The Zero Room

I posted this enormous torrent of blather on Blackboard the other day. It's mostly a restatement of stuff I've said before, but I'll repost it here for the purposes of copying and pasting in the likely case I have to restate it yet again elsewhere.

Because I've been studying economics for the last few years, rather than sticking to the curriculum and dutifully cultivating my employability, I feel obliged to chip in with a cautionary note: Almost all of the academic economists, and their policy prescriptions, which are characterised as Keynesian have nothing to do with the work of Keynes.

The post-war economic order established at Bretton Woods is conventionally understood as being Keynesian, but in fact Keynes was railroaded by the US representative Harry Dexter White, who insisted upon the system of fixed exchange rates pegged to the US dollar, with global dependency on holding US dollar reserves being greatly to America's benefit; the US gained the benefit of cheap foreign imports sold to acquire those reserves. Neither was Keynes responsible for the "Bretton Woods institutions", the World Bank and the IMF. His plan for regulating and settling international financial flows was considerably more humane than the usurious loans and standover tactics these institutions became notorious for.

Even "progressive" and "liberal" economists like Paul Krugman and Joe Stiglitz are members of the school of "New Keynesianism", a product of what Paul Samuelson called the "Neoclassical Synthesis"; taking some of the superficial trappings of Keynes' work and melding it with the earlier "neoclassical" school of economics, which Keynes actually intended to entirely overturn. Neoclassical models of the economy ignore the role of money and banking, believing that all economic transactions are ultimately barter transactions, and that money is therefore said to be "neutral", and banking is just redistribution of loanable funds, ultimately of no macroeconomic effect. Keynes wrote of this "Real-Exchange economics" (in an article unfortunately unavailable via SCU):

Now the conditions required for the "neutrality" of money, in the sense in which it is assumed in […] Marshall's Principles of Economics, are, I suspect, precisely the same as those which will insure that crises do not occur. If this is true, the Real-Exchange Economics, on which most of us have been brought up and with the conclusions of which our minds are deeply impregnated, […] is a singularly blunt weapon for dealing with the problem of Booms and Depressions. For it has assumed away the very matter under investigation.

This is the answer to Queen Elizabeth's question on how economists failed to see the Global Financial Crisis (GFC) coming; if the financial sector is macroeconomically neutral, as the neoclassicals claim, there cannot be any financial crises. However, outside the neoclassical tradition, the normal functioning of the economy, and the pathologies leading to crises, are well understood:

• The Chartalists determined that all money is credit, ultimately issued by the state. Michael Hudson recently did some exhaustive historical work on this, which David Graeber popularised in his book Debt: the First 500 Years.
• Wynne Godley showed how currency-issuing states must spend more than they tax if the private sector is to have the money necessary to spend and save.
• Irving Fisher identified the role of debt deflation in turning a rush to liquidate debt into an ongoing crisis where outstanding debts become impossible to repay.
• Hyman Minsky's financial instability hypothesis extended Fisher's work to describe how financial crises arise from the normal workings of a capitalist economy.
• Keynes implicitly regarded the money economy as a tool for allocating real resources in pursuit of public policy objectives, a principle explicitly formulated by Abba Lerner as "functional finance". This is in opposition to the neoclassical intuition that a household is like an individual, a firm is like a household, and a government is like a firm; therefore a government must follow the principles of "sound finance" and "live within its means".
• All of the above are incorporated in the teachings of "Post-Keynesian" economics, which Keynes' biographer Robert Skidelsky considers closest to Keynes' own thinking. The sub-field of Modern Monetary Theory (MMT) synthesises all of these into a single coherent framework for analysing the economies of countries which issue their own currency.

By the end of World War II, functional finance was so well established as to be almost universally understood to be common sense. The 1945 White Paper on Full Employment in Australia, prepared for John Curtin by H. C. "Nugget" Coombs, and based on the principles in Keynes' General Theory of Employment, Interest, and Money, declared:

It is true that war-time full employment has been accompanied by efforts and sacrifices and a curtailment of individual liberties which only the supreme emergency of war could justify; but it has shown up the wastes of unemployment in pre-war years, and it has taught us valuable lessons which we can apply to the problems of peace-time, when full employment must be achieved in ways consistent with a free society.

