By Michael Hoexter
I drafted the “Mixed Economy Manifesto” as one attempt to create a common basis for anti-austerity economists and non-economists to argue against, in the clearest terms possible, the waves of government spending cutbacks that are advocated by misguided elites, by the right-wing and by right-leaning neoclassical economists. The 87 “theses” listed at the end of the Manifesto enumerated empirically and logically sound propositions about the economy as it now exists with its mixture of government and private institutions that can under many circumstances productively interact with each other. (I may attempt or others may attempt to expand the arbitrarily numbered 87 to 95 theses which would then be suitable for nailing on doors.) The Mixed Economy Manifesto also contained many statements that would appeal to Left Neo-classicals or New Keynesian economists, while maintaining a basis in what I perceive to be the more realistic ideas about the economy that have been put forward by post-Keynesians, MMTers, and the institutionalist tradition, including Thorsten Veblen and John Kenneth Galbraith.
As it stands, the world appears to be heading into a policy-induced exacerbation of the ongoing Second Great Depression that may pale in comparison to the policy mistakes of 1937 in the US, when President Roosevelt listened too much to the hard-money ideologues of his day and cut spending only to weaken the ongoing recovery from the Depression of the 1930’s. It would seem to make sense to create an alliance of as many intellectual and political tendencies as possible against a repeat of these mistakes. One major problem is that the public is largely unaware that there is a choice, so has not yet joined the struggle, except in countries like Greece and Spain where austerity is now in full force.
Another major problem in creating such an alliance is that there are significant intellectual and institutional divisions among those economists who endorse counter-cyclical spending by government and/or mobilizing the resources of government to help the unemployed and the marginally employed. These economists disagree with each other about fundamental issues and, if listened to by the public closely and in sequence, can produce either confusing or not particularly decisive advice for anti-austerity activists. This in turn makes it difficult to create a mass political movement that opposes austerity measures before they take full effect or, furthermore, after some future political victory for anti-austerity forces, for policymakers to institute policies based on a consistent new economic thinking. The most consistent critics of austerity and the economic foundations of austerity thinking have been Post-Keynesians, a diverse grouping of schools that claim to be both heirs and critics of Keynes, including the growing Modern Monetary Theory school (MMT). Post-Keynesians are generally excluded from the centers of power within the economics profession, though are not as marginalized as biophysical, steady-state/ecological, and Marxist economists. “New Keynesianism” is a much more mainstream school that integrates certain aspects of Keynes into the dominant neoclassical economics taught in college Econ 101 courses. Often the publicly-identifiable Left of mainstream economics, for instance Paul Krugman and Joe Stiglitz, can be identified as New Keynesian and therefore fundamentally neoclassical.
Post-Keynesians and MMTers often direct their sharpest critiques at New Keynesian or Left Neo-classical economists, though there are also efforts at comity from the side of Post-Keynesians. On the other side, the more orthodox and “establishment” New Keynesians/Left Neoclassicals for the most part do not offer Post-Keynesians the professional respect of acknowledgement and/or serious intellectual critique of Post-Keynesian/MMT ideas. There are signs that this “Chinese wall” is breaking down, as the global Depression drags on, but often in ways that indicate that isolated terms from or fragments of Post-Keynesianism and MMT may be taken and reconfigured to fit the orthodox model and academic “lifestyles” of Left Neo-classical economists. This was the intellectual “move” that Paul Samuelson executed in the late 1940’s, validating those parts of Keynes that would fit with neoclassical orthodoxy, while leaving out the aspects of Keynes’s work that suggested that neoclassical orthodoxy should be fundamentally questioned or overturned.
Krugman’s Left Neoclassical Manifesto
More generally, we seem to be in a time of economic manifestos, which might function as potential rallying points. Paul Krugman, the famous economist and New York Times columnist from the New Keynesian school has recently published his own manifesto written with Richard Layard called the “Manifesto for Economic Sense” (MES), also an anti-austerity tract. While I think the Mixed Economy Manifesto (MEM) is in terms of its content of more durable value than the “Manifesto for Economic Sense” (though you shouldn’t take my word for it: read them for yourself), Krugman’s manifesto is for the most part to-the-point and outlines the basic Fisherian argument of a debt deflation/depression (an argument favored by many post-Keynesians) caused by an overindebted private sector unable to spend its way out of an economic slowdown after the bursting of a large asset bubble. Krugman, as do post-Keynesians, advocates that government fiscal policy, i.e. spending, is one of the keys to recovery from the debt deflation. From the point of view of post-Keynesians, sometimes grouped in the category of economic heterodoxy, “so far, so good”.
