This is the third and last installment of a critical review of Dean Baker’s second reaction to the debate kicked off by the WaPo’s piece on Modern Monetary Theory, written by Dylan Matthews. The first two installments starting with this one, discussed Dean’s views on using the monetary channel to boost aggregate demand, devaluing the currency and increasing exports, and work sharing. In this final installment I’ll evaluate Dean Baker’s view of the problems associated with relying primarily on the fiscal channel,
Pitfalls of the Fiscal Policy Channel
”One of the problems is the potential for creating large structural imbalances that could be difficult to correct, as noted in the case of large trade deficits. But there are other reasons why exclusive reliance on the government channel may not be the best route.”
As I said above, I don’t think that Dean Baker makes a convincing case for the claim that the trade deficit is a structural balance that will be difficult to correct, or for that matter that its costs necessarily outweigh its benefits. Above all, I don’t think that Dean has made the case that we need to do something about the trade deficit rather than just letting it change as other nations decide that they’d rather consume more of their own output. So, here is a disagreement between myself and, I think, the MMT economists, and Dean and (I suspect) other Keynesians as well.
Next, Dean says:
“First, if we go the spending route, there is a risk that some of the spending will be wasteful. This is both an economic concern and a political one. From an economic standpoint, we should always want our spending to be done in the most useful possible way. In the context where the alternative is just wasting resources by having workers and capital sit idle, then paying workers to dig holes and fill them up again would be an improvement, but we should hope to do better. Rushing huge amounts of spending into ill-conceived projects is not likely to be the best use of funds.
“This also raises the obvious political issue that bungled projects make great stories for the political opponents of economic stimulus. We will be hearing much about Solyndra in the months and years ahead. It is worth taking political risks when there are clear policy gains from going a specific route, but if it is not necessary, why do it?”
I don’t think Dean is directly addressing MMT proposals in this area. MMT doesn’t advocate wasteful spending, or digging holes for the sake of the activity, or spending money on projects and programs that will waste real resources or people’s lives. There is a risk that any spending, private or public, will be wasteful or involve an excess of real costs over real benefits. But that’s no excuse for avoiding private sector spending, so why should it be one for avoiding public sector spending when that’s called for?
The events of the last ten years show that both Federal spending on Wars, and private spending on financial adventures can be disastrous, but it was wasteful investments on fantasy sand castles that crashed much of the world economy; not deficit spending in the United States intended to achieve public purpose. In fact, that kind of spending has been starved for the past 35 years at least. And right now, there is no record of wasteful public spending that remotely compares with the record of wasteful private spending over that same period.
By the way, it really hurts me when I see an acknowledged progressive give voice to the conservative narrative that public spending is somehow excessively wasteful or subject to greater corruption than private sector spending is. That is not a narrative that has an empirical foundation. It is false. And it is not a framing that we ought ever to strengthen in the way Dean Baker does here.
Moving on to MMT, itself, it favors spending that can be justified based on projections of its real benefits and costs, not projections of its nominal benefits and costs to a Federal Government that can never have any solvency problem. MMT is against crony capitalism, and for prosecutions of banksters and fraudsters. MMT proposals in the health care area would not only improve health care outcomes and reduce private sector expenditures on health care but would also produce millions of new jobs in the health care sector, while putting the health insurance barons out of business. MMT stimulus proposals for ending the recession, include Revenue Sharing grants to States on a per person basis, so that States could re-hire staff laid off in response to the recession’s impact on tax revenues. It’s very doubtful that hiring back Police, Firefighters, Teachers, and other State Civil Servants would be viewed as wasteful to most people.
The MMT JG program would have its projects planned and implemented locally with the participation of workers in the program, as well as local Government and non-profit stake holders. Only projects whose positive value could be projected by these stakeholders would be approved. Of course, some of them would be wasteful. There’s no way to avoid that. But there’s no reason to believe that many, many worthwhile projects producing valuable and durable results would not occur. That’s what happened during the New Deal, and that’s what would happen here.
On the subject of political risks, the fact that Dean even raises the question of whether there are clear benefits shows that he still doesn’t know the MMT literature. The Job Guarantee proposal envisions a permanent program, that in the context of other stimulus measures would create Full employment WITH Price Stability. Dean may doubt this claim of MMT, but before saying that he can’t see the difference between Keynes and MMT, he has to address and dismiss this claim, because neoliberal Keynesians think there’s a trade-off between Full Employment and Price Stability at some level of Unemployment.
But MMT economists firmly reject that assumption and offer a policy that, in theory, at least destroys this historic trade-off by ending the unemployed buffer stock and replacing it with an employed buffer stock. If MMT is right and this goal can be achieved, then it is certainly worth taking a political risk to try to accomplish it, and show that Government can help the economy to create both Full Employment and Price Stability in both good times and bad ones.
