Friday lay day

Its my Friday Lay Day blog, which means I don’t really write one. I am working on an Modern Monetary Theory (MMT) volume for my publisher, Edward Elgar, which will document, to date, the key literature that I consider to be foundational to the development of what we now call MMT. I am putting the literature together and writing an extended introduction explaining how each contribution fits into the jigsaw. I am starting with Marx (of-course)! But today, I also take a moment to briefly reflect on an article that apppeared in the German Der Spiegel (September 3, 2014) – France and Friends: Merkel Increasingly Isolated on Austerity. I will follow up on this next week in more detail. The reflection is really just a segue for one of my favourite songs …

The Der Spiegel article was written before the ECB’s – Decision – (September 4, 2014) to cut interest rates further (10 basis points) and “to start purchasing non-financial private sector assets” as a renewed attempt to avoid the approaching deflation and likelihood of a triple-dip recession. I will consider that decision in detail next week.

Der Spiegel anticipated this decision and argued that it was a sign that the central bank was moving away from the hard-line German austerity position, which continues to cripple Europe.

This is in the context of the recent ructions in France, where the economy Minister quit after renouncing the austerity stance of the government and calling for the Stability and Growth Pact to be renegotiated and rendered more flexible.

The French economy is now in free fall and the Franco-German tensions are very high again. Merkel was evasive when Der Spiegel asked her whether she was empathetic to France’s plight. She basically accused it of avoiding structural changes. Of-course, the plight of France has little to do with structural matters – it is all down to killing total spending in the economy as a result of the imposed fiscal austerity.

Der Spiegel rightly points out that the current flare up in Franco-German tension:

… focuses on the question that has divided Europe since the beginning of the euro crisis … The Chancellery in Berlin has demanded that EU countries in crisis undertake far-reaching structural reforms coupled with biting austerity programs. Paris, meanwhile, has been the voice of those asking that the stability pact be made more flexible to make room for economic stimulus, with reforms coming later, if at all.

In fact, the issue has been at the heart of the struggles to create the EMU since it was first thought to be desirable. The French have always had a mind for using state policy capacity to reduce unemployment while the Germans have known they could run tight domestic policies and keep unemployment relatively low by exporting the austerity to other nations.

As I have said many times – the twain was never going to meet and the German approach cannot be a template for stable growth across Europe.

Der Spiegel notes that the SGP-austerity consensus is starting to crack. The French concerns are also reflected in the position taken by the Italian Prime Minister, who wants more SGP flexibility. External forces like the IMF and the US Government are also putting pressure on the European Commission to be more flexible.

The French are heading towards a 2003 violation which caused havoc back then when both Germany and France fell foul of the Excessive Deficit Mechanism. With both in trouble, the political process bent and the SGP was renegotiated. France is back in that position again and it is clear that the Commission is heading for a showdown, which I predict it will lose.

Der Spiegel says that:

Should Germany support EU infringement proceedings against its most important partner in Europe and deliver yet another humiliating blow to Hollande? Or would it be better to continue interpreting the rules generously for France? Such a course, however, would lend credence to accusations that only smaller member states are required to conform to the budget deficit rules.

Germany’s Foreign Ministry is in favor of treating France with kid gloves. “The high degree of anxiety in the Chancellery relating to everything that is an alleged renunciation of austerity is not very helpful,” an official there said. “We have to give the French room to breathe.” The official said that it is inconceivable that France, proud as it is, would accept the monetary penalties that would result from such an EU proceeding.

That has been the problem all along. The rules are unenforceable unless the violating Member State is small and without political influence. They will bend to France because of its size. The best thing for France is to tear the SGP up and exit. Italy would be well advised to provide their considerable support to breaking up the whole show.

The French government is so precariously poised (small majority) and the realists in the Socialist Party who know the damage that austerity is causing will likely block the attempts by Hollande to toe the German line.

Der Spiegel quotes a German politician from Merkel’s Christian Democrats as saying:

For France, it’s not five minutes to midnight, it is midnight.

