I have received several E-mails over the last few weeks that suggest that the economics…
Imagine if we treated humiliation itself as a cost
I am currently writing a piece for the US weekly The Nation which is focusing my mind on issues relating to what a social democratic narrative should look like and in what way does it have to change from that which dominated government policy and the relationship the state had with its citizens in the Post WWII period up until the neo-liberal resurgence in the mid-1970s. It is an interesting topic and my deadline looms. Serendipitously, while I was driving back from the airport the other day I was listening to a repeat of an ABC radio program Big Ideas (thank god for our public broadcaster) which was a repeat of a lecture – What is Living and What is Dead in Social Democracy? – given by the late Tony Judt as the 2009 Remarque Lecture at New York University on October 19, 2009. The lecture nicely dovetailed into my current thoughts and challenged the “left” to wake up to themselves and revive the collective narrative and to get angry about what we have lost over the last 30 years. There are many memorable lines in this speech and the title – imagine if we treated “humiliation itself as a cost” is just one of them (more about which later).
You can hear the full lecture via the ABC. You can watch the lecture via the Remarque Institute, NYU and there is a transcript available via the New York Review of Books, which is based on the lecture.
As an aside, the conservatives have long been trying to privatise (read: compromise) the Australian Broadcasting Commission (ABC) because it consistently accuses it of left-wing bias. Interestingly, there was a study done last year during the federal election campaign which showed that in fact the ABC had given more airplay to the conservative ideas than those of the government.
I laughed when I read that because in this modern era it is hard to tell the difference between a Labor government (founded as the political arm of the trade union movement) and the conservatives (who historically have represented the wealthy elites and corporate sector). Both aim to create budget surpluses of x per cent within x years (minor differences in magnitudes) and both promote welfare-to-work reforms (read: deregulate the labour market and reduce entitlements), privatisation (read: hand over public assets at below value to wealthy elites) and neither has a solution to poverty and inequality except to preach the benefits of market-led growth.
But there is a slight difference and this relates to the lecture by Tony Judt where he says that today’s (so-called) social democrats need action not words to restore their place in the policy debate.
I won’t go into a detailed line-by-line analysis of Judt’s excellent speech. I urge you all to listen to it and reflect on its message.
He notes that social democracy evolved out of a period of insecurity which culminated in the twin events – the Great Depression closely followed by World War II. At the time there were two competing camps which aimed to address the question of the best way to maintain liberty in the face of totalitarianism (right and left) which had assumed dominance as a response to this insecurity.
He compares the Austrian influence (Von Mises, Hayek, etc) who eschewed state intervention – believing it was intrinsically doomed to be repressive of liberty – and the social democratic response – which followed on from the work of Beveridge and Keynes among others. This alternative response understood that the state was a vehicle for collective action which could promote better outcomes for all within a democratic context (that is, devoid of totalitarianism).
Judt notes that the latter position dominated until the mid-1970s and “(s)ince then, as we know, the Austrians have had their revenge” in the sense that the neo-liberal domination of economic policy has seen the pursuit of collective well-being severely retrenched and a new narrative (the old actually) has emerged such that:
… when asking ourselves whether we support a proposal or initiative, we have not asked, is it good or bad? Instead we inquire: Is it efficient? Is it productive? Would it benefit gross domestic product? Will it contribute to growth? This propensity to avoid moral considerations, to restrict ourselves to issues of profit and loss – economic questions in the narrowest sense – is not an instinctive human condition. It is an acquired taste.
By restricting “public policy considerations to a mere economic calculus” we have abandoned the great gains of the Post WWII era. Most of us forget that this era of state intervention into the economy in the name of collective good was extraordinarily successful. Judt says that:
The welfare state had remarkable achievements to its credit. In some countries it was social democratic, grounded in an ambitious program of socialist legislation; in others – Great Britain, for example – it amounted to a series of pragmatic policies aimed at alleviating disadvantage and reducing extremes of wealth and indigence. The common theme and universal accomplishment of the neo-Keynesian governments of the postwar era was their remarkable success in curbing inequality. If you compare the gap separating rich and poor, whether by income or assets, in all continental European countries along with Great Britain and the US, you will see that it shrinks dramatically in the generation following 1945.
In my 2008 book with Joan Muysken – Full Employment abandoned – we consider these themes in great detail.
Judt considers the success of that welfare state was a double-edged sword. By reducing insecurity “their success would over time undermine their appeal”. In other words, we forget what we have and what our past generations fought for and why. We forget historical context and in many ways that reduces our sense of meaning with policy frameworks. That makes it easier for the neo-liberals to tear these policy frameworks down – especially during times of prosperity and growth.
Our loss of collective memory only can be restored in times of hardship that align with the times that our forebears faced.
Judt says that the benefits derived from the welfare state were:
By the late 1970s … increasingly neglected. Starting with the tax and employment reforms of the Thatcher-Reagan years, and followed in short order by deregulation of the financial sector, inequality has once again become an issue in Western society. After notably diminishing from the 1910s through the 1960s, the inequality index has steadily grown over the course of the past three decades.
He quotes data which shows that in the “US today, the “Gini coefficient” – a measure of the distance separating rich and poor – is comparable to that of China”. The policy frameworks that have supported this return to significant inequality and which are at present entrenching long-term unemployment around the globe are re-creating the conditions that led to our forebears considering the development of the welfare state.
This is the terrain that the progressive agenda needs to be firmly fighting on. It requires a total rejection of the neo-liberal paradigm. Not bits of it. The whole shebang. A policy approach based on the “individual” without a value-system to ensure that all of us share in the spoils will never provide security and hope for the poor and disadvantaged.
