Have mainstream economists really embraced large deficits and central bank bond purchases?

When John Maynard Keynes wrote his essay – Economic Possibilities for Our Grandchildren – which was published in 1930 he considered that workers would be able to work just 15 hours a week because of the likely technological shifts over the 100 years from the date of his publication. He was right about the productivity gains that have been created but wrong about the benefits workers would gain from them. He thought the productivity would be more evenly shared out. He underestimated the capacity of capital to extract the gains for profits and capture the state to ensure it used its legislative and regulative capacity to suppress wages growth. Mainstream economists have aided and abetted the rising inequality and the reconfiguration of the state as a agent for capital. This bears on how we understand some of the apparent shifts in views by mainstream economists about fiscal deficits and central bank debt purchases. Yesterday, it was all bad. Today, all good. History warns us to be cautious in how we appraise these shifts. There is something to be said for consistency.

Keynes was both correct and incorrect

Keynes was no supporter of radical change to capitalism.

He wrote in that short essay that:

… both of the two opposed errors of pessimism which now make so much noise in the world will be proved wrong in our own time – the pessimism of the revolutionaries who think that things are so bad that nothing can save us but violent change, and the pessimism of the reactionaries who consider the balance of our economic and social life so precarious that we must risk no experiments.

But as you read, he was also not a fan of the conservatives who wanted to stop socio-economic changes that might spread income more evenly or change the balance of power within workplaces.

He talked about the “the enormous anomaly of unemployment in a world full of wants”.

His essay was an exercise in forecasting – 100 years hence – so what will things be like in 2030 – when “our grandchildren” would be in the mid-life phase (or a bit older).

He predicted that:

… the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day.

A fairly broad range – 4 to 8 times.

How did his prediction fare?

In 1930, Real GDP per capita in the UK was £5,042.

By 2014, it was £26,394 (using Bank of England’s 300 year database for 1930 and 2014).

In 2017, it was £29,670 (according to ONS).

So Keynes’ prediction was correct (at the lower end of his very wide range) – around 5.9 times increase over the period.

His predictions applied to US data were similarly correct (at the lower end).

In 1947, Real gross domestic product per capita was $14,118. By 2019, it was $58,113.

So a 4.1 times increase (Source):

But in his narrative he used the “eight times better off” as his benchmark, which probably explains why his other forecasts were inaccurate.

He acknowledged that there would always be those who continued to strive for more wealth – and his rehearsal of the story of the Professor in the Lewis Carroll novel – Sylvie and Bruno – was a testament to that idea.

But for most of us, he believed we would only work 15 hours per week to satiate our material desires and “to make what work there is still to be done to be as widely shared as possible”.

This would be made a reality because of the growing abundance delivered by technology which would reduce the need for labour yet provide massive wealth to workers.

The point is that Keynes broadly predicted the rise in productivity that has occurred since he wrote the essay but he failed to understand capitalism.

How do we reach that conclusion?

It is because the productivity growth that has occurred over this period has not been spread evenly among workers.

Keynes was naive in that respect – thinking that the great gains in productivity that could free workers from the capitalist workplaces would actually be shared across society.

The social democratic era that marked the Post World War 2 full employment consensus certainly had that in mind.

I am often surprised when people today express ignorance of the fact that in Australia we used to have an annual ‘productivity’ hearing conducted by our judicial wage setting authorities, which would determine how much output per unit had growth on average over the previous year and then award a commensurate wage increase to ALL workers based on that estimate.

It meant that the lowest-paid workers who toiled in labour intensive, low productivity workplaces could enjoy real gains in their material standards of living.

The system was vehemently opposed by employers, which is why it eventually was abandoned by a – wait for it – Labor government intent on providing its neoliberal credentials in the 1980s.

The gap between growth in real wages and productivity has widened ever since as capital has increased its profit share by approximately 10 percentage points at the expense of workers.

The flattening of real wages growth and the rise in household debt as workers found the only way they could maintain consumption standards was to increasingly borrow from financial markets, deregulated by neoliberal governments, has meant that most workers have to find more hours rather than less just to stay afloat.

