Archive for the ‘marxism’ Category

Secular stagnation, monetary policy and John Law

March 16, 2019

Last week, the prestigious Brooking Institution held a conference on the efficacy of monetary policy in stimulating and sustaining economic growth.  At the conference, Larry Summers, former US Treasury secretary and professor at Harvard University and Lukasz Rachel of the Bank of England, presented a paper that aimed to revive, yet again, the idea that the major capitalist economies are locked into ‘secular stagnation’: Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation.”

According this thesis, there is a long-term stagnation in the major capitalist economies.  Despite central banks pushing interest rates down to zero or even below (so that bankers and capitalists are paid to borrow!); and despite central banks printing huge amounts of money to buy bonds and other financial assets (quantitative easing), real GDP growth and investment remain weak.  Although unemployment rates are officially near cycle lows in many countries, inflation is equally low, confounding the traditional Keynesian view that there is a trade-off between employment and inflation (the so-called Phillips curve).

Central bank monetary stimulation has failed, except to promote ‘credit bubbles’ and speculation in financial assets and property. For example, here are the conclusions of a recent study on the impact of the monetary injections of the ECB in Europe: “the efforts of the ECB to hit its inflation target would be more credible if there was convincing empirical evidence that its balance sheet policies are effective at stimulating output and inflation. Our recent research shows that this macroeconomic evidence is still lacking.”

And there is every prospect of another economic slump approaching in which central banks will be powerless to do anything as interest rates are already near zero and the balance sheets of central banks are already at record highs. “Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation. This raises profound questions about stabilization policy going forward.” (Summers and Rachel)

In the FT, Keynesian columnist Martin Wolf echoed the views of Summers and Rachel.  Interest rates are near all-time lows and if you follow the Fisher-Wicksell theory of a ‘natural’ rate of interest that enables full employment, then it now seems that the natural ‘private sector’ interest rate needed to achieve jobs for all who want them has be in negative territory.

Of course, this so-called natural rate is a dubious concept at best.  But even you accept the theory, as it seems many Keynesians want to do [“That is the root of our problem: the natural nominal rate of interest … today is less than zero, and so the Federal Reserve cannot push the market nominal rate of interest down low enough.” Brad DeLong], it just exposes the problem.  Monetary policy has not and will not work in restoring the capitalist economy to a pace of growth that delivers investment and thus sustains jobs at rising real wages.

Indeed, as I have pointed out before, Keynes also realised after the Great Depression continued deep into the 1930s, that his advocacy of low interest rates and even ‘unconventional’ monetary policy (buying government bonds and printing money) was not working: ““I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”.  In other words, there is no natural rate of interest low enough to persuade capitalists to borrow and invest if they think the return on that investment would be too low.  You can take a horse to water, but you cannot make it drink.

This week the Bank of Japan monetary committee met and threw up its hands in despair.  After years of central bank ‘unconventional’ monetary easing (buying government bonds to the tune of 100% of GDP!) by printing money, the huge injection of credit into the banks has had no effect in lifting the economy.  As Darren Aw, Asia economist with Capital Economics, remarked: “There is a good chance that Japan’s economy will contract again in Q1 2019, for a third time in five quarters”… Given this, the key question for the Bank of Japan is no longer when it might retreat from its ultra-loose policy stance but whether it can do any more to support the economy.” Thus the first of the PM Abe’s three arrows of economic policy (monetary easing, fiscal stimulus and neoliberal de-regulation) has failed.

Now it’s true that per capita GDP growth in Japan since the end of the Great Recession ten years ago is actually faster than in most other major capitalist economies.  But that is simply because Japan has a sharply falling population.  Real and nominal (before inflation) GDP has been virtually static.  National output has remained more or less the same but there are less people that generate and consume it.  Japan has the lowest working population as ratio to total population in the top 12 economies of the world.

And yet monetary easing is still pushed by Keynesians, especially the more radical ones from the post-Keynesian school, including those following Modern Monetary Theory (MMT).  If the state and/or central bank prints money, it can use that money to stimulate the capitalist economy to get it going.  Money is not so much the root of all evil but the genesis of all that is good, it seems.  This sentiment reminds me of the earliest exponent of the magic of money – or the ‘money fetish’, namely John Law, who around 300 years ago had a unique opportunity to apply money printing to put an economy on its feet.

Ann Pettifor, the left Keynesian exponent of magic money, has called John Law a “much maligned genius whose 1705 account of the nature of money cannot be bettered”.  This proto-Keynesian was the son of a wealthy Scottish goldsmith and banker. Law was born in Edinburgh, proceeding to squander his father’s substantial inheritance on gambling and fast living. Convicted of killing a love rival in a duel in London in 1694, Law bribed his way out of prison and escaped to the Continent.  There Law concentrated on developing and publishing his monetary theory cum scheme, which he presented to the Scottish Parliament in 1705, publishing the memorandum the same year in a tract, Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1705).

Law argued for a central bank to issue paper money backed by ‘the land of the nation’. Echoing the MMT (or is it the other way round?), Law proposed to “supply the nation” with a sufficiency of money. This would vivify trade and increase employment and production. Like MMT, Law stressed money is a mere government creation which had no intrinsic value. Its only function is to be a medium of exchange and not any store of value for the future.

Law was sure that any increased money supply and bank credit would not raise prices and expanding bank credit and bank money would push down the rate of interest (MMT again). To Law, as to Keynes after him, the main enemy of his scheme was the menace of “hoarding,” a practice that would defeat the purpose of greater spending.  So, like the late 19th-century German money fetisher Silvio Gesell, Law proposed a statute that would prohibit the hoarding of money.

Amazingly Law found a supporter for his theories in the regent of France. The regent, the Duke of Orléans, set up Law as head of the Banque Générale in 1716, a central bank with a grant of the monopoly of the issue of bank notes in France. He was made the head of the new Mississippi Company, as well as director-general of French finances. The Mississippi Company issued bonds that were allegedly “backed” by the vast, undeveloped land that the French government owned in the Louisiana territory in North America.

This scheme eventually led, not to a booming economy, but instead to a speculative financial bubble where bonds, bank credit, prices, and monetary values skyrocketed from 1717 to 1720.  Finally, in 1720, the bubble collapsed and Law ended up as a pauper heavily in debt, forced once again to flee the country.  Law was not so much a ‘much maligned genius’ but more “a pleasant character mixture of swindler and prophet” Karl Marx (1894: p.441).  What the Law debacle showed was that the state just issuing money cannot replace the ‘real economy’ of production and trade. Money alone does not create investment or production.

Of course, modern Keynesians (unless they are of the MMT variety) do not promote unending printing of money for governments and the private sector to spend.  That’s because they have been forced to recognise; as John Law found in 1719-20; and as Keynes found in 1933; and as Abe in Japan has found now; and the secular stagnationists also accept, printing money does not work if capitalists and bankers hoard that money or switch it into speculative investments in financial assets.

So what’s the answer?  Well, as Martin Wolf puts it: “The credibility of the “secular stagnation” thesis and our unhappy experience with the impact of monetary policy prove that we have come to rely far too heavily on central banks. But they cannot manage secular stagnation successfully. If anything, they make the problem worse, in the long run. We need other instruments. Fiscal policy is the place to start.”  Yes, it’s back to fiscal stimulus.  But will that work either?

Last year President Trump launched a fiscal stimulus of sorts by cutting taxes for the rich and the big corporations.  It boosted after-tax profits in 2017 sharply and real GDP growth ticked up a little towards 3% a year.  But that boost has been all too fleeting.  US real GDP growth is heading back down to below a 1% rate in this quarter and business investment is also turning down.

One of the policy arrows of Abenomics in Japan was fiscal stimulus.  Indeed, there is no major economy that can match Japan for its government running permanent budget deficits (MMT-style).

Japan: annual budget deficits to GDP (%)

This should be the policy dream of MMT and other post-Keynesians.  But it has not worked in Japan.  Japan has ‘full employment’, but at low wages and with temporary and part-time contracts for many (particularly women).  Real household consumption has risen at only 0.4% a year since 2007, less than half the rate before.  So fiscal stimulus has not worked in Japan which remains in ‘secular stagnation’.

And it did not work in the Great Depression of the 1930s.  After dropping monetary easing as the policy answer to the depression, in the Los Angeles Times on 31 December 1933, Keynes wrote: ‘Thus, as the prime mover in the first stage of the technique of recovery, I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and is not merely a transfer through taxation from existing incomes. Nothing else counts in comparison with this.’   Deficit-financing was the answer.

The Roosevelt regime ran consistent budget deficits of around 5% of GDP from 1931 onwards, spending twice as much as tax revenue.  And the government took on lots more workers on jobs programmes (MMT-style) – but all to little effect.  The New Deal under Roosevelt did not end the Great Depression.  Keynes summed it up “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions,” (from The New Republic (quoted from P. Renshaw, Journal of Contemporary History  1999 vol. 34 (3) p. 377 -364).

Wolf recognises that fiscal policy may also not work. “It is of course essential to ask how best to use those deficits productively. If the private sector does not wish to invest, the government should decide to do so.” So if the ‘private sector’ (ie the capitalist sector) won’t increase investment rates to boost growth despite negative interest rates and despite huge government money injections funded by money printing, the government will have to step in do the job itself, apparently.

Thus, the Keynesian/MMT answer is to act as a backstop to capitalist failure. But the capitalist sector dominates investment decisions and it makes those on the basis of potential profitability, not on the cost of borrowing. Keynes saw it as politically impossible to ensure sufficient investment through government spending – and he was right in a way. Only complete control of the capitalist sector could enable governments to ensure full employment at decent wages. At this point, I’m tempted to repeat the comment of left Keynesian Joan Robinson to MMT/Keynesians: “Any government which had both the power and will to remedy the major defects of the capitalist system would have the will and power to abolish it altogether”.

Macro modelling MMT

March 3, 2019

“The accounting identities equating aggregate expenditures to production and of both to incomes at market prices are inescapable, no matter which variety of Keynesian or classical economics you espouse. I tell students that respect for identities is the first piece of wisdom that distinguishes economists from others who expiate on economics. The second? … Identities say nothing about causation.” James Tobin, leftist Keynesian 1997

Money is ultimately a creation of government—but that doesn’t mean only government deficits determine the level of demand at any one time. The actions and beliefs of the private sector matter as well. And that in turn means you can have budget surpluses and excess demand at the same time, just as you can have budget deficits and deficient demand.”  Jonathan Portes (orthodox Keynesian).

The increasingly abstruse debate among economists (mainstream, heterodox and leftist) continues on the validity of Modern Monetary Theory (MMT) and its relevance for economic policy.  The debate among leftists went up another gear with the publication of leftist Doug Henwood’s fierce critique of MMT in Jacobin here. Leading MMTer Randall Wray angrily responded to Henwood’s attempted demolition here. And then from the heart of MMT land, Pavlina Tcherneva, program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute replied to Henwood in Jacobin.

In the mainstream, Paul Krugman had a go, with a response from Stephanie Kelton.  Kelton is a professor of public policy and economics at Stony Brook University, Long Island New York. She was the Democrats’ chief economist on the staff of the U.S. Senate Budget Committee and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders.

Although this debate is getting very arcane and even nasty, it is not irrelevant because many leftists in the labour movement have been attracted by MMT as theoretical support for opposing ‘austerity’ and for justifying significant government spending to obtain full employment and incomes.  In particular, the radical wing of the Democrat party in the US has used MMT to support their call for a Green New Deal – arguing that more government spending on the environment, climate change and health can easily be financed by the issuance of dollars, rather than by more taxes or more government bonds that would raise public debt.

I won’t pitch into the MMT debate as above as I have already spent some ink in three posts trying to critique the theory and policy of MMT from a Marxist viewpoint, with the aim of working out whether MMT offers a way forward to meeting ‘the needs of the many’ (labour) over the few (capital).  And for me, that is the ultimate purpose of such a debate.

All I would add on the current debate among Keynesian, Post-Keynesians and MMTers is that MMTers argue with orthodox Keynesians over whether government spending can create the money to finance it; or taxation and borrowing is needed to create the money to fund government spending.  But as post-Keynesian Thomas Palley puts it: “government spending and taxation occur simultaneously so creation of money via money financed deficits and destruction of money via taxation also occur simultaneously. It is a pointless exercise to try and determine which comes first.”  Marxist analysis would agree.

Instead, in this post I want to look at MMT’s macro model.  In the twitter debate that is viral (at least among economists and activists!), critics of MMT have sometimes argued that MMT is just a series of vague assertions without any rigorous model.  This riled Kelton.  She immediately posted a paper written in 2011 by Scott Fullwiler of Warburg College, another MMT leader (who also recently commented on one of my blog posts).  In this paper, Scott outlined the MMT macro model in some detail.

Basically, he starts off with a Keynes/Kalecki post-Keynesian macro model of aggregate demand.  This model is simply an identity.  There are two ways of looking at an economy, by total income or by total spending and they must equal each other.

Thus National Income (NI) = National Expenditure (NE).

Following the ‘Keynesian Marxist’ Michal Kalecki, we can break this down into:

(NI) Profits + Wages = (NE) Investment + Consumption.  Now there are two sorts of income and two sorts of spending.

If we assume that all Wages are spent then and all Profits are saved, we can delete Wages and Consumption from the identity.  So

Profits = Investment

In the MMT version from Scott, he puts the same macro identity differently, with Investment on the left side of the equality.  Thus.

Investment = Profits

Why?  Because, as we shall see, all post-Keynesian theory argues that it is Investment that leads Profits, not vice versa.

