\t\t\t\tIt’s my Friday Lay Day blog and today I’m spending some time travelling and some time thinking about the Modern Monetary Theory (MMT) textbook that I’ve been promising to finish for some time. I can confidently say now that we are on track to finish the first edition by March 2016. Randy Wray and I have taken on a third author (Martin Watts) and have agreed on a completion plan. More information on availability will be available in the new year as we get closer to completion. This week I noted a lot of comments (particularly with respect to my Job Guarantee post) that suggested many readers still do not exactly know what MMT is. Further, there was a heterodox conference in Sydney this week, where MMT proponents were accused of being neo-liberals and politically naive. Unfortunately, other commitments prevented me from attending the conference this year but I read the paper in question and wondered why salaried academics would bother writing it. So a few reflections on both those matters today.
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I often read comments like “if we introduced MMT …” or “under MMT policies …” or “when MMT becomes the norm”, All of which, implies that MMT is a regime that we would move to if society was more enlightened and would open up a new range of policy options that a truly progressive government might pursue.<\/p>\n
This is tied in with other comments, specifically about the Job Guarantee, which suggest that MMT is a progressive doctrine or a left-wing approach to economic policy-making and what is holding MMT back from being introduced is the right-wing conspiracy to maintain hegemony.<\/p>\n
I understand all these comments are well intended and people are genuinely attracted to some of the policy options that MMT proponents advance. This is notwithstanding, what I consider to be some doctrinal and irrational resistance to proposals such as the Job Guarantee.<\/p>\n
But the conception that we might move to an MMT world where enlightened policy will free us from the yoke of capitalist exploitation is plain wrong.<\/p>\n
The fact is that we are already living in the MMT world. We interact with each other every day in the MMT world. The monetary system, whether it be in the US, Australia, Japan or any of the Eurozone nations, is and MMT-type construct.<\/p>\n
So it is not about moving to some new Shangri-La, which we might call the MMT world – we are already in, the world that is.<\/p>\n
What MMT provides is a new lens to view the world we live in and the monetary system operations that are important in our daily lives.<\/p>\n
This new lens opens up new insights into what is going on in the economy on a daily basis. It’s not something to move to, it already is.<\/p>\n
MMT, as a new powerful lens, makes things that are obscured by neo-liberal narratives more transparent.<\/p>\n
It means that the series of interlinked myths that are advanced by conservative forces to distract us from understanding causality and consequence in policy-making and non-government sector decision-making are exposed.<\/p>\n
So when a Conservative politician or corporate leader claims that the government has run out of money and therefore cannot afford income support for the unemployed any longer at the levels previously enjoyed, MMT alerts us to the fact that this is a lie and that there must be an alternative agenda.<\/p>\n
MMT thus empowers a population who learn about it to see things for what they are and to ask questions that they never previously would have thought possible to ask or even relevant.<\/p>\n
Previously, when a politician has said the government will run out of money or is maxing out its credit card, an uninformed population will take that statement as granted. But an understanding of the MMT framework all its lens would mean that the population will now reject the “run out of money” obfuscation and instead demand to know why the government doesn’t want to support a particular policy option.<\/p>\n
MMT thus, introduces into the policy debate, the possibility of new policy options and directions that have previously been dismissed out of hand through the use of spurious economic arguments that the politicians and their advisors know will not be properly scrutinised nor understood by the general population who they are trying to manipulate.<\/p>\n
MMT is thus, a framework for understanding how the monetary system we live in operates and the capacities and options that are currency-issuing government has to advance our well-being.<\/p>\n
It also allows us to understand the likely consequences of deviating from a truly sovereign state, which we define in terms of the currency-issuing status of the government (incorporating exchange-rate arrangements and central bank interest rate setting capacities).<\/p>\n
In the latter context, the MMT lens provided us with a clear understanding of why the Eurozone would be a failure with significant negative consequences for the Member States.<\/p>\n
