The Zero Room

This week, I have been mostly reading:

• How I Got Fired From a D.C. Think Tank for Fighting Against the Power of Google — Zephyr Teachout in the Intercept: In June, when the European Union fined Google $2.7 billion for abusing its dominant position to serve itself and quash competition, the Open Markets team put out a press statement that was entirely consistent with its longstanding position. It praised the EU’s action, and argued that American antitrust authorities should also look at Google’s use of its search power to leverage its influence in other markets. New America’s leadership must have gotten an earful. Within 72 hours, New America’s president, Anne-Marie Slaughter, told Lynn that he — and all of us on the Open Markets team — had to leave. As the New York Times reported yesterday, Slaughter emailed Lynn to say that “the time has come for Open Markets and New America to part ways,” and the email accused Lynn of “imperiling the institution as a whole.” (After the Times story was published, Slaughter tweeted that the article was “false,” though she later added, “facts are largely right, but quotes are taken way out of context and interpretation is wrong.”) [Some additional context provided by the Intercept]
• Racism is real, race is not: a philosopher’s perspective — Adam Hochman in the Conversation: From a scientific perspective, the best candidate for a synonym for “race” is “subspecies” (the classification level below “species” in biology). When scientists apply the standard criteria to determine whether there are subspecies/races in humans, none are found. In chimpanzees yes, but in humans no. Racial classification is unscientific. However, humanities scholars have their own justifications for race-talk. Many argue that while there are no biological races, there are social races. Race, as philosophers put it, is a social kind. In my view, the redefinition of race as a social kind has been a major mistake. Most people still think of race as a biological category. By redefining it socially, we risk miscommunicating with each other on this fraught topic.
• Stylised Facts — Robert Skidelsky Wow. This is great. Lots in here, but this jumped out at me, given my current interests: Though Kaldor was concerned with long-run growth and Keynes with the short- run management of demand, there was no contradiction between the two, since post-war Keynesians like Kaldor assumed that Say’s Law was now guaranteed by Keynesian full employment policy. This re-established the long-run growth agenda of the classical economists. So the Keynesian economists of that day produced growth models – Harrod-Domar, Solow, Rostow, etc. – geared chiefly to the problems of the developing world. This growth orientation did mean though that Kaldor was as much concerned with the conditions of supply as demand, something evident in his 1966 inaugural lecture. Kaldor was heir to the German economist Friedrich List, in that he regarded premature free trade as an obstacle to growth for those countries in the business of catching up with the leaders. Countries should seek to develop their dynamic rather than simply exploit their static comparative advantages. This required policies of protection and import substitution. Kaldor was passionately opposed to static equilibrium analysis.
• After such unexpected success in 2017, what does Jeremy Corbyn have planned for 2018? — Richard Seymour in the Independent: The result didn’t come from nowhere. It was a vindication of the strategy outlined by Corbyn when he won the leadership in 2015. To rebuild its electoral base, Labour had to rebuild itself as a membership party. It had to recruit previous non-voters, above all the young and the poor, shamelessly written off by pollsters and most politicians. It had to move sharply to the left, and stop trying to appease the media and the Conservatives. Corbyn’s point has been proven, far more quickly than even his supporters expected. More importantly, the form of organised distrust of the members evinced by the old managerial guard, has been discredited. Labour’s members have shown more insight into contemporary Britain than the majority of MPs. And finally, after many years in which activists themselves distrusted the party form, it proved its worth: for all its limits, this scale of organisation can change the country.
• Australian national accounts – government spending drives growth — Bill Mitchell: The ABS released the – June-quarter 2017 National Accounts data – today (September 6, 2017), which showed that real GDP had risen by 0.8 per cent in the June-quarter 2017. Annual growth (last four quarters) was just 1.8 per cent around half the trend rate before the GFC. The striking result was that public spending (consumption and investment) contributed 0.8 percentage points to the growth rate – which means that without that contribution, real GDP growth would have been zero in the June-quarter 2017. Private consumption expenditure contributed 0.4 points, although the household saving ratio fell again indicating the tenuous nature of relying on this growth with flat wages. Private investment spending was negative. Net exports were stronger with export volumes strong in the face of the falling terms of trade. Overall, the growth is unbalanced – relying on lumpy public investment spending and credit-driven private consumption growth. The outlook is thus uncertain.

This week, I have been mostly setting up a super-secret project, rather than reading:

• The Trump Team, starring in Spy Stories for Dummies — Tom the Dancing Bug by Ruben Bolling:
  

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.