Modern Monetary Theory, a Green New Deal and inflation

Voices on the left have been calling for a Green New Deal as a radical way of transforming the economy in order to tackle a confluence of crises: environmental, social and economic. It takes its name from FDR’s efforts to overcome the Great Depression in the US during the 1930s.

Yeva Nersisyan and L. Randall Wray, both proponents of Modern Money (or Monetary) Theory (MMT) have produced a short paper published by the Levy Institute in which they attempt to answer the question posed in its title: Can We Afford the Green New Deal?

The GND itself could include a “carbon-neutral energy policy and reversing climate change; universal single-payer healthcare; student debt relief and free public college; prison reform; ending “forever wars”; increasing care for the young, sick, and old; and the job guarantee.”

Employing their MMT framework, they argue that “there are no meaningful financial barriers to taking action”, rather “the question is whether sufficient real resources – workers, plant and equipment, raw materials – can be marshaled to implement” it. They draw inspiration from John Maynard Keynes’ 1940 work How to Pay for the War, making the case that the main barrier to such an ambitious government programme of public spending is inflation fueled by excessive aggregate demand, which can if necessary be curtailed by raising taxes or, should this prove insufficient, by other measures used in wartime such as price controls and rationing.

Nersisyan and Wray state that “excessive spending…creates problems not in terms of higher government deficits and debt, but in terms of true inflation” and that “taxes are used not to finance government spending, but to withdraw demand from the economy, creating space for government spending to move resources to the public sector without causing inflation.”

Ha-Joon Chang: the economy is much bigger than the market

I have posted a number of excerpts from work by Cambridge economist Ha-Joon Chang on this blog, particularly from his 23 Things They Don’t Tell You About Capitalism, an iconoclastic work aimed at the general reader. His more recent popular book is Economics: The User’s Guide, which aims to promote a wider understanding of economics by examining a variety of schools of thought alongside some analysis of real world economies and economic history, which Chang deems to be neglected in much modern economic thinking. I thought it would be useful to once more post the odd excerpt that both reflects and inspires my own thinking. The quote below comes from the final chapter (p.455-6):

“Much of economics these days is about the market. Most economists today subscribe to the Neoclassical school, which conceptualizes the economy as a network of exchange relationships – individuals buy various things from many companies and sell their labour services to one of them, while companies buy and sell from many individuals and other companies. But the economy should not be equated with the market. The market is only one of many different ways of organizing the economy. Many economic activities are organized through internal directives within firms, while the government has influence over – and even commands – large sections of the economy. Governments – and increasingly international economic organizations like the WTO – also draw the boundaries of markets while setting rules of conduct in them. Herbert Simon, the founder of the Behaviouralist school, once estimated that only about 20 per cent of economic activities in the US are organized through the market.

The focus on the market has made most economists neglect vast areas of our economic life, with significant negative consequences for our well-being. The neglect of production at the expense of exchange has made policy-makers in some countries overly complacent about the decline of their manufacturing industries. The view of individuals as consumers, rather than producers, has led to the neglect of issues such as the quality of work (eg., how interesting it is, how safe it is, how stressful it is and even how oppressive it is) and work-life balance. The disregard of these aspects of economic life partly explains why most people in the rich countries don’t feel more fulfilled despite consuming the greatest ever quantities of material goods and services.

The economy is much bigger than the market. We will not be able to build a good economy – or a good society – unless we look at the vast expanse beyond the market.”

How Abraham Lincoln’s political economy ‘trumped the Free Trade British System’

I have written before on the oft-neglected American School of political economy, drawing on the work of Michael Hudson here and here.

Along the same vein, November’s issue of the Cambridge Journal of Economics features an article by Emir Phillips. It is included as the Editor’s Choice, so you can read it for free on the journal website or by downloading the pdf.