But Scott re-expands the parts on the right-hand side to look at flows, so that wages that are saved are added back with profits to get Private Saving (so assuming some household saving); and he also adds in Government saving (taxation less spending) and Foreign Saving (net imports or current account deficit).

Thus Profits as a separate category disappears into Private Savings and we get:

Investment = Private Saving + (Taxation – Government Spending) + (Imports – Exports)

But then Scott also dispenses with the separate category Investment and converts it into Private Saving less Investment or the Private Sector Surplus.  So now we have Private Sector Savings (Wages saved plus Profits less Investment).  So Scott continues:

Private Sector Surplus = Government Deficit + Current Account Balance

Or

Private Sector Surplus – Current Account Balance = Government Deficit

This is the key MMT identity.  It argues that if the Government deficit rises, then assuming the Current Account balance does not change, the Private Sector Surplus (Wages saved +Profits less Investment) rises.  The MMT conclusion (assertion) is that increasing the Government deficit will increase the Private Sector Surplus . And if we exclude Wages saved (the MMT identity does not) and the Current Account balance, then we have:

Net Profits (ie Profits after Investment) = Government deficit

And we can conclude that Government deficits determine Net Profits ie Profits less Investment.

In the paper Scott then presents a time series graph comparing US Private Net Saving (remember this includes Household net saving) with Government deficits and concludes that “It shows how closely the private sector surplus and the government sector deficit have moved historically, which isn’t surprising given they are nearly the opposing sides of an accounting identity.”

But then Scott says: “What we notice (from these graphs) is that the current rise in the government’s deficit is creating net saving for the private sector.”  But is that how to view the causal direction of these macro identities?  The post-Keynesians reckon that the causal connection is that Investment creates Profits or in the MMT version Government deficits create net profits (private saving).  But in my view, the causal direction of this identity is in reality the opposite, namely that Marxian theory says that Profits create Investment, because Profits come from the exploitation of labour power.

Let us go back to the basic Kalecki identity, Profits = Investment, with Investment back on the right hand side.  Investment (which disappeared in Scott Fulwiller’s model) can be broken down to Capitalist investment and Government investment.

Profits = Capitalist investment + Government investment

Under the Kalecki causation, increasing government investment (by deficits, if you want) will raise Profits (and for that matter, wages too through more employment and wage rates – the post-Keynesian identities just refer to Private Saving and (importantly) do not break that out into Wages saved and Profits).

Thus Profits + Wages saved = Private investment + Government investment

But what if the Kalecki causation is back to front?  What if Profits lead Investment, not vice versa.  Then the identity is:

Profits (because Wages are spent) = Investment (comprising Capitalist investment and Government investment).  We can expand this to cover external flows so that:

Domestic Profits + Foreign Income = Capitalist investment + Government Investment + Foreign Inward Investment

Now assume both Domestic Profits and Foreign Income are fixed. What will happen if Government Investment rises?  Private Investment will fall unless foreign inward investment rockets.

How can government investment/spending be increased without Private (capitalist?) investment falling (being crowded out)?  By running budget deficits, say the post-Keynesians (and MMT).  Borrowing could be done by issuing government bonds (orthodox Keynesian) or by ‘printing money’ ie increasing cash reserves in banks (MMT).  Issuing bonds may reduce Private Investment to boost Government investment, but the credit created would stimulate overall Investment.  Printing Money (MMT) would raise Investment without reducing Private Investment (magic!). MMT/Keynesians will say if Government Investment is not funded by taxes on Domestic Profits but by borrowing with bonds or printing money, then it will not affect profits.  Marxists would say that this is ‘fictitious’ investment that must deliver higher profit at some point. 

All this is because identities do not reveal causation and it is causation that matters.  For the Keynesians, it is the right hand side of the equation (Investment) that causes the left hand side (Profits); namely, that it is capitalist investment and consumption that creates profit.  For MMTers, it is a variant of the same, but netted: Net government investment/spending (deficits after taxes) causes Net Private Savings (Profits and Saved wages after investment).

But in the real world of capitalist production, this is back to front.  Profits lead Investment, not vice versa; and Net Private Savings enable Government deficits not vice versa.  The graphs offered by Scott in his paper of the time series of deficits and net private surpluses can be interpreted with just that causality.  What I read from the first graph is not that the current rise in the government’s deficit is creating net saving for the private sector” (Fullwiler), but the opposite: higher net savings (profits after investment) will produce a higher government deficit or lower surplus.  In other words, when capitalists hoard/save and won’t invest, and that is particularly the case in recessions, then government deficits rise (through lower tax revenues and higher unemployment benefits).  And Scott’s graphs show that the US government deficits reach peaks in all the post-war US recessions and are at their lowest in boom times.

Indeed, if I do the correlations between the government balance and net private savings, there is indeed a very small inverse relation of 0.07; in other words, a larger government deficit is correlated (weakly) with a net private savings surplus.  But if I do the correlation between the government balance and GDP growth, there is a small positive correlation.  In other words, more government surplus/less deficit aligns with more GDP growth, the opposite of the Keynes/Kalecki causation, which suggests that it is growth that leads government balances, not vice versa (see the Portes quote above).

Any causation is also modified by the external account.  Scott’s second graph including the current account shows that a persistent current account deficit (net foreign inflows) from the 1980s helped to fund US government deficits, even though the private sector surplus disappeared in the 2000s.  So the main MMT causation argument is further muddied by foreign income.

We can only really better understand the causal connections if we have Investment isolated and Profits isolated. You see, contrary to the Keynesian/post-Keynesian/MMT view, the Marxist view is that “effective demand” (including government deficits) cannot precede production.  There is always demand in society for human needs.  But it can only be satisfied when human beings do work to produce things and services out of nature.  Production precedes demand in that sense and labour time determines the value of that production.  Profits are created by the exploitation of labour and then those profits are either invested or consumed by capitalists.  Thus, demand is only ‘effective’ because of the income that has been created, not vice versa.

Because the Keynesians/post-Keynesians have no theory of value, they do not recognise this and read their own identity the wrong way round. From a Marxist view, profits are the causal variable.  So if profits fall, then either investment, or capitalist hoarding or the government deficit must fall, or all three.

What is the evidence that profits lead investment and government deficits and not the other way round, as the Keynesians argue?  This blog has provided overwhelming empirical support to the Marxist causal direction. See my paper here which compiles all the compelling empirical research (including my own) that supports the Marxist view that, in a capitalist economy, profits lead investment, which in turn drives GDP growth and employment, while government deficits have little influence.

If the Keynes/Kalecki causation direction is right, then all that we need to do to keep a capitalist economy going is to have more government budget deficits.  If the MMTers are right, all we need to achieve permanent full employment is permanent government deficits (subject to some possible inflation constraint).  What the orthodox Keynesians and the MMTers disagree about is whether these deficits (of government spending over taxes) can and should be financed by issuing government bonds for banks to buy or by the central bank printing money.

The more important question, however, is what drives a capitalist economy.  It is the profitability of capitalist investment that drives growth and employment, not the size of a government deficit. The Keynes/Kalecki/MMT macro models hide behind identities and turn them into causes.  But identities “say nothing about causation” (Tobin).  It’s profits, not government spending, that call the tune.

MMT, Minsky, Marx and the money fetish

February 26, 2019

Recently the former deputy governor at the Bank of Japan Kikuo Iwata argued that Japan must ramp up fiscal spending with any increased public sector debt bankrolled by the central bank.  This ex-governor seems to have adopted Modern Monetary Theory (MMT), or at least a version of Keynesian-style deficit spending as a ‘radical’ (or is it desperate?) answer to the continued failure of the Japanese economy to grow anywhere near its pre-global crash rate.

The very latest data on the Japanese economy make dismal reading.  The best measure of activity in manufacturing, the Nikkei manufacturing PMI, declined to 48.5 in February 2019, the lowest reading since June 2016, as both output and new orders declined at faster rates.  Meanwhile, business confidence weakened for the ninth straight month.  In Q4 2018, Japan’s national output stagnated.  There has been zero growth compared to the end of 2017. That compares with average annual growth of 2% since the 1980s.

Iwata was originally the architect of the BOJ’s massive bond-buying programme dubbed “quantitative and qualitative easing” (QQE).  This was supposed to boost the economy through a massive injection of money supply.  But although the Japanese government continually ran annual government budget deficits, it was to no avail in reviving nominal GDP growth or real household incomes.

Japan’s per capita GDP has been rising, but that’s only because the population is declining and the workforce too.  Personal disposable income has not risen as fast as the economy as a whole in many years—at 1 percentage point less than average GNP growth in the late 1980s.  Japan may have ‘full employment’ but the percentage of the workforce employed on a temporary or part-time basis is up from 19% in 1996 to 34.5% in 2009, together with an increase in the number of Japanese living in poverty.  According to the OECD, the percentage of people in Japan living in relative poverty (defined as an income that is less than 50% of the median) from 12% of the total population in the mid-1980s to 15.3% in the 2000s.

Iwata’s answer to Japan’s ‘secular stagnation’ is to continue with government deficits and spending, but this time financed by just printing money, not issuing bonds. “Fiscal and monetary policies need to work as one, so that more money is spent on fiscal measures and the total money going out to the economy increases as a result,” That’s the only remaining policy option because “the BOJ’s current policy does not have a mechanism to heighten inflation expectations. We need a mechanism where money flows out to the economy directly and permanently.” BoJ bond purchases are just not working, because the banks are hoarding the cash in deposits and reserves and not lending.  They must be by-passed, says Iwata.

This proposal resembles the idea of “helicopter money” – a policy where the central bank directly finances government spending by underwriting bonds. Iwata’s solution to low growth and weak real incomes is just one more variant of the idea that demand must be stimulated to get a capitalist economy going, in this case by just printing more money.

Another variant now in the offing is to create a cashless economy.  You see, people keep hoarding their cash (under the mattress) and not spending while small companies get paid in cash and then hide it from their declared profits by hoarding.  So central banks and governments, in the world of digital and crypto-currencies, have now come up with the idea of abolishing or devaluing cash in favour of digital transactions.

The latest version of this comes from the IMF.  Having tried quantitative easing, as in Japan and elsewhere, and then ‘negative interest rates’ (ie people get paid to borrow money) to boost economies, the idea now is devalue cash.  This is how it goes: “In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.  One option to break through the zero lower bound would be to phase out cash”  How? Make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. Shops would start advertising prices in e-money and cash separately, just as shops in some small open economies already advertise prices both in domestic and in bordering foreign currencies. Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits. “This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash.”

This IMF idea comes hard on an actual attempt by a government to ‘devalue’ cash.  Two years ago, the Indian government under Modi overnight abolished high-denomination banknotes. The government claimed the aim was to flush out ill-gotten gains by rich Indians hiding their earnings in cash to avoid tax.  But it was the Hindu poor, in the rural areas particularly, who were most hit by this ‘demonetisation’. Two-thirds of Indian workers are employed in small businesses with less than ten workers – most are paid on a casual basis and in cash rupees The demonetisation was supposed to attack corruption and tax evasion, but it seems to have had little effect on that.  Indeed, lots of rich Indians made ‘private arrangements’ to obtain new bank notes and avoid having to declare monies into bank accounts..

Getting out of a recession or depression by printing money or reducing the value of holding cash has long been a Keynesian-style idea.  Keynes himself was very keen on the ideas of Silvio Gesell, a German merchant, who was minister of finance in the revolutionary government of Bavaria in 1919.  Gesell was convinced that the problems of capitalist depressions like the one in the late 19th century were due to the high interest rate on borrowing.  This encouraged ‘hoarding’.  If that could be stopped, then money would flow into spending and depressions would be overcome.  Keynes reckoned that Gesell’s work contained “flashes of deep insight and who only just failed to reach down to the essence of the matter.”  Keynes was particularly enamored of Gesell’s attempt to establish “an anti-Marxian socialism, a reaction against laissez-faire built on theoretical foundations totally unlike those of Marx in being based on a repudiation instead of on an acceptance of the classical hypotheses, and on an unfettering of competition instead of its abolition. I believe that the future will learn more from the spirit of Gesell than from that of Marx.”  (General Theory).

Gesell’s main policy proposal to end slumps was stamped money. According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office.  Keynes commented: “The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale.”  The idea was to devalue cash and force people to spend and thus raise ‘effective demand’ by breaking the ‘liquidity trap’ of money hoarding.

Gesell’s idea has been widely acclaimed by many post-Keynesians.  But unlike them, although Keynes was keen on this ‘trick of circulation’ (to use Marx’s phrase), he saw deficiencies.  One was that Gesell did not realise that capitalist investment was not just governed by the rate of interest on borrowing but also by the rate of profit on investing (what Keynes called the ‘marginal efficiency of capital’).  So he “constructed only half a theory of the rate of interest.”  The other worry was that if cash notes were stamped, then those who wished to hoard would just keep money in bank deposits, gold or foreign currency.  So we were back to square one.  For more on the fundamental differences between Gesell and Marx on money, see here: http://www.unotheory.org/files/2-15-4.pdf

All these money theories of crises – the wider exponent of which is so-called financialisation – have one thing in common.  They ignore or deny the law of value, namely that all the things that we need or use in society are the product of human labour power and under a capitalist economy where production is for profit (ie for money over the costs of production), not need, then money represents the socially necessary labour time expended. We see only money, not value, but money is only the representation of value in its universal form, namely abstract labour as measured in socially necessary labour time. It is a fetish to think that money is something that is outside and separate from value.

