Who Needs the Fed?

Project 2025 promotes "free" banking, which is to say, no pesky regulations or backstopping from the Federal Reserve. What could go wrong?

Policy wonks can't help themselves- they need to write down their plans so that all the world can see how brilliant they are, and how real they could be, if only others recognized their brilliance. In that way, the project 2025 plans from the Heritage Foundation have been a gold mine, at least for Democrats. And since the Republican Party couldn't be bothered to write down a platform, other than "anything Trump wants", this project serves as the functional platform of the current Republican campaign, written as it was by scores of officials from the first Trump administration, plus many others itching to be appointed to a second. And it is crazy- more like a project 1825 than anything we would want to look forward to.

One of its less publicized planks is its approach to banking. It heaps criticism on the Federal Reserve, and recommends, as the most effective solution, its abolition and a return to "free banking". Which means a world where no regulator controls the banks, and no federal reserve backs it up against panics and crises. And just to complete the return to barbarism, it recommends a return to the gold standard as well.

"In free banking, neither interest rates nor the supply of money is controlled by the government. The Federal Reserve is effectively abolished, and the Department of the Treasury largely limits itself to handling the government’s money. Regions of the U.S. actually had a similar system, known as the “Suffolk System,” from 1824 until the 1850s, and it minimized both inflation and economic disruption while allowing lending to flourish." - From Chapter 4

Needless to say, US history is littered with banking panics, runs, and depressions, usually due to the unregulated nature of this "free" banking and to monetary gold backing. It is hard to express just how absurd and damaging it would be to return to such a world. The Federal Reserve was conjured up after a long history of the establishment of the first national bank, then its destruction by Andrew Jackson, a century of economic instability with particularly damaging panics in 1893 and 1907. By 1913, the US finally had had enough, and set up an updated national bank in the form of the Federal Reserve, to regulate and backstop the banking system. 

Illustration from 1873, portraying "Panic" on Wall Street.

Unfortunately, until the advent of Keynesian economics, it didn't really know what it was doing, and was particularly ineffective during the Great Depression, making things worse instead of better. Even now, it amounts to a cabal of bankers who are more interested in jacking up interest rates than in national prosperity. MMT economists tend to think that interest rates should be kept low, and the functions of the Federal Reserve folded into the Treasury Department, with greater political oversight. The use of interest rates- which are such a blunt tool of economic policy- could then be de-emphasized, in favor of more dynamic fiscal policy to manage inflation and monetary conditions. It is worth noting that over the last eighty years, the Fed has routinely over-shot its mark in raising interest rates, ending up with recessions, and rapid, belated retreats to lower rates. It is only with the current cycle that it has achieved, at least so far, the dream of a soft landing, taming inflation while avoiding recession.

Recessions (gray) have regularly followed interest raising campaigns by the Fed, and not always intentionally.

But note that the word "depression" is no longer in our lexicon. For all its faults, the Fed has kept the economy on a much more even keel than was possible under the wild-west free banking era, when monetary conditions were hostage to whatever Yosemite Sam dug up in the Yukon, or how wildly bankers over-extended their issuance of notes. Banks built impressive buildings to foster the illusion of stability in an environment where stability was impossible, lacking the infinite backstop that the Federal Reserve can now bring to bear during a crisis. Both individual depositors and the population as a whole benefit. It is a classic example of the people of the US coming together to create an institution that makes our lives better, so that we can worry about other things than the next banking panic. 

This economic craziness is just one small example of the fevered imaginations of the right wing in current US politics, which seems to have crawled out from the former fringes of Lyndon Larouche and the Birchers to take over an entire half of our political system. And this is fundamentally thanks to the air given them by an appalling right wing media that cares nothing for truth or civility, rather making its money from button pushing, whining grievance, and reflexive anti-state propaganda. And people complain about social media! Just how long ostensibly reasonable and decent (even Christian(!)) people will wallow in this environment is anyone's guess, but our common, rational, and beneficial institutions will in the mean time be in constant danger.

• Luddites of today.
• We need to win this war.
• Profile in courage.

Correction- The Republican convention did actually come up with a platform.

What's Inflation For?

Why do we have, and want, inflation?

I recently watched some of a documentary- "The Monopoly of Violence"- an attack on the state from a libertarian perspective. It is the kind of thing Elon Musk and fellow Ayn Randians love to go on about- how jackbooted and totalitarian the evil state is, over the little people and wonderful entrepreneurs of our sadly oppressed Western countries. How compulsory taxation, schooling, and legal responsibility is an affront to the natural rights of man. Maybe it is better somewhere else less governed, like maybe Haiti, or Mars! The absurdity of it is grating, as they rant from comfortable chairs, protected by the innumerable services of the state.

One such service is management of the monetary system. Back in the wonderful days of unregulated money, anyone could found a bank, and any bank could issue money. Sounds nuts, right? Well it was nuts, and led to numerous booms and busts in the 1800's, and countless smaller bank failures, lost fortunes, swindles, etc. Early Mormon history gives us just one small example, where Joseph Smith set up the Kirtland Bank on a fraudulent basis, issued an ocean of notes, and collapsed less than a year after founding. As the old saying has it, man is wolf to man. And anarchy, while sometimes conducive to self-organization and initiative, is more often the province of con men, swindlers, gangs- criminals of all kinds.

The recent inflation scare brought the topic of inflation front and center in the news again, after a couple of decades in remission. The Fed has a target of two percent, which seems arbitrary. Why not something else? Why not zero? If you read lots of history or Victorian novels, it becomes apparent that this idea of having, even wanting, ongoing inflation, is a modern idea. Economies used to run on a gold standard, on the pound sterling, or the Roman denarius, which were stable in value (barring debasements in the coinage) for centuries. What happened?

Modern economics happened, along with heightened trust in government institutions such as the Federal Reserve. Where we once relied on the perceived and relatively constant value of rare minerals like gold and silver for money, we have spent the last century getting off that standard and graduating to a standard simply of trust in collective insitutions to issue, manage, and account for .. notional (fiat) money such as the dollar. With that transition, we now have far more flexible ways to manage the value of this money, both preventing large swings during crises, (such as crises of balance of payment, or lack of gold mines, or episodic depressions in the business cycle), and seeking that inflation rate mentioned at the top.

John Maynard Keynes played a large role in this change, explaining why the gold standard was a barbaric relic, and that the central banks failed to mentally leave the gold standard world behind in their mismanagement of the Great Depression. He helped design the post-war Bretton Woods arrangement of exchange rates, which gradually helped wean the world off the gold standard fully, to where we are today, with fully floating exchange rates and fully fiat government issued currencies, unbacked by crystals, metals, coconuts, or anything else. 

Lots of inflation is, naturally, bad.

