Sandpit

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

To be clear, the sandpit is for regular commenters to pursue points that distract from regular discussion, including conspiracy-theoretic takes on the issues at hand. It’s not meant as a forum for visiting conspiracy theorists, or trolls posing as such.

A trillion here, a trillion there, pretty soon you’re talking real money (creation)

As with most really neat sayings, the original (with billions, instead of trillions) is misattributed, in this case to the late Senator Everett Dirksen, a conservative Republican who nonetheless helped to write the 1964 Civil Rights Act. The saying can be traced back to an unsigned New York Times article in 1938, which said ““Well, now, about this new budget. It’s a billion here and a billion there, and by and by it begins to mount up into money”. This in turn improved on earlier versions going back at least to 1917
US GDP today (Over $20 trillion) is around 250 times as high, in dollar terms, as it was in 1938, so replacing billions with trillions isn’t much of a stretch.

With that in mind, what should we think about the $2.4 trillion pandemic relief package, and the likelihood of huge demands for public expenditure stretching well into the future? And how much of this analysis is applicable to the world as a whole, where large scale government responses have been the norm rather than the exception.

The simplest way to finance a public expenditure program is to “print money”, or, more usually in a modern economy, to create monetary reserves that can be used to buy government bonds or other financial assets (so-called “quantitative easing”). That in turn means the government can spend, or lend, money without a net increase in the debt owed to the public (or to overseas bondholders). The magnitude can be measured by the monetary base.

The scope to expand the monetary base is limited, but more than enough to cover the immediate needs of the pandemic response. The response to the GFC led to an expansions of the monetary base from $1 trillion to $4 trillion between 2009 and 2015, after which it was wound back by about $1 trillion. It’s grown by nearly $2 trillion (about 10 per cent of GDP) in response to the pandemic, and more is likely to come

The ultimate constraint on money creation is inflation. That hasn’t been a problem lately and (as I’ll argue in more detail later) the world is in need of a fair bit of inflation, probably at an annual rate of about 4 per cent for the foreseeable future. It’s unclear how much expansion of the monetary base would generate this outcome, while avoiding the risk of a resurgence of inflation like that of the 1970s. But looking at the scale of the response that’s going to be needed for a meaningful Green New Deal (I’d estimate at least 5 per cent of GDP every year for the next decade at least), the amount that can be financed through money creation will be nowhere near enough. Substantial reductions in private consumption and investment will be needed to make room for the required public expenditure, and that can only be achieved through a combination of taxation and debt. More on this, and on global response soon, I hope.

The climate emergency after the pandemic

In an excess of zeal, I’m planning an Australia-specific book (working title, Australia after the Apocalypse: rebuilding a livable future) which will deal with the social, cultural and economic implications of the bushfire and pandemic catastrophes. This will complement The Economic Consequences of the Pandemic which will be global in its scope, but more narrow in its focus on economic issues. Over the fold, the opening section of a chapter on the climate emergency

Read More »

Hard-hat utopians

That’s the title of my latest piece in Inside Story, pointing that, even though the occupations most affected by the Covid pandemic are dominated by women and young people, government responses have been focused on ‘hard hat’ sectors, mainly employing prime-age men.

I appeared before a Committee of the Queensland Parliament making this point. I don’t think I had a lot of impact, but I will keep on pushing.

The Republican phase transition

I’ve been reading the latest (excellent as usual) book from Jacob Hacker and Paul Pierson, Let Them Eat Tweets: How the Right Rules in an Age of Extreme Inequality . The opening paras read

This is not a book about Donald Trump. Instead it is about an immense shift that preceded Trump’s rise, has profoundly shaped his political party and its priorities, and poses a threat to our democracy that is certain to outlast his presidency. That shift is the rise of plutocracy – government of, by, and for the rich

This passage reflects the conflict between two propositions that I (and lots of others, I think) have been grappling with
(1) The rise of Donald Trump represents a radical transformation of the Republican party and American conservatism
(2) Everything Trump has done is a continuation of long-established Republican policy and practices.

Here at CT, Corey Robin has argued for a long time that (2) is correct, and that conservatives or, more properly, reactionaries have always been about preserving hierarchy and power. I find Corey’s argument convincing, but not enough to persuade me that (1) is wrong. Hacker and Pierson also broadly endorse (2). But much of their book is a comparison of the trajectory of the Republican Party with that of the German nationalists in the dying days of the Weimar Republic. The fact that such a comparison, until recently regarded as an automatic disqualification from serious argument (Godwin’s law) now seems entirely plausible, suggests that something really has changed.

In trying to find a way to understand this, I was struck by the idea that the concept of a phase transition (such as from liquid to gas, or dissolved solid to crystal) in physics and chemistry might be a useful metaphor. I didn’t get past high-school in science, so I may well use the metaphor inaccurately – I’m sure commenters will feel free to set me straight.

To develop the metaphor, think of the Eisenhower-era Republican party as a complicated mixture of many dissolved ingredients, in which the dominant element was the business establishment, and the Trump era party, as described by Hacker and Pierson as a crystallised mass of plutocratic economics, racism and all-round craziness. The development over the 60 years between the two has consisted of keeping the mixture simmering, while adding more and more appeals to racial animus and magical thinking (supply-side economics, climate denial, the Iraq war and so on). In this process various elements of the original mix have boiled off or precipitated out and discarded as dregs. Stretching the metaphor a bit, I’m thinking of boiling off as the process by which various groups (Blacks and Northeastern liberal Republicans in C20, liberaltarians more recently) have left the Republican coalition in response to its racism and know-nothingism. The dregs that have precipitated out are ideas that were supposed to be important to Republicans (free trade, scientific truth, classical liberalism, moral character and so on) that turned out not to matter at all.

