In recent days, I have become confused about the problems facing the US economy.
Among liberal commentators, it’s more or less accepted wisdom that the stimulus was too small. The underlying premise is that the problem facing the economy currently is a lack of aggregate demand and that adequate Keynesian “pump-priming” could thus get things moving nicely again. Meanwhile, the deficit spending required would pay for itself as a growing economy increased government revenues. In general, I have tended to find such views convincing.
Many other commentators embrace the view that the high unemployment we are experiencing is “structural” and that the only thing hiding it for the last decade was an artificial housing bubble. Absent such irrational exuberance, the US economy faces a mismatch between skills needed and skills actually possessed by workers, hampering job creation. I have tended to find these views less convincing, in part because the policy prescriptions of such commentators seem to be “therefore there’s really nothing we can do.” Like Dr. House, I prefer a diagnosis that has a treatment. Further, various Rortybomb posts (which I have shared along the way) have argued that even if there is a structural component to unemployment, Keynesian stimulus can significantly lower the unemployment rate — and Rortybomb is, of course, always right.
Accepted wisdom used to be that Obama was misled by powerful advisors such as Larry Summers and Timothy Geithner into believing that a small stimulus was all that was necessary. Now, however, a new book by Ron Suskind reveals that the seemingly evil Summers was actually to Obama’s left on this issue and joined Christina Romer in urging him to push for further stimulus once it became clear that the economic projections they had been using were much too optimistic. Obama rejected the idea, embracing something like the structural unemployment hypothesis — specifically, he is reported to believe that greater automation and greater use of offshore labor necessarily increase unemployment in a way that Keynesian stimulus can’t fix.
Liberal commentators have reacted to Obama’s views with horror. (How, they ask, could he possibly ignore the expert advice that, based on previous presuppositions, liberal commentators were urging him to ignore for the past two years?) My reaction is different. Going against all my instincts, which have been thoroughly trained to distrust Obama at this point, I wonder: doesn’t he kind of have a point? In Michigan, for instance, it’s clear that increased automation and use of offshore labor have decreased the number of industrial jobs — and weirdly, new jobs didn’t magically materialize to take their place.
More generally, I find the Marxist view of this issue, recently articulated by Jameson in Reading Capital, pretty compelling: namely that the tendency is for capitalist development to produce massive accumulation and massive unemployment in tandem. Isn’t that precisely what’s happening in the US, as corporations and wealthy individuals hold huge stockpiles of cash while Depression-level numbers of unemployed workers sit idle?
During the postwar “golden age” of Keynesian policy, the tax code discouraged over-accumulation while the hegemony of union power forced corporations to distribute more profits to workers. By contrast, in an economy that is set up to push down wages and funnel most profits directly to the already bloated holdings of the rich, how much good could Keynesian stimulus, even if of “adequate size,” really do? So now I’m inclined to think that the “structural unemployment” advocates and, even moreso, Obama have a point — except that the “structural unemployment” people misidentify the “structure” that’s to blame and Obama, characteristically, fails to push his initial insight in the direction of the necessary political confrontation.
The problem isn’t that we’ve failed to innovate and educate workers adequately for an increasingly competitive global economy, etc., and meanwhile papered over the problem with asset bubbles — the problem is that we’ve been doing neoliberalism for over three decades. In these circumstances, a bigger stimulus most likely would have relieved some short-term suffering — a worthy goal, and I for one wish it had been pursued! — but the economy it would have pushed back into high gear is one that is designed, from the ground up, to create stagnant wages and greater unemployment while increasing already appalling levels of inequality.
An und für sich 
Good post, where exactly to you stand on Accelerationism then? It’s something I’ve been grappling with for a while, I can’t definitively bring myself onto one side or the other.
‘During the postwar “golden age” of Keynesian policy, the tax code discouraged over-accumulation while the hegemony of union power forced corporations to distribute more profits to workers.’ Never quite thought of it that way, re. discouraging over-accumulation. Always thought that it was perhaps hoped by Governments that more money would come under the purview of the top rate of tax at the time so as to boost the coffers and (theoretically) redistribute from bosses to workers in an indirect and less antagonistic way than wrangling between the two parties.
But ‘Dragon’s Den’ provides a nice link here: Entrepeneurs/Very wealthy = Dragons > Dragons as treasure hoarders. Definitely a slogan or a poster in that.