Judt’s lecture documents how the neo-liberal era has undermined the liberty of citizens around the world while enhancing the wealth and power of a few. He asks:
Why do so few of us condemn such “reforms” – enacted under a Democratic president? Why are we so unmoved by the stigma attaching to their victims? Far from questioning this reversion to the practices of early industrial capitalism, we have adapted all too well and in consensual silence – in revealing contrast to an earlier generation. But then, as Tolstoy reminds us, there are “no conditions of life to which a man cannot get accustomed, especially if he sees them accepted by everyone around him.”
It is the silence of the majority that has allowed this state of affairs to take control of the policy space. It will be the voice of that same majority that changes things. The alternative, as Judt clearly notes, is that more and more extreme responses will emerge as they did in the 1930s in Europe which crush liberty.
The neo-liberal paradigm might give way to an equally oppressive totalitarian state. Neither is desirable.
Judt went on to critique the neo-liberal dismantling of the state including the faux rationale for privatisation and the outsourcing of public services. He noted that it has been a fallacious notion of “costs” that has allowed the free market lobby to claim that private provision is superior to public provision. His historical record is impeccable.
In Paul Ormerod’s 1994 book – The Death of Economics – we read that during the period of full employment:
A perfectly feasible outcome for the Western economics in the post-war period would have involved a much higher average level of unemployment, with everything else remaining exactly the same: Marshall Plan, monetary stability, high investment, rapid growth. The sole difference would have been that those in employment would have become even better off than they did, at the expense of the unemployed.
This bears on the issue of the way in which we construct the modern day debate. We seem to think that unemployment is inevitable (“its natural”) as a buffer against inflation. It is quite clear that this claim – which is central to the neo-liberal position – the so-called NAIRU argument – is erroneous. Please read my blog – The dreaded NAIRU is still about! – for more discussion on this point.
As I explained in this blog – Modern monetary theory and inflation – Part 1 – that there are two broad ways to control inflation and the use of buffer stocks are involved in each:
- Unemployment buffer stocks: Under a mainstream NAIRU regime (the current orthodoxy), inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing.
- Employment buffer stocks: The government exploits the fiscal power embodied in a fiat-currency issuing national government to introduce full employment based on an employment buffer stock approach. The Job Guarantee (JG) model which is central to Modern Monetary Theory (MMT) is an example of an employment buffer stock policy approach.
Full employment requires that there are enough jobs created in the economy to absorb the available labour supply. Focusing on some politically acceptable (though perhaps high) unemployment rate is incompatible with sustained full employment.
Under the neo-liberal policy regime, central banks have, increasingly, been given the responsibility by government for managing the price level. In conducting monetary policy to fulfill their major economic objectives, central banks manipulate the interest rate and attempt to manage the state of inflation expectations via aggregate demand impacts.
They now use unemployment as a policy tool rather than a policy target to discipline the inflation generating process. Where negative real effects from the operation of inflation-first monetary policy are acknowledged they are theorised to be necessary for optimal long term growth and employment and small in magnitude.
In MMT, a superior use of the labour slack necessary to generate price stability is to implement an employment program for the otherwise unemployed as an activity floor in the real sector, which both anchors the general price level to the price of employed labour of this (currently unemployed) buffer and can produce useful output with positive supply side effects.
The employment buffer stock approach (the JG) exploits the imperfect competition introduced by fiat (flexible exchange rate) currency which provides the issuing government with pricing power and frees it of nominal financial constraints.
So Ormerod’s point bears on this choice between buffer stocks. Ormerod notes that the economies that didn’t let unemployment rise after the first OPEC oil shocks in 1973-74 (Japan, Austria, Norway, Switzerland etc) each:
… in its particular way … exhibited a high degree of shared social values, of what may be termed social cohesion, a characteristic of almost all societies in which unemployment has remained low for long periods of time … The social values in Western Europe after the war, for example, following a period of hardship and privation, were generally conducive to sharing the fruits of economic growth and to the preservation of high levels of employment … the countries which have continued to maintain low unemployment have maintained a sector of the economy which effectively functions as an employer of last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified. There is of-course, a cost associated with this concept, but it is a cost which societies with a high degree of social cohesion have been willing to pay.
This is a compelling historical account of where an employment buffer stock approach has served to provide inclusion and hope to those who would otherwise be impoverished and excluded.
Under the neo-liberal approach – the unemployment buffer stock solution – those with hope have become those with fear again.
This reminds me of a great line from the great American founder of its very meagre social security system – Arthur Altmeyer – who said (in 1963) that social welfare was important because:
… it isn’t fear that presses people on to high endeavor, to do better and better, but hope; and I think social insurance replaces fear with hope …
I think of that construction often. The neo-liberal approach is to invoke fear and desperation among the have-nots as if to compel them into entrepreneurial zeal by starvation. It doesn’t work.
A major reason why it has failed us is because it ignores the macroeconomic basis of unemployment and disadvantage. The neo liberals wrongly assume that the plight of the disadvantaged is the expression of their laziness, their loose living, their lack of skills, their seduction by government welfare systems. They therefore think the solution lies in reversing these individual failings or dismantling the state disincentives.
But they fail to understand that mass unemployment is a systemic failure – a failure of aggregate demand to match the level required to elicit enough output to employ everyone. Spending equals income remember which, in turn, generates employment. Please read my blog – What causes mass unemployment? – for more discussion on this point.
They fail to understand that individual action, upon which they base all their considerations, is powerless when there is a macroeconomic constraint. That is what a fallacy of composition is all about and the mainstream macroeconomics and Austrians all fall into that error of logic when discussing macroeconomics.
