The Australian Treasurer brought down the 2018-19 Fiscal Statement (aka Budget) on Tuesday evening with much fanfare. The one message that dominated the cant and hypocrisy was that there will probably be an early election, maybe later this year. The Government is scandal-ridden, is enduring destructive infighting over leadership and policy direction, and has made some monumentally disastrous decisions in the current term of office (for example, denying the need for a Royal Commission into the financial sector, which they were bulldozed into finally accepting, and, which is now revealing massive corruption in our banks and insurance companies). Being so far down in the opinion polls means one thing. They use the annual ‘fiscal’ show to make themselves look good and dollop out (albeit with a lag) some scraps (tax cuts) to the masses, while reserving the huge tax cuts for the top-end-of-town. And, for the first time in as long as I can remember, I didn’t even bother to listen to the Treasurer’s speech. In fact, I could write some text generating code which would generate a ‘Budget Speech’ that was remarkably similar to the Treasurer’s speech. So why waste 30 minutes in the evening listening to it. I would prefer to be sorting socks in my sock draw!
I was running late yesterday and the blog post was already rather long so I left some matters concerning central banks for today. The question we address briefly today is what is the role of central banks in all these trade transactions. Does an export surplus country face an ever increasing money supply as central banks provide the counterparty service to traders who sell in a foreign currency but want their own currency (such as a manufacturer who incurs costs in say Yen but sales revenue in $AUD – as per our example yesterday)? There appears to be confusion on that front as well. So while I am not typically going to write a detailed blog post on a Wednesday, in the interests of continuity, here is Part 2 of the series on trade and currencies.
I have received many E-mails and direct twitter messages overnight and today following the ‘debate’ on Real Progressives yesterday, where trade issues and related financial transactions were discussed. I saw that section of the debate (after the fact) and concluded that only one of the guests knew what happened when nations exported and imported. But it appears that readers of this blog who listened to the debate were confused by what they heard. So, today, by request, I aim to clarify a few of these issues. They are in fact fairly simple to understand once you trace through the transactions carefully, so it is a surprise that basic errors were expressed in the ‘debate’. So here is the way Modern Monetary Theory (MMT) helps you understand trade transactions.
I am using today to sketch out some ideas for my next book with Thomas Fazi as a follow up to Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017). I am also lying low from the Australian media given that it is less than a week to go before the Australian Treasurer delivers his annual fiscal statement (aka ‘The Budget’). The standard of commentary and hysteria about this event and what it means seems to be getting worse. So I have a radio blackout today and am listening to music as I work instead. But here is a snippet of what Australians are being fed – in this case from our national broadcaster who, with public money, sets out (probably in a state of ignorance) to deceive its listeners (and these days, its readers). It is shocking really to think that a public broadcaster in this day and age can render such a biased (and error-ridden) rendition of a subject matter that is so important.
Over the last few years, it is clear that Modern Monetary Theory (MMT) is achieving a higher profile and the attacks are starting to come thick and fast. I see these attacks as being a positive development because it demonstrates that recognition has been achieved and a threat to mainstream ideas is now perceived by those who desire to hang on to the status quo. Hostility and attack is a stage in the process of a new set of ideas becoming accepted, ultimately. Clearly, some new interventions never receive acceptance because they are proven to be flawed in one way or another. But I doubt the body of work that is now known as MMT will be discarded quite so easily given my assessment that is is coherent, logically consistent and grounded in a strong evidence base. As part of this evolution there are now lots of what I call ‘sort of’ contributions coming from mainstream commentators. One of the ways in which mainstreamers save face is to claim they ‘knew it all along’ and that the existing body of practice can easily accommodate what might be considered ‘nuances’ or ‘special cases’. We are seeing that more now, with the more progressive mainstream economists claiming there is nothing ‘new’ about MMT that it is just what they knew anyway. Even though that approach is disingenuous it is part of the evolution towards acceptance. People have positions to protect. These ‘sort of’ contributions demonstrate a sort of half-way mentality – a growing awareness of MMT but with a deep resistance to its implications. A good example is the UK Guardian’s editorial (April 15, 2018) – The Guardian view on QE: the economy needs more than a magic money tree.
People are allowed to change their opinions or assessments in the light of new evidence. Diametric changes of position are fine and one should not be pilloried for making such a shift in outlook. Quite the contrary. But when the passage of time reveals that a person just recites the same litany despite being continually at odds with the evidence, then that person’s view should be disregarded, notwithstanding the old saying that a defunct clock is correct twice in each 24 hours. The US Congressional Budget Office (CBO) released its latest – The Budget and Economic Outlook: 2018 to 2028 (April 9, 2018) – and various commentators and media outlets have gone into conniptions over it. The economists that have responded – and they come with affiliations from both sides of US politics (although it is hard to differentiate separate ‘sides’ in the US anymore such is the demise of the Democrat Party) – have significantly embarrassed themselves. Their hysteria is not matched with the facts and they have been guilty of invoking these hysterical responses year-in, year-out for many years. A crack in a record, goes click, click, click, click and repeats ad infinitum. Sort of like the nonsensical arguments about US fiscal deficits that have appeared in the US press this last week.
