The long-running Brexit fiasco has overshadowed most news coming out of the United Kingdom these days. It’s not surprising, therefore, that hardly any attention was paid to news that may be of more long-term economic significance to Australia, and to the current crisis of neoliberalism, than a rearrangement of relations between the UK and the European Union.
In the Budget brought down in late October, UK Chancellor of the Exchequer, Phillip Hammond announced the end of the Public Finance Initiative (PFI). The PFI was introduced by the Conservative government of John Major in 1992, and greatly expanded under Tony Blair’s New Labour government. The PFI provides a financial framework for Public-Private Partnerships, which have their own acronym, PPPs.
PPPs are the archetypal example of the soft neoliberalism represented by Blair’s ‘Third Way’. Like the hard neoliberalism of Thatcher and Reagan, soft neoliberalism accepts the primacy of financial capital and the superiority of markets over governments. On the other hand, soft neoliberals recognise the need to match the achievements of the social democratic welfare state, which reached its peak in the third quarter of the 20th century. These achievements include universally accessible health and education services and the provision of physical infrastructure such as roads.
The central idea of PPPs, instead of governments undertaking infrastructure projects themselves, or contracting with construction firms to do so, a private consortium would build, own and operate the project. The most immediate attraction to politicians was that the infrastructure asset would be off the government’s books and therefore would not involve any addition to public debt. A more sophisticated claim was that the projects would deliver ‘value for money’, by unleashing the power of private-sector innovation and incentives.
The public debt rationale ran into trouble early on. Most of the time, the construction firm involved in building, say, a tunnel, wanted to be paid for finishing the job, not for the number of cars that used the tunnel. So, financial engineers came up with a variety of ways to guarantee the payment, while making it appear that the asset was privately owned. Unfortunately for them, government audit offices were quickly on to this, and forced governments to take such assets, and the associated debt, back on to their books.
The claims of greater efficiency held up a bit better at first. PFI projects were generally completed on time and on or under budget. The problems emerged later on. First, the value of the stream of payments associated with PFI financing greatly exceeded the cost under traditional public procurement, making a mockery of the ‘on or under budget’ claim. Even now that the PFI has ended in the UK, the National Audit Office estimates that the public is on the hook for nearly 200 billion pounds in payments stretching out to 2050.
Second, the operational phase has been a mess, particularly in the case of service facilities like schools and hospitals. Every unanticipated change can potentially require a contract variation, and, as anyone who has ever gone through a renovation project, it is contract variations that really ramp up costs. Because the British PFI has been running longer than its many imitators, the problems are more acute there.
In the years before the Global Financial Crisis, these problems were obscured. Investors were willing to take on high-risk projects, based on dubious projections, on the assumption that there would always be someone willing to bail them out if things went wrong. Sometimes that was true. But as governments tightened up, there were a string of failures.
The fundamental problem is that PPP projects almost invariably involve a higher cost, over the lifetime of the project, than direct public procurement. Either the public must pay more to meet this cost or private investors must take a loss. As both parties wise up, the flow of PPP projects turns to a trickle. The decline in the UK was so steep that the official end of the program was merely a recognition of reality.
The PFI has failed miserably in its country of origin. Yet it carries on a zombie existence in Australia, where it was the model for the National PPP Policy Framework and its various state-level counterparts. Our national planning body, Infrastructure Australia seems oblivious of the failure of PFI.
Worse still, Australia is actively exporting this failed idea throughout the Asia-Pacific region. According to the Department of Foreign Affairs
Our recognised domestic expertise in Public Private Partnerships (PPPs) and “asset recycling” are of significant interest to our partners [in the Indo-Pacific region]
Even as the UK looks for ways to unwind failed PFI contracts, new PPP contracts, with payments stretching far into the future, are still being signed.
Considered as a coherent policy program with a tenable theoretical basis, neoliberalism has been dead ever since the global financial crisis. But the habits of mind instilled linger on a decade later. The bills for neoliberal policies like the PFI will still be coming due in the middle of this century and perhaps even beyond.
John Quiggin 
Not sure about soft neo-liberalism.
PPPs involve infrastructure spending. this means it is public spending not private.
PPPs seems to ,me a poor way to reduce public spending when ti should be increasing.
Neo-liberals believe the supremacy of the market but not when involves essential services.
As we have seen in the electricity sector the market is not suited to sectors where competition cannot thrive.
PPPs are surely symptomatic about this.
Perhaps some neo-liberals would support this but not this neo-liberal.
In time for the London Olympics, some unsung heroes tevamprd the standard contract forms for public construction projects. They got rid of most of the misaligned incentives on both parties that drive up costs. It became very difficult to revise specifications, for instance. The Olympics faculties went up on time and to budget. This reform eliminated the main efficiency argument for PFI.