More controversially from the point of view of heterodox economists, Krugman injects into his anti-austerity manifesto one sop to “conventional wisdom” in neoclassical and pro-austerity economics: the idea that eventually governments, like businesses and households, should cut their deficits in the medium term, as if this action were in itself a sign of fiscal probity.
There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult. (MES paragraph 7)
This statement, considered conventional wisdom among policy makers and among neoclassically-trained economists, violates the insights of MMT based on Wynne Godley’s clarification of basic macroeconomics. Godley’s method of stock-flow consistent accounting of flows of funds between the three great sectors of the macro-economy suggests that governments are almost compelled to run deficits if the national private sector is to experience net economic growth, the supposed goal of all economic policy as currently understood, except where nations have a substantial trade surplus, i.e. are net exporters. Working in seeming obliviousness or ignorance against the growth imperative baked into economics and capitalism, balanced-budget (austerity) advocates appear to forget that to balance a government budget the public sector must take away in taxes exactly as much money as it spends into the economy, requiring then every nation to become a net exporter if its private sector is to grow.
Governments that control their own (fiat) currency, can by design, run deficits indefinitely because, based on the observations of Modern Money Theorists, they do not actually use taxes collected to spend but instead “mark up bank accounts (issue currency)” when needed. There may be prudential (inflation, currency depreciation) but not affordability constraints on spending of a monetarily sovereign government but the excess of spending relative to collected amount of taxes, i.e. “deficits” is not one of them. MMT argues that it is, in fact, imprudent for monetarily sovereign governments to use budget balancing as a means to determine levels of spending. The injection of Krugman’s concession to this supposed economic virtue alone makes the “Manifesto for Economic Sense” unpalatable to those who follow MMT’s account of the monetary operations of government.
Much of the rest of the “Manifesto for Economic Sense” is devoted to arguing against the main right-wing economic talking points that austerity will increase business “confidence” and that unemployment is due to there being a structural deficit of skills and/or willingness to work in the labor market. While most Post-Keynesians would also share Krugman and Layard’s opposition to these arguments, the MES at this point in my opinion could have been sharper and more satirical of the pro-austerity camp. Austerity economics makes so little sense that serious analysts should grant themselves the license to use the sharpest rhetorical tools to demolish its supposed respectability.
Points of Agreement and Division
Left neoclassicals and post-Keynesians often agree on what government should be spending money on right now: on aid to state governments (that cannot issue currency), on social services, and on environmental initiatives. Many left neoclassicals join post-Keynesians in supporting direct investment by the government in infrastructure projects and moves towards full employment, though there are important differences in the manner and extent to which they push for these initiatives. Both left neoclassicals and post-Keynesians are not generally afraid to use government spending to spur demand for real goods and services.
In the United States especially, a key theoretical and policy difference between heterodox MMTers and left neoclassical economists is the function and role of taxation especially taxation of the wealthy. As in Krugman’s concession to conventional wisdom above, left neoclassicals believe that government can’t or shouldn’t issue money in excess of taxes collected in the long run, demanding with more or less passion increased taxation of the wealthy to use the tax revenues to pay for desirable government expenditures. The main political issue then becomes whether to raise tax rates to, in this older theory of government finance, use the money collected to pay for social programs. The examples of countries with higher tax rates and higher social expenditures (European social democracies) are held up as examples of what the United States should emulate to enable greater government expenditure on needed services and public investments. In contrast to Left neoclassicals who oppose their right-wing neoclassical brethren on this issue, MMTers concede to the Right that raising taxes on the rich would dampen aggregate demand, though prefer cutting regressive taxes such as the payroll tax, which differentially affect poor and working people.