But why do these issuers seek inflation? Under mismanagement, inflation can easily run rampant, as the government creates money for itself to spend, beyond the economy's capacity to absorb, and beyond what its taxation policies bring back in. It is exceedingly tempting, but in the US, the citizenry and media are quite negatively inclined towards inflation, limiting our government's profligacy in that direction. But low inflation, that is a different story entirely. The Fed's two percent target is founded on several beneficial consequences:

• Low and consistent inflation encourages investment, as opposed to hoarding cash. If cash loses value continually, then savers need to find places to put their money where it can grow and that means investing in hopefully productive pursuits like stocks, bonds, businesses, real estate, etc... things that make our economy go around.
• Low and consistent inflation takes money from workers, silently. It is a subtle way to sink the general wage scale, lowering pay for non-innovative sectors and increasing (relative) productivity, as more dynamic sectors engage in more active wage negotiations and give higher pay. This effect is mitigated by union negotiations that seek to make up for inflation losses, and sometimes exceed them, thus accelerating inflation.
• Low and consistent inflation guards against deflation, giving the central bank more scope to lower interest rates in a crisis. At two percent inflation, interest rates may be at four percent, so setting rates at zero in a crisis would have a stimulatory effect, which would not be possible if inflation were already at zero. Granted, the Fed and the Federal government has plenty of other tools to prevent deflation, but deflation is also far more dangerous than inflation, thus a preference for low inflation as a consistent policy target.
• Low and consisten inflation creates a psychological impression of growth, as the monetary value of things goes inexorably up. Real estate is most obvious, but everything is worth "more" over time, and, like the wage theft argument, people think generally in nominal (monetary) values, giving a subjective impression of gains in wealth. Values like this can be baked into the language, in terms like "millionaire".

So, while it is weird to live in a world where the value of money goes continually down and the monetary value of things continually goes up, there are positive aspects to it. At two percent, values double every 35 years and go up ten-fold every 115 years. So someday, the dollar will either become a notional, almost valueless currency, or we will want to rebase it by a couple of orders of magnitude. At any rate, monetary consistency is the gift that the state brings us, deploying its many powers to keep the monetary system stable, and thus a critical support for a flourishing society where people do not have to think too much about fluctuations in the value of their money.

• Was it monopoly power and greedflation?
• No getting away from our masters and servants.
• Is nuclear the only answer?
• Breaking news... homelessness tied to high housing costs.

Some Theological Aspects of Modern Economics

Economics remains in a difficult intersection between science and humanities, with distinctly political and ideological conflicts.

We seem to be in a passion play about inflation right now. It is skyrocketing, or zooming, etc. It is a huge crisis. But, since it is measured year-over-year, maybe it is just a simple bounce from the depths of the pandemic when demand and prices, especially for gasoline, were negligible, and some businesses shut down. Now demand is back, but some sectors of the economy are having a hard time meeting demand, especially for workers, so prices are going up, by modest amounts. Some stories say that "inflation is never temporary". Others say the structural dislocations will pass and things will get back to normal. One can tell the ideology quite clearly from the story line. Conservatives have double motives to paint it a crisis, to disparage the current president (tax cuts had nothing whatsoever to do with this!), to support the preservation of capital and capitalists, and to generally box in policy makers from spending money on truly momentous objectives, like addressing climate change.

Why is this such a drama? Why isn't economics more of a science? In real sciences, you do not see competing schools of thought, such as the Chicago and the Keynesian schools of economics, the New Keynsians and the Modern Monetary Theorists, which last for decades and never seem to resolve their warfare. Maybe that is because real sciences don't study anything important. But more likely, real sciences have methods to efficiently describe and resolve their differences- with reference to reality- that economists do not seem to have. For in the macroeconomics realm, there is not a lot of experimentation that one can do. It is a field more like history, from which scholars and observers tend to draw the lessons they want to draw, not the ones that would serve them best. Or theology, whose subject is wholly illusory, such that its practitioners are not really in the business of studying anything observable at all, (or even discernible!), but in social management- how to build ideologies and propagandize with effective rhetoric, how to build churches, how to sermonize, whom to target in their weaker moments, what and whom to value, which social hierarchy to support, and how to do so.

Economics is far from illusory, and plenty of economists do the truly scientific work of describing the economy as it is, giving us the grist of statistics from which the theorists can spin their opinions. It is at the policy and macro level where things get theological, where moral and ideological commitments outweigh technocratic sense. For economics at the policy level is fundamentally Darwinian- how one wants to split the pie depends on who you think is worthy- morally and operationally. Economics is not intrisically democratic- far from. There are some who are worth more to the system, depending on one's standpoint. The Ricardians (with the Chicago school carrying on its supply-side banner) deemed production and producers the only important parts of the mechanism. Demand would take care of itself as long as producers were given maximum latitude to conduct business and trade as they wished. As the ideological cycle turned, entrepreneurs were once again the vanguard and watchword in the eighties and nineties. 

When it comes to inflation, similarly vast ideological forces are at work. The progressive Kenyesian policy environment of the 1960's was eroded, then eviscerated by Milton Friedman's and the Chicago school's general neo-Ricardian attacks during the 1970's, in our period of stagflation. It was genuinely destructive to experience inflation at relatively high levels, and the solution ended up being deep recessions ultimately authored by Jimmy Carter via his appointment of Paul Volker. The power of workers to bid for higher pay and inflation-protected pay was destroyed by de-unionization, outsourcing and off-shoring. Those forces largely remain today, suggesting that the current inflation blip will be transitory. 

Inflation is measured in consumer prices, so it largely reflects low-end wages that are spent most readily, rather than the stock market or other places where the rich invest. As long as wages are kept down, then inflation will be kept down as well. The big question is how the economy splits the pie- between wages at the low and middle levels, versus returns on capital / wealth and executive pay. This balance has been heavily out of kilter over the last few decades. This may have been great for keeping inflation down, but has obviously had highly corrosive effects on much else, from the opioid epidemic, to our great dependence on China for goods and supply chains, and our political breakdowns. So economics is not just about the economy, but about a great deal more- who we value and what vision we have for the future.

Keynes in his magnum opus had some wry comments on this phenomenon, in 1936:

"The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident to the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commanded it to authority. That it afforded a measure of justification to the free activities of the individual capitalist attracted to it the support of the dominant social force behind authority."- John Maynard Keynes, The General Theory of Employment, Interest, and Money

• Resisting the lies is harder than you think.
• Sustainability is the big issue, and our politics are too small to address it.
• Democracy is hanging by a thread.
• And each side seems to think it is saving democracy, apparently. Though only one side does so undemocratically.
• Of course.. Republicans dedicated to state destruction will support crypto.

Keynes Would be Spinning in His Grave

If he could see what is going on in the Euro Zone.

There are deep structural and policy problems in the Euro Zone which have prevented or muted its recovery from the recession. The policy problem, similar to ours, is a lack of stimulus spending to put an end to general deflation and recession. The structural problem is that the individual countries, while sharing the same monetary unit, can not adjust their levels of general economic activity relative to each other, or have independent monetary policy, except through trade. And their trade relationships are hopelessly unequal, with Germany in the lead, and the peripheral countries like Greece and Spain uncompetitive, at least in fixed Euro terms.

While the going was good, Germany was willing to lend the money which flowed in through trade back out to the southern and peripheral countries. But these were only loans, not fiscal transfers as would happen in a  more integrated country/zone. So then we had the drama of creditors asking for the money back, arranging for debt forgiveness, bailouts, etc., all when the debtor countries were on their knees.