In peace-time the responsibility of Commonwealth and State Governments is to provide the general framework of a full employment economy, within which the operations of individuals and businesses can be carried on.

Improved nutrition, rural amenities and social services, more houses, factories and other capital equipment and higher standards of living generally are objectives on which we can all agree. Governments can promote the achievement of these objectives to the limit set by available resources.

(Emphasis mine.) As expressed by MMT, currency-issuing governments are not fiscally constrained. The only limits on public policy are real resource limits. During the last UK election campaign, Theresa May was vehemently insisting "there is no magic money tree". But in fact there is: it's called the Bank of England (we have the Reserve Bank of Australia), and Her Majesty's Treasury has an unlimited line of credit there. Whenever the government wants to spend, the Bank of England just credits the accounts of commercial banks. I was delighted when while campaigning May was confronted by a furious protester wanting to know "Where's the magic doctor tree? Where's the magic teacher tree?" The policy limits we should be worried about are real resources (including people), not money.

Nevertheless, mainstream economists and politicians believe, in some vague way, that (as Stephanie Kelton puts it) "money grows on rich people". So it's not surprising to read already on the discussion boards here that Keynesianism is all very desirable, but how will the federal government pay for it? This is a meaningless question. The government will pay for it like it pays for anything: by spending the money into existence. That's where all money comes from, net of private sector credit creation. Logically, it can't come from anywhere else. If the government were to try to achieve fiscal (or, conflating governments and firms again, "budget") surpluses over the long term by taxing more than they spend, as neoclassicals, including New Keynesians, recommend, they would merely be draining savings from the private sector for no good reason. State-issued money is an IOU, a tax credit. When the credit is redeemed it ceases to exist. The government doesn't have to tax in order to spend. It has to spend in order to tax. Think about it: where else would the first dollar ever taxed come from?

Now you might be thinking, hang on: what about the most fiscally responsible government we've ever had (Howard/Costello) and their record run of "budget" surpluses? The economy was going gangbusters! Okay, here's the fiscal balance for that period:

As with every currency-issuing sovereign state in history, deficits are the rule, not the exception. Here's what happened to private sector debt over the same period:

(Data from the Bank of International Settlements and OECD.) As soon as the government started taxing more than it spent, private sector debt took off, and subsequent fiscal deficits were insufficient to reverse the damage. Notably, at the same time household debt overtook corporate debt, as credit was used to sustain consumer demand, not to mention standards of living, rather than for investment in productive capacity. Australia "Nimbled it, and moved on", and to hell with the consequences.

Australia recently passed two milestones of note: total private sector debt (the blue line above) exceeded 200% of GDP — at roughly the level that Japan's private debt was at in the early 90s when its real estate bubble burst — and bank equity in residential real estate passed 50%. That's 50% of the total residential real estate stock, not just houses built in the last x years. Minsky describes the path to financial collapse as progressing through the stages of "hedge finance", then "speculative finance", and finally "Ponzi finance". When you see phenomena like interest-only mortgages — where the principal is never repaid, on the assumption that housing prices only ever go up, and the debt will be settled whenever you sell the property, presumably pocketing a tidy and lightly-taxed capital gain at the same time — you know which stage you're in.

So why does nobody in mainstream politics or economics know anything about this? To put it succinctly, because neoliberalism. On the left, the "balancing the books" rhetoric serves a useful purpose: it gives you a disingenuous pretext to do what you want to do anyway that is compatible with the dominant paradigm. As Randy Wray said at a recent MMT conference:

"[Progressives] link the good policies they want to 'we'll tax the rich to pay for it'. So when you point out we don't need to tax the rich to pay for it, they're just crestfallen because they want to tax the rich. So I say 'Of course we should tax the rich. Why? They're too rich.' You don't need any other argument than that."

Taxes drive demand for the currency. If you know you have to pay taxes, you will work to get the money to pay for it. It's a coercive way for the government to mobilise labour to achieve its policy objectives, but assuming policy is arrived at democratically, it's relatively fair and vastly preferable to the autocratic alternative of having a gun put to your head. Taxes are also a fiscal instrument that can be used to discourage certain kinds of behaviour, and harmful social phenomena (like income inequality).

