Bill Mitchell – Why the financial markets are seeking an MMT understanding – Part 2

There was an article in the Project Syndicate (July 1, 2019) – Does Japan Vindicate Modern Monetary Theory? – written by a Yale economics professor and advisor to Shinzo Abe, that reveals the extent to which the mainstream is becoming paranoid and is failing to understand what MMT is about.

I won’t deal with it in detail because it is not my brief today. But it aims to disabuse readers of the notion that “Japan … [is] … proof that the approach works.”
The approach he refers to is MMT.

Basic flaw. MMT is not an approach. These commentators haven’t even reached the first place in understanding what our work is about.

Mainstream economists have crudely characterised or framed MMT within their own conceptual structure (typically the so-called ‘government budget constraint’ (GBC) framework) and imputed their own language when discussing MMT.
The Project Syndicate author is no exception.

He thinks MMT is about “excessive deficit-financed spending” which “lacks any safeguard”.

He says:

Policymakers who recklessly implement MMT may find, like the sorcerer’s apprentice, that once the policies are set in motion, they will be difficult to stop.

One cannot “implement MMT” – recklessly or otherwise.

One can understand it and use its insights to craft policy interventions that accord with one’s value system (ideology).

MMT is not policy, or even about policy. It informs policy by putting the approach to policy on a correct monetary, financial, and economic foundation instead of an incorrect one, as is currently the case.

This is a longish post but not wonkish at all. It is one of Bill's most important posts for a basic understanding of the "MMT framework" (lens) versus the "flawed GBC framework" of the mainstream.

Note: "GBC" signfies "government budget constraint."

Bill Mitchell – billy blog
Why the financial markets are seeking an MMT understanding – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — Being anti-European Union and pro-Brexit does not make one a nationalist

The European Parliament elections start today and finish at the weekend (May 23-26). The Europe Elects site provides updated information about the opinion polls and seat projections, although given the disastrous showing of the polls in last Saturday’s Australian federal election, one should not take the polling results too seriously. But it is clear that there is an upsurge in the so-called populist parties of the Right at the expense of the traditional core political movements (centre-right and centre-left). It is also easy to dismiss this as a revival of ‘nationalism’ based around concepts of ethnicity and exclusivity and dismiss the legitimacy of these movements along those lines. However, that strategy is failing because the ‘populist’ parties have become more sophisticated and extended their remit to appeal more broadly and make it difficult to relate them to fascist ideologies. The fact that the progressive (particularly Europhile variety) continue to invoke the pejorative ‘nationalist’ whenever anyone begs to differ on Europe and question why they would support a cabal which has embedded neoliberalism and corporatism in its very legal existence (the Treaties) is testament to why the traditional Left parties are showing up so badly in the polls these days. The British Labour Party, for example, should be light years ahead of the Tories, given how appalling the latter have become. But they are not a certainty if a general election was called and the reason is they have not understood the anxieties of the British people and too many of their politicians are happy to dismiss dissent as being motivated by racism. The Brexit outcome so far is a good case study in that folly....

Since MMT focuses on monetary systems, in particular the existing floating rate regime, and currencies are national units of account, nationalism versus internationalism becomes relevant, especially in democracies. 

Limitation of sovereignty, including currency sovereignty limit the scope of democracy by transferring control of previously national matters to international bodies and entities that are not accountable to national electorates and cannot be addressed through the political process.

In this, there is nothing intrinsically xenophobic or ethnic involved. It is simply preserving the power of the people to require accountability from elected representatives.

This was the original idea of Populism, Prarie Populism, and the Populist movement in the US and Canada, as well as Progressivism historically. The basic idea is the people taking sovereignty back from the elite that had hijacked popular sovereignty as the basis of liberalism and liberal democracy, and turned the country into a plutonomous oligarchy.

Very often, international arrangements benefit national elites but not the people at large. Therefore, international institutional arrangements can be viewed as anti-democratic by design. Actual outcomes seem to support this view.

Historically, such issues were discussed in detail at the time of the formulation of the US founding documents, which involved states ceding a great deal of the sovereignty to the federal government, specifically in The Federalist Papers. 

The discussion there is informed by the founding fathers knowledge of the Western intellectual tradition that was formed in ancient Greece, where Athens was the incubator of Western democracy and the Western liberal tradition. Although centrists led by Alexander Hamilton prevailed at the time, the controversy over federal prerogatives and states' rights remains lively today. America fought the Civil War over it.

