It's Wednesday, and as usual I scout around various issues that I have been thinking…
MMT blows the cover on the fictional world of mainstream economics that serves class interests
Given I presented a full analysis of the National Accounts release yesterday, I am calling today Wednesday and not writing much by way of blog posting, to give me more time to write other things that have to be done. But there is one issue that I will deal with today and regularly comes up and indicates that we are making progress. And after that we can all ‘Rise and Shine’ with some beautiful music.
We agree with everything but don’t want anybody to know anything!
That is where the evolution of Modern Monetary Theory (MMT) is heading at the moment.
The critics started off just shouting insults – getting as many nasty epithets into an Op Ed as possible – in between sniping about ‘printing money’, Zimbabwe, chaos etc.
That showed they were realising that their dominance was under threat.
Then the criticisms were along the lines that what is old in MMT is correct and what is new is incorrect and variations on that argument.
The variation ranged from ‘we knew it all along’ claims to denial that there was anything interesting to know – which always amused me.
More recently we are hearing the story line – MMT is correct (although they don’t express it that way) but god save us if anyone finds out.
An MMT understanding allows us to appreciate that most choices that are couched in terms of ‘budgets’ and ‘financial constraints’ are, in fact, just political choices.
Given there are no intrinsic financial constraints on a currency-issuing government, we understand that mass unemployment is a political choice.
Imagine if citizens understood that.
An MMT understanding lifts the ideological veil imposed by mainstream economics that relies on the false analogy between an income-constrained household and the currency-issuing government.
Households always have to finance their spending choices, through earned income, savings, asset sales or through borrowing. A currency-issuing government spends by instructing its central bank to type numbers electronically into relevant bank accounts.
All the elaborate accounting structures and institutional processes that are put in place to make it look as though tax revenue and/or debt sales fund spending are voluntary smokescreens, which serve the purpose of imposing political discipline on government spending.
Insiders know this, but actively decline to share that knowledge with the public.
Renowned British journalist Martin Wolf, commenting on MMT, recently wrote in his Financial Times article – Summer books of 2020: Economics:
In my view, it is right and wrong. It is right, because there is no simple budget constraint. It is wrong, because it will prove impossible to manage an economy sensibly once politicians believe there is no budget constraint.
And I have provided this historical quote before – famous US economist Paul Samuelson saying something similar during a 1988 interview with Mark Blaug for the program – John Maynard Keynes – Life – ideas – Legacy (the statement starts at 52:50 minutes with the ‘aahs, ums’ taken out):
I think there is an element of truth in the view that the superstition that the budget must be balanced at all times. Once it is debunked takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that long-run civilised life requires.
We have taken away a belief in the intrinsic necessity of balancing the budget, if not in every year in every short period of time. If Prime Minister Gladstone came back to life he would say oh oh what you have done and James Buchanan argues in those terms.
I have to say that I see merit in that view.
These are profound statements of how a ‘fictional’ world is promoted by mainstream economists to serve as a brake on political volition. While MMT exposes these fictions many economists still think it is better to keep the public in a state of ignorance.
This sort of reasoning – MMT is right but the politicians cannot be trusted narrative – was most recently rehearsed in the Sydney Morning Herald article (August 29, 2020) – We’re edging towards a big change in how the economy is managed – written by their Economics Editor, Ross Gittins.
My research centre – Centre of Full Employment and Equity (CofFEE) used to hold an annual ‘Path to Full Employment Conference’.
At the third edition of that Conference held on June 14-15, 2001, Ross Gittins appeared as a discussant on the panel – The Job Guarantee Versus The Five Economists.
The Five Economists were a group who proposed supply-side solutions to the chronic unemployment and underemployment of the day, claiming that demand-side solutions would unlikely reduce unemployment below seven percent.
They represented the mainstream orthodoxy.
They claimed that wage restraint (real wage cuts) and making it harder to stay on unemployment benefits.
They advocated a reduction in the rate of wage increases relative to the rate of productivity growth via a four year freeze on award wages.
Tax credits would be used to compensate low wage earners in low-income families while lower effective marginal tax rates would improve the incentives for low-income families to pursue employment opportunities.
My paper with Martin Watts contested that view, saying that it was just a modern version of the classical wage cutting approach, with some equity insurance being provided by the state. It also invoked the classical Say’s Law which assumed all the demand issues (insufficient spending) could be assumed away.
In his comments on both papers (as a discussant), Ross Gittins opposed the Job Guarantee, claimed MMT was nonsensical and largely supported the view expressed by the Five Economists.
19 years or so later he wrote in his weekend article that:
But here’s the scoop: the idea that, rather than borrowing to fund their budget deficits – thus incurring big debts and interest bills – governments should just create the money they need has been anathema to economists for the past 40 years, but this may be changing.
There is a growing debate among economists, between the proponents of what they call “modern monetary theory” and more conventional economists and econocrats over whether governments should just create the money they need.
The defenders of the conventional wisdom have had to concede a lot of ground. Whereas a decade ago MMT was lightly dismissed as a crackpot idea, as this radical idea has gained more attention its opponents have had to admit it would be perfectly possible to do. They just think it would be a really bad thing to do.
So he is now really admitting we were correct.
He also said (by way of revising history):
As sensible economists always knew, it was never true that creating money always leads to greater inflation. It does so only when the demand for “real resources” – land, labour and physical capital – exceeds the supply of real resources. Only then do you have “too much money chasing too few goods”.
Where in any mainstream textbook will you find that clearly stated?
But then he pulled out what the critics are now relying on as their trump card.