In essence, the Euro Zone operates like an old-fashioned gold standard international system. A common unit of exchange and value is kept stable across supposedly independent countries which each have their own policies of trade, employment, corruption, public services, etc. This unit is not really shared out from the central bank on a per-country basis, let alone to correct specific trade imbalances, but generated in response to economic growth in sum across the whole zone, managing issuance and interest rates with the overarching goal of low inflation (since the Germans are running the ECB, more or less). Thus each country needs to accumulate what is to them a fixed unit of exchange through trade, lest they run into chronic debt to the other countries. Each country is moreover on the hook for its various economic disasters like insolvent banks, unemployment, and social unrest.

Here is what Keynes wrote about this kind of system, as opposed to a system of floating exchange between sovereign nations:

"Never in history was there a method devised of such efficiency for setting each country's advantage at variance with its neighbours' as the international gold (or, formerly, silver) standard. For it made domestic prosperity directly dependent on a competitive pursuit of markets and a competitive appetite for the precious metals. When by happy accident the new supplies of gold and silver were comparatively abundant, the struggle might be somewhat abated. But with the growth of wealth and the diminishing marginal propensity to consume, it has tended to become increasingly internecine."

"I have pointed out in the preceeding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account."

".. those statesmen were moved by a common sense and a correct apprehension of the true course of events, who believed that if a rich country were to neglect the struggle for markets its prosperity would droop and fail. But if nations could learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbors. There would still be room for the international division of labor and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbor, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favor. International trade would cease to be what it is, namely a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbor which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage."

One might add that this need for markets and trade also drove European countries toward colonialism which was so destructive, especially in the latter phases as laggards like Belgium, Italy and Germany got into the game. It is a wonder (of a negative kind) how, eighty years after Keynes's lessons were introduced in response to the Great Depression, and after several postwar decades during which they were put to such prosperous use, we, and especially his own continent, are struggling in the mire of older orthodoxies that he had laid to rest. I was about to note that we can at least be thankful that none of the current leaders advocate a return to an actual gold standard, but that turns out to be incorrect.

• How is the European Union doing generally?
• Trade plus redistribution.
• The Fed: is OK with continued unemployment, cont.
• Have you been left behind?
• Protest and diversity in Saudi Arabia - ends unhappily.
• Regulation remains important, despite corruption.
• Yes, education spending works.
• This occupation must end.
• Meanwhile the occupation of the Senate by retrograde do-nothings must also end.
• What happens when the Donald finds a mic.
• The species of our debt.
• Can we give half of the earth back to nature?
• Economic graph of the week. Not just wages, but benefits as well have dropped for the poor, while each has risen for the rich.

Say's Law

The convolutions of economics, cranks, and class.

The class war has deep roots, and is fought on many fields, in many guises. One of the most interesting and influential is the field of economic theory, which as Paul Krugman persistently points out, has undergone startling episodes of battle, tide turning, and forgetting over the last century. One battle is over the meaning, interpretation, and validity of Say's law.

Enunciated by Jean Baptiste Say, who lived through the French revolution as an economist and businessman, and founded the first business school, the law states that production calls forth demand. If an excess of some good is produced, someone is sure to want it, at some price. More importantly, in general, if production in an economy increases, that production will be eagerly sold by its producers and bought by someone, even if the price might be less than expected. For instance, if a technological change makes it much cheaper to make computer memory, demand for that memory is sure to materialize, even as its cost and price go down. And if productivity decreases the prices of many goods, that allows consumers to buy more of other things, and have higher living standards. To some degree, this law makes assumptions about human psychology- that entrepreneurs meet a market, and that prices provide the flexible mechanism to bring supply and demand into agreement, pretty much at all times.

Unfortunately, Maynard Keynes claimed by the 1930's that Say's law was invalid. Then classical-minded economists tried to reclaim its validity by the 1950's and the debate has proceeded onwards, though mainstream economists give it little explicit credence these days. Its significance lies in the issue that if one grants that production can occasionally and on a wide scale be glutted, or demand be deficient in aggregate, that opens the door to solutions that come from elsewhere than the free, unfettered market- i.e the state as a manager of the macroeconomy. And this causes ideological heartburn to many on the right.

The Great Depression was an obvious case in point. Why did economic activity grind to a virtual standstill? The people still had the same needs they had before, and the skills, factories, and materials were the same as well. Yet a plague of unemployment and, frankly, deficient demand ripped through the economy causing misery for millions. Conventionally-minded economists, called "liquidationists" maintained that the financial fever would quickly work itself out if all businessmen cut their costs to meet the new (lower) demand, and if workers accepted the lower wages that they deserved given the reduced business conditions. A new equilibrium would be found at a new, if lower, level. Indeed, they argued that it was the perverse reluctance of workers to accept lower wages that led to the whole problem, preventing a new equilibrium from being achieved rapidly.

But we need to go back a step to the start of the process. How is it that business conditions could deteriorate so dramatically in the first place, if production always calls forth appropriate demand? Keynes didn't dispute that a supply-demand equilibrium, particularly of labor, would eventually be achieved, in the long run. But when? His quip was that in the long run, we are all dead. An event like the Depression, caused by a dramatic collapse of the financial system which drained wealth, consumption and investment, and thus effective demand out of a system whose actual, human demand was unchanged caused unprecedented misery, though milder depressions were common enough through economic history. This misery is prima facie evidence that Say's law is invalid in the short term in macroeconomic terms. Demand can be dramatically deficient, especially in modern economies with enormous financial superstructures whence investment and credit flow (or don't flow).

So why the continuing discussion? There are strong ideological forces at work. The Mises, Rand, Hayek, Austrian wing of the right, seeing themselves as the last pillars of human freedom, find it hard to accept that, into this breach of deficient demand should step the only actor with the wherewithal to do so: the state. Not only that, but the amelioration of the misery of the working class (though also the much more modest misery of the business class) by way of public works and other forms of macroeconomic management, (even including the printing of paper money in place of proper gold!), reduces the power of the employer class. Which is certainly relevant to the class war. This attitude is ironic, if one defines human freedom as the freedom of most humans, but that is how the class war works. It is the freedom of the upper, employer, feudal overlord class that concerns the Austrians and conservatives, not that of the workers who are dependent upon them. Under this system of thought, there can be no such thing as involuntary unemployment, there being always some work somewhere at some wage, for the worker willing to take it. If only workers were willing to be paid pittances, everyone could be happy!

Thus one gets quotes like: "The short answer is that there is still need and place to assert Say's Law whever anybody is foolish enough to deny it. It is itself, to repeat, essentially a negative than a positive proposition. It is essentially the rejection of a fallacy. It states that a general overproduction of all commodities is not possible. And that is all, basically, that it is intended to assert." - Henry Hazlitt, "The Failure of the 'New Economics'", 1959. Hazlitt's book is little more than a screed, but can still be found in my local library, proudly placed right next to Keynes' general theory, a sign of the seriousness with which it once was taken, and perhaps is, in some quarters.

Say's law was reflected more recently in the ideology of supply side economics, whose contention was that prosperity arises from unleashing job creators from taxes, regulation, unions, and other obstacles, so that production can increase and the benefits trickle down to everyone. Subsequent history has not been kind to this theory either, yet it remains the cornerstone of Republican platforms in this year's campaign, for obvious reasons of the class war.

