The impossibility theorem that beguiles the Left

Some years ago (June 27, 2007), Harvard economist Dani Rodrik outlined what he called his “impossibility theorem”, which said that “democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full”. In his brief article – The inescapable trilemma of the world economy – he made the case that “deep economic integration required we eliminate all transaction costs … in … cross-border dealings” and that “Nation-states are a fundamental source of such transaction costs”. Ergo, if you want ‘deep’ integration then the Nation-state has to surrender. His “trilemma” guides his view of how the “international economic system” should be reformed. He think that if “want more globalization, we must either give up some democracy or some national sovereignty”. This view has been adopted by political parties as if the conceptual framework is in some way binding. The trilemma has been skillfully sold as a narrative by right-wing think tanks and others who serve the interests of capital. The so-called progressive politicians have fallen into the trap and have shifted their political parties closer and closer to their right-wing opponents, such that now it is hard to distinguish between the major parties in most nations. The reality is that while the impossibility theorem beguiles the Left – its applicability as a binding constraint on government is limited. It is as vapid as the statements made by these career politicians on both sides of politics that they serve the people.

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The European circus continues

Yesterday, I briefly examined how a pack of big-noting financial market traders were trapped in stupidity by patterned behaviour and self-reinforcing group dynamics (aka Groupthink). Today, we consider the neo-liberal Groupthink that continues to trap political leaders and policy makers in Europe into a web of denial and stupidity.

In both case, innocent people have suffered huge negative impacts while, by and large, the idiots have escaped fairly unscathed. The recent data from Eurostat shows that growth is fairly flat in the Eurozone and industrial production is in recession. It also shows that the banking system is in deep jeopardy and the so-called reforms that were introduced post-GFC are not considered robust by investors. With massive bank deposit flight going on and banking share prices plunging, it is clear that the ‘markets’ have lost faith in the financial viability of the Eurozone. Meanwhile. Mario Draghi winds the key up in his back and tells the world that everything is fine and the ECB is on top of the situation. With chaos descending on the monetary union again, the ECB cannot even achieve its single purpose – a stable 2 per cent inflation rate. It has failed to even achieve that over the last four years. One couldn’t write this sort of stuff if they were trying.

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The mass consumption era and the rise of neo-liberalism

I was having a talk with a friend in San Francisco last Monday about globalisation and the capacity of the state, which is the topic of the upcoming book I am working on (manuscript due around May 2015). He made the comment that globalisation had meant that the state can now only do bad and can no longer do good. I asked him whether he was talking about globalisation (the international nature of finance and supply chains) or neo-liberalism (free market economics) and he said “neo-liberalism is a disease – that is the problem and since the 1970s it has meant the state is restricted to doing bad”. The point I was digging at was that progressives often conflates the two concepts which then leads to flawed conclusions about what the state can and cannot do. Further, when he talked about the state doing bad he was really talking about the impact on the average person and those who are disadvantaged. He wasn’t talking about the so-called top-end-of-town, which have without any question done very well since the 1970s. And that is my next point – the state hasn’t gone way or been rendered impotent by neo-liberalism as many on the Left believe and angst over. As the currency issuer it is still very powerful. It just serves the interests of a different cohort now relative to the cohort it served during the full employment period that followed the Second World War. In doing so, it has shifted from being a mediator of class conflict to serving the interests of capital in its battle to appropriate ever increasing shares of real income from labour. That is a wholly different narrative to the one that emerges when globalisation is conflated with neo-liberalism – as if they are parts of the same process.

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Friday Lay Day – Travelling all day today

Its my Friday Lay Day blog and, today, I am travelling for most of it on my way to the US. I will be giving a talk on Monday morning in San Francisco on employment guarantees at the ASSA meetings. Later next week (Wednesday and Thursday), I will be in Los Angeles. I have some free time each of the next several days if anyone out there would like to catch up. I will be back into blogging action on Monday (and the quiz will be available tomorrow). Note also that I won’t be attending to moderating comments for an extended period today. That means that those with external links might sit in the queue for some time and I will get around to dealing with them when I have a connection again. For the next several hours I will be immersed in a novel about post-Colonial Jamaica, the CIA, gangs, and that sort of stuff. I am currently reading – A Brief History of Seven Killings – which is a very long and detailed book written by the US-based, Jamaican author Marlon James. Here are a few more snippets.