This relates to Tony Judt’s discussion about the way in which the neo-liberal era has sought to erode the concept of universal rights and entitlements as citizens which was a central plank of the modern welfare state following WWII.
In the same way that Ormerod notes that sharing costs some (for example, in terms of reduced purchasing power if inflation is to be kept in check), Judt says that “it is cheaper to provide benevolent handouts to the poor than to guarantee them a full range of social services as of right”. The concept of the deserving poor underpins much conservative discussion to welfare these days.
Judt says that the problem is that:
… it is notoriously humiliating to be on the receiving end of that kind of assistance. The “means test” applied by the British authorities to victims of the 1930s depression is still recalled with distaste and even anger by an older generation … Conversely, it is not humiliating to be on the receiving end of a right. If you are entitled to unemployment payments, pension, disability, municipal housing, or any other publicly furnished assistance as of right – without anyone investigating to determine whether you have sunk low enough to “deserve” help – then you will not be embarrassed to accept it.
It is in this context that he asks “what if we treated humiliation itself as a cost, a charge to society?” I think about those types of ideas a lot and clearly it fits squarely with Ormerod’s insight that we could have done the Post WWII period very differently had we constructed our approach to welfare differently.
The problem is that we don’t factor in the right costs. Judt says that:
What if we decided to “quantify” the harm done when people are shamed by their fellow citizens before receiving the mere necessities of life? In other words, what if we factored into our estimates of productivity, efficiency, or well-being the difference between a humiliating handout and a benefit as of right?
This would alter the whole policy calculus and reinstate the wisdom of providing “universal social services, public health insurance, or subsidized public transportation” as a “cost-effective way to achieve our common objectives”.
Imagine, if we proposed that unemployment would be annually balloted among the population. So that each year, based on the policies that the society agreed were appropriate for government to follow – some unemployment (above frictional) would be generated. In other words, the political consensus in the US at present is to maintain a policy environment that is generating around 10 per cent unemployment rates.
Now, each year each adult person goes into the ballot and to “win” a year’s unemployment – 10 per cent of the adult working age population would be drawn out and those people – lawyers, judges, entrepreneurs, right-wing think tank bosses, Wall Street CEOs, economics professors, downtrodden low-skill workers – all of them would have to be unemployed and live only on the unemployment assistance available under current policy (that is, the wealthy would have to forgo any other income source).
How long would it before social democratic solutions to unemployment would be introduced? Not long at all. Those with a political voice would force the governments to take a collective role and would be willing to forego some purchasing power to ensure that the required aggregate demand was permissible within the inflation constraint.
From a MMT perspective, we need to be careful in understanding what the “costs” of public provision (and sharing) are. The higher taxes that accompany most welfare states have nothing to do with “financing” the higher public spending even though it looks like that at the superficial level. As I noted yesterday, the higher taxes are necessary to ensure that the scale of public spending has enough “spending room” to elicit real output responses from the economy and thus not engender inflation.
The return to sharing that social democrats have to talk about is what are the appropriate burdens involved in maintaining price stability. Under the NAIRU approach the burdens are all pushed onto the weak and disadvantaged via unemployment. A far better way – in terms of maximising the potential of the available resources is to ensure everyone has employment and the higher consumption levels of the poor have to be “funded” by slightly (imperceptibly) lower consumption levels of the strong.
The point is that the progressive solution lies in restoring a notion of collective – of sharing the bounty and the costs.
This also bears on Tony Judt’s closing theme that we are now entering “a new age of insecurity” after some period of prosperity. He said that this prosperity and stability:
… is now behind us. For the foreseeable future we shall be as economically insecure as we are culturally uncertain. We are assuredly less confident of our collective purposes, our environmental well-being, or our personal safety than at any time since World War II. We have no idea what sort of world our children will inherit, but we can no longer delude ourselves into supposing that it must resemble our own in reassuring ways.
This is the sort of situation that faced our grandparents (and perhaps some parents if they still alive) during the Great Depression and the world war that followed. That insecurity led to the great debate between the Austrian school who feared totalitarianism and translated that fear into an irrational loathing of state intervention and Keynes and his ilk, who Judt says thought “uncertainty – elevated to the level of insecurity and collective fear – was the corrosive force that had threatened and might again threaten the liberal world”.
Fortunately, Keyne’s solution to the insecurity dominated until the mid-1970s and was was based on “an increased role for the social security state, including but not confined to countercyclical economic intervention”.
Please read my blog – A new progressive agenda? – for a detailed discussion of this historical period and the way in which the Keynesian consensus gave way to the destructive neo-liberal NAIRU paradigm during the 1970s.
Judt says that “social democracy in Europe, the New Deal, and the Great Society here in the US were explicit responses to the insecurities and inequities of the age. Few in the West are old enough to know just what it means to watch our world collapse”.
So the challenge for social democrats is to leverage this renewed insecurity to construct a realistic picture of history – “by reacquainting ourselves with the recent past” which includes reminding the public “of the achievements of the twentieth century, along with the likely consequences of our heedless rush to dismantle them”.
The progressive agenda has become very defensive and concessionary to the nonsensical (un)truths peddled by the conservatives. The progressive response has to hit these myths about budgets and public debt head-on. Not concede that there are financial constraints on sovereign governments and so the challenge is to balance public spending more towards equality. That is a dead-end narrative. Rather, the progressive side of the debate has to demystify the conceptual structure of neo-liberal which few understand so that the public start asking the right questions for once.
For example, if governments are not financially constrained why don’t they create work for all? Rather than, will taxes rise if the deficit remains?
I agree with Judt that “(s)ocial democrats … need to speak more assertively of past gains” which include:
The rise of the social service state, the century-long construction of a public sector whose goods and services illustrate and promote our collective identity and common purposes, the institution of welfare as a matter of right and its provision as a social duty: these were no mean accomplishments.
