I was reading an interesting article at the weekend (February 17, 2012) in The UK Independent – The Left should learn about plain speaking from George Galloway – which was about language and the way ideology is communicated. The use of nomenclature and communication methods is clearly central to the way a paradigm establishes itself and maintains its popularity even when its legitimacy in theoretical and empirical terms evaporates. The article points to the failure of the “left” to construct an alternative narrative that relates directly to the human experience. It demonstrates that the “right” can lie but relate those lies at a human level to gain traction. They appeal to our intuition which as I noted in this blog – When common sense fails – is bound to lead us astray. There was an excellent example of this in two articles recently. The left has become so paralysed by its embrace of management-consultant styled, neo-liberal techno-speak that it can no longer speak to us at the human level. With millions of people unemployed it should be a political no-brainer to address the concerns of that cohort to garner political support. Instead, so-called progressive governments and parties in advanced nations fall foul of the neo-liberal dialogue about “scroungers” and “dole-bludgers” and demonstrate their resolve by invoking harsh welfare-to-work policies. Nothing progressive will ever come from that surrender to neo-liberalism. That is what this blog is about today.
The Independent article focused, in part, on the British left-wing politician George Galloway, who apparently has a habit of upsetting the middle-class sensitivities in Britain. He is vilified by many, who stand on very shaky ground themselves.
One example of that point was he has made “apparently sympathetic remarks about brutal dictators (although, unlike some of his detractors, he hasn’t sold them arms, funded them or even been paid by them)”.
There are countless examples of sanctimonious hypocrites in public life. For example, a common example are those who tar anyone who advocate government intervention with the dangerous communist brush but then encourage trade and profit-making with China, even though they know they violate human rights and allow workers to be exploited unconscionably.
The article suggests the British Labour party is full of politicians that speak:
… the language of the political elite – technocratic, stripped of passion, with too much jargon and management speak, with phrases like “direction of travel”. But Galloway offered direct, clear answers; he spoke eloquently, and with language that resonated with non-politicos; he had enthusiasm, conviction and – to borrow a Tony Benn phrase – said what he meant and meant what he said.
The problem is that as the neo-liberal dominance spread in the late 1970s, the insecurity of the major progressive parties intensified. The Independent notes that far from embracing a more direct narrative that spoke to people about what was happening to them under neo-liberalism:
New Labour remorselessly helped to professionalise politics, it bred a generation of “on-message” politicians with focus group-approved lines. Verbless sentences – “new challenges, new ideas”; macho cliches – “taking the tough decisions”; platitudes like “fairness”. A new breed of political Kreminologists were assembled to decipher insufferably dull speeches and articles by politicians.
That trend has developed everywhere. In Australia, the Australian Labor Party doesn’t stand for anything anymore.
This article (February 19, 2013) – Final nail in PM’s coffin – examines the pending demise of the Australian Prime Minister – either at the hands of her own party soon or in September at the hands of the electorate.
The current Labor government is a pale imitation of what we expect from a progressive movement. The article describes the PM as a ” dead woman walking” and “her certain demise” arises from the fact that “she has provided no clear direction as to where she is leading the country”.
The journalist exposes a series of “contradictions” that Labor has fallen into as it loses any other purpose other than to gain and retain power.
With the carbon price in place, the government should be earning kudos from the many Australians who care about the environment and are concerned about human-induced climate change. But the carbon price is more than offset politically by the government’s uncritical support for the coal and the coal seam gas industries.
And the contradictions don’t end there. When in opposition, Julia Gillard attacked the Howard government for its heartless, punitive policy towards asylum seekers, but then introduced much more punitive policies herself … The Prime Minister has also disappointed many Australians with a foreign policy that is not discernibly different from that of John Howard. She kept the troops in Afghanistan and has thrown Australia open to American bases. She has rejected another referendum on the republic and keeps the portrait of the Queen at naturalisation ceremonies.
I would have added that her government’s heartless treatment of those on income support has trumped the venality displayed by the conservative government that Labor replaced. The previous government gained socio-pathological satisfaction by “fining” (technical term “breaching”) the unemployed who they claimed failed activity tests, which might have been demonstrated by them failing to attend an interview with some heartless case manager or another.
