I have been following the Occupy Wall Street developments with interest because ultimately I consider the only reasonable way entrenched elites become unseated is if there is mass action by citizens. I do not think military coups are a very sound way to lay the groundwork for grassroots democracy. I also like the idea of a “leaderless resistance movement with people of many colors, genders and political persuasions” although politics doesn’t take long to creep in and steer movements like these in particular ways. In the last day or so I have become aware that there is some notion among the “occupiers” that the evil they are opposing is fiat currency rather than corporate power particularly that of the financial monoliths. While power does lie in the monetary system the only way of ensuring that this power is democratised is if the currency-issuing entity is freely elected and accountable to us. That is a necessary but not sufficient condition for the advancement of economic development. My input to the OWS movement is by understanding Modern Monetary Theory (MMT) we can appreciate how governments are necessary for the development process and that we have to concentrate on making the fiat currency system work for us and prevent it from being hi-jacked by the so-called 1 per cent.
To kick things off, sometimes, I laugh to avoid crying. Apparently some citizens have decided to cash in on the Occupy Wall Street and they created a WWW site for their so-called “Occupy Party”. The narrative reads as if it is intrinsically related to the OWS movement – 1% versus 99%, “grass roots” etc except the OWS have disowned them.
I checked the Occupy Party’s home page and was besieged with advertisements for “motor cars”; “forex trading” and some book about how to get richer. My conclusion – this party has no class at all.
Here is a snapshot of the front page:
Anyway, in thinking about the OWS action, I went back to development economics today and re-read a fairly old contribution by The Meaning of Development by the late British economist Dudley Seers, who was a trenchant critic of the “neo-classical” approach to development studies which dominated the Post Second World War period. Neo-classical and neo-liberal are interchangeable for our purposes.
I was reminded of this chapter by Seers by a regular reader – who was unable to access it. He now has it.
We often tend to dichotomise the world into advanced and less developing countries (although the new terminology about emerging nations blurs that somewhat). But the advanced world sits smugly while the less developed countries are forced to take their IMF medicine to become like us. Of-course, the IMF medicine doesn’t make them like us but rather further enslaves them.
Please read my blog – Bad luck if you are poor! – for more discussion on this point.
My view is that the current crisis has produced outcomes for the advanced world that are not inconsistent with the problems facing the poorer nations (at least for some demographic cohorts) and the work of Seers (and later Sen) in development economics resonates strongly. This is a theme I am researching and organising my thoughts about for a chapter in a book I am working on.
I also think this resonance helps to explain the motivation for the OWS movement – and could give the movement some sharper focus and disabuse it of damaging ideas with respect to the monetary system.
Seer said that we should be careful not to confuse economic growth (measured by real GDP growth) with development. He says:
The questions to ask about a country’s development are therefore: What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? If all three of these have become less severe, then beyond doubt this has been a period of development for the country concerned. If one or two of these central problems has been growing worse, especially if all three have, it would be strange to all the result ‘development’, even if per capita income had soared.
He goes on to say that when a nation makes progress on these fundamental issues, educational (literacy etc) and political aims (participation in decision-making, etc) become “increasingly important objectives” and “Later still, freedom from repressive sexual codes, from noise and pollution, become major aims”.
But he emphasises that:
… these would not override the basic economic priorities … A government could hardly claim to be ‘developing’ a country just because its educational system was being expanded or political order was established, or limits set on engine noise, if hunger, unemployment and inequality were significant and growing, or even if they were not diminishing.
He also criticised the “neo-classical” obsession with real GDP growth and preferred to concentrate on what was necessary for development. After discussing the reduction in poverty (and its association with unemployment) he said:
Another basic necessity in the sense of something without which personality cannot develop, is a job. This does not just mean employment. It can include studying, working in a family or keeping house. But to play none of these accepted roles, i.e. to be chronically unemployed, to be chronically dependent on another person’s productive capacity, even for food, is incompatible with self-respect for a non-senile adult, especially somebody who has been spending years at school, perhaps at university, preparing for an economically active life.
It is true, of course, that both poverty and unemployment are associated in various ways with income. But even a fast increase in per capita income is in itself not enough, as the experience of many economies shows, to reduce either poverty or unemployment. In fact, certain processes of growth can easily be accompanied by, an in a sense cause, growing unemployment.
He went on to discuss income distribution and that “equality should … be considered an objective in its own right, the third element in development”.
If you think about what has occurred in the period leading up to the crisis and then since one could construct an argument that the leading economies (bar Japan) have been engaged in a process of “reverse development”. I exclude Japan because they have largely maintained their social safety nets and through their collective approach they have kept unemployment from rising substantially. I am not holding Japan out as some utopia but it clearly manages economic crises better than the West.
