By William K. Black
April 11, 2019 Bloomington, MN
Part 7b of the MMT Series
Part 7a is available here.
Blair, Brexit, and Friedman Show the Need for MMT Insights
Part One: The MMT Critique of Orthodox Microfoundations
Orthodox ‘modern macro’ is based on ‘microfoundations’ that implicitly assume that firms profit-maximize, that there are no negative externalities, that there is no market power, and that there is no control fraud or predation. In sum, they assume out of existence reality and particularly the parts of reality that produce the “endemic” global financial crises that Friedman admits his favored model produce. (See Parts 2A and 2B of this MMT Series for a much more detailed discussion of microfoundations.)
Friedman, of course, loved both Blair and Brown. In the same April 22, 2005 column, Friedman described Brown as Blair’s “deft finance minister.” (Perhaps he meant to write ‘daft.’) In 2005, the UK was racing toward the GFC. It nosed Wall Street at the wire to ‘win’ the regulatory ‘race to the bottom’ that produced the epidemics of control fraud and predation in the U.S. and the UK that hyper-inflated bubbles and drove the GFC. The UK economy was sick in 2005. It was systematically misallocating capital. It was driven not by real industrial productivity gains, but by accounting scams in the City of London. The ethics of the City of London had fallen to sewer levels. Its biggest banks had been specializing in predating on their customers for two decades. Its most prestigious bankers were driving the two largest price-rigging cartels (Libor and Forex) in world history. Even the sleaziest U.S. bankers at the ‘vampire squid’ (Goldman Sachs) based their worst, most rapacious predators in the City of London. On any real economic basis, many of the UK’s largest banks were insolvent because of their terrible asset quality.
The UK was only two years before the first large bank crisis of the GFC – the run on Northern Rock. Only a government bailout saved the bank from immediate failure. Friedman, the triple Pulitzer Prize winner supposedly the world’s expert on ‘globalization’ was oblivious to reality. He believed the financial CEOs who wine and dine him and receive his unctuous praise.
Friedman’s 2005 column called the UK economy “strong” and “vibrant.” He attributed this to Blair and Brown embracing Friedman’s mantra – we all need to “to firmly embrace the free market and globalization.” The Brits think we are incapable of irony, and perhaps they are right about Friedman. To state the obvious, the City of London’s leaders despises ‘free markets.’ They love control fraud and predation and price-rigging cartels. Their business model is control fraud and predation plus price-rigging cartels. They love tax evasion, money laundering, and sanction busting. Those are sanctions against terrorism, which Friedman purports to love. They run criminal enterprises. They assist other criminal enterprises and wealthy criminals evade the tax laws. These financial control fraud and predation drove the fiction of the “vibrant” UK economy, which was actually a predatory and wealth-destroying economy. When the City of London reports enormous profits, we know that they are making the world poorer and sleazier.
The City of London’s leaders, like Wall Street’s leaders, are the most powerful generators of the ‘Gresham’s’ dynamic. George Akerlof explained and named the dynamic in his famous 1970 article on markets for ‘lemons.’
[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.
Control fraud and predation mean that markets are neither ‘free’ nor efficient. Control fraud and predation cause market forces to become perverse. When cheaters prosper, markets harm consumers and honest business people. Finance is particularly important in this regard, for it ‘disciplines’ CEOs to maximize reported returns. Control fraud and predation are the easiest and surest ways to maximize reported returns. This means that finance tends to send enormous amounts of capital to the worst actors and deny it to the best, intensifying the Gresham’s dynamic in the real economy. (Financial executives also rake off enormous profits for themselves, further reducing efficiency and growth.) Globalization means that the harmful effects of the Gresham’s dynamic can now dominate industries globally. Again, finance is the whip hand of globalization’s most perverse incentives.
There is no such thing as natural “free markets.” A vibrant rule of law that effectively constrains control fraud and predation is essential to well-functioning markets. The ‘race to the bottom’ of regulation that the City of London (barely) ‘won’ over Wall Street eviscerated effective financial regulation in the two financial epicenters of globalization. This supercharged the Gresham’s dynamic, which produces endemic control fraud and predation. Blair and Brown were the two UK leaders most culpable for destroying any effective rule of law in finance. Effective financial regulation is essential to creating an effective rule of law, and an effective rule of law is essential to block the Gresham’s dynamic. When we regulate finance effectively we make possible, not harm, “free markets.” Markets without effective financial regulation are neither free nor efficient.