Income support recipients who were breached then lost weeks of support – when they were already skating along the bottom in poverty. It was an ingenious way to engender motivation and incentive. Not!
The evidence was that the majority of those “breached” were homeless (so didn’t receive letters about the interviews), mentally ill (so were having episodic issues when they were meant to be at the interview) and similar sorts of situations.
The current Labor government not only kept this system (largely) but have also refused to increase the unemployment benefit despite the acknowledged fact (even from right-wingers) that the unemployed are being forced to live well below the poverty line and the gap has grown over the life of this dreadful government.
The heartless (neo-liberal) response of the government is that they prefer to focus on generating jobs not worrying about income support. At the same time they mouth these meaningless motherhood statements they pursue macroeconomic policy which increases unemployment and is a net destroyer of jobs.
On one page of their Budget Papers you will read that they are designing policies for jobs growth, and then, on another page, you will see that they forecast rising unemployment. Lies and contradictions of the sort the Independent article focuses on.
The Independent article considers the “Right is better at communicating because it uses stories so much; the Left often rely on cold facts and statistics”.
Apparently “people connect better with stories”.
It cites the “classic right-wing story of our time” the comparison of “the national deficit to a household budget”. Apparently:
Any serious economist will tell you this is gibberish – which house has a money printing press, and will mum get sacked if young Dan stops spending his pocket money?
Which is why we shouldn’t believe such a myth but according to the article this sort of narrative (lie) “resonates with people”.
The article also cites the way we use pernicious nomenclature to vilify the unemployed – as lazy, dole-bludgers, scroungers etc – living the high-life watching TV all day on at least 60 inch flat screen – and all at our expense. Such nomenclature is promoted by the media and governments who are intent on justifying the harsh treatment of the disadvantage that they know their policies caused.
What better way to blame the victim and divert attention from the cause of the problem – the poorly designed macroeconomic policy which generates the deficiency in aggregate demand that leads to the mass unemployment?
As an aside, I might question the claim that “(a)ny serious economist” would use the household-government budget analogy. The fact is that it is used all the time in undergraduate economics classes.
This raises another issue. Apparently, the latest from the Modern Monetary Theory (MMT) attack squad (the squads that are forming to attack MMT) is that MMT sets up “strawman” targets which it calls mainstream economics and in doing so fails to address what mainstream economists actually think and advocate.
This is becoming a repeating theme among those who seek to challenge the statements we are making. It is a good sign – a sign that the mainstream is recognising that an increasing number of people are seeing through the fictions that the economics profession has been trading on for years.
In this vein, apparently I have said that mainstream economists deny that governments can “print money” but you will find a recognition that governments can print money “in any graduate macro book”. Of-course you can and in any undergraduate text book as well.
But you will also find in all mainstream macroeconomics textbooks an elaborate discussion of the government budget constraint (GBC), which builds a narrative about the impacts of government “finance” by drawing an analogy between the household and the sovereign government. It asserts that the microeconomic constraints that are imposed on individual or household choices apply equally without qualification to the government.
The GBC is in fact an accounting statement relating government spending and taxation to stocks of debt and high powered money. However, the accounting character is downplayed and instead it is presented by mainstream economists as an a priori financial constraint that has to be obeyed.
So students are shifted away from realising that the GBC is merely an ex post sum that has to be true because it is an accounting identity, and encouraged into thinking it is constitutes some behavioural and financial constraint on government spending decisions.
The GBC is always true ex post but never represents an a priori financial constraint for a sovereign government running a flexible-exchange rate non-convertible currency. That is, the parity between its currency and other currencies floats and the the government does not guarantee to convert the unit of account (the currency) into anything else of value (like gold or silver).
This literature emerged in the 1960s during a period when the neo-classical microeconomists were trying to gain control of the macroeconomic policy agenda by undermining the theoretical validity of the, then, dominant Keynesian macroeconomics.
The narrative developed by suggesting that just as an individual or a household is conceived in orthodox microeconomic theory to maximise utility (real income) subject to their budget constraints, the government was also constrained by a budget or “financing” constraint. Accordingly, mainstream macroeconomics developed an analytical framework whereby the budget deficits had stock implications – this is the so-called GBC.
