Two problems with Modern Monetary Theory

I spend quite a bit of time (more than I should) engaged in Twitter debates with advocates of Modern Monetary Theory (MMT). Some are generally sensible, while others are convinced they have learned a deep secret which enables us to have whatever we want without paying for it. Unfortunately, the sensible ones (Meaningful Monetary Theory) don’t do the hard work of correcting the others (Magical Monetary Theory)

A couple of tweets referring to the latter group (followed by the usual long and confused set of responses)

A striking feature of #MMT discussion is that it starts from a presumption of failure. Always supposed to be lots of unemployed resources that can be mobilised by fiscal policy .

When MMT advocates (or anyone else) start suggesting rationing and forced saving are preferable/sensible alternatives to taxation, I don’t think it’s unfair to call them anti-tax. These are really bad ideas, and should be repudiated.

Feel free to add your thoughts

MS Brissie to the Bay Appeal

Once again, I’m trying to combine exercise and fundraising, in this case for the MS Brissie to the Bay Appeal.

Please donate to help me raise $2500 for multiple sclerosis research and help for patients and their families .I’m running a marathon in June, so I’m going to go with virtual fundraising, instead of taking part in the physical ride. My aim will be to run 300km and cycle 500km over May and June, and to raise $2500. Feel free to suggest challenges I could undertake to encourage donations.

Adani and the grief to income ratio (from my newsletter)

Adani (now ludicrously renamed Bravus) is pushing ahead with the Carmichael mine-rail-port project, but the financial and reputational costs keep mounting. Having been forced to finance the mine and rail project out of its own funds, Adani is now finding that its Adani Ports business (of which the Abbot Point coal terminal is only a small part) is becoming equally toxic. PIMCO, once its biggest bondholder announced that it would no longer invest in new bond issues. At the same time, S&P reversed a decision to include Adani Ports in its sustainability index because of investments in Myanmar – without the continuous focus of critics, this investment might have escaped notice.

The name changes under which Adani Mining became Bravus and Adani Abbot Point became North Queensland Export Terminal is an indication of the toxicity of these projects.

The continuing struggle against Adani may not stop coal being shipped from the mine, but it will sooner or later make the project a stranded asset, ensuring that most of Adani’s investment is lost.

The bigger picture is that Adani has greatly increased the “grief to income ratio” of investments in any part of the coal production chain. Financiers and suppliers who have agreed, under pressure, to withdraw support from Adani, have realised that they are better off getting out of coal altogether, and are starting to draw the same conclusion about gas.

A recent example is the decision of US insurer Liberty to abandon a proposed mine at Baralaba in Queensland. Liberty had already agreed, under intense pressure, not to insure Adani, and this step was a logical consequence 

This pattern is not unique to Australia. The struggle to stop the proposed Vung Anh 2 coal-fired power station in North Vietnam hasn’t yet succeeded. But companies like Mitsubishi involved in Vung Anh 2 have dumped projects that haven’t yet started and promised to withdraw from coal altogether.  . The Hunutlu coal plant in Turkey, funded by China’s Belt and Road initiative, looks like being the last such venture.

More grief, less income. That’s the future for anyone involved in coal.

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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.

Economic policy after the pandemic

I’m racing to get a draft manuscript of The Economic Consequences of the Pandemic, not helped by the fact that Biden keeps doing pretty much what I think he should do. More of the fold. Comments greatly appreciated, as always.

Like Keynes’ Londoner in the aftermath of the Great War, we are emerging from the pandemic into a world where the certitudes of the past have crumbled into dust. Balanced budgets, free trade, credit ratings, financial markets, above all free markets; these ideas have ceased to command any belief.

The failure of these ideas evident since the GFC and, in many respects, since the beginning of the 21st century. It have sunk in gradually as the neoliberal political class formed in the 1980s and 1990s has passed from the scene, replaced by younger people whose experience of financialised capitalism is almost entirely negative.

But it is only with the shock of the pandemic that the thinking of the past has completely lost its grip on the great majority. The absence of any serious resistance to Biden’s stimulus and infrastructure package reflects the fact that hardly anyone seriously believes the old verities of balanced budgets and free markets

Yet the fundamental realities of economic life remain unchanged. We can collectively consume or invest what we produce, nothing more and nothing less. And our productive capacity is constrained by resources and technology, as it always has been. One way or another we need to decide what goods and services will be produced and who will get to consume them.

What has changed is that the economic system we have used to allocate resources and investments for the last forty years is no longer fit for purpose. Financial markets are not repositories of wisdom and market discipline; rather they are, in Keynes words, gambling houses where ‘enterprise becomes the bubble on a whirlpool of speculation.’ And as Keynes said ‘When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.’.

Unsurprisingly, the casino economy has delivered huge gains for a small number of winners, and losses for everyone else, certainly when compared to the broadly shared gains of the mid 20th century. But contrary to the claims of trickle-down advocates, these massive rewards have not generated increases in productivity. Profits are obtained, not by making a better product at lower cost, but by securing and holding a monopoly position.