Conclusion
We need to fight for the gains our grandparents made against the urgency of capital to expropriate ever more proportions of the real economic pie for itself. The neo-liberal agenda for the last three decades has been about “methodically unraveling and destabilizing those same improvements” and Judt says that:
… this should make us much angrier than we are. It ought also to worry us, if only on prudential grounds: Why have we been in such a hurry to tear down the dikes laboriously set in place by our predecessors? Are we so sure that there are no floods to come?
Anyway, that was my little diversion for the day – now it is back to my real writing for today …
Total aside – Golden Globe awards
There seems to be an outcry about the hosting by Ricky Gervais of the 2011 Golden Globe awards this week in Los Angeles. Apparently most Americans didn’t think it was funny and have become a trifle precious. Here is his opening monologue. I laughed (a lot). But then …
That is enough for today!
Great post!
I think this anger is already under way. In Europe by tradition the first people to become annoyed and angry are the French. If you visit Amazon France you will notice that a little essay titled “Indignez-vous!” (Get angry!) is the number one book for some time now. This essay is written by Stéphane Frédéric Hessel, a 93 year-old resistance war hero who then participated to draft the Universal Declaration of Human Rights of 1948. In his essay Hessel argues that people need to get outraged again about the growing gap between the very rich and the very poor, the silent abolishment of the welfare state, … He concludes that we need a new resistance movement. You can read an English translation here.
In regard to Austria in the 70s the low unemployment rate beside the OPEC oil shock was due to the policies of the then chancellor Bruno Kreisky. This year we’re celebrating his 100th birthday and it’s worth noting that he was the last true socialist chancellor in Austria basing his election campaign in 1979 on the premise: If I have to choose between high state-debt or people become unemployed I choose the later. Of course 1979 Austria was sovereign in its currency. John Kenneth Galbraith wrote, that when he asked Kreisky how the post-war economic miracle in Austria came into being, Kreisky said: we were very successful with exports. We exported all our economists. Which is true insofar as after the war all the once dominant Austrian school economists of the 20s and 30s were relocated to the US. (For US commentators: my sincere apologies for these exports!)
Has anybody else spotted the redefinition of the multiplier? We’re now seeing comments like this:
“If fiscal policy becomes focused on long-run considerations (e.g. deficit reduction) economic conditions will improve over time. But, if fiscal policy remains focused on short-term stimulus, the economy’s prolonged under-performance will persist since the government expenditure multiplier is less than one, and possibly close to zero.
The recent scientific work on the expenditure multiplier is aligned with the Ricardian equivalence theorem as well as the views of the Austrian economists who continued to follow Ricardo even when the Keynesian revolution was ascendant. Economist Gary Shilling made this point very well in his outstanding new book, The Age of Deleveraging – Investment Strategies for a Decade of Slow Growth and Deflation.
Dr. Shilling’s analysis of the simplified and unsubstantiated Keynesian multiplier (p.216) still taught in many colleges and universities is extremely insightful. ‘But the Austrian School of economists like Friedrich Hayek and Ludwig von Mises believed that the economy is much more complicated The Austrian view suggests that the government spending multiplier may be only 1.0 and that there are not any follow-on effects. More recent academic studies indicate that the multiplier is less than 1.0, and perhaps much less.’
After recognizing the difficulty of calculating the multiplier, Dr. Shilling writes, ‘Also, the inherent inefficiencies of government reduce the effects of deficit spending and lower the multiplier.’ Thus, if steps are taken to reduce deficit spending, the economy’s growth rate will recover after the initial transitory negative impact as additional resources are provided to the private sector.”
It’s interesting that you rarely see a multiplier greater than 1 in any of the official documents (I’m thinking the Office of Budget Responsibility here in the UK marking the VAT rise has having a multiplier effect of 0.35).
It’s another clever trick – redefine the multiplier. Most people won’t realise that there are differences of opinion of how they’ve been calculated.
I love how neoclassical/neoliberals tried to argue that the cause of the high unemployment during the 1970s was a rise in real wages – which is non-sense. Most countries real wages were flat, if not falling, and in Australia where they were rising, unemployment was due to a lack of demand in the construction and manufacturing sectors (where wages were fairly static, if not falling). So its still a Keynesian explanation of unemployment. Combine that with a government which doesn’t care about full employment, hey presto, you get high, persistent unemployment. I read an interesting paper today entitled AUSTRALIAN UNEMPLOYMENT: SOME EVIDENCE FROM INDUSTRY LABOUR DEMAND FUNCTIONS (see Australian Economic Papers Volume 22, Issue 41, pages 333-344, December 1983) that drives home this point. Perhaps this was a result of the excesses and oversupply in buildings following the 1973-75 worldwide property bust: why would you need to employ more construction workers when you’ve built 3-4 years worth of housing stock and office space?
Also, I think you guys focus way too on ‘capital’. Capital is not the issue. Rather, rent (‘debts’ for mortgage fall under this) are the issue: they cream off everything from the labour and capital classes produce, and if capital is lucrative most “capitalists” ultimately become “rentiers”. Moreover, both capital and labour need cheap land to survive in the long run (as high rents stimulate overbuilding). Also, how can one misappropriate any ‘surplus value’ if he is a single labourer who owns his own land, and produces his or her own goods? I find Marx painful to read, and Henry George retaining similar insights about exploitation and effective demand, but without blaming capital which is vital to building a prosperous society. The cause of growing inequality is the privatisation of rent. What point are rising wages when they go into the hands of a landlord or banker? Even building public infrastructure raises land values – so when Bill advocates public investment, I ask him to emphasis that the best way to raise “revenue” (even though taxes don’t fund government) through such devices. Of course, neoliberals are just as bad for minimising or ignoring debt/rents as well.