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Spain in limbo but has not rejected austerity

On the Sunday before last (December 20, 2015), Spain conducted a general election, which has left the nation in limbo. Alex Tsipris, the Greek Prime Minister, still trying to hang on to the image that he is a progressive leader in some way, tweeted once the results were known that “Austerity has now been politically defeated in #Spain, as well. Parties seeking to serve society made a strong showing #20D”. I wonder who he is trying to kid … “as well” – as well as where? Certainly not in Greece, which was the implication of his tweet. And, to be clear, certainly not in Spain. While the conservative Popular Party (PP), which has overseen the most recent imposition of austerity and is firmly pro-EU and pro-euro, did not gain an absolute majority, they did win the most seats (123 in the Spanish parliament) and were well ahead of the other major austerity party, yes, the Spanish Socialist Party (PSOE), which won 90 seats). Even the left-wing We Can party (Podemos), who won 69 seats is not planning to exit the common currency. There is no hope of an anti-austerity coalition forming.

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Friday lay day – The Stability Pact didn’t mean much anyway, did it?

It’s my Friday lay day blog and I am spending most of today reading French documents from the 1960s. The French theme is appropriate given recent statements by the ‘new Napoleon’ a.k.a. François Hollande this week about his intentions to ignore the rigid fiscal rules imposed on Eurozone Member States and expand the fiscal deficit to allow him to employ a significant number of extra workers in various areas of policing and security. While abandoning the “Stability Treaty” to use Hollande’s own words, by which he means the Stability and Growth Pact and its associated and pernicious fiscal rules and oversight, is an admirable display of leadership, the fact that he can only see to do this by engaging in more machinery to entrench the ‘war on terror’ more deeply is disturbing. It would have been much better if he just admitted that fiscal rules governing the Eurozone Member States are unworkable and prevent a government from fulfilling its responsibilities to advance the well-being of its citizens. He is now open to debate in France was the Conservatives who clearly favour more state police, security and military expenditure, such is their xenophobia, but are now demanding that such expenditure is done within the narrow limits of the fiscal rules and are therefore calling for reductions in spending on health and public services. I doubt that even this new Napoleon will be able to sale free of the fiscal straitjacket that is the Eurozone, major security threats notwithstanding.

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Friday lay day – Is MMT applicable to the Eurozone?

Its my Friday lay day and I am catching up on reading today. But one thing I have had to complete by today is the introduction to the German Translation of my friend Warren Mosler’s 2010 book – The Seven Deadly Innocent Frauds of Economic Policy. The publisher wanted an introduction for the German readership that helped them relate the discussion in the book to the reality in Europe – given that the Economic and Monetary Union is a perverted hybrid of a fixed exchange rate/fiat currency system that works for no-one really. So you may be interested in reading my introduction. Then a dose of the master guitarist completes my Friday blog.

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The British Tax Credits system is a sign of New Labour failure

In 2012, the British government, which had for the first two years of its last term, realised that it was going to drive the economy back into deep recession if it maintained its fiscal austerity plans. It had spent the previous two years telling everyone how it had to cut into the fiscal deficit to save Britain but by 2012 the data was telling the government that their view of the world did not accord with reality. As a consequence they curtailed the austerity onslaught and allowed the deficit to grow and support growth. The result was that Britain avoided a triple-dip recession and the nation demonstrated to its EU partners across the Channel how stupid and reckless the Eurozone’s fiscal austerity was. But ideology often comes back to the fore when the emergency is over. Now with continued, albeit weak growth and a renewed electoral mandate, courtesy of the pitiful British Labour Party, the Tories are once again talking tough and in the Spring 2015 ‘Budget’, the austerity returned with vengeance. The focal point at present of that austerity is the impending parliamentary vote on cutting the benefits to low income families in Britain via the Tax Credits system. The attempt to force harsh austerity onto the poor in Britain is vile in its conception. But the Tax Credits system in the first place is the result of weak-kneed decisions by New Labour to avoid forcing British employers to pay a decent minimum wage which would have eliminated ‘working poverty’. Now the chickens are coming hometo roost. And as usual, when austerity is introduced it is the poor that suffer. A disgrace all around really.

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Rising income and wealth inequality – 1% owns more than bottom 99%

This week is – Anti Poverty Week 2015 – in Australia and there are many events and happenings on to mark the time and to highlight the issue of poverty. I will be appearing on a panel on Wednesday afternoon in Newcastle (see below). I was thinking about what I might say in my short presentation next week as I read a report in the UK Guardian (October 17, 2015) – Wealth therapy tackles woes of the rich: ‘It’s really isolating to have lots of money’ – that appealed for sympathy from the rest of us for the top-end-of-town, who have to undergo psychological counselling because they are stressed out being wealthy. Apparently, they also have to engage in “stealth wealth” which means they “are hiding their wealth because they are concerned about negative judgment”. I immediately felt bad for them. Oh, the pain the top 1 per cent feel owning around 50 per cent of all the assets in the world! What a shocking plight they face. In the context of this week’s focus on Anti-Poverty, I couldn’t quite rouse the sympathy the story was seeking to elicit. Sorry!