How should we respond? The answer must be a combination of past, present and future. First, we need to look at the institutions of the 20th century Golden Age, and ask which can be revived and refurbished to address our current problems. Second, we must consider what elements of the neoliberal era are worth saving. Finally we must consider our future options in a world unlike anything that has come before.

The first step must be to look back at the institutions of the postwar Golden Age. Not all of these will turn out to be useful in our current situation, and some were inappropriate even at the time they operated. Nevertheless, taken all in all, the mixed economy of the mid-20th century worked much better than the system of financialised capitalism that prevailed in the era of neoliberalism.

Most of the policy program announced by the Biden Administration can be understood as a return to Golden Age policies wound back or abandoned in the neoliberal era. Examples include explicit support for unions, investment in physical infrastructure, partial repeal of the 2017 tax cuts, and free community college.

Unions, progressive taxes, expanding education – the case for all of these is as strong or stronger as it was in the aftermath of the Great Wars. Similarly, the need for public investment in physical infrastructure, after years of neglect, is evident. Biden’s measures so far are steps in the right direction, but much more remains to be done.

The innovations of the neoliberal era have mostly been negative. But there have been some positive developments. The movement towards racial and gender equality, which began in the 1960s continued, if slowly and with occasional reversals, through the neoliberal area. And some more specifically neoliberal policy innovations such as the earned income credit and emissions taxes have been value. Similarly, while most financial innovations have been harmful, there have been exceptions such as the rise of venture capital.

Looking to the future, the shift from an industrial to an information economy requires fundamentally new approaches to economics. We are still at the beginning of understanding what is needed here; but it is already obvious that the combination of financialized capitalism and Big Tech is not working out well as a solution.

GM and Google

The archetypal product of the 20th century industrial economy was the motor car, the archetypal technology was the production line and the archetypal firm was General Motors. Each car that rolled off GM’s production line embodied a set of physical and labour inputs; steel for the body, parts supplied by a network of subcontractors, the work of a large body of skilled and semi-skilled workers. Dealers and finance providers distributed the cars to buyers, who then owned and uses the products. Our thinking about how an economy works still reflects this model.

A 20th century firm like General Motors can easily be understood in terms of the economic categories of mainstream classical and neoclassical economists, beginning with Adam Smith. The whole apparatus of national accounting, reflected in concepts like GDP, was developed to deal with such firms.

But consider a firm like Google. Google doesn’t produce a physical good1; it doesn’t even generate the information that is at the core of its business. Rather, it indexes the information generated by others, with or without their permission, then allows users to search those indexes, with advertising attached.

Google doesn’t fit at all comfortably into the categories of traditional economics. Its output can’t be measured in quantitative terms, nor is there any obvious price attached to it. This hasn’t stopped Google making massive profits, or attaining a stratospheric market valuation. On the other hand, it is far from obvious that this is the best way of making the information resources of the Internet available to everyone.

1 Except for a relatively modest business producing tablet computers that run Google’s Chrome operating system.

Global capital, crony capital and the centre-left

Writing in the New York Times, Elizabeth Bruenig makes the case against an alliance of convenience between liberals and “woke” corporations against the threat posed to democracy by Trumpism . After acknowledging how desperate the situation has become, she presents the argument, to which I’ll respond bit by bit

Capital is unfaithful. It can, and does, play all sides. Many of the courageous businesses that protested North Carolina’s 2016 “bathroom bill,” for instance, also donated to political groups that helped fund the candidacies of the very politicians who passed the bill.

This is the nature of alliances of convenience. When the Western Allies joined Stalin to fight against Hitler they had no (or at least few) illusions about him, and didn’t rely on him to keep his word any longer than necessary, or to refrain from undermining them in other quarters

It isn’t possible to cooperate with capital on social matters while fighting them in other theaters; capital can fight you in all theaters at once, all while enjoying public adulation for helping you, as well.

This simply isn’t correct as the Biden Administration is showing. Despite co-operating with capital on social matters,. Biden has proposed substantial increases in corporate tax rates and global action against corporate tax avoidance. In this context, it is the position of capital that has been weakened by the toxicity of its usual allies, the Republicans.

Setting aside the fact that capital can in a single moment be both heroic and diabolical — Amazon wants you to be able to vote, but it would prefer if you didn’t unionize — it is, incredibly, even less democratic, accountable and responsive than our ramshackle democracy. Capital rallies to the defense of democracy while aggressively quashing that very thing in the workplaces where its workers labor.

Again, this is what happens in an alliance of this kind. Fights over unionization go on, in parallel with an alliance over the right to vote. Once again, it’s the corporations who face the bigger problem here, with opportunistic Republicans pretending to back the rights of the workers.

I have no idea what to do about this other than know it for what it is. If it were ever the case that knowledge was power, it certainly isn’t so anymore: Knowledge is more widely dispersed than ever; power remains notably concentrated. But knowledge confers a certain dignity. It’s worse to be powerless and unaware than to be powerless and perfectly clear on where you stand.