In the period leading up to the crisis, the neo-liberal onslaught sought to undermine and reverse many of the gains that were made through a hundred years or more of collective bargaining and Welfare State legislation. In several key ways the conservatives were successful – redistributing national income to profits (away from workers) and providing more “freedom” for financial markets etc.
Capitalism in unable to deliver sustainable prosperity under the conditions that the neo-liberals achieved in the last two decades or so. Greed, dishonesty, corruption etc – giving the financial elites too much power and too much scope to mis-use that power – is not commensurate with “economic development”.
The “reverse development” process was already in train before the crisis. The MMT literature, to which I contributed, was pointing this out in the mid-1990s. It was clear the increased financialisation of the world economy and the reliance on credit-fuelled consumption growth provide an unsustainable growth process. It was just a matter of time before it blew up – despite the denials of the mainstream macroeconomists and central bankers etc.
It did blow up and the “reverse development” process gathered pace. I think it is this process that has generated the OWS movement and its counterparts that are spreading throughout the world. The pre-crisis forebodings led to G20 protests etc but the “reverse development” process wasn’t stark enough for the angst expressed at those protests to really spread and capture the imagination of ordinary people.
The crisis has led to a worsening in all three basic development aims outlined above by Dudley Seers. The US economy is now in a very bad way and the entrenched nature of the malaise is undermining the basic conditions of social life.
First, the income and wealth distributions have increasingly become more unequal over the neo-liberal period but the contrast between rich and poor is now so stark that stability of the social order can no longer be guaranteed. The income distribution in the US now looks like a less developing nation.
The US Congressional Budget Office provided very interesting data = “Additional Data on Sources of Income and High-Income Households, 1979-2005” which reveals that in 2005, the top 1 per cent of Households on average earned $US24,286,300 (post tax) while the bottom quintile earned $US15,300 on average. The second quintile earned $US33,700, the third $US50,200; the fourth $US 70,300, and even the second last percentile earned on average $US3,191,600.
The following graph shows movement in average household income in the US by distributional cohort (quintiles and percentiles) from 1975 to 2005. There has been virtually no growth in average income for the bottom 60 per cent of the distribution over this period but staggering growth for the top percentile.
The following graph is taken from the CBO data and shows the post-tax shares in total household income for various cohorts (quintiles and percentiles). I indexed the shares to be 100 at 1975. You can see how the lower quintiles have lost share and the top three cohorts have gained share. These shifts in income distribution have been dramatic and resemble the sort of outcome you would find in a poor nation.
Second, the unemployment rate has now become entrenched at around 9.5 per cent (with minor variations around that) and long-term unemployment has entered the US scene for the first time, previously being a European/Australian phenomenon. Broader indicators of labour underutilisation published by the US Bureau of Labor Statistics suggest that around 18 per cent of available productive workers are idle in one way or another in the US.
The rule of thumb which provides a conservative estimate of the broad labour underutilisation rate is to double the official unemployment rate.
The problem is worse in some of the European nations. Further, the distribution of unemployment is also very unequal. Youth unemployment rates are very high – a wasted generation. Disparities across regional space are also marked.
Third, related to the previous two trends is the growing poverty rates in the advanced world – surely a sign of “reverse development”. What possible case could the advanced world put forward which would suggest that the policy environment that leads to increased poverty rates – long after the so-called “development problem” had been “solved” – was appropriate.
Neo-liberalism stands condemned for this reason alone.
There are other country-specific factors that are driving the OWS movement including the way in which education is funded and the prospects that failing economies (poor job prospects) present our youth (many who are lumbered by enormous debts as neo-liberal governments moved further to a “user pays” higher education system).
These are the issues that the OWS movement is addressing in its own way. Loose perhaps but definitely driven by genuine issues – the disenfranchisement of the majority by an increasingly arrogant and unproductive power elite concentrated in the financial sector, large corporations and the political ranks.
But if we are concerned with economic development (as outlined above) – that is, reducing poverty, reducing unemployment and reducing inequality – then we have to understand that how the monetary system is organised and the conduct of government within it are crucial.
Railing against fiat currency and proposing a return to a Gold Standard, for example, is the anathema of economic development.
Suggesting that private banks be denied the capacity to create credit is similarly misguided.
Some principles that I will expand on in future blogs:
1. Fiat monetary systems are the best way to ensure there is full employment and price stability – and economic development. Convertible currency systems with fixed exchange rates undermine the capacity of governments to pursue public purpose. They bias all adjustment onto external deficit nations which means they become prone to stagnation.
2. Allowing private banks to create credit is not inflationary per se. Banks need to be tightly regulated by government. Banks have to become banks again. Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.
3. Governments are not corrupt by definition and so we have to trust them to issue the currency under monopoly conditions. We then have to create pressure groups to ensure our representatives do not get captured by those who would undermine the economic development process. Governments have to advance public purpose as their primary goal and we have to hold them to account on that.
