Last year I saw this interview with William Mitchell, an Australian economist not to be confused with the guy we named the airport after, who is one of the leading economists working in Modern Monetary Theory. The interview is by Marshall Auerbach of the Institute for New Economic Thinking (INET).
Bill Mitchell: “A basic starting point for modern monetary theory is that a government that issues its own currency, that has its own central bank-it controls monetary policy, the setting of interest rates, and doesn’t sell any debt in a foreign currency – it can never go broke. The idea that it can never run out of money; you know we’ve seen these dramatic statements. The U.S. president a few years ago said the U.S. is running out of money. In my country the budget’s just coming up and the treasurer’s saying we have run out of money. Well that’s impossible. A government of that persuasion with those characteristics can never run out of money. And that’s juxtaposed as you say against Greece or Germany who surrendered their currency sovereignty and gave it to the European Central Bank, and they can run out of money because they’ve gone back to the old pre-1971 fixed exchange rate system where they have to cover their spending beyond tax revenue with the sale of debt, and so the bond markets can retaliate against that sort of government.”The gold standard constrained the supply of money to a commodity like gold. That meant you could only increase government spending by shrinking the spending of the private sector, hence the contraction of the Depression. As Mitchell points out later in the interview, all spending carries and inflation risk, including that of the private sector. But won't "money printing" cause hyperinflation?
WM: “In Zimbabwe for example, probably for good reason, Mugabe wanted to honor and reward the soldiers that led to the break with the British. But he went about it a very silly way, by basically undermining the supply capacity of the economy, which was essentially the farming sector, and destroyed in a very short time about sixty percent of your production capacity. Well of course if you keep spending and you can’t produce goods to meet that spending you’ll get inflation. And if you keep spending on top of that you’ll get hyperinflation. But that’s such a weird circumstance.”
Marshall Auerbach: “You had a similar situation in Weimar Germany. You had about twenty-five percent of the industrial capacity of Germany destroyed when the French occupied the Ruhr valley for example, and that’s on top of the fact that you had a devastating war which probably destroyed another part of their productive capacity. And in addition to that they were forced to make reparations in gold.”Mitchell makes the same point I did a few posts back about borrowing from the rich instead of taxing them, and how this gives them a safe place to park their cash, backstopped by the beleaguered American taxpayer:
WM: “Yeah, the Treaty of Versailles made ridiculous demands on them in nominal terms in the amount of money they had to give to the allies so that they were forced by the treaty to expand the money supply out of any proportionality with the supply capacity of their economy. That’s a major point. And the second major point is that the steel production was devastated so they lost their supply capacity. Whenever we see hyperinflations we typically see something extreme like that, and that’s not remotely like a situation of a government like the U.S. or the Australian government picking up unused capacity in the economy, unemployment and firms without enough sales on their books and increasing the spending via the central bank, basically ratifying that spending by crediting the bank accounts. That’s a perfectly reasonable approach.”
“What that leads to is the conclusion, well, why do they issue debt? An important part of Modern Monetary Theory is that it dispels the myth that what we’ve now identified as a sovereign government, a currency issuing government, should issue debt. The issuing of debt to the private bond markets is what I call just corporate welfare. It’s most ironic. It basically gives them a risk-free asset in order to hedge their uncertainty and store up their uncertainty in a safe asset…it alters the portfolio of the private sector. It gives them…a guaranteed income flow, an annuity each year. The bigwigs in the bond market are those that often lead the charge in the public debate about the need for so-called ‘structural reform’, that is, to reduce unemployment benefits or income support for the most disadvantaged citizens, yet they’re sitting on a welfare pool supplied by a federal government of a greater proportion [by] many factors the support that gets given out to low income groups. It’s sort of an irony. But what modern monetary theory emphasizes is that that debt is not necessary to support the government spending.”Indeed, how many times have you head that the U.S is either "out of money," or even more amusingly, "bankrupt?" Bankruptcy is a condition of businesses where their liabilities exceed their assets. A business that is bankrupt will be dissolved and its assets sold off to its creditors. A nation state cannot go bankrupt by definition! To say a nation is bankrupt makes as much sense as saying a tree is pregnant. The adjective does not apply to the noun. The United States as an entity cannot cease to exist (what would we call ourselves?), and its assets cannot be sold off - we will not be shipping our citizens, natural resources and productive farmland to another country, even if they had the room for it (although we did voluntarily send our manufacturing base to China).