Somewhat tangentially, I also think the structural unemployment folks have a point, so what is interesting to me is what the left should be working towards. Peter Frase–a blogger that Rortybomb has linked to a few times recently (and so you may have read him)–makes some interesting arguments that the left/progressive rallying cry for “Jobs” is misplaced and is forgetful of the alienating (and overall sucky) quality of most “jobs”. Therefore, he argues, what we should be working for is something more like a guaranteed income. Frase is aware, of course, of how unlikely success would be, but in my mind, putting an agenda like that in front of us is a good way to remember that the problem is not simply cyclical or one of effective demand, but is due to the nature of capitalism itself.
Even if all it did was relieve short term suffering, it would have been worth it. I completely agree with the Marxist analysis but you are probably giving Obama too much credit.
I think you’ve just worked through your own question with sufficient clarity at the end. In so doing you also remind us of two structural correlates: the incompatibility of globalized capital with the modern liberal nation-state, and the depressed relevance of Keynesian economics under such circumstances. The problem with Democrats is that they refuse to acknowledge this sort of truth, whereas Republicans seem completely untroubled by it (so capital wins, and death of Keynes is good). Jameson is right in his analysis of what has been happening, but it obtains as long as there are still untapped or emergent sources (fungible either through transnationalism or migration of workers) of ever cheaper labor outside the main supply chain. So industry jobs have largely gone from U.S. and Europe to China, India, Brazil, etc., and once that has been exploited to its measure, then capital moves to Vietnam, Indonesia, Ghana, say, and after that to Laos, Ecuador, Madagascar, and so on. (China of all countries understands this best, and that is why they are investing heavily in the Middle East and Africa – both for raw materials and labor.) Automation does play a key part, but only ancillarily to the greater operations of capital. Once that general dynamic has exhausted itself, i.e., reached its geographic end, then something else will have to happen (if the earth is still around and kicking). It seems to me that the best way to anticipate that terminus (even as the domestic labor market already shows signs of being permanently reduced) is to focus on creating NOW alternative values of labor, production and consumption – better, other ecologies of life. For that, obviously, we are compelled to draw on our diverse historical traditions and savvies in order to MOVE (since capital is at present much more resistant to revolutions than are any tyrants as such) to a post-capital life. Thus, like evolutionary biologists today, we need to shift our mind from selection to MUTATION.
I think you’re getting tripped up by the idea of an “artificial housing bubble.” It was malinvestment, sure, and the spending was driven by the misguided view that housing prices would keep rising for all time, but the spending was quite real. You’re still left with the simple spending = income equation–when spending was higher, unemployment was lower. Now that consumers have stopped spending, unemployment has soared. The very fact that the unemployment rate has been fairly volatile over the last 10-15 years would seem a strong argument against the skills mismatch theory, particularly since unemployment has exploded across every single level of education–higher-skilled workers are better-off, but still facing higher unemployment. With enough demand, companies do hire–the evidence is quite clear on that.
What’s more, while I don’t want to discount the importance of unions, how much of the Keynesian golden age was simply the result of tight labor markets? When companies have to compete for workers, they will pay more, they will train more–I would argue that many of the pathologies of our current economy stem from the fact that we’ve had a demand-deficient economy (and subsequent elevated unemployment) for the better part of 30 years.
Let’s not overcomplicate things–get rid of the payroll tax, guarantee a minimum-wage job to anyone who wants one (preferably at a higher minimum wage than we have now), and you’re done. Accept that the deficit is a natural outcome of private sector desires to save (indeed, it’s what makes higher rates of saving possible). Most of the problems you cite go away with sufficient demand.
That solution sounds good to me, but I have a couple questions. Wouldn’t a guaranteed minimum income also decrease employer leverage over employees while maintaining demand? Do you think it needs to be direct employment?
Also, why wouldn’t endless massive deficit spending create a bubble just as much as endless borrowing against inflated housing bubbles? (Presumably it would take longer, but still.) From another direction: if the housing bubble was a kind of “stimulus” that supported demand, why didn’t it become self-sustaining? It seems like you do have to talk about structural issues and the kind of “nihilistic” Keynesian view that you can bury money in the ground, etc., doesn’t tell the whole story.
The thinking behind the Job Guarantee (which is not mine, I’m cribbing heavily from Bill Mitchell, Hyman Minsky, and a host of others) is that you cannot achieve full employment -simply- by spending, or by cutting taxes–you can’t just build bridges until you have 2% unemployment, as you’ll likely hit inflationary bottlenecks before you get there. The argument for a Job Guarantee vs. a guaranteed income is that it is a) less inflationary, as workers with guaranteed jobs are producing actual goods and services, while those receiving transfer payments are not; and b) simply a more just way of doing things–able-bodied people should receive an income for work performed, rather than simply collecting transfer payments, provide there is a job available for everyone who wants one. Both are open to debate, I suppose, and a guaranteed income would also go a long way towards increasing worker power relative to employers, but I like the Job Guarantee idea, personally.