My background is in philosophy and while not my primary focus, social and political theory is a sub-specialty. Like Karl Marx, I came to realize that social and political thought and practice cannot be approached comprehensively independently of economic and financial thought and practice. While Marx is often viewed as an economist, his training was in philosophy and whose work is chiefly about social and political theory, not economics per se. Adam Smith also. I regard Smith, Marx and Keynes as the big three in economic thought, and none of them were trained in economics. Keynes was a mathematician, as Michael Emmett Brady has attempted to show, which he contends, is why economists fail to understand what Keynes actually wrote.

The following quotation sums up why currency sovereignty and who controls it are crucial. 

"Give me control of a nation's money and I care not who makes its laws" — attributed to Mayer Amschel Bauer Rothschild (likely a false attribution)

Even though this quote appears to be spurious, the idea behind it is sound. Thus, the importance of currency sovereignty to democratic governance, and the relevance of MMT to social theory and practice.

Of course, the same can be said of the press, the commanding heights of the economy, and the political process. However, in a plutocracy, which is what representative democracies (republics) are, wealth is determinative. In a plutonomy everything comes back to money, who has it and who doesn't have it.

Neoliberalism can be viewed as a political theory that serves plutonomy. And the neo-imperialism and neocolonialism that follow from it can be viewed as the attempt to extend Western dominance and achieve global hegemony with the assistance of comprador governments run by local elites as minions of the Western elite.

Bill Mitchell – billy blog
Being anti-European Union and pro-Brexit does not make one a nationalist
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Annie Gilroy — Why Ray Dalio Says Shift to Modern Monetary Theory Is Inevitable

Dalio, however, agrees that MMT has weaknesses. He said, “The big risk of this approach arises from the risks of putting the power to create and allocate money, credit, and spending in the hands of politically elected policy makers.” He states that the system has been designed in a way that “highly skilled people” are in charge of decision making rather than politically motivated people. He added, “At the same time it is inevitable that we are headed in this direction.”

This is both a pertinent concern and also a legitimate one. Ralph Musgrave had observed this in the comments on the link to Dalio's article.

It's basically conservatism versus liberalism, "republicans" with a small "r" and "democrats" with a small "d" — Hamilton versus Jefferson in the US  and Tories versus Old Labour in the UK.

The former assume that the people at large are not qualified to make decisions that require any degree of expertise; hence, governing should be put in the hands of experts. This is the basis of "republicanism" as representative government. They especially fear "Jacobinism" as the rule of the rabble and recall "the reign of terror" during the French Revolution.

The later assume that sovereignty resides in the people, that a liberal government is a government of, by and for the people, and that political freedom is based on self-determination in a society in which all persons are equal before the law. They doubt that any government by experts will eschew privilege for the elite classes and and fear institution of a double-standard before the law.

The former favors hierarchical technocracy and the latter, consensual democracy. While lip-service is paid to democracy in liberal states today, the reality is that there are no genuine democracies. Moreover, there never has been, perhaps excepting some so-called primitive tribes.

Even if one accepts that MMT is the state of the art and science in macroeconomics, including as a "policy science," the political question hangs in the background. As a macroeconomic theory (economic science), MMT is supposedly value-free. But policy and politics are value-laden, and different value systems are indicative of different ideologies.

So this is a hot-button issue as MMT gains ground, and it is doing so quickly — alarmingly quickly for some.

Market Realist

Why Ray Dalio Says Shift to Modern Monetary Theory Is Inevitable

Annie Gilroy

Rebecca L. Spang — MMT and Why Historians Need to Reclaim Studying Money

Good read! 

Controversy over money is nothing new in US history, since it has been a lively political issue. The arguments are not chiefly about money, although couched in terms of money, economics, and finance, but rather, politics, which involves winners and losers in the policy game. Historically, sound money advocated have been the wealthy, and functional finance people have been ordinary citizens aka "the little people" (h/t Alan Simpson).