Blair and Brown did not hide from Friedman their zest for destroying regulation, particularly financial regulation, and ‘winning’ the race to the bottom against Wall Street. I have written two articles about this point. Blair delivered his most famous speech attacking regulation only one month after Friedman’s April 22, 2005 column praising Blair.
Blair most famously made public his war on regulation and his embrace of “winning” the regulatory race to the bottom in his May 26, 2005 speech on “Risk and the State.”
Blair explicitly cited regulatory restraints on financial control fraud that the U.S. adopted after the Enron-era control fraud epidemic as the exemplar of the rules he was most dedicated to never adopting. Blair admitted that because of his ‘light touch’ regulatory policies “the UK is very lightly regulated by international standards.” That was not sufficient for Blair. To ‘win’ the race to the bottom against Wall Street, Blair was dedicated to making the UK the weakest major financial regulator.
Blair bragged in his speech that he had ordered “light touch” regulation be the standard.
The new inspectorates will be actively charged with ensuring those doing well get a light touch approach….
At a time when UK financial regulation, in reality, was effectively non-existent, and UK financial control fraud and predation were epidemic, Blair claimed with all his faux sincerity that the City of London fraudsters and predators were the honest victims of rapacious regulators.
But something is seriously awry when … the Financial Services Authority that was established to provide clear guidelines and rules for the financial services sector and to protect the consumer against the fraudulent, is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone….”
The UK satirical magazine Private Eye aptly labeled the FSA the “Fundamentally Supine Authority.” There was no major UK bank whose officers had “never defrauded anyone.” The FSA did not even slightly inconvenience, much less “hugely inhibit” any UK bank. The UK Parliamentary inquiry commission reported on a related and analogous disaster caused by “light touch” approaches.
The corporate governance of large banks was characterised by the creation of Potemkin villages to give the appearance of effective control and oversight, without the reality.
Friedman, the master of unintentional self-parody, celebrated how Blair had increased spending on “law and order.” Yes, at the same time that Blair and Brown eviscerated ‘law and order’ for elite white-collar criminals, they increased spending on ‘law and order’ for blue-collar criminals. Friedman cheered that combination.
Friedman, as late as 2017, was writing that the U.S. had a critical “need” to “enact sensible deregulation.” He had seen U.S. deregulation produce the fraud epidemics that drove the savings and loan debacle, the Enron-era frauds, and the GFC, UK deregulation produce the epidemics of control fraud and predation that caused the GFC, Icelandic deregulation produce the fraud epidemics that drove its financial crisis, and Irish deregulation produce the fraud epidemics that drove its financial catastrophe. This is another example of Friedman’s central madness – the belief that heads of state should allow horrific “trends” to continue and merely ameliorate the worst aspects of those trends. Friedman, however, wants to exacerbate the disastrous trend by increasing deregulation even though existing regulation is woefully weak.
Part 2: The MMT Macroeconomic Critique of Blair, Brown, Obama, and Friedman
The GFC and austerity devastated UK and U.S. growth. Austerity drove the “Leave” vote in favor of Brexit. Friedman and his heroes Blair, the Clintons, and Obama, betrayed the working class that was once the core of the Labour Party and the Democratic Party by adopting austerity in response to the GFC. Obama, who told the congressional New Democrats caucus that he was a New Democrat, initially supported stimulus, but he quickly abandoned it. That stimulus program was too small, but relative to the EU and the UK, it still set the U.S. on a path of a far quicker recovery from the GFC. By early 2010, Obama was working with Republicans to slash the safety net and increase the severity of austerity (the Grand Betrayal that he called the Grand Bargain). Fortunately, Tea Party Republicans were pretending to worry about deficits and they killed the Grand Betrayal because it did not do enough to rend the safety net. These policies were all ‘mad.’
Due to Blair and Gordon Brown, his chosen successor, the Labour Party was an enthusiastic promoter of severe austerity even before the GFC began. Friedman, of course, proclaimed this a stellar virtue.
[Blair] has made liberalism about … embracing fiscal discipline.
By “liberalism,” Friedman means the American usage. The three critical questions are: what does he mean by “fiscal discipline,” why does he think it is great, and why does he think American liberals should “embrace” it? Friedman does not even try to answer any of these questions. To him, it is self-evident that “fiscal discipline” is a virtue next to godliness. MMT, however, demonstrates that the budgetary balance of nations with sovereign currencies are not matters of ethics. The contents of the budget have great moral content. Spending massive amounts of money to invade Iraq is a grotesquely immoral budgetary policy. Failing to spend money to fix acute societal problems is inefficient and immoral. Failing to provide adequate stimulus in response to a GFC is self-destructive and immoral. Adopting austerity in response to a GFC is beyond stupid, self-destructive, and immoral.