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Capitalists shooting their own feet – destroy trust and layer management

There was a wonderful article – The Origin of Job Structures in the Steel Industry – written by Katherine Stone and published in 1973. It was part of an overall research program that several economists and related disciplines were pursuing as part of the radical economics that was being developed at Harvard and Amherst in the early 1970s. One of the major strands of this research was to understand labour market segmentation and how labour market structure, job hierarchies, wage incentive systems and more are used by the employers (as agents of capital) to maintain control over the workforce and extract as much surplus value (and hopefully profits) as they can. It challenged much of the extant literature which had claimed that factory production and later organisational changes within firms were technology-driven and therefore more efficient. The Harvard radicals found that to be unsustainable given the evidence. They also eschewed the progressive idea that solving poverty was just about eliminating bad, low pay jobs, an idea which had currency in that era. They showed that the bad jobs were functional in terms of the class struggle within capitalism and gave the firms a buffer which allowed them to cope with fluctuating demand for their products. It also allowed them to maintain a relatively stable, high paid segment (primary labour market) which served management and was kept docile via hierarchical incentives etc. I was reminded of this literature when I read a recent paper from Dutch-based researchers on the way firms have evolved in the neo-liberal era of precarious work. Much is made of the supposed efficiency gains of a more flexible labour market. How it spurs innovation and productivity through increased competition and allows firms to be more nimble. The entire ‘structural reforms’ agenda of the IMF, the OECD, the European Commission and many national governments is predicated on these myths. The Dutch research shows the irony of these manic neo-liberals.

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Rejecting the TINA mantra and the second ‘Gilded Age’

There was an interesting article by US historian Jackson Lears in the in the London Review of Books (July 16, 2015) – The Long Con: Techno-Austerity. I recommend people regularly reading the LRB because it has some fabulous articles. In this case, the review by Jackson Lears is of the recent book by Steve Fraser – The Age of Acquiescence: The Life and Death of American Resistance to Organised Wealth and Power (published by Little, Brown). I have taken time to write about this because I had to read the book being reviewed myself first. There is also an excellent review of the book by Naomi Klein in the New York Times – ‘The Age of Acquiescence,’ by Steve Fraser (March 16, 2015). So what is it about?

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There is no need to issue public debt

At the London event last week, I indicated that governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs. The Modern Monetary Theory (MMT) position is that there is no particular necessity to match public deficits with debt-issuance for a currency-issuing government and deficits should be accompanied by monetary operations which we now call Overt Monetary Financing (OMF). Surprisingly there was some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.

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Friday lay day – no case made to cut penalty rates

Its my Friday lay day and I end this week feeling infinitely better (how would I measure that?) than this time last week. The human capacity is pretty phenomenal. This week the Productivity Commission of Australia released its draft report on how to reform the Australian industrial relations system – Workplace Relations Framework (11.7 mbs). The Productivity Commission grew out of the old Tariff Board (then Industries Assistance Commission) and so administered the trade protection policy of the Federal government in the C20th. As ideological preferences changed, it morphed into its current guise, which is to give advice to government on how to deregulate, privatise, outsource and other trash the conditions of workers. As we awaited this current report, the only interesting question was not what they would recommend but what spurious route and flaky evidence they would call upon to attempt to justify their inevitable embrace of more deregulation and wage cutting in the labour market. As it turned out, the Commission disappointed. They couldn’t even find enough flaky evidence to support their conclusions so in the best traditions of the right wing they just offered up the tripe without any coherent argument and then managed to fit all that into a 1001-page tome. I imagine there is low job satisfaction in that part of government having to come up with this sort of nonsense and pretend you do serious work.

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Friday lay day – South Korea shows us a different way

Its my Friday lay day blog where I pretend to take it easy. Today I have a nice story to contrast with the shocking news we have been following over the last month or so from Europe. The economics news has been dominated by the madness and badness of the EU in recent weeks and how the miserably depressed Greece has been brought to heel by the EU bullies and will have to inflict even more austerity on its suffering people. Unemployment already above 26 per cent will rise further and more of its youth will head to other shores in search of opportunities. It is a process that is hollowing out the capacity of a nation. They do things differently in South Korea. The Korean government appears to actually care about its people. It provides a lesson for all nations who have become infected by the Recession Cult of Austerity (RCA).