History News Network
MMT and Why Historians Need to Reclaim Studying Money

Rebecca L. Spang | Professor of History at Indiana University where she directs the Liberal Arts and Management Program, and author of Stuff and Money in the Time of the French Revolution (Harvard University Press, 2015)

Bill Mitchell — The effectiveness and primacy of fiscal policy – Part 2

This is the second part of a three-part series discussing the political issues that give me confidence in the primacy of fiscal policy over monetary policy. The series is designed to help readers see that the recent criticisms of Modern Monetary Theory (MMT) as being politically naive and unworkable in a real politic sense have all been addressed in the past. In Part 1, I gave examples of how ‘agile’ or ‘nimble’ fiscal policy can be when an elected government has it in their mind to use their spending and taxation capacities to change the direction of the non-government economic cycle. It is simply untrue that fiscal policy is inflexible and cannot make effective, well-designed policy interventions. In this second part, I will address aspects of how such interventions might be organised. Specifically, some people have advocated that MMT might replace the so-called ‘independent’ central bank, with an ‘independent’ fiscal authority, which they seem to think would take the ‘politics’ out of fiscal policy decision-making and focus it on advancing the well-being of the people. The intentions might be sound but the idea is the anathema of what progressives, interested in maintaining democratic accountability would propose. I consider such an independent fiscal authority would constitute the continuation of the neoliberal practice of depoliticisation and further increase the democratic deficit that is common in our nations these days. Politicians are elected to take responsibility and make decisions on our behalf. They should be always be held accountable for those decisions and not be allowed to defer responsibility to an external source (like an ‘independent’ central bank or an external fiscal authority)....

Bill Mitchell – billy blog
The effectiveness and primacy of fiscal policy – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Alan Austin — Modern monetary theory and the real game

Good presentation about why getting progressives to admit that MMT is correct won't change them. It's about politics. Short read.

In my view, the way to proceed is by calling attention to economic rent — financial rent, land rent, natural resources rent, and monopoly-monopsony rent — along with socializing negative externality instead of imposing true cost.

A comprehensive analysis also necessitates going beyond economics and finance to include all other areas that are relevant ‚ individual and social, and social, political and economic — as well as how they fit structurally and operate functionally in terms of a whole system — the global economy.

MMT is an integral part of the solution. But it is not THE solution.

Independent Australia
Modern monetary theory and the real game

Alan Austin

Bill Mitchell — The effectiveness and primacy of fiscal policy – Part 1

In this two-part series I will:

1. Consider the question as to whether fiscal policy is sufficiently flexible enough to provide an effective counter-stabilisation against the non-government spending cycle.
If a nation is heading into recession, can governments act quickly enough with discretionary spending changes?

If a nation is ‘overheating’ and inflation is threatening to accelerate, can spending and tax changes be implemented quickly enough to counter these tendencies?

2. Should fiscal policy be outsources to technocrats, who work independently of the political cycle and stop politicians from making political decisions that might not be economically sound?

3. Is MMT a flawed paradigm for policy development given that a progressive application of its principles, relies on politicians understanding the operations of the monetary system and the capacities that the currency-issuing government possesses and to use those capacities to advance the public interest rather than sectional interests or their own venal political survival?  

Can we trust politicians?

These are all issues that have been raised in some of the critiques of MMT over time and warrant attention and response.

In Part 1, I will consider the first of the questions above – the flexibility of fiscal policy….

Bill Mitchell – billy blog
The effectiveness and primacy of fiscal policy – Part 1
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Ramanan — Some Extreme Reactionary Views Of The Neochartalists

MMT is taking flak not only from the right over abandoning "sound finance," but also from the left for apparently advocating reduction in the welfare state through a job guarantee and opposing the attempt to reduce inequality through progressive taxation.

What we are seeing now is the transition from MMT as a macroeconomic theory based on institutional analysis to MMT as a policy science advocating for a specific angle on policy formulation that appears to be centrist.

First, is this a fair characterization and appraisal of the MMT position? If so, is there a political faction in the US to support this?

The Case for Concerted Action
Some Extreme Reactionary Views Of The Neochartalists
V. Ramanan

Jack Fitzpatrick — MMT Makes Democrats Curious Amid Debate on Health Care, Climate

Modern Monetary Theory, or MMT, is almost never mentioned specifically by members of Congress who negotiate budget and appropriations measures, but it is working its way into the mainstream political debate. Now, it’s gotten some Democratic lawmakers’ attention as the party considers big-ticket policy priorities. That includes House Budget Chairman John Yarmuth (D-Ky.), who will decide over the next few weeks whether to produce a fiscal 2020 budget resolution that maps out the caucus’s fiscal vision for the future.

