{"id":19641,"date":"2012-05-31T18:14:13","date_gmt":"2012-05-31T08:14:13","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=19641"},"modified":"2012-05-31T18:14:13","modified_gmt":"2012-05-31T08:14:13","slug":"the-new-economy-cannot-flourish-with-fiscal-austerity","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=19641","title":{"rendered":"The New Economy cannot flourish with fiscal austerity"},"content":{"rendered":"

\t\t\t\tI often get E-mails from readers – some hostile others more reasonable – telling me that I should stop arguing for more economic growth. The reasoning is relatively straightforward – the Earth is buckling under the rapacious resources demands of the capitalist system and not only is that process likely to be finite, notwithstanding substitution via technological advances, but also in the process of exhaustion the amenity declines. The argument juxtaposes ecological claims with other claims relating to the desirability of the current neo-liberal dominated system which relies, seemingly, on creating more inequality, a reduction in government oversight and allows the worst aspects of the capitalist system to run amok. However, somewhere along the way, the 99% or whatever percentage it is (I think it is substantially lower than 99) miss the boat. The current crisis is used to demonstrate that conjecture. I haven’t time to reply to all the E-mails and I try to provide “collective” replies (which should tell you something in itself) via my blog posts. So today I am addressing that issue. The message is simple – I am very sympathetic to localised, new economy-type collective ways of organising social and economic activities. I support egalitarianism and co-operative solutions rather than competitive, dog-eats-dog approaches. I don’t mind working and giving my surplus to aid those who are unable for whatever reason to achieve the same material outcomes by their own hand. I am happy with consolidation rather than growth. But despite the romantic appeal of all this – as the solution – we have to understand that there is still something called a monetary system and a currency to deal with. Localised solutions are still constrained by the sovereign state they are located in and their fortunes are determined in no small way by the way the currency-issuing government conducts its fiscal policy. There is no escape from that.
\n
\nIn the New York Times Sunday Review article (May 26, 2012) – Let’s Be Less Productive<\/a> – we are asked to consider whether:<\/p>\n

\n… the pursuit of labor productivity reached its limit?\n<\/p><\/blockquote>\n

Viewed as the “engine of progress in modern capitalist economies” where “(o)utput is everything. Time is money” – productivity has been the way material wealth has grown over the eons.<\/p>\n

The article says that “productivity may also have some natural limits” and we should work to reduce our addiction to growth to prepare us for when material advance is no longer possible.<\/p>\n

The article proposes that we see unemployment as a problem of not sharing the hours of work appropriately – an idea they say is “now enjoying something of a revival in the face of continuing recession”.<\/p>\n

While well-intended (to eliminate unemployment) such proposals fail, in my view, to address the principle cause of mass unemployment – not enough aggregate demand.<\/p>\n

Ah, but then I am accused of being captive of a spending obsession. My response – not at all. I am just not going to be captive to the neo-liberal obsession with creating buffer stocks of unemployment to allow the elites to expropriate more real income than they might be able to if all workers were working to their desired limits and secure.<\/p>\n

Modern Monetary Theory (MMT) tells us that spending equals income. One person’s purchase is another person’s income. If there is not enough spending then someone has no job. Rationing hours of work to fit this constraint merely imposes the burden of the inadequate fiscal policy onto workers.<\/p>\n

I do not think progressives should let our governments off the hook like that so easily.<\/p>\n

The NYT proposes an alterntive “strategy for keeping people in work when demand stagnates”:<\/p>\n

\nPerhaps in the long run it’s an easier and a more compelling solution: to loosen our grip on the relentless pursuit of productivity. By easing up on the gas pedal of efficiency and creating jobs in what are traditionally seen as “low productivity” sectors, we have within our grasp the means to maintain or increase employment, even when the economy stagnates.\n<\/p><\/blockquote>\n

The article also says that “this may sound crazy; we’ve become so conditioned by the language of efficiency”.<\/p>\n

