhile, governments were running large deficits – a legacy of the economic downturn – which renewed growth was supposed to shrink. In the eurozone, countries such as Greece faced sovereign-debt crises as bank bailouts turned private debt into public debt.

But he admits that the governments “committed themselves to fiscal tightening” shortly after the stimulus packages were introduced.

He doesn’t seem to make the connection to the stalled growth.

Why not?

His explanation?:

Once beliefs and expectations are introduced into economics, as is surely reasonable, the results of fiscal policy become indeterminate. Too much depends on what people think the results of the policy will be. In the economists’ lingo, policy results are “model-dependent.”

But to show that actual policy made things worse does not mean that a better policy was actually available. The right policy’s success may depend on the public’s expectations of its effects. The unanswered question is why the public should have the wrong expectations

Expectations are important in driving economic behaviour. That point is correct but hardly justifies his claim that fiscal policy becomes ineffective because people are led to believe it is ineffective.

That is the nonsense that mainstream neo-liberal economists sprout.

So here are some examples of fiscal stimulus measures. Ask yourselves what you expect the impacts to be.

The national, currency-issuing government facing entrenched high unemployment and increasing poverty in an environment of depressed sales and poor income support measures announces that it will introduce a – Job Guarantee.

It tells the citizens, all of who are skeptical of government deficits, that it will offer a job at a reasonable wage (a socially viable and inclusive minimum) to anyone who cannot find work elsewhere.

This job offer is unconditional and permanent and the wage will be protected in real terms over time.

The difference between the wage and the income support payment is not insignificant.

1. Will there be a reduction in unemployment? Definitely. Not entirely, because some higher skilled workers may eschew the Job Guarantee opportunity and hang out for a better job. They might also have redundancy payments. So they will stay in what we call ‘Wait Unemployment’. But most of the unemployed would take the jobs.

2. Will the newly employed workers who were facing poverty spend more as a result of the Job Guarantee position? Almost certainly. The propensity to consume for someone in poverty is almost 1, which means for every dollar they get extra they spend that amount.

Some newly employed workers will clearly lift their saving rates as well.

But there will be a solid increase in aggregate spending.

3. Will that extra spending induce further spending? That is, are expenditure multipliers above 1? Even the IMF admits that expenditure multipliers might be around 1.7 in a recession. So not only will the Job Guarantee workers spend their extra income but that spending will stimulate sales throughout the economy which will induce further production and employment and wage payments, which lead to further spending overall.

4. Will workers worry about the fiscal deficit and not spend the extra incomes? Not a chance. Even if they are right-wing neo-liberals in their ideological swing, they will spend more – poverty is harsh, consuming is better.

5. What will firms do? They suppress investment in recessions because the existing capital stock (machinery and equipment) is sufficient to meet the depressed sales levels.

As spending increases, they will find they need extra productive capacity to maintain market share and this will induce further investment spending, especially as they realise the Job Guarantee will be permanent and the incomes paid to workers will be on-going.

As more economic activity occurs, the Job Guarantee pool would shrink and workers would transit into other higher paying jobs and by then the recovery is entrenched.

Example Two – the government places a major order for new public mass transit systems or new educational or health infrastructure. The contracts for building etc will offer payments over the next two to three decades.

1. Do you think construction and infrastructure contractors will refuse to tender for these opportunities because they are worried about higher tax rates?

2. Do you think successful tendering firms will refuse to increase production and employment – even the most conservative business firms (politically) take advantage of government contracts to expand their businesses.

There is zero evidence that such stimulus measures will hit an ‘expectations’ wall and cease to underpin economic activity.

It is only when governments introduce uncertainty into policy making by claiming austerity is needed when the economy is not yet fully recovered – and confidence remains low – that pessimism mounts and private thrift dominates.


You can see the contradiction between the UK Guardian article by Skidelsky and the FT letter he signed.

I won’t attempt to speculate on what was in his mind in either case.

But the ECB should follow our advice and the Eurozone malaise would end very quickly.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 37 Comments

  1. I was baffled by Skidelsky’s article too.

    As for the OMF, I completely agree, but politically it’s a non-starter.

  2. There are a few things here that worry me about OMF type ideas – particularly in the Eurozone

    Mostly because it crosses the boundary between the ECB just altering the existing circulation mix to actually spending substantial money on real things. For me that is federal spending without an elected federal government authorising that spending – and that crosses the rubicon from Republic to Empire by creating a Tyrant.