On March 13, 2018, the OECD released its latest Economic Outlook with accompanying “Interim projections” as at March 2018) suggesting that the current growth phase will continue through to next year as consumer and business confidence improves and translates in higher investment rates. The OECD, however, forecasts that growth in the Eurozone will decline over the next two years. The major Eurozone nations (France, Germany and Italy) are not witnessing the growing investment expenditure. The Eurozone might be seeing a little sunshine creeping out from the very dark clouds. But it is far from recovered and the future is ominously black. Key cyclical indicators remain at depressed levels, which means that when the next cycle hits, the Eurozone will be in a much worse position than before. And the reason: the fundamentally flawed design of the monetary system with its accompanying austerity bias. The reform required is root-and-branch rather than a prune here and there.
I have been (involuntarily) copied into a rather lengthy Twitter exchange in the last week or so where a person who says he is ‘all over MMT’ (meaning I presume, that he understands its basic principles and levels of abstraction and subtlety) has been arguing ad nauseum that Modern Monetary Theory (MMT) proponents are a laughing stock when they claim that taxes and debt-issuance do not fund the spending of a currency-issuing government. He points to the existing institutional structures in the US whereby tax receipts apparently go into a specific account at the central bank and governments are prevented from spending unless the account balance is positive. Also implicated, apparently, is the on-going sham about the ‘debt ceiling’, which according to the argument presented on Twitter is testament to the ‘fact’ that government deficits are funded by borrowings obtained from debt issuance. I received many E-mails about this issue in the last week from readers of my blog wondering what the veracity of these claims were – given they thought (in general) they sounded ‘convincing’. Were the original MMT proponents really overstating the matter and were these accounting arrangements evidence that in reality the government has to raise both tax revenue and funds from borrowing in order to deficit spend? Confusion reigns supreme it seems. Once one understands the underlying nature of the financial flows associated with government spending and taxation, it will become obvious that the argument presented above is superficial at best and fails to come to terms with the basic questions: where do the funds come from that we use to pay our taxes and buy government debt? Once we dig down to that level, the matter resolves quickly.
The Italian elections were held last Sunday (March 4, 2018) and the results are devastating for the Europhiles that think that the EU and the Eurozone, in particular, can be reformed to bring the people together in some sort of democratic paradise. Anti-establishment parties including the far right Lega Nord (who want to expel all migrants) have made spectacular gains. This follows elections in several nations where rather extreme results have emerged. What is apparent is that social democratic parties have started to lose electoral supports in large swathes and, in some, cases are now diminished and ruined forces. After hearing what the Shadow Treasurer in Australia said yesterday I can only hope the same electoral whitewash of the Australian Labor Party occurs at the next election. The message from the various national elections is pretty clear. Voters have seen through all the neoliberal nonsense that they have been bombarded with over the last decades and the miserable actual outcomes that have followed in terms of things that matter for peoples’ prosperity – jobs, real wages growth, income security, public services and infrastructure etc. They are sick of seeing the top-end-of-town walk off with the largesse while government’s attack the poorer elements in the name of ‘budget repair’. The neoliberals have pushed their luck to far. Sunday’s Italian result is just part of the evidence mounting to support that view. But, back in the Southern Hemisphere the Labour government in New Zealand the Labor opposition in Australia do not seem to have understood the trends. They are still thinking it is clever to ape the neoliberal nonsense about fiscal surpluses, AAA credit ratings and war chests to help fight future recessions. Sad sad sad.
This is Part 3 (and final) in the series which examines the robustness of claims made by two British academics about the desirability of the British government (particularly Labour) adopting further fiscal constraints on their flexibility to advance well-being in that nation. Part 3 further develops the critique and focuses on the validity of tightening voluntary constraints on government and outsourcing key parts of the fiscal policy development process to so-called ‘independent’ fiscal councils or boards. We conclude that these suggestions would further entrench the neoliberal dominance of government policy and reduce its capacity to serve the wider interest. In effect, taking this sort of advice would be counterproductive for British Labour, which really needs to to further break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements. This will require more than articulating progressive-sounding social and environmental policies. It will require more than proposals to renationalise the railways. Effectively, British Labour has to reframe the macroeconomic debate and eschew the sort of reasoning that the mainstream of my profession offers. It must, in my view, embrace Modern Monetary Theory (MMT) principles to free itself from the shackles of all the neoliberal mumbo jumbo that the New Keynesians continually offer as economic verities. The reality is the the New Keynesian approach has one output – an elaborate litany of lies.