Further, MMT is neither left-wing nor right-wing (I’ve said this before). The ideological persuasion of any perspective will manifest in the values that are expounded and the policy prescriptions that are proposed to advance those values.<\/p>\n
What MMT means is that the ideological persuasion becomes much clearer when a person advances a particular policy proposal.<\/p>\n
For example, when a politician, faced with rising unemployment, says that there is no fiscal space for the government to create jobs to deal with the mass unemployment, a person considering that comment through the MMT lens, will immediately realise that the government must have a reason for maintaining higher than necessary unemployment.<\/p>\n
We know there must be a ‘hidden’ agenda because our understanding tells us that the government fiscal space is defined in terms of available real resources that the government can purchase with its currency-issuing capacity. So if there is mass unemployment then we know that there are such available real resources.<\/p>\n
So why would the government refuse to purchase them and bring them back into productive use?<\/p>\n
The focus then shifts on what that reason is and questions are likely to lead, for example, to an examination of corporate influence that might be leading the government to refuse to use their currency-issuing capacities to maintain full employment.<\/p>\n
I hope that clarifies any misunderstandings.<\/p>\n
The second issue that arose this week relates to a paper that was presented to the heterodox conference in Sydney this week. The paper claimed that the Job Guarantee was politically naive and that it essentially reflected a neo-liberal approach. Apparently, MMT is a “theoretical cousin” of the JG.<\/p>\n
I’m not sure how this family tree was arrived at.<\/p>\n
The JG is a buffer stock approach to macroeconomic stability, where employment buffers are used instead of unemployment buffers, the latter which characterises the so-called NAIRU approach of mainstream economics.<\/p>\n
The JG should not be thought of, exclusively, as a job creation program, although clearly its use of employment buffers accomplishes that end.<\/p>\n
The JG is the MMT response to Phillips curve equations in the mainstream macroeconomic theoretical frameworks. The Phillips curve proposes a trade-off between unemployment and inflation, and the extent of that trade-off is a topic of considerable debate within the mainstream framework.<\/p>\n
The advent of Monetarism tried to claim there was no trade-off, which they believed all owed for a categorical rejection of the so-called Keynesian framework.<\/p>\n
By turning the question of price stability on its head, if you like, the JG, through the use of employment buffers, also shows that there is no trade-off between involuntary unemployment and inflation, but with quite devastating consequences for the Monetarist conclusions.<\/p>\n
What the JG shows is that a currency-issuing government can maintain stable inflation rates with full employment through the use of appropriately designed employment buffers. I consider that a major theoretical advance in macroeconomics and one of the contributions of MMT to advancing knowledge in this area.<\/p>\n
The claim in the paper presented to the heterodox conference in Sydney is that the use of employment buffers “incorporates neoliberal methods of inflation reduction” and “does not represent a departure from a neoliberal paradigm.”<\/p>\n
Apparently, using restrictive macroeconomic policies to ensure that total spending is consistent with the available real output at any point in time is a neoliberal mechanism.<\/p>\n
The alternative proposed by some Post Keynesians is to rely on so-called incomes policies to suppress income growth in the private sector so that spending grows in line with real capacity.<\/p>\n
Apart from the logistical problems of introducing effective incomes policies and the fact that these policies have historically broken down when under strain, there is nothing objectionable to an MMT proponent about the use of incomes policies.<\/p>\n
But to suggest that the introduction of the JG will face political constraints yet the implementation of an effective incomes policy will not is rather far-fetched.<\/p>\n