    Arguably the ECB is already acting as Tyrant via its attempts to restrict ELA at the national central bank – an action that is likely Ultra Vires given that one of the basic tasks of the ECB is to promote the ‘smooth operation of payments systems’. I’m wondering at what point relations with the ECB will get so bad that a country will attempt to injunct the ECSB.

    I note that the Greek Finance Minister is pushing a similar line by trying to drive the OMF via the European Investment Bank. Again there who elected the people running these centralised banks and who said they were competent to decide what is good for each country? Shouldn’t the principle of subsidiarity suggest that there is a locally owned Investment bank in each member state where the ECB provides what is demanded?

    I worry that in trying to relieve the suffering of the European people we will inadvertently hand victory to those who wish to further embed the anti-democratic rules of centralised corporate power in the function of the European Union.

    As we’ve seen with Greece it is already bad enough to realise that a sea-change election in an entire country cannot really alter anything.

  3. The letter to the FT was signed by:
    Victoria Chick, University College London
    Frances Coppola, Associate Editor, Piera
    Nigel Dodd, London School of Economics
    Jean Gadrey, University of Lille
    David Graeber, London School of Economics
    Constantin Gurdgiev, Trinity College Dublin
    Joseph Huber, Martin Luther University of Halle-
    Steve Keen, Kingston University
    Christian Marazzi, University of Applied Sciences and
    Arts of Southern Switzerland
    Bill Mitchell, University of Newcastle
    Ann Pettifor, Prime Economics
    Helge Peukert, University of Erfurt
    Lord Skidelsky, Emeritus Professor, Warwick University
    Guy Standing, School of Oriental and African Studies,
    University of London
    Kees Van Der Pijl, University of Sussex
    Johann Walter, Westfalische Hochschule, Gelsenkirchen
    Bocholt Recklinghausen, University of Applied Sciences
    John Weeks, School of Oriental and African Studies,
    University of London
    Richard Werner, University of Southampton
    Simon Wren-Lewis,University of Oxford

  4. Bill, Further to your letter in the Financial Times, I think you and your co-signatories do yourselves and MMT a disservice by proposing that “each eurozone citizen could be given €175 per month, for 19 months”. Whilst MMT proponents will realise this is perfectly possible and acceptable, I’m afraid I think the majority of FT readers will simply label you a crackpot and turn the page. I have been studying MMT for a couple of months now, and whilst I understand the principles at this time, I certainly didn’t before. Most other people are the same, and you make a mistake by assuming everyone understands how government spending works. They are hooked on the modern religion of Government Debt Reduction.

  5. Bill,
    How does the job guarantee apply in the UK as part of the EU with unrestricted immgration of other European job seekers?
    Surely any UK citizen only employment policy would be deemed illegal and anti-European?

  6. comments on the comments
    Neil is absolutely right progressive politics cannot proceed without democracy
    the eurozone is a step towards federal government or a step
    towards autocratic rule and there is no appetite amongst Europeans for cross border
    fiscal transfers.
    The same fundamental flaw Chris longs points out even outside the eurozone
    the separation of democratic process and macroeconomic power.
    Nigel there is no way of getting around the nature of monetary sovereignty .
    whether it’s MMT or any derivative of Chartalism.
    Governments have the power to create money.It is a debate which needs to met
    full on.The smoke and mirrors need to be avoided .Honesty and transparency
    are required .Without monetary reality politics ends in the charade we are facing
    in the uk in the next 6 weeks and power remains in the hands of the few with
    the biggest spending power.
    The only question is if €175 a month for 19 months while welcome enough!

  7. chrislongs

    Assumimg the policy is adopted throughout the EU why would you wish to limit the job guarantee to UK citizens anyway?

  8. Dear Bill

    When you recommend that every eurozone citizen should receive 175 euros from the ECB, does that include children? Should a couple with 2 children under 18 receive 700 or 350?

    Although I certainly have no qualms about OMF, using it in the eurozone will not do anything about the competitive disequilibrium between Southern Europe and other members of the eurozone. The euro is overvalued for countries like Greece and Spain and undervalued for countries like Germany and the Netherlands. Your proposal doesn’t address that problem.

