Category Archives: MMT

Modern Money’s Job Guarantee

Australian Real Progressives has mentioned this piece previously as a parry and riposte to nominal progressives in this piece but it deserves a full treatment of its own.

Modern Monetary Theory (MMT) is an incredibly complex body of work that studies macroeconomics. At its most elemental level, it says a currency is a social and legal construct. Currency issuers spend via an appropriation bill and are not financially constrained, though they are constrained by real resources. A monopolist of a currency can purchase whatever is for sale in the currency it issues, including idle labour. Thus unemployment is a political choice.

Within the body of work that is MMT it uses a Job Guarantee (JG) as a macroeconomic price anchor and stabiliser which I will explain below.

There have been claims that the Job Guarantee is workfare. It is not. It is a voluntary offer of a job to anyone, anywhere paid at a living wage with access to all the National Employment Standards just like every other worker.

The social policy setting of the JG is the policy manifestation of a technical concept to eliminate the tradeoff between unemployment and inflation. Current orthodox economists identify a link between rising employment and rising inflation and use unemployment to discipline the inflation rate. MMT economists say you can achieve the same end by using a ‘buffer stock of employed’ rather than a ‘buffer stock of unemployed’. This is what the Job Guarantee is.

The reason for the fixed-wage is the anchor. It sets the general price level. All prices within an economy are a function of government spending. The JG chooses to use employment as the anchor for the general price level. In the event of accelerating inflation, the cause of inflation can never be the wages of the JG workers because by definition they are purchased from the bottom and released from the pool when a better offer is made.

The JG is a small part of a broader full-employment agenda. Ideally, you want the pool to be as small as possible. It is not there to replace existing skills-based employment. It is there to sit alongside a national skills development framework to assist those that need it in finding future employment.

It ensures ’loose’ full employment as workers are drawn in and out of the JG pool rather than ending up unemployed. The automatic spending triggered by those entering the JG mean the government’s spending is directed when and where it is needed most – the unemployed.

The advantage workers have particularly those at the bottom who often hold little, if any, bargaining power is that the JG sets the floor for wages. Private employers would be forced to compete with what we as a society determine to be the absolute minimum socially inclusive wage.

A Job Guarantee is designed to create work to suit the individual. It is administered at the local level but funded by the federal government. The workers within this program are free to unionise and advocate whether something should be classed as a JG job. They are free to take part in determining what the living wage should be.

The work would be of public benefit and assist the JG worker in upskilling and finding work in the private or public sector. It is there to enhance the individual’s well-being and provide a public purpose. It is not used as a punitive system of punishment.

In a similar way to how the Commonwealth Employment Service worked, the unemployed person would have a case manager that held their CV and attempted to match that person to a job but rather than having that individual lay idle, they have the opportunity to maintain and enhance their skillset while seeking better employment working actively with their case manager to match them with an appropriate job.

The types of work that can be done are limited only by our imaginations. We could pay musicians to give workshops on band dynamics, pay them to create and assist in the organisation of community festivals, we can have arts programs where artists can paint murals in public spaces and aid others in their own skill development. Surfers could be paid to pass on surf life safety skills and teach others how to identify and avoid rips. They could take part in sand dune rehabilitation. There is massive potential to enlist thousands of unemployed in ecological restoration and plant trees along with other flora to mitigate against climate change while they undergo study in a related area.

Most importantly the JG allows the most disadvantaged in our society an opportunity to engage in paid employment which would lead to recognition in the community and vastly improved self-perceptions and a more prosperous society.

Jengis Osman is a union organiser based in the NT. He is a member of the NT- ALP Left and a research associate at the Centre of Full Employment and Equity. Twitter This first appeared in Challenge Magazine and is giving a fuller treatment on Jengis’s website Fighting Fish.

 

MODERN MONETARY THEORY ENHANCES DEMOCRATIC ACCOUNTABILITY

MODERN MONETARY THEORY (MMT) is a description or if you prefer, a systemic analysis of currency as it presently exists.

It reveals that taxation is important in driving demand for currency among other things, including the creation of unemployment. After all, there is no unemployment in a non-monetary economy.

Adam Triggs, a research fellow at the Brookings Institution and Crawford School of Public Policy at Australian National University (ANU) wrote back in 2019 that MMT ‘looks like a solution in search of a problem’. That is not the case. MMT shows that the new economic consensus on the monetary system is false and it also shows what tools are available in the modern money toolkit.

Triggs proceeds:

‘If its [MMT’s] stated objective is to achieve full employment, then it appears unnecessary.’ 

This simple sentence is misleading in the extreme. MMT is just what exists. It has a preference for sovereign currencies but can explain any monetary system.

The preference for sovereign currency is because it makes available more independent policy space, enhancing democracy. Triggs then defines full employment as an unemployment rate of five per cent. Oh, the horror! This relies on the mythical “non-accelerating inflation rate of unemployment” (NAIRU), which is sometimes transposed with the phrase “natural rate of unemployment”.