“It sounds like there is a lot of validity to it,” Yarmuth told reporters in February. “The problem I see with it is that ultimately it all could work until it doesn’t. And when it doesn’t, it would take congressional action to correct it, and that’s far from guaranteed.”…

The alternative? Stick with something already shown not to be working? Is it really being prudent to stick with the devil we know rather than take a chance on the devil (maybe) we don't know?

Bloomberg Government
MMT Makes Democrats Curious Amid Debate on Health Care, Climate
Jack Fitzpatrick

Bill Mitchell — The abdication of the Left – redux – Part 1

Former Austrian Chancellor Bruno Kreisky was quoted as saying during the 1979 Austrian election campaign that: “I am less worried about the budget deficits than by the need for the state to create jobs where private industry fails”. That is the statement of a social democrat. That is a progressive Left view. In June 1982, with French unemployment at 7.2 per cent (having risen from 2.4 per cent in 1974 after a near decade of austerity under the right-wing Prime Minister Raymond Barre), the French Minister of Economy and Finance cut 30 billion francs from government spending so that the fiscal deficit would remain below 3 per cent. In March 1983, the same Minister pressured his colleagues including President François Mitterrand, into imposing a further bout of austerity, cutting another 24 billion francs and increasing taxes by 40 billion francs. These were very deep cuts. The austerity under the so-called ‘Barre Plan’ had failed to reduce inflation. When the turn to austerity was repeated under Mitterand’s so-called Socialist government, France was already in a deep recession. Under the Socialist austerity period unemployment rose sharply to further to 9.3 per cent by 1987. By then the architect of that austerity, one Jacques Delors, was European Commission President and starting work on his next exercise in neoliberal carnage – the Eurozone. None of his behaviour during that period remotely signals a position we could call progressive or Left. Like his austerity turn (“tournant de la rigeur”), Delors had turned into just another neoliberal obsessed with fiscal surpluses, free markets (he oversaw the 1987 Single European Act), and privatisation (which he claimed was necessary to attract foreign direct investment) (Source). This is Part 1 of a two-part series on the abdication of the Left, which some still choose to deny....

Bill goes heavy on fact today. He has a firm grip on the history of the period. If you are looking for the blow by blow, here it is.

Bill Mitchell – billy blog
The abdication of the Left – redux – Part 1
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — The way forward for progressives

Today’s blog represents the notes that make up the conclusion of my upcoming book with Italian journalist Thomas Fazi which will be entitled – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World – and is due to be launched by Pluto Press in London on September 26, 2017. More details of that event and the promotion tour that will follow in due course. We have just about finalised the events through Europe and hope to see as many of you as is possible. As previously noted, this work 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. Social democratic politicians frequently opine that national economic policy must be acceptable to the global financial markets and, as a result, champion right-wing policies that compromise the well-being of their citizens. The book traces both the history of this decline into neo-liberalism by the Left and also presents what might be called a ‘Progressive Manifesto’ to guide policy design and policy choices for progressive governments. We 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. In today’s blog I present some notes that will form the conclusion of the book. The manuscript is now at the publishers and it will be available for purchase in a few months.…

Bill Mitchell – billy blog
The way forward for progressives
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — Resistance and change doesn’t come from going along with the (neo-liberal) pack

I get a lot of E-mails that accuse me of being politically naive. The accusations were rekindled by yesterday’s blog – British labour lost in a neo-liberal haze. I imagine if I wrote a blog where I outlined support for Marine Le Pen in the context of a two-way fight against the worse-of-the-worst neo-liberals Emmanuel Macron the accusations would turn uglier even. My support for Brexit was met with similar hostility from a range of (self-styled) ‘progressives’ as being naive and offensive. Why, Brexit was a conservative plot wasn’t it? How could I have missed that? Progressives are now advocating votes for Macron even though they know he is an archetype neo-liberal – the anathema of what they believe. And they tell me every day in these E-mail tirades and other blogs that I should give people like Jeremy Corbyn some slack because he knows better than me that to advocate a major departure from the neo-liberal macroeconomic narrative would be political suicide. So why don’t I just shut up and recognise that politics is beyond my grasp and I should desist. Basically that is the message I get regularly. Well, I am sorry to say, such views completely misunderstand the role of an academic and the way in which resistance is constructed....

Bill Mitchell – billy blog
Resistance and change doesn’t come from going along with the (neo-liberal) pack
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia