MMT is what is, not what might be

One of the things I have noted with regularity is that readers and other second-generation Modern Monetary Theory (MMT) bloggers often fall into the error which we might characterise as the “When we have MMT things will be different” syndrome. Or the “we need to change to MMT principles to make things better” syndrome. Thinking that MMT constitutes a regime change is incorrect and steers one away from the core issues. In this blog, I reflect on that syndrome and some other aspects of the development of ideas, which I hope will provide readers with a clearer picture of what the core (early) MMT developers (Mosler, Bell/Kelton, Wray, Mitchell, Tcherneva, Fullwiler) had in mind when we set out in the early 1990s to construct a better way of doing macroeconomics. The point is that while MMT constitutes a regime change in economic thinking within the academy it does not constitute a regime change in the way the monetary system operates. We need to separate the operational principles exposed by MMT academics from their ideological values to really come to terms with the fact that MMT is what is, not what might be.

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British Labour has to break out of the neo-liberal ‘cost’ framing trap

The other day I read a report in the UK Guardian (April 6, 2017) – Jeremy Corbyn: add VAT to private education fees to fund school meals – which appeared to signal that the world has gone mad. Today, I read a story in the Financial Times (April 11, 2017) – NHS looks to hedge funds to finance possible improvements. They both tell us how entrenched the erroneous neo-liberal ‘cost’ framing is. Modern Monetary Theory (MMT) emphasises real resource availability as the demarcation of fiscal space and rejects the way in which ‘costs’ are framed in the mainstream debate. Statements such as the ‘nation cannot afford the cost of some program’ are never made when the military goes crazy and launches millions of dollars of missiles to be blasted off in the dark of the night. But when it comes to public health systems or the nutritional requirements of our children, the neo-liberals have their calculators out toting up the dollars. However, the actual cost of a government program is the change it causes in the usage of real resources. When we ask whether the nation can afford a policy initiative, we should ignore the $x and consider what real resources are available and the potential benefits. The available real resources constitute the fiscal space. The fiscal space should then always be related to the purposes to which we aspire, and the destination we wish to reach. British Labour needs to learn those basics fast and to break out of the neo-liberal ‘cost’ framing it is trapped within.

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Household debt in Britain on the rise – lessons not learned

Economic debate in Britain in the last year or so has been dominated by the Brexit issue. Both sides of the debate have swamped the public with claims and counterclaims that mostly just seek to confuse. My position was clear – if I was a British voter I would have been voted to Leave. Some 9 months or more later my opinion has not changed. The EU is a right-wing corporatist failure which deliberately impoverishes its citizens and should be dismantled as soon as possible. The Brexit debate, whatever your view, has, however, clouded other trends in Britain that are clearly, and immediately, more damaging that anything that might happen when Britain finally regains its independence from the thugs in Brussels. The latest data relating to household debt in Britain confirms what we have known all along and first raised in 2011. British growth is reliant on the private domestic growth in credit and indebtedness, which was the growth drivers that were present before the GFC. Which means one thing: the current growth will not be sustainable unless there are significant changes in the composition of final expenditure in the UK. With private income growth lagging well behind consumption growth and the external sector draining growth, the solution is for the government to abandon its austerity obsession and increase the fiscal deficit. That would support private income growth and provide space for some private balance sheet restructuring which is so sorely needed. Lessons do not seem to have been learned.