MMT defines full employment (as do all good economists) as frictional unemployment which is somewhere between one and three per cent with zero or next to zero underemployment. These are the people that are switching jobs or are ill. After all, there is no natural rate of unemployment, just as there is no natural rate of homelessness, no natural rate of poverty and no natural rate of illiteracy.

MMT shows that all spending is new spending and is effectively financed by “printing” money. However, the term “printing money” is pretty misleading in economic circles.

What economists usually mean, in fancy terms, is quantitative easing (QE) — the swapping of government bonds for cash. A plain and simple financial asset swap. Bonds are first bought with cash and when QE is implemented the bonds are swapped back for cash. The cash comes first. What MMT means is that all spending is new spending whether done electronically with keystrokes or with physical cash. So, no, QE is not MMT and nor did QE produce inflation anywhere as predicted.

Quantitative Easing explained simply.

MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Triggs talks about the world lending us our own currency which is just nonsensical. For that to be even plausible, lenders would have to get it from us first — the word “sovereign” does the heavy lifting here. Even then, unless in physical cash, it stays on accounts at the central bank. So how on earth is foreign savings in Australian dollars going to finance anything?

Triggs also delves into some new economic consensus falsehoods about rising inflation, interest rates and depreciating exchange rates — as if we do not have the tools to manage these. We do.

The closest thing to a genuine critique or critical analysis of MMT Triggs offers is an appeal to the authority of some “eminent” new economic consensus economists, including Olivier Blanchard, who is moving closer and closer to MMT.

Triggs tries again in 2020 to say MMT is just a rebranding of orthodox economics — what I have previously called the new economic consensus. This is simple to disprove as orthodox economics believes taxes and/or bonds finance government spending.

Stephanie Kelton, author of the bestseller The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, wrote a detailed operational paper that disproved that. The great irony is she was attempting to prove it.

In his 2020 article Triggs said:

For Kelton, the core propositions of MMT are that government budgets are fundamentally different from household budgets, that budget deficits are not necessarily bad, that governments should spend more when the economy is weak, and that governments should focus more on unemployment than budget deficits. She believes that the main constraint on government spending is inflation, that increasing the deficit need not make future generations poorer and that governments can’t run out of money if they have their own central bank, their own currency and no foreign debt.

If that all sounds right and logical to you, that’s because it is. Most mainstream economists have been making these points for close to one hundred years.

If Triggs accepts all this, he is approaching acceptance of MMT. However, to say most mainstream economists have been making these points for years is mistaken.

To quote the Australian developer of MMT, Bill Mitchell:

It is very strange – if all the major features of MMT were so widely shared and understood – how do we explain statements from politicians, central bankers, private executives, lobbyists, media commentators etcetera, etcetera that appear to not accept or understand the basic MMT claims?

Again, Triggs tries to counter with the inflation and/or hyperinflation argument against MMT — to which I repeat, MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Kelton herself reflects on this on Twitter in response to U.S. Senator Mike Braun:

‘If you get hyperinflation, then you didn’t follow the recipe. The recipe clearly defines the limits on spending.’

Kelton’s comment is a great counterpoint to relying on politicians to use the monetary system for anything beyond the public purpose. That is the reason we have democratic accountability and vote every electoral cycle.

This article was originally posted on Independent Australia on the 18th July 2021.
I improved the final paragraph.

History: Modern Money Theory and Stagflation

Australian Real Progressives has written about full employment and the job guarantee many times previously.  What follows is a historical analysis of how the mythical NAIRU came into being and why Full employment, in the truest sense, was abandoned.

Via Bill Mitchell

Full employment gave tremendous advantages to the working class and allowed for upward inter-generational socioeconomic mobility – where children born into poorer families could aspire to transcend that social class and enter the more secure middle class.

And as capital became more concentrated – through takeovers etc, and, trade unions became more powerful, the two conflicting forces obviously gained increasing price setting power.

Firms set prices according to markups which reflected their expected profit return on capital and unions, representing their workforces, could exert power to gain wage increases.

As a result real wages mostly grew in proportion with productivity growth which reduced the likelihood of a realisation crisis (expenditure lagging behind production) but also reduced income inequalities and allowed workers to fast track into middle class life (and mass consumption).

But that increase in ‘price setting’ power brought a new propensity to crisis relating not to unemployment but rather to inflationary biases.

The – 1973 OPEC Oil Crises – triggered an inflationary spiral driven by the ‘battle of the markups’ (the conflictual struggle between capital and labour for real income shares).

The existing Keynesian policy consensus had really only constructed inflation threats in terms of demand pull events – where nominal spending outstrips the capacity of the economy to respond by producing more real goods and services.

There was some delay among policy elites in grasping what a raw material price hike (particularly one that is imported – such as the oil shock) meant when it interacted with the distributional conflict between labour and capital.

The point was that nations as a whole had to take a real income loss because an essential raw material they imported now took a larger share of nominal income.

So who would take that loss?