Further, Keynes’ himself, in his essay – How to Pay for the War<\/a> – written in 1940, considered the question of inflationary pressures. He had also written extensively about this in the early 1930s (for example, in Essays on Persuasion), but this was before he broke with classical monetary theory and published his General Theory in 1936.<\/p>\n The range of policies proposed all amounted to limiting the spending capacity of the private sector to allow for more spending space by the public sector – all intended to avoid inflation.<\/p>\n Further, Abba Lerner, in his theories of functional finance, elaborated more extensively on the way in which inflation control could be accomplished by the government managing total spending.<\/p>\n Are we really going to call these approaches neoliberal?<\/p>\n In my early JG writings (which, by the way go back to 1978 when I was fourth-year (honours) student), I examined, in detail, the shift from a NAIRU economy to a JG. <\/p>\n Specifically, I considered the issues that arise when the government seeks to maintain full employment using the JG.<\/p>\n I should add that my intellectual evolution in economics did not start with Keynes’ General Theory but rather with Karl Marx and later Micha\u0142 Kalecki. Some of the early MMT proponents place much more emphasis on Keynes than I ever have.<\/p>\n While orthodox economists typically attack the JG policy for fiscal reasons, economists on the Left are also critical.<\/p>\n They constantly cite Kalecki’s 1943 article – Political Aspects of Full Employment<\/a> – to argue that the JG policy is politically naive.<\/p>\n That brilliant article by Kalecki laid out the blueprint for socialist opposition to Keynesian-style employment policy. The criticisms are also relevant to the JG.<\/p>\n Indeed, the paper presented in Sydney this week specifically uses the 1943 article as its authority.<\/p>\n Kalecki said:<\/p>\n \n… the assumption that a Government will maintain full employment in a capitalist economy if it knows how to do it is fallacious. In this connection the misgivings of big business about maintenance of full employment by Government spending are of paramount importance.\n<\/p><\/blockquote>\n Kalecki (1971: 139) lists three reasons why the industrial leaders would be opposed to full employment “achieved by Government spending.”<\/p>\n The first asserts that the private sector opposes government employment per se<\/em>.<\/p>\n The second asserts that the private sector does not like public sector infrastructure development or any subsidy of consumption.<\/p>\n The third asserts that the private sector merely dislikes “the social and political changes resulting from the maintenance of full employment”.<\/p>\n One is tempted to respond to these assertions by referring to the long period of growth and full employment from the end of WWII up until the first oil shock.<\/p>\n Most economies experienced strong employment growth, full employment and price stability, and strong private sector investment over that period under the guidance of interventionist government fiscal and monetary policy.<\/p>\n This period of relative stability was only broken by a massive supply shock, which then led to ill advised policy changes that provoked the beginning of the malaise we are still facing some 40 years after they occurred.<\/p>\n In Kalecki’s defense it might be argued that it took 30 odd years of the Welfare State to generate the inflationary biases that were observed in the 1970s.<\/p>\n Kalecki explains how the dislike by business leaders of government spending:<\/p>\n \n… grows even more acute when they come to consider the objects on which the money would be spent: public investment and subsidising mass consumption.\n<\/p><\/blockquote>\n If public spending overlaps with private spending then:<\/p>\n \n… the profitability of private investment might be impaired and the positive effect of public investment upon employment offset by the negative effect of the decline in private investment.\n<\/p><\/blockquote>\n This criticism is inapplicable to the JG because the JG jobs would most likely be located in the areas that have been neglected or harmed by capitalist growth. The chance of overlap and substitution is minimal.<\/p>\n Of course, government industry policy may deliberately target an overlap to drive inefficient private capital out.<\/p>\n Kalecki acknowledges that the “pressure of the masses” in democratic systems may thwart the capitalists and allow the government to engage in job creation.<\/p>\n His principle objection then seems to be that:<\/p>\n \n… the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders.\n<\/p><\/blockquote>\n The issue at stake is the relationship between the threat of dismissal and the level of employment.<\/p>\n Kalecki says:<\/p>\n \nIndeed, under a regime of permanent full employment, ‘the sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow.\n<\/p><\/blockquote>\n Kalecki is really considering a fully employed private sector that is prone to inflation rather than a mixed private-JG economy.<\/p>\n The JG creates loose full employment rather than tight full employment because the Job Guarantee wage is fixed (growing with national productivity).<\/p>\n The issue comes down to whether the JG pool is a greater or lesser threat to those in employment than the unemployed when wage bargaining is underway.<\/p>\n This is particularly relevant when we consider the significance of the long-term unemployed in total unemployment. It can be argued that the long-term unemployed exert very little downward pressure on wages growth because they are not a credible substitute.