I did an interview in August with the Harvard International Review (published by Harvard University). It was finally published yesterday (October 16, 2011) – Debt, Deficits, and Modern Monetary Theory. I consider the principles that are outlined in that interview to provide a sound organising framework for progressive movements aiming to make changes to the current failed systems. I think Modern Monetary Theory (MMT) does provide insights to the general population that are not only obscured by the mainstream media but which if they are broadly understand will empower the 99% to demand governments redefine their roles with respect to the non-government sector. Part of that re-negotiation has to be to reduce unemployment and redistribute national income more equally. We will also be better placed to have a sensible discussion about the human footprint on the planet. The three goals – full employment, reduced inequality and environmental harmony – should be central to the current civic protests (such as OWS). But we also have understand that government has to be involved in the pursuit and maintenance of those goals. The problem is not government but the politicians we elect and the coalition between them and the corporate elites. An understanding of MMT can energise the progressive fight back.
The right-wing News Limited rag, aka our national newspaper – The Australian published an article today (October 17, 2011) – Wall Street occupiers are an insult to the workers. The article was written by Spiked editor Brendan O’Neill who appears to be interested these days in taking the steam out of the left while masquerading as a progressive.
He labels the OWS crew a “gaggle of hipsters and leftists” who have mounted an “obsessively anti-big business protest” but are accepting “the backing of trendy ice-cream company Ben & Jerry’s, which is owned by the vast food conglomerate Unilever”.
The basic conjecture is that the OWS movement:
… claims to speak on behalf of ordinary Americans … Yet, its super-cool members spend most of their time moaning about how ordinary Americans, being a bit dumb, have been “emotionally brainwashed” by “right-wing propaganda”.
Apparently, O’Neill is upset about about what the OWS protesters (those “corporate-hating hipsters”) are wearing and thinks that “(m)ocking anti-capitalist fashionistas is the gift that keeps on giving”.
But his “deeper” thought is that OWS represents:
… the final death agony of the progressive Left.
What we’re witnessing is not the birth of something new, as the occupiers would have us believe, but rather the death of something old – the death of a principled Left that believed in progress and development and in the ability of “the little man” to change his world for the better.
This is because OWS destroys the traditional Left “faith in the working man” which reflected:
… the entire premise of the Left was that this class of people had it in them to shake up and remake the world.
But Occupy Wall Street – which is the modern expression of the Left “has nothing but disdain for what it views as the fat, feckless, Fox News-addicted inhabitants of mass society”.
According to O’Neill, the “East Coast hipsters” are angry middle-class people who exude superiority relative to the “thick, greedy, Foxed automatons who dare to think differently” to them.
He thinks it is an outcry of students who have chosen the wrong courses (without earning capacity) and are now resentful.
The other strand of his argument is that the new Left expression – environmental conservation – is just a rehearsal – a “very public display of middle-class piety, of petit-bourgeois values such as thriftiness and meanness and disdain for the vulgar hordes with their insatiable materialism”. He claims that the old Left wanted to create “a world of plenty, in making more stuff so everyone could live a life of comfort”.
To reinforce the point, he wonders what would happen if one of the old trade union bosses in “the early 20th century” has have asked the workers to “respect nature’s limits!”
While I have some sympathy with the argument that the “latte set” in advanced countries who talk about sustainability and consuming less etc ignore the fact that millions are starving and need to consume more, I think O’Neill fails to recognise the way the left actually handled the politics of their struggle in the early 20th century.
I don’t want to write much here about this but think back to the 1848 Communist Manifesto. In Chapter II. Proletarians and Communists – there is a discussion of how the “Communists stand to the proletarians as a whole” – that is, the Party and the workers generally. This discussion was very influential in Lenin’s later notion of the Vanguard which is outlined in his 1902 pamphlet – What is to be Done?.
In Chapter II we read:
The Communists do not form a separate party opposed to the other working-class parties. They have no interests separate and apart from those of the proletariat as a whole. They do not set up any sectarian principles of their own, by which to shape and mould the proletarian movement.
The Communists, therefore, are on the one hand, practically, the most advanced and resolute section of the working-class parties of every country, that section which pushes forward all others; on the other hand, theoretically, they have over the great mass of the proletariat the advantage of clearly understanding the line of march, the conditions, and the ultimate general results of the proletarian movement.