What does happen to nation state is that it defaults on its debts. This is bad, but is there a real risk of this? Yes - a totally artificial one forced by Republicans which undermined the nation's fiscal stability. The Republicans' political posturing over the debt ceiling was just another part of their sabotage of the ability of the U.S. government to meet the needs of its citizens from the inside on behalf of the 1 percent.
That is why you heard all that talk about the trillion-dollar platinum coin. Through a loophole in the rules, the government can issue debt-free coinage in whatever denomination it chooses, but not debt-free dollars. The debt-free money would cover the budget liability. The spending would end up as surpluses to the private sector. The sad thing is we had to use this loophole instead of just being able to issue debt-free money.
Instead of being obsessed with deficit to GDP ratios which are arbitrarily put together by elite economists who can’t handle a spreadsheet, we should be concerned with:
“It gets back to what fiscal policy is about. And fiscal policy should be about reducing that idle capacity that you’ve been talking about. And so advancing what I call public purpose or well-being of society, and that’s defined in a number of ways. But it will come down to provision of public services, provision of enough spending to ensure there’s enough employment and provision of public infrastructure. Now, as long as the spending is buying those things, then it can’t crowd out private spending, whereas once it gets to the point where there are no things left to buy, then you get a point of much more completion emerging.”This leads to some surprising conclusions:
“It goes back for me to 1978. I was sitting in an agricultural economics class in my fourth year at Melbourne University. Australia at that time had a wool price stabilization scheme. This was a sop to the very powerful rural lobby...The scheme worked to provide a guaranteed income to wool providers so that the fluctuation of the wool cycle wouldn’t damage their annual incomes.”
"So the government would step in and support the price of wool producers at a certain point. They’d agree on what price they would support. If the harvest was very good in one year…and the market was flooded with wool, well then the government would buy all that wool because that would stabilize the price."
"The income of the farmers would be stabilized. Around Australian cities there were these big red brick buildings everywhere, big warehouses, and they were the wool stores. We used to go by in the car and our parents would say, ‘that’s the wool store.‘ And of course when the clip was poor, the government would sell the stuff out of the wool store to stabilize the price.”Mitchell wasn’t interested in wool, he went to school to study economics because he was concerned about unemployment which was especially high after the oil shocks of the 1970's. Mitchell had an epiphany. What if we treated labor the way we treated commodities like wool or milk?
WM: “I thought, this is a full employment of wool scheme, this price stabilization scheme. It made sure that all wool would always be demanded. And of course a bit of lateral thinking then says that well the government can do that with employment. So that if there’s idle--too much labor without a job, that is, unemployment—the government can buy all that stock up at a fixed price.”
MA: “In effect maintaining a stockpile of 'shovel ready' labor that can be drawn back into the private sector as the private sector transitions back to…”
WM: “We’ve probably gone beyond shovels now in 2014. But, yeah, a pool of labor, the government can buy it, and when the private sector resumes its strength after a downturn, then because it’s been at a fixed price, and you would set the price at the bottom of the private sector wage structure so you don’t need to fear of that; the private sector can buy back that labor any time it wants if it offers the right terms and conditions. And that overcomes a whole series of problems. Unemployment is the worst evil or cost or whatever the word you want to use, we can think of…So it addresses that problem, workers are never in a nonproductive situation. And one of the problems with unemployment is that workers…slowly but surely they become dislocated and they start losing their general skills and also their specific skills. And so the job guarantee scheme stops all of that from happening, provides steady income support, and most importantly it fixes the minimum amount that the deficit has to rise by when there’s a downturn to stimulate employment. It sets a boundary, because when do you know that the government’s spent enough? When the last worker’s walked into the job guarantee office to pick up a job.”
“For people who want to hang on the that system as though it’s the TINA – there is no alternative – that’s just untrue. Even if all these job guarantee workers just turned up in the morning, dug a hole through the day…even if they just did that it would be better than the system we’ve got now. Our research has shown that there’s a multitude of productive activities that can be done by that workforce that would be oriented to unmet community and environmental care needs. And so it’s not just a matter of digging holes and filling them in again, the old sort of boondoggles…”
MA: “It’s a matter of political will, actually. And one hopes that the governments will see the wisdom of that approach.”Now there are of course many other questions and objections too involved to go into here. Fortunately, Mr. Mitchell has a blog, and I recommend this entry - If you can have full employment killing Germans …
WM: “One of the things that Modern Monetary Theory emphasizes, at least the way I talk about it, which reflects my background and where I came into economics is that the government always chooses the unemployment rate. You know, I do work in less developed countries as a development economist. And I’m always being met by bureaucrats and IMF type officials who start off the meeting saying that unemployment is a highly complex, multi-layered, deep problem. And I say, no it’s not. The government chooses the unemployment rate, you could employ all those people within about a week.”