Which was a reference to the German view that the French Socialists had one last chance to bite the bullet or face political oblivion.

But Hollande would be politically better off if he redirected his policies towards growth and reducing unemployment. The factory closures and joblessness is caustic for him.

Anyway, for the Eurozone it is well past midnight – and we know what happens then …

After midnight – what happens then?

Here is the great JJ Cale as the guest of Eric Clapton at the – 2004 Crossroads Guitar Festival in Dallas, Texas (June 4, 2004).

Turn it up loud.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

This Post Has 14 Comments

  1. Bill,

    Will you be including the JG in your volume?

    I must admit that the JG is the one aspect of MMT that troubles me. If the JG is administered in a socially responsible way then I do appreciate that it could be the progressive change that its more ardent proponents may claim. On the other hand, if it isn’t and there jobs on offer pay just slightly more than welfare, then it won’t be.

    The devil will be in the detail. If young people are offered jobs with training to get them started, that will be good. If 60 year old labourers who lose their jos are forced to keep working that won’t be so good. If mothers are forced into a JG and end up paying all their wages for childcare that won’t be so good either!

    MMT supporters usually tem the JG as ‘voluntary’. But in what sense is it voluntary? Is it going to be an additional option ? I can support that. Or, will it really be compulsory in the sense that the British Labour Party use the term in connection with their proposed JG scheme?

    I’d also make the point that a theory (MMT), from a scientific perspective, should be a desciption and explanation of what we see actually happen in our economy. There is really no need to include the JG in that theory beyond including it in models where it has already happened. Like in India and Argentina.

    MMT should , in other words, be descriptive, rather than prescriptive.

  2. Dear Bill,

    Just an immense thank you for all your blogs, essays and quizzes which I have found so incredibly informative, and which have motivated me to try to spread the MMT message in Canada. Below is an example of a letter sent across Canada and published in several papers. (My letters almost always include footnotes for the editor’s information which include quotes from your blogs and links to them.)

    Re: “Create jobs by running deficits, Ottawa urged,” Julian Beltrame, The Canadian Press, July 23

    The C.D. Howe Institute has urged the Canadian government to create 75,000 jobs by running a small deficit. But since we have over 1.3 million unemployed, why not create a substantial deficit and put everyone to work, just the way we gave jobs to all during the Second World War?

    The belief that higher deficits damage the economy stems largely from a paper written by economists Rogoff and Reinhart that has recently been discredited when a student discovered background computer calculation errors.

    The country with the largest debt ratio today is Japan, which controls its own currency just as does Canada. Japan has little inflation, low interest rates and no problem issuing government bonds. Why would having creating full employment through deficit spending be problematic for our economy? On the contrary, it would make us more productive and reduce long-term costs of unemployment, social problems and welfare.

    As John Maynard Keynes put it many years ago: “The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years”

  3. “But in what sense is it voluntary? ”

    It’s voluntary in that being a member of society is voluntary. You can choose not to, but it is hard work. Or you can choose to give a little to your fellow citizens and life will be easier for all.

    There is no other alternative in real human society.

    The reason there is no one design for the JG, but a simple framework. The type of work that is considered ‘acceptable’ by society varies depending upon the social maturity of that society.

    ‘Spend the money I’m given’ is an unacceptable job in every current society on earth. Try that and those doing the ‘real work’ will political agitate to have the income removed from the ‘slackers’.

    So you have to move away from that to something that other people consider to be acceptable recompense for the earnings you receive. Hopefully that something includes mothers looking after their own children, street entertainers, and other activities that are useful to the general population but it depends on the particular society.

    I can imagine some societies being so restricted in their perceived forms of acceptable activity that they can never implement anything and are doomed to rampant and persistent unemployment until they grow up a bit.

    “I’d also make the point that a theory (MMT), from a scientific perspective, should be a desciption and explanation of what we see actually happen in our economy.”