Here is the abstract:

The Whigs could legitimately emphasise what Hamilton’s Report had not touched upon: urban labourers made unemployed by import competition could not shift to ‘collateral employments’ with the presumptive ease asserted by Free Trader Democrats. More than anything, it was the structural cyclical instability (Minsky moments) that engendered a new party (Republican) to exert political pressures for government involvement in the management of the economy (mercantilism). Economic beliefs played the most fundamental role in Lincoln’s career, and his mercantilist views, in conformity with Hamilton, Clay and the economist Carey, were key determinants in effectuating the Industrial Revolution within the United States through tariffs, government-supported macro-projects and structurally stimulating aggregate demand through a national currency. Permeating Lincoln’s political economy was a fierce non-neutral view of money wherein banks created the funds to ignite the American System. Henry Clay, Henry Carey and Abraham Lincoln were seeking to supplant the Ricardo–Malthus long-term model of economic growth (emphasising distribution within a relatively stagnant economy) with one of expanding productive powers and rising wage levels. These interventionist issues are still quite relevant since US economics students are taught modernised versions of the doctrines of Ricardo and Malthus which were controverted more than a century ago by the American School, and more specifically by Abraham Lincoln.

The article tells the story of how 19th century Whig-Republicans, and Abraham Lincoln in particular, accelerated industrialisation in the US through government intervention in the economy, such that

Mercantilist nationalism (Republican Party of 1860) confronted both the Free Trader Jacksonian-Democrats and the US Constitution, and created a commercially linked Nation whose industrial productivity over the next 60 years (all US Presidents without exception were Republican until President Wilson) supplanted England as the world’s workshop (p.1455).

The policies used included a combination of tariffs to protect domestic industry from English manufactured exports and raise government revenue, investment in transport infrastructure, particularly railroads, and management of the national currency to sustain aggregate demand and investment in industry.

The American System or School saw capital and labour as potentially complements, in that investment in productive capacity in increasing returns industries, namely manufacturing, would stimulate rising productivity and output. This would enable both profits and wages to rise, so that both capitalists and workers would benefit from economic development, resulting in some form of social harmony and supporting national democracy. Thus

[b]y 1845, Lincoln perceived these United States as entirely dependent upon certain economic activities subject to increasing returns, with each regional section being a synergetic phenomena built upon a mutual dependency created by finely knit and interlocking network of rail, divisions of labour and raw inputs into a manufacturing Northeast. Within this matrix, social mobility (‘equal opportunity for the pursuit of happiness’) was enchained to industrial productivity to the benefit of all Americans. The increasing returns found in Northern manufacturing created the synergetic element that made the United States greater than its parts (the States). The Republicans were then the National Capitalist Party, with wealth creation and not Constitutional adherence as its abiding precept (p.1455-6).

Indonesia’s State-Led Development: Custodian of the National Interest, or Boondoggle? — Developing Economics

Nobel Laureate Esther Duflo once likened the work of economists to that of plumbers – tinkering and adjusting as necessary as they engage with the details of economic policy-making. The implication in this comparison is that economists generally understand economic systems and behaviour – how the pipes come together – and that the main work […]

via Indonesia’s State-Led Development: Custodian of the National Interest, or Boondoggle? — Developing Economics

What sort of big government? Corporate welfare versus the common good in the US

For me, the argument is over. Big government is all-pervasive and inevitable in today’s democratic capitalism. Markets and states are or should be complements, not alternatives, in any society which is both wealthy and continuing to develop and improve the lives of its citizens in the widest possible sense.

This is not an argument for socialism, although there are some on the right who see big government as an evil leading inevitably to a totalitarian and repressive state. This remains a possibility, but it was big government that saved a system on the edge of collapse during the financial crisis, however imperfectly. Crises may be inevitable under capitalism, but it remains the job of government to improve economic and social performance by harnessing the dynamic potential of markets so as to serve the common good.

In today’s US, an unlikely president is unashamedly trying to subvert and dominate the system for his own ends. The process may seem incoherent, but perhaps it mostly boils down to serving a thirst for power and attempting to fill what some have called an ’emptiness’ at the heart of the man.