    As to the Job Guarantee, how should that program deal with bad workers. Every employee needs to show up on time, practice some diligence, get along with his co-workers and carry out the instructions from his manager. What if a participant in the JG is habitually late, very lazy, continually insults his co-workers and ignores the instructions of his manager? Should he be fired? If participation in the JG is conditional on standards of punctuality, diligence, ability to cooperate with others and willingness to comply with instructions, then it is no longer a guarantee. The JG has the same problem as public education. Every child has a right to go to a public school, but how should public schools deal with chronically misbehaving pupils?

    Regards. James

  9. “Although I certainly have no qualms about OMF, using it in the eurozone will not do anything about the competitive disequilibrium between Southern Europe and other members of the eurozone.”

    There’s rather too much focus upon this. You deal with it in a simple fashion. You give money to the South Europeans so that they can buy output from the efficient machines in Germany, et al.

    It then works like it does, or should, in any other currency area – the population has the effective demand to buy the output of the productive areas which makes it worth the productive areas producing anything.

    In any area you will have hotspots of high efficiency and large areas of generally average production. That’s how it has always worked from the first industrial city in Manchester, UK onwards.

    The trick is ensuring sufficient circulation outwards to the rest of society so that the productive centres don’t suck in everybody and create a destructive spiral of inequality.

    As to the Job Guarantee, you take people as they are and you do the best you can with them. But it is work and there is a minimum standard of behaviour expected to receive the minimum standard of wages and benefits. If you don’t fulfil that then you don’t get the wage.

    What you do get then depends upon how society views that. If it views the individual as suffering from health or social care issues, then they become funded by the health and social care systems. If it considers the choice a valid one then it will offer income support options, or perhaps hands that over to charities that are funded by that section of society who believe the choice should be offered.

    But again there is too much focus on the minority and the edge cases. Let’s get the *millions* of people who want to work into work at the living wage and then deal with the residual once that is in place.

  10. Fiona,

    I was attempting to be pragmatic/realistic – expecting EZ countries to adopt a job guarantee seems wishful thinking even with the current high levels of youth unemployment.. Mild progress in the UK is attracting Spanish nurses etc but reducing future training of same in the UK?

  11. What’s to stop them spending money on a bunch of corporate welfare.
    Infrastructure spend should not be cyclical and offset with land value tax.
    The Eurozone should be abolished, not made more powerful.

  12. “As to the Job Guarantee, how should that program deal with bad workers. Every employee needs to show up on time, practice some diligence, get along with his co-workers and carry out the instructions from his manager. What if a participant in the JG is habitually late, very lazy, continually insults his co-workers and ignores the instructions of his manager? Should he be fired? ”
    Yes. It’s a alternative job. But they won’t do that, as they would not get any money.
    The quality workers will be more likely to be hired by private firms.

  13. Kevin,

    I absolutely agree YOU and I know that. What I’m saying is the vast majority of FT readers don’t, and suggesting everyone in the EZ should get a load of dosh FOC from the ECB just sounds flippant to anyone who thinks we have to balance our budgets. Suggesting that the EZ embarks upon a programme of infrastructure spending – yes and possibly job garantees – is far more positive and even the dynosaurs can get that. There’s plenty of historical evidence to show it works. Even the last Labour government did it after a fashion in the UK.

    Chrislongs, the Tories are already proposing to restrict benefits to new immigrants. It is adopting a like-it-or-lump-it approach, and if the EU doesn’t like it we’ve always got the option of leaving. Same would go for job guarantee – although I’m not a fan of the idea having been involved in the youth training scheme as an employer years ago. Much better to create an environment where employment expands so everyone has a proper job.

  14. Dear Bill

    Another point about Weimar inflation was that the Weimar republic was burdened by foreign denominated debt as a resultof the treaty of Versailles.It was forced to buy up foreign currency to pay them off.The creation of money for domestic spending was not inflationary at all.Instead it was the declining currency exchange rate and rising import prices which in turn lifted home prices.

    As for Zimbabwe,the government was printing money to pay for foreign currency to pay off dollar denominated debts to the IMF.

    So really the two stock cases used to argue against money creation are really just examples of exchange rate inflation as a result the governments having large foreign denominated debts.

  15. Nigel,

    “I’m afraid I think the majority of FT readers will simply label you a crackpot and turn the page.

    Some may say that even though they’ll certainly understand the logic. What better policy to combat deflation that creating and spending additional money. Exactly the policy which has always been previously condemned as a bad thing because it creates inflation? What’s hard to understand about that?