    And the counter point is that you implement an ideology by trying to restrict things like that. Economics is a social science and a set of political philosophies. Trying to pretend otherwise is to try and impose one overarching political philosophy!

  4. To complement the other comments, I would like to emphasize that the logical structure of the “theory”, not “model”, of MMT be set out in a clear way. This means at the very least separating definitions from substantive assertions. In the standard theory of definitions, definitions have no truth value, only use value. There are a number of ways of introducing them, but however it is done, it should be done explicitly.

    Why did I use “theory” instead of “model”? This is because if you are going to stray into the realm of political philosophy, which I would recommend, then it becomes important to take note of the philosophical practice whereupon a model is a non-linguistic structure in which a theory is true. That is, if a theory is true, it has a model. If it is false, it doesn’t. And most theories will have more than one model. The real world will be one of them and, perhaps, the most important.

    What then is a theory? Looking at things this way means that a theory is a linguistic entity formulated in a given language, which in your case will include the fundamental accounting identities. The formal status of these identities in MMT is unclear to me in what you have written so far.

    If this distinction is adhered to, what often happens, and you see it in the literature, is that writers equivocate on the term “model”. It is then up to the reader to figure out what is being discussed, the theory or the model in which the theory is true. But it also renders subtle distinctions difficult if not impossible to make.

    The importance of this distinction can be seen when one has a look at Rudolf Carnap’s Logical Structure of the World. His set of distinctions are much more complex than the one I have mentioned. It is not that hard to do and the logical structure of the theory will be the beneficiary in that it will clarify for the reader just what is going on conceptually.

  5. JJ & EC – very nice! I just got hold of the latest Clapton CD ‘Eric Clapton & Friends: The Breeze (An Appreciation of JJ Cale). It features Willie Nelson & Trigger. Well worth checking out.

  6. “why not create a substantial deficit and put everyone to work”

    True, this is the way it’s commonly argued in MMT circles.

    However, I’d like to suggest that it’s not quite the right way of looking at it. A Government’s deficit is largely outside of its direct control as those who will have attempted Bill’s quiz questions will know.

    Government Deficit = Savings of the Private Domestic Sector + Net Imports (or external deficit)

    So if it’s outside of any direct control then Governments can neither increase nor decrease their deficits at will. They can increase their spending at will, but this spending will also increase taxation receipts so the change in the deficit could go either way. For instance, if everyone is less scared about the future, savings could fall as money is invested in productive enterprises.

  7. Neil,
    I still think you are being too severe.

    JG, which I wholeheartedly support, has to be voluntary. If people can happily live on meagre benefits, then let them and allow a way out at any time through JG.

    If they can’t cut it at first, there’s no value in throwing them into the abyss, just send them back to the waiting room.

    This has two advantages, it doesn’t gum up the JG with with people who don’t want it and it undercuts the canard that unemployment and underemployment are lifestyle choices.

    I’m convinced people are motivated by their own circumstances, social security most of all, and will happily ignore the few remaining deviants. That’s what they did during periods of full employment.
    As for people agitating for change, when does that ever happen on a wide scale? Have they agitated against high involuntary employment as a policy, or the many ‘make rent’ and ‘make profit’ schemes in the last 30 years?

    The way I see it, people are agitated, their resentments refined, by that most valuable strategic industry, public relations. This well funded army of amoral sophists could easily reacast an involuntary JG as a ‘make work’ scheme, as they have done in the past.

  8. Paul and Neil,

    I would say JG is probably the least understood part of MMT. So, there needs to be some more explanation. To start with, the meanings of the terms voluntary and compulsory need to be clarified. Randall Wray, in his book (Modern Money Theory) uses the term voluntary but meaning, as I understand him, exactly the same as the British Labour Party when they use the term compulsory in connection with their proposed JG scheme. So I would suggest the former sense should only be used for JG schemes which are additional options, and we should use the term compulsory in the same way as used by the Labour Party.