As for the Austrian School is the last, devasting remnants left behind from the Hapsburg monarchy – luckily, they are now out of Europe, and destroying the US. Also, as you know, I’m a big fan of Australia adopting/melding the Finnish, Austrian and Swiss models if it were to become a Republic, so I’m glad to see the latter being mentioned in Bill’s blog. Although you can get as angry as you want – under a politicans’ monarchy (aka. Australia) or a politicans’ Republic (US) what point is there when your representative don’t even listen to you? No wonder 80 percent of Austria wanted to join Switzerland, and 75% of Germans in South Western German did in recent polls!
@Spadj
I’m assuming you are referring to a poll conducted by Die Weltwoche last year. They only polled neighbor regions of Switzerland. Which in Austria is Vorarlberg. Thus 80% of the population of Vorarlberg wanted to join Switzerland. This is an age-old dispute here. After the First World War there was a referendum whether Vorarlberg should join Switzerland with a similar result. Switzerland did not want another German speaking Kanton and then the treaty of St. Germain came into effect. We’ve an old joke about Vorarlberg: What God separated by a huge mountain range men should not connect via a tunnel ;~)
The high unemployment and the 1973-75 worldwide property bust was the result of the central banks rising their interest rate. Please don`t call it “oil shock”, they had to pay 6 Cent more in 1974 each litre oil. There has been no real danger of inflation and no true argument, to fight inflation and cause unemployment to fight inflation. After a little hedonic regression there would have been no inflation.
@ Stephan – yep, I’m referring to those polls and yep, that right on 11 May 1919, there was a referendum in Vorarlberg in which 80-1% of the population voted to join Switzerland, although with other parts of Europe who have expressed similar sentiments:
http://www.parlament.ch/D/Suche/Seiten/geschaefte.aspx?gesch_id=20103215
http://www.suedkurier.de/news/brennpunkte/politik/Schweiz-Politik;art410924,4340617
http://www.20min.ch/news/kreuz_und_quer/story/25284853
http://en.wikipedia.org/wiki/Enlargement_of_Switzerland
@ Wolfgang, yes central bankers did indeed cause the bursting of the 73-75 property bubble. I’ve been arguing this for some time now on these blogs. Curiously, though, Whitlam remarked that “if as a result of these high interest rates…it curbs a speculative rush in land that would be all too good”. I was looking at the 1975-6 Yearbook (Australia) which suggested that 80% of the fall in output (GNE) was in gross fixed investment (at 1967 dollars), mostly in dwellings and ‘other construction’ – although the quarterly National Accounts are a bit more mixed and in some quarter 56% of the fall in output in one quarter was attributed to gross fixed K, in others gross fixed K rose, even though GDP fell (imports were to blame). Depends really on the quarter, although during 1974-85 GDP was all over the place. Nevertheless, the point is quite clear: there is alot of doubt that the oil shock caused the inflation (alot of the inflation in the US was taking place BEFORE the oil shock – the Arabs only hiked oil prices to mop up US dollars), and any loss in even real output was probably neglibile (for example, there was a decline in car sales in Oz of about 3.8% in the March quarter, butin the June quarter car sales rose by 11.8%).
Neil Wilson,
I spotted your comment about VAT. I have noticed that most UK media economists are down-playing the effect of the VAT hike, and your comment may explain why.
Economists talk about “consumer confidence” rather than, say, “spending power”, as if household spending is driven purely by psychological effects rather than how much money they have to spend. They seem to think that because people won’t notice the small change in prices, it will have little effect on demand.
Since the recession, there is now a much higher proportion of the population that is “cash-constrained” and therefore only their spending power matters not “confidence” (they’ll keep spending till the money runs out). If that’s right then maybe the VAT hike will cause a much bigger contraction than these economists are expecting.
Kind Regards
Brilliant lecture! I’m not sure continental Europe should be let off the hook so easily though. The amount of business English that is used in the German language is quite frightening. And they don’t even understand the meaning of the words most of the time. I also see libertarianism much more cynically. It isn’t that they don’t think of humiliation as a cost. In fact, I think they deliberately use it against what they believe is the only moral hazard worth mentioning – the laziness of the poor (which to them is a pleonasm anyway).
Spadj, “The cause of growing inequality is the privatisation of rent.”
Michael Hudson in a nutshell. Historically, most wealth has been gained from economic rent along with privatizing the commons.
Hudson separates economic rent into land rent, monopoly rent, and financial rent. Rent is fictitious profit since it is not based on factors but skimming – and scamming. Taxation should be directed at economic rent in order to disincentivize it directly and indirectly incentivize productive contribution.
According to Hudson, the surplus above the factors involves in the production > distribution > consumption cycle goes toward either taxes or economic rent. The plutocracy wants low taxation so they can increase economic rent thereby increasing their distributional share without productive contribution.
Can The People get really angry? YES. Do Revolutions happen also nowadays? YES. I was just bringing me up2date about all the latest developments in Tunisia. Fascinating stuff. This is the first WikiLeaks revolution. “WikiLeaks reveals what everyone was whispering.” The son-in-law has a tiger named “Pasha” as a pet in his garden? He imports his ice cream by private jet from St. Tropez? So President Ben Ali and his ilk are now finally on a never ending holiday in Saudi Arabia.