Unfortunately, Keynes had an even deeper insight about Say's law, which was that even if the employers had their way, and reduced worker wages and positions as rapidly as they liked to bring their businesses back into equilibrium with demand, they would not, on a macroeconomic basis, be successful any more rapidly. As wages sank, so would demand, since over the whole economy, income equals demand minus savings. As income heads south in a massive depression, so would demand, in a downward spiral whose limit is reached when something changes in this dynamic- when money comes out of mattresses for consumption and capitalists eat into savings, setting a floor for demand, given the (reduced) stocks of money available.

How much more civilized if the demand can be made up before all the parties are reduced to extremis- if the state steps in with a tool kit that can include public works, tax cuts, reduced interest rates, and all the money required to make it happen, when the private financial system goes through one of its regular collapses. But that requires a state with great technical and moral resources. That was the work of the New Deal and the Greatest Generation, who not only won World War 2, but demonstrated in doing so that the state could dramatically re-establish demand through the economy and keep it going through efforts like building the interstate highway system and winning the Cold War.

One can argue whether the prosperity of that era was due to tremendous technological advances, the artifical demands generated by wars hot and cold, and / or the newly installed Keynesian macroeconomic management. But its wide demographic distribution was a matter of the power of workers, which was aided at the time by strong unionization and the Keynesian economic policy. These conditions required some decency on the part of the elite, to recognize their choice between reform and revolution.

The US has always been run by a rich elite, from the founding onwards. The question is whether these elites work for all, as Washington and FDR did, or for themselves, as the slaveholders did who wrote the evil lines into our constitution which took so much blood to expunge. The retreat and even forgetting of Keynes, under the assault from Milton Friedman, the Chicago school, and other ideologues of the right, which has resulted in the withering of the position of workers and the vast inequality seen today, results from a callous and short-sighted (not to mention corrupted) elite culture, mostly on the right, whose current candidates to a man (and woman) promote the interests of the rich in the most blatant ways, such as planning big federal deficits to give them money through the tax system.

So, we have to ask what is the point of freedom, and of the economic system. Governments are certainly capable of destroying freedom in a quest for economic and moral perfection (and power). At the same time an unfettered, unregulated capitalistic system destroys the freedom of its workers just as surely, ending up in feudalism. Predators are on every side. Say's law and the other ideological structures of classical and right-wing economics hide a presumption in favor of the capitalist, championing the freedom of the 1% while treating labor as a faceless, disposable commodity. We need a middle way, as exemplified by the mid-20th century compromise, and indeed the social democracies of Europe, where the democratic state acts as the balance-wheel to promote the freedom of all classes in rough proportion, as well as their prosperity.

• Continuing relevance and reaction to Keynes.
• The great depression before the Great Depression.
• The monetary straightjacket comes from abject and destructive fiscal failure.
• Message from the markets: We are looking at being Japan for the new decade or more, with little growth, especially in Europe. That is not good for any future-denominated investment. 
• Vulgar scientism, in economics.
• How to help Trump voters? Elect a Democrat.
• The Big Short, and what is legal.
• Low wages plus EITC plus food stamps ≠ American Dream.
• Koch enterprises.. the evil deepens.
• State of the UAW.
• State of the Russian economy.
• State of acid rain ... worse than it could have been.
• The Super Bowl halftime shows where America is going ... tie dye pinwheels and black power.
• Bill Mitchell on exchange rates and inflation.
• Quote of the week, on who is progressive.

"Twitter chatter aside, when it comes to judging who's more progressive than who, political scientists have an app for that—at least for those who've served in Congress, as Sanders and Clinton both have. It's the DW-Nominate first dimension, scaled from +1 to -1, which explains the lion's share of how members vote. For the two years when they served in the Senate together, Sanders had a score of -.717, making him far and away the most liberal member. Number two, Sheldon Whitehouse had a score of -.507, while number 15, Hillary Clinton had a score of -.403. The difference between Sanders' score and Clinton's was greater than the difference between Clinton and Evan Bayh, the second-most conservative member of the Democratic caucus at the time. So in short, the difference between them in terms of who is most progressive is both objective and huge."

• For instance, the Fed and Bernie Sanders.

For Whom Shall the Robots Work?

When robots do everything, will we have work? Will we have income? A review of Martin Ford's "Rise of the Robots".

No one knows when it is coming, but eventually, machines will do everything we regard as work. Already some very advanced activities like driving cars and translating languages are done by machine, sometimes quite well. Manufacturing is increasingly automated, and computers have been coming for white collar jobs as well. Indeed, by Martin Ford's telling, technological displacement has already had a dramatic effect on the US labor market, slowing job growth, concentrating economic power in a few relatively small high-tech companies, and de-skilling many other jobs. His book is about the future, when artificial intelligence becomes realistic, and machines can do it all.

Leaving aside the question of whether we will be able to control these armies of robots once they reach AI, sentience, the singularity ... whatever one wishes to call it, a more immediate question is how the economic system should be (re-)organized. Up till now, humans have had to earn their bread by the sweat of their brow. No economic system has successfully decoupled effort in work (or predation / warfare / ideological parasitism) from income and sustainance. The communists tried, and what a hell that turned out to be. But Marx may only have been premature, not wrong, in predicting that the capitalist system would eventually lead to both incredible prosperity and incredible concentration of wealth.

Ford offers an interesting aside about capitalism, (and he should know, having run a software company), that capitalists hate employees. For all the HR happy talk and team this and relationship that, every employee is an enormous cost drain. Salary is just the start- there are benefits, office space, liability for all sorts of personal problems, and the unpredictability of their quitting and taking all their training and knowledge with them. They are hateful, and tolerated only because, and insofar as, they are absolutely necessary.

At any rate, the incentives, whether personal or cooly economic, are clear. And the trends in wealth and income are likewise clear, that employment is more precarious and less well paid (at the median), while income and wealth have concentrated strongly upward, due to all sorts of reasons, including rightward politics, off-shoring, and dramatic technological invasion of many forms of work. (Indeed, off-shoring is but a prelude to automation, for the typical low-skill form of work.) There is little doubt that, left to its own devices(!), our capitalist system will become ever more concentrated, with fewer companies running more technology and fewer employees to produce everything we need.

What happens then? The macroeconomic problem is that if everyone is unemployed, no one (except the 0.00001%) will be able to buy anything. While the provision of all our necessities by way of hopefully docile machines is not a bad thing, indeed the fulfillment of a much-imagined dream of humanity, some technical problems do arise; of which we can already see the glimmerings in our current society. Without the mass production lines and other requirements for armies of labor that democratized the US economy in the mid-20th century, we may be heading in the direction, not only of Thomas Piketty's relatively wealth-heavy unequal society of financial capital, but towards a degree of concentration we have not seen lately outside of the most fabulous African kleptocracies.

What we need is a fundamental rethinking of the connection between income and work, and the role of capital and capitalists. The real wealth of our society is an ever-accumulating inheritance of technology and knowledge that was built in common by many people. Whether some clever entrepreneur can leverage that inheritance into a ripping business model while employing virtually no actual humans should not entirely dictate the distribution of wealth. As Ford puts it:

"Today's computer technology exists in some measure because millions of middle-class taxpayers supported federal funding for basic research in the decades following World War II. We can be reasonably certain that those taxpayers offered their support in the expectation that the fruits of that research would create a more prosperous future for their children and grandchildren. Yet, the trends we looked at in the last chapter suggest we are headed toward a very different outcome. Beyond the basic moral question of whether a tiny elite should be able to, in effect, capture ownership of society's accumulated technological capital, there are also practical issues regarding the overall health of an economy in which income inequality becomes too extreme."

