I am covering a few topics today, given that I used yesterday's post space to…
In a few weeks I am off to Britain again to participate in a series of events. Two of these events will be in Scotland where we (Warren and I) will discuss, as outsiders, issues pertaining to the monetary arrangements that might accompany a move to Scottish independence. It is a controversial issue in itself, but, unfortunately, is also intertwined with the vexed issue of EU membership. And the complication then becomes that progressives, who might otherwise be attracted to the Modern Monetary Theory (MMT) way of understanding the monetary system, also exhibit the standard misconstrued Europhile view that the EU, neoliberal though it is, can be reformed and that an independent Scotland should be part of that mess. And, in doing so, they then take problematic positions on the currency question. So a sort of ‘nest of vipers’ sort of situation, from the Aesop’s fable – The Farmer and the Viper. As in the Fable, the Europhiles embrace of the EU will always pay them back in grief. Anyway, while I am always cautious discussing the pro and con of situations where I have no direct material stake and a less than full understanding of specific cultural and historical influences that are at work, the Scottish question is interesting and demonstrates many of points that nations should be cogniscant of when discussing monetary sovereignty. And besides I have to get up in Edinburgh and Glasgow in a few weeks so as a researcher I am trained to be prepared and seek the best understanding that I can of the complexity of the situation. I will be writing a few posts on the Scottish issue as I prepare for that speaking tour.
My previous blog posts on Scotland are:
1. Oh Scotland, don’t you dare! – Part 2 (June 5, 2018).
2. Oh Scotland, don’t you dare! – Part 1 (June 4, 2018).
3. I would be voting NO in Scotland but with a lot of anger (August 18, 2014).
4. Bonnie Scotland – ignorance or denial – either way it is fraught (October 30, 2013).
5. Scotland should vote yes in 2014 but only if … (September 27, 2012).
In other words, I have been following the Scottish debate for some years and have read a lot of literature and studied a lot of data.
My interest in Scotland came early in life as I was friends with a lot of young Scots who were accommodated in the Migrant hostel (camp) just near to my childhood home in Melbourne. This was part of the post-War migration push that the Federal government pursued and the camp was a disgrace – little tin sheds called Nissen Huts – which in the Melbourne summer became furnaces.
I was also particularly taken by the historical writing of – John Prebble – who covered the Jacobite uprising and the subsequent – Highland Clearances – in great detail. That episode left an indelible impression on my perception of Scotland, right or wrong.
Gordon Brown’s five (neoliberal) tests
In October 1997, Gordon Brown, the then Labour Chancellor in the Blair government, proposed five tests that should be conducted and passed before Britain should contemplate joining the Eurozone and abandoning the pound.
At the time, Tony Blair, who would later go on to lie about the reasons for Britain joining the invasion of Iraq, was determined for Britain to join the Eurozone. That, alone, tells you about his judgement.
Why Blair thought that anything would be different from the near disaster that befell Britain as a result of its membership of the ERM is beyond rational explanation.
But his pro-euro position is emblematic of the denial that current day Europhiles suffer from in their defense of the EU, in general. It is also one of the reasons that British Labour is so betwixt on the Brexit issue, when in their historical (pre-neoliberal) DNA they should be leading the charge out of the EU.
As part of the process that would inform the required referendum on the euro membership issue, Gordon Brown, who, as legend has it, was apparently sitting in the back of a taxi during a US sojourn with his advisor, Ed Balls, came up with the so-called – Five Economic tests.
Those tests informed the Treasury analysis, which concluded in its Report soon after that:
… was neither sufficiently converged with that of the rest of the EU, nor sufficiently flexible, to justify a recommendation of membership at that time.
An enquiry was set up within H.M. Treasury to probe the issue further (began in June 2001) and the resulting report – Government Policy on EMU and the Five Economic Tests – was published in June 2003.
That study (which was over 2,000 pages long if we include all the supporting work published) concluded, categorically that Britain should not join the EMU.
However, if one reads that Report, it becomes clear that the Blair Treasury was neoliberal central.
It says the British government “supports the direction in which the EU fiscal framework is evolving” and the Stability and Growth Pact.
It praised the “ambitious programme to reform labour, product and capital markets and the Government supports policies to strengthen competition in the EU and the Single Market.”
It also claimed that while Britain was not quite ready to join the EMU (largely for reasons pertaining to the different structure of the housing market), “to enable Britain to prosper inside the euro area, the Government is entering into a wide programme of economic reform”.
The documented reforms were all characteristic neoliberal policy interventions designed to undermine worker security, promote financial market deregulation, and bias fiscal policy towards austerity.
In other words, the European way!