Next, Dean addresses tax cuts as a way to deficit spend:
Alternatively, we can go the tax cut route. There is little doubt that if we have big enough tax cuts that we will eventually prompt enough consumption to bring the economy back to something resembling full employment. However, this does raise the risk that at some point when housing has recovered, the additional consumption from the tax cut will lead to a real problem of excess demand leading to inflation. I know the MMT answer is then to raise taxes, but I am not confident that this can always be done so easily.
Politicians are not generally eager to raise taxes. If we create a situation in which we are counting on big tax increases to prevent inflation, then we run a real risk that inflation could become a big problem, especially if we have been very loose with our monetary policy.
MMT policy proposals for both spending and tax cuts occur in the context of creating a strengthened safety net with automatic stabilizers that would not require frequent positive action by Congress to maintain. The JG program is one of these. Since the JG hourly rate would be the de facto minimum wage rate and once implemented, would not be raised to compete with the private sector even in good times, so when private employers require all available labor, JG program spending would fall to close to zero, and would make close to no contribution to Government deficit spending. On the other hand, when deficit spending is needed because private sector employers had laid people off, the JG program would rapidly ramp up deficit spending to directly create effective demand.
In the revenue sharing program the program would be triggered during each cyclical downturn when unemployment reaches a particular level. The Federal grants would be implemented through a single countercyclical infusion for each cyclical downturn.
On the tax cut side, one of the major MMT legislative proposals is to cut all payroll taxes on both the employer and employee sides during a recession, when a particular level of unemployment is reached, then payroll taxes would be automatically re-imposed based on reaching a preset level of unemployment. Neither the cuts, nor the re-imposition of taxes would require Congressional intervention once the MMT program was passed.
There are variations of the above proposals, of course, and debates about which variation is best. But the main point here is that whatever tax cut programs would be implemented by MMT would be based on the idea of automatic indexing to real economic conditions. The legislation would provide for both automatic tax cuts and tax increases indexed to cyclical conditions measured by specific economic indicators.
Dean’s Conclusion and Mine
Dean next discusses the political difficulty of resolving tax and spending trade-offs in Washington, DC at this point. And he concludes by talking about his reluctance to embrace MMT because:
— He has “. . . long realized that in Washington policy debates who says something is far more important than what is being said.” And “. . . that anyone challenging the status quo is almost completely excluded from public debate.”
— And that if one can’t even “. . . win a debate on arithmetic, how can we think we will get people in policy positions to accept that their conceptual framework is wrong?”
— And that he thinks the best course is to challenge people on their arithmetic and their inconsistency if you want change, rather than to change people’s minds about the “. . . sort of monetary theory the Fed should be applying.”
I think this is a reasonable position for a person to take; but I also think that it makes the common mistake of denizens of Washington, which assumes that the politics of the past will, more or less, be the politics of the future. Politics in Washington is frequently linear and stable in its patterns over a period of years. One comes to understand those patterns and to believe that there will never be more than incremental pattern change.
However, my view is that Washington in its current state doesn’t care about logical inconsistency, or rationality, or arithmetic. At this point it is a closed “village” of opinion. As Dean implies, points of view that have no currency in the village don’t get discussed, or ridiculed when they are. The question however, is how does a closed system like this change, since it is fairly closed to changes in viewpoint that may be necessary to use to solve its problems?
I think the answer to that question is raw failure that destroys confidence in the governing world view which is neoliberalism. The highly visible failure of neoliberalism in 2008 wasn’t capitalized on by this Administration. It was loyal to the neoliberal point of vew and followed the prescriptions of neoliberals for fixing the problems it created.
However, the failures of neoliberalism continue. We see the disaster in Europe now taking shape, we see the extreme discontent among so many in American society, including most importantly the young who cannot see any acceptable future. The stresses grow with each passing year of injustice and maintenance of levels of real unemployment that haven’t been seen in this country since the 1930s.
Washington is still the old Washington, and it is terribly resistant to changes in thinking. But OWS is a movement that will come back with renewed vigor this Spring, and related movements will grow more and more intense in Europe, and the Administration’s latest attempt to bail out the big banks with the mortgage settlement will be undermined by those very banks themselves as they accelerate their immoral and illegal seizures of properties and evictions of the homeowners whose homes they have literally “stolen” through forged documents that they continue to forge.
The worst of the anger is yet to sweep this country. When it does, when the banking system falls either in Europe or here, when the big banks are taken into resolution and the serious investigations start under a new Attorney General, the changing of the guard in Washington will come; and the old regime, along with their neoliberal paradigm, will be swept away. And it is then that MMT will be accepted in Congress and the Executive Branch sufficiently, so that its policies will get a chance. If those policies succeed, then neoiberalism will be gone, hopefully for good.
(Cross-posted from Correntewire.com