I have been in Sydney today for Day 1 of the Australian Society of Heterodox Economists’ (SHE) Conference. I always go down as a solidaristic gesture but I admit to not being fully engaged in some of the topics given there is an underlying hostility among many heterodox economist to getting the macroeconomics right before you delve into various microeconomics topics. I do not find it appealing to analysing demographic cohorts distinguished by sexuality, gender, race as if they are “independent” and can be understood without recourse to acknowledging their relationship to capital and without understanding the macroeconomic constraints that bear upon their decision-making environment. But during the day I was thinking about why societies voluntarily go along with state imposed restrictions on their freedoms which clearly entrench the disadvantage of individual members within these societies. I was thinking of this within the context of the choice nations have to exit the euro and the pressure being put on such nations to remain within the zone even though the status quo is devastating private well-being. I was also thinking about the forces that are working within the US to misrepresent the true nature of the financial crisis and allow government support for the elites who have committed gross fraud to override basic job creation support for the unemployed. I was also thinking about this in the context of the debate about the morality of WikiLeaks and the growing government attacks on that organisation.
As I am typing this, an announcement just came over the train PA system that we are going to be stuck indefinitely at Epping Station (heading north) because of a police operation in Hornsby (a bit further north) – rumoured to be a bomb scare. Hmm, later home than I wanted to be. Patience called for. Fortunately, the delay was only about 45 minutes and movement resumed and no bombs were discovered. As an aside, I was able to learn about the reasons for the delay etc by sending out a Twitter question. The normal news channels available on-line were not helpful.
Anyway, so many issues have been raised by the WikiLeaks information release. I thought about the “western outrage” about how the “free world” was scandalised by the Chinese government’s censorship of Google (and other information access that its citizens might enjoy and benefit from). Yet as soon as things turning embarrassing for the US government and all the other governments it has been dealing with – the situation changed. Suddenly, the suppression of our access to information on the Internet has become a a matter of defending our national security and this has justified blocking access to WikiLeaks servers in our so-called “free nations”.
This is just hypocrisy writ large. Censorship is never a demonstration of our freedom. It is a denial of our freedom to gain access to information that might allow us to make different decisions about what is best for us. Governments are our agents not our masters. The WikiLeaks revelations demonstrate that our governments lie and manipulate us to advance their own agendas which do not necessarily coincide with the agendas that maximise social welfare.
I am not making any judgements about whether the WikiLeaks organisation is consistent in its morality (apparently some are saying that Assange is inconsistent because he won’t publish all the private E-mails that he has etc). The issue transcends the personalities involved.
I am of the opinion that we would be better off knowing about the devious ways in which foreign diplomacy is conducted. I do not share the view that Iran or China or anyone else has become “knowledgeable” as a result of the leaks. They probably already know all this stuff as a result of their own covert operations.
Rather, the group that is more informed and who would have remained ignorant if the leaks had not occurred is us – the voters – the workers. We now know things about our governments that they didn’t want us to know and in some cases lied point blank to us about.
Whether much of the information that has been released is all that important as yet is moot. The general point is that we should all be encouraging whistle-blowers and leakers en masse to provide us with this sort of information so we can better discipline the political process and force our governments to adopt more direct ways of operating. Widespread dissemination of “damaging” information is the only way we will ever be able to judge whether our governments are working in our interest. Under this sort of “new” paradigm of information sharing the governments would have to work out better ways of communicating with us.
In this vein, I have to say that I applaud the conservative British government’s decision to make the expenditure data more transparent. They are using it as a political stunt but as a general principal I think all information should be available to the public.
There was an interesting article in the Economist Magazine (December 2, 2010) – Breaking up the euro area – How to resign from the club – which speculated about the sorts of costs and benefits that would accompany a decision by an individual state to leave the EMU.
The article notes that the rhetoric that accompanied the creation of the monetary union – immunity from speculative attack – convergence of government-bond yields – etc has been laid bear by the crisis. The article does not make the obvious point that the crisis has been the first time that EMU has faced a serious demand shock and that the so-called stability prior to the crisis was just an illusion. The basic design flaws in the monetary union were there from the state and were always going to lead to the dynamics that are now unfolding once a shock of this size hit the zone.
But I think it is interesting that the mainstream economics media is now laying out narratives about the possibility of countries leaving the zone in pursuit of better outcomes for their citizens.
The Economist said:
The idea of breaking up the currency zone raises at least three questions. First, why would a country choose to leave? Second, how would a country manage the switch to a new currency? Third—and perhaps most important—would leavers be better off outside the euro than inside it?