<\/p>\n The JG workers, however, do comprise a credible threat to the current private sector employees for reasons noted above. The JG pool provides business with a fixed-price stock of skilled labour to recruit from.<\/p>\n In an inflationary episode, business is more likely to resist wage demands from its existing workforce because it can achieve cost control.<\/p>\n In this way, longer term planning with cost control is achievable. So in this sense, the inflation restraint exerted via the employment buffer is likely to be more effective than using a NAIRU strategy.<\/p>\n The International Labour Organisation (1996\/97) said “… prolonged mass unemployment transforms a proportion of the unemployed into a permanently excluded class.” The ILO argues that these people “cease to exert any pressure on wage negotiations and real wages.”<\/p>\n The result is that “the competitive functioning of the labour market is eroded and the influence of unemployment on real wages is reduced.”<\/p>\n Kalecki says that counter-stabilisation policy would not worry business as long as the “businessman remains the medium through which the intervention is conducted.”<\/p>\n Such intervention should target private investment and should not “involve the Government either in … (public) investment or … subsiding consumption.”<\/p>\n He said that if attempts are made to:<\/p>\n \n… maintain the high level of employment reached in the subsequent boom a strong opposition of ‘business leaders’ is likely to be encountered … lasting full employment is not at all to their liking. The workers would ‘get out of hand’ and the ‘captains of industry’ would be anxious to teach them a lesson.\n<\/p><\/blockquote>\n He was very vague about the form that capitalist opposition would take. Kalecki implies that the reaction would work via business and rentier interests pressuring the government to cut its budget deficit. Presumably, corporate investors could threaten to withdraw investment.<\/p>\n It is clear that the investment ratio moves as a mirror image to the unemployment rate, which reinforces the demand deficiency explanation for the swings in unemployment. In Australia, the rapid rise in the unemployment rate in the early 1970s followed a significant decline in the investment ratio. The mirrored relationship between the two resumed albeit the unemployment rate never returned to its 1960s levels.<\/p>\n Far from being a reason to avoid active government intervention, the JG is needed to insulate the economy from these investment swings, whether they are motivated by political factors or technical profit-oriented factors.<\/p>\n Another factor bearing on the way we might view Kalecki’s analysis is the move to increasingly deregulated and globalised systems.<\/p>\n Many countries have dismantled their welfare states and enacted harsh labour legislation. Trade union membership has declined substantially in many countries as the traditional manufacturing sector has declined and the service sector has grown. Trade unions have traditionally found it hard to organise or cover the service sector due to its heavy reliance on casual work and gender bias towards women. It is now much harder for trade unions to impose costs on the employer. Far from being a threat to employers, the JG policy becomes essential for restoring some security for workers.<\/p>\n Finally, looking to the future, those who criticise the JG from a Kaleckian viewpoint have to address the issue of binding constraints.<\/p>\n Kalecki comes from a traditional Marxian framework where industrial capital and labour face each other in conflict. The goals of capital are antithetical to those of labour. In this environment, the relative bargaining power of the two sides determines the distribution of income and the rate of accumulation.<\/p>\n Industrial capital protects its powerful position by balancing the high profits that come from strong growth with the need to keep labour weak through unemployment. However, the swings in bargaining power that have marked this conflict over many years have no natural limits.<\/p>\n But the concept of natural capital, ignored by Kalecki and other Marxians, may now become the binding constraint on the functionality and longevity of the system. It doesn’t really matter what the state of distributional conflict is if the biosystem fails to support the continued levels of production. The research agenda for Marxians has to embrace this additional factor – natural capital.<\/p>\n I could write much more about all of these issues and I haven’t provided a detailed critique of the specific paper presented this week in Sydney but time is short today.<\/p>\n The ABS publication – Labour Force, Australia – November 2015<\/a> – allows us to understand why I (and many other commentators) assessed yesterday’s employment data as being a strain on credibility.<\/p>\nUpdate on November Labour Force estimates for Australia<\/h2>\n