While those who dabble in identity studies applaud the liberation of women and their entry into the labour market, the dark side of that social trend has been the growing pressure on two-income families to make ends meet in this stifled wage environment.

A women who has to work in maybe two or three casual cleaning jobs every day – with shifts split over the day – is hardly enjoy the liberation of her gender from patriarchal society.

Which is why per capita income comparisons across a long historical span are highly misleading.

While Keynes saw technology cutting the needs for workers across all occupational categories and render high-pay and low-pay together technologically unemployed, the reality of capitalism is very different.

Unemployment remains a burden that is largely borne by the most disadvantaged workers.

The development of the gig economy, a further contrivance of modern capitalism to entrench the inequalities that have accelerated over the neoliberal period, now interacts with this cohort of disadvantaged workers.

So we see workers competing with each other for ridiculously low-paid work, which is not only precarious in tenure but dangerous to boot (several scooter delivery drivers have been killed in motor accidents recently in Australia as they rush around clawing for pennies).

These workers now occupy the casualised denizens of modern capitalism – unable to accumulate wealth, unable to purchase houses, unable to be secure if they get sick, unable to take a holiday with pay, and unable to look forward to a retirement with a secure pension.

Their outlook is myopic – it has to be because they have little future – in the way Keynes envisaged it and in the way the baby boomers could look forward to as a consequence of the social democratic period.

How does this tie in with the shifts in economic thinking right now?

It is clear mainstream economists are falling over themselves lately trying to make out that they are on top of the debate about fiscal dominance.

Economists who just a few years ago were preaching the dangers of fiscal deficits (even when unemployment and underemployment was high) are now championing big spending governments and central bank purchases of debt.

That last taboo – the central bank debt purchases – has now seemingly fallen. It is now hardly scorned within the economics profession.

Just this week, a mainstream economist Ross Garnaut came out and said that the Governments of Australia (Federal, State and Territory) should increase their fiscal deficits until we reach full employment and that the Reserve Bank of Australia should buy up all the debt issued to match the deficits.

He considered the RBA should push interest rates into negative territory.

He also advocated a basic income paymentin the form of a Milton Friedman style negative income tax.

He considered that would stop the Australian dollar appreciating

I remembered back to early in my career when I gave a workshop at Parliament House in Canberra on the early MMT ideas and Garnaut was in the audience and took the floor in Q&A and in his stentorian way proceeded to tell the audience that I was crazy and that rising fiscal deficits would bankrupt the nation.

This was at a time when surplus mania was unleashed within Federal government.

It was an unpleasant interaction but relatively normal for me at that time.

If you run against the mob, retaliation is to be expected. That is how Groupthink works.

Garnaut is one of those characters who rely on us having a short memory. Their ability to airbrush history is amazing.

In 2016, he was warning us that “Australia’s is too weak” to justify the monetary policy stance of the RBA (interest rates too high) but that (Source):

We need a tighter budget but we need to do it gradually because we have a weak economy and we don’t want to shock it by suddenly and radically tightening fiscal policy, either by raising taxes too suddenly or reducing spending by too suddenly. We need moderate and targeted tax increases and we need moderate and targeted spending cuts …

There is no law of nature that says Australians are incapable of coming to grips with a severe budget problem of the kind we have.

At the time, Australia’s broad labour underutilisation rate was around 14.9 per cent.

And this character was advocating fiscal austerity because we had a “severe budget problem” – which was just an on-going deficit many billions short of what it should have been.

He has consistently been on about deficits.

Go back to December 3, 2004, when he gave the Sir Leslie Melville Lecture at the Australian National University, where was was then Professor of Economics.

At time he gave this speech, inflation was low but labour underutilisation remained around 12 per cent (unemployment and underemployment). Yet he claimed, in relation to fiscal policy, that:

… it would have been better if the surplus had been even larger at the height og the 1980s boom, to perform its counter-cyclical task. If true for the late 1980s, this view would hold more strongly for fiscal policy over recent years …

It would help if fiscal policy were now tightened considerably. It would have been better done much earlier, but now is better than later. This would take pressure from domestic demand without raising the exchange rate-as tightening monetary policy would do.