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Iceland should not peg its currency to the euro or any other currencies

In between reading economics articles, I read a lot of fiction novels especially when sitting around airports and flying places. I get through a lot of novels. I am currently tracking some Icelandic noir writers (for example, Arnaldur Indriðason and Ragnar Jónasson) and have been sort of ‘living in the fjords’ lately such is the imagery these great writers present of life in Iceland. I am right up north in a place called Siglufjörður at the moment surrounded by towering mountains and snow storms and enjoying it a lot. It was also where the excellent TV series ‘Trapped’ was filmed. Anyway, Iceland has been firmly in my focus. And the politics of the place is interesting at the moment because with the economy well down the recovery path, the neo-liberals which nearly ruined the place are trying to reassert their mindless policies – to wit, in this case, the Finance Minister claiming that Iceland is thinking about pegging the króna to the euro or perhaps a basket to maintain ‘stability’ (now you can laugh). Current Prime Minister Bjarni Benediktsson has rejected the plan it seems setting up an internal power struggle within the government. One of the reasons Iceland has recovered so well and left the Eurozone nations in its wake is because its currency was floating. Pegging it to the euro would be a very silly thing for that nation to do. Only a little less stupid that trying to revive their old neo-liberal plans to join the Eurozone as a Member State. If they did that then it would be a case of Dark Iceland (the theme of Ragnar Jónasson’s novels) – the economic lights would well and truly go out.

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Currency-issuing governments never have to worry about bond markets

How many times have to heard a politician claim they had to cut government spending and move the fiscal balance to surplus because they had to engender the confidence of the bond markets. Apparently, this narrative alleges that if bond markets are not ‘confident’ (whatever that means) then they will stop begging treasury departments for more debt issues and the government, in question, will run out of money and then pensions will stop being paid and the public service will be sacked and public trains and buses will stop running and before we know it the skies will blacken and collapse on us. The narrative ignores the usual statistics that bid-to-cover ratios are typically high (hence my ‘begging’ terminology) which are supplemented by well documented cases where the bond dealers (including banks etc) do actually beg central banks to stop driving yields down in maturity segments where these characters have pitched their “business model” (read: where they make the most profits). The facts are exactly the opposite to the neo-liberal pitch. Currency-issuing governments never need to worry about how bond markets ‘feel’. Essentially, the bond markets are irrelevant to the ability of such a government to design and implement its fiscal plans. And, the central bank always can counteract any tendencies that the bond markets might seek to impose where governments do actually issue debt.

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Why are CEOs now supporting basic income guarantees?

It does not quite add up. But then why should it. Spin is spin. On the one hand, we are being constantly told that the world has entered a new era of secular stagnation, driven by an ageing population and a fall off in productive innovation, and we just have to get used to the elevated levels of unemployment that come with that. Yet, other spin doctors are talking about the innovation revolution, the second machine-age, where the march of the robots who will be embedded with AI that will make them smarter than us, big data, automation, the Internet of Things, and more will render work obsolete. In both cases, apparently, the introduction of a guaranteed income is recommended. Suspicious? Then there is more. When CEOs of big companies start advocating a policy that they claim will improve the lot of workers I become immediately suspicious. And why would people with a progressive bent advocate policies that are part of the continuing conservative ambition to achieve social control and which essentially amount to an abandonment of responsibility that government has for maintaining employment for those who cannot otherwise find jobs? So what is with this rush of support for a basic income guarantee (BIG) from all sides of politics??

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When fake knowledge peddled by macroeconomics starts to fail the ‘investors’

Last Tuesday, in Maastricht, I gave one of two lectures I presented in a series (the other was on the previous Monday night). The first lecture, which was public, focused on the Eurozone disaster and I outlined why an orderly breakup of the failed monetary union would be in the best interest of all (I will post video of that lecture next Monday). The next lecture, which was to staff and students only, focused on the failure of macroeconomics and I juxtaposed fake news with the fake knowledge of mainstream macroeconomics. I want to expand a little on that topic. The Wall Street Journal published an article last week (March 6, 2017) – Everything the Market Thinks About Inflation Might Be Wrong – which bears on the validity of Modern Monetary Theory (MMT) relative to mainstream monetary economics. What I would call actual knowledge (MMT) and fake knowledge (mainstream theory). The article is not without its issues but it correctly notes that the underlying basis of orthodox inflation theory is false and fails to explain movements in inflation.