The reason I introduce this piece of history is because it relates to benchmarks.
Brown’s ‘five tests’ held out that the appropriate benchmarks were defined by the framework that the EMU had established following the acceptance of the Maastricht Treaty.
That framework presented a highly articulated neoliberal vision for Europe, which, as history tells us, has delivered on its promise – mass unemployment, increased poverty risk, rising inequality, degradation of public infrastructure, financial chaos, and stagnant growth.
There is nothing in that framework (and the resulting benchmarks it provides) that should interest a progressive agenda.
So why any version of that sort of decision-making framework should be used by progressives defies reason.
The Scottish 6 tests
On May 25, 2018, the so-called Scottish Growth Commission, set up by the SNP government released its 354-page report – Scotland – the new case for optimism: A strategy for inter-generational economic renaissance.
As I noted at the time, the Report could have been published by the IMF given its adherence to the flawed neoliberal macroeconomic framework that that institution imposes on everything.
I concluded that it was too generous to call the Growth Commission’s work ‘analysis’. Rather, it was a series of unfounded assertions with logical extrapolation from that flawed basis is more accurate.
It was obvious that if Scotland were to create an independent nation on the basis of the ‘blueprint’ outlined in the Growth Commission’s Report then it would soon be heading into a mediocre oblivion – a future where it would be unable to effectively counteract the fluctuations of non-government sector spending and a future where fiscal policy was forced to be pro-cyclical.
Scotland would end up another failed austerity state.
You can read a summary of the overall Report – HERE.
A key part of the Report is conclusion that Scotland should retain the British pound until “a series of tests for future currency decisions” are met.
The Brown testing environment back again.
And the same type of neoliberal benchmarking.
I discussed those tests in detail in the already cited blog post – Oh Scotland, don’t you dare! – Part 2 (June 5, 2018).
I won’t repeat that analysis here.
The Report also recommended encumbering the new independent government with a series of ad hoc fiscal rules identical to those that have made the Eurozone unworkable.
The response from the the SNP First Minister Nicola Sturgeon at the time of the Growth Commission’s release denied that the blueprint set out by the Growth Commission would involve fiscal austerity.
She said (Source):
The report explicitly rejects austerity … We have a choice – stay as we are, locked into the Brexit spiral and continued austerity that the Westminster parties offer no alternative to – or decide to equip ourselves with the powers to build our way to a better future.
The problem with that assessment is that, while the Report does make those claims, the framework it presents – very similar to the EMU’s fiscal compact (with six pack, SGP, etc) – makes it hard not to conclude that there would be a pro-cyclical bias in fiscal policy settings in times of recession.
They talk continually of “the journey to sustainable public finances” and this is defined in terms of meaningless ratios such as debt limits of 50 per cent of GDP and deficits no larger than 3 per cent of GDP. Further, the primary fiscal balance should be zero.
None of that sort of talk, which is influencing the way the Scots and their politicians are constructing the independence question (challenge), would be possible if the general public understood Modern Monetary Theory (MMT).
In other words, my contention is that the likes of the Growth Commission only can only exhibit a seeming credibility in the eyes of the public because the latter are mesmerised by flawed neoliberal economic concepts introduced by the mainstream of my profession.
MMT in Scotland
MMT has become involved in the debate within Scotland about whether to and how to achieve independence from Britain.
Unfortunately, a series of articles in the pro-independence daily newspaper – The National – has distorted the understanding that readers might have otherwise achieved, if MMT had have been correctly represented.
On January 3, 2019, The National published an article by one Gordon MacIntyre-Kemp – Hot new economic theory is just one piece of the puzzle.
The author was the founder of the influential business network – Business for Scotland – so hardly an unbiased commentator.
It is interesting that his critique pre-dates those of coming out of the American debate surrounding the Green New Deal. It shows that the growing interest in our work is impacting on policy debates around the world, which is as it should be.
In his article, MacIntyre-Kemp straw-person’s MMT and then concludes:
It sounds too good to be true – and guess what, it is.
Which shows he hasn’t even arrived at square one in comprehension.
This conclusion amounts to a denial of reality. MMT is true because it is about reality. I know that is taking a realist view of phenomenon and I appreciate that position is, itself, debatable. But I prefer to call A, A, if I see something resembling A, unless there are good reasons not to take that position.
He initially tries the ‘we knew it all along’ stance:
At the core of MMT is an accurate observation of how money works that any serious economist has been aware of since the end of the gold standard: the creation of free-floating currencies.