As Marx puts it: “a particular commodity only becomes money because all other commodities express their value in it” BUT “it seems on the contrary, that all other commodities universally express their values in a particular commodity because it is money. The movement which mediated this process vanishes in its own result, leaving no trace behind. Without having to do anything to achieve it, the commodities find the form of their own value, in its finished shape, in the body of a commodity existing outside and alongside them…. Hence the magic of money. …The riddle of the money fetish is therefore merely the riddle of the commodity fetish, which has become visible and blinding the eyes.”

This is important and not metaphysical gobbledy gook. If Marx is right in his characterisation of money, then we can argue that capitalist production is production for more money (value and surplus value) through the exploitation of the labour force. That means unless more value is created by the labour force, money cannot make more money. Marx was always quick to oppose the fanciful notions that the contradictions which arise from the nature of commodities, and therefore come to the surface in their circulation, can be removed by increasing the amount of the medium of circulation.” (referring to the work of Physiocrat Jean-Daniel Herrenschwand).

It is precisely in the category of interest that Marx reckons the money fetish is strongest.  In interest-bearing capital the “fetish character of capital and the [conception] of this capital fetish [become] now complete“19 (CAP III, Penguin, p.516).  Then it appears that money can make money through interest accrual with no ‘exploitation’ or ‘production’ involved. It is “form without content” (CAP III, p.255). “In M–M’ we have the meaningless form of capital, the [inversion] and [reification] of production relations in their highest degree, the interest-bearing form, the simple form of capital, in which it antecedes its own process of reproduction; […] capacity of money, or of a commodity, to expand its own value independently of reproduction – which is a mystification of capital in its most flagrant form“(CAP III, p.256).

it is this money fetish that dominates the theories of post-Keynesian gurus like the American economist of the 1980s, Hyman Minsky. Minsky’s obsession with money and finance as the cause of crises has been brilliantly exposed in a recent article by Mike Beggs, a lecturer in political economy at the University of Sydney.  Beggs shows that Minsky started off as a socialist, following the ideas of ‘market socialism’ by Oscar Lange.  But he eventually retreated from seeing the need to replace capitalism with a new social organisation, to trying to resolve the contradictions of finance capital within capitalism.

In the 1970s, Minsky contrasted his position from Keynes.  Keynes had called for the “somewhat comprehensive socialization of investment” but went onto to modify that with the statement that “it is not the ownership of the instruments of production which it is important for the State to assume” — it was enough to “determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them.” In the 1970s, Minsky went further and called for the taking over of the “towering heights” of industry and in this way Keynesianism could be integrated with the ‘market socialism’ of Lange and Abba Lerner.

But by the 1980s, Minsky’s aim was not to expose the failings of capitalism but to explain how an unstable capitalism could be ‘stabilised’. Biggs: “His proposals are aimed, then, at the stability problem. ….The expansion of collective consumption is dropped entirely. Minsky supports what he calls “Big Government” mainly as a stabilizing macroeconomic force. The federal budget should be at least of the same order of magnitude as private investment, so that it can pick up the slack when the latter recedes — but it need be no bigger.”

This policy approach is not dissimilar from that of MMT supporters.  Minsky even proposed a sort of MMT job guarantee policy. The government would maintain an employment safety net, promising jobs to anyone who would otherwise be unemployed. But these must be sufficiently low-paid to restrain market wages at the bottom end. The low pay is regrettably necessary, said Minsky, because “constraints upon money wages and labor costs are corollaries of the commitment to maintain full employment.” The discipline of the labor market remains: working people may not fear unemployment, but would surely still fear a reduction to the minimum wage (Beggs).

Thus, by the 1980s, Minsky saw government policy as aiming to establish financial stability, in order to  support profitability and sustain private expenditure. “Once we achieve an institutional structure in which upward explosions from full employment are constrained even as profits are stabilised, then the details of the economy can be left to market processes.” (Minsky).

Minsky’s journey from socialism to stability for capitalist profitability comes about because he and the post-Keynesians deny and/or ignore Marx’s law of value, just as the ‘market socialists’, Lange and Lerner, did.  The post-Keynesians and MMTers deny that profit comes from surplus value extracted by exploitation from the capitalist production process and it is this that is the driving force for investment and employment.  Instead they all have a money fetish. With the money fetish, money replaces value, rather than representing it. They all see money as both causing crises and also as solving them by creating value!  That leads them to ignore the origin and role of profit, except as a residual of investment and consumer spending.

So much for theory.  What about reality?  The reality is that the late 19th century depression did not end because money was pumped into the economy.  But it did end, so why?  In my book, The Long Depression, I explain how Marx’s law of profitability operated and after several slumps, profitability in the major economies was restored to enable a recovery in investment in the 1890s (Chapter 2) followed by increased international rivalry in a period of globalisation (imperialism) that eventually exploded into a world war as profitability began to slip again in the 1910s

The Keynesians (including the MMTers) like to say that the Great Depression was resolved by Keynesian-style monetary easing and fiscal spending.  But the evidence is against this.  In the 1930s, monetary easing (QE etc) failed, something Keynes recognised at the time.  New Deal budget deficits were never applied much but, even so, the New Deal work programmes did not really reduce unemployment or get real incomes up until the war ‘boom’.  Again, see my book, The Long Depression, Chapter 3, where I show that the US economy only recovered once a war economy was imposed with government now dominating investment.

What is different about the Long Depression since 2009 is that, unlike the Great Depression of the 1930s, there are now very low (official) unemployment rates in the major economies. Instead, real incomes are stagnant, while productivity and investment growth is abysmal.  Financial markets are booming but the productive sectors of the economy are crawling along.  And yet the period since 2009 has been accompanied by all sorts of monetary tricks: zero or even negative interest rates, unconventional monetary policy (QE) and now proposals for ‘helicopter money’, unending MMT-style government deficits and a cashless economy (Gesell-style).

As Maria Ivanova has shown, there remains a blind belief that the crisis-prone nature of the latter can be managed by means of ‘money artistry’, that is, by the manipulation of money, credit and (government) debt.  Ivanova argues that the merits of a Marxian interpretation of the crisis surpass those of the Minskyan for at least two reasons. First, the structural causes of the Great Recession lie not in the financial sector but in the system of globalized production. Second, the belief that social problems have monetary or financial origins, and could be resolved by tinkering with money and financial institutions, is fundamentally flawed, for the very recurrence of crises attests to the limits of fiscal and monetary policies as means to ensure “balanced” accumulation.

None of the ‘money fetish’ schemes have worked or will work to get the capitalist economy going.  Instead such measures have just created financial bubbles to the benefit of the richest.  That’s because these “tricks of circulation” are not based on the reality of the law of value.

The Green New Deal and changing America

February 8, 2019

It seems now very opportune that I recently posted three times on my blog my views on Modern Monetary Theory (MMT), an increasingly attractive theory for the left to justify government spending to meet the ‘needs of the many’.  For just this week, left Democrats in the US Congress, led by the rising star Alexandria Ocasio-Cortez (AOC), a member of Democratic Socialists of America, launched what they call the Green New Deal (GND), an alternative programme for a future US government to adopt to provide proper public services in education and health and to deal with global warming and environmental pollution.  And the GND and AOC make clear that funding for these badly needed government programmes can be achieved if we follow the policy conclusions of MMT.

The GND is a welcome attempt to reset the agenda for economic and social policy in favour of labour in America, for the first time since the New Deal of the 1930s.  The GND wants to establish a national health service free to all at the point of use, as exists in most of Western Europe and other advanced capitalist economies.  It wants to introduce free college education and end the heavy burden of student loans placed on working-class people; and it wants to create jobs at decent wages for environmentally sound projects through government investment. Such a programme may be modest and it will bet bitterly opposed by American capital.

The GND preamble notes that “the Federal Government-led mobilizations during World War II and the New Deal era created the greatest middle class that the US has ever seen” and frames the GND as “a historic opportunity to create millions of good, high-wage jobs in the United States.”  Of the GND projects, investment in “community-defined projects and strategies” to increase resilience is the first; repairing and upgrading infrastructure is the second, along with “appropriate ownership stakes and returns on investment, adequate capital (including through community grants, public banks, and other public financing), technical expertise, supporting policies, and other forms of assistance to communities, organizations, Federal, State, and local government agencies, and businesses working on the Green New Deal mobilization.”  So this is a New Deal like the 1930s, but designed for the 21st century to revive public investment, with the returns going back to the public.  GND calls for the US to “meet 100 percent of our power demand through clean, renewable, and zero-emission energy sources.”

Also GND has what are called “aspirations” like “guaranteeing a job with a family-sustaining wage, adequate family and disability leave, paid vacations, and retirement security to all people of the United States.”   In other words, the Job Guarantee as promoted by MMT enthusiasts (see my post).  And more rights for trade unions to organise, “strengthening and protecting the right of all workers to organize, unionize, and collectively bargain free of coercion, intimidation, and harassment.”  Another key aspiration is in “providing all members of society with high-quality health care, affordable, safe and adequate housing, economic security, and access to clean water, air, healthy and affordable food, and nature.”

So the GND involves a federal job guarantee, the right to unionize, action against free trade and monopolies, and universal housing and health care.  In Europe and other advanced capitalist economies, these aspirations are not so radical(although in the neoliberal world, they are increasingly so), but in Trump’s America, where corporate interests are paramount and the main enemy is now ‘socialism’, the GND programme is an anathema.

But it is not just Trump and Wall Street who have thrown up their hands in horror at the GND proposals.  Some orthodox Keynesians have wrung their hands.  Noah Smith, the Keynesian economics blogger and Bloomberg columnist, let out a howl of anguish because he reckoned that GND, as promoted by AOC,”definitely seems to include: 1) universal health care paid for by MMT; 2) trillions of dollars in infrastructure spending paid for by MMT; 3) economic security for those “unwilling to work”, paid for by MMT and makes clear that it will ultimately rely on deficits to pay for the Green New Deal. As justification, it points to the basic ideas of MMT.”  Smith is horrified by this because he considers the ‘nonsense’ of MMT will completely undermine the objectives of the GND.  He wants the Democrat lefts to decide between work-based policies and redistributive policies.

It does seem that AOC and other promoters of the GND programme think that MMT can justify and explain where the money is going to come from to pay for all the aspirations and necessary public investment.  For example, leading MMTer, Stephanie Kelton was asked: “ Can we afford a #GreenNewDealShe replied: Yes. The federal government can afford to buy whatever is for sale in its own currency.”  So there it is. The financing of the GND will apparently be achieved by government spending the necessary money, which it gets by running deficits and ‘printing’ whatever amount of currency required.  Other means of revenue, like taxes, come later (if at all), and issuing government bonds for households or financial institutions to buy is not needed.

What is wrong with this?  Well, I have argued in previous posts that MMT is a novel ‘trick of circulation’ (Marx) that ignores the whole circuit of money that goes from money through capital investment into production for profit and more money.  The MMT argues that we can just start with the state printing money and then all will flow from that – more investment, more production, more incomes, more employment – as though the social relations of capitalism were irrelevant.  MMT will deliver full employment at decent wages, healthcare, education and other public services without interfering with the big banks, the multi-nationals, big pharma and Wall Street.  You see, because the state controls the money (the dollar), then it is all powerful over the likes of Goldman Sachs, Bank America, Boeing, Caterpillar, Amazon, WalMart etc.

Therein lies the danger of MMT as the theoretical and policy support for government spending and running deficits.  Actually, it is not necessary to adopt MMT to deliver the GND programme.  There are many ways to meet the bill.  First, there is the redistribution of existing federal and state spending in the US.  Military and defense spending in the US is nearly $700bn a year, or around 3.5% of current US GDP.  If this was diverted into civil investment projects for climate change and the environment, and those working in the armaments sector used their skills for such projects, then it would go a long way to meeting GND aspirations.  Of course, such a switch would incur the wrath of the military, financial and indsustrial complex and could not be implemented without curbing their political power.

Then there is the redistribution of income and wealth through progressive taxation to raise revenues for extra public spending on the needs of the many.  The Trump administration has made huge cuts in the tax burden for the very rich and the big corporations; and it has encouraged and allowed the salting away of profits into tax havens around the world equivalent to 1-3% of US GDP.  So the proposal by AOC and others to raise the top income tax rate to 70%, along with the idea of Elizabeth Warren to apply a wealth tax on the assets of the very rich, is another direction to go.  The latter could raise up to $275bn a year. Of course, these measures would only scratch at the surface of the grotesque income and wealth inequality in America.  Tax inequality expert Gabriel Zucman reckons that the Warren wealth tax would raise the total effective burden at the very top of the distribution from 3.2% of net worth to only 4.3%. This tax obligation would still be lower than the average burden of 7.2% of net worth paid by most other Americans.

The problem is that is the already high level of inequality in wealth and income before taxation:  the US and the UK have highest degree of inequality in the advanced economies.  The graph below shows inequality before and after tax and transfers.  The US and the UK have the highest inequality before and, although their tax and transfers reduce that inequality considerably, they still remain at the top.  The Scandinavian economies have high inequalities, but redistribute most, to end up with the lowest inequality ratios.

But again, to change things fundamentally on inequality would require a change in very structure of the economy ie capitalism.  Warren, a supporter of capitalism, does not want to do that.  Instead she wants, like other leftists (Joe Stiglitz), just seek to end of the ‘rigging’ of the economy in favour of the rich and the big monopolies.