I agree with the author (one Tim Jackson) that this is a very viable solution. I construct that solution in the form of a Job Guarantee<\/a>.<\/p>\n

Tim Jackson says that “there are sectors of the economy where chasing productivity growth doesn’t make sense at all” – such as, personal care services.<\/p>\n

If we allocate more spending to areas such as “medicine, social work, education” etc, then we can have “growth” (in employment and happiness) without imposing a heavy resource footprint on the nation.<\/p>\n

Someone asked me the other night after I had presented a workshop on the Eurocrisis – how I deal with ecological issues while continually calling for full employment.<\/p>\n

My preference for full employment is based on the role that employment plays in our social lives as well as its intrinsic role in giving us independent access to the distribution system. Work defines people. It gives us inclusion and self-esteem. Unemployment alienates and disclocates as well as the material impoverishment it brings.<\/p>\n

I answered the question by posing the situation that musicians (who always struggle for gigs) could become JG workers and, in return for their income security and being part of the wider employment scene could reciprocate by conducting rehearsals in school halls and teach kids about bands, instruments, song-writing etc.<\/p>\n

Artists likewise. Surfers could teach children water safety (to eliminate the drownings that occur each summer) and dune maintenance and physical fitness in return for being employed.<\/p>\n

By the time you go through the list – we have a very green employment structure and inclusion. Win-win the management consultants call it. Me too!<\/p>\n

If we need this employment to be highly skilled (and therefore closed to many of the current most disadvantaged citizens) then the public sector can easily offer work in personal care and environmental care services at above JG wages.<\/p>\n

The NYTs article says that:<\/p>\n

\nThe care and concern of one human being for another is a peculiar “commodity.” It can’t be stockpiled. It becomes degraded through trade. It isn’t delivered by machines. Its quality rests entirely on the attention paid by one person to another. Even to speak of reducing the time involved is to misunderstand its value.<\/p>\n

Care is not the only profession deserving renewed attention as a source of economic employment. Craft is another. It is the accuracy and detail inherent in crafted goods that endows them with lasting value. It is the time and attention paid by the carpenter, the seamstress and the tailor that makes this detail possible. The same is true of the cultural sector: it is the time spent practicing, rehearsing and performing that gives music, for instance, its enduring appeal. What – aside from meaningless noise – would be gained by asking the New York Philharmonic to play Beethoven’s Ninth Symphony faster and faster each year?\n<\/p><\/blockquote>\n

I agree with all of this and have actively promoted these ideas throughout my professional career. Much to the chagrin and\/or amusement of most of my profession I might add. Their loss!<\/p>\n

But the point to understand is that to fulfill these new economy ideals we still have to have appropriate fiscal policy to ensure that there is sufficient spending support for these jobs.<\/p>\n

Running budget surpluses when the non-government sector is draining aggregate demand will not get us to this new level of social efficiency.<\/p>\n

Progressives have to understand that the macroeconomic policy settings are crucial to achieving these more local goals. Too often, the new economy is held out as being a local solution. Well it can only be that if the aggregate solution allows it to be.<\/p>\n

So we have to become au fait with macroeconomics and see that the way the neo-liberals push governments to run surpluses is the main game to be attacked before we can all go off in our Kombis (loaded up to ensure not too many cars are being used) to some “local” nirvana.<\/p>\n

A fully employed sustainable economy will still require real GDP growth rates of say 2-3 per cent (depending on labour productivity and labour force growth). It will still require aggregate demand (spending) to grow. But its employment structures will be very different.<\/p>\n

Then consider this article (May 22, 2012) – The Rise of the New Economy Movement<\/a> – by Gar Alperovitz, who is an American academic and co-founder of the Democracy Collaborative.<\/p>\n

He says that:<\/p>\n

\nJust beneath the surface of traditional media attention, something vital has been gathering force and is about to explode into public consciousness. The “New Economy Movement” is a far-ranging coming together of organizations, projects, activists, theorists and ordinary citizens committed to rebuilding the American political-economic system from the ground up.<\/p>\n

The broad goal is democratized ownership of the economy for the “99 percent” in an ecologically sustainable and participatory community-building fashion. The name of the game is practical work in the here and now-and a hands-on process that is also informed by big picture theory and in-depth knowledge.\n<\/p><\/blockquote>\n

Sounds good.<\/p>\n

Apparently, there is to be an bursting out of “thousands of real world projects — from solar-powered businesses to worker-owned cooperatives and state-owned banks” which will rewrite capitalism and become “state and local laboratories of democracy” which “may be applied at regional and national scale when the right political moment occurs”.<\/p>\n

The article provides a lot of interesting examples of what is happening by way of co-operative movements in the US. It does sound very exciting.<\/p>\n

These economic and banking type developments – private co-operatives are dove-tailing with the Occupy movements to present a public opposition to the Wall Street model of crony capitalism.<\/p>\n

Sounds good.<\/p>\n

Various proposals such as to put “worker, consumer, environmental, or community representatives of “stakeholder” groups on corporate boards” are outlined. Other plans include setting up citizen funds to reclaim “a significant portion of the state’s mineral revenues and returns dividends to citizens as a matter of right”.<\/p>\n

And it goes on – all sounding good.<\/p>\n

We learn that:<\/p>\n

\nRecently, the United Steelworkers union broke modern labor movement tradition and entered into a historic agreement with the Mondrag\u00f3n Cooperative Corporation and the Ohio Employee Ownership Center to help build worker-owned cooperatives in the United States along the lines of a new “union-co-op” model.\n<\/p><\/blockquote>\n

The aim of all this is to “… put an end to the most egregious social and economically destructive practices in the near term … [and] … lay foundations for a possible transformation in the longer term”.<\/p>\n

The author says that one of the contraints of the New Economy movement is that it:<\/p>\n

\n… confronts the enormous entrenched power of an American political economic system dominated by very large banking and corporate interests-and bolstered by a politics heavily dependent on the financial muscle of elites at the top.\n<\/p><\/blockquote>\n

My view is that the real constraint is the poor economics education within the population. The elites, mentioned above, exploit this collective public ignorance and hold out neo-liberal free market economics as the only alternative. Even though there is nothing free about the market organisations they lobby governments to create by deregulation etc, we (the collective) don’t know that and are ill-equipped to see through the myths.<\/p>\n

We know there is something wrong when “400 individuals at the top now own more wealth than the bottom 160 million” (in the US) but at the same time we support fiscal austerity because we think TINA.<\/p>\n

Imagine if everyone understand the fundamental principles of macroeconomics (developed by MMT)? How long would the Wall Street elites maintain their lobbying sway? How long would politicians who advocate undermining our fortunes and the future of our children via fiscal austerity last in office?<\/p>\n

Answer: not very long.<\/p>\n

The author says that:<\/p>\n

\n… driving the movement’s steady build up, day by day, year by year, is the growing economic and social pain millions of Americans now experience in their own lives-and a sense that something fundamental is wrong. The New Economy Movement speaks to this reality, and just possibly, despite all the obstacles-as with the civil rights, feminist, environmental and so many other earlier historic movements-it, too, will overcome. If so, the integrity of its goals and the practicality of its developmental work may allow it to help establish foundations for the next great progressive era of American history. It is already adding positive vision and practical change to everyday life.\n<\/p><\/blockquote>\n

All of which I agree with BUT …<\/p>\n

No where in the article is there any reference to fiscal policy nor to the role of the currency-issuing government in maintaining macroeconomic conditions that would allow these localised initiatives to bloom and become the base for democratic revival.<\/p>\n

