This is the second part of a three-part series discussing the political issues that give me confidence in the primacy of fiscal policy over monetary policy. The series is designed to help readers see that the recent criticisms of Modern Monetary Theory (MMT) as being politically naive and unworkable in a real politic sense have all been addressed in the past. In Part 1, I gave examples of how ‘agile’ or ‘nimble’ fiscal policy can be when an elected government has it in their mind to use their spending and taxation capacities to change the direction of the non-government economic cycle. It is simply untrue that fiscal policy is inflexible and cannot make effective, well-designed policy interventions. In this second part, I will address aspects of how such interventions might be organised. Specifically, some people have advocated that MMT might replace the so-called ‘independent’ central bank, with an ‘independent’ fiscal authority, which they seem to think would take the ‘politics’ out of fiscal policy decision-making and focus it on advancing the well-being of the people. The intentions might be sound but the idea is the anathema of what progressives, interested in maintaining democratic accountability would propose. I consider such an independent fiscal authority would constitute the continuation of the neoliberal practice of depoliticisation and further increase the democratic deficit that is common in our nations these days. Politicians are elected to take responsibility and make decisions on our behalf. They should be always be held accountable for those decisions and not be allowed to defer responsibility to an external source (like an ‘independent’ central bank or an external fiscal authority).
A distinction and setting the scene
Note, the distinction I gave at the outset of this series.
When I write about Modern Monetary Theory (MMT), I try to be careful to distinguish between what we might consider the core MMT principles (theory, description, accounting) and the imposition of my own values (political and otherwise) that is informed by those core principles.
That separation is important and should (but doesn’t) stop others misrepresenting the core principles by appealing to proposals that might flow from the value imposition.
An example of this separation (and confusion), a topic which I receive many E-mails from people which seek clarification, is the concept of setting up an independent fiscal authority.
The proposal to establish such an authority is not a core MMT principle.
It might reflect an opinion that has been expressed by someone writing about MMT but that is as far as it goes.
The issue of outsourcing fiscal policy decision-making to a group of technocrats akin to the way in which monetary policy is deemed to be made has many motivations and raises many questions.
First, there is a claim that reliance on the polity to deliver timely outcomes that are in the best interests of the nation is fraught.
Many issues arise here including:
Can we trust the politicians who, it is claimed, are more interested in short-term power grabs than long-term societal well-being?
Wouldn’t an external body of experts, whose positions are, by construction, not sensitive to the political vagaries of the day, deliver more effective decisions in relation to targets set them?
These propositions assume that the external body of experts are non-partisan. This is the oft-repeated and naive proposition that a fiscal board that is constituted by appointing economists with PhD degrees would be free of ‘ideology’ and thus ‘independent’.
In terms of trust issues – that is what elections are for. Every so often (3 years in Australia) the voters can cast judgement on the performance of the politicians.
Governments regularly change as a consequence of this sort of behaviour and policy regimes can shift quite markedly if there is sufficient heterogeneity across the political classes.
The neoliberal period has been marked by a lack of such heterogeneity but that is not immutable and there is tremendous scope for aspiring, progressive politicians to create meaningful differentiation in their approaches.
The new Green New Deal narrative in the US Democratic Party is a case in point and is causing massive disruption to the regular, shared two-party neoliberalism that has choked American politics for some decades now.
The idea that major economic policy decision-making should be the responsibility of technocrats flies in the face of the fact that they do not stand for election.
They might give advice to elected politicians but have no democratic responsibility. And that is sufficient reason to eschew the ‘independent’ fiscal authority route to implementing a progressive agenda.
Closed-door decision-making is a recipe for Groupthink.
The neoliberal hollowing out of the state
Thomas Fazi and I have written before that the transition to a new economic order (that is, neoliberalism) – was achieved primarily through a gradual depoliticisation of economic policy: that is, through the hollowing out of national sovereignty and removal of macroeconomic policy from democratic (parliamentary) control, thereby effectively insulating the neoliberal transition from popular contestation.