As to your second point, well, no, government deficit spending is not comparable to a housing bubble. The housing bubble fell apart because it was supported by consumer debt—there is a real limit to how much debt consumers can take on—and also because it was an asset bubble, predicated on always being able to sell an asset for higher prices. Eventually, we ran out of buyers, but the debt was still there, forcing increasingly desperate sellers to try and offload their assets at lower prices, which led to still-lower prices, and even more unserviceable debt.
The idea of a govt debt bubble, by contrast, doesn’t make any sense—the govt can –always- service debt denominated in its own currency. Govt spending on actual goods and services (or tax cuts) in a time of excess capacity is unlikely to cause inflation in the near term (though it may not get you all the way to full employment, as noted above). As for sustainability, well, if the private sector as a whole wants to increase its savings, the govt –must- run a deficit, it can be no other way—otherwise income falls and you have a recession. No one’s suggesting endless, unlimited deficit spending, but the govt –must- spend in line with private sector desires to save for a given level of income.
Governments can run deficits in their own currency as needed–consumers can’t. An expansion supported by consumer debt and rising asset prices -has- to collapse eventually. Meanwhile, the US govt has run a deficit for almost the entire 20th century.
The government can always technically service debt in its own currency, but it is not an immutable fact that people will accept that currency — it’s possible for governments to lose credibility or authority. If the US government announced it was going to do a guaranteed employment program by spending money into existence, I’m pretty sure it would trigger a self-fulfilling inflation panic. That is, I accept the MMT positions about what is conceptually possible, but I don’t think it would work in practice, because MMT tends to abstract away from the “faith” or “trust” dimension of money by focusing on the coersive power of government to tax, etc.
No. You’re applying the theory behind “structural unemployment” into an entirely new and different theoretical framework. In neoclassical economics, business cycles are caused by technology shocks (primarily, along with such more obvious things as natural disasters or commodity price volatility). These technology shocks can be positive or negative. Technology shocks can have a negative effect on employment if they cause structural unemployment – i.e. technology has dramatically shifted such that the labor force is lacking necessary skills. The theorists who developed the real business cycle theories (Prescott, Kydland. etc) categorically do not believe that inequality of wealth drives or impacts business cycles. Structure emphatically does not refer to the structure of capital for these theorists.
Within Keynesian theory, all major theorists believe that structural unemployment is, at best, a minor factor. The major factor behind business cycles is the velocity of money for Keynesians. The same is true of Marxist theory – it also does not consider structural unemployment to be a compelling thesis – for Marxist theory, it is not technology shocks that are causing skill misalignment in the main, but the structure of capital.
The structure of capital can be controlled and regulated in ways that technological innovation cannot (or that natural disasters or commodity prices cannot). Even within the restricted set of highly capitalist economies, we see wide variations in taxation structures and levels. Obviously, if business cycles were caused by the structure of capital, then by simply regulating the structure of capital we could reduce or entirely eliminate the business cycle.
More concretely, there is a problem with your theory: if the structure of capital is the primary driver of business cycles, then we need to be able to identify what changes happened in the structure of capital before each recession. But there aren’t vastly different structures of capital on a macro scale between 2006 and 2008. Some categories of investment assets lost value, but the overall structure of capital was precisely the same in 2008 as it was in 2006. And the structure of capital wasn’t much different in 2008 than in 1999 or than in 2001. Yet we saw wide variations in employment levels between 1999, 2001, 2006 and 2008.
“because MMT tends to abstract away from the “faith” or “trust” dimension of money by focusing on the coersive power of government to tax, etc.”
Admittedly, I agree that MMT would be likely not to function at upward bounds and highly unpredictable situations (government crisis, war, severe commodity shocks, etc). But a guaranteed income policy would not necessarily create an unpredictable situation or push the deficit to it’s upward bounds.
No, in essence, you cannot have a government debt bubble with debt in the currency the government controls – the investors are buying debt from the government at very low interest rates (which is what you meant by a bubble in this instance), so the government can, when it needs to pay the interest on that debt down the road, print (create) the small amounts of money needed for interest payments (now in the 2-4% range of the money it borrowed).
To set off the kinds of massive inflation you fear, the US government would need to be roughly creating at least 3 trillion in a year (a 20% increase in the M3 money supply), if not more. Assuming 5% nominal interest on government issued debt, that means that the US government would be creating 3 trillion to service a debt of 60 trillion dollars, which is an amount of money that is essentially unimaginable.
“If the US government announced it was going to do a guaranteed employment program by spending money into existence, I’m pretty sure it would trigger a self-fulfilling inflation panic.”