This is a counsel of despair, without any real basis. Bruenig gives no reason to suppose that the fight for democracy can’t be won, even if it requires alliances between groups with interests that are otherwise opposed. But if the Republicans can be held at bay long enough to allow the passage of strong voting rights law, they will have to reform themselves or face permanent minority status. Getting to that point (for example, by winning bigger majorities in both Houses of Congress in 2022, then scrapping the filibuster) will be difficult, but not impossible

An important limitation of Bruenig’s analysis is that she treats “capital” as a unitary force. There is a sharp division between global corporations, with a long-run interest in the preservation of the rule of law under a democratic government, and the crony capitalists, epitomized by Trump himself, for whom the object is to extract as much as possible from the US economy, as quickly as they can.

Someone with more expertise than me could interpret all this in terms of the “fractions of capital” idea put forward by Poulantzas and others in C20. A search on those terms produced this piece in The Guardian, which covers some of those points.

How much is a trillion dollars?

Updating an old aphorism, “A trillion here, a trillion there, pretty soon you’re talking real money. But how much is a trillion dollars, really? Over the fold an extract from The Economic Consequences of the Pandemic.

The crises of the 21st century have commonly resulted in emergency spending of the order of a trillion dollars or more.

When the Bush Administration made the case for the Iraq War in 2002 and 2003, it was suggested that the venture might pay for itself as had been the case with the first Gulf War [cash contributions from allies more than paid for the direct costs of US forces]. In fact, the director of the National Economic Council, Lawrence Lindsay, was fired for suggesting that the cost might be as much as $200 billion.

By the time the US forces were withdrawn in 2009 estimates of the cost ranged from $2 trillion to more than $3 trillion. To this must be added the costs of the Afghan war and renewed campaign against ISIS.

The stimulus package introduced by the Obama Administration in response to the GFC was held below a trillion dollars in the hope of securing Republican support. Unsurprisingly, the package received no Republicans in the House of Representatives and only three in the Senate. The inadequacy of hte package ensured a weak recovery and contributed to big Republican gains in the 2010 election.

As the saying has it, ‘success has a thousand parents, failure is an orphan’ and most of those who argued for a limited response are now pretending otherwise. Nevertheless it is clear that the primary advocate of a strong response was incoming chair of the Council of Economic Advisers, Christina Rome. Her main opponents were Rahm Emanuel and Larry Summers.

The only benefit of Obama’s restraint was as a source of lessons for his vice-president Joe Biden. Most obviously, the lesson is that erring on the side of restraint is worse than erring on the side of stimulus. Second, that the likelihood of securing Republican support for anything is minimal, so there is no point in proposing an inadequate response in the name of bipartisanship. The final lesson is reflected in the fact that neither Emanuel nor Summers has been given any role, formal or otherwise in the Biden Administration.

The response to the Covid pandemic has on a larger scale than that of the ‘forever wars’ and massively greater than the failed Obama stimulus package. Adding up CARES, the November supplemental package andthe American Rescue Plan and the total expenditure amounts to more than $6 trillion. The impact on the government’s fiscal and monetary position is substantial. But it must be compared to the demands of a pandemic that has killed half a million Americans, sickened many more and shut down much of the global economy.

The Biden Admiminstration has now gone further putting long-term plans for infrastructure (American Jobs Plan) and education (American Families Plan). In each case, the proposal is for $2 trillion over four to eight years. Unlike the stimulus packages, which have been funded by a combination of debt and money creation, about half of these expenditure increases would be offset by increased tax revenues, from a combination of higher tax rates on very high incomes, higher company taxes and increased enforcement of existing laws.

But how much is a trillion dollars really? It amounts to about $3400 for every American, which sounds like a lot. But on average, major crises like those discussed above occur about once every ten years. So, a trillion dollar expenditure involves expenditure of $340 per American per year, or a little over $6 a week. That’s not much more than the price of a Starbucks coffee drink or (for the kids) a McDonalds Happy Meal.

And indeed, the multi-trillion dollar expenditures on the Iraq war, spread over many years, have not had any perceptible impact on the finances of the average household.

Another way to get an idea of scale starts with the observation that a trillion dollars is around 5 per cent of annual GDP (it’s more correct to think in terms of Net National Income, but the difference isn’t huge, and it’s an argument I’ll deal with elsewhere). So, the Covid rescue packages amount to around 30 per cent of one year’s GDP, or about 3 per cent of 10 years’ GDP. Biden’s new proposals are equal to about 20 per cent of annual GDP, which would be 5 per cent of four years’ GDP or 2.5 per cent of eight years GDP.

These are large numbers, but not so large as to imply a radical transformation of the US system.

Yet another way to think about this is to look at the gains made by those in the top 1 per cent of the income distribution as a share of national income. My preliminary estimate is that this group is getting around $2 trillion a year more than they would have if the benefits of productivity growth has been shared evenly.

In summary, the appropriate scale of the public policy response to the pandemic and its economic consequences is measured in trillions of dollars. Rather than being scared of big numbers, we should focus on making sure those trillions are used properly.