Within the mainstream model, taxes are conceived as providing the funds to the government to allow it to spend. But taxes are alleged to distort individual incentives to work (and do other things) and should be minimised.
Further, this approach asserts that any excess in government spending over taxation receipts then has to be “financed” in two ways: (a) by borrowing from the public; and (b) by printing money.
Please note: an MMT proponent (me) acknowledges (as I have always done) that mainstream economists knows that governments can print money.
But here is the twist. From a policy perspective, they believed (via the flawed Quantity Theory of Money) that “printing money” would be inflationary (even though governments do not spend by printing money anyway).
As a result, students are told that if governments are to run deficits (and that is generally discouraged) then they should be “funded” by debt-issuance. However, it is claimed the costs of debt issuance is to push interest rates up because the government is increasing the demand for scarce savings, which, in turn, crowds out private investment. All sorts of variations on this nonsense has appeared ranging from the moderate Keynesians (and some Post Keynesians) who claim the “financial crowding out” (via interest rate increases) is moderate to the extreme conservatives who say it is 100 per cent (that is, no output increase accompanies government spending).
The point is that students learn (whether in undergraduate or graduate classes) that these so-called “financing” options have different impacts on the degree of expansion arising from government spending. They learn that government spending accompanied by bond-issuance is likely to be less inflationary (because there is the crowding out dimension) than if the government just prints money.
This narrative is why neo-liberal governments changed the institutional mechanisms through which they issue debt and eschewed central banks from buying primary issue debt. Mainstream economists told policy makers that it would be less inflationary.
As I explained in this recent blog – I wonder what the hell I have been writing all these years – the mainstream model claims that money creation (borrowing from central bank) is inflationary while the latter (private bond sales) is less so. These conclusions are based on their erroneous claim that “money creation” adds more to aggregate demand than bond sales, because the latter forces up interest rates which crowd out some private spending.
What would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a budget deficit without issuing debt?
Like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.
The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made. Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet).
This means that there are likely to be excess reserves in the “cash system” which then raises issues for the central bank about its liquidity management. The aim of the central bank is to “hit” a target interest rate and so it has to ensure that competitive forces in the interbank market do not compromise that target.
When there are excess reserves there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the target. Some central banks offer a return on overnight reserves which reduces the need to sell debt as a liquidity management operation.
There is no sense that these debt sales have anything to do with “financing” government net spending. The sales are a monetary operation aimed at interest-rate maintenance. So M1 (deposits in the non-government sector) rise as a result of the deficit without a corresponding increase in liabilities. It is this result that leads to the conclusion that that deficits increase net financial assets in the non-government sector.
If the government, instead sold bonds to match the deficit, then that would just reduce bank reserves. The deposits created by the net spending remain and thus the private net worth augmentation of the government spending is not altered.
What is changed is the composition of the asset portfolio held in the non-government sector.
The only difference between the Treasury “borrowing from the central bank” and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If it debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).
This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and productive capacity.
But it is totally fallacious to think that private placement of debt reduces the inflation risk.
I have yet to read a critique of MMT that challenges any of that analysis. Merely saying MTT says that mainstream economists deny governments can print money when they don’t won’t cut it. We don’t say that and our discussion is deeply entwined in the operations of the banking system. That level of detail is absent in mainstream textbook treatments of the monetary system.
The other curious attack on MMT that came across my desk today was that apparently the “money multiplier is a ceteris paribus example, not a description of the causal device”. Hmm, whatever that means. Think back to 2008 when the Federal Reserve started expanding the monetary base. What were the reactions of leading mainstream economists? Inflation, inflation, inflation.
Why? Because they claimed the money supply would burst. Why? Because they were using the monetary multiplier as their model. This model considers that building bank reserves (expanding the monetary base) increases the ability of the banks to lend. Apparently, the expansion of the base will expand the money supply (the monetary multiplier) and this will cause inflation.
The money multiplier model is much more than a “ceteris paribus example”. It is a view of how the banking system operates. Within the view, students learn to manipulate assumptions (in that sense, play ceteris paribus) – such as what happens with different values of reserve deposit ratio etc. But they are never taught to question whether the banking operations that are central to the multiplier represent reality.
If we polled undergraduate macroeconomics classes around the world we would find a vast and overwhelming majority of students would spin a story about banking that is consistent with the money multiplier model – that is, concur with this “mainstream” view. Erroneously, of-course.