We covered this in detail in our book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017)
The various policies adopted by Western governments from the 1970s onwards to promote depoliticisation include:
1. Reducing the power of parliaments vis-à-vis that of governments and making the former increasingly less representative (for instance, by moving from proportional parliamentary systems to majoritarian ones).
2. Making central banks formally independent of governments, with the explicit aim of subjugating the latter to ‘market-based discipline’. We note that this ‘formality’ does not create independence in a functional sense. Central banks and Treasury have to work hand-in-glove on a daily basis to ensure the monetary system functions, central bank boards are appointed by governments, and central bankers regularly deliver pronouncements on fiscal policy and thus enter the politicial process.
3. Adopting rules-bound policies – on public spending, debt as a proportion of GDP, competition, etc. – thereby limiting what politicians can do at the behest of their electorates; removing controls over capital flows, thus reducing the ability of governments to exercise control over economic policy.
4. Signing trade and investment treaties, which severely limit the capacity of governments to regulate in the public interest. Allowing corporations the power to subjugate the decisions of parliaments if they impede private profit is the exemplar of the anti-democratic shifts under neoliberalism.
5. Surrendering national prerogatives to supranational institutions and para-state and super-state bureaucracies. Allowing the IMF to impose conditions on democratically-elected governments undermines democracy.
In this sense, the erosion of national sovereignty that we have witnessed in recent decades, rather than the consequence of external factors over which states allegedly have little control, should be considered, to a large degree, the result of a deliberate and voluntary reduction of sovereignty by nation-states themselves.
The reason why governments chose willingly to ‘tie their hands’ is all too clear: as the European case epitomises.
The creation of self-imposed ‘external constraints’ allowed national politicians to reduce the politics costs of the neoliberal transition – which clearly involved unpopular policies – by ‘scapegoating’ institutionalised rules and ‘independent’ or international institutions, which in turn were presented as an inevitable outcome of the new, harsh realities of globalisation.
Thus, the hollowing out of substantive democracy and curtailment of democratic controlling rights that has accompanied the neoliberal transition in recent decades should not be viewed as a separate development, possibly resulting from the pressures of economic and political internationalisation, but as an essential element of the neoliberal project.
The important point is that all these shifts have come with the participation and cooperation of the leaders of the nation states.
All these shifts have come via changes to legislation and regulation at the behest of the governments involved.
Short of military invasion, neoliberal interests have to work through the legislative processes. They have to co-opt government to advance their interests at the expense of broader public interest.
The nation state has been hollowed out – but that situation (status) can only be maintained while the polity is cooperative and compliant.
A progressive new polity could unwind those shifts any time it chose, which is why the elites work so hard to keep those political positions subdued.
As I often note in presentations, if the nation state was powerless, why do corporate interests spend billions every year lobbying the politicians to advance their interests?
The logic advanced to justify the outsourcing of fiscal policy
This brings us to the proposal to outsource fiscal policy.
The logic of such a proposal appears to be that:
First, the neoliberal period has been marked by a shift in macroeconomic policy emphasis away from fiscal policy to an almost total reliance on monetary policy to stabilise the economic cycle via so-called ‘independent’ central bans.
Decisions about macroeconomic policy are thus outsourced to unelected and unaccountable officials.
Second, this shift was part of the depoliticisation noted above.
Third, it was justified in various ways including statements that fiscal policy suffers from time lags that leave it open to becoming pro-cyclical.
For example, in a downturn in non-government spending, the correct fiscal response is to expand net public spending to support growth while the non-government sector reorganises itself.
However, if there are decision, design, and/or implementation lags in that policy intervention, the net spending impulse might finally enter the economy at a time the non-government spending cycle has already turned, which means the fiscal intervention will be pro- rather than counter-cyclical.
One of the features of MMT, to reduce this possibility is to bolster the automatic stabilisers, which come into play immediately there are shifts in the non-government spending cycle.