He acknowledges that the leading proponents of MMT do not claim that:
… governments would be free to create (or “print”, to use a misleading metaphor) as much money as they needed, without restraint. The restraint is the same one it always was: the limited supply of real resources.
But:
This is what’s really worrying the opponents of MMT (and me). If you let the politicians off the leash to spend as much as they liked up to a point, how would you ever get them to stop once that point was reached? …
why risk letting the pollies start creating money when the government can borrow from the public at interest rates that are pathetically low.
So there you have it.
Thus:
1. The politicians are deliberately left in the dark by the technicians (the economists) who know that they are pushing a fiction but use it to keep the politicians doing things they determine rather than other things that the economists might think are less worthy.
That means unemployment remains at elevated levels – because the economists think it is necessary to discipline inflation – poverty rates increase and income is redistributed to profits away from the workers.
The economists know the government could do something about these problems but tell their political masters otherwise.
And/or:
2. The politicians know damn well they are lying and use the fictional world developed by economists to provide the authority (cover) to pursue politics that serve their own interests and those of their mates (funders etc).
There is clearly truth in both options.
I can tell you that most ‘economists’ do not actually know what is actually going on. They go to university, rote learn the mainstream dogma, and then take it into their professional lives.
Clearly, there are some who do have more awareness that they are creating a fictional world to serve particular interests.
I can also say that most politicians really do not have a deep understanding of the way the monetary system works and take the mainstream litany as gospel.
But either way, it is the citizens who are being kept in the dark.
Clearly those who espouse this view that it is better people do not know the truth believe it stops us making demands on politicians that the economists prefer not to be pursued.
They never extend the argument to consider the implications for the quality of democracy. Yet if asked, they would extol the virtues of democratic systems over their alternatives.
Not only do those who support this deliberate deception want to deny reality but they also want to pervert the choices available to people when electing their governments.
It amazes me that they can keep a straight face when doing so.
But then politicians have been lying ever since.
Irish writer – Jonathan Swift – wrote an essay – The Art of Political Lying – for the Tory publication The Examiner, which was published on November 9, 1710.
Swift explains that politicians apply the art of lying “to the gaining of power and preserving it, as well as revenging themselves after they have lost it.” In other words, they lie all the time.
But is this sufficient reason to set out fictional constraints on them to constrain their ability to, for example, spend freely?
And do the constraints we put on politicians through these deficit and debt fictions actually ensure they use their ‘constrained’ fiscal capacity to serve generalised well-being?
That is the crux of the issue.
We might be offended but willing to support the continuation of these voluntary fiscal rules (derived from the fictions) if the policy outcomes were advancing well-being for all.
But the neoliberal reality is that, even within the fictional world we operate in, governments use their fiscal capacity to serve special interests at the expense of the rest of us.
So these disciplines that are placed on them by the ‘fictional world’ really just serve class interests.
There is never a shortage of currency when a bankster needs to be bailed out or some invasion of another country is pursued.
MMT blows the cover on that scam.
And that is the real reason there is so much hostility towards our work right now.
Music – Bunny Livingston
This is what I have been listening to while working this morning.
This is from Jamaican singer, poet, drummer – Neville O’Riley Livingston (aka Bunny Livingston, aka Bunny Wailer).
The latter assignation (Bunny Wailer) comes from his status as one of the original Wailing Wailers with step-brother Bob Marley and Peter Tosh. That band would split and produce three separate and brilliant musical contributions in the 1970s and beyond.
To some extent Bunny is my favourite despite the fact that he is probably the lesser known of that illustrious trio from the 1960s.
He was often backed as a solo artist by the premier Jamaican rhythm section – Sly and Robbie – which comprised Robbie Shakespeare on bass and Sly Dunbar on drums.
Horn sections were usually supplied by the Blazing Horns (Tommy McCook and Bobby Ellis).
This song – Rise and Shine – is off his 1981 release from Solomic Records (with Solomic Dub on the B-side).
I regularly received shipments of Mento, Ska, Rock Steady, Reggae and Dub singles from the UK in the 1970s and beyond. They were very cheap and you could buy a big box of records for hardly anything.
Some of the gems of all time were in those boxes and I learned a lot of the diversity of artists, recording studios and their technical differences from those bits of plastic.
Here is what he is singing – rather apposite in this current period one thinks:
This is the cry of a people
who were robbed and raped from their homeland
and their loved ones.
A people stripped of their culture,
their dignity, their liberty and their rights
and by the cruel and presumptuous
hands of the colonial and imperialistics slavers
were cargoed into the west,
where for over 400 years they have toiled and laboured,
and with their blood, their sweat, them tears and hands
they have built the great cities of Babylon,
only to be paid with the wages of the taskmaster’s whip,
torture and death.
Oh yea yea! This is my history!
Oh yea yea yes! Oh!
We’ve been down in the valley much too long.
We’ve been down in captivity oh so long.
We’ve been down in humility much too long.
We’ve been down in slavery oh so long.
But we’re gonna rise and shine!
And win our liberation,
for now is the time
when all nations must be free.
So rise and shine!
Restore your strength and power,
waste no more time,
remember your history.
We’ve been down in a sufferation much too long.
We’ve been down in a condemnation oh so long.
We’ve been down in a segregation much too long.
We’ve been down in humiliation oh so long.
But we’re gonna rise!
As the morning sun that surrounds you,
it’s international morality time,
where mankind must be born anew.
So rise and shine!
For the sake of the younger generations,
putting hearts and minds,
to brotherhood and unity.
Oh yea yea yea yea yes!
Remember the slavemaster’s ship!
Remember the taskmaster’s whip!
