{"id":32938,"date":"2016-02-11T13:07:27","date_gmt":"2016-02-11T03:07:27","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=32938"},"modified":"2016-02-11T13:07:27","modified_gmt":"2016-02-11T03:07:27","slug":"ultimately-real-resource-availability-constrains-prosperity","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=32938","title":{"rendered":"Ultimately, real resource availability constrains prosperity"},"content":{"rendered":"

\t\t\t\tThere are many misconceptions about what a government who understands the capacity it has as the currency-issuer can do. As Modern Monetary Theory (MMT) becomes more visible in the public arena, it is evident that people still do not fully grasp the constraints facing such a government. At the more popularist end of the MMT blogosphere you will read statements such that if only the government understood that it can run fiscal deficits with impunity then all would be well in the world. In this blog I want to set a few of those misconceptions straight. The discussion that follows is a continuation of my recent examination of external constraints on governments who seek to maintain full employment. It specifically focuses on less-developed countries and the options that a currency-issuing government might face in such a nation, where essentials like food and energy have to be imported. While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention. In the latter case, the specific problems facing a nation cannot be easily overcome just<\/strong> by increasing fiscal deficits. That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population. We are about to consider the bottom line here – the real resource constraint. I have written about this before but the message still seems to get lost.
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First of all here is a totally general statement about the capacity of a currency-issuing government that applies to any nation and is a fundamental principle of MMT.<\/p>\n

Accordingly, such a government can always<\/strong> use its currency-issuing capacity to ensure that all available productive resources that are for sale in that currency, including all idle labour, can be productively engaged.<\/p>\n

That is, such a government can always, without exception, ensure there is full employment.<\/p>\n

There is no financial constraint on such a government who desires to achieve that desirable policy goal.<\/p>\n

While that might sound salutary, and, by comparison with the ambitions of most governments in this neo-liberal era, is light years ahead on any well-being index, it somewhat evades a further question as to whether achieving this desirable goal moves a nation out of poverty.<\/p>\n

So, second, here is another totally general statement to complement the first. The worst-case scenario for a nation, irrespective of its government’s currency-issuing capacity, is defined by the real resources that such a nation can access.<\/p>\n

If a nation can only access limited quantities of real resources relative to its population, then no matter what capacities the government might have, that nation, in all likelihood, will be poor.<\/p>\n

The ultimate constraint on prosperity is the real resources a nation can command, which includes the skills of its people and its natural resource inventory.<\/p>\n

Thus, even if the government productively deploys all the resources a nation has available, it will still be poor if its resource base is limited.<\/p>\n

Clearly, productively deploying all resources is a necessary condition for prosperity. And that remains the responsibility of the currency-issuing government after all of the non-government sector spending decisions have been made. But it is not a sufficient condition. A nation has to have sufficient resources to be prosperous.<\/p>\n

The problem in this neo-liberal era is that currency-issuing governments use the myth that they are financially constrained to avoid fulfilling the responsibility to achieve full employment no matter how resource rich the nation might be.<\/p>\n

So we have the obscene situation where even resource rich nations are succumbing to elevated levels of mass unemployment and increasing poverty rates amidst the ‘plenty’ because the ideological currents at the moment that has spawned an obsessive neo-liberal Groupthink are intent on shifting national income distribution in favour of those at the top end at the expense of everyone else.<\/p>\n

Please read my blog – Bad luck if you are poor!<\/a> – for more discussion on this point.<\/p>\n

Moreover, world poverty is not being solved as multilateral institutions such as the World Bank, the UNDP, and the IMF, who remain locked in the grip of the neo-liberal myth that austerity leads to prosperity – or should I say, are principle instruments of that myth.<\/p>\n

I was at a United Nations Development Program (UNDP)<\/a> workshop some years ago to discuss employment guarantees.<\/p>\n

While the main focus of the two days was meant to be employment guarantees, the conversation appeared to be dominated by discussions about fiscal space. Almost every presenter (bar me and one other) had several slides covering the topic as if it mattered.<\/p>\n

The UNDP appears to be obsessed with the concept and it conditions the way they think about macroeconomics and constrains the way they construct the development agenda.<\/p>\n

Their policy vision is so constrained by this erroneous thinking that their capacity to eliminate poverty is limited. Countries will never be able to create the requisite number of jobs necessary to fully employ the available labour while they are being advised by ‘experts’ who operate in the neo-liberal macroeconomic paradigm.<\/p>\n

I was heavily criticised at the Workshop for daring to marry my advocacy for the Job Guarantee with Modern Monetary Theory (MMT) logic. One UNDP official claimed I had performed a “dis-service” (quote) to the proceedings by talking about macroeconomics in the context of employment guarantees.<\/p>\n

He claimed that any discussion of employment guarantees should be de-coupled from the ideological debate about macroeconomic theory. He was warmly clapped by the audience (with notable exceptions). It was an appalling experience. I packed up at the end of my session and drove a few hundred kms south to Washington D.C. where better waters lay!<\/p>\n

The problem is that the UNDP are obsessed with macroeconomics.<\/p>\n

In its 2004 publication – Making fiscal policy working for the poor<\/a> – we read:<\/p>\n

\nMacroeconomic policies represent a key ‘entry point’ for the UNDP’s activities to foster human development. In order to present programme countries with viable macro policy options, UNDP seeks to support access to policy advice that presents a menu of feasible options and alternative analyses.\n<\/p><\/blockquote>\n

The link between macroeconomic theory and poverty alleviation goals is undeniable. We have to get the former right before we will make significant progress in eliminating poverty.<\/p>\n

But both the UNDP and the IMF push a flawed macroeconomic line, which reduces, perhaps negates their ability to meet their stated charters.<\/p>\n

The IMF defines – Fiscal space<\/a> – as the<\/p>\n

\n… room in a government\u00b4s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.\n<\/p><\/blockquote>\n

The UNDP also talks about fiscal space a lot. In its 2007 publication – Fiscal Space for What? Analytical Issues from a Human Development Perspective<\/a> we encounter this definition in the first paragraph:<\/p>\n

\n… is the financing that is available to government as a result of concrete policy actions for enhancing resource mobilization, and the reforms necessary to secure the enabling governance, institutional and economic environment for these policy actions to be effective, for a specified set of development objectives.\n<\/p><\/blockquote>\n

While the UNDP always exudes a sort of higher moral ground relative to the IMF when discussing economic development, when it comes down to it, there is not much difference at all between the two.<\/p>\n

The UNDP and IMF both assume that government has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed. These definitions, despite their subtle differences, could have been written in 1950.<\/p>\n

In a fiat monetary system, whether the nation is rich in real resources or poor, the concept of fiscal space is not captured by these ‘financial’ constraint type approaches.<\/p>\n

MMT teaches us that:<\/p>\n