Paul Krugman’s recent posts “Deficits and the Printing Press (Somewhat Wonkish)” and “A Further Note on Deficits and the Printing Press” have been responded to by leading modern monetary theorists and contributors to the various comments sections at NYT and MMT blogs. Tom Hickey has collected the key contributions to the debate here and here.
My first thought on reading Krugman’s discussion of MMT was that he was attempting to position his own arguments against austerity as “moderate”. Whatever the motive, he may well have done the “modern monetary theory people” (I prefer “24 Hour Modern Money People”) a favor. By posting an easy-to-counter straw-man characterization, he has basically given MMT proponents an open invitation to articulate their position on a high-profile site. The commentary on the original post was so lopsided in favor of MMT – they are 24 Hour People, after all, and their posting activity frenetic – that he apparently saw fit to add the follow-up post clarifying his position. It was another easy-to-counter straw-man characterization and open invitation. The crazy thought occurs that maybe he is actually trying to give MMT a boost. It wouldn’t completely surprise given his real concern at the moment is austerity – a policy matter on which he is in agreement with MMT in the neoclassical short run – and not primarily theoretical debate.
It is encouraging to see MMT gaining exposure, but part of me worries where all this may be heading politically. There seems to be an ugly combination of the general population believing in the merits of austerity, which paves the way for cutbacks on social expenditures and continued high unemployment, alongside an understanding in high places that the government has a larger than ever capacity to pursue military aggression in the Middle East and elsewhere to control access to oil and other resources (larger than ever because of the high unemployment and excess capacity) and a Fed that uses fiscal actions to transfer wealth to banks, including foreign ones.
There appears to be a concerted effort by the elites to grind down general living conditions as low as possible while preserving a privileged position for the few. In the aftermath of the Depression and WWII, capital made concessions, mainly due to the threat (to them) of socialism. That threat seems largely absent this time. Technological advances (e.g. relating to surveillance capabilities) and ideological developments (a widespread rejection of socialism and embrace of neoliberalism) mean compromise is no longer necessary. Propping up living standards for the “middle class” (i.e. working class) in developed economies would now seem superfluous from the perspective of capital.
On another level, there is also a grinding down of knowledge and understanding (decimation of the education system and unrelenting propaganda through all media) that is reducing the capacity of general populations to assess political and policy options or to separate lies from truth. This is occurring alongside the ever-increasing acquisition of knowledge accessible to the few.
Relating back to the recent exposure given to MMT and the relevance, if any, to the elites, Tom Hickey has mentioned in a recent comment the possibility that a certain section of the establishment may fear a repeat of 1937 and believe – as Kalecki and Keynes influenced approaches suggest – that applying austerity everywhere is counterproductive to capital. If so, austerity measures and the political shenanigans over the debt ceiling may have some in the establishment concerned.
If this is the case, their concern would relate to profitability. In aggregate, profits are the sum of capitalist expenditures, budget deficits and net exports minus saving out of wages. At the global level, net exports are zero, meaning global profits are simply capitalist expenditures plus budget deficits minus saving out of wages. Contrary to the position of the Crowding Out Crowd, Kalecki and Keynes influenced economists argue that private investment is positively influenced by the level of aggregate demand, which can be bolstered through budget deficits when there is excess capacity and high unemployment. Cutting budget deficits, in this view, depresses demand, private investment and aggregate profits, since smaller budget deficits together with low private investment imply weak global profits as a matter of accounting.
There is, however, a role for austerity from the perspective of capital. Austerity, from that perspective, would be best targeted at beating down organized labor (especially in Europe). Stimulus measures could then be used in the US and China partly to provide export demand for Europe, putting a floor under Eurozone profits, and partly to underpin aggregate demand and profitability in the US and China.
Putting it all together to get a sense of what may be ahead, and how MMT might fit in, military expenditure is likely to be the preferred form of deficit expenditure for the elites. There is also plenty of scope to step up development and application of surveillance, security, propaganda and police-state measures to tame any dissent in the US and its client states. The capacity for the US government to do this is self-evident on MMT grounds. Understanding MMT is useful to capital in this respect. It leaves the way open for further military aggression and curtailment of individual liberties.
At the same time, concerning the general population, budget cuts can be justified as necessary for currency-using state governments. MMT makes clear the constraints on currency users. Of course, the states’ financial constraints are completely at the discretion of the financially unconstrained federal government. This is one benefit, from capital’s perspective, of having a federal system. Responsibilities most important to capital can be retained at the federal level while responsibilities most pressing for general populations can be relegated to (deliberately constrained) state governments. The feds can starve the states, limiting funding for social expenditures on education and public services, and leave general populations to blame their state governments for poor service provision. Meanwhile, things important to capital can be funded by the financially unconstrained federal government.
The class-interested motive for the common currency in the Eurozone is basically the same. It puts national governments in the same position as states in a federal system and legitimizes austerity for the many and bailouts and fiscal transfers for the few, framed as being necessary to “save” the system from collapse.
The daunting task is to convince general populations of the correctness of MMT so that they resist austerity measures and the intentional starving of the states (or EMU member nations) and the deliberate attacks on working conditions and living standards. Unfortunately, general populations seem to remain utterly unconvinced by (or ignorant of) the MMT position and, on the whole, adhere to neoliberal thinking on fiscal matters. This is as true of the socialist left as it is of social democrats, liberals, centrists and most conservatives. These people might oppose specific austerity measures but they don’t doubt that cutbacks are necessary (at least under capitalism). They just want them made elsewhere (or in the case of socialists, the system replaced, which personally I support, but not based on a groundless claim of a financial constraint for fiat-currency issuing governments).
Meanwhile, the elites can make use of an understanding of fiat-money systems when it suits them (military, police-state measures, stepped-up propaganda, Fed fiscal operations) and exploit the neoliberal beliefs of general populations when it comes to legitimizing attacks on working conditions and entitlements or cuts to expenditures on health, education and other social services.
MMT offers paths to a better world. But what are the odds of it being employed for good? The establishment will do everything in its power to prevent the knowledge becoming general, and general populations give every impression of preferring delusion to truth.
We need to keep getting the word out there into the general community. It’s up to others if on hearing it they accept it. Krugman’s recent posts, though critical and straw-man representations, gave MMT more exposure and may help in this respect.