I considered that tactic in these blog posts (among others):
1. Modern Monetary Theory – what is new about it? (August 22, 2016).
2. Modern Monetary Theory – what is new about it? – Part 2 (August 23, 2016).
3. Modern Monetary Theory – what is new about it? – Part 3 (August 25, 2016).
The mainstream (his “serious”) economists plainly have not updated their theoretical structures and predictions to address the implications of “the creation of free-floating currencies”.
I have just completed a two-part interview with the New York Times that I guess will come out in due course. The topic was Japan and the recent comments from Government and Bank of Japan officials about how crazy MMT is.
If you asked a mainstream economists in the 1990s, and you can do simple searches and find their answers back then, what would happen to that country as a consequence of the growing deficits, growing public debt ratio, they would have (and did) predict(ed) that interest rates and the inflation rate would accelerate upwards and the bid-to-cover ratios in the bond auctions would fall until the bond investors refused to purchase government debt at any yield.
Many predicted insolvency before the end of the 1990s.
MMTers never predicted any of those things. Rather, we knew that the observed outcomes, which have been diametrically opposed to what an application of mainstream macroeconomics would have predicted, would be more or less as they have been.
So if these “serious” economists knew it all along, how do they explain that massive discrepancy. MMT and the mainstream macro could not be further apart on our analysis of Japan, although the former have attempted to cover their tracks (mistakes) with rubbish about cultural peculiarities in Japan.
MacIntyre-Kemp then pulls out the next trick in the anti-MMT bag that is regularly used. This is the ‘politicians cannot be trusted’ or variation ruse.
… if a government can spend what it wants there is no restriction on unhinged leaders spending in a way that kills the planet.
So apparently, governments would cause unparalleled “environmental cost”, “the world would further deplete it’s finite natural resources, driving us to the CO2 tipping point disastrously quickly” and so on.
Okay, so his solution is to keep everybody in the dark using the lies that mainstream macroeconomics perpetuates as if that will constrain crazy governments from destroying the planet.
So democracy has no meaning in this scheme.
People should be mislead.
Politicians should adopt ridiculous voluntary constraints as if they are ‘natural’ or immutable, which are then politically leveraged by their political opponents to ensure that policies favour the top-end-of-town and allow millions of workers to remain unemployed under the ruse ‘there is not enough money’.
And, on the environmental theme, we continue to promote coal-based energy production, for example, because we ‘cannot afford’ investments in renewables.
And we starve our health and educational systems of funding and deny third world countries essential aid because some debt ratio is too high.
Meanwhile, if some church burns down, money springs up without limit. Unless, of course it is “three historically black churches in rural Louisiana” (Source), although those cases recently received a funding boost on the back of the Paris disaster. People were guilt-tripped into coughing up some cash.
The bottom line is that ultimately a capricious politician, of the sort MacIntyre-Kemp thinks will destroy the planet, is brought to account by the democratic process, not by fiscal rules and the like that punish the workers more than the bosses and wealthy.
He builds on his politicians cannot be trusted theme by claiming that “right-wing populist leaders”, inspired by MMT, “might not bother taxing business at all”.
Or “a socialist populist could cut income tax but maintain business taxes”.
These sectional ideologies in politics already exhibit variations on this behaviour.
What an understanding of MMT would generate is a new awareness among the voting public which would force the political elites (of any persuasion) to construct the political narrative in a more open way, stripped of the lies derived from an application of sound finance.
It goes from ridiculous to worse when he claims that:
MMT means no limit on military spending and effectively guarantees a new global arms race. The fact that nuclear weapons are expensive to develop is one of the key reasons we are still breathing, making this cheaper will have disastrous consequences.
Any government now, could, if the populace was so inclined, pursue the conflagration of the world. The fact they do not is not because the governments haven’t the capacity to equip their armies.
Didn’t Sting sing something about hoping that the “Russians love their children too”?
But the constraint stopping crazy martial behaviour from world governments is not dependent on whether the population understands MMT or not. Although, as noted above, such an understanding would probably better protect us from such behaviour.
Further, the real resource cost of building some nukes does not change if the population is aware that the government can buy whatever is for sale in the currency it issues, including all idle labour.
It is ridiculous to leverage that sort of argument as a case against the public receiving an MMT education and being better informed about what governments can and cannot do.
Further, apparently nations might “utilise MMT to replace taxation” with the consequence that “the value of its currency would sink like a stone”.
How does an understanding of MMT generate that policy option (replacing taxation)? Replacing it with what?
What an understanding of MMT provides is a clear view of how modern (fiat currency-issuing) governments spend and what the monetary operations that might accompany that spending might look like and their different impacts.
It ends the lie that ‘taxpayers’ are funding the spending. They are certainly still ‘taxpayers’. And so, if the taxpayers are not funding the government spending, what are they doing?