The immediate aim of the Communists is the same as that of all other proletarian parties: formation of the proletariat into a class, overthrow of the bourgeois supremacy, conquest of political power by the proletariat.
The theoretical conclusions of the Communists are in no way based on ideas or principles that have been invented, or discovered, by this or that would-be universal reformer.
They merely express, in general terms, actual relations springing from an existing class struggle, from a historical movement going on under our very eyes. The abolition of existing property relations is not at all a distinctive feature of communism.
In other words, the “fat, foxed-out” American workers may find it difficult to break out of those patterns without some vanguard movement.
There was always a sentiment in Marxist thinking (the early basis of Leftism) that the workers were limited in their capacities to develop a revolutionary consciousness and think of themselves as the “working class” opposite the capital class. Lenin believed that workers might join unions to fight “local” issues but these “struggles” would not lead to a broader struggle.
So the “vanguard” was the most militant section of the working class struggle that aimed to reorient the debate away from reform (which is what he saw the trade unions as being about) towards fundamental change of the economic system.
If you think about that some more then the concern that the “fat, foxed-out” workers are being bought off by the Murdoch press and limited mass consumption while the banksters take an increasing proportion of real income to play with is not incompatible with the old concerns of the left. How to organise the “brainwashed” was an old discussion.
I see OWS and its derivatives as a cry for change but that change is yet to be defined very well because their is limited educative material from which a comprehensive “manifesto” to guide an alternative economic order could be derived. MMT is the centre of my work but I accept it has – as yet – limited reach in the mainstream “middle-class” world.
I reject O’Neill’s critique that OWS is just a bunch of angry students who have taken poorly designed courses and now cannot pay their debts back. Students, in some ways, can be the most militant and drive social change because they have less to lose in many important ways. I don’t consider the student political leaders to be fonts of wisdom – but their vocal assaults on the world of the adults – provides the matches to start the fire.
The challenge of the intellectuals is to provide the fuel so that the fire burns. That is one of the problems. University academics have become cowed by the increasing managerialism of our sector and the increasing attack on our tenure and working conditions. There has been a growing feeling within universities among academics that they better be careful as to what they say.
I have never supported that caution nor practised it. I went into academic life because I wanted to be free to research what I liked and to say what I liked upon the basis of that research. More academics should be speaking out around the world now providing ideas and concepts for the OWS movement to take forward in a political way.
Which brings me to a book I have been reading by an American academic at Cornell and an IMF Staff Discussion Note (April 8, 2011) – Inequality and Unsustainable Growth: Two Sides of the Same Coin?. A shorter “blog” rendition of the IMF research is to be found in this article – Equality and Efficiency (published September 2011).
The IMF Note investigates whether “societies inevitably face an invidious choice between efficient production and equitable wealth and income distribution”. They want to know whether “social justice and social product at war with one another”. In other words, is there a reliable relationship between inequality and growth?
Economists use (among other measures) the Gini Coefficient to summarise the degree of inequality in a nation. It is a relatively simple statistic to understand. It lies between 0 and 1. A value of zero represents absolute equality while a value of 1 represents absolute inequality.
It is derived from a Lorenz curve which plots say the cumulative income distribution by household (or person) in percentiles. So if everyone had the same income, then 1 per cent would have 1 per cent of total, 2 per cent would have 2 per cent and so on. That is the graph would be a straight-line emanating from 0 at 45 degrees.
The more skewed the distribution of income is the more “bowed” the Lorenz curve becomes. The Gini coefficient then summarises the Lorenz curve by dividing the area above the curve and below the 45-degree line by the total area below the 45-degree line. So with perfect equality the numerator would be 0 and so the coefficient would be zero.
A higher number means more inequality.
The following graph shows the Gini coefficient for the US and Australia since 1995. On August 30, 2011, the Australian Statistics Bureau published the most recent – Household Income and Income Distribution, Australia – which is drawn from the Survey of Income and Housing. The data is from that publication.
I also considered the stark inequality in the US in this blog – Some further thoughts on the OWS movement – which provides additional data sources.
I know that there is an issue with producing graphs that do not include zero – but sometimes the message is not distorted if you deviate from that.
It is clear that inequality has been sneaking up in both countries over the period shown. The most recent data will probably show that once the crisis has been ingested inequality will start to rise again.
The trend to increasing inequality is a salient characteristic of the neo-liberal period.
To give you an idea of the changes in inequality in Australia and the US over this period, the following graph indexes the Gini Coefficient at 100 in 1995. You can see that inequality in Australia has been rising faster than in the US over the period shown.
The changing patterns are mostly related to the inability of the lower wage workers to enjoy real wage gains over the period shown. The detailed analysis of the trends way from goods-producing industries (mostly higher wage jobs for lower skilled workers) to service industries (low-wage jobs) and the rising underemployment is the topic of several blogs.
There have also been within-industry shifts which have undermined the conditions for low-skill workers (these include out-sourcing, global shifting, etc).
I read an interesting article once that implicates marriage patterns in the rising inequality. So educated males used to marry their low-wage secretaries. Now they marry their educated female work mates and the secretaries are left to marry low-wage workers elsewhere.
Now what does the IMF say about inequality and growth?
Their summary note says that:
… we discovered that when growth is looked at over the long term, the trade-off between efficiency and equality may not exist. In fact equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality. Countries may find that improving equality may also improve efficiency, understood as more sustainable long-run growth.
That is contrary to a lot of the “trickle-down” theory that mainstream economics preaches.
The following graph is taken from the IMF Note (their Figure 2 or Chart 3 in the shorter note). The graph shows “the length of growth spells and the average income distribution during the spell for a sample of countries” where the “a growth spell” is defined “as a period of at least five years that begins with an unusual increase in the growth rate and ends with an unusual drop in growth” and inequality is measured by “the Gini coefficient”.
The IMF paper says that one of the possible reasons “that inequality is strongly associated with less sustained growth” is because it:
… may amplify the potential for financial crisis, it may also bring political instability, which can discourage investment. Inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis. Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity.
You can see that this conclusion was written by IMF economists. They just cannot help putting in nonsense about debt crises etc although it is true that politicians act as if there are sovereign debt crises which clearly influences the capacity of their economies to absorb a negative demand shock. In other words, by invoking austerity – unnecessarily – they actually undermine growth.
I have in the past emphasised the role that the changing income distribution between wages and profits has played in the crisis. The two points bear repeating. First, the wage share has plummetted in many nations as real wages growth has failed to keep pace with productivity growth. Legislative attacks on trade unions and other welfare-to-work policies have led to this divergence. The question then was how can growth be maintained?
Second, that problem was solved by the growing financial sector need to push credit onto households. Consumption was maintained not through the traditional means of real wages growth but by credit growth. The financial engineers seized on a winner they could keep economic growth going (via consumption) and earn interest on top of it.
The real income that was expropriated by the financial sector came from the redistribution of national income.
The problem with this rising inequality (partly driven by this redistribution of factor shares) was that it could not sustain growth. The rising indebtedness was always going to explode.
If the OWS movement starts to articulate concrete concepts to guide their “revolution” then one of the first principles is that growth should be based on real wages growth not credit growth.
That will make it sustainable and more evenly distributed but will also starve the “banksters” of their gambling chips. The question of how much growth we should have is a separate issue.
Whatever growth there is to be – real income will have to be produced. That should be produced equitably. That should be a growing cry among the “hipsters”.
Now what about that book I was referring to?
The book The Darwin Economy: Liberty, Competition, and the Common Good was recently published (September 21, 2011) by Princeton University Press and was written by Cornell University’s Robert H. Frank.
I cannot say I agree with everything that he writes and in fact I consider his representation of “public finances” to be mainstream and thus incorrect. But the general tenor of the book – emphasising the damage that inequality inflicts on economic prosperity – is well founded and worthwhile.
The Book sets the theme from the outset:
During the three decades following World War II, for example, incomes were rising rapidly and at about the same rate— almost 3 percent a year— for people at all income levels. We had an economically vibrant middle class. Existing roads and bridges were well maintained, and impressive new infrastructure was being added each year … No longer. The economy has grown much more slowly during the intervening decades, and only those at the top of the income ladder have enjoyed significant earnings gains. CEOs of large U.S. corporations, for example, saw their pay increase tenfold over this period, while the inflation-adjusted hourly wages of their workers actually fell. The middle class is awash in debt.