I am not suggesting all articles about the economy etc should deal with that issue in the depth that I might as a practising macroeconomist. But it would have only taken one sentence to establish that the author understood how crucial it is for the “local” movement to also develop and articulate a powerful narrative critical of the current neo-liberal macroeconomic orthodoxy that my profession puts out.<\/p>\n

The omission is very telling and this shortcoming permeates much of the New Economy-type literature.<\/p>\n

And, speaking of Mondrag\u00f3n.<\/p>\n

In the 1970s, as a student I studied the Mondrag\u00f3n Cooperative Corporation (MCC)<\/a>, which was formed in the 1950s and was continually held out as an example of how the capitalist system can be improved by evolution rather than revolution.<\/p>\n

The MCC is a capitalist formation with a difference – “a corporation and federation of worker cooperatives based in the Basque region of Spain”. It has evolved into a very large set of interlocked co-operative firms employing around 80 thousand people directly across various industry sectors (Finance, Industry, Retail and Knowledge).<\/p>\n

The business approach is participatory and worker-focused and owned with one-person, one-vote rules applying.<\/p>\n

However I often read statements such as (Source<\/a>):<\/p>\n

\nThe Mondragon Cooperative Corporation employs 104,000 workers\/owners in 140 cooperatives. Only 4 of their businesses closed in the last 60 years. They have NO unemployment. If one coop reduces staff others pick them up. Even now, with the financial turmoil hitting Europe, the unemployment rate in Mondragon is Zero.\n<\/p><\/blockquote>\n

Which is an absolute lie.<\/p>\n

The truth is very different.<\/p>\n

You might like to read this article (October 24, 2011) – Mondrag\u00f3n Revisited<\/a> – which was written by a former Australian (left-wing) politican, Race Matthews.<\/p>\n

He notes that:<\/p>\n

\nIn the face of the global financial crisis that has Spain’s unemployment level standing currently at some 22 per cent, the Mondragon co-operatives offer an astonishingly successful alternative to the way we organise business and economies …\n<\/p><\/blockquote>\n

Have they?<\/p>\n

Race Matthews quotes the HR Director of Mondrag\u00f3n who says “We are private companies that work in the same market as everybody else. We are exposed to the same conditions as our competitors.”<\/p>\n

We learn that Mondrag\u00f3n’s retail businesses “experienced for the first time since its inception in 1959 losses consequent on massively reduced consumer demand”.<\/p>\n

We learn that Mondrag\u00f3n and Spain’s “largest manufacturer of white goods … has successfully managed down production by 30 to 40 per cent in the face of a precipitous contraction of the effectively discretionary consumer durables market”.<\/p>\n

We learn that a Mondrag\u00f3n credit union (“Spain’s ninth largest bank”) lost “seventy-five per cent reduction in its profitability” during the crisis so far.<\/p>\n

So how have they been able to maintain low unemployment within the permanent workforce?<\/p>\n

Answer: they rely heavily on temporary workers. They were the ones who became unemployed as the co-operatives had to dance to the falling aggregate demand.<\/p>\n

This article – What is happening to Mondragon in Spain’s economic crisis?<\/a> – tell us that 50 of the Mondrag\u00f3n co-ops are making losses.<\/p>\n

They deal with this, in part, by transferring “worker members … from one coop that isn’t doing well to one that is”. They have also cut wages by up to 8 per cent in the hardest hit areas.<\/p>\n

They have an internal income support scheme but still workers face losses in annual incomes.<\/p>\n

But it is this dichotomy in the workforce which is far from democratic. The Mondrag\u00f3n co-operatives typically have two types of worker – (a) the worker-owners who participate in decision-making and share profits; and (b) the hired labourers (temporary workers) who do not vote, participate in decision-making and have no job security.<\/p>\n

I haven’t time today to detail the way in which this segmented labour market operates and some of the insidious social practices that evolve (bullying, coercion etc).<\/p>\n

It was these disenfranchised workers that took the fall when aggregate demand slumped and sales collapsed. Co-operatives and other forms of corporation are alike – they need spending to maintain prosperity (however that prosperity is distributed).<\/p>\n