Now, wool in Australia is hardly unique. In fact, we do it for almost all agricultural commodities, milk, wheat, corn, cotton, beef, sugar, soybeans, and so forth, all across the industrialized world. The avalanche of cheap food at the supermarket and Cracker Barrel has nothing to do with "free markets" and everything to do with the socialism that we all live under and pretend doesn't exist. For example, where I live, it's milk, not wool, that is king. And the government price support for milk was made very clear when the so-called "milk cliff" was looming during one of congress's recent Polish Parliament sessions.
The farm bill contains something called the Dairy Product Price Support Program. It's designed to help farmers by guaranteeing a minimum price for milk. Basically, the government buys things made from milk — cheese, butter and dry milk. (It doesn't want to have to actually store milk, which can quickly go bad.) Buy up enough of this stuff, and you drive up the price of milk.
The government hasn't had to buy a significant amount of this stuff in the past decade because the price of milk has been high enough on its own.
The minimum price for milk, called the "support price," is set in the farm bill. The farm bill is set to expire on Jan. 1, and here's the catch: If that happens, the minimum price reverts to the price set more than 60 years ago in the Agricultural Act of 1949. That price is a parity price, which means it was calculated based on how much it cost farmers to make milk during the "golden age of agriculture" 1910 -1914. Things have changed a lot since then, and costs for farmers today (equipment, labor, feed, cows) are radically different.
The parity price set in 1949 is $39.53 per 100 pounds — right now, farmers are getting half that, $19.50 per 100 pounds of milk.
If Congress doesn't do something, the government will find itself buying a lot of cheese, butter and dry milk come Jan. 1, and even worse, it will essentially be paying double the price. Those higher prices will then trickle down to the grocery store where the rest of us could see milk prices go from around $4 a gallon to something more like $6 a gallon.
Milk would only be the first commodity affected. Without a farm bill, other commodity prices would spike as the year went on, affecting every family in America. Farm policy, often obscure for most consumers, would get personal fast.Understanding the Milk Cliff and Why $7-Per-Gallon Milk Looms Once Again (NPR)
Now, as absurd as it sounds, there is a very good reason we do this. Individual producers want to produce as much as possible, because the more they sell the more money they make (duh!). But when all producers of a commodity collectively do this, the market is flooded, and the price of the commodity plummets. In fact, the price drops so low that often times the producers can't get even enough money from selling their commodity to pay their debts and they go under. As producers go under, the capacity to produce the commodity shrinks, and it can't be expanded again quickly. This subsequently leads to critical shortages and people going without in future years; from boom to bust, from feast to inevitable famine.
The long history of agricultural markets under capitalism demonstrates this time and time again, giving rise to the iconic image of the dairy farmer pouring his milk out in the street because he can't get a good enough price to make it worthwhile to sell. The irony here is that it is overproduction and abundance, not scarcity that leads to poverty and famine under capitalism. For a good example, read this Wikipedia entry about the 1933 Wisconsin Milk Strike. Rather than equilibrium, the real free market is constantly headed toward boom and bust, ruining the lives of farmers and causing havoc for the essential foodstuffs we all need to buy.
To avoid this unfortunate situation, governments a long, long time ago abandoned any pretense of a free market and developed the sorts of schemes listed above to make sure farmers can earn a living year to year despite the vagaries of the market. Now, of course, with farm consolidation this helps out big producers nowadays instead of the small farms it was intended to help, but that's another matter.
Just like anything else, sometimes there is too much supply for the available demand. We recognize that situation for producers and take steps to rectify it. As Mitchell describes above, we could take similar steps to rectify that situation, and eliminate the inefficiencies, not to mention that social dysfunction, pain and suffering caused by this situation, but we are told there's nothing we can do, we just must leave it to the private sector and give more tax reductions to the "job creators." Unlike producers, our response to America's workers is pretty much, well, fuck you.
And we need it worse that ever:
Unemployment Report Shows Labor Force Drop Outs At Record High (Economic Populist)
Still Missing: At Least 3 Million Jobs (Bloomberg)
The New Job Figures and Secular Stagnation (The New Yorker)
Uncle Sam is all to happy to buy up excess milk and cheese to keep the price up, apparently. When it comes to the nation's workers, well, you're on your own. We set a floor under the price of milk, and just about every other commodity, paid for by the taxpayers, but when it comes to labor, workers are left to sink or swim cold, hard reality of the "free market." As Mitchell outlines above, there is no reason the government can't buy the excess labor in the economy, just like excess milk. This would also set a floor under the price of labor, which could be indexed to the rate of inflation.