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US Bond Markets cannot bring down Trump

By the time this blog is published I will be heading to Malta. I will have very little spare time in the coming days so the blogs will be shorter and perhaps non-existent or as normal as the case might be. There was an article in the ABC Opinion series (March 8, 2017) – Donald Trump’s presidency might be short-lived, because ‘something’s gotta give’ – which more or less claimed that the private US Treasury Bond markets had the capacity to bring Donald Trump’s Presidency to a halt. Apparently, if the bond markets form the view that Trump won’t deliver on his promises they can somehow end his term in office. What, by driving yields up? Not likely. And even if there was a way that higher US Treasury bond yields had some link to his political tenure, the central bank could control the yields at whatever level they wanted.

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The Weekend Quiz – February 18-19, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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US labour market deteriorating – the losses from GFC will be long-lived

In September 2016, I assessed that – The US labour market is nowhere near full employment. This was in the context of an increasing number of commentators claiming that the US economy had already returned to full employment. The IMF World Economic Outlook is also estimating that the output gap in the US (actual relative to potential) has turned positive (meaning the US is beyond full employment). By way of contrast, the Congressional Budget Office considers the US had an output gap of around 0.9 per cent (actual below potential) in the December-quarter 2016. The facts point to even higher output gaps. The current BLS data release – Employment Situation Summary – January 2017 – has not altered my view. It showed that total non-farm employment from the payroll survey rose by 227,000 and the unemployment rate remained “little changed” at 4.8 per cent. But from the perspective of the labour force survey (Current Population Survey), total employment fell by 30 thousand. See below for an explanation of that paradox. The point is that employment still remains well below the pre-GFC peak and the jobs that have been created in the recovery are biased towards low pay. Additional research reveals that the losses from this sluggish economic performance will be long-lived and undermine the prospects of future generations. Fiscal austerity is bad for our grandchildren! In general, the problem is less job creation as quality of the work being created and the capacity of US workers to enjoy wage increases.

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Market manipulation and electricity blackouts

Australia is suffering the conjunction of a number of events in recent weeks which demonstrate the poverty of the neo-liberal approach that governments on both sides of the political fence have followed over the last three decades. Electricity prices are rising and the governments have bowed to pressure from the power companies to end the favourable feed-in tariffs that promoted the widespread adoption of solar power by households. Further, our climate change denying federal government has seized on recent power outages in South Australia to attack that state’s accelerated move to renewable energy. The federal government claims it validates its decision to back coal (and they are planning to provide $A1 billion to the Adani group to build transport infrastructure for a new coal development that will never be economic. The problem with the federal narrative is that in the extreme weather Australia is now enduring (very prolonged hot spells with major bush fires) the state with about the lowest renewable mix in its electricity also had to cut power late last week. Further investigation shows that the privatised electricity generating sector has been deliberately manipulating the supply of power (maintaining spare capacity) to exploit price spikes while the captive regulator turns off power to thousands of homes and businesses. Profits before public service – that is what privatisation has delivered. And then, we have to put up with a rising ‘star’ treasurer who thinks government infrastructure spending is unfair to future generations and more privatisation is required. It is best not to put all this together – it is not good for one’s equanimity.

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There is hope – neo-liberalism is an historical aberration

