Covid-19 has shown that governments with monetary sovereignty can turn the tap off quickly, if they must, and just as easily turn the tap back on. This has been coupled with a new appreciation for the ability of a sovereign economy to operate effectively despite large levels of net government (and net foreign) debt as a proportion of GDP, reconfirming the experience of those governments during WWII, when debt was used as an instrument to curb consumption and to redirect productive resources and research activity into investment in new capacity and new technology to support the war effort (viz the Agenda 30 strategic policy goals).
A similar imperative now confronts nations as they direct resources into a sustainable transformation of the economy. This paper will contribute to these policy objectives by examining the respective economic roles to be played in this transformation by the Job Guarantee, the Green New Deal, and what Mazzucato chooses to call “ mission-oriented finance”! In this context, a range of metrics for guiding policy is also evaluated.
Keywords: Modern Monetary Theory, Agenda 30, Green New Deal, Job Guarantee, Mission-oriented Finance, Short-changing Nature.
The main purpose of this paper is to clarify both the rationale for, and policy objectives underpinning, a range of interventions recently advocated by Modern Monetary Theorists (MMTs), within the context of the UN’s Agenda 30 strategic policy goals. Specifically, it will address the Job Guarantee (JG) as an anti-inflationary instrument and the Green New Deal (GND) as a means for redirection of resources and capital investment.
However, I intend to achieve this clarification within an academic context where it has become fashionable to question MMT for its on-going adherence to supposedly inadequate or erroneous theoretical principles. Much like much like Marc Antony in Shakespeare’s Julius Caesar, who guilefully claimed that he came “to bury Caesar not to praise him”, for although Brutus (along with Georg Friedrich Knapp and Abba Lerner) was purportedly an honourable man, MMT is faulted on a fundamental level for its less than honourable fidelity to the principles of (i) neo-Chartalism; and, (ii) Functional Finance.
The first theoretical allegiance is criticised on the basis of a broader Post Keynesian or Marxist interpretation of “money with no intrinsic value”, which questions the notion that stability in the value of money, when it functions as both a unit of account and a store of value, can be guaranteed solely by the legislated requirement that it be used for the payment of outstanding tax obligations (Lapavitsas & Aguila, 2020, is representative on this strand of critique). The second allegiance is questioned by so-called Structuralists, on the basis that current account deficits and cumulative net foreign indebtedness do matter, especially for emerging economies, which suffer from being situated low in the global currency hierarchy, plagued by a narrow, commodity-based admixture of exports, while subject to a rapidly destabilising pass-through of exchange rate fluctuations onto tradeable goods prices (for examples of this Structuralist critique, see Prates, 2020; Vernengo & Caldentey, 2019, for critiques, and Carnevali et al., 2020 for a discussion of strategic pass-through as a generalization of the Marshall-Lerner conditions).
With the intention of clearing the way for a more focused discussion of macroeconomic policy options, I wanted to briefly respond to the above-mentioned criticism of MMT’s theoretical foundations. To begin with, I wanted to highlight the fact that, in the 1980s, the Australian tradition of MMT developed within an environment where many mainstream and more left-wing economists adopted what were effectively Structuralist arguments to argue that a return to policies of full employment that were temporarily abandoned in the last year of the Whitlam Labour Government, was prevented by a “Balance-of-Payments Constraint”. When Hawke-Keating Labor Government was returned to power in the early 80s, Treasurer Paul Keating, largely mirrored then ex-Prime-Minister John Howard’s obsession with the rising level of foreign debt.
In Australia, back in the 80s, a series of inter-linked Structuralist arguments legitimised a sustained assault on the wages and conditions of Australian workers, and ultimately, the level of trade union influence. However, the biggest impact on the industrial working class could be sheeted home to rising labour underutilisation (a combination of rising unemployment and ‘precariousness’). With the clear intention of reducing the “real wage overhang,” workers were encouraged to trade-off increases in the ‘social wage’ for cuts to real wages as a means of restoring the international competitiveness of Australian goods and services.
