Have Economists Learnt Anything from the Crisis
The dawning realization that conventional economic thinking that did not foresee the crisis cannot help solve the problems we now face, means that we must be open to exploring new economic ideas. It is time to move beyond criticizing the clear shortcomings of our country’s economists and politicians and consider – with open minds – economic ideas that are being developed outside of the mainstream. Such a new macroeconomic model has been developed by a pioneering community of heterodox economists based in the University of Missouri, Kansas. Their Modern Money Theory (MMT) approach predicted the current crisis and so unsurprisingly, their analysis and economic solutions have attracted intense interest amongst economic commentators including Nobel Prize winning, Paul Krugmann.
MMT will inform some of the economic policies to be presented and debated in a conference entitled “Lessons from the Crisis: Money, Taxes and Saving in a Changing World” co-hosted by Smart Taxes, (Fiscal Policy for Sustainability Network) and TASC (Think Tank for Action on Social Change) on the 9th May 2011 at Croke Park, Dublin. Others from Tasc will have been developed within a critical progressive perspective and those from Feasta, an analysis based on the role of cheap fossil fuels particularly oil, within a complex and interdependant financialised economic system.
What does Modern Money Theory have to offer us that is different?
Although Modern Money Theory describes the money creation and management system of a fully sovereign (i.e. currency issuing) state, MMT is still relevant to Ireland in formulating strategy and its negotiating stance with the European Central Bank and European Parliament to address the debt crisis.
MMT tells us that the ECB can issue currency or liquidity at no cost to itself, nor to its constituent central banks, nor to the national economies of the eurozone. The ECB already tacitly acknowledges this fact because it has declined to turn its liquidity support to the Irish banks – currently at €70b – into a medium term loan. Such a loan is actually unnecessary and not in Ireland’s interest as it would carry a substantially higher interest rate than the current 1% charged for the liquidity. The ECB provides the liquidity by simply crediting it in the accounts of the banks. The pretence that the liquidity given to Irish banks was provided in exchange for valuable assets has been shown up to be a non-essential requirement and notional fiction because the ECB has permitted the Irish central bank (a subsidiary of the EEB) to also credit the Irish banks without a matching transfer of bank assets of equal or greater value.
Under the MMT perspective, a central bank should not be concerned per se by the mounting sum in the sovereign government’s deficit account as it does not, despite ‘common sense’ claims to the contrary, represent a debt analogous to that of a household, business or bank debt. Instead the central bank should watch intently for signs of inflation – of which there are few at present in our struggling economies – as its overarching guide for money creation and taxation levels. Taxation both destroys money – by removing it from circulation – and gives it value – as only a national currency is ever accepted in payment of taxes. Once it is understood that money can be safely issued by a central bank without repayment of capital and interest and does not have to be first borrowed in the bond market or raised in taxes (yes, that means given free) new policy options open to tackle unemployment and inflation – not forgetting resource peak and climate change.
Furthermore, MMT suggests that, instead of making liquidity available to the banks, the ECB could just as easily and probably more safely, give it directly to member state governments. It can write a metaphorical cheque for immediate and annual distributions of for instance, 10% of GDP on a per-capita-basis to pay down member state outstanding debts. It should, at the same time impose national deficit ceilings sufficiently high to promote desired levels of aggregate demand.
This positive attitude to government deficits is another counter intuitive aspect of MMT compared to conventional analysis and goes beyond promoting deficits to counter liquidity traps in a depression. Once you accept that all non-government money i.e. bank money is matched by liabilities it follows then, for the private sector to net save, the government has to be in net debt. Even though a sovereign government does not have to sell bonds to raise money, MMT tells us it should still do so to a certain extent, in order to provide secure interest-bearing saving vehicles for its citizens.
Another important policy of most MMT economists is the Job Guarantee, i.e. that the government should act as an ‘Employer of Last Resort’. A job guarantee is a permanent job offer from the government to all citizens of a certain age who are ready, willing, and able to work, for a basic wage. Some MMT economists suggest that the ECB could directly fund a Job Guarantee Programme in Ireland and in any other EMU state that requested it. Or if general EU agreement cannot be got, a national government could fund a Job Guarantee out of their allocation of EEB issued liquidity.
The banks of Member States would still benefit from an ECB directly or indirectly funded Job Guarantee as the newly employed lodged their salaries in their accounts and paid off their mortgages. The exchequer would benefit as people came off social supports and paid income and indirect taxes out of their wages. The resulting increase in circulating money would transfuse the economy to provide the confidence that is so lacking and which no amount of direct liquidity injection into the banks appears to be able to create.
The Irish Environmental Pillar contends that the jobs provided in the Job Guarantee programme should ideally be Green Jobs and should address the most important challenges of our time : resource peak- especially fossil fuels, climate change and biodiversity loss. In addition to the obvious need to tackle these issues, a Green Job Guarantee programme would have no real impact on the public or private sectors as these environmental resources and systems are not yet priced (i.e. are accounted as externalities) in the marketplace.
Who will Present Papers at “Learning from the Crisis” Conference?
In “Learning from the Crisis” US based MMT economists from the University of Missouri, Kansas Dr. Randall Wray, Dr. Stephanie Kelton and Roosevelt Scholar, Marshall Auerback will present and debate Modern Monetary Theory and the Job Guarantee Programme with participants and fellow presenters Richard Douthwaite and David Korowicz from Feasta; The Foundation for Sustainability, and Prof Gerry Hughes from TCD Pension Policy Research Group, Sinéad Pentony and Tom McDonnell from TASC and Michael Taft from Unite Trade Union.
The conference is free and open to anyone whose mind is also open.
Email Tasc to book your place : contact@tascnet.ie