Another lesson from history coming up. People of my generation studied the great books by Charles Dickens, which apart from their literary form, left an indelible impression of life in England during the period covered by the 1834 Poor Law. We also read George Orwell’s account of working class life in Northern England in the pre-World War 2 period. These impressions meant that we heralded in the creation of comprehensive welfare states in the Post World War 2 period as evolutionary innovations made possible by increasing national prosperity. We formed a common belief that this prosperity allowed us to escape the sort of conditions that Dickens was describing in early industrial England. And if prosperity fell, we would have to rein in some of the generosity that the welfare state systems provide. How many times have you read or heard some politician or corporate lobbyist claim that advanced nations, with fiat currencies, can no longer ‘afford’ to fund comprehensive welfare states that protect the poorest citizens in their societies. Many of these speeches are made at glittering functions where business types enjoy sumptuous lunches with plenty of wine and fine food and listen to politicians talk about running out of money and the need to pull our belts in. The arguments are used to attack the comprehensive welfare systems that emerged in the post World War 2 period as governments took responsibility for improving the plight of the poor. But, an understanding of history allows us to appreciate that the modern welfare state was nothing particularly new. There had been a comprehensive welfare support system in place in Britain for 300 years before the 1834 Poor Laws ended that system. This should give us hope – 1601 Poor Law (comprehensive welfare system) -> 1834 Poor Law Amendment (demolished it and blamed the poor for their plight) -> Modern Post World War 2 welfare states (comprehensive welfare system recognising systemic failure rather than individual blame) -> neo-liberalism (back to the 1834 mentality) -> ???? – hopefully another progressive reaction to the greed driving the current system.

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The Italian elites knew all along that the Eurozone would be a disaster

There is often a discussion about whether politicians and government officials introduce policy changes that end up being damaging to the well-being of the people are ignorant or wilful. It is sometimes hard to discern what the agendas are and who knows or understands what. The release of the US Central Intelligence Agency’s declassified report – Economic Intelligence Weekly Review 9 November 1978 – tells us a lot about the deliberate deception that goes on where the citizens are kept in the dark and the politicians deliberately make decisions that they know are not in the best interests of the nation. The questions then are why do they do that and what can citizens do about it? In the case of Italy – and the decision to enter the European Monetary System (EMS) in 1978, which was the precursor to the Eurozone, the motivations are fairly apparent. They knew that the EMS would not be in the best interests of Italy from an economic standpoint but were lured by the ‘European dream’. This is the idea that ‘Europe’ (by which we mean the formal European Union) is a representation of political stability and sophistication. The southern European states never felt part of ‘Europe’ and considered that their own political stability and oversight of corrupt politicians would improve if they went along with any idea proposed by the European Union. Italy had been a foundation state but still doubted their own legitimacy. The neo-liberals that were taking over the European integration process by the late 1970s sold this line to subtlety coerce these nations into joining up. It worked. But the polity and the technocrats knew all along that entry into the EMS and later the Eurozone was not in Italy’s best economic interests.

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The (neo-liberal) Third Way infestation continues

“Fresh thinking delivered to your inbox – Subscribe”. That is the message on the homepage of Third Way an American think tank (aka conservative propaganda machine) masquerading in the public space as a “centrist think tank”. The problem is that this particular ‘think tank’ does not seem to do much fresh thinking, if thinking at all. According to the Politico article (January 17, 2017) – Democratic Party rethink gets $20 million injection – largely aimed to reestablish the narrative that allowed Bill Clinton and then Barack Obama to be elected as President. In part, this initiative is to head off the likes of Bernie Sanders and Elizabeth Warren (neither who are mounting what I call a fully progressive agenda anyway) and claw back the voters who abandoned the unelectable (my judgement) Hillary Clinton in favour of the (shouldn’t have ever been elected) Donald Trump. The narrative that the Third Way organisation has been engaged in for years is hardly fresh. They attack fiscal deficits and call for retrenchments of pension entitlements and public health care funding, they oppose single payer health care and, thus, favour pumping billions of public funds into private insurance companies who offer inferior services, and are strong advocates of the deeply flawed Trans-Pacific Partnership. There is nothing progressive about this group nor fresh. They are mainstream central and the fact they are spearheading a Democratic Party initiative to win back political support tells me that the Party has learned next to nothing from last November’s Presidential election.