«The PFI»
Actually the acronym “PFI” has been ended, the practice will continue under other names and disguises. For example two clever schemes have been recently reported by the FT at the municipal level:
https://ftalphaville.ft.com/2018/11/23/1542975908000/The-local-government-gamble-on-commercial-property/
https://www.ft.com/content/cd5a015e-f48a-11e8-ae55-df4bf40f9d0d
«has failed miserably in its country of origin.»
From the point of view of governments and businesses that’s just the politics of envy for the huge profits that it has made for private investors (much of them paid to offshore entities and in general pretty much tax-free) and in doing that PFI+PPP have been very successful.
«But the habits of mind instilled linger on a decade later.»
PFI/PPP schemes have an aspect that makes them very valuable to their beneficiaries for a long time: opaqueness, because:
* Being stretched over a long period of time and confusing capital and operating costs, the true costs of a PFI+PPP scheme are difficult to figure out (sometimes even for the private investors that are supposed to be their beneficiaries).
* Because they involve private contractors, the contracts contain sweeping “commercial confidentiality” clauses that make third-party examination of the true costs of the deals very difficult.
Opaqueness is a “habit of mind” that is very valuable to both contracting sides (government and business) and will continue in many ways; for example the articles in the FT mentioned in the previous post seem to me to omit critically important aspects of the deals, and that’s the FT…
Any and all moves away from PPPs are a good thing. On that, we can agree.
Re “the long-running Brexit fiasco”, I’ll simply point out the latest inconvenient truth about the long-running EU fiasco. France is a hot mess. The FIGS are falling off the tree. (France, Italy, Greece, Spain.)
“ Yet it carries on a zombie existence in Australia”
State governments are now big putting infrastructure projects on their own books, motivated more by the belated recognition that they can borrow very cheaply than any ideological conversion.
This means though that they wear the risks (as now seen in the Sydney light rail project) rather than the private investors, such as those who did their dough on the Sydney cross city tunnel, and plenty of others.
On the subject of debt I want to know if I should be listening to MMT folk like Stephanie Kelton.
Is MMT bunk?
The main idea of MMT, which is quite valid, is that monetarists and orthodox economists focus too much on balancing the federal budget. Monetarists and others act as if money is the real limit to economic activity. More to the point, they act is if money is the real limit to government activity. This cannot be the case when the government “prints” its own fiat currency.
The real limits to a nation’s economic activity are real resources and the work of real people. Only a government which has abrogated its responsibility to govern for all the people (in favour of letting elites with big money run the country) will fail to ensure that government activities provide all necessary health, welfare, education, necessary services and infrastructure which are possible within real limits.
Inflation and stagflation are the big fears of the monetarists and neoliberals. Like all “generals”, they are fighting the last economic “war” not the current one. Inflation and stagflation are no longer our main dangers. Recession, depression, stagnation and real limits to growth are now our dangers.
Our economy needs stimulus via more deficit spending. The government can do this by the simple expedient of “printing” money, which is done electronically these days. Of course, a watch has to be kept on inflation. If the economy lags or does not respond to stimulus because of real limits or structural and adjustment problems then excess inflation could occur. But a priori ruling out more deficit spending before testing the response of the economy is an un-empirical approach. It’s an ideological approach designed to protect stores of capital (money, shares, bonds) before real people.
The modern global economy (essentially capitalist in nature) faces a new problem. This problem is the limits to growth imposed by the finite nature of the earth (the biosphere). The limits are both on the inputs side (resources) and on the waste outputs side. In fact, it turns out that waste limits (the capacity of the biosphere to absorb wastes without serious disruption) are the closest limits. Global warming is the main case in point currently but other planetary limits or boundaries exist.
What capitalism cannot come to terms with is its need to grow endlessly on a finite planet. This is not possible. Even MMT does not properly grapple with the limits to growth problem (in my opinion).
I will just add to my above post re MMT. There is research which suggests that capitalism possibly could continue without growth.
http://theconversation.com/how-capitalism-without-growth-could-build-a-more-stable-economy-91779
There is a link to the full paper in that article. I’ll suspend my judgement at this point. I suspect the current form of capitalism would have to undergo considerable changes to meet the necessary criteria and conditions for a non-growth system. Whether it would still merit the term “capitalism” at that stage is quite possibly a moot point.
Here is my take on MMT https://johnquiggin.com/2011/10/18/money-for-nothing/
Thanks John. As a layperson I can’t say that I that I have a clue about how the economy really works. I do however see that tax must be collected and redistributed to reduce inequality and that inflation is regressive and that the prospect of inflation limits how much money government can create out of thin air.
This is how I see it. Professional MMT advocates and the more enlightened of orthodox economists (ie those who are not monetarists or neoliberals) tend to mis-characterise each others’ views. We could ponder on the reasons for this but that is of secondary importance.