In grappling with these problems, progressive economists often (incorrectly) applied Kaldor-Thirlwall multiplier models of trade to the case of floating rather than fixed exchange rates (McCombie & Thirlwall, 1994). On this view, income elasticities of demand dominate in their effects over exchange-rate related price-elasticities. A country like Australia is seen to have a high income-elasticity of demand for imports whereas the rest of the world has relatively low income-elasticities of demand for Australian exports. Accordingly, if Australia were to grow too rapidly compared with rates of growth exhibited by our major trading partners, the current account deficit would widen dramatically. “Stop-Go” policies would be the inevitable result.
Within the Commonwealth Government bureaucracy, it was commonplace for economists to refer to the “twin deficits” hypothesis, which viewed total public sector debt as the main driver of deficits on the current account. Similar views were actively promoted by supposedly ‘left wing’ economists in the National Institute of Economic and Industry Research, officials at the OECD, and members of Secretariat of the tripartite Australian Economic Planning and Advisory Commission. At around the same time, there was much-heated debate about “Dutch Disease” (i.e., the “crowding out” of other industries when the resource-sector expanded) and the “J-curve” effect in Australia (which arises when an exchange-rate depreciation initially worsens the trade deficit before contributing to a gradual increase in net exports).
Both Marxist and Post Keynesian critics of MMT have emphasised the importance of the global currency hierarchy, the determinants of effective sovereignty, and the influence of conventions and confidence in the whole monetary system as having some bearing on the value of money. And Chartalist views have been questioned on the dubious basis that spot/forward contracts were developed before effective principles of taxation were formalised. It has been claimed that many developing economies simply “will not find foreign demand for their currencies”.
Kaltenbrunner (2012) has attempted to achieve an integration of what she calls the ‘horizontalist’ or structuralist position and ‘verticalist’ interpretations of monetary policy in open economies (the work of Lavoie, 2000, 2002-03 can be seen as illustrative of the ‘verticalist’ position, especially in his interpretation of the covered interest parity condition). To this end, she has identified three structural factors that determine the ability of a country to meet outstanding external obligations (and thus, the liquidity premium on its currency); namely: (i) a country’s total stock of net (short-term) external obligations (expressed as a proportion of GDP); (ii) the proportion of its liabilities denominated in foreign currency and the possible existence of other liabilities to foreign investors; (iii) a country’s ability to meet its outstanding liabilities through “forcing a cash flow in its favour” either through the income generation process (including income from previous rounds of lending) and/or dealing and trading in capital assets and financial instruments; and finally, if current cash flows are insufficient to meet outstanding obligations, (iv) the ability to “make positions” (i.e. to refinance existing debt and/or to liquidate assets).
The question for policy makers is whether a country exposed to external pressures in each of these three ways, can put together a cluster of policy interventions, including capital controls, to counter any likely shocks (while recognzing the fact that floating exchange rates ensure greater levels of autonomy in the pursuit of effective fiscal policy). This is where consideration must be given to a range of policy instruments that help to develop and diversify the economic and trading base.
Personally, I see a strong resonance between Marxist views on the credit system, when it fails to work as a means of payment, and Minsky’s notions of financial instability, which have long been accepted by MMT advocates. By the same token, I see little difference between Marx’s conception of money with no intrinsic value and Chartalist efforts to explain how a stable value for the national currency can be established.
In the next section of the paper, I will examine the Job Guarantee (JG). This will be followed by an interpretation of the Green New Deal (GND) as a policy for controlling inflationary pressures in the long run, while achieving dramatic changes in the resource base. Australian MMT researchers would insist that a raft of supplementary policies (apart from, but including capital controls) can also be adopted as supplements in the pursuit of full employment, including tax policy, industry policy and a strategic commitment to industrial development on the basis of competencies.
2. The Job Guarantee in a “Nutshell”
The JG is premised on the fact that only the national government (as issuer of fiat currency) can create Net Financial Assets (NFA) through deficit spending. To avoid any under-employment of labour and productive capacity, the flow of NFA must match non-Government sector’s desire to net save. Otherwise, there would be a shortfall in effective demand. Jobs created through the issue of NFA would be paid at minimum wage and designed so that they do not directly compete with those to be subsequently created within the domestic private sector via the multiplier.
The JG labour-force thus functions as a “buffer stock” whose primary role is that of anti-inflationary instrument This is because the uneven distribution and persistence of underemployment means that traditional policies of public investment would otherwise meet inflationary bottlenecks well before full employment is reached (Mitchell & Juniper, 2007).