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The Obama legacy

I heard some of President Obama’s Farewell Address on the radio yesterday and read the transcript later. Early on, the crowd started chanting “Four More Years” and at that point I concluded they were blind too the reality before them. Obama’s legacy and the legacy of the Democratic period in office is Donald Trump. But it is much more than that. It was full of American exceptionalism, which those from the outside just brush off as the usual hype from a nation that is close to being a failed state but just has more guns and ammunition than anyone else. Press those E-mail send buttons now, I have the full fire suit on – as always. I get more hate E-mails from Americans who profess to love freedom and liberty than any other nation. At any rate, if I was departing what has been a failed Presidency when judged in progressive terms, I would have gone quietly. The ultimate Obama legacy is the Trump presidency. The embrace of the Clinton divine right to rule helped get Trump across the line but the damage was done earlier and Obama only consolidated the failure of Democratic party to offer an alternative to the rabid neo-liberalism of its opponents. The first problem is that the Democratic Party has long ceased being a voice for progressive policies. It masquerades as a progressive party. Obama adopted that masquerade and when one puts together a report card, he gets a failing grade on so many fronts, a few of which lie within my expertise, that I discuss below.

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The Left lacks courage and is riddled with inferiority complexes

When the British people voted to leave the dysfunctional European Union on June 23, 2016, I saw it as a massive opportunity for progressive forces to shed the neo-liberal chains that they have become enslaved by and narrate a new, inclusive manifesto for the future. The Brexit referendum was really a fork in the road for progressives – they could go one way and stay irrelevant and cede legitimacy to the rabid Right, or, go the other route, and reinvent themselves as the force of the future. The signs are they have opted to remain irrelevant. In doing so they have essentially conflated financial responsibility and competence with neo-liberal principles relating to the conduct of fiscal surpluses and the role of government in mediating the conflict between workers and capital. In the former sense, they have bought into the myths such as the need to run fiscal surpluses etc. In doing so, in relation to the latter, they have supported policy environments that are heavily biased in favour of capital and undermine the prospects for workers. And when the workers revolt, and, for example, use the Brexit referendum as a voice amidst their powerlessness, the progressives have turned on them accusing them of being ignorant and racist. The reality is that the lack of leadership within the political Left and their deep sense of inferiority (in the face the so-called mainstream economics experts who they mimic to sound smart) has left the door open for the Right to harness the working class anxiety and steer it in a very retrogressive direction.

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Austerity is the problem for Britain not Brexit

Regular readers will know that I firmly supported the LEAVE vote in the British referendum in June 2016 even though that was somewhat gratuitous given I am neither a British citizen or live there. It was one of those academic exercises where we wax lyrical with little personal at stake. But that aside, if I had have been a British citizen then I would have voted to leave without doubt. The Internet links us more closely these days and in before the Referendum vote I received heaps of antagonist E-mails informing me that I was bereft of all credibility in taking that position. After the vote, when I dared to point out that the official (Bank of England, Treasury, IMF, OECD) and non-official predictions (the investment bankers etc – remember Credit Suisse sending out a Mayday alert of an impending recession which would wipe out 500,000 jobs!) were over the top to say the least (given the post-vote data), I was called delusional and worse. And these personal attacks came mostly from those who claim to be on the progressive side of the debate. Spare the thought! Subsequent data has indeed pointed out that none of the predictions of doom have so far turned out to be true. I know there might be longer term issues when they get onto working out the detail but I stand by my view – Brexit – if handled correctly by the British government will be a net benefit to the nation and its democracy. If not it could offer no real gains. But in this smokescreen of misinformation, a serious study from Cambridge University researchers – The macro-economic impact of Brexit – has concluded, that while there might be some short-run losses in GDP per capita, they soon recover as the British economy adjusts to its break from the dysfunctional European Union. There is no disaster scenario forthcoming! To the de

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The Centrelink letters – a clear breach of human rights