The fact is that the model does not represent reality. Bank lending is not reserve-constrained as in the money multiplier model. The central bank cannot control the money supply by manipulating the monetary base.
MMT notes that banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending. Loans create deposits and banks do not need bank reserves to lend. That point is a major departure from the mainstream conception of the way banking operates.
So saying that the money multiplier is just a ceteris paribus idea belies the pedagogy that surrounds it.
It is interesting though that in these emerging attacks on MMT, there is a desire to suggest that mainstream thinking knew all about the things MMT presents all along. Which is intending to portray the view that MMT is just an ideological and “ridiculous” smokescreen to avoid “admitting … [we] … want a larger state”.
I know all the major MMT economists very well. Many are close friends. Some want a larger state while others want a smaller state. The point of MMT is that it provides a more coherent framework to evaluate the consequences of imposing one’s values on the policy design. It is free from the biases and lies of mainstream economics, which unambiguously pushing for a smaller state, despite there being nothing in the theoretical model to suggest a larger state is better or worse than a smaller state.
Anyway, I digress.
All of that has to do with the way narratives are spun. The Independent article, while suggesting the conservatives are better at lying – and inducing the general public to accept lies as self-evident truth, does say that the “Left” should avoid indulging in “casual dishonesty or inaccurate generalisations” but at the same time relate the stories they tell to human beings.
The right lie and relate those lies to human beings. That is how they gain traction and support for the myths which lead to policies that promote their own hegemony.
The left should tell the truth and yet relate those truths to human concerns rather than get bogged down with techno-speak, thinking that such formality makes them look like better economic managers.
The Independent article quotes the linguistics expert George Lakoff who emphasises the importance of “framing” – or story-telling:
Facts and figures, when used, should create a moral point in a memorable way.
The former progressive parties have all fallen prey to the influence of “management consultants” and accept the language and concepts promoted by the right. The Independent uses the “scrounger” nomenclature as the example. So both sides of politics want to get “tough” on the unemployed. Extending that – both sides of politics claim budget surpluses are the exemplar of fiscal responsibility without educating the public as to the impacts of fiscal surpluses, if for example, the non-government sector is intent on saving more than they earn.
The Australian Labor Party goes along with the idea that they have to respond to polling – from voters who are conditioned by the conservative media to uncritically accept lies. They have abandoned the notion that they might try to lead the debate and de-condition the electorate and promote a wider knowledge base.
So the battle becomes – “we will generate a bigger surplus than the other party”
The battleground should be – is a surplus responsible at this time given other spending patterns. But the debate becomes fixated on who has the largest surplus, when at this time, any surplus is the height of fiscal irresponsibility and certain (in Australia and most nearly everywhere else) to destroy real GDP and employment growth and further increase poverty rates.
The Independent says:
New Labour ideologues always feared policies that sounded too left-wing, but the truth is most voters do not think in terms of “left” and “right”, they think in terms of issues that have to be addressed, with policies that are coherent, convincing and make sense with their own experiences.
There was a good example in the press recently of how the conservatives present information within an attractive story line and how another perspective opens up new ways of thinking.
There was a Bloomberg Op Ed article yesterday (February 18, 2013) – Greece May Get Cruel Reward for Its Success – that ran the line that Greece is moving to success because it has “reached a primary budget surplus, the Holy Grail of austerity” and that:
… news should be worthy of a ticker-tape parade, after three years of Draconian retrenchment and a partial writedown of privately held Greek debt.
Further, this is a “a genuine achievement made at enormous cost” and there followed a paragraph of data about financial ratios. The article is full of words or phrases such as: “impressive”, “reap its reward”, celebrating the “success in eliminating the primary deficit” etc.
The entire article didn’t mention unemployment nor poverty once.
It then chose to rehearse the mainstream narrative – “A country that doesn’t pay back its debts can expect either to lose market access entirely, or to borrow at an unsustainably high cost” – well only if the nation uses a foreign currency and the relevant central bank doesn’t defend public purpose.
The article asserts, without analysis, that “accepting further spending cuts seemed the better option” than restoring the Greek currency. Without explanation, the latter option would lead to “sovereign and bank defaults and a huge drop in living standards for Greeks”. Why? The sovereign state would not have to default on its own currency loans. It could protect all bank deposits easily.