Oh yea!
We’ve been down in the valley much too long.
We’ve been down in captivity oh so long.
We’ve been down in slavery much too long.
We’ve been down in humility oh so long.
But we’re gonna rise and shine!
And win our liberation,
for now is the time
when all nations must be free.
Rise and shine!
Restore your strength and power,
waste no more time,
remember your history.
Yes we’re gonna rise and shine!
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
I was going to complain about you calling Thursday Wednesday. Something about that being unscientific or something better if I could come up with it. But then I realized that when I started this comment, it was still Wednesday here so that kind of wrecked that complaint.
Perhaps we will get a Friday on Thursday blog?
Thank you for an insightful article. I would like to donate to your blog and MMTed on a monthly basis. Do you have a Patreon page?
How would you stop the politicians? Democratically.
This is not an argument against MMT but an argument against existing democratic and political institutions.
If we accept this as a truthful argument then it is an argument for reform of those institutions. I think many in the MMT community would agree with this. Intellectual honesty now opens this for discussion on What do we want to reform and the Why and How of the reform(s).
This is a separate argument from any MMT macroeconomic argument.
I stumbled upon the MMT project while I was conducting my own research about the origins, history and operations of money. I learned a great many things during this investigation, in particular on the anthropology side, including that debt predates money (which was surprising to someone who never experienced a life without money, and hence whose notions about debt were all tied to money) but few things that I learned were as fundamentally astonishing to me as the MMT insight that the monetary sovereign CREATES unemployment by imposing a tax liability.
This single observation has profound moral consequences where unemployment and its pernicious economic, social and psychological effects are concerned. Regimes that use unemployment to control inflation and discipline labour on behalf of the oligarchs are evil, full stop.
Watching the orthodox attempt to motte and bailey their increasingly untenable positions would be amusing, were it not for the knowledge that they are busily defending the indefensible.
“I am calling today Wednesday ”
It’s Bank Holiday week here in England, so we’re all out by a day up here anyway. Everybody gets up, scratches their heads and wonders why the bins haven’t been emptied. Then they remember: Bank Holiday week. They come tomorrow.
“If you let the politicians off the leash to spend as much as they liked up to a point, how would you ever get them to stop once that point was reached? …”
We can counter that very easily. We just tell them they have an alternative – give the citizen the right to sell their labour hours to the central bank for a fixed wage. Then get parliament to set a “balanced budget” requirement on the Treasury.
That has two advantages. The politicians are constrained, as they wish, but most importantly the banks become normal entities that can be allowed to go bust and the wonks at the central banks are sacked, along with the “office of budget responsibility” and all the other “expert” groupings.
After all if these macro economic experts believe in the fallibility of humans, then getting rid of all the humans in the process, including them, makes perfect sense.
That would be the perfect “conservative” position wouldn’t it. Assuming they actually believed in market competition and making sure we’re at full employment rather than transferring everything to the top end of town.
The alternative “social” position would be to trust politicians and hold them to account at the ballot box in the traditional democratic manner.
Regarding your point on “economists don’t know how things really work” there is a few interesting videos by Steven Hail from Adelaide uni on his lived experience of this. He was an economist training bankers about macroeconomics, and he would get experienced bankers tell him about how things actually worked. Interesting viewing.
Another thing to highlight in this space – I think the household analogy for macro can still work, if you replace “money” with vouchers issued by the head of the household. I remember reading this from Warren Mosler and it made sense straight away. Eg head of household demands a “land tax” of say 5 vouchers per week from any person staying in the house. A job guarantee scheme would be like the list of chores in the household that need doing, but aren’t currently being done.
It’s amazing what’s happened over the years. I still can’t believe it at times.
If it is a paradigm shift we are living through (and I’m still sceptical due to geopolitics) it’s been one he’ll of a ride.
Brennan Cook
Thursday, September 3, 2020 at 14:31
Thank you for an insightful article. I would like to donate to your blog and MMTed on a monthly basis. Do you have a Patreon page?
Ditto; I’ve tried but Paypal blocks monthly payments due to password problems too tricky for me to sort. Can we just have a sort code and account number?
Bill hits a home run with this post: “a ‘fictional’ world is promoted by mainstream economists to serve as a brake on political volition. While MMT exposes these fictions many economists still think it is better to keep the public in a state of ignorance.” Until the 18th Century Enlightenment, a fictional world of monarchy was promoted by the church and other institutions to serve as a similar break on political volition. That the people might rule themselves collectively through democracy, instead of being ruled by individuals who inherited political power, was a new and radical idea in the political arena that suddenly caught fire and changed the course of history. MMT has brought us a similar new and radical idea in the economic arena, and if it catches fire, it too will change history. How to light that fire must the primary concern of all of us, as it has been Bill’s for an intellectual lifetime. Right now, I’d like to link to The Doors’ “Light My Fire,” but it would delay this comment. So those inclined can search for it on YouTube and CRANK IT UP. “The time to hesitate is through, no need to wallow in the mire….” You know the lyrics, but sometimes only music, as Bill well knows, can ignite the flame that must blaze inside if we are again to set the world on fire.
These people are will to lie about this and claim we can not save the planet from climate change because there is no money to pay for it. I hope they have no children.
There is a wall of government money that has been created and injected into the UK and US non-government sectors, by their respective currency issuing Treasuries, via their respective Central Bank intermediaries.