In the neoliberal era, that's why Australia has a retrospective tax on education called HECS-HELP, which in turn is why SCU has no school of history, or philosophy, or in fact any of the traditional academic disciplines. Students know that their education will be retrospectively taxed, so they can't afford to choose disciplines unlikely to offset that tax with increased earnings. There are twice as many universities as there were in 1988, but the new ones are glorified vocational colleges with next to no permanent academic staff. Australian post-Keynesian economist Steve Keen, who correctly predicted — and more importantly, explained — the GFC, subsequently lost his job at the University of Western Sydney when they closed down their economics department. Who needs academic economics when you have business studies courses, after all? He ended up at Kingston University in London, another young neoliberal institution, where last year he was given an ultimatum to spend more hours teaching or take a significant pay cut. He's ended up having to put his hat out for donations from the public in order to continue his work as a public intellectual.

Why would public policy function like this? Why would policy makers want a population uneducated about how the world actually works, and instead merely trained in how to work in it? Why is the conventional wisdom so full of assertions that are demonstrably untrue, and profoundly damaging to society? Paul Samuelson, author of the macroeconomics textbook that gave generations of undergraduates a completely misleading interpretation of Keynes' work explained this in an interview:

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say "uh, oh what you have done" and James Buchanan argues in those terms. I have to say that I see merit in that view.

So basically, belief in myths must be maintained among the general population wherever doing so provides support for the elite political preference for small government, i.e. for control over the economy to be exercised by private finance rather than public fiscal policy. This is what neoliberalism fundamentally is, an Orwellian fiction imposed on a deliberately dumbed-down populous, with access to the truth as much the reserve of a select educated elite as ever. "Long-run civilised life" has been restored, thanks to neoliberalism's making of the 21st century by its un-making of the 20th.

I could go on forever (evidently) but others explain all this better than I:

• Here's a short interview with Steve Keen explaining how neoliberal austerity economics leads inevitably to financial crises.
• Stephanie Kelton is probably the best person to explain MMT to a general audience. Watch her describe the Angry Birds Approach to Understanding Deficits in the Modern Economy.
• Here's Bill Mitchell explaining in 15 minutes how fiscal policy works in the real world.
• Warren Mosler explains here why fiscal deficits are generally desirable. If you find reading easier than listening, I recommend Warren's slim volume (and even slimmer PDF file) Seven Deadly Innocent Frauds of Economic Policy.

If you have read this far, I admire your tenacity.

This week, I have been mostly reading:

• Johnstown Never Believed Trump Would Help. They Still Love Him Anyway. — Michael Kruse in Politico: Over the course of three rainy, dreary days last week, I revisited and shook hands with the president’s base—that thirtysomething percent of the electorate who resolutely approve of the job he is doing, the segment of voters who share his view that the Russia investigation is a “witch hunt” that “has nothing to do with him,” and who applaud his judicial nominees and his determination to gut the federal regulatory apparatus. But what I wasn’t prepared for was how readily these same people had abandoned the contract he had made with them. Their satisfaction with Trump now seems untethered to the things they once said mattered to them the most. “I don’t know that he has done a lot to help,” Frear told me. Last year, she said she wouldn’t vote for him again if he didn’t do what he said he was going to do. Last week, she matter-of-factly stated that she would. “Support Trump? Sure,” she said. “I like him.”
• Al Franken Just Gave the Speech Big Tech Has Been Dreading — Nitasha Tiku, in Wired: Franken has not shied away from voicing concerns about tech’s encroachments on privacy and competition in the past, but Wednesday’s criticism was unusually sweeping, tying together a revised narrative about Silicon Valley that only emerged in glimpses during the Russia hearings. Franken argued that the same control over consumers that facilitated the spread of Russian propaganda on social media also helps Facebook and Google siphon advertising revenue from other publishers and helps Amazon dictate terms to content creators and smaller sellers. Tech giants are incentivized to disregard consumer privacy, Franken noted. “Accumulating massive troves of information isn’t just a side project for them. It’s their whole business model,” he said. “We are not their customers, we are their product.”
• Landmark study links Tory austerity to 120,000 deaths — Alex Matthews-King, the Independent: […] Professor Lawrence King of the Applied Health Research Unit at Cambridge University, said it showed the damage caused by austerity. "It is now very clear that austerity does not promote growth or reduce deficits - it is bad economics, but good class politics," he said. "This study shows it is also a public health disaster. It is not an exaggeration to call it economic murder.”
• Trump is trying to quietly reverse decades of social progress in America — David Usborne, the Independent: It is to the federal courts that disputes of law always travel, some eventually landing in the Supreme Court. Where America goes next on social issues like LGBTQ rights, abortion rights, the constitutionality of the death penalty, religious rights - to name a few - will turn on rulings from federal judges. It is some of those same judges nominated by previous presidents who have blocked Trump’s travel ban. “Nobody wants to talk about it,” Trump lamented during a recent meeting of his cabinet. “But when you think about it…that has consequences 40 years out. A big percentage of the court will be changed by this administration over a very short time.”
• The world's most important asset class — Patrick Commins, Australian Financial Review: "The definition of 'important' is malleable but try this one: name an asset class that – were it to either fall or rise in value by 30 per cent – would inexorably imply a global recession or a global boom? Oil, gold and arguably the US dollar fail that test for the simple reason that all have seen price changes of or near that magnitude this decade with little direct effect on the global economy," [Bernstein analyst Michael] Porter says. So what is the world's most important asset class now? Answer: Chinese real estate.