Trump’s arrival is the catalyst that produces the phase change. The final product of the reaction emerges in its crystallised form, and the remaining elements of the mixture are discarded.

Sandpit

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

To be clear, the sandpit is for regular commenters to pursue points that distract from regular discussion, including conspiracy-theoretic takes on the issues at hand. It’s not meant as a forum for visiting conspiracy theorists, or trolls posing as such.

The General Theory and the Special Theories

The title of my book-in-progress, The Economic Consequences of the Pandemic is obviously meant as an allusion to Keynes’ The Economic Consequences of the Peace, and one of the central messages will be the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment Interest and Money. That title, in turn was an allusion to Einstein*, and the Special and General theories of Relativity.

The special theory Keynes wanted to replace was that of classical economics, in which the economy always tends to full employment unless governments or unions get in the way. The implication of classical economics, articulated in the Great Depression by Mellon (“liquidate the rottenness”) and in the Lesser Depression by the advocates of “expansionary austerity” is that the correct government response to a recession is to cut taxes, cut spending even more so as to balance the budget, and let the private sector expand as it naturally will.

The disastrous failure of austerity, particularly in Europe, has put its advocates on the defensive. Nevertheless, the idea that deficits are always bad has plenty of intuitive appeal (think of Angela Merkel’s Swabian housewife carefully balancing the household books). Austerity has an even stronger hold on those in the policy elite whose thinking was formed in the “inter-crisis” period between the breakdown of the Bretton Woods system in the early 1970s and the Global Financial Crisis of 2008. That accounts for just about everyone in the political class aged over 40, with the exception of a handful of people who have stuck to positions taken in the 1960s or just afterwards, such as Jeremy Corbyn and Bernie Sanders** .

Public expenditure has expanded everywhere in response to the pandemic, and the need for more spending is going continue long after the pandemic is controlled, either by continued restrictions or the development of a vaccine. The fight against austerity will begin with the expiry of time-limited emergency measures, which will happen in the second half of this year (September in Australia and much sooner in the US).

But if we can fight off the push for austerity, there’s another special theory that needs to be dealt with. Modern Monetary Theory (MMT) is, in essence, based on the assumption that the economy is always in what Keynes called a “liquidity trap”. This is a situation where the economy is so depressed that cutting interest rates to zero has no effect on demand – people pile up money rather than spending it. The only solution is for the government to spend money creating jobs (expansionary fiscal policy). And, as long as the liquidity trap continues, governments can keep increasing spending, financed either by money creation or zero-interest bonds.

The problem with this special theory is that a successful application implies destroying the conditions under which it works. Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure. The only sustainable way of achieving this is through taxation, and the only just way of doing it is through progressive taxation, with those in the top decile of the income distribution giving up a bit more consumption, and those in the top 1 per cent giving up a lot more. MMT advocates, like Stephanie Kelton kind-of admit this, but continuously seek to dodge the point. Here for example MMT advocates Nersiyan and Wray suggest that the Green New Deal can be financed without “taxing the rich” (a problematic term for progressive income taxation, since so few people admit to being rich) relying instead on “well-targeted taxes, wage and price controls, rationing, and voluntary saving”. “Well-targeted taxes” turns out to be a euphemism for a payroll tax surcharge, the most regressive form of broad-based tax.

Nersiyan and Wray draw on Keynes’ proposals in “How to Pay for the War”, which do include measures such as rationing and deferred pay, as well as large trade deficits. But the central point underlying Keynes analysis was that the war could not last forever. One way or another, the struggle with Hitler would be decided. In these circumstances, and with the total mobilisation needed for a life-or-death struggle, measures like deferred pay and rationing represent a way of sharing a necessary sacrifice. These were additional to, not a substitute for, steep increases in income and consumption taxes

A permanent change, like the original New Deal or a Green New Deal can’t be sustained with temporary wartime expedients or expansionary fiscal policy. What is needed is a transfer of resources from private consumption and privately directed investment to public use. That can be achieved through various forms of predistribution, reducing the incomes of those receiving an excessive reward at present, or through taxation. While both need to be pursued, it’s unlikely that predistribution can do all the work.

Keynes got this right in 1937, when he said “the boom not the slump is the time for austerity at the Treasury”.

*This just struck me, but of course I’m not the first to notice. Here’s James K Galbraith, attributing it to Robert Skidelsky. Still, good company to be in and Galbraith says not many others have made this point. And, it has been pointed out on Twitter, Pigou made much the same point in his critical 1936 review.

** If I had ever achieved any political influence, I would also fall into the category

The end of ecomodernism

I was due to appear tomorrow before the Environment and Planning Committee’s inquiry into Nuclear Prohibition in Victoria, but I’ve just been advised that it’s been deferred until after the lockdown. I’d just finished writing a supplement to my earlier submission which concluded that there was no real support for the kind of ‘grand bargain’ I’d earlier proposed, combining a commitment to a rapid phase-out of coal with a removal of the prohibition on nuclear power. It’s over the fold.

Read More »