The fiscal surpluses that were being recorded and the ‘boom’ were products of a massive rise in household debt which had allowed consumption growth to continue for the time and flood the government with revenue.

But the labour wastage remained high.

The surpluses were highly irresponsible, yet characters like Garnaut want them to be higher.

Which means he wanted unemployment and underemployment to rise even higher.

Fast track 2021 – he claims to be concerned about the lack of attainment of full employment.

His quite abrupt change of attitude towards fiscal deficits etc is one of many that are going on around the world.

Mainstream economists, fearing their own irrelevance, are shifting positions and claiming they knew this all along. Or that the facts have changed.

Nothing material has changed.

Fiscal policy still works in the same way.

The monetary system still operates as it has since the early 1970s.

Exchange rates still fluctuate.

What has changed is the number of rats in the queue deserting the ship.

Shouldn’t I be happy about this?

I get asked that question a lot now by journalists that ring me most days to discuss one thing or another.

They say that finally economists are giving voice to the ideas I have advocated all my career and that Modern Monetary Theory (MMT) is now the flavour of the epoch.

Well, not quite.

It might look like this but I suspect another agenda is at work.

About a year ago, the UK Guardian Editorial (February 17, 2020) – The Guardian view on a comeback for Keynes: revolutionary road – reflected on this march of economists to the ‘other side’.

It reflects on how the dominance of Keynes in the period after World War 2 and up to the 1970s was “toppled” by the conservative arguments that:

… generous welfare spending did not just undermine capitalism, but had inflationary, destabilising consequences and hence was a threat to democratic governance.

That is, the sort of policies and trends that were behind Keynes’s 1930 predictions about worker gains.

With Monetarism at the helm, the decades that followed have undermined those predictions.

The mainstream economists who mouthed the Monetarist doctrines are the same ones who are now mouthing fiscal dominance.

The rise in acceptance of Monetarism and subsequent mainstream variants was not based on an empirical rejection of the Keynesian orthodoxy. It was just an argument based on highly abstract a priori theorising and reasserted the conservative ideology at the expense of liberal thinking.

Alan Blinder in his 1988 book – Hard heads, soft hearts – wrote that the rejection of Keynesian ideas (p.278):

… was instead a triumph of a priori theorising over empiricism, of intellectual aesthetics over observation and, in some measure, of conservative ideology over liberalism. It was not, in a word, a Kuhnian scientific revolution.

It was not, in a word, a Kuhnian scientific revolution.

At the time, any Keynesian remedies proposed to reduce unemployment were met with derision from the bulk of the profession who had embraced the NRH and its policy implications.

Remember that mainstream economics serves the interests of the ruling class and in the modern era has advocated policies that have undermined the working class.

As the UK Guardian Editorial notes (with respect to Britain):

Monetarism, the economic theory that took over, has failed. Growth in UK GDP per head since 2008 has been almost zero.

But it goes on to note that:

Many authoritarians are now using state power to lock in the dominance of the rich. That is what Iain Duncan Smith meant when he told the BBC “you need a dose of Keynesianism to restore monetarism”. Austerity meant the economy was starved of demand when inflation was low. The answer is for governments to spend. But Mr Duncan Smith was not talking about the state intervening on the side of labour, redistributing wealth or socialising investment. Instead, the right now proposes a Keynesianism without Keynes.


So when you ask me whether I am happy that all these rats are jumping ship, think about whether they are really leaving the ship or just disguising it to sail under the radar for a while, to give the surplus extracting system time to reorganise after the two shocks in a decade – GFC then the pandemic.

When in crisis, capital always calls up the state’s financial capacity to bail it out.

Its economists may have made the journey across the line.

But then they may (probably) have not.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 14 Comments

  1. What is arising is a push to liberalise the amount and type of stuff the central bank is permitted to buy – encouraged I suspect by the way the Eurozone is propping up monetary policy by ever wider purchase of assets. The rubicon will be crossed when central banks start buying derivatives of ever more physical things. Charges over excess inventory for example – all the ice cream that wasn’t sold last summer and which is now classified by economists as ‘savings’.