Friedman was particularly impressed that Blair’s surpluses “helped the government pay down its national debt.” Orthodox economists tend to believe that running a surplus during an economic upturn is obviously desirable. MMT teaches that this is frequently not the case. Budget surpluses are leading predictors of serious U.S. recessions and depressions. There is nothing inherently virtuous about running a budget surplus even during a period of robust economic growth. A budget surplus may be a desirable as a means of reducing inflationary pressures when there is a shortage of real resources.
MMT explains why nations like the U.S. and UK with sovereign currencies cannot run out of their own money. Such nations are not remotely equivalent to ‘households’ when it comes to budgets and deficits. Blair, Brown, Obama, and Friedman illustrate the ignorance of money and the terrible harm that ignorance can cause. There is dumb, and then there is Brown’s appointee,
Liam Byrne, chief secretary to the Treasury under Gordon Brown, left a note for his successor that proved to be a gift for the Conservatives
The note said: “I’m afraid there is no money.”
The Tories, of course, made copies of the note and waved them at campaign rallies. The UK has a sovereign currency. It had an unlimited amount of its own ‘money.’ Real resources, not a sovereign currency, can suffer real shortages and those shortages can be important, e.g., by driving harmful levels of inflation. In a Great Recession, it is vital that a government with a sovereign currency adopt fiscal stimulus. Real resources are rarely so scarce in a Great Recession that there is any risk of fiscal stimulus causing harmful inflation. Stimulus is a win-win-win-win in those circumstances. It reduces unemployment, increases growth, reduces the ultimate deficit, and reduces the risk of a deflation trap.
New Democrats, New Labour, and Friedman, however, all favor austerity and think national budget deficits are immoral. Here are key excerpts from Byrne’s efforts to explain why he wrote the note. As one would expect from someone that would write such a note, his explanation is incoherent, delusional, and intended to excuse his failures.
The final years of Gordon Brown’s government were tough.
His leadership of Britain and the G20 at the London summit stopped the collapse of Lehman Brothers triggering a global depression – an incredible achievement we should never have stopped shouting about. But the recession slashed Treasury tax receipts by over £40bn, forcing us to borrow to keep public services on the go and get Britain back on its feet. And because the deficit was big, the responsible thing to do was draw up a long-term plan to cut spending.
In government, it was my job to craft a plan. As chief secretary, I spent bruising months negotiating £32bn of annual savings to help halve the deficit in just four years and set out in huge detail in our 2010 budget. Of course, the Conservatives attacked us – though it was the timetable they eventually delivered.
Those negotiations were tough and bruising. And so in my final hours of office, I was writing thank-you notes to my incredible team of civil servants. And then I thought I’d write one letter more to my successor. Into my head came the phrase I’d used to negotiate all those massive savings with my colleagues: “I’m afraid there is no money.”
Nearly every phrase of his excuse is false. Brown did not prevent a global depression – he was an important cause of the GFC. Lehman’s failure did not cause the UK crisis; UK bankers and anti-regulators caused it. A government with a sovereign currency does not have to ‘borrow.’ It, routinely, creates money through computer keystrokes. No, it does not follow that because a deficit is ‘large’ the ‘responsible thing’ is to plan to ‘reduce spending.’ The responsible thing is to increase spending, which can greatly speed the recovery and support future productive spending.
It is insane, in response to a Great Recession, to cut spending to “halve the deficit in just four years.” Byrne is describing a plan for brutal, self-destructive austerity. Labour’s austerity was sure to turn much of the UK into an economic anti-opportunity zone, sowing the seeds of Brexit. The fact that Byrne used the same economically illiterate phrase repeatedly with the UK Labour cabinet without a single minister telling him he was illiterate tells us how pervasive the rot was among New Labour’s leadership. I have written previously on this same rot infesting New Democrats.
In fairness, Byrne’s note was strikingly similar to one of the all-time stupid statements of another official – President Obama. In a C-SPAN interview that caused conservatives to chortle, Obama channeled his inner-Byrne.
SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?
OBAMA: Well, we are out of money now. We are operating in deep deficits….”
MMT is not simply an Ivory Tower theory. Finance professionals use it because it produces superior predictive results. If politicians like Blair, Brown, and Obama had studied MMT, they would have avoided many of their worst economic blunders that brought us Brexit and Trump.