As a solution, Ford suggests the provision of a basic income for all citizens. This would start very minimally, at perhaps $10,000 per year, and perhaps be raised as the policy develops and the available wealth increase. He states that this could be funded relatively easily from existing poverty programs, and would at a stroke eliminate poverty. It is a very libertarian idea, beloved by Milton Freidman, (in the form of negative income tax), and also emphasizes freedom for all citizens to do as they like with this money. Ford also beings up the quite basic principle that in a new, capital-intensive regime, we should be prepared to tax labor less and tax capital more. But he makes no specific suggestions in this direction ... one gets the impression that it cuts a little too close to home.

This is the part of the book where I part company, for several reasons. Firstly, I think work is a fundamental human good and even right. It is important for us to have larger purposes and organize ourselves corporately (in a broad sense) to carry them out. It is also highly beneficial for people to be paid for positive contributions they make to society. In contrast, the pathology surrounding lives spent on unearned public support are well-known. Secondly, the decline of employment in the capitalist economy has the perverse effect of weakening the labor market and dis-empowering workers, who must scramble for the fewer remaining jobs, accepting lower pay and worse conditions. Setting up a new system to compete at a frankly miserable sub-poverty level does little to correct this dynamic. Thirdly, I think there is plenty of work to be done, even if robots do everything we dislike doing. The scope for non-profit work, for environmental beautification, for social betterment, elder care, education, and entertainment is simply infinite. The only question is whether we can devise a social mechanism to carry it out.

This leads to the concept of a job guarantee. The government would provide paying work to anyone willing to participate in socially beneficial tasks. These would be real, well-paying jobs, geared to pay less than private market rates, (or whatever we deem appropriate as the floor for a middle class existence), but quite a bit more than basic support levels for those who do not work at all. Under this mechanism, basic income is not wasted on those who have better paying jobs. Nor are the truly needy left to fend for themselves on sub-poverty incomes and no other programs of practical support. While the private market pays for any kind of profitable work no matter how socially negative, guaranteed jobs would be collectively devised to have a positive social impact- that would be their only rationale. And most importantly, they would harness and cultivate the human work ethic towards social goals, which I think is a more socially and spiritually sustainable economic system, in a post industrial, even post-work, age.

The problem with a job guarantee, obviously, is the opportunity for corruption and mismanagement, when the market discipline is lifted in favor of state-based decision making. Communist states have not provided the best track record of public interest employment, though there have been bright spots. In the US, a vast sub-economy of nonprofit enterprises and volunteering organizations provides one basis of hope and perhaps a mechanism of expansion. The government could take a set of new taxes on wealth, high incomes, fossil fuels, and financial transactions, and distribute such funds to public interest non-profit organizations, including ones that operate internationally. It is a sector of our economy that merits growth and has the organizational capacity to absorb both money and workers that are otherwise slack.

Additionally, of course, many wholly public projects deserve resources, from infrastructure to health care to combatting climate change. We have enormous public good needs that are going unaddressed. The governmental sector has shown good management in many instances, such as in the research sector, medicare, and social security. Competitive grant systems are a model of efficient resource allocation, and could put some of the resources of a full job guarantee to good use, perhaps using layperson as well as expert review panels. Improving public management is itself a field for development as part of the expanded public sector that a job guarantee would create.

In an interesting digression, Ford remarks on the curious case of Japan. Japan has undergone a demographic shift to an aged society. It has been predicted that the number of jobs in health care and elder care would boom, and that the society would have to import workers to do all the work. But that hasn't happened. In fact, Japan has been in a decades-long deflationary recession featuring, if anything, under-employment as the rule, exemplified by "freeters" who stay at home with their parents far into adulthood. What happened? It is another Keynesian parable, since the elderly are poor consumers. For all the needs that one could imagine, few of them materialize because the income of the elderly, and their propensity to spend, are both low.

The labor participation rate in the US.

Our deflationary decade, with declining labor participation rates, indicates that we are heading in the same direction. We need to find a way to both mitigate the phenomenal concentration of wealth that is destroying our political system and economy, and to create a mechanism that puts money into the hands of a sustainable middle class- one that does not rely on the diminishing capitalist notions of employment and continue down the road of techno-feudalism, but which enhances our lives individually and collectively.

• For instance, we can afford a post office.
• Poverty is permanently damaging.
• Welfare and public goods feed economic growth.
• Do we have a perpetual savings glut?
• Bill Mitchell on labor-capital relations. Such as they are.
• Panopticon and the modern office.
• Bernanke: I was pwned. Krugman: ... and anyway, the deficits were more important than the Fed bailouts.
• We are, typically, fools.
• ... to believe that CEO pay relates to performance.
• Bill Mitchell on why banks are pushing for higher interest rates. Hint: it is not to help the rest of us.
• Further map of Taliban control in Afghanistan. The long-term institutional failure of short-term engagement.

The Federal Budget Should Never Balance

Honest ... the deficits are OK. The sovereign government has a critical role in economic stabilization and prosperity.

The household analogy is a very durable one: the idea that, since taxpayers and households need to balance their budgets, that the government should as well. Politicians across the spectrum enunciate this mantra / analogy as though it were self-evident. The irony is that although liberal politicians may speak such lines with less formal conviction, it is Republican office-holders who have shown time and again over recent decades the most willingness to throw such balance out the window, in pursuit of tax cuts, with their ensuing deficits. Nothing personal, of course, just class war as usual!

The recent British debacle of liberalism kowtowing to a Tory narrative of austerity and budget-cutting is one more example of the false consciousness that is damaging particularly to liberalism, but also to everyone else who participates in modern economies. Because, in truth, the federal budget should never balance. Its imbalance is the most powerful tool we have to keep the economy stable and growing.

For households, and for dependent government entities like cities and states, the budget constraint is absolute ... there is no free money, and no use to a deficit. They may have capital accounts, with bonded debt for capital needs, like houses and roads. But every such debt has to be paid off eventually. Banks occupy a special place in this system, since they can create money, via the loans they fund. But every cent of these deposits (though not the interest ... where does that come from?) is matched by the loan note on the bank's books. Banks also have a zero-sum balance sheet.

A federal government with a sovereign, floating currency is an entirely different beast. It is the entity that creates the (high-powered) money that everyone else uses. It is not constrained by a zero-sum balance sheet. Therefore the propaganda of a federal government "running out of money" or being broke, or having to live within its means ... are all meaningless. The federal treasury (in combination with the central bank) can spend money at will on whatever it likes. The idea that it has to issue bonds to "fund" spending not matched by tax receipts (i.e. deficits) is an economic fiction. Such policies are legal fossils from another age, where money was not printed by fiat, but was backed by gold / silver. The fact of the matter is that federal spending provides the money to those who buy such bonds, and the bonds do little but replace one form of low-risk saving with another, rather than altering the buyer's behavior, affecting inflation, etc. Plus give a stream of income to the wealthy.