He notes that the “almost completely paralyzed” political system in the US refuse to use the same public funds to provide the same growth in infrastructure which “has been steadily falling into disrepair”.
An exemplification of the failure of the US state is “the stubborn unemployment spawned by the financial crisis of 2008”. His characterisation of the permanent losses that are endured daily by the unemployment is worth noting:
Each new day of widespread unemployment is like a plane that takes off with many empty seats. In each case, an opportunity to produce something of value is lost forever. There was no good reason for failing to take every possible step to avoid such waste. Yet critics of economic stimulus were quick to denounce government spending itself as wasteful, even as a host of useful projects cried out for attention.
He cites government research (Nevada) which shows that “a worn 10- mile stretch of Interstate 80 would cost $6 million to restore if the work were done today; but if we postpone action for just two years, weather and traffic will eat more deeply into the roadbed, and those same repairs will cost $30 million”. That is, quite apart from the issue of how we measure “costs”, austerity is myopic. It takes more real resources to repair vital public infrastructure if it is neglected than if it is maintained sequentially.
I was a PhD student in Britain during Margaret Thatcher’s onslaught on the public sector. The sewers/drains in Manchester collapsed during that time because of lack of maintenance and required much more extensive repair as a result than if they had have maintained the systems sequentially. In the meantime, the inconvenience to the public of the subsequent restoration was a major irritant (and health issue).
Frank also notes that the Austerians don’t even understand the nature of public finances. He cites “credible evidence” that:
… says that each dollar cut from that budget causes tax revenue to fall by $10, for a net increase in the deficit of $9! That such cuts could be approved by the House of Repreentatives suggests that we’re becoming, in the coinage of one pundit, an ignoramitocracy— a country in which ignorance-driven political paralysis prevents us from grappling with even our most pressing problems.
He cites many examples of policy positions that make no sense, even in terms of the “goals” they are aspiring to. That is, if you want to cut the deficit you have to grow the economy. Cutting public spending when private spending is weak is pure ideology.
In this context, I really liked the New York Times Editorial (October 14, 2011) – Britain’s Self-Inflicted Misery – which focused on the vandalism of the British government.
In commenting on the fact that British economic data is uniformly bad at present (and getting worse), the NYT Editorial said:
For a year now, Britain’s economy has been stuck in a vicious cycle of low growth, high unemployment and fiscal austerity. But unlike Greece, which has been forced into induced recession by misguided European Union creditors, Britain has inflicted this harmful quack cure on itself.
Austerity was a deliberate ideological choice by Prime Minister David Cameron’s ruling coalition of Conservatives and Liberal Democrats, elected 17 months ago. It has failed and can be expected to keep failing. But neither party is yet prepared to acknowledge that reality and change course.
Britain’s economy has barely grown since the budget cuts began taking effect late last year. The most recent quarterly figures showed the economy flat-lining, with growth at 0.1 percent.
It added that “(d)rastic public spending cuts were the wrong deficit-reduction strategy for the weakened British economy a year ago. And they are the wrong strategy for the faltering American economy today. Britain’s unhappy experience is further evidence that radical reductions in federal spending will do little but stifle economic recovery”.
I didn’t agree with its further discussion about the need for fiscal consolidation being important in the medium-term but the overall message of the Editorial was sound – that:
Austerity is a political ideology masquerading as an economic policy. It rests on a myth, impervious to facts, that portrays all government spending as wasteful and harmful, and unnecessary to the recovery. The real world is a lot more complicated. America has no need to repeat Mr. Cameron’s failed experiment.
Robert H. Frank seeks to ask whether Adam Smith or Charles Darwin is the “greater economist”. He concludes that it is Charles Darwin despite the adulation by mainstream economists who continually tell us that Smith’s invisible hand – the “unbridled market forces harness self-interest to serve the common good.”
Robert H. Frank concludes that “Darwin understood that individual and group interests sometimes coincide … [but] … also saw that interests at the two levels often conflict sharply. In those cases, he said, individual interests trump”.