The UK does not publish a velocity of circulation of its “units-of-account” the US does. Hence, it doesn’t know how quickly it will get its money back via taxation. MMT ignores this factor. It disregards where and in what liquidity form, Treasury “units” are being hoarded within the non-government sector; nor, how likely the holders of those “units” are to stop saving them and and go on a spending spree that could quickly produce demand side inflation; if say, there was a temporary VAT/ Sales tax reduction by government trying to boost its economy.
How does MMT propose to deal with such a flood of spending power? QE has swapped a lot of government savings securities (Gilts and Treasuries) back into the “reserves” that bought them originally. That cash ended up being saved in the form of corporates’ shares, hence boosting prices and lowering dividend yields.
What is the MMT plan for the UK from here and now?
Would you be willing to consider the possibility that the people themselves, on the whole, are the authentic liars. The politicians being merely a proxy for the people who elected every one of them.
This idea brings into the light new possibilities. Which I’m sure you can see clearly.
The question is, will you need to become a liar to avoid looking at it?
I’m not sure MMT proposes anything for a particular/regional/temporal situation.
It describes the mechanisms that persist in spite of deliberate/unintended decisions wherever they are in a soft currency environment.
The only proposal to respond to malign policy decisions is to create a benign one and implement it.
MMT is best suited to inform this decision, in my opinion, as it allows the possibility of error.
If you willingly relinquish your ability to regulate (tax) your spending, then only hell will mend you.
The problems/crises you worry about seem to be born out of forces not beyond MMT ,more alongside, yet you demand it solves them.
It’s like a sprinter asking his opponent to check his shoes and then complaining about interference to the ‘authorities’.
Hearing of David Graeber’s passing, to echo an earlier one here:
Vale David
In a nutshell, Sennex…an argument advanced by an un-elected bureaucrat, the governor of the RBA, who holds office “at the pleasure of the Treasurer”, an interesting thought in itself.
I was trying to understand MMT a few months ago. If you can print money and to create jobs for the unemployed, at some point do you not hit economic drag. You are hiring people to do useless jobs and then at some point your creating bureaucracy that is fighting the private productive market. Does printing money have no effect on your dollar in exchange market? Does reserve currency play in a role in your position in the exchange market (is it as wise for Canada as it is for the USA)? Are you really able to predict where you will see money enter the market and what velocity? If you print too much does that not create dangers of flooding the market and sudden inflation? Does printing money not cause a larger wealth gap and asset prices to bubble? I’m only an electrician, and can see how technically it could be correct. It just seems to me that there is going to be unforeseen consequences of allowing politicians to run the printing press, and you should see forever diminishing returns focusing on unemployment. If unemployment is the only measure we care about I guess communism would be a good system. I would be really agree that if we are injecting money that it would be nice to see it go the people, but in the same breath I would generally rather see banks use the money to give out loans to productive means then have a bunch of people go buy tv’s. Is MMT not just a way of sneaking bigger government and more state power through the back door? Does MMT actually prescribe a limit to their printing? What happened in Venezuela?
Mac,
These are the right questions. My answers (maybe only mine):
The government’s policies should not focus on “printing money” for the sake of printing money.
Government policy should focus on achieving social goals. Government will spend to achieve those goals, and at the national level, government spends simply by ordering the Central Bank to pay money out to the vendors. You can think of Treasury just sending a check, or ordering an electronic funds transfer. But the emphasis should be on achieving specific goals, and the spending will tend to be limited to what it costs to do that.
I can understand your questions about runaway money, because we’ve seen MMT used badly following the crash of 2008. The policy behind Quantitative Easing and the Troubled Assets Relief Program was definitely a policy of pushing money out there, and we all saw where it went and what happened to it. So MMT pushes for Fiscal policy rather than unspecific monetary easing, and pushes spending directed to specific goals.
When you talk about “hiring people to do useless jobs”, maybe you mean the Job Guarantee Program. JG is meant to be most useful at low points in the business cycle, when private-sector employers are refusing to hire people. It’s meant to provide a decent living to people who have been dumped out of private-sector employment, and who without it would be earning nothing. Ideally, people in the JG will do work that’s useful, but not profitable for the private sector. And when the business cycle turns around, and employers are in the mood to hire again, they can hire people away from the JG, people whose lives are still intact, and are ready for better work.
The central economic message, maybe, is that for a sovereign national state, money is no way a problem – a sovereign’s central bank can simply conjure money on demand, any amount, any time. So because money is no problem, it’s pointless to build national policy around money. Build national policy around real problems and real resources. What do we need? What do we have? What do we do? And use the money accordingly.
It’s pretty interesting that the US deficit is reaching 3.3 trillion USD. That’s exactly how much money it would cost to give to every American 1 million dollars. I wonder who has received the money?
Dave, you better check your math. It is more like ten thousand dollars per American.
Bill,
Does Ross Gittins still attend the Coffee conferences? I vaguely remember seeing him at one many years ago talking nonsense.
” . . . existing democratic and political institutions.”?
“Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
Martin Gilens and Benjamin I. Page
Each of four theoretical traditions in the study of American politics-which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism-offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. “
“QE has swapped a lot of government savings securities (Gilts and Treasuries) back into the “reserves” that bought them originally. That cash ended up being saved in the form of corporates’ shares, hence boosting prices and lowering dividend yields.”
That can’t be true can it. Whoever sold the shares gets the money, and the money stayed saved or the increase in tax yield would have eliminated the need to issue bonds. The whole point of QE is to remove the financial repression that comes about from artificially setting market interest rate targets rather than just letting it go to its “natural rate” of zero.
Therefore there is no evidence of any alleged “hot potato” effect – not here, and not in Japan. It doesn’t happen.