If one takes Trump’s recent State of the Union address as an accurate description of his political achievements and the state of the US, rather than analysing what he has actually done, one could be forgiven for thinking that all is well there. It is not.

This post is not an analysis of Trump’s achievements in office, rather a discussion based on three books which take a critical view of US capitalism and society, reaching beyond the current political cycle. Although each takes a slightly different perspective and more or less covers a different period in US history, the thread which links them is the idea that its economy and society are being held back by an excessive concentration of power.

Don’t Be Evil. Rana Foroohar on Big Tech

The FT’s Rana Foroohar discusses the ‘evil’ side of ‘Big Tech’. She is pushing her new book, but it is an interesting interview which touches on a range of issues relevant to the economics, business, politics, finance and culture of this increasingly all-pervasive phenomenon.

Foroohar has also written on the dangerous and distorting power and influence of ‘Big Finance’, which has become known as financialisation and has generated a large and growing literature among political economists, particularly those writing in the Marxist and post-Keynesian traditions.

Trump’s trickle dries up — Michael Roberts Blog

An interesting take on Trump’s economic stimulus and current and prospective US economic performance from Marxist economist Michael Roberts. The full post is at the link below.

“The economy now has hit 3 percent. Nobody thought we’d be anywhere close. I think we can go to 4, 5, and maybe even 6 percent.” – Donald Trump, Dec. 16, 2017 Well, Trump’s boast turned to dust in 2019. US GDP grew by 2.3% in 2019, well below President Trump’s promise of 3%+ growth. […]

via Trump’s trickle dries up — Michael Roberts Blog

Keynesian economics – back from the dead?

Here is an interesting recent lecture given by Robert Rowthorn on the “main developments in macroeconomics since the anti-Keynesian counter-revolution 40 years ago.” It can be downloaded for free. Alternatively the video of the lecture can be viewed here.

Rowthorn is Emeritus Professor of Economics at Cambridge University. Back in the 70s and 80s he was very much a Marxist, but has since moved away from that commitment and written on a wide range of topics, from Kaleckian growth and distribution theory to deindustrialisation in the advanced economies and the economics of the family.

For those who are interested in development economics, he supervised the PhD of another prominent Cambridge economist, Ha-Joon Chang, who has written a number of popular books alongside his academic work.

This is the rest of the abstract of Rowthorn’s paper:

It covers both mainstream and heterodox economics. Amongst the topics discussed are: New Keynesian economics, Modern Monetary Theory, expansionary fiscal contraction, unconventional monetary policy, the Phillips curve, hysteresis, and heterodox theories of growth and distribution. The conclusion is that Keynesian economics is alive and well, and that there has been a degree of convergence between heterodox and mainstream economics.

All of these topics are relevant to today’s economic problems, and Rowthorn argues that “many leading economists in the USA and the UK have Keynesian sympathies”.

Thanks to The Case For Concerted Action blog for drawing my attention to this lecture.

Prospects and Challenges for the US economy

Here is the latest Strategic Analysis paper from the Levy Economics Institute of Bard College on the prospects and challenges for the US economy over the next few years. The Levy Institute is officially nonpartisan, but much of its output is in the post-Keynesian tradition, and influenced by luminaries such as Hyman Minsky and Wynne Godley.

Minsky and Godley were instrumental in highlighting the interdependence of the real and financial sectors of the capitalist economy and the role of the latter in contributing to its periodic instability.

The post-Keynesian or ‘left Keynesian’ tradition is a broad church, but is generally critical of capitalism while suggesting policies which attempt to mitigate its defects, in particular the presence of unemployment, inequality and instability. It emphasises the importance of aggregate demand and macroeconomic categories and relationships.

The Levy Institute publishes a short Strategic Analysis on the US economy like this one every year. It is accessible while being based on a stock-flow consistent macroeconomic model that Godley spent the final years of his life helping to build.

The paper highlights the risks to the US over the next few years of an overvalued stock market, overstretched and fragile corporate sector balance sheets, an overvalued dollar, a slowing global economy and the US administration’s erratic trade policy. It is well worth a read.