Please read my blog – Exiting the Euro?– for my ideas on this issue (written in February 2010).
The Economist said that the “main reason why a country might choose to leave the euro is to regain the monetary independence it sacrificed on joining and to set monetary policy to suit its own economic conditions”. They define monetary independence as restoring the capacity to set a separate interest rate (from the ECB rate) and implicitly eschew the fiscal aspects that would accompany a restoration of sovereignty.
From a Modern Monetary Theory (MMT) perspective it is the restoration of fiscal capacity uninhibited by the “anti-people” Maastricht and Lisbon rules that is the most attractive features of the exit option.
Further, which is consistent with MMT, the Economist noted that leaving “the euro would allow Italy, Spain and the rest to devalue and bring their wage costs into line with workers’ productivity” without harsh cuts in nominal wages which only further exposes the economies (and households) to default risk on mortgages etc.
The Economist article outlines some of the consequences of exiting would elicit and I won’t cover them here. They include – the need to “impose caps on bank withdrawals, other forms of capital controls, and perhaps even restrictions on foreign travel”. They suggest that in the short-run foreign credit would be withdrawn and trade would suffer. They suggest that the nation would be tied up in legal challenges from loss-making parties – including foreign banks and pension funds which hold “euro-denominated government bonds”.
They acknowledge that the defaulting sovereign would probably win all these legal battles because it could change the relevant laws as it undertook the exit. The point is that sovereignty is all powerful within a national border. The legal framework could be changed to override the primacy of European law.
The Economist then reveals its biases. They say:
All the while a government seeking to replace the euro with a devalued currency could scarcely rely on bond sales to finance its operations. But such a country would have long been cut off from capital markets anyway. The prospect of monetary independence would give it new options. In the run-up to passing a conversion law, the government could pay some of its bills, including wages, by issuing small-denomination IOUs, which could be traded for goods and services. These would form a proto-currency that would trade at a discount to the remaining euros in circulation—a shadow price of the devaluation to come. Since the money supply would be shrinking fast, as euro deposits fled the country, this sort of paper would be accepted readily. Scrip issued by the province of Buenos Aires circulated freely months before Argentina’s dollar peg broke.
None of this is an accurate description of anything inevitable. The sovereign government could simply ignore the capital markets. Please read my blog – Who is in charge? – for more discussion on this point.
Restoring sovereignty provides all the fiscal capacity to spend in the local currency and to honour any obligations denominated in that currency. As long as there were real resources that were idle the government would have the capacity to expand employment and well-being by using its newly restored currency.
A sovereign government does not have to issue IOUs. A sovereign currency is really equivalent to an IOU. The important point is that there would be a demand for this “new” currency as long as the government allowed the non-government sector to relinquish its tax obligations using it.
The revelations of last week (see more on this below) that the US Federal Reserve lent trillions to the non-government sector at zero interest rate demonstrates that credit does not need to evaporate when private banks go on “holiday” in a crisis. So there is no reason for the money supply to shrink fast. The demand for credit can be satisfied without financial constraint by the currency-issuing capacity of the newly restored sovereign government.
The Economist then asked whether an exit would be worth it:
A determined country could leave the euro and establish its own currency again: nothing is truly irreversible for a sovereign nation. But even the most wilful and powerful state could not fully control the banking chaos and social unrest that a forced currency conversion would unleash … Countries at the euro zone’s periphery that face years of austerity and high unemployment inside the euro may find it harder to believe that things could be much worse if they left. A devaluation would spare them the grinding wage deflation needed to price the unemployed back into work (though it would not address the economic weaknesses that lie behind poor competitiveness). The spectre of bank runs, high funding costs, default and social unrest might not seem so scary in today’s conditions: some countries are already vulnerable to these. Efforts to ameliorate these problems have so far proved inadequate …
Therein lies the danger for the euro. The cost of breaking up the single currency would be enormous. In the ensuing chaos and recrimination, the survival of the EU and its single market would be in jeopardy. But by believing that a break-up cannot happen, the euro zone’s authorities will always tend to stop short of the radical measures needed to hold the project together. Given the likely and devastating chaos, it would be a mistake for a country to choose to leave. But mistakes occur in times of stress. That is why some are beginning to contemplate the unthinkable.
I am not suggesting there would not be chaos. But the restoration of the fiscal capacity of the sovereign government is a very powerful tool to minimise the chaos and to divert activity to the domestic economy while all the external issues were resolved over time.