This week, I have been mostly reading:

• The Little Black Box That Took Over Piracy — Brian Barrett, WIRED: Kodi itself is just a media player; the majority of addons aren't piracy focused, and lots of Kodi devices without illicit software plug-ins are utterly uncontroversial. Still, that Kodi has swallowed piracy may not surprise some of you; a full six percent of North American households have a Kodi device configured to access unlicensed content, according to a recent Sandvine study. But the story of how a popular, open-source media player called XBMC became a pirate's paradise might. And with a legal crackdown looming, the Kodi ecosystem's present may matter less than its uncertain future.
• Freedom for the Many — Shant Mesrobian in Jacobin: After salary or wages, the most significant part of the [US] employment contract tends to be health insurance. And employers know it. The resulting dependency and vulnerability is especially acute when a worker’s entire family relies on them for health coverage (particularly if one of their family members has a chronic or life-threatening disease). In such cases, health insurance surpasses even monetary compensation as the primary motivation for maintaining employment. When your child has cancer, it’s that much harder to speak up about your boss’s sexual harassment. […] Lack of health insurance (and college debt, and middling disability benefits — the list goes on) severely limits a person’s ability to choose which career to pursue, where to live, when to start a family, how many children to have, and what types of hobbies to take up. In short, it’s not about free stuff — it’s about a free life.
• The Angriest Librarian Is Full of Hope — Alex Halpern in CityLab: Those mousy, quiet librarians are a thing of the past, if in fact they ever existed at all outside of Hollywood. Today, depending on the community they serve, a public librarian is part educator, part social worker, and part Human Google. What they aren’t is a living anachronism, an out-of-touch holdout in a dying job who’s consigned to a desk, scolding kids for returning books a few days late.
• Monopoly was invented to demonstrate the evils of capitalism — Kate Raworth in the Conversation: ‘Buy land – they aren’t making it any more,’ quipped Mark Twain. It’s a maxim that would certainly serve you well in a game of Monopoly, the bestselling board game that has taught generations of children to buy up property, stack it with hotels, and charge fellow players sky-high rents for the privilege of accidentally landing there. The game’s little-known inventor, Elizabeth Magie, would no doubt have made herself go directly to jail if she’d lived to know just how influential today’s twisted version of her game has turned out to be. Why? Because it encourages its players to celebrate exactly the opposite values to those she intended to champion.
• Physics Confession — xkcd:
  