__http://www.guardian.co.uk/commentisfree/2011/jan/13/tunisia-youth-revolution
__http://www.guardian.co.uk/world/2010/dec/07/wikileaks-tunisia-first-lady
As an addendum to my previous post: I’m a little bit wondering why Bill has nothing written about Tunisia yet? This revolution is not only about a corrupt regime. It’s mostly about employment. The whole thing was started by an unemployed graduate who burned himself to death after police tried to stop him selling vegetables without a permit.
Thanks Bill,
I aggree with you. We need a moral awakening. The top end of town produces no wealth. They only expropriate it! The share they expropriate is obscene. It is important to let people know that wealth produced in a given period is finite and that if elites grab the lions share, the producers of the wealth, the workers and their families and society as a whole (our commonweath) will be short changed on a massive scale and privation will become the norm.
One comment on the sentance:
“He notes that social democracy evolved out of a period of insecurity which culminated in the twin events – the Great Depression closely followed by World War II.”
Let us remember that the Social Democracy was the party of Engels and Lenin, and since the right German social democrats organized the provocation and smashing and murder of the German working class in 1919, it steadily has lost the moral high ground. It has done a lot of evolving in the last 100 years!
Thanks again.
Hi Stephan,
I see you are still here.
As Kreisky is concerned:
” If I have to choose between high state-debt or people become unemployed I choose the later.”
I think it was vice versa
@Gerhard
Thanks! You are correct. Kreisky choose employment and did not care of incurring sovereign debt in that regard. My fault. These double negations in German can be tricky if you write a quick comment in English ;~)
PS: “I see you are still here.” Why not? Bills blog is one of my favorite economics blog. Beside of course Greg Mankiws blog. Shorter posts and much more amusing. And you don’t have to work the keyboard because Gregs gospel doesn’t accept dissent by comment.
Dear Bill,
The ‘skin of the earth’, the Intelligence and kindness required to provide ecologically sustainable access to its resources, so that the entire human species might enjoy the security and certainty of food clothing and shelter provision, health and education – is not really a systemic political decision, moral religious or even an economic one. I grant this is difficult to understand.
There are certain forces that hold sway over human nature, recognised over millennia: recently I heard them listed as ‘lust (wish life), anger, attachment, greed and ego’. These are human fundamentals, modified perhaps by some overriding systemic discipline as mentioned above – but still fundamental, integral in human nature. They can only be subjugated personally. Once subjugated, a collective of such persons may carry a potential to focus, and work cooperatively; perhaps even create more equitable systems. The notion of ‘self’ widened and elevated to the notion of a ‘greater self’ or ‘community’; the self rewarded as the greater self prospers.
It appears that the degree to which these forces are subjugate in a human being is reflected in the ideology of the mind and ego: at least that is my observation. However one must surely interact with the other; so that a change in ideology might help in subjugation, and v.v. – your description of the ascent of neo-liberal dogma a case in point.
You can see by the Queensland floods, when disaster strikes (very generally speaking) it is ordinary people who suffer the most, yet stretch themselves to the limit helping each other; from their ranks emerge Heroes.
In stark contrast as is well noted: many of the so called human ‘elite’ are often captive of these forces and these same people control systems. I think Intelligence in a human being, should be redefined as that principle that allows the being to subjugate his or her lower nature – then harness whatever intellectual emotional and physical capacity exists to a true expression of the Intelligence.
If people desire freedom, I don’t see any other path on offer than to do the hard yards. Freedom is not lifestyle, ego, temporal power or even a fancy haircut – and people who think so are kidding themselves. May as well call it the slavery for what it is!
I have seen the look on such people’s faces as the last breath arrives: their concepts and possessions are worth nothing to them as they have always been worth nothing.
True Intelligence always manifests in a genuine feeling for, and expression of the richness that is in the heart of each and every human being. Its ‘carrier signal’ a genuine humility and Love for all of life. It seeks fulfillment.
Cheers ….
jrbarch
Bill, your idea of a ballot to determine who should be unemployed highlights one of the weaknesses of your argument. How many unemployed “lawyers, judges, entrepreneurs, right-wing think tank bosses, etc” do we have now? Very few, because all these people have skills and knowledge that are valued in the marketplace and hence they can readily find employment. The defining characteristic of the unemployed is that they do not have skills and knowledge that are saleable in the marketplace at a price they are willing to accept (or that is within a range prescribed by the government). The solution could come from a number of directions: improve their skills and knowledge so that they can compete in the market (currently done, but note this will only be possible for some); provide government incentives to private employers to employ such people (currently done); and provide government jobs directly (also currently done). Conservatives/neo-liberals (your political opponents, whatever word you want to use to describe them) do, perhaps grudgingly in some cases, accept these government programs. Many of them might also suggest that the removal of minimum wage rate restrictions would also add to the employability of those currently unemployed (although if they are politicians they would generally be unwilling to publicly advocate removal).
So what is really needed is just an expansion of existing measures until “full employment” (however defined) is reached. It is not that the government is ignoring the problem, just that they do not spend enough on addressing it.
I guess what I am saying is that from your perspective, you are painting too bleak a picture of the winding back of socialist agendas over the past couple of decades. The basic principles are still acknowledged, the argument is over the extent of the government involvement.
If you want a real target to aim at, I suggest corporate welfare and the concomitant corruption of politicians (particularly in the US) as a candidate.
“The plutocracy wants low taxation so they can increase economic rent thereby increasing their distributional share without productive contribution.”
You’re right of course, Tom. Hudson often makes the point that Marx never could have dreamed that “rentier capitalism” would reassert itself the way it has and win out over the industrial capitalism that he wanted to make more humane. It’s interesting that the plutocrats don’t usually call for the outright elimination of the “capital gains” tax and I think the reason is that they’re afraid someone might notice that “capital gains” are almost wholly made up of rent. They seem to get ever bolder, though, and openly call for the abolishment of the inheritance tax. Hell, even Adam Smith was for an inheritance tax.