By suggesting that staying in the EMU is the only long-term way to avoid chaos, the conservatives and the supporters of the power elites are really deceiving the populace with respect to the viable choices that are available. Exit will be costly, but as the Economist notes staying in is also going to be very costly.
You can see the controlling nature of the debate by the conclusion that a decision to exit would be a “mistake”. I would like to see Ireland or Greece actually articulate the costs and benefits (given they have superior access to their own data) of exit compared to staying on in the EMU.
My top-of-the-head thinking on this is that over a 20-year period, exit will be less costly. Further, staying on only exposes the nations (already crippled by the current crisis) to the next major demand shock. The problem is that the basis design flaws are not being dealt with and the EU bosses are not going to introduce policy changes which would reduce this dysfunctional design because they have convinced the member states and their citizens that exiting will be catastrophic.
Where is the evidence for that? The EMU is a classic example now of a citizenry that is being steam-rolled by a power elite which is using a highly filtered and biased flow of information to suppress alternatives that would probably advance the interests of the populations involved.
The EMU will never serve the interests of the vast majority of citizens in the member states.
In this article – In Defense of the Public – that appeared in In these Times (December 3, 2010) the case is made against the pressures to privatise the commons. The article notes that “Americans have come to associate anything “public” with a notion of inferiority” and quotes from a 2009 (Beacon Press) book Another Kind of Public Education:
Ideas about the benefits of privatization encourage the American public to assume that anything public is of lesser quality … The deteriorating schools, health care services, roads, bridges, and public transportation that result from the American public’s unwillingness to fund public institutions speak to the erosion and accompanying devaluation of anything deemed public. In this context, public becomes reconfigured as anything of poor quality, marked by a lack of control and privacy—all characteristics associated with poverty.
This trend in public opinion is not confined to the US. In all the advanced (English-speaking at least) countries the neo-liberal onslaught has successfully indoctrinated us to accept the view that public is bad, private is good. This message is also rammed home in most mainstream economics textbooks. I remember the intermediate micro book by Jack Hirschleifer that described someone receiving state income support as being “welfare dependent” and those who did not as being “robustly independent” (or words to that effect). The author didn’t mention all the bond market players who enjoyed coporate welfare via public debt issuance or other firms that relied on state aid in the form of handouts of various times.
How would we describe the modern banking system not to mention the other “private” beneficiaries of public money during the current crisis – as disclosed in the recent US Federal Reserve statement – (December 1, 2010)? Trillions of US dollars of zero interest loans to corporate America and beyond. The loans were extended to multinationals, billionaires and foreign banks. The Federal Reserve is being called “the central bank of the world”. Are they all “welfare dependent”? Should the recipients be subjected to the humiliating “public” accountability that we inflict on the unemployed?
The point is that we have let these inconsistencies in rhetoric flourish and in being so complacent we have allowed the policy framework to become distorted and work against the interests of the majority by advancing the interests of the elite and powerful.
No-one could credibly advance a case that private sector decision-making is capable of advancing social welfare independent of government. The current crisis has demonstrated, beyond doubt, that the private sector profit-seeking is susceptible to corruption, deep fraud, and incompetence – in no particular order and the overall stability of the system (financial and real economy) is reliant on public intervention and public financial support.
While the hard-line Austrian school types were saying we should have let the crisis play out – it is clear that they have little understanding of the depth of the crisis and how much public intervention was required to stem the collapse. The scale of the US Federal Reserve credit line intervention is staggering. If the public interventions had not been made then we would have endured a major depression beyond doubt.
As it is, the news that is slowly emerging from the US about illegal foreclosures indicates that a large proportion of the housing loan industry is in an uncertain state. Where did all the mortgage notes that were not passed on as part of the securatisation process go? Why weren’t they passed on? It seems that the financial sector attempted an elaborate scam on state governments to avoid real estate transfer taxes by not passing the notes on as required by law and exploiting the Mortgage Electronic Registration System (MERS).
Now the banks are about to endure the costs of this widespread fraud. This blog and the links it provides is interesting in this regard (especially the work of Yves Smith on this topic). This Testimony is also helpful.
The saga has demonstrated the sector was based on a “failed business model” and has exposed the entire US economy to systemic risk (that is, risk of collapse). Why? Greed and fraud. That is what drives private sector decision making and unless there is public oversight the whole show heads for self-destruction. None of the developments that the illegal foreclosure scandal has exposed are covered in mainstream microeconomic or macroeconomic textbooks. There we just learn about private optimising agents pursuing self interest to maximise welfare for all of us. It is a fairy tale without any application to the real world we live in.