Mainstream economics provides no answers to that essential question nor an entree that would even lead to that question being posed.
That is a value of an understanding of MMT – we get to ask better questions of government from a better informed basis.
No government that wants to maintain full employment and high levels of capacity utilisation in the economy would abandon taxes.
They are essential for creating the fiscal space within which government can utilise real productive resources to fullfil the political agenda, for which it was elected.
And then the ‘out of control money supply’ argument enters.
He quotes an alleged “MMT evangelist” as saying “No problem, we just print more money”. Whether a person did say that to him is moot.
But if they did, then they are no MMTer. No MMTer, who understands the body of work we have created and called MMT would say anything remotely like “we just print more money”.
That is a mainstream type construction that MMTers would never use. And they would never use it because it violates an accurate description of how governments spend.
When the government spends it does not ‘print money’. That is a loaded term designed to create an emotional vision of crazy government officials in some basement churning out notes at ever increasing rates as hyperinflation means that people need wheelbarrows full of cash to buy a loaf of bread.
The more savvy commentators have become slightly more sophisticated and now claim that, yes, the printing is done via digital transfers. But they still are trying to hang onto the imagery of the crazy printers.
The fact is that if any spending source – government or non-government (household consumption, business investment, export sales) – pushes nominal spending growth well beyond the capacity of the productive sector to absorb it – then accelerating inflation will be the result.
There are not many examples of that sort of behaviour in history.
But the point is that all expenditure carries an inflation risk.
Why would a government try to push the economy beyond full employment and watch the price level accelerate upwards and the exchange rate start to plummet?
His final argument against MMT is just more of the same:
MMT removes all discipline in the economy – from individuals, corporations and politicians, which would impact negatively on inflation, the environment and the supply of labour.
Inflation would accelerate and would “end all civilisation when it crashes”.
Yep, MMT is all that and more.
Note, all through his diatribe, the reader is encouraged to think about MMT as a regime that an independent Scotland has the option of adopting.
Regular readers will know that that conception is plain wrong – one might say it displays the height of ignorance about what our work is about.
Anyone who promotes that sort of understanding about MMT is not qualified to hold themselves out as an expert on the topic.
Scotland is a monetary economy. MMT is alive and well in every nook and cranny in Scotland right now. It is just that the politicians choose to use and the public is encouraged to adopt an inferior, misleading lens to view the operations of the monetary system.
They use a lens that promotes spurious causations, wrongful conclusions about policy interventions and more.
Presumably, MacIntyre-Kemp thinks, like many commentators that duping the public like this (including himself obviously) is best for the society.
I disagree because I prefer to educate people with knowledge acquisition so they can make better and more informed choices and hold the state to account in the democratic process on matters of substance not deception.
The point is that the policy insights that an understanding of MMT allows to develop focus very clearly on where the ‘discipline’ in policy has to be.
The public gets a very clear idea that it is real resource constraints that impinge on government spending choices.
They come to realise that it is a political play before them when there are competing demands on the available resources. The choice between one option (use of resources) and another becomes a political choice not one driven by a lack of ‘money’.
They come to realise that the national government chooses the unemployment rate once the non-government sector’s spending and saving decisions have been made and executed.
There would be no more toying by politicians that unemployment is a complex and difficult to solve problem when the public come to understand that the government could buy the services of all idle labour at any time it wanted by simply offering jobs.
And so on.
The point is that building an understanding of MMT would introduce a new sense of discipline on politicians to more accurately outline the policy choices they are entertaining.
For a newly independent Scotland, desperately wanting to free itself from the mindless austerity from London, that must be an advantage.
By promoting an understanding of MMT – as a superior way of looking into and comprehending the monetary system and the capacities of the currency-issuing government within that system – progressives would be helping the new Scottish government see obvious differences between institutional and policy structures.
They would see:
1. The imperative for Scotland in introducing its own currency and floating that currency in foreign exchange markets.
2. The folly of maintaining sterling as its currency and/or pegging some new currency to sterling.
3. The necessity to create its own central bank that has control over interest rate setting and can never become insolvent.
That is, it would help progressives in Scotland understand that the future laid out by the Growth Commission is nowhere the nation should be wanting to traverse.
They would also see that the ‘tests’ (benchmarks) which it claims should be passed before the nation could introduce its own currency, are just neoliberal conceptions and nothing that a progressive should consider to be of any standing.
And, then, they would see the absolute folly of joining the EU (or worse the Eurozone).
For details of all upcoming events, go to the – Events Page.
My next public event is on May Day when I am speaking at a Climate Action Newcastle event in Newcastle.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.