What you’re actually seeing is people paying back debt. The left is obsessed with confiscating savings for reasons that can be nothing other than envy, whereas the right is obsessed with hiding them via offsetting debt so they can pretend the savings aren’t there. Debt is the control tool of the right that they believe allows them to keep the hamsters on the wheel and they see everything through that lens.
Once you reduce debt the savings that were there all along appear. It’s like removing 2000 years of dirt to reveal a Roman Mosaic.
As MMT suggests the savings are largely inert for the fairly obvious reason that almost of all of it forms a good part of the retirement industry illusion (domestic and foreign), bank liquid assets which offset their deposits, or locked in place as ‘hard assets’ against created local currency deposits.
There is no evidence they will be “spent”, and no reason for them to be in any amount that will not be nipped back by the response of the spend and tax side auto-stabilisers. Particularly if you have a Job Guarantee.
And with job positions so insecure I doubt people will be back hitting the credit cards either.
Mac,
Excellent you are starting to understand MMT. If you don’t mind let me help you as we all asked these questions at the start when we were all learning.
Question 1: was trying to understand MMT a few months ago. If you can print money and to create jobs for the unemployed, at some point do you not hit economic drag. You are hiring people to do useless jobs and then at some point your creating bureaucracy that is fighting the private productive market.
Answer: The Job guarentee is a bottom up approach done at the local community level. Look around your local community is there anything local people would like to be done. That the private sector have turned their back on and is being done via charity when these jobs should be being done by paid work at a living wage. There’s thousands of things to do that should never be done by charity work.
The Job Guarantee wage is only paid to people working in Job Guarantee jobs. The more people on the scheme the more government spending. When they move to private sector jobs that payment stops - which automatically reduces government spending.
It is an ‘auto-stabiliser’. Spending goes up when the economy is down, and spending goes down when the economy is up. instead of paying humans £70 per week after becoming unemployed they walk into a living wage job. That doesn’t hinder the private sector that supports the private sector as aggregate demand keeps consumer spending moving along.
So because the JG is carefully targeted at only the people that need it, and it automatically self-adjusts based upon need, there is no requirement to correct any over spend via taxation on the other side.The result of that is straightforward. The current low tax rates can stay.
Not only is it a brilliant automatic stabiliser it is a fantastic price anchor also. A crucial point is that the JG does not rely on the government spending at market prices and then exploiting multipliers to achieve full employment which characterises traditional Keynesian pump-priming. It works like any Monopoly price setter you set the price and let it float. It is a one off price adjustment then competition within the private sector keeps prices stable. Imagine if there was a JG in place in 2007 and now during covoid. There would not be millions of job losses that has a domino effect of destroying small to medium size businesses.
Which allows humans to transition from the JG to private sector jobs as they pick up new skills when the private sector are ready to hire again. Never again becoming long term unemployed which makes them unemployable. All the social problems that destroy communities as the domino effect of job losses rip towns and villages apart.
How it would work :
Business is tight. Employer A hires Labourer B at the minimum wage. Employer A can then pile more and more work and hours on Labourer B because B’s alternative is the dole. So B ends up earning far less than the minimum wage for their hours while Employer A earns super-normal profits, or perhaps even normal profits in a downturn, when they shouldn’t.
Hardly fair is it. We have a minimum wage for a reason.
However that scenario only applies in a system that is systemically short of demand and has no alternative employers bidding for Labourer B. There are other scenarios over the business cycle. When you get alternative employers popping up, as you do in an expansion, you get the following:
Business is good. Employer A hires Labourer B at the minimum wage. Employer A piles on the work. Employer C pops up, but doesn’t like the unemployed because they have no idea if they will turn up. Instead Employer C offers the minimum wage and promises faithfully to be nicer to employees. So Labourer B changes jobs, and Employer A is stuck because the alternative is unemployed people who they have no idea will turn up, let alone work the crazy hours now expected. Then Employer C piles on the work… Rinse and repeat.
You’ll note the scenario is highly dynamically disruptive, yet this is the scenario that plays out pretty much every day in areas like the construction business. It is partially the reason why getting things completed is so difficult. The cultural dynamic is corrosive and workers walk off the job.
Now let’s look at boom time:
Business is really good. Employer A hires Labourer B at the minimum wage. Employer C pops up, doesn’t like the look of the unemployed and starts touting round their alternative offer at a higher rate. Labourer B asks for more money, or they’ll move. Employer A doesn’t like the look of the unemployed, because they have no idea if they’ll turn up, so agrees to pay more money because there’s loads of work coming in and charges accordingly.
The unemployed buffer has little effect on the behaviour of business because it is a one way trap designed to frighten labour.
Now lets replay those interactions with a Job Guarantee in place.
Business is tight. Employer A hires Labourer B at the market determined minimum wage. Employer A can no longer pile on the work onto Labourer B because there is a guaranteed decent employer who Labourer B will move to if ill-treated. So Employer A has to keep the work at a reasonable level. Employer A now earns normal profits, and may move into a loss, while the worker earns the minimum wage.
Surely that is how it should be?
Let’s do the expansion phase:
Business is good. Employer A hires Labourer B at the minimum wage. Employer C pops up offering the minimum wage and has the choice of Labourer B or new Labourer D currently with a track record of reliability on the Job Guarantee. Employer A would be happy to retain Labourer B but knows they have the option of Labourer D. Neither Employer A, nor Employer C can pile on the work, because the Job Guarantee is known to be decent. So both Employer A and Employer C get the labour they require at a fair deal and stuff finally gets done.
And the boom phase.