    I suspect, however, that they will never go fully down that route and buy what they should buy – all the spare labour hours.

  2. “so when you ask me whether I am happy that all these rats are jumping ship, think about whether they are really leaving the ship or just disguising it to sail under the radar for a while, to give the surplus extracting system time to reorganise after the two shocks in a decade – GFC then the pandemic.”

    covid19 is the begining of a chain reaction , not an isolated incident, and we can go back to our cosy lives. the last pandemic a 100 years ago took around 25 years for the consequences to play out, and if history is any guide, i wouldnt be making long term plans for the next few decades.

    the period from 1917 to 1945 was very busy indeed.

    whos markets are going to shrink, and whos going to move towards a more autarkic framework, and how soon before all this leads to rebellion and war.

    there will be no going back to business as usual, and central bank balance sheets will have to expand to levels many fold of what they are now to try and keep the peace. these rats will be dead before they can come out of their burrows.

  3. The Anglosphere has more or less followed the same rule book by limiting any fiscal ‘largesse’ in response to the pandemic economic shut downs to saving the wealthy and the business owning class.

    In Australia Federal Treasurer Josh Frydenberg and Prime Minister Scott Morrison do understand the federal government’s finances and knowingly enlarged the deficit to limit the economic dislocation associated with the pandemic shutdowns. You can clearly see the extent of their fiscal policy.

    It was to save businesses with an extravagant JobKeeper program and to provide just enough income support to the general public to keep the share and real estate markets in the black. They saved capital and the wealthy.

    The fact that many of the underclasses suffered badly, falling through the many cracks in the rescue programs, was not of significant concern to them as everyone could have just as easily have been brought under their fiscal safety net.

    This government now talks of returning to the old austerity ideology of tightening OUR belts to limit the ‘debt’ burden for future generations and is happy to maintain high ongoing levels of unemployment and underemployment and a totally inadequate level of unemployment payments.

    They know and knew about the RBA’s ability to issue currency at no cost and have deliberately decided to limit that generosity to the rich and the business owning class – Socialism for the rich and serfdom for the masses.

    Trump with his massive tax cuts for the wealthy prior to the pandemic that greatly increased the federal deficit was similarly Socialism for the rich while the pandemic responses in most nations were mostly limited to the wealthy – to save the economy!

  4. The other day I sampled one of the articles on MMT that Google frequently suggests for me (and I’m sure you too). Apparently ‘the evidence to conclude MMT correct will take years to emerge’. Will the pandemic/post pandemic period of high deficits and QE go on for long enough for the truth to emerge one asks, or will the, it’s got to be paid for conmen (that took over 30 minutes of prime time UK TV yesterday evening for their Dispatches programme) have their way and get us back to the unregulated capitalism and particularly financialised capitalism, and monetarism which apparently never needs to be put on trial. I did read one cheering story in Public Finance online journal (still bringing neo-liberal views to my inbox since I left the accountancy career 11 years ago for brighter days): Bolivia’s Central Bank has returned a $350m loan to the IMF, citing violations of sovereignty and economic interests. Meanwhile Fitch reported that 19 countries needed to make ‘progress’ on deficits to improve credit ratings. Bolivia, a landlocked island of democratic sanity.

  5. Seems Keynes didn’t foresee the increase in real resources consumed by the financial sector and by real compliance/legal costs in general? I suspect that the 25 hours per person per week’s work is going in that direction?

  6. “The point is that Keynes broadly predicted the rise in productivity that has occurred since he wrote the essay but he failed to understand capitalism.” I have confidence that Bill never will make Keynes’ mistake. Bill’s eco-socialist values run too deep. And I believe this to be true of a number of his MMT colleagues. Yet now and then I get the feeling, listening to some MMT proponents, that their principal goal is to fine tune oppressive, ecocidal capitalism. For example, is the JG merely a means to more efficiently utilize available “human resources,” or is it the cracking open of a door to stable, decent employment for all? Should MMT continue to struggle to win over mainstream capitalist economists, akin to the U.S. Democrats (insipid as they are) trying to work with the Republicans (both parties, of course, being neoliberal to the core), or does MMT want to become the clarifying, intensifying lens for those who desire the end of capitalism and the birth of eco-socialism? Can MMT have it both ways? And does trying to do both run the risk of doing nothing?