“The defining characteristic of the unemployed is that they do not have skills and knowledge that are saleable in the marketplace at a price they are willing to accept (or that is within a range prescribed by the government).”
No. The defining characteristic of the unemployed is that when the music stopped they were unable to get to one of the available chairs.
Your assumption is that there is a labour market and that it will ‘clear’. That may be the case but it will clear at a wage of zero because there are more people than jobs. We don’t need all the people to produce the resources the world requires – that’s what we have machines for.
The problem with the human labour market from a neo-classical point of view is that it is not sufficiently like the market for cattle. When you have surplus livestock you send it to the abattoir.
“The problem with the human labour market from a neo-classical point of view is that it is not sufficiently like the market for cattle. When you have surplus livestock you send it to the abattoir.”
Sums up the conservatives view of labor pretty well Neil. Machines that bleed and need to be fed. Good point about the clearing wage. Its all a matter of where you build the floor. Should we build a floor at a minimum living wage or should the floor be destitution?
David: “Hudson often makes the point that Marx never could have dreamed that “rentier capitalism” would reassert itself the way it has and win out over the industrial capitalism that he wanted to make more humane.”
Yeah, I love that observation. It’s so outrageous, even Marx couldn’t conceive of it. And that is not even mentioning the fraud, manipulation, and outright capture of the apparatus of the state through influence.
Neil: “The problem with the human labour market from a neo-classical point of view is that it is not sufficiently like the market for cattle. When you have surplus livestock you send it to the abattoir.”
Neil there are rabid conspiracy theories holding that this is exactly the plan. I see them in my email regularly for friends asking whether it is true. Now I don’t think they are true, but…..
At the (unfortunately) popular Gonzalo Lira site there is a long anti MMT rant (“MMT’ers are fools”) going on, with lots of comments and replies from GL. It would be good if someone would post a little intelligence there.
Why Democracies Will Always Go Bankrupt
http://gonzalolira.blogspot.com/
Found through the above comments:
(4.7) Common Errors in MMT
I think MMT is worth understanding, even though they have not understood hyperinflation in MMT terms. There are many other errors MMT folks make.
MMT folks say, “When inflation starts the government simply has to increase taxes and thereby destroy more money”. For regular inflation this statement is simple and true; however, for hyperinflation this statement is clueless and foolish. But MMT people don’t usually understand the difference between regular inflation and hyperinflation.
If people stop buying the government bonds then suddenly the government has to print new fiat money to cover the whole deficit as well as all the bonds that come due. If bonds are short term it is easy for this to be several times the existing taxes per year. It is simply not possible to increase taxes sufficiently to destroy money fast enough. Most MMT people just don’t get this.
Another common MMT error is, “solvency is never an issue for a government that issues its own currency”. At the end of hyperinflation a government still issues its own currency, but nobody will accept it as payment for anything. So this claim is clearly not true.
Another error MMT people make is saying something like to pay off the national debt the government can just change some numbers in a computer, no big deal. It is fun to have a whole new way of thinking and talking about economic issues, but it still needs to fit the evidence of the real world. MMT people seem not to be aware that many other governments have already run experiments on monetizing debt. We know what happens when you do this. If the whole national debt were monetized at once you would get hyperinflation for sure.
Another error MMT people make is something like, quantitative easing is just swapping bonds for bank reserves, it is not printing money. Again, MMT people think accounts on computers are different than accounting done with physical paper. If a bank requested to withdraw physical paper money from their excess reserves, the Fed would have to give them paper money. If the Fed did not have enough already, it would have to print more. The fact that they first credited an account on a computer, instead of first printing, does not change the impact of what is going on.
MMT people often count government bonds as money. But they are not the same. A 30 year bond can go up and down in value as interest rates change. In the real world things are priced in money, not 30 year bonds. They point out that a 1 day bond is not much different than money, and even a 3 month bond is not all that different. In MMT terms, a bond is delaying demand, so the shorter the term the less it really does. But if you watch the value of a 30 year bond go up and down relative to dollars, you can’t say they are the same.
Another basic error is that MMT people think the government can get something for nothing by printing money. They believe that wealth is created when the government prints money and nothing bad, like prices going up, will happen. Many times in history people have thought this, for example, the Greenbackers could only see good in printing money.
MMT people want lots of new fiat money, but insist that they are not advocating “printing money”. They have to do this because most everyone understands that just printing more money can not really create more real wealth and leads to inflation. This is similar to the Fed saying “Quantitative Easing” instead of printing money. The MMT guys argue that much of the money is just accounts in computers and not actually printed. That the Fed is using computers to keep track of accounts without always really printing money does not change the problem. When governments spend more than they get in taxes and from net bond sales they make up the different by creating money. It does not matter if you call it, “money out of thin air”, “seigniorage”, “making money”, “printing money”, “quantitative easing”, “QE”, “issuing fiat currency”, “adding to bank reserves”, “spending without borrowing”, “debasement”, “expanding the Fed’s balance sheet”, “just monetary policy”, “monetization”, “liquidity operations”, “deficit accommodating”, or “that thing which will not be named”, it lowers the value of the currency.
There are basically just 3 guys pushing MMT. These are Bill Mitchell, Rodger Mitchell, and Warren Mosler. They claim that everyone else gets the wrong answers because they don’t really understand how the modern monetary system works. While these 3 don’t even agree on what MMT theory is, they seem to think they understand it and nobody else does. It is not that it is just a different language to them, they think others are wrong.