    You may be aware that the Aussie government handed out $1000 cheques after the GFC, which went a good way to stabilising the Aussie economy at the time. Of course there were arguments, for and against, but no-one (as far as I can remember) claimed Aussie fiscal policy was being devised by crackpots. If they did they’ve turned out to be wrong.

    The A$ had fallen sharply on the exchange markets at the time and the prediction of the naysayers was that simply “printing money” would depress its value even further. Of course nothing of the sort happened and the $A recovered pretty quickly as the economy itself recovered.

  16. “Much better to create an environment where employment expands so everyone has a proper job.”

    That’s impossible and irrational in a productive private sector. If you try you end up reversing productivity gains and preventing new ones while driving wages through the floor.

    The trick is to get the private sector in that sweet spot where they are desperately investing to eliminate jobs with machines because of ever increasing labour costs while in massive competition with other firms. That’s the maximum power point of capitalism.

    Everybody in the economy must have an alternative job offer on the table so that ‘no deal’ is a viable outcome. Otherwise you have a power differential because workers must get hired in order to eat, whereas capitalists only need to hire if there is a profit to be made.

  17. Neil Wilson- “Everybody in the economy must have an alternative job offer on the table so that ‘no deal’ is a viable outcome. Otherwise you have a power differential because workers must get hired in order to eat, whereas capitalists only need to hire if there is a profit to be made.”

    A most excellent observation. I wanted to repeat it and remember it. Thanks.

  18. Bill, what Skidelsky did was rather extraordinary, but he engaged in what is a contradictory state of affairs because he doesn’t really understand Keynes’ paradigm. He seemed to me to get lost. And when I read Krugman’s analysis of Keynes’ General Theory (in an intro to a recent edition), I thought exactly the same thing, that he didn’t really understand what Keynes was saying. Neither of them really understand what Keynes was up to. Skidelsky may believe that the two positions he has taken are complementary rather than contradictory. But if that is so, does that not indicate that he may be out of his depth?

    This may seem outrageous, but there are economists who have absolutely no understanding of Keynes’ concept of uncertainty, conflating it with Fisher’s. And this is nowhere near as difficult as understanding Keynes’ incompletely and sometimes incorrectly argued general theory. For instance, Keynes’ theory of investment is incorrect, but was corrected by Kalecki in a review of the book, and Keynes agreed that Kalecki was right. Keynes knew that the argument wasn’t quite right and was revising the book in his head as soon as it went to the printers.

    In the end, I have no real idea what Skidelsky thought he was doing. But he could have been doing what I hypothesize he may have been doing. You could say that he was, if only temporarily, confused.

  19. Again, a good article and a desirable public policy outcome. Unfortunately, as you are probably perfectly aware, it is highly unlikely that our neoliberal politicians will take any heed. My only hope, a remote one, is that Greece or some other country breaks away from the monetary union and demonstrates the rest of the World that you can actually grow and decrease unemployment outside of the Euro. I was having this long twitter debate yesterday with the member of a thinktank who believes that it is cold outside of the Euro and that Europe will be moving to a fiscal union in 7, 10 or 20 years from now. In the meantime, large sections of our population will eek out a meagre existence with no help from their Government. As always, the poor cannot defend their interests but the wealthy and the bankers can do so very successfully by manipulating public opinion through the media and controlling the agenda of public debate.

  20. Dear Neil Wilson (at 2015/03/30 at 17:52) and others who supported this line of argument

    Your comment about the problem of reinforcing the ‘federal’ machinery in the Euro and the implications for democracy are sensible. But they remind me of the coffee shop conversations that hard-core Marxists (‘smash the state’ types) have when I propose a Job Guarantee or some other remedy to reduce unemployment – they cry out ‘palliative’ ‘apologist’ etc.

    I have been a long-term critic of the Eurozone. It can never be a prosperous arrangement that respects the peoples’ rights in the Member States. And in that sense, like Capitalism, the people should revolt and end the oppression.

    Another latte please, and one of those nice raspberry friands, if you will!

    Meanwhile, while the coffee is being made and we continue to plot the revolution, millions of people are without work (not us, we are on sinecures) and poverty rates are rising and suicides escalating as people lose dignity and hope.

    So palliative is human. It is not apology to the corrupt system.