Mitchell (2020) explains how a JG operates as a superior means for the control of inflation when compared to the mainstream pursuit of a non-accelerating inflation rate of unemployment (NAIRU). The effectiveness of inflation policies based on NAIRU can and has been undermined by: (i) the continual movement of workers out of short term into long-term unemployment; and, (ii) the dramatic rise in the proportion of those in precarious employment. In the more technical literature on inflation, these combined effects are said to have contributed to the development of a “horizontal” Phillips Curve.
Fig. 1., below, suggests how the JG could operate by comparing three positions on the traditional Phillips Curve, which depicts trade-offs between realized inflation and unemployment. Governments increase effective demand in response to high unemployment in position A, moving to position B, at the cost of a rise in inflation from IA to IB. If a JG were put into place, the economy could instead move to position C, achieving full employment at the original rate of inflation.
3. The Green New Deal in a “Nutshell”
Where the JG is a short-run anti-inflationary mechanism, the Green New Deal (GND) is a log-run anti-inflationary mechanism for achieving a dramatic transformation in the economy through intervention in the process of capital accumulation. The GND adopts the methodology originally proposed by J. M. Keynes in his pamphlet on How to Pay for the War in the context of responding on a massive scale to environmental problems such as climate change (Nersisyan & Wray, 2019).
Under this modern version of the scheme, the stages to be followed are first to estimate the “costs” of the GND in terms of resource requirements; second, to assesses resource availability that can be devoted to implementing GND projects. This includes mobilisation of unutilized and underutilised resources, plus shifting of resources away from current destructive and inefficient uses into GND projects. Here, the main problem that could arise is that of inflation if sufficient resources cannot be diverted to the GND. Accordingly, the scheme also proposes a series of anti-inflationary measures, which could include well-targeted taxes, wage and price controls, rationing, and voluntary saving. During WWII, voluntary saving was accomplished, both Great Britain and the US, through issue of war bonds to all classes in society. This combination of policy interventions is summarised in Fig. 2., below.
4. Industry-Policies and Economic Development
Through an historical and political analysis of the East Asian development model, have Amsden and Wade have highlighted the difficulties faced by developing economies that are located at some distance from the frontier of best practice, yet still want to tilt the “playing field” away from existing configurations of comparative advantage. Amsden (1989) emphasises the need for a strong state to impose binding condition of reciprocity on corporations and sectors that benefit from a variety of subsidies designed to influence the path of capital accumulation. Wade (1990) attends to the complexity of “governed market” interventions that might appear to be even-handed in regard to trade versus non-traded, or import-substituting rather than export-oriented industries (conditions which he describes as those of a “simulated free-market”), yet nevertheless still provide incentives for advancement.
The work of Felipe et al., (2012) builds on the competency-based economic analysis of strategic development. This research updates work originally conducted by Hidalgo and Hausman using another set of data encompassing 5107 products and 124 countries. A minimal spanning tree is constructed for global trade based on proximity links between different products. Production of traded goods located at the centre of the network is seen to require a more diverse and non-ubiquitous but unobservable set of competencies. In countries such as India and China, policy makers seem to have been able to exploit available proximity links in their efforts to expand both the scale and scope of what is being produced and traded.
More recently, Barry Naughten (2021) has identified a shift in Chinese industry policy away from sectoral policies for strategic emerging industries towards policies that promote core digital technologies that, if successful, would enable China to leap-frog ahead of EU and US industries in a selected range of key domains (including digital fabrication and production, quantum computation, AI, and machine-learning, big data and the internet-of-things). Understandably, Naughten is reluctant to evaluate the success or failure of these initiatives, remarking that insufficient evidence has yet been amassed to make such judgements. He describes at some length the Industry Guidance Funds (IGF) that China deploys to coordinate different forms of investment at all levels of government—national, provincial, and local—in innovation, infrastructure, and commercialisation of these technologies—while identifying potential sites of failure and emerging risk.
Along similar lines, Mazzucato and Wray (2015) have emphasised the important policy role of State Investment Banks for “entrepreneurial states” wishing to engage in counter-cyclical expenditure, capital development, and new venture support. In particular, they describe an over-arching process of “mission-oriented” finance instantiated by Eisenhower’s efforts to “land a man on the moon” before the Soviet Union. The interventions of a variety of agencies—both public and private, including the newly formed NASA and DARPA—were orchestrated to achieve this set of aims, through the injection of finance at each stage in the innovation chain (i.e., from research, through concept invention, early-stage technology development, and product development, into final production and marketing). If successful, China’s IGFs would fulfil all of these requirements. This same kind of coordinated approach could readily be harnessed to achieve ecological rather than military and geo-political goals.