MMT focuses on which account names are debited and credited and misses out on understanding the big picture of what is going on. While talking about accounts being debited and credited they won’t mention the obvious fact that new fiat money is being created. They also don’t look at the history of previous experiments in fiat money creation, which is a sad history really.
[Bill deleted the link that was provided here – I do not wish to advertise sites on my blog which are lures for commercial products]
@Jim
OK. I visited the site. Gonzalo Lira: Writer & Filmmaker. Good. I have no idea how to make a movie. And Dear Gonzalo has no idea what he’s talking about. And from the comments: Pinochet rescued Chile in 1973? A bunch of assholes having a big emotional problem with democracy. In regard to your links this Vince Cate is some idiot who thinks he can bullshit people by selling them his homemade gold bullion coins minted from scrap gold. Dear Jim: Please stop disseminating this outlandish nonsense.
This sounds rather like a high-school essay. It demonstrates the adage that a little knowledge is a dangerous thing. We live in a very garrulous society, where everybody thinks he has an opinion worth listening to.
Yes, Stephan…dear. I posted this to show it was stupid, but that it might be worth making some rebuttals there. Read someone’s post and think before you shoot from the hip.
@JIm
This was not meant ad hominem! But I had a very interesting email correspondence with Mister Cate months ago and I can assure you this guy is insane. He’s convinced his Anguilla gold bullion coins will replace Kruger Rand and Philharmoniker coins? Do you really think it is worth the time to engage with this sort of lunatics? Me I do not waste my time and visit mises.org to make some rebuttals to Austrian believers who are married to their ideas. The same policy applies to Mister Gonzalo Lira. (PS: Having the last name Lira I would be very worried and immediately change it. I mean the Italian Lira was debased all the time since being in existence or?)
No worries, Stephan. About the name Lira, lol. You’re probably right. Waste of time to try to speak to these people. It’s just too bad they have so many followers.
Bill sorry about the link. Didn’t read the idiotic stuff far enough to see there was advertising involved.
@Neil Wilson:
“No. The defining characteristic of the unemployed is that when the music stopped they were unable to get to one of the available chairs.”
I admit there is an element of this. However, the low skilled are undoubtedly greatly over represented in the unemployed. Whatever the case, it remains the fact that (in Australia) the argument is over the extent and methods of government intervention in the labour market, not over whether or not such intervention should take place.
“Your assumption is that there is a labour market and that it will ‘clear’. That may be the case but it will clear at a wage of zero because there are more people than jobs. We don’t need all the people to produce the resources the world requires – that’s what we have machines for.”
And your assumption (or rather, bald assertion) is in the last sentence above. Even if it were true, Government can intervene (for example, by reducing standard working hours) to spread available work over more people.
“The problem with the human labour market from a neo-classical point of view is that it is not sufficiently like the market for cattle. When you have surplus livestock you send it to the abattoir.”
I don’t know why you think I was espousing neo-classical (or indeed any economic) views. My point was about the politicial realities of debate over government labour market intervention in Australia.
@ Jim.
“For regular inflation this statement is simple and true; however, for hyperinflation this statement is clueless and foolish”
Uh, Jim, no. It’s not as black and white as that. I depends on WHY the hyperinflation is happening. If it’s just a case of government religiously and randomly “printing money” (bit hard to consciously or automatically detect this nowdays with electronic debiting systems and all – I can’t quite see the toilet paper and walls of fiat everywhere!) then the solution is simple – stop issuing the money, and absorb it with excess taxation. Although you have to be VERY VERY stupid to do that. If it a result of ENDOGENOUS forces – such as huge supply shocks (oh, like, say Chinese POSTWAR hyperinflation, Zimbabwe POSTCIVIL WAR hyperinflation, Weimar Germany POSTWAR hyperinflation or Israeli hyperinflation after various oil crises) – where people stake their distributional claim on very limited and scarce resources (oil, manufactured goods, food etc), then obviously this can only be solved increasing productive potential and direct intervention in the currency. So P (prices) leads the cycle (due to an exogenou supply shock), followed by a rise in M and V to meet the rise in P, which raises P further and a vicious spiral develops while banks etc are complicit with the rise.
Japan’s central bank has been debiting trillions of trillions of Yen the way you describe it. It got DEFLATION. So much for lowering the value of the currency! NOT! *No* supply shocks and *high* private debt means you ain’t gonna get inflation anytime soon!
“but nobody will accept it as payment for anything”
Often because governments have to turn around and stop it due to endogenous demand for the escalating currency(!) – anyways when they say solvency they people “paying off government debt”. Again, there is only one example of a default in a fiat currency regime – that’s Japan refusing to pay war bonds to American bond holders after it just got nuked!
Btw, gold standards’ give us systematic Depressions’ and fiat currencies gives us a few bouts of inflation – often during supply side shocks. I know which one I’d be choosing.
Ps by endogenous forces I mean endogenous demand for money, but that may be a result of exogenous forces (oil shocks) or endogenous forces (civil war and supply side shocks).
Errata on 2nd last paragraph in my first post (fat fingers): “anyways when they say solvency, they mean ability to “pay off government debt”. That is, to meet contractual obligations. All they have to do is click a button”.
.
Again, name 10 examples where a fiat currency has involved a default due to solvency issues.
@Jim,
If you want some real nutty stuff you just have to read Conservapedia. That people believe this stuff is beyond the pale.
You’ll find the line of argument on there is similar to Vincent’s.
@spadj
That post is not what I think. I posted it “à toute fines utiles” for those who might be interested in defending MMT on the Gonzalo Lira site. I am not in the least interested in their “arguments.”
Ah, Jim, we get so many Austrian nutters on here that its hard to tell the difference anymore.