Business is really good. Employer A hires Labourer B at the minimum wage. Employer C pops up offering the minimum wage because they have the choice of Labourer B or new Labourer D currently with a track record of reliability on the Job Guarantee. Labourer B asks for more money. Employer A would be happy to retain Labourer B but knows they have the option of Labourer D so they turn the wage rise down. Labourer B can’t get any more money out of Employer C either for the same reason. Yet still neither Employer A, nor Employer C can pile on the work, because the Job Guarantee is known to be decent. So both Employer A and Employer C get the labour they require at a fair deal and stuff finally gets done.
Importantly Employer Z will tend not to pop up and stay around because policy has been set sufficiently tight that the Job Guarantee buffer will not exhaust. But even if it did the Job Guarantee remains a credible threat to labour services in the private firms. Nobody can become a parasite business. Competition for labour would ultimately eliminate one of the other players, force their profits down to the new normal, or drive an innovation cycle (doing more with less). All of which leads to cheaper prices, not more expensive ones.
Between 1935 and 1943, the WPA literally built the infrastructure of modern America, including 572,000 miles of rural roads, 67,000 miles of urban streets, 122,000 bridges, 1,000 tunnels, 1,050 fifty airfields, and 4,000 airport buildings. It also constructed 500 water treatment plants, 1,800 pumping stations, 19,700 miles of water mains, 1,500 sewage treatment plants, 24,000 miles of sewers and storm drains, 36,900 schools, 2,552 hospitals, 2,700 firehouses, and nearly 20,000 county, state, and local government buildings with unskilled workers. They built modern day America.
These jobs were not useless and these human beings were more productive than they would be sitting on £70 a week on the dole. Many of them moved into private sector work afterwards using the new skills they learned in the job.
Further reading Mac
Planning public works – history has a lot to say if we listen properly
https://billmitchell.org/blog/?p=37930
The Job Guarantee is more than a Green New Deal job creation policy
Operationalising core MMT principles – Part 1
https://billmitchell.org/blog/?p=41399
Operationalising core MMT principles – Part 2
https://billmitchell.org/blog/?p=41403
I would like to talk to you about some very simple concepts, not unrelated to the many discussions taking place concurrently regarding the practicalities of establishing a way forward for all our fellow citizens.
I write under a cloudless sky late in the evening – a crescent moon rising over the Pennines in the north of England.
I had a dream when I was a young boy, where I woke up on a deckchair in the Sea of Tranquillity and looked down on Earth – and try to imagine the same now with the passage of half a century. There is a bubble of air and a few other items in this fantasy – my guitar and a good bottle of Islay Whisky – but if I can invite you all to consider what you might take with you and close your eyes and imagine the scene.
When you open them, you know what to expect. That image of Earth from space – the bright white line of our atmosphere atop the blue and green hues below.
Our home. But consider this.
As a species on this planet, we have one of the poorest eyesight. An eagle can spot a mouse six miles away at 12,000 feet – most of us would struggle to see the same beastie at 100 yards. Our sensory evolution has not kept pace with our other inhabitants and it’s debatable whether out cognitive functions have too – but let’s concentrate on our eyesight.
There is so much out there in front of us right now that we can’t see. We don’t know if it’s there or not.
Like a tiny strand of RNA. Or a gas that’s hitherto invisible.
In my dream, everything is illuminated. Every substance takes on a different colour – gas, chemicals, radiation, heat and energy – the effect akin to the Doppler satellite imagery on a meteorological map. The enhanced visual spectrum reveals a completely different place to that I would find had my visit to the moon had been a few hundred years before.
The delicate balance of our atmosphere is changing because of our activity on this planet. As we are discovering, once started, that process gains a momentum of its own – with the consequences for the future of all life on earth horrifyingly bleak.
Consider Venus.
Venus is the most dangerous planet in the solar system: its surface is at 393°C, hot enough to melt lead. It’s even hotter than the planet Mercury, which is closest to the Sun. The atmosphere on Venus is acidic and thick. Its clouds, which hide the surface from view, contain concentrated sulphuric acid – strong enough to dissolve most metals used to make spacecraft. The atmosphere is nearly as thick as liquid water because its surface pressure is extremely high – ninety-three times the pressure of Earth’s atmosphere.
But there is no water on Venus and only small, trace amounts of water in its atmosphere. Acting together, heat, acid, and pressure allow only the strongest spacecraft to survive on the surface of Venus. The United States sent four landers to Venus as part of the Pioneer Venus mission; three crashed to the surface, and the fourth survived for only one hour. From 1967 to 1985, the Soviet Union sent ten spacecraft to Venus’ surface. All survived just long enough to send some data back to Earth, and none survived longer than two hours. The photos that were sent to Earth show a rubbly surface made of lava rock.
Venus was not always so dangerous. The best evidence now shows that Venus once had enough water to form oceans, so it must have been cooler and much less acidic. It is possible that Venus was habitable then, or even had life. Why did Venus get so hot and lose its ocean? No one knows for sure, but for years scientists have tried to understand why Venus’ climate changed.
But it did. We can argue that these things are under constant flux, influenced by forces beyond our control. After all, before the Great Oxygenation Event – Earth’s atmosphere was highly toxic and uninhabitable. But these events occur over millions of years.
Yet, in just two or three centuries, human activity has damaged and continues to alter all the factors critical for providing the delicate balance in the many ecosystems we rely on to maintain a breathable atmosphere.
Our plastics, chemicals, waste and emissions. These are all by-products from things we have created to serve only for our own convenience. We don’t need any of them to survive here, but our insane addiction for them now threatens that very prospect. It may already be too late to avoid catastrophe.