That’s an extraordinary assumption to make–the gov’t “spends money into existence” every day. And why would it suddenly make people start spending like mad? If the gov’t spent well beyond the economy’s productive capacity, sure, we’d have inflation. Before that, however, I don’t see the mechanism–and I don’t think you do, either. Faith in the currency is a function of the gov’t’s ability to collect taxes–I am paid in dollars, and other people expect me to pay them in dollars, because we all have tax obligations that the gov’t is quite capable of enforcing. If said enforcement ability went away, well, inflation is likely the least of our worries.
And that’s leaving aside the whole point about self-fulfilling inflation expectations, which is equally wrongheaded–if you’re worried about inflation eroding away your savings, what are you going to do? Buy a powerboat? Buy a year’s worth of groceries ahead of time?
The Fed does spend money into existence all the time, but it obscures the fact that that’s what it’s doing by maintaining the focus on debt and interest rates, etc. Most lay people have no idea that’s what’s going on — see for example the hysteria about quantitative easing, even though it’s basically the same mechanism by which the Fed always sets its policy rates.
For the government to openly start printing money in order to fund new programs — even if it’s under conditions where it “normally” wouldn’t cause inflation — would be a radical change in people’s concept of what money is, and at that point, I think all bets are off. You can’t enforce your tax laws if the IRS agents and police officers and soldiers don’t believe in the currency they’re getting paid in.
I’m reading Graeber’s Debt: The First 5000 Years, and the model of money-creation that MMT presupposes as normative and immutable has historically been associated with military empires — they establish a currency by paying soldiers in that currency and then requiring everyone else to pay their taxes in that currency. Obviously this is a model that applies to situations where coersive force is the primary political reality, such as in the Roman Empire. I’m not convinced that’s how modern currency regimes were established or how they work — the Bank of England was founded through a loan to the royal family, for instance, i.e., the money was created as debt.
Graeber’s argument is that it’s a mistake to view money as either purely debt or purely a commodity (i.e., currency), because those are the poles between which it moves. Money in modern fiat regimes centered on central banks seems to me to be closer to debt than to a sheer commodity on the Roman Empire model. Shifting that dominant concept would be a major change in the social contract, with results that I think are literally unpredictable — but not likely to be positive. We were all shitting our pants a couple months ago about the catastrophe that a US default would cause, and that’s at least conceivable within our current concept of what money is. Literally and openly firing up the printing presses is not.
You’re comparing people’s concerns over quantitative easing (which were real, but hardly rioting in the streets) to law enforcement offers suddenly refusing to enforce the laws of the country–one of these things is plainly not like the other.
We’re basically arguing on faith here in terms of how we think people will react, so I don’t know if there’s much point in taking this further, but honestly it seems a bizarre view of human nature–as though all of society would collapse if people started reading all the papers the Fed and the Bank of International Settlements publish on the banking industry and how it actually works. The social fabric is hopefully being held together by stronger stuff than a belief in the loanable funds market.
Okay, I’m just going to come out and say that modern fiat money does not work like MMT stipulates — it is not primarily a commodity that is valuable because of the government’s power to tax. Modern fiat money is created as debt. Money printing is never carried out in the abstract, but always has to do with crediting bank accounts (i.e., putting the central bank in debt to the institution holding the account) or buying up debt securities. The government literally never directly “prints money” in order to spend it, without any mediation of debt-creation. The primary force that makes people submit to the money regime is not the coersive force of the government’s taxing power but the moral force of debt.
A radical change in the way money operates is a radical change in the social contract, and printing money in order to spend it into circulation would be a radical shift. Your arguments all seem to view this as a purely technical matter — basically assuming away questions of legitimacy, consent, or political struggle.
Burritoboy, I’m talking about class structure, not capital structure.
No–the spending comes first, it has to. One cannot drain reserves by issuing debt without first spending the money into existence. Think about it–the govt is the monopoly issuer of currency, it cannot come from anywhere else. We’re not issuing gold certificates anymore. The Treasury must have money in its account at the Fed before it can spend, yes, but that doesn’t mean it’s dependent on private debt demand. For starters, all a debt auction is is a reserve drain, targeting excess reserves in the banking system which were already spent into existence by the government previously. Second, treasury debt is auctioned to primary dealers–their sole function is to create a market for government securities. They purchase whatever is on offer, knowing they can sell it or loan it right back to the Fed if demand for reserves shifts–this happens all the time. The supposed constraints are fictional–in reality the government simply spends.