The advice of MMTers to progressives is to prioritize what government should spend money on and put forward those demands without linking them to the amount of taxes collected in countries that control their own currencies such as the US, UK, Canada, Australia, Japan and China. Secondarily, some in MMT might suggest using taxation as a means for shaping economic behavior and regulating economic inequality, uses of taxation which are considered commonsensical among economists of most schools and political tendencies. In a fiat currency system, according to MMT, there is no connection between what is collected by tax authorities and what is spent, though for governments that are “currency users” like regional governments (US States) or the governments of Euro-Zone countries, the linkage between taxation and expenditure remains. MMTers view all Neoclassicals, including Left Neoclassicals as firmly in the grip of “hard money” ideology, seeing money as a tradable, hard commodity in limited supply. MMT views money as a more flexible creature of public policy and social practice rather than a commodity “thing” that is controlled by market forces or via a fixed multiplier controlled ultimately by central bank lending to private banks. MMT is considered by some observers, a version of “Chartalism” or “Cartalism” , the idea that money is a “creature of the state” and not the spontaneous product of market exchange.
To give credit where credit is due, there are prominent economists of the Left Neoclassical school that have been agitating against the austerian madness, some with great ferocity. Besides his “Manifesto”, Krugman stands out as a Left Neoclassical who has devoted considerable time and effort to issuing public calls to stop the thoughtless drive towards austerity. Krugman is making as much of a ruckus as he can, including titling his latest book “End this Depression Now!” Joe Stiglitz has also been calling out against the austerity wave. Other Left Neoclassicals include former government advisors and officials like Christine Romer, Jared Bernstein and Brad DeLong speak regularly against austerity, at least in the short- and medium-term, Even the highly influential Larry Summers, who was in many cases an architect of the Great Financial Crisis, is now coming out against the austerity wave, now that he is safely out of government. Nouriel Roubini has been critical of austerity, though still holds to many neoclassical precepts. Mark Thoma runs an influential blog and is critical of the austerity wave. Robert Reich does not contradict neoclassical tenets in his continual attacks on austerity policies, often congratulating himself and his former boss, Bill Clinton for running government surpluses in the late 1990’s. In Great Britain, Simon Wren-Lewis is a prominent Left Neoclassical who has spoken out against austerity and also has attempted a dialogue, on his own terms, with post-Keynesians. Many of these economists occupy positions of prestige and are sought out by the media.
Unfortunately the economists, Post-Keynesians and MMTers, who are on the trail to more durable solutions to the problems of the economy and government finance are less well-situated within the economic establishment and, to date, less favored with media attention. They are barred from the most prestigious economic journals such as “American Economic Review” or “Journal of Economic Theory” which are uniformly bastions of neoclassical orthodoxy and function as gateways to relatively secure careers at major academic institutions. They are not typically published in nor do they typically appear in the mainstream media and when they do, they are not given space and time to expand on their views.
Perversely, media and academic outlets have generally ignored heterodox economists, whose theories are generally more relevant to business and the public and who among other things, are the group that was more acutely aware of the looming 2007-2008 financial debacle than the orthodox mainstream. Steve Keen has not only written a rigorous critique of conventional economics but seems to be on the trail to understanding the role of debt in the capitalist economy overall. Keen is also critical of the austerity drive and the focus of austerians on public debt as opposed to private debt. The University of Missouri at Kansas City (that hosts this blog) has developed a powerhouse economics department that is one of the few places in the world where Ph.D. economics students can use and work on models of the economy that more closely approximate the real economy. Randy Wray, Stephanie Kelton, Bill Black and Michael Hudson are all professors of associates of UMKC and are some of the most vociferous critics of austerity. Warren Mosler, a post-Keynesian and a founder of MMT, often speaks out against austerity. Bill Mitchell in Australia is one of the founders of MMT who focuses on full employment and leads the Center for Full Employment and Equity at the University of Newcastle, New South Wales. Austerity runs counter to MMT theory, so critique of austerity is a logical extension of the theory and not simply the product of economic personal “taste”. To some degree most of the economists who have been associated with the heterodox post-Keynesian tradition treat austerity madness as just another edition of the foolishness of the neoclassical economics they have spent decades criticizing and, they hope, uprooting.