We all know this. We failed to heed the warnings – we failed to use common sense. Whether we can do anything to avoid disaster is debatable – but if we continue on the same trajectory there is no hope whatsoever.
It is my birthday today. But as I enter my sixth decade, it is with a sense of profound sadness, with the realisation that few children born today, will reach or pass beyond that milestone in their own lives.
Unless we all act collectively as a species, that will be our final legacy.
I have enjoyed – if that is the correct word – being enlightened by the writings on this blog, not least as they confirmed many of my own beliefs gained from many experiences. But I am also aware that this knowledge has stoked a feeling of anger in me that I don’t enjoy. It simply confirms that a significant part of humanity is selfish and consumed by greed. Not just the ‘elites’. Most of us.
Witness how we have reacted to a viral contagion. Once the shock and fear subsides, our primary focus is how to “get back to normal”. As I write this, a radio interview of a woman who was forced to return from a foreign holiday because of quarantine restrictions. She bemoans “It’s cost us an arm and a leg”. Indeed, but what has her selfish actions cost the rest of us?
What is “normal” about destroying our habitat? What is “normal” about consigning all life here impossible? Do we leave a note saying the deficit got too much?
Although enjoyable, the writings and observations here have little value. Even if we all had a higher intellectual capacity, the knowledge gained from the ‘MMT lens’ would likely start a fury that would consume all ‘economists’ and other so-called experts – especially if there was a ‘war of words’.
It’s been interesting reading the comments about Job Guarantees, rights and responsibilities etc. None have any validity anymore. To survive, we will all have to play our part – to the best of everyone’s ability.
If you can design a system that supports that simple goal, then we may have a chance – but first we have to clear our eyes and heads and appreciate our predicament. Not just the things we can see; not just the tangible or obvious; but everything. We must be quiet again and consider what must be done calmly – and set aside all our differences and injustices.
We are all in this together. Properly. There is so much to do – and not a great deal of time to achieve any of it.
I will write again after the weekend and offer some suggestions, if that is acceptable.
Making music is one of our redeeming characteristics. Bill’s contributions in his posts have been marvellous. This is one of my standards. John Martyn was one of the most incredible musicians of my generation. The effects are from an Echoplex and wah wah pedal – but the voice and message need no enhancements.
Have a good weekend.
https://youtu.be/PPsSOV2yCYc
Neil W
QE was designed to shift investment from government savings into non-government investment/savings. The BoE makes Gilt holders a capital gain cash offer they can’t refuse. The BoE expectation is the cash will be directed into corporates, to jack up their share price, to create more collateral to back loans from non-government banks. We have reached the point where the BoE is repo-ing Gilts nearly as fast as the DMO is issuing them.
Regardless of which tax wrapper those corporate shares are held in; pension funds for one, what happens if inflation appears due to supply side contraction (pandemic wise) and the BoE jacks-up interest rates, in a bog standard monetary policy type reaction?
Japan is running a debt to GDP ratio circa 230%. Its citizens save like there is no tomorrow. They have adopted a habit of spending very little and saving very large. There are periods where they save 40% of their income in their own government’s risk free savings bonds. The Japanese Treasury prays for an outbreak of inflation; but, knows it has control of how fast it will allow its own savings products to be converted back into citizen spending cash; should inflation get out of hand. There are no such control mechanisms in the UK or US.
Wow, I didn’t even realize my post went through. Thank you for the detailed answers! I will dove into those this weekend.
“The BoE expectation is the cash will be directed into corporates, to jack up their share price, to create more collateral to back loans from non-government banks.”
Yes that is the expectation. It’s a portfolio reconfiguration. Mainstream is obsessed with debt and they believe they limit the amount with their interest rate.
Turns out they don’t and are pushing on a string. Nobody is borrowing and instead they are paying it back. Hence the ever more hysterical and mad schemes to try and get people to ‘borrow money’ rather than just creating jobs and paying people to do stuff.
The demand side has collapsed far more than the supply side. The fear of inflation was always overdone and it is massively overdone here. The BoE has no scope to put up interest rates because it would be political suicide to do so – people are already underwater on mortgages, out of work and the rest of it. The interest rate cycle has had an ever lower top for 40 years. Now the top is barely above zero as the USA has already found out.
Neil W writes: “The fear of inflation was always overdone and it is massively overdone here”.
I recently received a reply from the Oz shadow treasurer (centre-left) saying “the public would not accept inflation being controlled by taxation” as proposed by MMT.
I suppose that if the public demand access to grog, junk food and tattoo parlors, in preference to useful above poverty work via a JG, he may have a point.
The other objection was the usual fear re capital markets:
“In addition MMT also ignores the current reality of modern capital markets. If foreign investors lose confidence in a country’s ability to repay debt, countries run the risk of much higher borrowing costs and foreign debt”.
“In addition MMT also ignores the current reality of modern capital markets. If foreign investors lose confidence in a country’s ability to repay debt, countries run the risk of much higher borrowing costs and foreign debt”
Then ask the question: For yields to go up, prices have to come down. If they come down the central bank can QE the bond out of existence and force the price back up and the yield down. And it can do this forever. As Japan, the UK and the rest of the developed world has shown you can QE billions of bonds with no inflation.
So how do borrowing costs go up in a world with QE?
The government has no foreign debt and should never have any. And there is no mechanism by which it can come about other than foolishness in government.
“”the public would not accept inflation being controlled by taxation” as proposed by MMT.
That’s because it is controlled by automatic stabilisers, primarily the Job Guarantee. Taxation already operates as an automatic stabiliser to help control inflation. Does the representative not realise that.