4. The central bank is really part of government and should be brought within the accountability structures of the elected government. They play an essential role in maintaining financial stability and maintaining the payments system. They should not be allowed to use unemployment as a policy tool to maintain price stability. They would be better placed managing an employment buffer stock system (a Job Guarantee) in that regard. Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.
5. Flexible exchange rates free government to pursue domestic policy. Severe fluctuations in parities are typically generated by unproductive speculative activity instigated by the investment banks/hedge funds. A truly progressive vision would render all that behaviour illegal. That should be the focus of the OWS movement not the flexibility of exchange rates.
6. We have to have a government sector as the centrepiece of the monetary system whichever way we want to organise the productive economy. The issue is to ensure governments work for us and not the top 1 per cent. Building those accountability structures is what the OWS movement should work towards rather than assuming that we can do away with evil government.
More evidential shortcomings from the neo-liberals
There was a very interesting article in the New York Times (October 4, 2011) – Misrepresentations, Regulations and Jobs
The author Bruce Bartlett has been a free market contributor for many years and has been an advisor to the “Reagan and George H.W. Bush administrations”. It seems in recent years he has realised that “supply side” economics is inappropriate for the age and is now writing very Keynesian pieces.
I find it interesting when people make these paradigm swaps but that sort of analysis is for another blog.
In this article, Bartlett attacks the conservative notion that US unemployment is the result of government regulation. He said:
Republicans have a problem. People are increasingly concerned about unemployment, but Republicans have nothing to offer them. The G.O.P. opposes additional government spending for jobs programs and, in fact, favors big cuts in spending that would be likely to lead to further layoffs at all levels of government.
Republicans favor tax cuts for the wealthy and corporations, but these had no stimulative effect during the George W. Bush administration and there is no reason to believe that more of them will have any today. And the Republicans’ oft-stated concern for the deficit makes tax cuts a hard sell.
These constraints have led Republicans to embrace the idea that government regulation is the principal factor holding back employment. They assert that Barack Obama has unleashed a tidal wave of new regulations, which has created uncertainty among businesses and prevents them from investing and hiring.
So it is more of what I was considering yesterday in the blog – One quarter shorter, three quarters deeper – where all the empirical evidence in Britain is running contrary to the neo-liberal narrative.
Bartlett says that in the US, the Republicans offer “no hard evidence” to support their claim and “it is simply asserted as self-evident and repeated endlessly throughout the conservative echo chamber”.
He cites the House majority leader, Eric Cantor as being particularly transfixed on this idea. On August 29, 2011, Cantor issued this Press Release and backed it up with a media blitz. He said:
We also have a very critical jobs and growth crisis. What we’re looking to do as we return to Washington next week is focus on how we stop the federal government from making it so difficult for small business people to create jobs … Whether you are talking about the National Labor Relations Board which has made decisions that have begun to stop companies from relocating or expanding in states where they choose to create new jobs, or whether it is the EPA which has been on a rampage making it more difficult for small businesses and manufacturers to deal with added costs so they can’t create jobs, this is the point, we want to make it easier for small businesses to grow …
And so it went – railing about the way in which regulation was stifling job creation in the US.
Clearly, he is playing on the fact that Americans are stupid and will accept what is, in fact, a made-up story with no empirical support at all.
Bartlett produces a Table that is derived from the US Bureau of Labor Statistics site for Extended Mass Layoffs. The relevant table is “Table 2. Reason for layoff: Extended mass layoff events, separations, and initial claimants for unemployment insurance, private nonfarm sector”.
Here is Bartlett’s Table (which is the sum of Layoffs and Separations) as per the BLS definitions. I checked the data and his aggregations are accurate.
Once again the evidence overwhelmingly supports the claim that American firms have been sacking workers because there is a shortage of demand (spending). The firms that volunteered “government regulations/intervention” as the reason for laying off their workers constituted a miniscule proportion of the total.
No-one who was familiar with this data would conclude that business regulation is choking the American labour market or was in any way responsible for the substantial drop in labour demand and the rise in unemployment.
Bartlett also proffers other evidence to support his conclusion that:
In my opinion, regulatory uncertainty is a canard invented by Republicans that allows them to use current economic problems to pursue an agenda supported by the business community year in and year out. In other words, it is a simple case of political opportunism, not a serious effort to deal with high unemployment.
As noted, I will expand on the principles I outlined above in more detail in further blogs. The point is that we will not get very far if the OWS movements and their derivatives get hi-jacked by the sort of Tea Party nonsense that is now crippling the world.
We need governments to be purposeful and to use their currency power to advance the economic development process. There is nothing evil about fiat currency or budget deficits or private banking monetary creation.
The problem comes when the incentive structure of those institutions are perverted by the elites so that the institutions work against public purpose.
The Saturday Quiz will be back sometime tomorrow – even harder than last week!
That is enough for today!