Readers who have now seen the latest Ken Loach movie – I, Daniel Blake – will know the frustration that it depicts when a disadvantaged citizen is confronted with the reality of having to deal with a national welfare agency. Many readers, presumably, have first hand experience of the labyrinthic procedures, rude staff, endless waiting on telephone lines, threatening letters and the rest of the wall that neo-liberal governments have erected to discourage access and/or push people of welfare benefits. While this access and receipt became a right of citizenship in the social democracies that emerged after the Second World War, the neo-liberal era has degraded those rights in favour of a bean-counter interpretation of the world – welfare payments are dollars that can always be saved to balance fiscal accounts and every opportunity should be taken to do so. Australia is way ahead of the game in terms of using government policies and processes to punish and isolate our most disadvantaged citizens so the Government can reduce its welfare spending a few million. We now allow our Government to implement the work of sociopaths and threaten poor citizens with imprisonment on the basis of half-cocked ‘automatic computer-matching’ algorithms that are allegedly tracking welfare fraud. The evidence suggests these processes are massively buggy and deliver wrong outcomes in almost all the cases of fraud they claim to detect. However, that hasn’t stopped the government from sending out tens of thousands of letters to the most disadvantaged among us accusing these people of receiving thousands of dollars in illegitimate welfare payments and threatening criminal prosecution if these alleged overpayments (now debts) are not paid back. Mostly, it seems, the debts are illusory – mistakes by the ingenious (not!) algorithm that was introduced to replace people sacked by the austerity push – sorry, by the Government’s “efficiency dividend” policy. Some people should be prosecuted for breaching human rights in this latest scandal!

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Mainstream macroeconomics in a state of ‘intellectual regress’

At the heart of economic policy making, particularly central bank forecasting are so-called Dynamic Stochastic General Equilibrium (DSGE) models of the economy, which are a blight on the world and are the most evolved form of the nonsense that economics students are exposed to in their undergraduate studies. Paul Romer recently published an article on his blog (September 14, 2016) – The Trouble With Macroeconomics – which received a fair amount of attention in the media, given that it represented a rather scathing, and at times, personalised (he ‘names names’) attack on the mainstream of my profession. Paul Romer describes mainstream macroeconomics as being in a state of “intellectual regress” for “three decades” culminating in the latest fad of New Keynesian models where the DSGE framework present a chimera of authority. His attack on mainstream macroeconomics is worth considering and linking with other evidence that the dominant approach in macroeconomics is essentially a fraud.

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Moving on from the post-modernist derailment of the Left

“The linguistic construction of post-capitalist hegemony opens a space for the engendering of the public sphere”. Sounds ominous and deep. Sounds knowledgeable. Then what about the next sentence: “The illusion of praxis carries with it the discourse of the public sphere.” amd the next: “The emergence of normative value(s) opens a space for the ideology of the public sphere.” I could write a whole essay about that topic in the style that typified the so-called post-modernist explosion in social sciences in the 1970s and beyond. Aah, Pomo, the nonsensical shift in literary endeavour that has set the Left back as much as the embrace of Monetarism and, more generally, neo-liberalism. This blog continues to add to the material we are working on as part of my next book (with co-author, Italian journalist Thomas Fazi), which traces the way the Left fell prey to what we call the globalisation myth and formed the view that the state has become powerless (or severely constrained) in the face of the transnational movements of goods and services and capital flows. This material will be part of the final section of the book, which we are sort of calling a ‘Progressive Manifesto’, designed to guide policy design and policy choices for progressive governments. We also hope that the ‘Manifesto’ will empower community groups by demonstrating that the TINA mantra, where these alleged goals of the amorphous global financial markets are prioritised over real goals like full employment, renewable energy and revitalised manufacturing sectors is bereft and a range of policy options, now taboo in this neo-liberal world are available. The book will be published in 2017 by Pluto Books, London. This blog examines the way the Left became entranced with post-modernism and fell into the trap of disappearing into crevices of meaningless at the expense of a focus on class struggle and a coherent critique of capitalism. We argue that critique is an essential part of the revitalisation of the Left political struggle against neo-liberalism and the restoration of the Left as a political force.

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