And while imported goods and services might rise in local currency price terms the government could ensure that the 25 per cent unemployment fell to frictional levels (2-3 per cent perhaps). The gains overall of increased national income would be huge. The temporary losses involved from the depreciation might initially be large but they would also be finite.
It is not a neo-classical argument to note that when a currency declines exports become more attractive (so more rich Germans holidaying in the Greek Isles) and imports become less attractive. Neo-classical economics has never had a monopoly on those insights.
The article finishes by stressing that giving up austerity now would be a “a disastrous choice” and has to be backed up by “structural reform of the Greek economy”. So even more pain.
That is the intuitive narrative that is then supported by the “lazy Greek” nomenclature and “living beyond its means” and those sort of catch-cries that garner appeal and support.
The article sets the scene immediately using facts that relate to human experience. No management techno-babble about “responsible fiscal policy” etc. We read:
Even after securing billions in loans from the so-called ‘Troika’, the Greek economy continues to shrink at an alarming rate. Jobs are vanishing. Unemployment is double the euro-zone average and 55 per cent of people aged between 15 and 24 can’t find work.
A quarter of the Greek population is now living in poverty – a proportion worse than Iran’s or Mexico’s. And with taxes rising, the minimum wage falling, and social welfare being withdrawn, it’s hard to see a bright side.
So the human tragedy of the “primary surplus success”.
The article is actually very interesting because it describes how local communities are coming to terms with the enforced poverty and working out new ways of engaging with each other.
Farmers are now selling produce directly to households and by-passing the middle-person. Goods are therefore cheaper as one link in the capitalist profit making chain is avoided.
People are returning to self-sufficiency which is being “interwoven with more contemporary ideas like sustainable living and ethical consumption”. Collectives are spreading to promote sharing and local attachment to work and output.
It provides a number of examples of this sort of poverty adjustment including the development of local currencies in preference to using the Euro. Local communities could improve their economic outcomes if the authorities were to accept these currencies in return for tax and other formal obligations. That would broaden the demand for the currency and allow the local organisations to step beyond the tyranny of the Euro.
Better still the Greek government could just reintroduce the drachma and stop using the foreign currency (Euro).
It is interesting that collective kitchens are spreading which improve the nutritional quality and also serve as a meeting place to discuss politics. The Greek government has tried to ban these kitchens.
The article draws the following lessons from what is happening at the grass roots level in Greece.
1. Local activism is becoming “a social experiment that might suggest an alternative model of development”.
2. There is a growing view that “an economy based on solidarity, according to the values of co-operation, democracy, equality and equity” is the path forward. Exactly the opposite to what the elites are seeking to promote.
3. “There is a galaxy of initiatives in Greece, with people inventing ways to overcome economic, social and environmental problems that the state seems unable to resolve. Similar initiatives are flourishing in other countries with troubled economies”.
Once this collectivism develops into a mature form, then the next step is to reinvigorate the state as the monetary authority and empower it once again to use its fiscal capacity to promote prosperity and to stop serving the interests of the elites.
The problem with local solutions is not that they promote the values of solidarity etc but that they still run up against a spending constraint as long as the national government is running surpluses (or deficits that are too low given non-government spending).
One local community might be able to improve their lot but if there are aggregate demand constraints not all communities can increase their prosperity.
The Independent article notes that:
The appetite for left-wing populism is greater than it has been for a generation. Much of the Establishment – from banks to the media – have been discredited by scandal. Free-market capitalism is a wreck. But the Left is a long way from learning how to put its case.
The steps are clear. First, start understanding how the macroeconomy actually works and challenge at the elemental level the budget and debt myths propagated by the conservatives.
When a conservative politician or commentator says a rising budget deficit will be inflationary – ask them to explain in detail how that will evolve.
Second, build these localised collective visions that empower citizens once again to take back control of the political processes so that the “Troika” (as representative of the unaccountable elites) are marginalised and confined to history.
Third, promote the cause of citizens and the environment as the goal of economic activity rather than whether corporations make more or less profits.
Fourth, demand a major overall of the economics curriculum being taught in our universities.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.