And not only that, but should something unfortunate or unforeseen happen to producers, the government is all too happy to step in and cover their risk:
According to a new analysis, crop insurance allowed corn and soybean farmers not only to survive last year's epic drought, but it also allowed them to make bigger profits than they would have in a normal year. A big chunk of those profits were provided through taxpayer subsidies. In fact, crop insurance has grown into the largest subsidy that the government provides to America's farmers...In all, payouts added up to $16 billion last year, a new record, most of which was paid by taxpayers.Who Paid For Last Summer's Drought? You Did (NPR)
So farmers are generously protected from risk by the taxpayer. But what about the inevitable risks of the job market? Well, rather than the safety net extended to farmers, workers are left to face the free market all alone and forced into a vicious musical-chairs game for the available jobs and demonized as lazy freeloaders if they cannot find one. Workers even bear the brunt of the enormous costs of education on their own, with no guarantee of any sort of job, which exposes them to enormous risk. Yet while we taxpayers stand ready to help out commodity producers, workers are turned into debt slaves.
So we have this image of workers being told to stand on their own two feet or starve, while private producers enjoy a generous safety net of benefits, subsidies, backstops, and guarantees to make sure they, unlike labor, are totally insulated from the vagaries of the free market and their incomes are kept high no matter what. And all the while we’re all sold free market fairy tales straight out of Adam Smith, especially from the economic priesthood who have become nothing more than propagandists for the wealthy elite. We're so concerned about citizens becoming"dependent" on the government even while we use it to make sure producers are kept comfortable and insulated from risk. And we haven't even talked about corporate bailouts of major industries like automobiles, airlines, and banking. Risk, like taxes, are for the little people.
And it looks like this preferential treatment will continue. While workers are told that they're on their own and demonized for being lazy and unproductive, and going heavily into debt to pay for more education, the safety net for sellers of commodities is becoming more generous, thanks to the "fiscally responsible" Tea Party congress:
For decades, farmers have been getting checks from the federal government as part of a safety net to help protect against, for instance, the financial ruin of drought or floods.Congress Poised To Make Crop Insurance Subsidies More Generous (NPR)
So last year when a big drought hit the Midwest, who paid for it? You did.
And as Congress debates a new farm bill that will authorize future spending on crop insurance subsidies, it seems that the programs are poised to become more generous.
Lawmakers are considering an additional program that would help farmers recoup even more of their losses than currently is covered by crop insurance.
You see, the way crop insurance works, farmers are eligible for payouts not only when their crops fail due to drought or flood, but also when the prices of their crops drop.
In essence, farmers with crop insurance are able to lock in a guaranteed price. Sometimes, like last summer, they're able to get the best of all worlds: High prices for their crops, together with a hefty insurance payout to compensate them for a small harvest.
Since we, the taxpayers, pay about 60 percent of crop insurance premiums, farmers can get these generous insurance policies on the cheap.
Farm state Sen. Pat Roberts, a Kansas Republican, is among those who think the program works. He summed up his support recently on the Senate floor when he said, "Crop insurance allows producers a way to manage risk, so they can provide a stable and secure food supply and pass their operations onto their children."
In fact, according to this USDA report, the median household income for farmers operating commercial farms in 2011 was $84,649 (from farming activities), and total household income (including nonfarm income as well) was $127,009. The median U.S. income is about $50,000.
So, critics ask, should we be subsidizing farmers to the tune of billions of dollars a year at a time when the deficit is forcing cuts to federal spending, including cuts to food stamps?
A version of the farm bill recently passed by the Senate cuts $4 billion from the food stamp program over the next 10 years, and there seems to be little support for scaling back these cuts. An amendment from Sen. Kirsten Gillibrand, D-NY, to eliminate this cut failed. The House Committee on Agriculture is proposing even more draconian cuts to food stamps: More than a billion dollars each year.