    Further, (and this bears on Nigel Hargreaves’ comment about doing MMT a disservice), by proposing something so stark as a cash handout (stark in the context of the Euro neo-liberal, austerity Groupthink), we are pushing the debate to the limit – the FT can hardly be seen as a haven for left-wing crackpots – that is, it is read by the conservatives.

    To force latitude in debates, the boundaries have to be pushed out. Otherwise, what we now call ‘left’ is really out there quibbling on what we used to call ‘right’ about how severe austerity should be and progressives seem to applaud themselves for being softer on the punishment.

    Those are the reasons I signed the FT Letter and went into coalition with many of the signatories who I would, when push comes to shove, disagree with some key issues (without naming names).

    best wishes

  21. Neil Wilson said:

    “Much better to create an environment where employment expands so everyone has a proper job.”

    That’s impossible and irrational in a productive private sector. If you try you end up reversing productivity gains and preventing new ones while driving wages through the floor.

    The trick is to get the private sector in that sweet spot where they are desperately investing to eliminate jobs with machines because of ever increasing labour costs while in massive competition with other firms. That’s the maximum power point of capitalism.

    :end Neil Wilson said

    Governments can crowd out human technical capital in the way that US defence spending does. This incentivises the private sector to improve the efficiency of the remaining human capital. Expansion of government research grants and research institutions would have this effect without the unfortunate side effect of military spending, i.e. mass murder. This type of government spending creates technical opportunities for private sector growth via gimmicks such as iPads or Facebook. At the same time the government spending can make progress on serious work, e.g. cancer pattern recognition (using neural nets or big/small data mining).

  22. Dear Neil

    The competitive differences within the eurozone are not due to productivity differences, but are caused by discrepancies in unit labor costs, that is, productivity divided by wages. Suppose that a German factory makes 20 widgets per hour and receives a wage of 20 dollars. A Greek worker makes 10 widgets per hour and receives a wage of 15. An Indian worker makes 8 widgets per hour and receives a wage of 1. In that case, the unit labor cost for widgets is 1 in Germany, 1.5 in Greece and 0.125 in India. Although the productivity of the Indian worker is the lowest, he has the smallest unit labor cost. The German unit labor cost is lower than in Greece, even though the German worker receives a higher wage.

    What matters is not productivity or wages, but productivity divided by wages. Trade between countries of disparate wages and productivity is quite possible, as long as the unit labor costs are right. What happened in the eurozone is that German and Dutch unit labor costs are unreasonably low because of excessive wage restraint in those countries. In Germany and the Netherlands, wages have to rise faster than productivity in order to correct the competitive disequilibrium.

    As to the argument that German goods are of superior quality, maybe they are, but quality is not the only consideration. Price also matters. Suppose that an Italian machine costs 20,000 and a German machine 25,000. The German one is slightly better, but most people may prefer the Italian machine because the German one is 25% more expensive. Now suppose that 10 years later the Italian machine costs 25,000 and the German one 27,000. If the quality difference is the same, then this time many people may prefer the German machine because it is only 8% dearer. Something similar happened in the eurozon. The price/quality ratio of German and Dutch products decreased because of a policy of wage restraint.

    Regards. James

  23. OK Bill. The ECB’s track record is hardly great though.
    I would want them to setup a DEMOCRATIC national fiscal authority, part of the ECB.
    I think this will be converted to workfare.

  24. Not suprised to see James Schipper attacking the unemployed or less fortunate once again in another of his neo-conservative tirades.

    The truth is that given half a chance the majority of people would grab a JG position with both hands and never look back.

    But this isn’t good enough for James. He’d rather assume that people will try and rort the system.

  25. Re infrastructure, Spain is awash with underutilised roads and airports. Second, using infrastructure spending to escape a recession is absurd because it normally takes YEARS to get infrastructure projects going, plus they normally last for years, thus they’re as likely to stoke the next boom as cure the current recession.

    If the amount currently being spent on infrastructure is sub-optimum, then fine: increase infrastructure spending. But that’s something for the long term.

    That’s the trillionth time I’ve made that simple point, but so called professional economists never seem to get it.

  26. Dear Alan

    I am no more neo-conservative than I am Chinese. Anybody who lives in the real world knows that there are some bad employees, just as there are some troublesome children in schools. I did not say or imply that all the unemployed are responsible for their fate. That would be an absurd idea. It would require one to believe that in countries like Spain or Greece there is a sudden massive increase in laziness which caused the unemployment rate to plummet.