The real way to find the finance needed to carry out the GND programme would be to deliver more revenues through faster economic growth.  President Trump boasted that his administration would deliver 4% real GDP growth a year from his tax cuts and incentives to the stock market.  Of course, this was an idle boast.  At the end of 2018, US real GDP growth peaked at 3% in the last quarter and is now expected to slow fast (even if the economy avoids an outright recession).  The long-term forecast for US economic growth made by the US Congressional Board Office is just 1.7% a year.  That’s why Trump tax cuts for the rich have already created rising annual federal budget deficits – but something we need not worry about, according to him and to the MMTers.

I am indebted to Scott Fullwiler, a leading MMTer at the Levy Institute, for pointing out in a comment on my blog that MMT experts have simulated their own projections for the cost of delivering full employment at wages above $15 an hour and reckon that it would increase the federal deficit by 1.0-1.5% of GDP annually over the next ten years without incurring any significant rise in inflation. rpr_4_18

Let me be clear, Left Democrats and the supporters of MMT are rightly pushing for measures that really would help ‘the many’ in America.  But, in my view, it will be an illusion to think the GND can be implemented, even in just economic terms, simply by following MMT and printing the dollars required.  Yes, the state can print as much as it wants, but the value of each dollar in delivering productive assets is not in the control of the state where the capitalist mode of production dominates.  What happens when profits drop and a capitalist sector investment slump ensues? Growth and inflation still depends on the decisions of capital, not the state. If the former don’t invest (and they will require that it be profitable), then state spending will be insufficient.

And even accepting that the MMT/Levy projections could be achieved, they would not deliver nearly as much as a doubling of the sustainable US growth rate would generate, which would be over $750bn a year.  That would mean a tripling of investment growth. Over a decade, even a proportion of that would amply meet the financing requirements of the GND. But such a growth rate is impossible to achieve without a substantial change in the economic structure of the US economy. It is not going to happen when the 80% of all investment is done by the capitalist sector and depends on the profitability of capital.  That tells me that the GND is only possible to achieve if 80% of the productive sectors of the economy are socialised and incorporated into federal, state and local plans for investment and production.  That thorny question cannot and should not be ignored by MMTers.

MMT 2 – the tricks of circulation

February 3, 2019

In my first post on Modern Monetary Theory (MMT), I offered a general analysis of the theory, its similarities and differences with Marx’s theory of money; and some of the policy implications of the MMT and its usefulness for the labour movement.

In this post, I want to delve deeper into the analytics of MMT.  As I said in the first post, MMT is the child of what is called Chartalism, namely that money is historically the creation of the state and not, as mainstream neoclassical theory claims, an extension from barter trading; or in the Marxist view that money appears with the emergence of markets and commodity production (“Money necessarily crystallises out of the process of exchange, in which different products of labour are in fact equate with each other, and thus converted into commodities…. as the transformation of the products of labour into commodities is accomplished, one particular commodity is transformed into money.” – Marx Capital Vol 1).

I won’t tackle whether Chartalism is an accurate historical account of the emergence of money.  Instead, let me refer you to an excellent short account of the history of money by Argentine Marxist economist, Rolando Astarita, here.  Astarita has also analysed MMT in several posts on his blog, and I shall draw on some of his arguments.  Suffice it to say that to argue that money only arose because the role of the state in pre-capitalist economies is not borne out by the facts.

Nevertheless, MMT starts with the conviction that it is the state (not capitalist commodity relations) that establishes the value of money.  Leading MMTer Randall Wray argues the money takes its value not from merchandise “but rather from the will of the State to accept it for payment”.  Chartalist founder Knapp says: “money is a creature of the law”; “The denomination of means of payment according to the new units of value is a free act of the authority of the State”; and “in modern monetary systems the proclamation [by the State] is always supreme”. Thus the modern monetary system “is an administrative phenomenon” and nothing more.

Keynes also backed this Chartalist view. In his Treatise on Money, Keynes says: “the Chartalist or state money was reached when the State assumed the right to declare which account money is to be considered money at a given moment”.   So “the money of account, especially that in which debts, prices and general purchasing power are expressed, is the basic concept of the theory of money”I don’t think it is correct to say that MMT bastardises Keynes (as one comment on my first post argues) – on the contrary, MMT and Keynes are in agreement that money is a product of state creation as the state decides the unit of account for all transactions.

But deciding the unit of account (eg whether dollars or euros) is not the same as deciding its value for transactions ie as a measure or store of value.  MMT supposedly supports the ‘endogenous’ money approach, namely that money is created by the decisions of entrepreneurs to invest or households to spend, and from the loans that the banks grant them for that purpose. So banks make loans and so create money (as issued by the state).  Money is deposited by the receivers of loans and then they pay taxes back to the state.  According MMT, loans are created by banks and then deposits are destroyed by taxation, in that order.  At a simple level, MMT merely describes the way things work with banking and money – and this is what many MMTers argue: ‘all we are doing is saying like it is’.

But MMT goes further.  It argues that the state creates money in order to receive it for the payment of taxes. The state can force taxes out of citizens and can decide the nature of the legal tender that serves for money.  So money is a product of the state.  Thus MMT has a circuit of money that goes: state money – others (non-state entities) – taxes – state money. The state injects money into the private sector, and that money is then reabsorbed with the collection of taxes. According to MMT, contrary to what most of us simpletons think, issuing money and collecting taxes are not alternatives, but actions that merely occur at different times of the same circuit.  So if a government runs a fiscal deficit and spends more than it receives in taxes, the non-state sector has a surplus which it can use to invest, spend and employ more. The state deficit can thus be financed by creating more money. Taxes are not needed to finance state spending, but to generate demand for money (to pay taxes!).

But the MMT circuit fails to show what happens with the money that capitalists and households have.  In MMT, M (in value) can be increased to M’ purely by state dictat.  For Marx, M can only be increased to M’ if capitalist production takes place to increase value in commodities that are sold for more money.  This stage is ignored by MMT.  The MTT circuit starts from the state to the non-state sectors and back to the state.  But this is the wrong way round, causally.  The capitalist circuit starts with the money capitalist and through accumulation and exploitation of labour back to the money capitalist, who then pays the state in taxes etc.  MMT ignores this. But it shows that money is not exogenous to capitalist economic activity.  Its value is not controlled by the state.

MMT creates the illusion that this whole process starts and ends with the government when it really starts within the capitalist sector including the banking system. Taxes cannot destroy money because taxes logically occur after some level of spending on private output occurs. Taxes are incurred when the private sector spends and governments decide to use those taxes to mobilize some resources for the state. Private incomes and spending on resources precede taxes.

Another Chartalist, Tcherneva writes: “Chartalists argue that, since money is a public monopoly, the government has at its disposal a direct way to determine its value. Remember that for Knapp the payments with currency measure a certain number of units of value. For example, if the State required that in order to obtain a high-powered money unit a person must provide one hour of work, then the money would be worth exactly one hour of work. As a monopoly issuer of the currency, the State can determine what the currency will be worth by establishing the terms in which the high-powered money is obtained“(page 18).  Tcherneva’s policy of State ‘exogenous pricing’ is pretty similar to the views of 19th century utopian socialist John Gray who reckoned that by issuing bonds that were exogenously priced to represent working time, so economies could deliver growth and full employment – a view that Marx criticised.

Where MMT differs from Keynesian-type fiscal deficit spending is that its proponents see government deficits as permanent in order to drive the economy up and achieve full employment of resources.  In this way, the state becomes the “employer of last resort”.  Indeed, the MMT exponents claim that unemployment can indeed be solved within capitalism. So there is no need to change the social formations based on private capital.  All that is needed is for politicians and economists to recognise that state spending ‘financed’ by money creation can sustain full employment.

MMT proponent Tcherneva writes: “Chartalists propose a policy of full employment in which the state exogenously establishes an important price for the economy, which in turn serves as an anchor for all other prices …. This proposal is based on the recognition that the State does not face operational financial constraints, that unemployment is a result of restricting the issuance of currency, and that the State can exercise an exogenous pricing (exogenous pricing)”  This policy conclusion is rather ironic. It leads to a view that full employment can be achieved by the “exogenous” issuance of currency at a fixed price.  And yet MMT is prominent in its rejection of the monetarist argument that an exogenous increase in the quantity of money will lead to a boost in economic activity. It seems that MMT also has an exogenous theory of money!

As Cullen Roche, an orthodox Keynesian, put it: MMT tries to reinvent the wheel and argue that it is the government’s fault (and implicitly, the rest of society’s fault) that you can’t find a job… MMT gets the causality backwards here by starting with the state and working out.” Roche goes on: “The proper causality is that private resources necessarily precede taxes. Without a highly productive revenue generating private sector there is nothing special about the assets created by a government and it is literally impossible for these assets to remain valuable. We create equity when we produce real goods and services or increase the market value of our assets relative to their liabilities via productive output. It is completely illogical and beyond silly to argue that one can just “print” equity from thin air. Government debt is, logically, a liability of the society that creates it. In the aggregate government debt is a liability that must be financed by the productive output of that society.”

One comment on my first post queried my claim that MMT exponents reckon that money can be created out of thin air – this was a distortion of MMT, I was told.  The real argument of MMT is that government spending can finance itself by raising economic activity and thus more taxes.  I did cite some economists who talked about ‘thin air’ but apparently these were not true MMTers.  Well, British tax expert/economist, Richard Murphy, is definitely a supporter of MMT.  He expounded that MMT first says “governments can make money out of thin air, at will… MMT then says all government spending is in fact funded by money created in this way, created by central banks on the government’s behalf… MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.”  Similarly, Stephanie Kelton is currently the most followed MMT economist.  She argues that governments can expand spending to whatever level necessary to achieve full use of productive resources in an economy by state money because such spending is ‘self-financing’.

Money only has value because if there is value in production to back it.  Government spending cannot create that value – indeed some government spending can destroy value (armaments etc).  Productive value is what gives money credibility. A productive private sector generates the domestic product and income that gives government liabilities credibility in the first place.  When that credibility is not there, then trust in the state’s currency can disappear fast, as we see in Venezuela or Zimbabwe, and even Turkey right now (I’ll come back to this in a future post).

To quote Cullen Roche again: “productive output MUST, by necessity, precede taxes.  In this sense it is proper to say that productive output drives money.  And if productive output collapses then there is no quantity of men with guns that can force people to pay taxes… So the important point here is that a government is indeed constrained in its spending. It is constrained by the quantity and quality of its private sector’s productive output. And the quantity and quality of income that the private sector can create is the amount of income that constrains the government’s ability to spend.”  This is Keynesian terminology: but if we alter the word ‘income’ or ‘output’ to ‘value’, we can get the point in Marxist terms.

Marx’s theory of money concurs with the endogenous approach in so far that it is the capitalist sector that creates the demand for money; to act a means of exchange and a store of value.  Banks make loans and create deposits, not vice versa.  Indeed, Marx’s theory of money is more consistently endogenous than MMT because it recognises the primacy of the capitalist accumulation process (with banks and markets) in deciding the value of money, not any ‘exogenous’ role of the state.  As Astarita puts it: “the fundamental difference between the Marxist approach to money and the Chartalist approach revolves around this single point. In Marx’s conception, money can only be understood as a social relation. In the Chartalist approach, it is an artifice in which essential social determinations are missing…..it “sweeps under the carpet” the centrality of productive work, and the exploitation of work, the true basis on which capitalist society is based.”

The state cannot establish at will the value of the money that is issued for the very simple reason is that, in a capitalist economy, it is not dominant and all-powerful.  Capitalist companies, banks and institutions rule and they make decisions on the basis of profit and profitability.  As a result, they endogenously drive the value of commodities and money. Marx’s law of value says value is anchored around the socially necessary labour time involved in the overall production of commodities (goods and services), ie by the average productivity of labour, the technologies and intensity of work.  The state cannot overcome or ignore this reality.

And it is reality.  Let me offer some simple empirical evidence (something MMTers do not do).  Government spending in modern economies, particularly the ones that dominate MMT thinking (they don’t have much to say on so-called emerging economies – but I’ll come back to that in the next post), like the US or the UK or the G7, is around 30-50% of GDP.  Government investment is only about 3-5% of GDP.  This compares with capitalist sector investment of 15-25%, while household spending varies between 55-70% of GDP.  The quantity of domestically held government bonds in the US is just 4% of private sector net worth.

I did a small empirical analysis of the relation between government expenditure and unemployment.  According to MMT, you would expect that the higher the ratio of government spending in an economy, the lower the unemployment.  Well, the evidence shows the opposite!  Government spending in France is over 55% of GDP, while it is 39% in Japan and 38% in the US.  But which of these three countries has the higher unemployment rate?  France 9%; Japan 2.4% and the US 4%. Most advanced capitalist economies with higher government spending ratios had higher unemployment rates.  This shows is that there are other reasons than the lack of state spending for the level of unemployment in capitalist economies.

So state issuance is hardly a key driving force of the economy and employment. Of course, MMT exponents sometimes argue that this is the problem – just expand government spending, particularly investment, fund it by ‘issuing money’ and then the state will exogenously overcome or bypass failing capitalist accumulation.  But this response immediately begs the question, studiously ignored by MMT, that it is the capitalist sector that runs modern economies, for better or worse, not state money.

Is it realistic for MMT to claim that the only reason modern economies have unemployment is because politicians do not adopt MMT and so let governments spend as much as necessary, backed by issuance of state-controlled money?  That is certainly not the view of Keynes or Marx.  Keynes reckoned unemployment emerged because of the lack of investment by capitalists; Marx said the same (although the reserve army of labour was the result of capital-bias in capitalist accumulation). The difference between Marx and Keynes was what causes changes in investment. Marx said profitability; Keynes said ‘animal spirits’ or ‘business confidence’.  Both saw the faultlines within capitalism: Keynes in the finance sector; Marx in capitalism as a whole.  In contrast, MMT reckons it is only the failure to allow the state to expand the issuance of money!