The New Economy movement walks a similar path to the Social Entrepreneurship Movement (SEM), in that they both focus on local, community-designed and implemented solutions.<\/p>\n

SEM claims that main welfare-role for government should be to assist the development of local social entrepreneurs, encourage entrepreneurial projects and to ensure that resources and service delivery are devolved to what they call place management models.<\/p>\n

They aim to break the government-individual nexus and use public funds to subsidise private entrepreneurs. They also support strengthening the ties between non-profit organisations and business for mutual benefit. They claim that by investing directly into the community, private corporations are empowered to determine where social spending is allocated. And so the company and the community enjoy a mutual benefit.<\/p>\n

There are major concerns with these proposals. I published a fair bit on this about a decade ago. A freely available working paper is available as a sample – Social Entrepreneurship – false premises and dangerous forebodings<\/a>.<\/p>\n

First, basing social spending according to corporate aims starkly contrasts with the social justice orientation of the Welfare State where resources were allocated according to an ordering of societal needs, determined in the public domain, rather than by corporations.<\/p>\n

Second, using non-profit organisations to administer state welfare programs for commercial gain may fundamentally change the character of these organisations. In particular, imposing sanctions (income-losses) on some of the most disadvantaged members of the community may conflict with long-standing organisational goals and values. This may cause internal conflict between the enterprise and welfare divisions of such organisations, as clients sanctioned by one part of the organisation seek emergency assistance from another.<\/p>\n

We have the situation in Australia where successive governments (Labor and Conservative) have increasingly outsourced service delivery of welfare and labour market programs to the private sector, supposedly to increase efficiency. The data and evaluations tell a vastly different story of waste and corruption and inadequate outcomes, but that is another story for another day.<\/p>\n

But the churches have been among those at the centre of the outsourcing and have sought to create profitable arms of their organisations to, for example, case manage the unemployed. However, government policy is also to penalise the unemployed for various “activity” infractions, For example, a person losing his\/her home because they can no longer pay the rent receives a letter to attend an interview at the employment agency but does not get it because they are homeless. Result – their benefits are withdrawn for some weeks as a punishment. Schizophrenics who have episodes on the day of their interview and fail to attend are similarly treated by this heartless neo-liberal rabble we call our government.<\/p>\n

Anyway, the churches who are the servicing these contracts – have to rat on the unemployed who then lose income support. The punished then walk out one door of the church office and into the other door which delivers emergency food aid. This schizoid nature of welfare agencies these days – that is, those who have been co-opted by our neo-liberal governments is driving a wedge into them and the tension is dissipated by many abandoning the emergency aid function – with shocking results.<\/p>\n

Third, community pooling arrangements are proposed as a radical new form of welfare provision. So we get these ideas that government allocations for health, education, housing, training and employment and all social security payments which are paid to individuals (as a right of citizenship) should instead be pooled and invested in community cooperatives, which then pay a living wage for community employment.<\/p>\n

This model of community entrepreneurship thus sees the government as a venture capital provider and underwriter of small-scale capitalist production. The StartUp Loans which I analysed in this blog – StartUp Loans – neo-liberal smokescreen which denies macroeconomic reality<\/a> – are in that mould.<\/p>\n

They ignore the fact that small business failure at the best of times is very high. Such schemes cannot be a reliable employment generator.<\/p>\n

It is also undesirable to implement an income support system where the fortunes of the disadvantaged receiving assistance are dependent on entrepreneurial vagaries. Further, community entrepreneurship is susceptible to a major source of market failure referred to by economists as moral hazard. The government would have a moral obligation to prevent an entrepreneur from failing.<\/p>\n

The entrepreneur thus faces distorted risk and return choices because they can effectively ignore downside risks of any particular development plan. Market failure would be endemic and wasteful investment schemes would proliferate. There is no moral hazard in a government provided welfare model where the allocations are based on a system of political accountability.<\/p>\n