• Willmot now last Sydney suburb with a median house price under $500,000 — Nicole Frost at Fairfax's dog-wagging tail Domain (via MacroBusiness): There are just 632 houses located in the suburb, which was established in the early 1970s and named for the first president of the Blacktown Shire Council, Thomas Willmot. The majority of the suburb’s homes are owned by investors. It has been this feverish investor activity that has led to the disappearance of Sydney’s sub-$500,000 suburbs. At the start of the year there were four and five years ago there were more than 150.
• The wilderness years: how Labour’s left survived to conquer — Andy Beckett, the Guardian: In the vast literature written about Labour between the 1980s and 2015 – all the fat gossipy memoirs, diaries and biographies, confident overviews by journalists and historians, and careful analyses by political scientists – there is an absence, which has seemed ever larger and more puzzling since Corbyn was overwhelmingly elected leader. He and his closest comrades for decades – John McDonnell, now shadow chancellor, and Diane Abbott, now shadow home secretary – rarely feature. They are not in books about the 2003 Iraq war, which they all opposed. They are hardly in books about New Labour; or about the Conservative government and its austerity policies, which they opposed when their party barely did. They do not even feature much in studies of Labour’s startling success in London, where they all have constituencies and have hugely increased their majorities since the 90s.

This week, I have been mostly reading:

• Modern Economists: The Inept Firefighters’ Club — Dean Baker in Democracy Journal: The problem is not that modern economics lacks the tools needed to understand the economy. Just as with firefighting, the basics have been well known for a long time. The problem is with the behavior and the incentive structure of the practitioners. There is overwhelming pressure to produce work that supports the status quo (i.e. redistributing to the rich), that doesn’t question authority, and that is needlessly complex. The result is a discipline in which much of the work is of little use, except to legitimate the existing power structure.
• ANZ: Australia “place of choice” for property money laundering — Leith van Onselen at MacroBusiness: Legislation to implement the second tranche of anti-money laundering (AML) legislation covering real estate gate keepers has been gathering dust for a decade. The end result is that realtors, lawyers, accountants and other real estate gate keepers are currently exempted from AML requirements. And this exemption has provided an easy avenue for foreign buyers to launder funds through Australian property.
• I have run out of interesting things to write about edtech — Jonathan Rees: What I’ve learned in my years of studying this topic, is that there are actually a ton of really devoted people who are trying to develop and utilize various educational technologies to create useful and – at least in some cases – superior experiences to how colleges and classes operate now. These efforts are, as you might expect, hugely labor intensive. Therefore, they seldom appeal to private Silicon Valley companies trying to make a quick buck. They do, however, appeal to all of us who are in higher education for the long run and a willing to try something new.
• Universities' greed and phony prestige to blame for appalling drop-out rates — Tracie Winch in the Sydney Morning Herald: In terms of classroom engagement, it's fair to say that the centuries-old method of formal lectures and tutorials is outdated, but simply shunting classes online is not the answer and, of itself, it certainly isn't innovative. It's sending a message to students saying "hey you don't really need to show up" and so the majority don't – unless there is some kind of assessment hurdle attached. And we are shocked?
• America’s hidden philosophy — John McCumber in Aeon: As far as rational choice theory is concerned, it doesn’t matter if I want to end world hunger, pass the bar, or buy myself a nice private jet; I make my choices the same way. Similarly for Cold War philosophy – but it also has an ethical imperative that concerns not ends but means. However laudable or nefarious my goals might be, I will be better able to achieve them if I have two things: wealth and power. We therefore derive an ‘ethical’ imperative: whatever else you want to do, increase your wealth and power! Results of this are easily seen in today’s universities. Academic units that enable individuals to become wealthy and powerful (business schools, law schools) or stay that way (medical schools) are extravagantly funded; units that do not (humanities departments) are on tight rations.
• Why Race Is Not a Thing, According to Genetics — Simon Worrall interviews geneticist Adam Rutherford for National Geographic: It says something about us that we look for simple answers to complex questions. Inevitably, people have turned to the relatively new science of genetics to try to explain otherwise unfathomable human behaviors, such as spree killing or murder. […] If we sequenced [mass-shooter] Adam Lanza’s genome, we would simply find that he has a human genome and that all the variants in him would be found in other people that don’t commit spree killings. Turning to genetics to try and find out why this guy killed all of those kids in this wicked act completely misses the point! The single common factor in all spree killings is access to guns. That seems straightforward to me.