  7. @Newton Finn

    I would caution that your questions are properly the sphere of political decision makers. My understanding of MMT is that its macroeconomic insights delineate available policy space, and doesn’t have anything to say about the political priorities that might be chosen within those real resource constraints.

    Of course, many MMT and MMT adjacent scholars/activists happen to hail from (for lack of a more precise term) “progressive” political backgrounds. This does not mean, however, that the policy space available couldn’t also be used in other, less congenial ways where “progressives” are concerned.

  8. As a young person living in Los Angeles, my goal is to be able to pay the rent first. Having a house or a family of my own is simply impossible for me. I see no way out for me.

    Our professors would be saying that people like me need more education because education fixes everything. Thats the most advanced theory they have.

    Our university lecturers have median salary of ~25k, so they have to work two jobs etc (yes, they have PhD’s).

    Its easy for Keynes to have his opinions when he hasn’t been strangled by the system.

    Anyway, people like Garnaut need to be demolished, period and never be allowed to speak again.

    The passage about empiricism and theorizing is a much underrated issue. It is such an important philosophical debate. After the age of enlightenment, it becomes the age of empiricism (as I call it), since new theories are found not by intellectual deduction (ie. essentially idealism) but experimental results (materialism & empiricism).

    When a proton can be a particle and a wave, we simply cannot trust our logics anymore (albeit an extreme example) but to rely on experiments. Re-reading enlightenment era stuff, I constantly find them err in trusting their own brain (viz. analyze stuff with their own prejudices and biased life experiences).

    “you need a dose of Keynesianism to restore monetarism”

    I think we are still in monetarism era. Here, isn’t keynesianism used to keep the stupid monopoly game for longer and really just kick the can down the road for future generations? How long can we keep the broken game going?

    Anyway, back to union organizing. Great article.

  9. “I remembered back to early in my career when I gave a workshop at Parliament House in Canberra on the early MMT ideas and Garnaut was in the audience and took the floor in Q&A and in his stentorian way proceeded to tell the audience that I was crazy and that rising fiscal deficits would bankrupt the nation.
    This was at a time when surplus mania was unleashed within Federal government.
    It was an unpleasant interaction but relatively normal for me at that time.”


    other anti establishment figures have delivered sermons on the mount in time past, so you are in good company bill.

    lets hope professor garnaut has had genuine conversion on the road to damascus.

  10. I believe that characters like Garnaut and company have become deficit spending advocates all of a sudden because of the almost zero cost of financing the budget. In reality they remain down to the toe debt vigilantes and still openly declare balancing the budget over the business cycle and keeping it sustainable in the long run. Had interest rates been higher, they would still insist on austerity in spite of the calamities imposed by the pandemic.

  11. Justin Holt If the reserve wants the 10 yr yields to fall they can buy back more 10 yr bonds with
    their QE programme .They can leave them scrambling for as little bonds at whatever yield they want just like the BOJ.

  12. Isn’t the point really that accepting mmt won’t create change on its own? The political element is still there. To me it is similar to the saying “awareness on its own does not bring change”

    As Bill has said many times mmt is not a policy regime.

    Personally I think the real issue is actually in the private banking system. If we accept that “loans create deposits” then this pretty much means that private banks are similar to the government – they can create as much money and lend it to whoever they deem worthy. Add in things like offshore entities and the private banks can pretty much lend money to themselves.

    You also have the very weird eurodollar market (explained by Jeff snider) where the you have the following things happen. Bank A and Bank B both have no US dollars. But Bank A has access to a market to get US dollars in the future. So bank B lends bank A say 1 million US dollars….but remember…bank B has no US dollars!

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