Your whole argument is predicated on the idea that the govt must go hat in hand to the bond market before they can spend and that’s simply not true. The Fed can and does ensure that private sector demand for currency, reserves, and bonds is met under a given interest rate and a given level of government spending, any level, and it has complete freedom to do so. I have to get back to work, but your position on reserve accounts is also strange–a liability of the central bank, yes, but not debt in any real sense of the word.
No money is created without also creating a corresponding debt, even if that debt is largely a formality (as in bank reserves). In theory, the federal government could simply create money without the mediation of any debt and rely on its power to tax in order to enforce it — but no modern government that I know of actually does this. The way the modern, central-banking money system is set up is to create money as debt, rather than as a commodity. Obviously the spending comes first, just like I spend money on my credit card before paying back the loan, but the debt comes into existence simultaneously with the spending.
The choice between the two models is a political one, whether to rely primarily on the coersive force of taxation or the “soft power” (i.e., moral force) of debt, and in the case of the US, reliance on the national debt rather than taxation was a political decision intended to get the bourgeoisie on the government’s side by getting them to put “skin in the game.”
I don’t think it makes sense to argue that the commodity model of money “really” underlies our current system when no money is ever created otherwise than by issuing debt. People would experience a pure MMT regime as a major change because it actually would be. And when you throw people’s fundamental expectations into question, the outcome is unpredictable.
I’m struggling with your insistence that a “true MMT world” would involve spending without adding to bank reserves–literally no one I can think of talks this way, it’s a fundamental misunderstanding on your part. And reserves are not debt in anything like the way your credit card is–they can be issued at will, often carry no interest, and are ultimately redeemable for…more reserves, or currency, all of which ultimately comes from the government. Every MMT thinker out there will tell you currency is an IOU of the government–it’s just it’s an IOU that can be issued without limit, and is only redeemable for another IOU, thus making any comparison to consumer debt kind of pointless. If the government gave out great big bags of money, completely bypassing the banking system, they would still be “issuing debt” under your definition–but so what? The “moral force of debt” argument falls apart when that debt can be instantly redeemed for the exact same thing at zero cost.
One potential “MMT ideal,” as I understand it, would be to do away with Treasury debt issuance, with the Fed instead paying interest on reserves in order to hit the desired federal funds rate. So in that regard they would still be “issuing debt,” in the sense that all money is ultimately an IOU of the government–I don’t really disagree with your statement that all money is debt on some abstract level, I just don’t think it has anything like the significance you think it does in the current system.
I guess I’m misunderstanding, then, in part because you’ve placed so much emphasis on the power of the government to tax beforehand — and other things I’ve read in an MMT vein have put that forward as a kind of “in the last analysis” explanation for why all this is possible.
“Burritoboy, I’m talking about class structure, not capital structure.”
No, we’re both talking about both things, because they aren’t separable. The problem remains: what were the changes in class structure between 2006 and 2008 to create a recession?
Why does it have to be that short-term?
There have been huge changes to the class structure since the 1950s or so. Look at our rising GINI coefficient (now at the level of Rwanda!) and falling wages for workers.
“I guess I’m misunderstanding, then, in part because you’ve placed so much emphasis on the power of the government to tax beforehand — and other things I’ve read in an MMT vein have put that forward as a kind of “in the last analysis” explanation for why all this is possible”
I suspect we might be going around in circles at this point, but the MMT view is that taxes -are- vital–they create demand for government IOUs (currency and reserves) which must be used to settle tax liabilities. Likewise, they remove demand from the economy, creating the “space” for govt spending without inflation. They do not, however, “fund” anything.
If you’re at all interested, the UMKC economists (Stephanie Kelton, Randall Wray, Scott Fullwiler) have written many, many papers dicussing reserve accounting in fairly excruciating detail–the impact of government spending/taxation, Fed open market operations, and the like on the private banking sector and how that impacts behavior. How the govt -actually- spends, right now, is most emphatically -not- glossed over in any way–it’s the core of the whole project. Likewise with the idea of currency as a nonconvertible liability of the govt.
This concept of the “moral power of debt” might be worth discussing over beers sometime, however–I suspect I’m not fully grasping your point. Graeber book’s on order, however, so perhaps that will help.
There are some indications that we’re talking past each other to some extent. I assume beer will help smooth those issues out.
Brendan,
Of course. But the original problem Obama and his economic team were trying to answer is how does the business cycle happens – i.e., how does recession and expansion happen? There was no significant change in wealth inequality between 2006 and 2008 so it’s not a plausible explanation for the current recession. It may well be a plausible explanation for all kinds of other things, but it’s not a plausible theory for the cause of the business cycle.
I’m going to go out on a limb here and say that a catastrophic financial crisis caused the recession.