But obviously, there is a constraint on federal spending and money creation. That is the overall level of economic growth and monetary inflation. Since the government is free to create money, it assumes the risk of fostering inflation and the responsibility to manage monetary growth to keep pace with the various forms of economic growth: population growth, productivity growth, and trade deficits, if any. Additionally, economics has found that modest inflation, on the order of 2%, is beneficial to encourage productive investment over inert savings (such as gold). Add all these categories of monetary growth together, and you get a virtually constant need for federal deficits. This is why, as a matter of fact, we in the US do have perpetual deficits, why making the federal budget go into surplus creates highly unstable economic conditions, and why politicians seeking to balance the federal budget are charlatans.

Taxation is part of this scheme as well, of course. While deficits may be required in perpetuity, they are not typically enough on their own to fund the whole government. Additionally, the central role of the fiat currency has to be established at the outset. Taxation fills both roles, creating a need for the "legal tender for all debts, public and private" which is demanded by the government for taxes, and which it uses to commandeer a large share of the private economy, above and beyond the annual growth it funds with new money.

So much for normal economic times and methods. It is in crisis when the powers of the federal monetary system become most important and evident. Where in the old gold standard days, a government could do nothing during the frequent business collapses, busts, depressions, etc., a modern federal government can spend exactly as much as is needed to make up for the evaporation of bank credit and the money that bank credit represents. The government can resolve deflation in a matter of a few pen strokes. Properly handled, there is no need for economic slowdown or unemployment at all, since the full gap of private credit-based money (which characterizes a depression) can be made up as needed by federal spending of new money.

Note, however, that such a gap can not be made up by the central bank alone. As currently constituted, central banks can lower short-term interest rates and can lower long-term rates by way of "quantitative easing", but they can not inject money directly into the economy. If banks do not want to lend, or borrowers do not want to borrow, no interest rate is going to induce them to do so. And they will be particularly shy of lending after having just lost their shirts in a credit-destroying debacle. Thus it is critical for the rest of the government to not sit on its hands, but spend as needed to cover the monetary shortfall created by declining economic conditions, or a credit crisis in the private banking system.

Of course, it isn't all spending and free money. When boom times come, (as measured by very low unemployment and rising inflation), the federal government needs to have the discipline to take away the punch bowl, using its tools of fiscal retrenchment, taxation, and higher interest rates to restrict inflation. Past governments have shown some laxity in this department, as is tempting and unfortunate. We spent the seventies perplexed by the connection between high government spending and inflation, before Paul Volker pulled the plug with a high interest rate-induced recession. But the fact is that the current atmosphere permeating central banking and conservative politics is far too scared of inflation, fighting a war that was won decades ago. The focus on austerity and budget constraints is not really about inflation anymore, but about keeping workers powerless and underpaid in a perpetually under-performing and under-employing economy.

Tom Tomorrow, on markets.

• For more on MMT & Keynesian economics, see a blog by Bill Mitchell.
• Brad Delong on Fed structure, mandate, and policy.
• Surowiecky on Stieglitz and inequality. 
• Krugman/Thoma on Keynesian policy.
• Robert Schiller on the idiocy of conservative economics: "But adhering to an approach that overlooks these factors is akin to doing away with fire departments, on the grounds that without them people would be more careful – and so there would then be no fires."
• Why do governments love banks so much?
• The bureaucrats knew a thing or two about Vietnam.
• What lack of competition and regulation is costing us in internet service.
• Buying the feudal political system you want ...
•  ... Leads to weakness in the Western (and antipodean) political class.
• The curse of year-around plenty in the tropics.
• Is complexity in scientific data opening the door to obfuscation and worse?
• Economic graph of the week ... median income:

Free Banking: How Good, and How Free?

A fixation of libertarians is banking without any government control, or free banking. Did it work? Can it work?

What if we could get the government off our necks and out of our pockets, reverting to a more blissful state of nature when human relations were voluntary and markets rendered, by their invisible hand, everything we need? That is the dream of libertarians, especially monetary libertarians, who yearn to go back to gold and back to a time when anyone could issue any kind of money they pleased.

It is difficult to take all this seriously, but let's try. We would have to put aside the myriad problems of the gold standard. The gold (and silver) standard did one thing very well in its day, which was to keep money similarly valued over long periods of time. A ducat was worth something reasonably similar for hundreds of years, as was a Pound Sterling, i.e. a pound of silver. The intrinsic scarcity of these metals, and the nature of mining that added to stocks in very rough proportion to human economic activity (at least when economic growth was very slow), made them natural stores of value, virtually universal among pre-industrial human societies.

Free banking has actually happened, apparently most purely in Scotland in the 1700's and 1800's, till the evil British put the Bank of England in charge of monetary policy for good, in 1844. In this system, banks competed by issuing notes on their stocks of gold. These notes constituted their funding for loans, and acted as currency. This was truly a fractional reserve system, where on a certain stock of gold, they could issue several times the value in notes, and expect that redemptions back to gold would be rare enough that they would not, in normal circumstances, face a "run" on those reserves. Their motivation, therefore, was to have their notes be as trusted as possible, and thus as long in circulation as possible, so that loans could be made in large amounts. This style of banking goes back a long way, back to the Venetians and probably beyond. The early US in the 1800's had a similar system, though free banking enthusiasts look askance because it was heavily regulated (and corrupted!) by the states, not to mention that it ended up being extremely unstable, with numerous runs, collapses, and depressions.

Free banking is not really free, in my estimation, but highly restricted in several respects. First is the gold standard. The only commonly and universally recognized form of money at the time was precious metal, for which the notes served merely as an IOU. But were everyone to wish to convert their notes to gold for safe-keeping in their mattresses, (say, if war beckoned), the system would fall apart instantly. So it was a sort of ponzi scheme from the start, as is, in fairness, most banking. The gold standard meant that many banks could operate simultaneously, recognize each other's notes, and clear each other's payments, (and have the motivation to do so), because ultimately, they knew they could settle in gold if the need arose. Crises arise, now as then, when one institution loses this trust, faces lack of credit from intermediaries and / or customers, and spirals immediately into liquidation.

Under what I would take as true libertarian principles, really free banking would be something quite different, where a bank could issue money based on any form of value at all, and compete in the marketplace of customer trust. Its reserves could be land, or timber, cows, or cockle shells. Perhaps this would reduce in practice to the old gold standard, or perhaps to the money of some well-run state far away, as many dollarized economies practice it today(!) In any case, the use of gold/silver would not be forced on the banks and their customers, but be their own choice of funding / backing.

The second restriction was the nature of the bank corporation, which had unlimited liability. Thus, unlike our own corporations, which can escape any adversity through bankruptcy, the owners (partners) of classical banks were on the hook if there was a run or over-lending and their gold stores ran out. The Scottish system had one spectacular failure, of the Ayrs Bank, which reportedly ended up with virtually no losses to the note holders because the partners were cleaned out. Obviously, this rested on a legal system that was willing to hold the partners to literal account, something that seems to be oddly lacking in the current business climate. Likewise, the legal system had to underpin the gold standard, recognizing its central role of value in economic life.

Additionally, arch-libertarian Murray Rothbard brought out a rather tart paper about how unfree the Scottish system actually was, since its banks evaded their gold redemption requirements with great determination, and relied instead on Bank of England notes for most redemptions, treating it as their central bank. It is actually an excellent article about banking in general, graced with terror over proto-Keynesian "rank inflationists".