That is one of the important roles that the Job Guarantee plays in our macro approach. It expands both public employment and public spending in a downturn in non-government economic activity and vice versa in an upturn.
The Job Guarantee becomes the minimum government spending that is required to sustain what we call ‘loose’ full employment.
Note, that the operation of the Job Guarantee doesn’t always mean that fiscal deficits will increase. One could imagine a situation where aggregate demand was lower as the Job Guarantee was introduced.
This is the point that Randy Wray and I made in our 2005 article – In Defense of the Employer of Last Resort: A Response to Malcolm Sawyer – which was published in the Journal of Economic Issues (Vol 39(1), pp.235-244).
The Job Guarantee provides ‘loose’ full employment in two ways:
1. It buys labour, for which it there is no market bid (that is why they are unemployed) at a fixed price – that is, it buys ‘off the bottom’.
2. It offers a single living wage to all workers who see a job irrespective of their skills.
While critics make much of the fact that labour is heterogeneous and so the Job Guarantee would just force skilled workers into jobs below their capacity, the reality is that such workers typically prefer what we call ‘wait’ unemployment which is subsidised by their redundancy payments, a luxury that most low-pay workers do not enjoy.
Further, mass unemployment is predominantly endured by such low-pay workers anyway.
As an aside, I get tired of reading that the Job Guarantee is not a core part of MMT – so the argument goes, because MMT allegedly just describes what is and the Job Guarantee is not what is so it cannot be core.
The twisted logic fails immediately, once one assumes that MMT is more than just descriptive.
When I introduced the notion of MMT being a superior lens to allow people to achieve a better understanding of the way the monetary system work, the operative word is ‘understanding’.
That goes beyond description. Understanding requires an appreciation of causal process, which, in turn, requires theorising.
For more discussion about this please see the blog post – Understanding what the T in MMT involves (September 20, 2018).
The point here is that one of the novel features of our work (MMT) is to address the debate within macroeconomics concerning whether there is a trade-off between inflation and unemployment using a buffer stock of employment concept.
The debate has been traditionally bogged down – with New Keynesians, Monetarists, Post Keynesians etc – arguing about the concept of a trade-off within an unemployment buffer stock paradigm.
The Job Guarantee cuts through that debate and helps to establish MMT as a new approach by showing that if there is an employment buffer stock operating, the economy can maintain both full employment and price stability.
The government does not have to sacrifice one to get the other.
But in the context of today’s post, the emphasis is on the automatic stabilisation properties of the Job Guarantee.
I also note some characters trying to denigrate the concept of the Job Guarantee by denying that it is, in fact, a buffer stock mechanism. Their flimsy logic is that a buffer stock requires the held stock to be withheld from active use.
It is a ridiculous ploy.
The buffer stock characteristics of the Job Guarantee are clear – it is a fluctuating stock of workers that is created by a fixed price purchase and varies directly with the overall level of activity.
It rises, when non-government activity is low and falls when non-government activity is high.
That is the same cyclical mechanism as operates in a wool price stabilisation scheme, which is where I originally derived the idea of the employment buffer stock from in the late 1970s.
The wool stock held by the government rises when the market is weak (and endangers the agreed price) and falls when the market is strong.
It doesn’t matter that the wool is held back from use by the government in the wool stores and the Job Guarantee workers are deployed on socially useful production.
In fact, that difference is a strength of the Job Guarantee buffer stock.
Agricultural buffer stocks require costly maintenance (refrigeration, etc) and can deteriorate to the point of being unsalable again, whereas, workers who maintain their employment retain many of their general skills that would otherwise deteriorate if they were forced into an unemployed buffer stock (as is the practice now).
The fourth part of the outsourcing logic seems to argue that politicians cannot be trusted and will deliberately use their fiscal policy powers to advance their own electoral chances at the expense of long-term economic stability.
This is a common theme in the neoliberal literature and one of the major sources of attack on MMT which prioritises fiscal policy.
The argument claims that central bankers are independent of the political cycle and make decisions that reflect data realities rather than the to and fro of the electoral cycle.
