MMT and the Next Growth Cycle

By Thornton Parker

Discussions on this forum generally treat MMT in isolation rather than in the context of other forces that drive an economy.   In Japan, for example, the sales tax increase to reduce the government’s deficit is widely seen as a recent cause of its lagging economy. But a bit of history shows a different picture.

At the end of World War II, the country was decimated. Many of its young men were dead; its industries and cities were in ruins; its people were humiliated and overwhelmed by two atomic bombs; even its religion was repudiated. An island nation, it had no local friends, little fuel, and almost no raw materials. The only thing it was rich in was poor people.

Most western economists believed it was destined to remain a basket case indefinitely. But the Japanese rejected that assessment, saying if that was what conventional economics predicted, they would invent their own economics. And they did just that.

After studying Britain’s industrial revolution, the rise of US industries, the Economists in western Pennsylvania, and other examples including their own history, they developed a new growth cycle which they called their virtuous cycle. They imported as little fuel and materials as they could and used several types of knowledge to convert them to products which they sold for high profits all around the world. They refined the idea of value-added as the foundation for industrial operations. Their growth cycle enabled them to become the world’s second largest economy in a few decades.  An important footnote is that the American occupation forces helped and guided the Japanese in this direction.

But eventually, they decided that developing new products created more value-added than making things that were becoming commodities, so they exported the manufacturing of TVs, VCRs, auto parts, and the like to other countries and concentrated on the front end of new product cycles.

They had not realized how fast the receiving countries could learn to develop new products of their own, however, and even the front-end development process became competitive. In addition, countries all around the world learned the lessons of value-added and the importance of quality control, so those advantages also turned out to be temporary.  And, I think most important; they accumulated so much money, making their money work became a major goal. Money managers replaced industry managers in importance and instead of investing to create a new growth cycle, they bought golf courses, prestige buildings, and trophy companies at exorbitant prices, which led to losses and lost opportunities.

This history is rarely mentioned when Japan’s problems are discussed, but it is important. It may be that the post WWII projections of western economists were just a bit early. The island economy with its aging population, few natural resources, and fuel limitations which are compounded by major weaknesses in its electrical system may be reaching the end of its spectacular run. Monetary and fiscal policies may not be much help.

If that is true, maybe we should be looking at growth cycles for our own future. A growth cycle is a combination of self-reinforcing loops of drivers that include dominant fuels, materials, modes of transportation, and industries; government policies; and financial innovations. A cycle spawns countless new products, businesses, and types of jobs as investors, companies, and individuals see opportunities to plug in. A cycle continues until a war intervenes, companies over-expand and markets become saturated, or new technologies become dominant.

The US has had several cycles. An early one involved wood and coal as the dominant fuels; wood, iron, and steel as dominant materials; rail and waterways as dominant modes of transportation; expansion of New England manufacturers and settlement of the West as the government policies; and commercial banking, bonds, and stock markets as the financial innovations. Each of the industrial drivers created markets for and sold to the others as the cycle expanded.

That cycle was gradually replaced by petroleum and electricity as the dominant fuels; autos and aircraft as the dominant transportation modes; stronger steel, concrete, copper, and aluminum as the dominant materials; industrialization of the South and expansion to the suburbs as the policies; and retail customer financing as a leading financial innovation.

Tales of the growth cycles and how they led to new supporting industries are fascinating. For example, the government fostered railroads with large grants of land which they could use or sell. It also paid for the first inter-city demonstration of the telegraph. As the railroads expanded, their right-of-ways were used to string telegraph lines across the country and stationmasters became telegraph operators.

The early railroads had only one set of tracks and there were no signal systems so the right of way was set by time. A train going in opposite direction without the right-of-way had to switch off to a lay-by so the two could pass. A cluster of serious wrecks brought a public outcry for greater safety, which led to the development of more accurate watches and spawned the New England watch business. The watches had to be synchronized, however, so this led to use of the telegraph to set them.

Meanwhile, the railroads wanted to build traffic for their tracks across the plains, so they established towns with grain elevators every so many miles. Even today, some of the towns still have their original street layouts and street names. The railroads populated the towns with immigrants whom they brought from Europe to be the farmers, ranchers, blacksmiths, butchers, and other tradesmen. The rails brought grain and cattle to Chicago, which became the central rail hub in the West. Merchants there prospered, including Montgomery Ward and Sears Roebuck that supplied the settlers with most of their needs including Sears kit houses. Railroads carried the traffic.

A growth cycle is a form of very broadband communication to millions of people. Part of this country’s problem today is that no growth cycle appears to be running, or if there is one, few people recognize or can participate. Companies will not invest to create new processes and new types of jobs that increase demand until they see the new trend. This is more basic than a monetary or fiscal policy issue. We just don’t see the next big picture.

If this is so, then MMT has a major opportunity to become a financial innovation of the next growth cycle. Global warming, dwindling water supplies, rising sea levels, and the growth of mega-cities which are major causes of environmental degradation are going to lead to major new industries which will be the drivers of the next growth cycle. But there is a big question: will those industries be defensive and just help the well-to-do cope with what is coming, or will they work to reverse the destructive trends for mankind and the planet? If the latter, they will need a great deal of financing long before they can become profitable, and today, the financial services industry doesn’t do much of that kind of heavy lifting.

Enter MMT. Those who are working on solutions to the country’s and the world’s biggest problems need MMT, they just don’t know it. Conventional finance will not support the long-term efforts that are needed. The leaders are systems thinkers who know that huge investments will be necessary. They are certainly able to absorb the basics of MMT. This is a natural match.

The Japanese were not the only ones to design a growth cycle. GE, the oldest, continuously listed company on the New York Stock Exchange had one developed by Thomas Edison that lasted until Jack Walsh killed it. One side of the company built generating, transmission, and distribution equipment for utility companies. The other side touched almost all parts of the economy as it built motors, lights, communications equipment, and appliances to use electricity. As the use side grew, it created demand for the utility side, and the beat went on. GE Credit, the financing arm that eventually became GE Capital, supported sales on both sides. Other companies have also built their own growth cycles, so the technique is proven.

If what we really need is a new growth cycle, MMT and what follows from it can be a major enabler or support function like GE Credit. It can be promoted in this context.

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