"Professor Sydney Checkland points out that Scottish banks expanded and contracted credit in a lengthy series of boom-bust cycles, in particular in the years surrounding the crises of the 1760s, 1772, 1778, 1793, 1797, 1802-03, 1809-10, 1810-11, 1818-19, 1825-26, 1836-1837, 1839, and 1845—47. Apparently, the Scottish banks escaped none of the destabilizing, cycle-generating behavior of their English cousins."

"The Scottish system was one of continuous partial suspension of specie payments. No one really expected to be able to enter a Scots bank . . . with a large holding of notes and receive the equivalent immediately in gold or silver. They expected, rather, an argument, or even a rebuff. At best they would get a little specie and perhaps bills on London. If they made serious trouble, the matter would be noted and they would find the obtaining of credit more difficult in the future."

"Bailey overlooked the fundamental Ricardian truth that there is never any social value in increasing the supply of money, as well as the insight that bank credit entails a fraudulent issue of warehouse receipts to nonexistent goods."

Anyhow, given these important restrictions and traditions, the Scottish system was quite competitive and reasonably robust for its day, with a few large and many small banks. The one thing it didn't do was serve the state, which by time was becoming used, in England, to running the monetary system for purposes of both inflation control and its own funding, especially in war. As Rothbard notes, the Scottish system had led to credit gyrations and substantial inflation, issuing roughly fifty times as many notes as the underlying gold/silver. This allowed economic growth, but also was completely unsustainable in terms of a true gold standard.

In the end, we return to the questions that were current in the 1800's as modern banking began to take shape. Should fractional banking be allowed in any form, or should money be 100% backed by the precious metals of tradition? If fractional banking be allowed, how should the creation of money be controlled to prevent the incessant cycles of boom and bust which appeared inherent to the free system whereby banks printed paper money in response to business demand for credit? If fractional banking be not allowed, how could one accommodate economic growth when the supply of money failed to grow- that is, when one's mines (or Imperial thievery) failed to crank out as much new metal as proportionately required for growth in population and technology? Would everyone end up being "crucified on a cross of gold"?

The answer, obviously, is that neither a 100% gold standard, nor free, unregulated banking, are optimal. Given the world's current wealth of about $250 trillion, an ounce of gold would have to be worth $50,000 to back wealth at 100%, which seems not just unrealistic, but obscene and a threat to our natural environment, given the mining this price would entail. Historically, as economic growth far outstripped metal mining, central banks took over macroeconomic policy with regard to money creation, inflation & interest rate control, bank regulation, reserve requirements, and many other practices. Central banks have made their share of grievous errors, particularly in the Great Depression. But some lessons have been learned, and our latest brush with the pitfalls of ponzi banking was significantly less bad than the Great Depression.

Nor is a stable store of value over long periods of time the only point of having a monetary system. Rather, it should exist to increase prosperity and human well-being. Gold is still available, after all, to all and sundry who wish for that imperishable store of value. For the rest, modest and controlled inflation using an elastic supply of money, as a spur to productive investment and labor over pure saving / mattress-stuffing, may be a more desirable feature of an optimal monetary system, combined with active state management to maintain value over booms and busts in the business cycle.

• Stiglitz on banking and credit catastrophes. A failure of mainstream economics.
• Bill Mitchell on basic Keynes.
• "Faith" is not faith.
• "Free" enterprise is anything but. There is always a network of consequences.
• The 1% vs Social Security.
• Modi calls Pakistan a spade. There is no "good" Taliban.
• All our money is belong to your national debt. Paul Krugman schools Rand Paul.
• The atheists are OK.

Why the middle class is so great

Working, but not desperately working.

Last week's post about robots and what happens when humans don't need to do anything raises a basic issue of economics- what is the point of an economic system? Is its point to rape the earth of its biological and mineral resources? Is it to justify the dominance of one class over another? Is it to afford a select few the leisure to do absolutely nothing? Is it to distribute goods of all kinds in accordance with each person's value, Or is it to make as many humans as happy as possible given the means at our disposal, whether those means are limited or unlimited?

People may idolize idleness, as the golden reward after a life of toil, a social right based on the exploitation of lesser classes, or the utopia of a roboticized world. But however arrived at, it is not, in fact, conducive to happiness. Not after the first day or two. Nor does entertainment fill the void on its own. Constant entertainment, without the fundamental bass of productive endeavor, palls quickly. Perhaps competition is the ultimate occupation, coming to the fore when other needs have been sated. But competition is also ultimately destructive when not carefully channeled to productive or legitimate ends.

So one point of an economic system is to keep people productively occupied. Hopefully with work they find interesting and fulfilling, but at any rate with something by which they can be and feel useful to others. If abundance is the norm, with sustanance a given, then this may be the *only point of an economic system. While some people have the fiery self-motivation and talent to create their own productive (or predatory) path- say, in the arts, or in entrepreneurial business, most people need more of a push.

Thus our system of capitalism, where one's income depends on some kind of service rendered to others, judged by the labor market, does its immense work of matching roles and enrollees admirably, for the most part. But it is hardly the last word. If due to the high productivity or ultimate roboticization of the economy as a whole, the vast majority of people do not have to work for sustenance, what then? Should the system allow vast riches to flow to the few so that the rest, while they could be amply provided for with little effort, end up scrambling for low-paying or even non-existent positions in a terrifying game of musical chairs?

Clearly, it is much worse to have no work due to due to the system malfunction of unemployment versus the blight of excess riches. Both waste the energies of a person who could be of service to her fellows. Unemployment adds existential and social terror. Low-paid work is less than optimal, tending to trap people in menial tasks that should be automated, and keep them (and their children) from the education and other cultural resources which would make them capable of greater service to their fellows, not to mention just basic happiness and flourishing. If menial tasks absolutely have to be done, that is bad enough. But why pay poorly for them as well?

My point is that the ideal economic system is one that generates the broadest and largest middle class. This is the economically (and psychologically) optimal condition, not only by way of political bromides aimed at the majority (if the middle class is the majority), but in an objective sense. It is the class that has the incentive to work diligently at productive jobs, the education to be maximally productive, and the means to enrich its communities and its children to generate still better future conditions along the same lines. The possible / prospective services that can keep everyone employed are absolutely boundless- they do not have to be "stuff" manufactured on an assembly line or drilled out of the ground. They can be philosophizing, teaching, music making, writing, street performing.. we just have to find a way to organize payment. It is sort of unfortunate that so much human creativity has over the last decade moved to the internet and become simultaneously far more productive than ever and far worse-paid, if paid at all. But that is a question of business models and what, perhaps, the public sector can do to either directly pay for creative works, or to alter the rules to make them financially sustainable.

Historically, high culture and high education were the preserve of the elite, and if a revolution generated more egalitarian economic conditions, equality would be achieved at a low level, not a high one. Great cultures of antiquity were built on brutal inequality. But after the French Revolution, and much more so in our current developed and wealthy age, this rule has been turned on its head. Cultural leadership is not a matter of wealth at all, and movement after movement of popular music and other arts rise from humble roots, not wealthy ones. Economic leadership comes from our meritocratic educational and corporate structures, not from the skull and bones (and blood) elites of old. The idea that the wealthy provide some special service that enriches us culturally or economically is completely defunct. So the only remaining rationale for wealth is simple just deserts- the reward of special and individual service to others, through leadership, invention, innovation, thought, and the like. Which pretty much leaves the bulk of the financial industry by the wayside, not to mention the lucky (ducky!) inheritors of wealth.