Given that MMT prioritises fiscal policy over monetary policy, the argument goes that a similar arrangement for determining the fiscal settings (spending and taxation choices) would be optimal as it would separate these choices from the electoral cycle.
Politicians would not be able to choose fiscal settings that enhance their electoral prospects but undermine longer-term stability and well-being.
The usual examples that are provided to justify this preference are typically flimsy and often rely on flawed mainstream reasoning.
So we often hear that politicians facing an election will go on a spending spree to garner votes which will generate inflation or some debt crisis sometime in the future, after they have been re-elected.
Where are the real-world examples of this sort of behaviour?
And how damaging is this behaviour in the long-term if we can punish it regularly at elections?
When these sort of criticisms are raised they never include the lobbying behaviour of the corporations and the financial sector to distort government policy in their favour.
That is a much greater problem than some power hungry politician announcing a pork barrel on the eve of an election.
It is the on-going capture of politicians that needs to be addressed and safeguards put in place so that there is transparency in the dealings between the public and the polity.
The objections to an independent fiscal authority
So what the objections to an ‘independent’ fiscal authority making decisions that the government would have to wear?
First, the notion that we now have ‘independent’ monetary authorities is a ruse promoted by neoliberals to justify their attacks on fiscal policy.
I have covered that issue in these blog posts (among others):
1. Censorship, the central bank independence ruse and Groupthink (February 19, 2018).
2. ECB continues to play a political role making a mockery of its ‘independence’ (June 12, 2018).
3. The sham of ECB independence (October 24, 2017).
4. The sham of central bank independence (December 23, 2014).
I also thought this little intervention was apposite.
On March 12, 2019, Peter Praet, an Executive Board member of the ECB conducted a Twitter Q&A.
At one stage he tweeted this statement, thereby buying into the MMT is dangerous narrative that has brought the mainstream out in droves in recent weeks.
Perhaps he might explain why the ECB continually misses its own inflation target (that is, cannot get inflation high enough to even satisfy its own definition of price stability) while pumping billions of euros into the non-government sector.
Perhaps he might explain why the ECB needed to pump billions of euros into the non-government sector via its various QE programs if the stated intention was to enhance liquidity management.
Such an operation would have required the tiniest proportion of the amount actually pumped in.
I considered that question in my book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).
Perhaps Praet might also explain why the ECB has effectively become the fiscal capacity in the Eurozone via its QE programs, which have, effectively, violated the Treaties by funding government deficits.
And, perhaps he might explain why, if the ECB was ‘politically’ independent, it continually makes statements about the fiscal policy positions taken by Member State governments; was a key player in the Troika and imposed harsh austerity conditions on those Member States in return for propping up their solvency via the QE purchases; and directly participated in the Troika threats to inflict financial instability (exactly the opposite of its legal charter) against the Greek government in June 2015, which forced the latter to surrender and defy the peoples’ voted wish to end austerity?
And, of course, if funding government deficits (whether directly or via the secondary market) “is a dangerous proposition” because it results “in hyperinflation”, why isn’t the Eurozone hyperinflating, given that the ECB has been doing exactly that in large proportions for many EMU governments for nearly a decade now?
And, of course, why isn’t Japan enduring hyperinflation?
So Praet wants us to believe in what he says not what he does. Another hypocrite.
The point is that those who use the false claim, that there are ‘independent’ central banks to justify outsourcing fiscal policy decision-making, always fall back, in one way or another, into the neoliberal narrative.
Such a proposition is problematic at the most elemental level.
There is always politics involved in macroeconomic policy-making and progressives must demand that these decisions are not taken by outsourced, unelected bodies that allow politicians to then depoliticise them.
To be continued.
The third and final part of this series will appear tomorrow.
I am pursuing these ideas further in my research activities and will have more to say in the future.
Many of these issues will appear in the next book that Thomas Fazi and I publish – hopefully later this year (if not early in 2020).
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.
That is enough for today!