It’s the juxtaposition of the two programs that so clearly exposes the party’s agenda. Anti-government ideology can justify even the most vicious cuts to the safety net. It can’t justify the massive socialist scheme that is agriculture policy. And, to be fair, conservative intellectuals generally don’t justify agriculture socialism. But the Republican Party certainly does. The ultraconservative Republican Study Committee recently banned the Heritage Foundation from its meetings because Heritage denounced the GOP’s farm subsidies. There is a grim hilarity here: Republicans punished Heritage for its one technocratically sane position.Republicans: We Were Too Nice to the Hungry, But We’ve Fixed That (Daily Intelligencer)
Henry Olsen has an admirable screed in National Review assailing Republicans for their lack of interest in cutting agriculture subsidies even as they go to war on food stamps. Even so, Olsen understates the case in crucial ways. He cites the budgetary cost of agriculture subsidies versus food stamps, but neglects to mention the non-budgetary cost of agriculture subsidies: Much of their cost comes in the form of higher food prices.
The problem with MMT is that money is power. Creating a lot of money means creating a lot of power, and that power tends to accumulate in the hands of the rich, and then they can use the power to undermine democracy. Which is why I'm in favor of a balanced budget myself, precisely because it deprives the wealthy of the means of accumulating money= power. Instead of printing new money when there is a shortfall of demand, tax the idle cash hoards of the rich and this put that existing money to work. The people behind MMT are useful idiots seeming the long-term interests of the oligarchs.ReplyDelete
You know, that’s a good point and I hadn’t thought of that. The only problem is, as I’ve pointed out before, the rich already understand everything I’ve just said. That’s why the government operates as a Magic Money Tree (as MMT is called by its detractors) for them, but when it comes to things like social security, healthcare or infrastructure, it’s "we’re broke," "tightening our belts," and "stealing from our grandchildren!!!" and so forth. That’s why you may be in favor of a balanced budget, but as Dick Cheney famously said, “deficits don’t matter.” Just look at the bailouts and "defense" spending.Delete
MMT is typically seen by its proponents as giving the public more power rather than less. With the current arrangement, the banking system and wealthy bondholders have the ultimate power over the state. With MMT, debt cannot be selectively used as a weapon to throttle programs the rich don’t like. Without an inflation risk, money can be spent for urgent social needs in peacetime, just as it is in wartime.
I agree that in the present situation, it ideally makes more sense to tax the unproductive wealth rather than create more money. There is enough money right now. The unproductive wealth is just driving up asset prices and making cities like New York, Boston and San Francisco unlivable. Confiscatory may be a bad word (like redistribution), but I think it’s a good idea for top tax rates. We had balanced budgets up until Reagan. As has often been pointed out, if we had the same tax rates as we did before Reagan, there would be no deficit. Government spending as a percentage of GDP in America is actually fairly low, even with our bloated and wasteful military, despite all the “dependent on government” rhetoric.
You know, your paragraph on producers overproducing and ultimately going under and destroying productive capacity, leading to shortages, perfectly describes the oil industry right now. First the glut, then the famine.ReplyDelete
The book "Carbon Democracy" made a fascinating point that oil producers were historically concerned with too much oil on the market, not too little, that is, how to make oil scarce enough that they could get a high enough price for it. Gasoline was originally a waste product of kerosene production.Delete
It’s the same for every commodity. The oil industry is also heavily subsidized and could not stand on its own two feet (unlike what we tell workers to do). We don’t live under a free market and wouldn’t want to. That’s why libertarians can complain essentially forever – their policies will never be implemented. As Nate Hagens once pointed out, we live in a socialist economy – if you tell him what the government will spend, he will give you the growth rate. We can either deal with this reality and live with it, or continue to play pretend and pine for an imaginary past.
Well, I think the oil industry can after a fashion stand by itself (it does produce arguably the most valuable commodity on the planet), but it seems to need a large organisation to help stabilise price (standard oil monopoly, Texas rrc proration, OPEC acting as swing producers) to avoid the whole poverty through plenty deal which the shale drillers are once again creating (they did the same with gas already!). With Saudi throwing in the towel it seems that wild fluctuations will be the order of the day again, which is good for nobody. Given that the oil industry is a real free market American symbol, there is no small irony in this state of affairs.Delete
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If you had a tiny house like those shown in your video clip you could plop it down for almost nothing on someone's land. Especially if you had a composting toilet and didn't need lots of connections to utilities. You can always buy propane by the tank and get electricity from neighbors or solar if you are a real miser but sewer service is often a tie breaker. You could bring it out to our land in Maine but based on your desire to escape the cold I'd recommend the Southern states or New Mexico. Bellingham WA is very nice but not always so sunny. People say a lot of terrible things about the South, and they are all true, but never the less a lot can be said for the Southern states as well. Especially if you don't mind the heat. We are buying a 640 sq foot for two people ourselves not tiny but not huge either. Best wishes.ReplyDelete