The In these Times article says that:
The schema of capitalism—where the pursuit of private profits is sanctified—has turned Americans shamefacedly away from the public life that is the birthright of all citizens in a democracy … How can we undo the prejudice against shared public resources that has settled over America’s discursive landscape? To begin with, we need a compelling argument that the public sphere is worth fighting for. We need to cultivate a richer understanding of what public actually means—or what it ought to mean.
Public does not mean government institutions or government ownership—although government institutions can and should serve the publics that conjure them into being. Public is more than offices in buildings where people’s salaries are paid for by taxes. By bickering over how much salary, whose taxes, and where the offices ought to be constructed, we lose sight of the grander meaning of our commitment to one another as human beings.
This sort of thinking has been important in my career as I have sought to advance understandings of how the state can advance public welfare through the use of the fiscal (and other) policy tools that a sovereign government has at its disposable.
Many readers write to me along these lines – “I wonder whether your faith in government would survive IF the world was using the principles advanced in MMT” – or words to that effect. The IF is the important demonstration or give-away that most people do not understand what prevails in the current situation.
The fact is that MMT is not a futuristic description – it describes how the monetary system operates NOW. It provides insights into why things happen at the macroeconomic level now. It tells you what the implications of voluntary constraints that governments might impose on themselves – including the imposition of the EMU on national governments, which were previous fully sovereign in their own currency.
So we all better get used to the fact that government is a central aspect of our modern monetary system. We can either work in communities to make sure the government uses its unique capacities in the fiat monetary system to advance our collective well-being.
The national government always has a choice: (a) It can maintain full employment by ensuring there is no spending gap – that is, run budget deficits commensurate with non-government surpluses; or (b) It can maintain some slack in the economy (persistent unemployment and underemployment) which means that the government deficit will be somewhat smaller and perhaps even, for a time, a budget surplus will be possible. Associated with these choices are an array of related policies including public provision of services without profit versus privatised service delivery for profit; regulative oversight of industry versus a belief in self-regulation of private markets etc.
The rise of neo-liberalism was the result of an erosion of the concept of collective will. The persistently high unemployment that the world economy has experienced since the mid-1970s has arisen because there has been a decline in collective will. The move away from collective solutions to the consequences of the demand fluctuations of the capitalist economy has accompanied the widespread acceptance of neo-liberalism. At the heart of this rationalist resurgence is the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) concept and the abandonment of full employment by the governments in Australia. The increasing emphasis on individual solutions to economic problems has meant that we are no longer prepared to bear some costs ourselves to ensure others have employment. The only way we will return to full employment is if the costs and benefits of economic activity are shared. The public sector must be the vehicle to restore the collective will.
In saying that the government sector is central to the monetary system does not disclose a naive belief that governments do not make errors – even monumental ones. In any complex organisation there will be mistakes, corruption and worse. But the fact is that we have no choice – the public aspect of our economy is central and we have learned that reducing its impact or footprint has not worked in our favour. To the contrary, it has led to the private sector fraud that has destroyed a fair percentage of the wealth that the workers have built up over their lifetimes.
The In these Times article says that public institutions are:
… simply the embodiment of a promise, a social contract, that we make to one another: to be mutually accountable and dependable, to cooperate in pursuit of the common good and to communicate openly and honestly when we can’t easily agree on what the common good is. No matter how uncertain the path, it is our right and obligation to discern it— but the collective fear and disillusionment gripping the nation in the shadow of the economic collapse has made that task seem too difficult or unpalatable. Instead of having the challenging conversations that are requisite for a robust public sphere, governing bodies of all kinds are taking the quick route: shut your eyes tight, privatize, privatize, and privatize some more.
The current policy debate is moving in the exact opposite direction to that required to stabilise the real economy and get it working again for the public good. There has to be a return to a notion of the collective. The individual pursuit of greed does not maximise welfare for all of us.
The public domain of our lives embodies the mutual nature of our lives – “to reject our need for collective support, choosing instead the conceit of solitude, is a false expression of a shallow “liberty”: liberty only from the ties that bind us.”.
The task of educators (like me) who understand that this mutual dependency is at the heart of social well-being and must involve comprehensive responses from our public policy makers – is to set out frameworks and controls which ensure our public agents are up to the task. The conservative agenda is to tear down the public elements and to convince us that we cannot rely on government. But that agenda is not consistent with a generalised social well-being. It is a recipe for accelerating the transfer of real goods and services to the elites with economic power. It works – for a time – and then collapses. When it collapses we witness the ultimate hypocracy – the request for the state to socialise the losses.
Time is up.
That is enough for today!