    I agree with Paul that the JG should, at least to start with, be voluntary. There’s little that can be objected to, with a genuinely voluntary scheme. The question of compulsion will arise at some stage, no doubt. It won’t , in all probabilty, be decided by advocates of MMT. The argument will be all too obvious. Anyone with some experience of young people will know that in many instances that compulsion will be beneficial all round.

    However, once any scheme does become compulsory there are lots of details to get right. How do we aproach the issue of equal work for equal pay for example? There are bound to be cases where we’ll have workers on JG doing much the same as other workers who are both better paid and have trade union representation. What happens when a JG worker joins the Union and the Union demands union rates for the job? It’s quite likely that the JG workers could be from an ethnic minority and/or are female. Any union looking to establish a principle would almost certainly choose a situation where these factors are involved to maximise their chances of success.

    So how would we deal with that? Accept it or align ourselves with the reactionary forces within society?

  9. Those are some of the reasons why I think JG is the most disruptive and valuable idea associated with MMT.
    ‘Core’ MMt is disruptive as it presents a plausible and explicable version of what happens in the real world and sweeps away the smoke and mirrors stuff which dominates economic chat.
    To me, at least, it says that most decisions are of a political nature, not constrained by the availability of some metal or accounting entry. I think most ‘operative’ economic actors believe this already, the academic flunkies are just there for window dressing.
    (e.g Richard Cheney’s remark:
    You know, Paul, Reagan proved that deficits don’t matter
    combined with Warren Mosler’s chilling account of his meeting with the highly receptive Donald Rumsfeld
    (Did he still have his glasses on in the sauna?) and Karl Rove stating:
    when we act, we create our own reality.)
    JG however strikes at assumptions much closer to home for the population. The ‘details’ show the conceptual problem. How do we value ourselves and others?
    JG starts with a problem, what to do with the unemployed?
    A: Give them a job
    Next question: What do you do with the employed? At least that section whose employers rely on the sanction of unemployment and the availability of welfare payments. The ‘make profit’ jobs that might not exist without these conditions. How would they regard others being forced into work conditions better than their own? How do you (should you?) stop JG being more attractive than a ‘real’ job?
    Then you start moving onto what makes a ‘real’ job.
    JG has quite dizzying possibilities. I’m not sure it can sit well with current assumptions.

    Peter, I wouldn’t bother paying any attention to the British Labour party just now, they’ve decided to sit this decade out and become the dozing partners in the tripartite coalition.
    Watching them abasing themselves here in scotland in defence of the majesty of westminster rule reveals how abject they are. Their rallies frequently reach double figures these days.

  10. Paul,

    ” How do you (should you?) stop JG being more attractive than a ‘real’ job?”

    I think MMT does answer this question satisfactorily. The answer is that it just pays a minimum wage which doesn’t pose any threat or present any problems of competition to capitalist employers who would be expected anyway to pay slightly more.

    I use the word ‘satisfactorily’ from the perspective of a capitalist employer. I doubt if those ‘compelled’ to work for wages below which they might be expected to receive from capitalist organisations would see it quite like that. Neither would they necessarily agree that their job was any less real! And with complete justification IMO.

    Therein lies the problem.

  11. I was hoping that pro-JGers would come back with a convincing argument as to why I was wrong! I would like to live in a society where there was no unemployment. And, in which there was a fair distribution of the rewards for everyone who put in the effort to create the wealth needed to enable that society to function effectively.

    So, in principle, I’m not ant-JG. It’s just there are too many loose ends, for my liking, with MMT as it stands at the moment.

  12. The strongest argument for JG is that is a humane,practical approach to the problem of people being denied access to a means of living and integration with society.
    It’s disruptive in that it challenges what we consider employment to be, the kind of thinking that prompts paul krugman to bleakly announce that ‘bad jobs ahe better than no jobs’.
    Their might be demons lurking in the details but the devil lies in the current, malignant orthodoxy.
    Anyway, you learn by doing as Harry Hopkins showed.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top