Fourth, the SEM claims that social cohesion is only developed at the community level. However, social cohesion can take many forms. Some countries like Japan, Switzerland, and Norway maintained Keynesian policies and avoided the sustained unemployment that beset most economies after the mid-1970s.<\/p>\n

In Paul Ormerod’s 1994 book – The Death of Economics<\/em> (Page 203) we read that each these countries retained:<\/p>\n

\n… a sector of the economy which … functions as an employer of last resort … [and] … exhibited a high degree of shared social values … [or] … social cohesion, a characteristic of almost all societies in which unemployment has remained low for long periods of time.\n<\/p><\/blockquote>\n

Social cohesion, here, refers to the willingness of citizens to allow the state to use macroeconomic policies to maintain full employment.<\/p>\n

SEN advocates want community to replace the state as the vehicle for social cohesion and argue that the community-focus would help to overcome the “one size fits all” aspect of bureaucratic Welfare States. However, a series of separate communities pursuing competitively driven aims do not necessarily develop shared values or social cohesion. They are indeed more likely to develop social antagonism toward each other.<\/p>\n

Moreover, the substitution of community-developed, for bureaucratically determined, programs may introduce discord between sections of the community with divergent priorities, including intolerance of minorities. There are suggestions in Australia, for example, that indigenous Australians, among the most disadvantaged people in the world to our eternal disgrace, should be subject to income support pooling arrangements and local rules be applied – such as church attendance, etc – in return for a share of the pie. Intolerance can quickly spread in localised situations.<\/p>\n

Unique programs in each community also imply the erosion of the individual right to a minimum service standard. Not only are rights exchanged for the concept of earning entitlements by proving deservingness, but, members of dynamic communities with greater entrepreneurial skills will be relatively disadvantaged.<\/p>\n

The assumption that positive outcomes of a small number of organisations will automatically be transferable to every community is also problematic. Social entrepreneurs would compete with private companies and employment generated in these communities may be partially or totally offset losses in the private sector.<\/p>\n

In short there are numerous dangers in pursuing the SEM model of community entrepreneurship. Communities working together with the fiscal power of the federal government to achieve national goals would best ensure the protection of citizens’ rights originally secured by the introduction of the Welfare State, and, avert the possibility of divisiveness between and within communities.<\/p>\n

Many of these dangers spill over into the more general New Economy models of economic organisation.<\/p>\n

Conclusion<\/strong><\/p>\n

I would not like it thought that I am opposed to Mondrag\u00f3n-type developments. Exactly the opposite is the truth. But realities are sometimes different to the romantic narratives that evolve to provide succour in times of stress.<\/p>\n

The Mondrag\u00f3n-type initiatives are dependent like all economic activity on the overall state of the macroeconomy. They have clearly suffered in the downturn because the Spanish government has been unable to conduct appropriate fiscal interventions given it has no currency sovereignty.<\/p>\n

While the worker-owners have not suffered the indignity of mass unemployment, the secondary labour market workers (the temporary workers) have. Just like everywhere, the most disadvantaged workers go first.<\/p>\n

Localism can only flourish within an appropriate fiscal environment that maintains aggregate demand at levels consistent with full employment. That is the same however production is organised.<\/p>\n

I support the New Economy initiatives but implore the leading lights to educate themselves about MMT and why macro matters.<\/p>\n

That is enough for today.\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

I often get E-mails from readers – some hostile others more reasonable – telling me that I should stop arguing for more economic growth. The reasoning is relatively straightforward – the Earth is buckling under the rapacious resources demands of the capitalist system and not only is that process likely to be finite, notwithstanding substitution…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[18],"tags":[],"class_list":["post-19641","post","type-post","status-publish","format-standard","hentry","category-economics","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/19641","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=19641"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/19641\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=19641"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=19641"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=19641"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}