Why does he think ensuring people having a job, mortgage rates locked permanently low along with stable prices wouldn’t be acceptable to the Australian people. Does he believe they enjoy being unemployed and having their cost of borrowing changed by unelected bureaucrats?
This podcast of an interview with Paul McCulley, a former MD of PIMCO, is extraordinary.
https://www.bloomberg.com/news/articles/2020-09-03/paul-mcculley-on-the-profound-change-coming-to-the-economy
This wealthy arch-capitalist, at the heart of global capitalism, is talking like Bill Mitchell, Stephanie Kelton , Randall Wray and Tony Benn rolled into one! He clearly thinks that the 40 year old age of monetarism is over, and we ARE (not might, or should) entering the age of MMT and a return to fiscal policy. He gets it that it has usually been social democracy that has saved capitalism .
Mark, again you bring us home to THE issue, which we must directly address for any of the smaller ones we talk about here to be meaningful. Are you familiar with J.D. Alt’s “Paying Ourselves To Save The Planet?” It’s a small book recently published by an advocate of MMT and explains how only fiat money, brought into public view by MMT, could provide the financial resources necessary to save and restore what’s left of our natural ones, thereby giving nature the opportunity to reassert her resilience. For me, that’s why MMT remains a crucial piece of the bigger picture to which you vividly and persistently call our attention. It’s also why I look forward to reading and commenting on Bill’s blog, knowing that he knows these things as well. Keep at it, my friend, as frustrating as it is, as hopeless as it seems. What else is there to do but give up and die, and who wants to go out that way?
Thank you for the recommendation, Newton. I shall certainly order a copy.
One of the greatest risks is the complete lack of trust in authority and rejection of the existing orthodoxy – with good reason. We live in a fearful world, full of secrecy, lies and corruption. The Sicilian Mafia had more honour and integrity than any of the snakes in Davos. With growing realisation of our actual predicament, I sense we are heading for some turbulent times.
Money. We all understand its potential for good – but we know its dangers too, especially when misused.
I will complete the essay next week, but can I invite you to consider carefully the scale of the crisis we face? We must cease all emissions, cease fishing and farming livestock. We have to quickly decommission all nuclear reactors and safely dispose of all spent fuel away from our coastlines. And we must somehow recover and isolate the three reactor cores (corium) from underneath the Fukushima facility before Japan – and the World -suffers a total catastrophe. Then there is the plastic and ‘forever chemicals’ to clear from the oceans and land.
And we have to find a way to live without causing more problems. If we wish to travel, we have to do so without using carbon-fuelled combustion engines. We must stop drilling oil.
There is so much to be done and every day that passes without redressing the balance, diminishes the chances of our survival here significantly. Nine months on and we still haven’t grasped where we really are!
If the public mood consolidates and the orthodoxy is completely rejected, the best possible solution would be to create a new, non transferable global currency, issued by a Central Bank to all governments, utilising the principles advocated by progressive economists, like Bill and other contributors. Make all operations completely transparent and ensure there is no secrecy and off-shore havens.
Eliminate the dangers money can create then put it to good use. Everyone must play their part to the very best of their ability if humanity is to survive beyond the next few decades.
Everyone. Equally.
There’s only one way that can happen.
Best wishes.
“Money. We all understand its potential for good – but we know its dangers too, especially when misused.” You might take a moment, Mark (and any others who may still be following this thread), and pull up on the Amazon bookstore a strange little booklet called “Life of Truth: a synoptic gospel.” The preface, free to read by clicking on the picture of the cover, fleshes out a bit more, albeit from an unorthodox religious perspective, what I suspect are our mutual philosophical misgivings about money, the personal and social dangers it inherently poses. I, too, have had the fantasy of some sort of new currency being created and adopted, which would instantly render a billionaire no better off or more powerful than anyone else. That’s where Edward Bellamy went in his two great novels from the first Gilded Age: “Looking Backward” and “Equality.”
Wise words indeed. I’ve always been highly sceptical of any organised religion, whilst extremely receptive to the notion of a higher collective consciousness – not least from many of my own experiences. That there may be something beyond what we can comprehend should come as no surprise to anyone. My constant companion is a small dog. Everyone who has a similar companion will understand and partake in a different kind of communication at a different level. The possibility that all conscious life can communicate within that medium to some degree or another is surely something we must explore?
There is a climb on the north face of the Eiger called Metanoia. The first ascent was by the American climber, Jeff Lowe, in 1991. It was aptly named. The dictionary definition means ” a change in one’s way of life resulting from penitence or spiritual conversion”.
I’ve climbed technically harder routes, but Jeff’s achievement was supernatural. There are some youtube videos if you are interested in that sort of thing. He was one of the giants – but what he had to do on that route was beyond what most of us could imagine. Where that strength came from, we all have to find – and soon.
I formed the opinion – rightly or wrongly – that most religious teachings were no more than a blueprint for humanity, how to exist in peace and contentment on this wonderful planet. But given the variability of human consciousness, the authors formulated the supernatural element into a deity with a binary judgement.
Trust me – and you will live forever. Forsake me – and you will perish.
It really isn’t that difficult. As a parable or story, this resonates beyond belief…
“We have reached the point where our very survival may hinge on hearing what Jesus tried to tell us: that there are only two deities – God and money; that we are bound to worship one or the other; that wealth is a snare almost impossible to escape; that despite our best efforts not to love money, if we have too much of it, it will invariably capture our heart.
Ha there ever been a message so diametrically opposed to our way of life?”
Whoever you are, whatever your beliefs. Just think about that.
Thank you, Newton.