But perhaps the most telling critique of MMT is that, because it has no recognition of the capitalist sector in its circuit of money and only the state and ‘the non-state’, it can tell us nothing about why and how there are regular slumps in production and investment in modern economies.  On this issue, MMTers have the same position as orthodox Keynesians: that it may be due to a lack of ‘effective demand’ or ‘animal spirits’ and it is nothing to do with any contradictions in the capitalist mode of production itself.  But for MMTers this issue is irrelevant.  MMTers take the same view as orthodox Keynesian Paul Krugman, namely that it does not really matter what the cause of a depression is; the main thing is to get out of it with government spending – in the case of Krugman through judicious government spending through bond issuance; in the case of MMT by government spending financed by the issuance of money.

Call me old fashioned, but I think science works best by finding out what causes things to happen to better understand what actions can be usefully applied to prevent them (vaccination for diseases, for example).  Blindly hoping that government spending will do the trick is hardly scientific.  Indeed, much work has been done by Marxist economics to show that it is the faultlines in the profitability of capital that is the most compelling explanation of recurring crises, not lack of demand or even austerity in public spending.  And that implies action to replace completely the profit-making monetary economy.

The answer to unemployment or the end of crises does not lie in the simple recourse of issuing money, as MMT claims.  MMT relies on what Marx called “the tricks of circulation” – “the doctrine that proposes tricks of circulation as a way of, on the one hand, avoiding the violent character of these social changes and on the other, of making these changes appear not to be a presupposition but gradual result of these transformations in circulation”.

MMT claims that it has an endogenous theory of money, but in reality it has an exogenous one, based on state issuance of money.  It claims that government spending can be expanded to any level necessary to achieve full employment through money issuance, without any reference to the productive activity of the non-state economy, in particular the profitability of the capitalist sector.  Indeed, according to MMT, capitalism can be saved and achieve harmonious growth and full employment by ‘tricks of circulation’.  MMT ignores or hides the social relations of exploitation of labour for profit.  And by selling ‘snake oil’ (MMT) instead, it misleads the labour movement away from fundamental change.

Modern monetary theory – part 1: Chartalism and Marx

January 28, 2019

Modern monetary theory (MMT) has become flavour of the time among many leftist economic views in recent years.  The new left-wing Democrat Alexandria Ocasio-Cortez is apparently a supporter; and a leading MMT exponent recently discussed the theory and its policy implications with UK Labour’s left-wing economics and finance leader, John McDonnell.

MMT has some traction in the left as it appears to offer theoretical support for policies of fiscal spending funded by central bank money and running up budget deficits and public debt without fear of crises – and thus backing policies of government spending on infrastructure projects, job creation and industry in direct contrast to neoliberal mainstream policies of austerity and minimal government intervention.

So, in this post and in other posts to follow, I shall offer my view on the worth of MMT and its policy implications for the labour movement.  First, I’ll try and give broad outline to bring out the similarities and difference with Marx’s monetary theory.

MMT has its base in the ideas of what is called Chartalism.  Georg Friedrich Knapp, a German economist, coined the term Chartalism in his State Theory of Money, which was published in German in 1905 and translated into English in 1924. The name derives from the Latin charta, in the sense of a token or ticket. Chartalism argues that money originated with state attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt.

Chartalism argues that generalised commodity exchange historically only came into being after the state was able to create the need to use its sovereign currency by imposing taxes on the population. For the Chartalist, the ability of money to act as a unit of account for credit/debt depends fundamentally on trust in the sovereign or the power of the sovereign to impose its will on the population.  The use of money as a unit of account for debts/credits pre-dates the emergence of an economy based around the generalised exchange of commodities.  So Chartalism argues that money first arose as a unit of account out of debt and not out of exchange. Keynes was very much a fan of Chartalism, but it is clearly opposed to Marx’s view that money is analytically inconceivable without understanding commodity exchange.

Can the Chartalist/Modern Monetary Theory (MMT) and Marxist theory of money be made compatible or complementary or is one of them wrong? My short answers would be: 1) money predates capitalism but not because of the state; 2) yes, the state can create money but it does not control its price. So confidence in its money can disappear; and 3) a strict Chartalist position is not compatible with Marxist money theory, but MMT has complementary features.

Let me now try to expand those arguments.

Modern monetary theory and the Marxist theory of money are complementary in that both are endogenous theories of money. They both reject the quantity theory of money, namely that inflation or deflation is dependent on the decisions of central banks to pump in credit money or not. On the contrary, it is the demand for money that drives the supply: i.e. banks make loans and as a result deposits and debt are created to fund the loans, not vice versa. In that sense, both MMT and Marxist theory recognise that money is not a veil over the real economy, but that the modern (capitalist) economy is a monetary one through and through.

Both Marx and the MMT guys agree that the so-called quantity theory of money as expounded in the past by Chicago economist Milton Friedman and others, which dominated the policy of governments in the early 1980s, is wrong.  Governments and central banks cannot ameliorate the booms and slumps in capitalism by trying to control the money supply.   The dismal record of the current quantitative easing (QE) programmes adopted by major central banks to try and boost the economy confirms that.   Central bank balance sheets have rocketed since the crisis in 2008, but bank credit growth has not; and neither has real GDP growth.

But the Marxist theory of money makes an important distinction from the MMT guys.  Capitalism is a monetary economy. Capitalists start with money capital to invest in production and commodity capital, which in turn, through the expending of labour power (and its exploitation), eventually delivers new value that is realised in more money capital.  Thus the demand for money capital drives the demand for credit.  Banks create money or credit as part of this process of capitalist accumulation, but not as something that makes finance capital separate from capitalist production.  MMT/Chartalists argue that the demand for money is driven by the “animal spirits‟ of individual agents (Keynesian) or by the state needing credit (Chartalist). In contrast, the Marxist theory of money reckons that the demand for money and thus its price is ultimately set by the pace of accumulation of capital and capitalist consumption.

The theory and history of money

That raises the underlying issue between Modern Monetary Theory, its Chartalist origins and the Marxist theory of money. Marx’s theory of money is specific to capitalism as a mode of production while MMT and Chartalism is ahistorical. For Marx under capitalism money is the representation of value and thus of surplus value. In M-C-P-C’-M’, M can exchange with C because M represents C and M’ represents C’. Money could not make exchange possible if exchangeability were not already inherent in commodity production, if it were not a representation of socially necessary abstract labour and thus of value. In that sense, money does not arise in exchange but instead is the monetary representation of exchange value (MELT), or socially necessary labour time (SNLT).

Marx’s theory analyses the functions of money in a capitalist-commodity economy. It is a historically specific theory, not a general theory of money throughout history, nor a theory of money in pre-capitalist economies. So if it is true that money arose first in history as a unit of account for taxes and debt payments (as the Chartalists and Keynes argue), that would not contradict Marx’s theory of money in capitalism.

Anyway, I have considerable doubts that, historically, state debt was the reason for the appearance of money (I’ll return to that in a future post). David Graeber, the anarchist anthropologist, appears to argue this in his book, 5000 years of debt. But it does not wash well with me. Marx argues that money emerges naturally as commodity production is generalised. The state merely validates the money form – it doesn’t invent it.  Indeed, I think Graeber’s quote from Locke on p.340 in his book summarises the argument well. “Locke insisted that one can no more make a small piece of silver more by relabeling it a ‘shilling’ than one can make a short man taller by declaring there are now fifteen inches in a foot.”

In the classic statement of chartalism, Knapp argued that states have historically nominated the unit of account, and by demanding that taxes be paid in a particular form, ensured that this form would circulate as means of payment. Every taxpayer would have to get their hands on enough of the arbitrarily defined money and so would be embroiled in monetary exchange.  Joseph Schumpeter refuted this approach when he said: “Had Knapp merely asserted that the state may declare an object or warrant or token (bearing a sign) to be lawful money and that a proclamation to this effect that a certain pay-token or ticket will be accepted in discharge of taxes must go a long way toward imparting some value to that pay-token or ticket, he would have asserted a truth but a platitudinous one. Had he asserted that such action of the state will determine the value of that pay-token or ticket, he would have asserted an interesting but false proposition.” [History of Economic Analysis, 1954].  In other words, Chartalism is either obvious and right OR interesting and wrong.

Money as a commodity or out of thin air

Marx argued that money in capitalism has three main functions: as a measure of value, as a means of exchange, and “money as money” which includes debt payments. The function of measure of value follows from Marx’s labour theory of value and this is the main difference with the Chartalists/MMT, who (so far as I can tell) have no theory of value at all and thus no theory of surplus-value.

In effect, for MMT exponents, value is ignored for the primacy of money in social and economic relations.  Take this explanation by one supporter of MMT of its relation to Marx’s value theory: “Money is not a mere “expression” or “representation” of aggregate private value creation. Instead, MMT supposes that money’s fiscal backbone and macro-economic cascade together actualize a shared material horizon of production and distribution…Like Marxism, MMT grounds value in the construction and maintenance of a collective material reality. It accordingly rejects neoclassical utility theory, which roots value in the play of individual preferences. Only, in contrast to Marxism, MMT argues that the production of value is conditioned by money’s abstract fiscal capacity and the hierarchy of mediation it supports. MMT hardly dismisses the pull of physical gravitation on human reality. Rather, it implicitly de-prioritizes gravity’s causality in political and economic processes, showing how the ideal conditions the real via money’s distributed pyramidal structure.”

If you can work through this scholastic jargon, I think you can take this to mean that MMT differs from Marx’s theory of money by saying that money is not tied to any law of value that drags it into place like ‘gravity’ but has the freedom to expand and indeed change value itself.  Money is the primary causal force on value, not vice versa!

In my view, this is nonsense.  It echoes the ideas of French socialist Pierre Proudhon in the 1840s who argued that what was wrong with capitalism was the monetary system itself, not the exploitation of labour and the capitalist mode of production. Here is what Marx had to say about Proudhon’s view in his Chapter on Money in the Grundrisse: “can the existing relations of production and the relations of distribution which correspond to them be revolutionised by a change in the instrument of circulation?” For Marx, “the doctrine that proposes tricks of circulation as a way of , on the one hand, avoiding the violent character of these social changes and on the other, of making these changes appear not to be a presupposition but gradual result of these transformations in circulation” would be a fundamental error and misunderstanding of the reality of capitalism.

In other words, separating money from value and indeed making money the primary force for change in capitalism fails to recognise the reality of social relations under capitalism and production for profit. Without a theory of value, the MMTers enter a fictitious economic world, where the state can issue debt and have it converted into credits on the state account by a central bank at will and with no limit or repercussions in the real world of productive capital, although it is never as simple as it seems.

For Marx, money makes money through the exploitation of labour in the capitalist production process.  The new value created is embodied in commodities for sale; the value realised is represented by an amount of money. Marx started his theory of money as a commodity like gold or silver, whose value could be exchanged with other commodities. So the price or value of gold anchored the monetary value of all commodities. But, if the value or price of gold changed because of a change in the labour time taken for gold production, then so did the value of money as priced in other commodities. A sharp fall in gold’s production time and thus a fall in its value would lead to a sharp rise in the prices of other commodities (Spain’s gold from Latin America in the 16th century) – and vice versa.

The next stage in the nature of money was the use of paper or fiat currencies fixed to the price of gold, the gold exchange standard and then finally to the stage of fiat currencies or ‘credit money’. But, contrary to the view of MMT or the Chartalists, this does not change the role or nature of money in a capitalist economy. Its value is still tied to the SNLT in capitalist accumulation. In other words, commodity money has/contains value while non-commodity money represents/reflects value, and because of this both can measure the value of any other commodities and express it in price-form.

Modern states are clearly crucial to the reproduction of money and the system in which it circulates. But their power over money is quite limited – and as Schumpeter said (and Marx would have said), the limits are clearest in determining the value of money. The mint can print any numbers on its bills and coins, but cannot decide what those numbers refer to. That is determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms.

This makes the value of state-backed money unstable. Actually, this is acknowledged by the Chartalist theory. According to it, the main mechanism by which the state provides value to fiat money is by imposing tax liabilities on its citizenry and proclaiming that it will accept only a certain thing (whatever that may be) as money to settle those tax liabilities. But Randall Wray, one of most active writers in this tradition, admits that if the tax system breaks down “the value of money would quickly fall toward zero.”  Indeed, when the creditworthiness of the state is seriously questioned, the value of national currencies collapse and demand shifts to real commodities such as gold as a genuine hoard for storing value. The gold price skyrocketed with the start of the current financial crisis in 2007 and another rise of larger scale was propelled in early 2010 when the debt crisis of the southern Euro countries aggravated the situation.

The policy conclusions

I often hear various MMTers saying that “money can be created out of nothing‟. ‘Bank money does not exist as a result of economic activity. Instead, bank money creates economic activity.’ Or this: ‘The money for a bank loan does not exist until we, the customers, apply for credit.’ (Ann Pettifor).  The short reply to this slogan is that “yes, the state can create money, but it cannot set its price”, or value. The price of money will eventually be decided by the movement of capital as fixed by socially necessary labour time.  If a central bank ‘prints’ money or deposits credits with the state accounts, that gives the state the money it needs to launch programmes for jobs, infrastructure etc without taxation or issuing bonds. This is the policy conclusion of the MMT. It is the ‘way out’ of the capitalist crisis caused by a slump in private sector production.