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Beyond metaphor … comes total nonsense, German style

Under an accompanying heading – “Beyond Greece” – the German Handelsblatt (a daily financial/business newspaper) published the article (July 14, 2015) – The Uncomfortable Truth About Debt. It was meant to be some sort of justification for the touch German stance against Greece. The authors claimed that “Germany has been hounded internationally for taking a hard line on Greece. But there is a bigger problem on the horizon: the debt mountain in Europe, and the world, is too high”. My BS sensors were on high alert as I read the opening paragraphs. There was good reason for my alert – the article, which would have been read by tens of thousands of German corporate sector managers etc, demonstrates a palpable failure to comprehend what the real issues confronting the Eurozone are and how Eurozone Member States (19 of them) are fundamentally different in terms of fiscal capacity relative to nations that issue their own currency. No wonder the political classes in Germany can get away with behaving so abominably.

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There is still a meaningful left-right distinction

There was an article in yesterday’s Australian Financial Review (July 12, 2015) – Left and right labels wear thin, lose definition – which as the title suggests tried to argue that it is hard “to know who or what is left or right wing any more”. The article used a number of examples, including the so-called Communist government of China bailing out its (farcical) share market and the Greek ‘far left’ government agreeing to austerity and on-going debt demands from the creditors, to suggest that it is no longer easy delineating what is left and what is right and dubbing policies accordingly (one way or another) “provides little illumination”. This is a recurring theme in recent years and part of the neo-liberal attempt to blur what it going on and treat ideological stances as reality or factual assessments. It is still very clear to me what is a left-wing position. The rest of the article provides in his own words “little illumination” about the issue. The argument in this blog is that the categories remain influential and meaningful but are blurred through ignorance as to how the monetary system operates. Left-wingers fall prey to right-wing policies because they have bought the TINA myth. That is the only way one could explain the Syriza disaster, for example.

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Saturday Quiz – July 11, 2015 – answers and discussion

Here are the answers with discussion for yesterday’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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A Greek exit is not rocket science

Last Wednesday (July 1, 2015), the ABC radio presenter, Phillip Adams, in a wide ranging interview about the upcoming referendum in Greece and the prospects for the nation, asked the then Greek Finance Minister: “My jokes about printing drachmas in the cellars, remain jokes?” The then Finance Minister replied: “Of course they do … we don’t have a capacity … because … Maybe you don’t know that. But when Greece entered the euro in the year 2000 … one of the things we had to do was to get rid of all our printing presses … in order to impress on the world that this is not a temporary phenomenon … that we mean this to be forever … we smashed the printing presses, so we have no printing presses”. The interchange occurred at the 49:46 minute mark in the – following program. In my research for my Eurozone book, which was published in May this year, I studied in some detail how the euro was introduced, how it is disseminated, how the notes are printed and the coins minted and how nations in other contexts had introduced their own currencies. When I heard that interview I wondered why the then Greek Finance Minister would want to mislead the Australian listeners, even though interviews like this are no longer geographically restricted and that he was clearly intent on convincing the world, a few days before the referendum, that Syriza was committed to the euro and exit was not an option. Earlier in the week, I had railed against the lies and misinformation coming out of the EU leadership. The boot was on the other foot in this case. But it also raises questions of how an exit might occur in the event that Syriza actually stand up for its electoral mandate (anti-austerity) and refuse to agree to any further austerity. I doubt they will do that but hope springs eternal.

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The ECB has to maintain ELA to Greek banks

Despite the shamelessly dishonest press barrage from the conservative owners of the highly concentrated Greek media (the ‘oligarchs’) to vote YES; despite many articles popping up in world newspapers about how the Greeks are to blame for their own problems because they overspend and undertaxed; despite the lies coming from other European leaders about what the vote was about (it was not about leaving the Euro but rather about whether the Greek people wanted further failed austerity); despite the ridiculous claims of the German SDP about “bridges being burned” (that party should change its name because it is a disgrace to the social democratic tradition) – despite all of that and heaps more, the Greek people voted overwhelmingly NO to reject austerity as a viable policy model for their country. This is a case of democracy coming head to head with the dominant political-economic ideology within which the Greek nation is situated – the Eurozone. It also demonstrates the flaws of the democratic process – the people have voted for an end to austerity but also consistently tell opinion polls they want to remain in the Eurozone, a monetary system that is built on austerity. They voted yesterday to reject the very basis of the monetary system they want to stay in – which tells us they don’t really understand the nature of the system and therefore how informed is the NO vote.

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Saturday Quiz – July 4, 2015 – answers and discussion

Here are the answers with discussion for yesterday’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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