5. Metrics for Short-Changing Nature
In a talk I recently gave to members of MMT-Australia I focused on the limitations of mainstream approaches to Ecological Economics focusing on the modified neoclassical framework of Pearce and Turner (1990). My major concern was to question those who saw policies for full-employment as being in contradiction with interventions designed to achieve ecological sustainability. However, I also questioned the notion of environmental capital, which featured in Pearce and Turner’s ‘4 Capitals’ model of sustainability. Accordingly, I turned to Marx’s concept of ‘fictitious capital’, which he applied both to human capital (with labour services being capitalised into a ‘stock’ using a discount rate that simply reflected the rate of exploitation) and to the capitalisation of fictitious structures of money taking the form of credit as a means of payment, that were increasingly divorced from real processes of capital accumulation. I suggested that environmental capital could be viewed as an equally fictitious concept, insofar as it attempted to ‘capitalise’ ill-defined flows of ‘environmental services.
I moved on to the need to build more rigorous bridges between Value Theory (understood in terms of Classical rather than Neoclassical Political Economy) and sustainability metrics (which adequately accounted for the ‘short-changing’ of nature). In the Classical system, prices are determined by socially necessary labour time, including the application of the labour embodied in productive capital. However, from a sustainability perspective, this should include the labour time required to recycle renewable resources, reduce other forms of waste, mitigate the impact of pollution, and discover substitutes for non-renewable resources whose stocks were being depleted (as argued by Moore, 2017).
To this end, I emphasised the proximity between this Classical theory of reproduction pricing, Leontief’s Input-Output Analysis (which has been taken up by a whole generation of Industrial Ecologists), and national accounting conventions for the measurement of GDP (on the former see Schmelev, 2012, along with Suh and Kagawa, 2005; on the latter see Flaschel, 2010). I then suggested that metrics for sustainability could be constructed by adopting techniques of linear programming that had been developed by mathematical economists and planners in the former Soviet Union, because these techniques were also grounded in the labour theory of value. At the time I was unaware that Paul Cockshott (2010) and his PhD student, Jan Dapprich (2020), had already pursued this approach to sustainability modelling, using modern software, while building on the research of Kantorovich (1939, 1965) and Novozhilov (1970) (also see Ellman, 1968 and Holubnychy, 1982).
For convenience, the various elements of what has been proposed above, are brought together in the Fig. 3., below.
By way of a recapitulation, let me suggest that policies such as the JG and the GND complement one another and, in combination, demonstrate ways that Agenda 30 can be successfully implemented both in Australia and elsewhere. I went on to argue that the Job Guarantee could serve as a short-run inflation control mechanism, while promoting full-allocation and processes of capital accumulation, to achieve sustainability objectives, while avoiding inflationary pressures over the long-run.
In arguing for this position, I also wanted to highlight the fact that MMT is and has always been cognisant of difficulties faced by ‘emerging economies. For this reason, I also considered a raft of industry policies that could assist developing nations in their efforts to progress up the technology and productivity ladder (even leaving the existing technology frontier behind them in their wake), while diversifying their trade activity. Industry policy can take a long time to come to fruition and some merging economies may be exposed to difficulty when servicing ballooning foreign debt. Under these circumstances capital controls may also fail to stem the tide of increasing financial obligation. However, as Kaltenbrunner (2019), explains, only a certain number of emerging economies would fall into this category. MMT advocates maintain that the loss of fiscal autonomy that would result from any move towards a fixed or ‘dollarised’ exchange-rate, would unfortunately be a heavy price to pay for the achievement of currency stability, even in the short-run.
Finally, I touched on ways that sustainability metrics could be developed using techniques of linear programming that deployed a modified labour theory of value approach to account for various ways in which nature was being ‘short-changed’. In this way, programmes to achieve full-employment could be designed to complement efforts to transform productive activity in ways that met ecological sustainability objectives.
Author: Professor Dr. James Juniper – Conjoint Academic, University of Newcastle; PhD in Economics, University of Adelaide
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