The MMT and Chartalists propose that private sector investment is replaced or added to by government investment ‘paid for’ by the ‘creation of money out of thin air’. But this money will lose its value if it does not bear any relation to value created by the productive sectors of the capitalist economy, which determine the SNLT and still dominate the economy. Instead, the result will be rising prices and/or falling profitability that will eventually choke off production in the private sector. Unless the MMT proponents are then prepared to move to a Marxist policy conclusion: namely the appropriation of the finance sector and the ‘commanding heights’ of the productive sector through public ownership and a plan of production, thus curbing or ending the law of value in the economy, the policy of government spending through unlimited money creation will fail.  As far as I can tell, MMT exponents studiously avoid and ignore such a policy conclusion – perhaps because like Proudhon they misunderstand the reality of capitalism, preferring ‘tricks of circulation’; or perhaps because they actually oppose the abolition of the capitalist mode of production.

Of course, none of this has been tested in real life, as MMT policy has never been implemented (nor for that matter, has Marxist policy in a modern economy).  So we don’t know if inflation would explode from creating money indefinitely to fund investment programmes. MMT people say ‘monetising the deficit’ would be ended once full employment is reached. But that begs the question of whether the private sector in an economy can be subjected to the fine manipulation of central bank and state policy. History has shown that it is not and there is no way governments can control the capitalist production process and prices of production ‟in such a finely managed” way.

Even leading MMT man Bill Mitchell is aware of this risk. As he put it in his blog, “Think about an economy that is returning from a recession and growing strongly. Budget deficits could still be expanding in this situation, which would make them obviously pro-cyclical, but we would still conclude the fiscal strategy was sound because the growth in net public spending was driving growth and the economy towards full employment. Even when non-government spending growth is positive, budget deficits are appropriate if they are supporting the move towards full employment. However, once the economy reached full employment, it would be inappropriate for the government to push nominal aggregate demand more by expanding discretionary spending, as it would risk inflation.” (my emphasis).

It seems that MMT eventually just boils down to offering a theory to justify unrestricted government spending to sustain and/or restore full employment. That’s its task, no other. This is why it attracts support in the left of the labour movement.  But this apparent virtue of MMT hides its much greater vice as an obstacle for real change.  MMT says nothing about why there are convulsions in capitalist accumulation, except that the state can reduce or avoid cycles of boom and slump by a judicious use of government spending within a capitalist-dominated accumulation process. So it has no policy for radical change in the social structure.

The Marxist explanation is the most comprehensive as it integrates money and credit into the capitalist mode of production but also shows that money is not the decisive flaw in the capitalist mode of production and that sorting out finance is not enough.  Thus it can explain why the Keynesian solutions do not work either to sustain economic prosperity.

In future posts. I’ll look more closely at the history of money and monetary theory; and at the international implications of MMT, particularly in the so-called emerging economies.

From amber to red?

January 15, 2019

Today’s news that the German economy, the powerhouse of Europe, had narrowly avoided a ‘technical recession’ in the second half of 2018 is another red light flashing for the world economy.  In 2018, German real GDP growth was 1.5% down from 2.2% in 2017.  This was the weakest growth rate in five years  And in the second half of last year, the growth was slowing fast, up only 1.1% yoy compared to 2% in Q2 2018.  It fell 0.2% in Q2 over Q1 and rose just 0.3% in Q3.

As for Germany’s industrial sector, that clearly is in recession. Industrial production in Germany decreased 4.7% in November of 2018 over the same month in the previous year.

German companies have been hit by poorer sales from a world economic slowdown and political uncertainty surrounding Brexit and the trade war between the US and China. The UK, US and China are all among German makers’ biggest markets.

The collapse is particularly noticeable in the very important auto sector, where the global slowdown, sharp drops in demand and the restrictions on diesel car emissions have destroyed the auto sector globally.  Passenger vehicle sales in China, the world’s largest car market, fell for the first time last year since the early 1990s, down 4.1%.  Sales in December were down 15.8 per cent from the same month last year, the steepest monthly fall in more than six years and the sixth consecutive month of declining sales.

Germany has dragged down industrial production in the Euro Area.  It fell 3.3% year-on-year in November.  It is the first annual fall in industrial output since January of 2017 and the biggest since November of 2012.

Indeed, the German experience is being followed in varying degrees across the globe, at least in the major economies.  The global PMI, the key business activity indicator, shows a slowing down. The level of activity is still above 50 (and therefore indicates expansion) and is not yet down to the recession depths of 2012 or 2016, but it is on its way.

And the global PMI for ‘new orders’ shows a slowdown in both manufacturing and services globally.

And among the so-called ‘emerging economies’, emergence is being replaced by submergence.  Real GDP in Latin America as a whole is contracting on annualised basis, according to investment bank JP Morgan.

Among the so-called BRICS (the major emerging economies), China’s industrial production slowed in November to 5.4% yoy, the smallest rate since the mini-recession of early 2016. Industrial production in Brazil contracted 0.9% in November, while Russia’s industrial production slowed to 2.4% yoy from 3.7% in October. Russian manufacturing output stopped growing altogether. Manufacturing output growth in South Africa slowed to 1.6% November from 2.8% in October. Even the fastest-growing major economy in the world, India, took a hit. India’s industrial production growth slowed sharply to 0.5% yoy in November, the smallest gain since June 2017 and manufacturing output actually fell 0.4%.

My post outlining an economic forecast in 2019 offered several different short-term indicators for the direction of the world economy.

The first was credit and the so-called ‘inverted yield curve’ ie the difference in the interest rate received for buying 10yr US government bonds and 2yr government bonds.  In a ‘normal’ situation, the interest rate earned for holding a longer term bond will be higher because the bond purchaser cannot get the bond back for ten years and there is higher risk from changes in inflation or default compared to a bond held over two years.  But on some rare occasions, the interest rate on two-year bonds can go higher than on ten-year ones.  This is because the interest rate is being driven up by hikes in the central bank rate and/or because investors are fearful of a recession, so they want to hold as much government paper as possible.  They sell their stocks and buy bonds.  Every time the yield curve inverts, an economic recession in the US at least follows within a year or so.

Well, investors have been selling stocks and the stock market has dived.  But we still don’t have an inverted yield curve yet, partly because the Federal Reserve appears to have decided not to raise its policy rate so quickly any more – precisely because it does not want to provoke a recession when the world is slowing down.

The second indicator is the price of copper.  As copper enters much of the components of industrial output, its price can be a good short-term gauge of the strength of economic activity globally.  Well, the copper price is down from its peak in 2017 but still not at levels seen in the mini-recession of early 2016.

The most important indicator in my view is the movement of profits for the capitalist sector of the major economies.  This drives investment and employment and thus incomes and spending.  But it is not possible to get such a high frequency measure – indeed most profit reports are quarterly at best.  Goldman Sachs, the investment bankers have made some forecasts, however for this year.  Their economists conclude that “In terms of profits, we do expect a sharp slowdown. In every region we expect profit growth to be below the current bottom-up consensus, and to be around 5% in 2019. In the case of the US, in particular, this would represent a very sharp slowdown from the 22% EPS growth expected for 2018.”  They ‘benchmark’ this profit forecast against their measure of ‘growth momentum’ and find that it “implies a further sharp deterioration in growth.”  But not yet a recession forecast.

These indicators all suggest a sharp slowdown in global growth, particularly in manufacturing and industry.  The US yield curve is close to inversion but not yet inverted; the copper price is down but not yet at lows; and global profits growth has slowed but is not yet falling.  So the amber light for a global slump in 2019 has still not turned red – yet.

ASSA 2019 part 2 – the radical: profitability, growth and crises

January 8, 2019

While hundreds attend the big meetings of the mainstream sessions at the annual meeting of the American Economics Association (ASSA 2019), only tens go to the sessions of the radical and heterodox wing of economics.  And even that is thanks to the efforts of the Union of Radical Political Economics (URPE), which celebrated its 50th year in 2018 that even these sessions take place.  URPE provides an umbrella and platform for radical, heterodox and Marxian analysis.  But it is also true that the AEA has included URPE (and other evolutionary and institutional economics associations) in its annual sessions – a mainstream concession not offered by economic associations in the UK or continental Europe.

This year the keynote address within the URPE sessions was the David Gordon Memorial Lecture by Professor Anwar Shaikh of the New School of Social Research in New York.  Anwar Shaikh has made an enormous contribution to radical political economy over more than 40 years, with the body of his work compiled in his monumental book, Capitalism, competition, conflict, crises, published in 2016.

Shaikh’s presentation was entitled Social Structure and Macrodynamics, which was an envelope for discussing the differences between mainstream economics (both micro and macro) and radical (Marxist?) political economy – and the resultant policy solutions offered to avoid and/or restore capitalist economies in crisis.  Shaikh argued that political economists must recognise the social structure of capitalism, including the reality of imperialism – something denied or ignored by the mainstream.  Instead of looking at the social structure of economies, the mainstream deliberately locks itself into the arcane and unrealistic world of ”free markets’’ and such things as game theory.

On crises, Shaikh delineated orthodox or mainstream theory as arguing that ‘austerity’ ie cuts in public spending and wage restraint was necessary to restore an economy in a slump, painful as it might be.  Heterodox (radical Keynesian) theory opposed this and imagined that spending through monetary and fiscal stimulus could restore growth to the benefit of both capital and labour.  Both sides ignored the social structure of capitalism, in particular that it is a system of production for the profit of the owners of capital.  Shaikh put it: “The truth is that successful stimulus requires attention to both effective demand and profitability”.

Those who read my blog regularly know that I would go further or indeed put it differently.   Capitalist economies go into slumps because of a collapse in profits and investment and this leads to a collapse in “effective demand”, not vice versa as the Keynesians (in whatever species) would have it.  So a restoration of profitability is necessary to restore growth under capitalism- this is what I (and G Carchedi) have called the Marxist multiplier compared to the Keynesian multiplier.

What is wrong with Keynesian theory and thus policy is that it denies this determinant role of profitability.  Indeed, in a way, the neoclassical mainstream has a point – that it is necessary (rational?) to drive down wages, weaken labour through unemployment and reduce the burden of the state on capital to revive profits and the economy. Of course, the mainstream cannot explain crises; often deny they can happen; and have no policy for recovery except to make labour pay.

The debate continues between the two wings of mainstream economics over fiscal and monetary stimulus.  Former chief economist of the IMF, Olivier Blanchard was the outgoing President of the AEA and in his address at ASSA 2019 he argued that, because yields on bonds were so low now, the interest cost of debt was very low; and so governments can run up budget deficits (ie reverse austerity) without causing a problem.

This view was echoed by that arch Keynesian policy exponent, Larry Summers in a recent article warning of an upcoming slump and the need for governments to provide counter cyclical infrastructure spending to avoid it.  “Fiscal policymakers should realise the very low real yield on government bonds is a signal that more debt can be absorbed. It is not too soon to begin plans to launch large-scale infrastructure projects if a downturn comes.”

Blanchard and Summers’ support for fiscal stimulus was attacked by the austerity exponents like Kenneth Rogoff (the controversial debt crisis history expert) who responded that fiscal stimulus a la Keynes is and would ineffective in avoiding a crisis: “those who think fiscal policy alone will save the day are stupefyingly naive…. Over-reliance on countercyclical fiscal policy will not work any better in this century than in it did in the last.

And so the debate within the mainstream goes on, blithely (or deliberately?) ignoring the social structure of macrodynamics (as Shaikh put it), namely that capitalism is a ‘money-making’ mode of production for owners of capital and so profitability not demand (or even debt) is what counts for the health or otherwise of economies.

So what has happened to the profitability of capital since the end of the Great Recession in 2009?  Two papers in the URPE sessions considered this.  David Kotz, the well-known Marxist economist from University of Massachusetts, Amherst, looked at the Rate of Profit, Aggregate Demand and Long Term Economic Expansion in the US since 2009.  Kotz (therateofprofitaggregatedemandan_preview) noted, as many others have, including myself in my book, The Long Depression, that the US recovery since 2009 has been the weakest since the 1940s.  Indeed, the last ten years are better considered as ‘persistent stagnation’.

Kotz made the point that the onset of recession in the US economy in the period since World War II has always been preceded by a decline in the rate of profit.  After a sharp drop in 2009, the profit rate recovered through 2012-13. It then declined from 2013 through 2016, then rose slightly in 2017. Kotz asked the question: why was the three-year decline in the profit rate not followed by a recession? His tentative conclusion was that “a likely explanation is that the profit rate remained relatively high after 2013 compared to past experience in the neoliberal era.”  I would argue differently: the modest fall in profitability from 2014-2016 was actually accompanied by a mini-recession, as I have shown.  Indeed, fixed investment plummeted in 2016 to near zero, as Kotz also shows.  So the connect between profits and investment and growth is still there.

Kotz does not think that the 2008 recession was the “consequence of a falling profit rate but rather was set off by a deflating real estate bubble and severe financial crisis”.  It may have been “set off”, but was that underlying cause?  There is no space to deal with this old argument about the Great Recession.  I can only refer you to these papers here – and my new book, World in Crisis.

Even though the rate of accumulation followed the movement in profitability after 2009, it remained low compared to its pre-recession level.

As Kotz says, this is a good explanation of why US productivity growth was also poor in the long depression or stagnation since 2009.  Kotz’s stats also reveal that the major contribution to the recovery after the end of the Great Recession was business investment, contributing 53.3% of GDP growth, almost as large as the 61.8% contribution from consumer spending growth, even though the latter constitutes 60-70% of GDP and business investment only 10-15%.  After 2013, consumer spending became more important as investment tailed off, leading to the mini-recession of 2014-16.