His research finds that “Darwin … understood that competition often favored traits that brought misery to all, and he knew animals like elk could do nothing about it. But human beings, who face similar conflicts, have better options”.
He concludes that if we understood these options, we could “resolve a host of seemingly intractable economic problems in the United States, and in nations that have followed our lead”:
Applied properly, it would lead to simple steps that could liberate trillions of dollars in resources each year — enough to end perennial battles over budget deficits, restore our crumbling infrastructure and pay for the investments needed for a sustainable future. No painful sacrifices would be required. No cherished freedoms would be threatened.
He argues that “a few changes in the tax code would suffice” – scrap progressive income tax and implement a progressive consumption tax – is is preference.
I won’t debate his policy suggestions here – another blog. Suffice to say that MMT provides a route whereby governments can ensure that there are no painful sacrifices. Clearly we can understand MMT to be a description of how the monetary system actually operates now – and therefore it provides us with an explanation as to why things turn out the way they do.
But MMT can also free our minds to provide solutions to problems that we have been educated to believe are insurmountable or can only be addressed with fiscal austerity etc. In this way, MMT can be empowering.
It is clear that a currency-issuing government can easily employ all the unemployed. So start with that proposition – it is financially possible. Then start debating the issue at a higher level – how would that happen? How would the organisational structure look? etc. Rather than just being bound by the statement that it would send the government broke.
No it wouldn’t. So an understanding of MMT represents a liberating force as well as a description/explanation of what is.
Robert H. Frank’s policy proposals might be flawed but his logic that increasingly competitive markets – the ideal of the mainstream – are “also hugely more wasteful” – and “actively undermines” common good in favour of individual interest – is well-founded in the data.
His book also helps us understand why inequality is damaging for the very goals that the proponents of inequality aspire to.
He says that until we understand things like that – and ditch the blind (ideological) adulation of Adam Smith’s “invisible hand” (free market):
… the wasteful aspects of the competitive process will continue to impose enormous costs on everyone.
I was interested to read New York Times columnist Nicholas Kristof’s article (October 15, 2011) – America’s ‘Primal Scream’ – refer to Frank’s book. The article was trying to understand the OWS movement.
Nicholas Kristof considered:
IT’S fascinating that many Americans intuitively understood the outrage and frustration that drove Egyptians to protest at Tahrir Square, but don’t comprehend similar resentments that drive disgruntled fellow citizens to “occupy Wall Street.”
His interviews “with protesters in Manhattan’s Zuccotti Park seemed to rhyme with my interviews in Tahrir earlier this year” in that they both reflect a frustration with inequality.
In the Middle East case it was an “inequality in the political and legal worlds” whereas in the US the concerns reflected “economic inequity”. He says the rising economic inequality in the US (and elsewhere) has started to raise questions about how the economic system works.
The OWS reflects, in his view, “a growing sense that lopsided outcomes are a result of tycoons’ manipulating the system, lobbying for loopholes and getting away with murder”.
We now have banks that get away scot free “with privatizing profits and socializing risks” which is really “another form of bank robbery”.
He then referred to the The Darwin Economy has showing that:
… among 65 industrial nations, the more unequal ones experience slower growth on average. Likewise, individual countries grow more rapidly in periods when incomes are more equal, and slow down when incomes are skewed.
Which takes him back to OWS which he thinks is echoing the rising inequality which is “a cancer on our national well-being”.
In closing, I hope that the OWS movements does start to articulate some coherent messages rather than just talk about jailing the banksters. I hope they see that government is not the problem per se but it is rather the coalition between government and the elites that is the problem.
I hope they articulate the point that we need radical change – not some local change – some amelioration of inequality or some more regulation. We need a fundamental rethink about the size and role of the financial sector and that can be driven, in part, by a fundamental change in the distribution of national income – back to wages.
That, in turn, will allow growth to be wages-driven rather than credit-driven which will help sustain full employment.
Once we understand how to achieve full employment and put in place a growth strategy that can sustain that we need to define how that growth strategy is consistent with our use of finite real resources.
These steps are not sequential but interactive but I hope the emerging OWS narrative doesn’t throw out the need for economic well-being while striving for its “green” and anti-materialist credentials.
That is enough for today!