This is not a revolutionary manifesto, just a statement of principle about the point of our economic and political community. As we look ahead to the imperatives of global warming and other dire environmental issues, some observers advocate "degrowth". But this is misguided. Getting off fossil fuels doesn't mean we have to wear hairshirts and eat soy wafers. It doesn't mean that everyone can't or shouldn't be employed doing useful things for each other. The means of economic organization and the distribution of its rewards are separate issues from what it is that we have to distribute.

• Keynes on the future mix of consumption, leisure, investment. At any rate, involuntary unemployment is the worst possible, and unnecessary, outcome.
• But it is perfectly fine with corporations: Krugman.
• And underemployment is the norm in capitalism.
• Robert Reich on inequality.
• Carbon needs to stay in the ground... and would need to be written off.
• Wealth makes us into jerks. Yeah, we built it!
• Perspectives on the evolution of capitalism- the constant battle between regulatory stabilization and financial innovation, aka destabilization. Such as under surrender monkey Alan Greenspan.
• For all of the UK's austerity madness, it still has better prospects than the Euro union.
• Bernanke: good or bad?
• On the reason for the season.
• Economic quote of the week, from Bill Mitchell:

"The US economy has stacks of idle capacity so increasing net public spending will bring real resources back into productive use rather than straining the price level. That doesn’t mean I support leaving the tax structure as it is. But I would consider that question quite differently from the aims of improving the fortunes of the poor. 

Further, I would also declare most speculative financial activity to be illegal (given it is unproductive and destabilising) and that, alone, would put a major dent in the incomes of the uber-rich in the US and force them to get a real job."

Money that floats

An Austrian-school economist faces reality ... and sees the light.

The great debate in economics, during this crisis and over the longer term, has been between Keynesians and Austrians / austerians, (lately represented by the Chicago school, also called classical economics). Is government good? Is gold better than paper money? Do unregulated free markets lead to stability and prosperity? Do federal deficits ever have be paid back? Austrian economists tend to be fixated on gold and so-called "hard-money" policies, urging a return to pre-central bank days when the business cycle boomed and purged in a constant and damaging whipsaw. The "Neo-Keynesian", (aka neoclassical synthesis) and micro-foundations turn of the last few decades has been a triumph of the Austrian school, even if we have not quite gone the whole distance back to gold. We have deregulated, feted the CEOs, reduced taxes, and tried to box the government into impotence and disgrace. We had almost forgotten about Keynes, and the general prosperity that strong interventionist government policy fostered in the mid 20th century, after the Great Depression.

The Keynesian school is most intriguingly represented by MMT economics, which is a bit beyond the mainstream, but a growing movement to resuscitate Keynes and his more left-oriented successors, and to take fiat money seriously, particularly the vast powers it gives the government to foster stable economic conditions and universal employment. The bywords are fiat money- money that is not gold, and not "hard", but rather whose amount is continually adjusted by the government via its central bank and treasury to accommodate economic growth and other aims, and which floats against all other currencies, thereby freeing the issuing country of any "pegs" or dependence on external standards, metalic, political, or financial.

"The New Depression and the Great Depression were both caused by credit-fueled economic booms. In both instances, the boom began when the link between money and gold was broken. The earlier episode began in 1914 when World War I destroyed the Gold Standard in Europe. This time the credit boom began when the United States severed the link between dollars and gold in 1968 and then destroyed the Bretton Woods international monetary system in 1971."

Richard Duncan has rather thin credentials, working for various asset management companies, and briefly for both the World Bank and the IMF. But this is his third book, and has the kind of title, "The New Depression: the breakdown of the paper money economy", that leaps off the library's new book shelf. My expectations were of a doctrinaire gold-bug, and indeed, quotes of Ludwig von Mises, Friederich Hayek, and Irving Fisher are abundant. Even Murray Rothbard comes in for a cameo. Duncan hammers again and again, with seeming horror, at the fifity-fold growth of credit that has engulfed the US over the last fifty years, complete with countless exponentially rising graphs that make no mention of any correction for inflation. Of course, to the hard money acolyte, inflation is fundamentally illegitimate. One should be able to bury one's dollars in the back yard and come back to them a hundred years later to find their value unchanged.

But halfway through the book, something shifts. Duncan not only makes his peace with the current reality, but makes a stunning about-face.

"Capitalism was an economic system in which the private sector drove the economic process through saving, capital accumulation, and investment. The government's role was very limited. The United States has not had that kind of economic system for decades. ... This is not capitalism. Market forces no longer drive the economy. The current system is government-directed, but not planned. Government policy is determined through a process of compromise between the demands of competing power blocks: big business, the banking industry, the military, the elderly, and the general public, which, until recently, had grown to expect en ever-improving standard of living. Deficit spending and fiat money allowed the government to satisfy all those competeing demands for more than a generation. During that time, a key component of government policy has been to channel ever-greater quantities of credit to the household sector. As total credit expanded 50 times in less than 50 years, it created wealth and kept the American Dream alive. ... Capitalism became Creditism, for lack of a better word."

But then... "It is crucial to understand, however, that Rothbard and von Mises lived and wrote in a different time. Were they alive today, is it certain that they would still condemn fiat money as a great economic evil. It is not certain, however, that they would recommend the laissez-faire method as the correct solution to the current crisis in the global economy. In fact, it seems inconceivable that they would."

He goes on to lambaste the conservatives of today for their austerity policies, for he clearly sees that government spending is the only thing keeping the ship afloat in the face of private deleveraging. Indeed, their politics could not be more cynically cruel and perfidious, as of his writing back in 2012:

"All of them understand that a weak economy and high unemployment will increase the chances of a Republican candidate being elected president in November 2012. Therefore, it is very unlikely that the House will pass any government spending measures that would improve the short-term economic outlook before then."

And indeed, he seems to argue the more spending, the better, with conditions. His explicit policy proposal is a three trillion dollar stimulus package to transition the US entirely to solar energy by 2025.

"Solar energy would rank among humanity's greatest accomplishments. Low-cost energy would make possible a host of other private sector innovations, with wealth-creating possibilities beyond comprehension. This is just one example of the opportunities that our new credit-based economic system makes possible. There are many others. A large government-directed investment program to develop genetic and biotechnology would create medical miracles. Heavy government investment into nanotechnology would generate a new Industrial Revolution."

And so on. There is much more to say about this author's conversion to what is in essence Keynesian MMT economics, with a few fig leaves here and there. (His total lack of fear of China stopping its US bond purchases, his recognition that US federal deficits offset trade deficits, allowing the private sector to escape deflation, his proposal of a global minimum wage (!), his recognition of World War 2 as the ultimate stimulus package despite having zero direct investment value, etc.)

Once faced with reality, and evidently without an ideological or political need to carry water for the business elite or the 1%, (or indeed to abide by his book title), this author, starting from such unpromising beginnings, and with a good bit of expertise in the world of finance, makes a complete about-face and recognizes that our vast real productivity could be put to much more sustained and forward-thinking use if we intelligently employed the vast tools that an elastic, flexible (and floating) currency provides ... to put everyone to work. This author is only a minor example, but one senses that the classical economics paradigm is weakening significantly, after a long period in the sun.

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