Kotz wants to distinguish the period of 1948-79 as one of ‘regulated capitalism’ and the period 1979-2017 as the ‘neoliberal era’, by showing that investment spending growth was much higher than consumption spending growth in the first period and lower in the second period. This leads him to conclude that “neoliberal capitalism is stuck in its structural crisis phase, a condition that can be overcome within capitalism only by the construction of a new institutional form of capitalism. However, there is no sign yet of the emergence of a viable new institutional structure for U.S. capitalism.”

But I don’t think that flows from Kotz’s data.  Actually in the neo-liberal period, both investment and consumer spending growth slowed and so did growth.  The swing factor was investment growth, which halved, while consumer spending fell only 20%.  Professor Kotz may not agree but I think his analysis tells us is that business investment is still the driver of growth under capitalism, while consumption is the dependent variable in aggregate demand.  It’s the same story in the neoliberal period as in the ‘regulated period’. What happens to profitability and investment is thus the crucial indicator of the future, not the emergence of any ‘new institutional structure’.

In this light, there was a revealing paper presented by Erdogan Bakir of Bucknell University and Al Campbell of the University of Utah.  They looked at the before-tax profit rate of US capital, unlike Kotz who looked at the after-tax rate of non-financial companies.  Bakir and Campbell conclude that the before tax rate is “a good predictive of cyclical downturn in the U.S. economy.”  In a typical business cycle, profit rate peaks at a certain stage of the business cycle expansion and then starts to decline while economic growth continues. This initial decline in the profit rate during what they call the “late expansion phase of the business cycle” becomes a reliably good predictor of cyclical contraction.  This very much matches my own view of profit cycle under capitalism.  Unfortunately, I don’t have the details of this paper to hand, so I’ll have review its conclusions another time.

The gap between the levels of profitability and investment since 2000 in several major capitalist economies have been subject of much debate.  In the past, it has revolved round the view that profits and investment are not connected causally and investment is driven by other factors ie demand or animal spirits a la Keynes or financialisation, where investment is going into financial speculation and away from productive investment (see here).

More recently, this ‘puzzle’ has centred on the measurement of investment – in particular, that investment increasingly takes the form of ‘intangibles’ (brand names, trademarks, copyrights, patents etc in ‘’intellectual property’.  Ozgur Orhangazi at Kadir Has University took this up in another paper
(revisitingtheinvestmentprofitpuzzle_preview).
He presents the usual facts showing the gap between profitability and tangible investment. He argues that this gap can be explained by missing intangible investments. Intellectual property as a share of capital stock has doubled since the 1980s.

However, I note from his graph that, in the period of the 2000s, this share did not move very much and yet this is the period of the apparent ‘puzzle’.  Orhangazi draws lots of conclusions from his analysis which I shall leave the reader of his paper to consider but the key one is, as he says “All in all, these findings are in line with the suggestion that the increased use of intangible assets enables firms to have high profitability without a corresponding increase in investment.”  If this is correct it suggests, post-2009, that the causal connection between profits and tangible investment has weakened and that capitalism is actually doing ok and investing well (in intangibles) and just does not need so much profit to expand. That begs the question on whether ‘intangibles’ like ”goodwill’’ are really value-creating.

But is this argument of mismeasurement factually correct? In his AEA presidential address, Olivier Blanchard also looked at US profitability.  Like Marxist analyses of US (pre-tax) profitability, he noted that there was a big fall from the 1960s to the late 1970s and a stabilisation afterwards.

Blanchard noted that the ‘market value’ of firms had doubled compared to the stock of tangible capital invested (Tobin’s Q) since the 1980s.  But he dismisses the argument of mismeasurement of investment in intangibles to explain this:  “A number of researchers have explored this hypothesis, and their conclusion is that, even if the adjustment already made by the Bureau of Economic Analysis is insufficient, intangible capital would have to be implausibly large to reconcile the evolution of the two series: Measured intangible capital as a share of capital has increased from 6% in 1980 to 15% today. Suppose it had in fact increased by 25%. This would only lead to a 10% increase in measured capital, far from enough to explain the divergent evolutions of the two series.”

Blanchard says the ‘puzzle’ is more likely due to monopoly rents.  My own explanation and critique of these explanations can be found here.  But the essential point for explaining slumps in capitalism and predicting new ones is intact, in my view,: it depends on the relation between profitability and capitalist (productive) investment that leads to new value.

I have not got the space to deal with all the other interesting papers in the URPE sessions.  They include an analysis by Margarita Olivera of the Federal University of Brazil of the obstacles to industrial development in Latin America posed by trans-national companies and the new free trade agreements like TPP.  Eugenia Correa of UNAM and Wesley Marshall of UAM Mexico analysed the new counter-revolution in economic policy ahead as right-wing governments take over in Argentina, Brazil and Ecuador.  And again, I shall have to neglect an analysis of China’s industrial development provided by Hao Qi of Renmin University (semiproletarianizationinatwosector_preview).

There were also several papers from a post-Keynesian perspective with Michalis Nikioforos of the Levy Institute presenting the usual wage-led, profit-led theory of crises. Daniele Tavani and Luke Petach of Colorado State University presented an insightful alternative to the explanation by Thomas Piketty of rising inequality of wealth and income based on the switch to neo-liberal policies in the 1980s driving down the share of labour, not Piketty’s neoclassical marginal productivity argument (incomesharessecularstagnationand_preview).  And Lela Davis, Joao Paulo, and Gonzalo Hernandez presented a paper that showed financial fragility was to be found in smaller new firms entering and exiting – this was the weak link in the debt story for capital (theevolutionoffinancialfragilitya_preview).

Finally, there were several papers on developments in international finance.  Ingrid Kvangravenof the University of York looked at changing views on the beneficial role of international finance for capitalism; Carolina Alves of Girton College, Cambridge reckoned that ‘financial globalisation’’ and neoliberal policies have led the economic strategy of international institutions to drop fiscal stimulus policy and Keynesian-style intervention for monetary management.  Devika Dutt from Amherst reckoned that international reserve accumulation particularly in so-called emerging economies encourages volatile capital inflows that make those economies vulnerable to financial crises (canreserveaccumulationbecounterprodu_powerpoint).

To sum up ASSA 2019.  The mainstream still avoids explaining the global financial crash and the Great Recession, ten years since it ended.  So it is still confused about what economic policies would avoid a new slump; are they monetary, ‘macro-prudential’ or fiscal?  This is because it denies the social structure of capitalism, namely that is a mode of production for profit to the owners of capital who are engaged in a class struggle to extract value from labour.  The irreconcilable contradiction between profitability and growth over time was at the core of Marx’s insight as the underlying cause of regular recurring and unavoidable crises of capitalism.  This is what the mainstream does not accept and where radical political economy comes up front.

ASSA 2019 part one – the mainstream: avoiding recessions

January 7, 2019

Past annual conferences of the American Economics Association have had some dominant themes: rising inequality, slowing productivity and secular stagnation.  But in 2018 and in the 2019 conferences, the focus switched – at least among the mainstream economic stream that overwhelmingly dominate ASSA – to whether there will be a new recession in the US and globally, which could be perhaps triggered by a trade war between the US and its main economic rival China. At ASSA 2019, the big issue was whether mainstream economics had learnt the right lessons from the debacle of the Great Recession; and what monetary and fiscal policies of stimulus are best to avoid another slump or at least get out of one quickly?

Of course, there were way more subjects discussed by the 13,000 participants attending the Atlanta Georgia ASSA 2019.  In the hundreds of papers and panels presented, there were some important longer term themes debated, in particular, the impact on jobs of robots and AI, whether China would become the leading economic power in the 21st century or was heading for a fall; and a continual subject for economists, namely whether the assumptions of mainstream economic theory bore any relation to reality.

In this review, I cannot possible cover all the issues, facts and fallacies presented.  So let me first concentrate on the headline panel discussions where the leading economic policy officials and economic gurus spoke.  On Friday, there was a heavily publicised and TV broadcast session with the current Federal Reserve chair Jay Powell and the two previous chairs, Janet Yellen (under Obama) and Ben Bernanke (under Bush).

The pronouncements of Jay Powell that the Fed was going to be cautious about pursuing further interest rate increases in 2019 and would look at the data rallied the stock markets where investors are clearly worried that global growth is slowing and further hikes by the Fed could provoke a recession.  But the overall line of the Fed chairs was that the US economy was looking good, there would be no recession and measures to avoid a new financial crash, while not fully perfect, were much better than back in 2007.

But when asked about what the economics profession needed to do, Janet Yellen said that the profession failed to see the global financial crash and the Great Recession coming. So now more research is needed on “systemic risk” (ie financial collapse). Jay Powell admitted that the Fed still did not have all the “tools” to avoid credit crashes in non-bank areas. And Bernanke was worried about rising inequality which he could not explain.

It seems that mainstream economics is putting its faith in what it calls macroprudential policies to avoid or mitigate future crises ie reducing risks of instability in the finance sector, where the last crisis is supposed to have originated. As Kristin Forbes of MIT put it: “Macroprudential regulations currently focus on where the last set of vulnerabilities arose, especially in banks and mortgage markets. These are critically important, but the next crisis could start in other sectors. In fact, the success of existing regulations in reducing the risks in banks could be contributing to the build-up of vulnerabilities elsewhere, such as by shifting exposures to currency and liquidity risk to the corporate sector and shadow financial system—sectors about which regulators have less information and where entities may be less prepared to handle surprises. Macroprudential policy has made impressive progress and significantly reduced the probability of another crisis unfolding in the banking system as it did in 2008. Macroprudential policy still has some way to go, however, to ensure that there is not another crisis and economists are not asked again by a future monarch: “Why did no one see it coming?”
(macroprudentialpolicywhatweknowdo_preview). Indeed. See here for my view on whether regulation of the finance sector will do the trick next time.

As for the current state of the economy, in another session, President Trump’s top economic adviser, Kevin Hassett, made what one observer called “a victory lap” over what he considered were the successful corporate and personal tax cuts and reductions in repatriating profits enshrined in the so-called flagship Taxes Consolidation Act (TCA).  Hassett claimed that his model that supported the large reduction in the corporate tax rate and predicted a sharp jump in business investment and economic growth as a result had been vindicated.

Hassett said the model predicted a substantial jump in business investment and a rise in the US growth rate by up to 1.4% pts in a year. With US real GDP hitting 3% in 2018, he had been proved right.  Interestingly, this showed that the trend growth rate of the US since the end of the Great Recession was just 1.6%, the lowest rate of expansion of any ‘recovery’ after a slump since the 1930s.

Hassett had to admit that his model was ‘ceteris paribus’ and there could be other factors that caused an acceleration in US growth from 2017 through 2018.  I can think of a few: heavy investment in energy sectors as oil prices rose; a pick-up in growth in Europe and Asia.  But it’s certainly true that the tax cut dramatically raised profits for US business (after tax profits were up 20% yoy in Q3 2018) and that has had an effect on getting business investment rising.  But most of the increased profit has been used by companies to buy back their own shares and raise dividends, leading to the stock market boom in 2017 and most of 2018.

The other counter to Hassett’s boasting is that the corporate tax cut is really a one-off and its apparent effect will dissipate as we go into this year.  According to two right-wing economic scholars, Robert Barro and Jason Furman of Harvard, in their paper, the tax cut could raise growth by 0.9% from trend in 2019 (taking growth to 2.5%).  But the long-term impact of the tax cut, if sustained for ten years would be to add a cumulative 0.4-1.2% to real GDP or just 0.04-0.13% a year!  But that boost would be cut if interest rates rose during that period.

Hassett was keen to argue that the poorest American workers would gain the most from the tax cuts. He put up a graph to show that there had been faster wage growth for low-paid workers.

The faster growth of the bottom 10% of wage workers was very slight however compared to the top 10% (and the latter’s wages are way larger!).  Moreover, back in 2013, the bottom 10% had bigger nominal wage increases than the top 10% when there was no special tax cut.  A more likely reason for the small acceleration in the wage growth of the bottom 10% was the recent hike in the federal minimum wage and the success of labour in some areas in raising the ‘living wage’.

Do corporate and personal tax cuts really boost economic growth?  Think of it the other way round: would higher taxes on the top 1% damage growth?  When left-wing Democrat Alexandria Ocasio-Cortez recently called for a 70% top rate of income tax for those ‘earning’ above $10m a year in the US, she was attacked for damaging growth.  Keynesian guru Paul Krugman rushed to her defence.  He claimed with this graph (below) that there was no correlation between a high personal tax rate and economic growth.  On the contrary, as the top marginal rate was cut over the decades, average economic growth slowed.

Clearly there is no long-term correlation because there are many factors in between the tax rate on income and the creation of that income from work or other sources.  Higher profits can mean that higher tax rates can be absorbed.  But when profitability falls then capitalist policy goes in the direction of cutting taxes on the rich (among other neo-liberal measures) to sustain profits and income for capital to invest and spend.  The real correlation is between profits and investment and investment and growth, the Marxist multiplier.  Indeed, that is what Hassett’s model shows.  When corporate taxes are cut, it provides a short-term boost to profits and thus to business investment and economic growth. But that does not last (as Barro and Furman show (macroeconomiceffectsofthe2017taxre_preview) and cannot reverse indefinitely any tendency in the capitalist accumulation for profitability and profits to fall.

Previous ASSA conferences had observed that the great period of globalisation: (rising world trade and capital flows) had ended with the Great Recession and ensuing Long Depression or slowdown since 2009. But in ASSA 2019, the big name headline speakers were concerned to talk about the end of globalisation slipping into outright trade war given the tit-for-tat trade tariff hikes already begun by the US and China during 2018.