Their differences revolve around two matters;
(a) How to frame a narrative that is essentially circular; and
(b) The relative weights to put on various quantities (real and notional) in the circulating and relational economic system.
In referring to a circular narrative, I am NOT implying that any of these economists are using circular proofs. They are not. I am stating that, to tell the story of a circulating system, one has to start the story somewhere. The choice of narrative starting point frames the narrative. It biases the narrative in the sense that the narrative starting point gains the appearance, and sometimes the implicit claim, of being the origin point for a linear chain of causation. But there is no simple, linear chain of causation in this system. Rather, there are circular, amplifying or decaying, chains of causation (endogenous links, internal feedbacks etc.) plus extra causes feeding in (exogenous inputs). This is true of the entire economy which is a complex system of the real economy and the money-finance economy (both complex systems in their own right but the former real system and the latter a formal system).
The first point of contention between MMT and New Keynesian economists, arises from where each likes to start telling the story of the national accounts (for government monies). New Keynesians, like all orthodox economists, like to start the story with taxation. The government taxes monies and then spends it spends monies. Simple, right? Yes, the story is simple, too simple.
MMT-ers like to start the story with the creation of fiat money. Where did all the extant legal tender money in the system come from? It came from the government originally creating legal tender money either entirely ex nihilo (from nothing and for nothing) or by giving legal tender state bills for something else like gold (commodity money).
Who is right? Both are right in a year-to-year cyclical sense. The government taxes money to spend money. But it also created the money that made its way to the private sector to now be available for potential taxation. The MMT picture has some greater claim to validity, historically, as a picture purely of fiat money. The legal tender had to be created first at some real, historical point.
But money is nominal (or formal) and not real. Is it more important to tell the story of the formal (money-finance) economy or the real economy? Actually, it is most important to tell the story, and to analyse them, as interrelated, interacting systems AND to understand that real system / formal system interactions exhibit complicated characteristics.
This is where MMT advocates and orthodox economists both (partly) fall down in my view, albeit in different ways. The orthodox economist tends to look at money as a good proxy (measure) of real economy processes and interactions. There are both descriptive and prescriptive reasons (in economic terms) for this bias. The market is held to be a “good enough for most practical purposes” valuer of relative economic values. In addition, money itself is managed and protected (to protect is value as a measure of value) by fiscal and monetary measures.
This tendency to look at money as a good proxy (measure) of economic values and to protect its role as same leads to an unconscious of reification (concretisation) of money. Money gets treated as wholly real. Orthodox economists themselves are well aware that money is formal, not real, but even they can at times fall into the trap of semi-reifying money. They certainly fall into line with, and even aid and abet, the standard terms of political rhetoric and public debate where money is treated as the only real economic question. The question becomes “where is the money coming from?”, when the question should always be “Where are the real resources coming from?” and “Who is going to lose a claim to real resources or real output so these can directed to other, government for-the-people purposes?”
MMT advocates get annoyed (so far as I can see) at this banal and simplistic level of political rhetoric and public debate where money is treated as real and as the real limit to all our economic choices (more correctly of our political economy choices). A number of possibilities are foreclosed by considering money as a real limit rather than as what it is; a greatly imperfect and highly stage-managed proxy indicator of real limits. This is especially so when money’s value and stability is managed to suit the owners of capital, real estate and shares and when this management (via NAIRU theory for example) is exercised at the expense of the poor and unemployed (to name two groups most hit).
I could go on but I wager nobody has read this far.
Please continue, Iconoclast. It’s not just the value of money that is manipulated to suit the 1%, eg., how can working one hour per week be defined as being fully employed?
…this view on NAIRU today in a CommSec Economic Issues annual report, The Big Issues of 2019 (p5/11):
“Jobs and wages
In the Big Issues report for 2018, we included the issue: “The disconnect between jobs and wages”.
This year, just like what we have done with the issue of inflation, we have again simplified the
discussion to Jobs and wages.
Like inflation, we expect that the discussion on jobs and wages will be somewhat multi-faceted. It won’t
just be discussion of why tighter job markets are not seemingly translating to higher wages.
For instance, some have questioned whether one of the changes wrought from technology/globalisation
is new levels of ‘full employment’. And by “full employment”, we mean the lift-off point for wages, usually
described as NAIRU – the Non-Accelerating Inflation Rate of Unemployment.
The NAIRU theory suggests there is some mystical jobless rate, and once you fall below that rate
businesses must bid more aggressively for the available workers in the economy.
Many advanced economies are experiencing historically-low jobless rates without a solid lift in wages.
Even in Australia, the Reserve Bank had generally been working on a ‘full employment’ rate of 5 per
cent. But the Reserve Bank Governor recently suggested that the unemployment rate could hit 4.5 per
cent without prompting the upsurge in wages that may have been witnessed in the past.