    Cheers. James

  27. Dear God not more European infrastructure spending……….

    The very home of Dirigisme has collapsed.

    It is exporting a massive amount of its surplus nuclear energy to the UK now that Drax power station has become a victim of Industrial biomass sabotage and its PPP high spend rail construction programme is merely yet another global banking method of obtaining yield at the expense of good agricultural land.

    Simply give people enough tokens so that they can return to village cooperative life and leave us alone.

  28. @James
    “””What if a participant in the JG is habitually late, very lazy, continually insults his co-workers and ignores the instructions of his manager? Should he be fired?”””

    Put said person in a call center. 😉
    Generally my thinking is ‘so what’ if there is a small number of bad workers?

    Better to have them continually attempt to stay in the most basic job offered by the JG than go completely idle.

    There is plenty of evidence to conclude more than one generation of welfare dependency has remarkably profund negative social concequences. It costs more in real terms to have this rather than a low entry basic job. (JG literature is quite clear on this point).

    “alternatively each eurozone citizen could be given €175 per month, for 19 months”

    This level of money is very much going to be hand-to-mouth and people do use it to pay off debt/pay bills. For instance studies done on in the US on “Earned Income Tax Credit” ” Tax Refund Expectations and Behavioral Responses study” showed recipients (working poor) knew exactly what bills would be, when they were due, how long it was going to take to pay off a loan. It gave people real breathing space in their family budget and this would be no different for the proposal of a eurozone cash handout if it eventuated.
    It would boost aggregate demand eg: places like France (half ofthe small businesses ‘autoentrepreneur’ scheme)
    fail after the first 2-3 years (you get the first year of operation tax free). Boost sluggish aggregate demand is critical.


  29. The main problem in Europe including the UK is the monopoly of credit.

    The banks extract purchasing power from us and then attempt to force us their credit centric products.
    Observe the British energy trends publication for March 2015 covering the year 2014 in total.
    The only energy input which has increased is oil for transport , all other inputs have collapsed.
    This is evidence for this front loading of consumption , the mechanism today is typically creating credit for diesel cars.
    Also take note – UK energy consumption in total is now below its 1984 low.
    The last period where UK society and economy was restructured to accept euro surplus production.
    The population was nearly 10 million less back then.

  30. We must concede the policy is to increase the value of bonds by reducing the size of the economy.

    This is done via Industrial sabotage at the primary input stage of the production process( converting Drax to biomass and the like)
    Or at the other end of the line , via flaring of the industrial surplus by dumping capital goods( cars and the like) on peoples heads.

    Anyhow the objective of European monetary , energy and Industrial policy is to NOT supply real demand.
    The ECB new building is our Barad -dur ( The Dark tower)
    To expect anything good to come from that place is naive at best.
    Anyhow nothing good will come from accepting their stale rat eaten bread.

  31. “Another latte please, and one of those nice raspberry friands, if you will!”
    I must ask you Bill, where you can get one of those nice raspberry friands? 🙂

  32. Sure the fascists eurozone needs more power. Sure these programs will be a relief for people, like Hitler economic policy was a relief for the majority of the German population when he got to power.

    Or like any other populist when it gets to power, initially a handful of poor men are relieved from pain and poverty. But oh man, what comes next… Desperate people buys into desperate policy and awful terrible ideas like destroying democracy further.

    Some people just does not get it, when someone achieves MORE power, it does not give it up later on freely because they are “smart, good people”. But hey, the lefties, as much as the rightist, are in love with somebody directing our lives for a handful of scraps, to get by.

    Sometimes you have to suffer, to wake up, and to do something. It’s not nice, peoples suffers and even dies, and it could be even me or some relatives. But that’s how progress has been always achieved by humanity. Not by handling in more power to a bunch of reactionaries in an undemocratic institution that shouldn’t even exists. Palliatives and can kicking will just achieve the opposite, making the end-game much worse (that, too, is a lesson from history). Some of us are young enough to see ourself and our children to harvest the product of such terrible policies in 10 or 20 years… so, no thanks, not on my behalf.


  33. I believe you can have a form of competition in JG, where local areas compete for workers and the best workers get nice jobs e.g read books to children.
    But I am wary of letting the state ‘punish’ people after seeing effects of so called ‘benefit sanctions.’
    Perhaps a small basic income in addition to JG, ‘funded’ by LVT.

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