A panel chaired by the IMF deputy director David Lipton were generally concerned that a trade war would be ‘disruptive’ to jobs in both the US and China. But as Jay Shambaugh at the Brookings Institution said, so was globalisation.  Yipian Huang from Peking University appeared optimistic that the US-China trade war would be avoided and things would improve (maybe that’s the Chinese leadership line).  Adam Posen, head of the Peterson Institute, was convinced that the trade war had been started by the US as a deliberate policy to isolate and weaken China.  And it could morph into a serious divergence bringing fragmentation to a previously US-dominated world.  For my view on that see here.

There were many papers at ASSA 2019 on China, its current situation and its future. US economists are putting a lot of effort into estimating where China is going, no doubt hoping they can find faultlines. I counted well over 70 papers on China, both from the mainstream and the radical. I cannot review these this post, however. I’ll be doing a a deeper analysis of China’s future development as a conference paper later this year.

But the theme that was highlighted most at ASSA 2019 is the impact of robots and AI on future productivity and jobs.  David Autor of MIT delivered the Richard Ely lecture called Work of the Past, Work of the Future .

Autor takes the view that robots and Ai are generally jobs creating and will not necessarily increase inequality of wealth and income in society.  He reckons that “it is great time to be young and educated” but not a clear “land of opportunity for non-college adults in the US.” One big problem is that young people are leaving the rural areas and moving to the cities to get qualifications and then staying there.  In the cities there are high wage, high education jobs that are less vulnerable to robots, but there are large numbers of jobs requiring less qualifications and mainly held by women that are vulnerable.  And the new jobs that will be created by the new technology displacing the old less qualified jobs constitute only 13% of total labour hours worked (see pix below).

Low skilled jobs that pay poorly like ‘gift wrappers’, baristas, marriage counsellors, wine waiters etc in leisure and care sectors are increasing but ‘mid-skill’ jobs are “falling off a cliff”.  Middle-skill work in cities has been hollowed out since 1980. Non-college educated workers have been pushed to do low-skill work in cities. In the 1950s, people living in cities were on average five years older than those in rural areas; now they are six years younger.  The rural areas and small towns are dying.

In another paper, Daron Acemoglu, MIT and Pascual Restrepo, Boston University reckoned that the aging population of the US and other countries will be the major contributor to automation
(automationandnewtaskstheimplicatio_preview).
It’s why older nations like Germany and Japan are on the forefront of replacing workers with robots.  It will soon be a driver in China where the population is about to peak at 1.44bn in 2029 and decline steadily afterwards as the population gets older.  Acemoglu and Restrepo took a balanced view of the future with automation.  capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect.  This reduces the share of labour in value-added.  But the effects of automation counterbalanced by the creation of new tasks in which labor has a comparative advantage: the reinstatement effect.  The slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, and a weaker reinstatement effect, and slower growth of productivity than in previous decades.”  They leave open the question of which way it will go from here.

In another paper (recentunitedstateseconomicperformanc_preview) in this session, Dale Jorgenson, Mun Ho and Jon project long-term growth of only 1.8% per year for US GDP growth, derived from a 0.50 pts of hours growth (more labour), 0.45 points from TFP (robots), 0.76 points from capital deepening (investment), and only 0.12 pts from labor quality (more skill). So as robots take over, education will matter less and less!  Interestingly, Robert J Gordon, the arch pessimist in the past on US productivity growth in 21st century took a more optimistic view for the near future in his paper
(prospectsforaproductivitygrowthrevi_preview).

So will robots, AI and automation mean less jobs or more?  The answer of the mainstream experts seems to be that there will be less jobs in the middle (manufacturing and clerical), some more jobs for a future workforce in new sectors but many more poorly paid jobs in sectors like leisure services and social care.  My own view is outlined here. Automation can create new jobs and income and destroy it. The balance will depend on the trend of profitability in an economy; if profitability is rising, companies will expand investment and production in new sectors to compensate for labour-shedding in other areas – and vice versa.

The issues of poverty and inequality that have dominated previous ASSA meetings have not disappeared. Bruce Meyer at the University of Chicago analysed US poverty and inequality of income over the last two decades.  He suggested that poverty and inequality was not as bad as researchers like Thomas Piketty and Gabriel Zucman have claimed because they have underreported transfer incomes from various US ‘safety nets’ in housing and medicare.

Indeed an argument over measuring the data has broken out between Davids Auten and Splinter
top1incomesharescomparingestimate_preview)
and the Piketty researchers. Auten and Splinter reckon that Piketty’s tax return based measures are biased. Correcting for this bias reduces the increase in top 1% income shares by two-thirds! Further, accounting for government transfers reduces the increase over 80%! However, in another session, Zucman questioned the assumptions and methods used by Auter and Splinter.

Pascal Paul at the Federal Reserve Bank of San Francisco presented empirical evidence for the view that rising and extreme inequality of income plus low productivity growth are harbingers of financial crises (historicalpatternsofinequalityandpr_preview).  But, as he said, he only shows evidence of high correlation not a causal connection.  I remain sceptical that financial crises are caused by high inequality and low productivity – if anything it is the other way round.

Finally, there was an inconclusive debate about whether mainstream microeconomics and its assumptions (free markets and ‘rational expectations’) were necessary for (the Lucas critique) or not compatible (heterodox) with macroeconomics.  The neoclassical view was expressed by Harvard’s Jacob Furman that “more and more research shows you can’t think about macro without thinking about what’s going on with individuals and firms. Furman: Inequality matters for macro and we can’t think about inequality if we ignore microfoundations.”  In contrast, Keynesian Amir Sufi says: macro data are super useful. For example, Sufi said, higher debt leads to a much larger contraction in household spending in response to unemployment. This is now well established. This has big implications for macro. But it also means representative agent macro models shouldn’t be used for business cycles.

My problem is not just with the neoclassical Lucas critique , but also with Keynesian-style macro models based on neoclassical DSGE that start from the idea that economies grow harmoniously but then get hit by ‘shocks’. This approach fails to recognise the uneven development of capital accumulation.  Any way going from the micro to the macro cannot work because of the fallacy of composition – the whole can deliver a different result from the sum of its parts.

A couple of interesting facts from some other papers:  1) there is no simple causal relationship between economic conditions and the abuse of opioids.” in the US (unitedstatesemploymentandopioidsis_preview); 2) in 18 US states, budget spending on prisons is greater than spending on education!

In part two, I’ll try and cover the deliberations of the non-mainstream and radical economic sessions at this year’s ASSA.

The euro – part two will it survive another 20 years?

January 2, 2019

In part two of my analysis of the euro currency, I consider the impact of the global slump of 2008-9 and the ensuing euro debt crisis on prospects for the euro.

The global slump dramatically increased the divergent forces within the euro. The fragmentation of capital flows between the strong and weak Eurozone states exploded. The capitalist sectors of the richer economies like Germany stopped lending directly to the weaker capitalist sectors in Greece and Slovenia, etc. As a result, in order to maintain a single currency for all, the official monetary authority, the ECB, and the national central banks had to provide the loans instead. The Eurosystem’s ‘Target 2’ settlement figures between the national central banks revealed this huge divergence within the Eurozone.

The imposition of austerity measures by the Franco-German EU leadership on the ‘distressed’ countries during the crisis was the result of the ‘halfway house’ of euro criteria.  There was no full fiscal union (tax harmonisation and automatic transfer of revenues to those national economies with deficits); there was no automatic injection of credit to cover capital flight and trade deficits (federal banking); and there was no banking union with EU-wide regulation and weak banks could be helped by stronger ones.  These conditions were the norm in full federal unions like the United States or the United Kingdom.  Instead, in the Eurozone, everything had to be agreed by tortuous negotiation among the Euro states.

In this halfway house, Franco-German capital was not prepared to pay for the ‘excesses’ of the weaker capitalist states.  Thus any bailout programmes were combined with ‘austerity’ for those countries to make the people of the distressed states pay with cuts in welfare, pensions and real wages, and to repay (virtually in full) their creditors (the banks of France and Germany and the UK).  The debt owed to the Franco-German banks was transferred to the EU state institutions and the IMF – in the case of Greece, probably in perpetuity.

The ECB, the EU Commission, and the governments of the Eurozone proclaimed that austerity was the only way Europe was to escape from the Great Recession. Austerity in the public spending could force convergence on fiscal accounts too (123118-euroeconomicanalyst-weekly). But the real aim of austerity was to achieve a sharp fall in real wages and cuts in corporate taxes and thus raise the share of profit and profitability of capital. Indeed, after a decade of austerity, very little progress has been achieved in meeting the fiscal targets (particularly in reducing debt ratios); and, more important, in reducing the imbalances within the Eurozone on labour costs or external trade to make the weaker more ‘competitive’.

The adjusted wage share in national income, defined here as compensation per employee as percentage of GDP at factor cost per person employed, is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year. Every capitalist economy had managed to reduce labour’s share of the new value created since 2009.  Labour has been paying for this crisis everywhere.

Reduction in labour’s share of new value added 2009-15 (%)

Source: AMECO, author’s calculations

The evidence shows that those EU states that got a quicker recovery in their profitability of capital were able to recover from the euro crisis (Germany, Netherlands, Ireland etc) faster, while those that did not improve profitability stayed deep in depression (Greece).

One of the striking contributions to the fall in labour’s share of new value has been from emigration.  This was one of the OCA criteria for convergence during crises and it has become an important contributor in reducing costs for the capitalist sector in the larger economies like Spain (and smaller ones like Ireland). Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal, and North Africa. Now there is net emigration even with these areas.

Keynesians blame the crisis in the Eurozone on the rigidity of the single-currency area and on the strident ‘austerity’ policies of the leaders of the Eurozone, like Germany. But the euro crisis is only partly a result of the policies of austerity.  Austerity was pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK. Alternative Keynesian policies of fiscal stimulus and/or devaluation where applied have done little to end the slump and still made households suffer income losses.  Austerity means a loss of jobs and services and nominal and real income. Keynesian policies mean a loss of real income through higher prices, a falling currency, and eventually rising interest rates.

Take Iceland, a tiny country outside the EU, let alone the Eurozone.  It adopted the Keynesian policy of devaluation of the currency, a policy not available to the member states of the Eurozone.  But it still meant a 40% decline in average real incomes in euro terms and nearly 20% in krona terms since 2007.  Indeed, in 2015 Icelandic real wages were still below where they were in 2005, ten years earlier, while real wages in the ‘distressed’ EMU states of Ireland and Portugal have recovered.

Iceland’s rate of profit plummeted from 2005 and eventually the island’s property boom burst and along with it the banks collapsed in 2008–09. Devaluation of the currency started in 2008, but profitability up to 2012 remained well under the peak level of 2004. Profitability of capital in Iceland has now recovered but EMU distressed ‘austerity’ states, Portugal and Ireland, have actually done better and even Greek profitability has shown some revival.

Net return on capital for Iceland and Greece (2005=100)


Source: AMECO

Those arguing for exiting the euro as a solution to the Eurozone crisis hold that resorting to competitive devaluation would improve exports, production, wages, and profits.  But suppose Italy exits the euro and reverts to the lira while Germany keeps the euro. Under the assumption that there are international production prices, if Italy produces with a lower technology level than that used by the German producer, there is a loss of value from the Italian to the German producer. Now if Italy devalues its currency by half, the German importer can buy twice as much of Italy’s exports but the Italian importers can still only buy the same (or less) amount of German exports.  Sure, in lira terms, there is no loss of profit, but in international production value terms (euro), there is a loss. The fall in the value rate of profit is hidden by the improvement in the money (lira) rate of profit.

In sum, if Italy devalues its currency, its exporters may improve their sales and their money rate of profit. Overall employment and investments might also improve for a while.  But there is a loss of value inherent in competitive devaluation.  Inflation of imported consumption goods will lead to a fall in real wages. And the average rate of profit will eventually worsen with the concomitant danger of a domestic crisis in investment and production. Such are the consequences of devaluation of the currency.

The political forces that wish to break with the euro or refuse to join it have expanded electorally in many Eurozone countries.  This year’s EU elections could see ‘populist’ euro-sceptic parties take 25% of the vote and hold the balance of power in some states like Austria, Poland and Italy.  And yet, the euro remains popular with the majority.  Indeed, sentiment has improved in 13 member states since they joined, with double-digit bumps in Austria, Finland, Germany and Portugal. Even in Italy, which has witnessed a roughly 25-point decline, around 60% of people still favour sharing a currency with their neighbours.  Greeks are still 65% in favour. What this tells me is that working people in even the weaker Eurozone states reckon ‘going it alone’ outside the EU would be worse than being inside – and they are probably right.

Ultimately, whether the euro will survive in the next 20 years is a political issue.  Will the people of southern Europe continue to endure more years of austerity, creating a whole ‘lost generation’ of unemployed young people, as has already happened in?  Actually, the future of the euro will probably be decided not by the populists in the weaker states but by the majority view of the strategists of capital in the stronger economies.  Will the governments of northern Europe eventually decide to ditch the likes of Italy, Spain, Greece etc and form a strong ‘NorEuro’ around Germany, Benelux and Poland?  There is already an informal ‘Hanseatic league’ alliance being developed.

The EU leaders and strategists of capital need fast economic growth to return soon or further political explosions are likely.  But as we go into 2019, the Eurozone economies are slowing down (as are the US and the UK).  it may not be  too long before the world economy drops into another slump. Then all bets are off on the survival of the euro.