One reason could be the ‘release valve’ of foreign workers. If a business can’t find the necessary
workers in the local market, it may seek to fill the positions from overseas. And if there was some
government restriction on ‘importing’ the labour, the business may find other ways of getting the work
done – such as out-sourcing to overseas contractors or employing staff who work remotely, such as
overseas.
Wage-price relativities, productivity-driven wage increases, the growth of non-cash remuneration
sources and new preferences for a great workplace instead of a high-paying job may also be issues or
questions in focus.” – Craig James, Chief Economist, & Ryan Felsman, Senior Economist, CommSec.
On the issue of money supply, CE (conventional economics) and MMT argue past each other. Essentially, the money argument between CE and MMT boils down to this.
CE says -x + x = 0.
MMT says x – x = 0.
These equations describe a balanced budget from the point of view of money supply. Taxation withdraws money from the money supply, hence the minus symbol for taxation. Government spending adds money to the money supply, hence the plus symbol. Thus, at the trivial level, the CE-MMT argument is not about the final balance but simply about “which comes first”.
If we were dealing with real quantities, it would matter which came first. If building x automobiles is +x and destroying x automobiles is -x then only this equation is possible: x – x = 0. The other equation of -x + x = 0 is impossible. However, in dealing with notional (formal system) quantities, either equation is possible.
This demonstrates that, purely in terms of money supply, arguing about which comes first, taxation or government spending, is worse than trivial. It is absurd. To sum up, at the logical level, with respect to extant money supply at any and every point in time, the CE-MMT disagreement or apparent disagreement on this point is absurd and entirely unhelpful in economic debate.
I stated at the outset that CE and MMT argue past each other. The two parties are talking about different aspects of the subject, while believing, or at least claiming, that they are talking about the same aspect. The MMT advocate is talking purely about money (at this point). The CE advocate is talking about money value as a proxy for real value. The (professional academic) MMT advocate is clear about the notional / real dichotomy: meaning clear about the money-finance / real economy-real resources dichotomy (which is a notional system / real system dichotomy. The CE advocate appears less clear on this issue and tends to conflate the notional and the real.
In the case of the (professional academic) CE advocate, this is more of a framing issue and argumentation shorthand than any fundamental ontological mistake at this point. The academic CE advocate is well aware of the difference between notional quantities and real quantities. However, I would argue that he/she has in general what one might term too high a regard for the assumed accuracy of money quantities as proxies for real quantities and thus tends to use money quantities as proxies for real quantities in debate without highlighting that this is being done. Also, in political and public economic debate, the discussion essentially is dumbed down for all those members of the public (the great majority unfortunately) who reify money as real and have no clear idea of the difference between the notional and the real and the central complicating role it plays in economics.
The CE advocate has the easier job of appealing to existing prejudices and misconceptions in the public mind about money (namely that it is real and sets real limits). Money indeed is socially real although it is not materially real (only its accounting record systems are materially real). Money is socially instantiated and conditioned by social laws, customs and beliefs. The CE advocate, in my view, passes over this extensive and important fact either naively or disingenuously.
The MMT advocate is pointing to this fact (the social instantiation and conditioning of money) and asking us to look at the completely notional and arbitrary aspects of money as it is practiced in the extant modern monetary system. (Money is a social practice with its own prescriptive theory). In doing this, the MMT advocate has the harder job of questioning the orthodox dogmas surrounding money.
Finally, this article explains MMT well enough at a very basic level.
https://www.vice.com/en_us/article/a34n54/modern-monetary-theory-explained
We must remember that MMT alone does not explain the entire economy, nor does it set out to do so. It simply explains how money is managed (created, destroyed and theorised about) in our current system. It details how these processes are misunderstood and misrepresented in conventional political and public debate.
Ikonoclast’s view on MMT is the most balance view I’ve seen on the internet so far. Indeed MMT gives a false impression on layman and public readers about suggesting “free lunches”, but that is mostly because they often denounce irresponsible fiscal contraction that is driven by political ideology instead of economic analysis (e.g. the peripheral EU countries).
In most cases, the MMT economists aren’t wrong to suggest that public debt are generally not an issue. This is well supported by historic data such as UK and US post WWII where nominal debt increases but public debt as a percentage of GDP decreases due to high growth in GDP. In terms of current data MMT also do not cringe at trying to explain Japan compared to orthodox (especially monetarist) economists.
I do not wish to address Ikonoclasts view of conventional economics vs MMT but I accept his other arguments. Especially the circulating money one. It is spot on. Spend and Tax and Spend. It depends on where you begin the story. Each are valid. To understand the operation of the economy though you have to understand the function of currency from inception otherwise we end up with infinite regression.