Capital didn’t want to take it, and, rather tried to pass it onto workers by increasing their markups and pushing up prices, thereby reducing real wages and the purchasing power of workers.

But strong trade unions were not keen to accept that profit push and ‘real wage resistance’ became a force, which was expressed in increased wage demands – thereby restoring the real wage cuts resulting from the price rises.

As both sides had price setting power, a price-wage spiral was easy to trigger and that is what happened.

Before long, inflation was accelerating away and governments, under the influence of the emerging Monetarist paradigm in macroeconomics, sought to cut net spending.

This resulted in rising unemployment coinciding with accelerating inflation, which we called ‘stagflation’ – the twin evils.

The rising unemployment was devastating but airbrushed by the Monetarists as being an essential ‘natural’ adjustment that we just had to tolerate to stabilise inflation.

And so the ‘natural rate of unemployment’ or NAIRU (non-accelerating-inflation-rate-of-unemployment) entered the picture and governments were told that there was no longer a choice to use discretionary fiscal expansion to reduce unemployment.

The only thing that would result from this strategy, we were told, was that inflation would continue to accelerate and only stabilise when the natural rate of unemployment was reached.

You can read more at Bill’s blog.  This is the most lucid explanation of stagflation from an MMT point of view.  It makes it clear that conflicting classes business and labour both had price-setting power and coupled with a supply shock that caused 70’s stagflation.  We are a far cry from that conflictual relationship today.

Markets are a Social Construction of the State

Money not only precedes markets and real exchanges as they are understood in the mainstream economy but also emerges as a social mechanism of distribution, usually by the power of some authority (be it an ancient religious authority, a king, a colonial power, a modern nation-state, or a monetary union). Money, it can be said, is a “creature of the state” that has played a key role in the transfer of real resources between the parties and the distribution of the economic surplus.

Pavlina Tcherneva, Money Power and monetary regimes 2016

The market is not a natural phenomenon, it does not have fixed and unavoidable characteristics. The market is a social construction whose functioning can respond both to the general interest and to the exclusive advantage of particular interests. Behind the violence of the market and, in particular, behind the unemployment that afflicts the so-called “labour market” – the system of sale and purchase of the labour force – there are hidden political options regarding the extent to which to leave the economic fabric is inactive, options that always go through decisions in the field of public spending and taxation Rigorous and arbitrary limits to the deficit, such as those in force in the EU, a priori compromise the outcome of people’s economic life. Also of those most deserving and capable.

The MMT illustrates how the markets in the various specific currencies, the generalized systems of sale of labour, goods and services in exchange for an established currency, are public social constructions . Constructions erected in a collateral way from the power to impose on residents in a given territory a tax denominated in a specific thing , generating in the population the job offer of people and goods and services of the companies to the monopoly political authority of the currency and whoever has obtained its currency, thus giving rise to the market, which in fact is thus one of the products of this artificial social construction, and therefore does not exist under “natural” conditions.

The existence of a market is based on the existence of a specific currency that makes exchanges necessary The “confidence” on the part of the agents when accepting the currency as “endowed with value” is based on the fact that this currency will be the only means accepted as payment of taxes by the political authority that imposes the taxes. This is the foundation of the “value” of the currency. Taxes give rise to the market.

Coins and their markets are state creations. The Swiss franc and the Swiss franc labour force trading system did not exist before the Swiss state conceived it, and the same is true for the Norwegian crown or any other state currency.

The preconditions for the market in a certain currency are imposed by the creator of that currency, and no one has a spending capacity equal to that of his monopolist. The currency is in fact imposed by the state as a mechanism to obtain part of the economic production.

No one is financially more solid than the sovereign state in the area of ​​what is denominated in its currency. A state endowed with its own currency in a fluctuating exchange rate, not linked to the currencies of other states or precious metals (or any other merchandise), will never stop paying its debts denominated in the currency of which it is the monopolist. 

“This is the truth that the oligarchies hide to preserve control over society.”

When it comes to euros, no one is stronger than the European Economic and Monetary Union (EMU), and all the financial limits that the EMU imposes itself, as do the US and many other monopoly political authorities of the currency itself, are self -impositions. They are political options justified with a false narrative, they are the plague.

The monopoly state of the currency always has the possibility of ensuring that there is sufficient spending in the economy to fully activate the productive capacity and the labour force present on the territory. The United States, the United Kingdom, and technically also the EMU as any monopoly subject of the currency, always have the possibility of eliminating unemployment and eliminating the monetary bottleneck to full economic and social development, to the full expression of social potentialities. and economics of the towns.

The monopoly state of the currency has the possibility of configuring what characterizes capitalist systems, the sale and purchase of labour power, putting out of the market jobs characterized by remuneration below the poverty line and degrading conditions, simultaneously maximizing price stability.

States can nevertheless – and frequently do – decide to self-limit their own space of action by linking the use of their currency to specific exchange rates with another currency or commodity or, directly, by limiting public spending.

To the best of my knowledge this post first appeared in Spanish on RedMMT Espana