Mitchellnomics

Newcastle economist Bill Mitchell criticises Greens economic policy from the left, which is welcome and quite apt on some points. It’s great to see this kind of discussion and it helps the left within the Greens.

He is right on about the wobbliness and incoherence of the commitment to full employment. But Mitchell’s views on money and government financing are problematic. Though he presents it as a case of “progressives who understand how the modern money system operates” versus “neo-liberal economics”, his ideas on money are a little eccentric even within the post-Keynesian or ‘heterodox’ community, hardly the obvious consensus he portrays with such confidence.

He says the federal government is a ‘monopolist’ in the issue of currency. This is not true, because the national currency is one among many. Everyone has the option of converting their money into a foreign currency. Most of us don’t do it unless we’re going on holiday or buying something on the internet, but of course managers of financial wealth are always comparing currencies, and if one national currency is expected to lose its  value, it will be sold for another. Even if Mitchell were right, and the federal government could expand its expenditure as much as needed for full employment by printing money without sparking inflation, the fact that financial managers would expect it to be inflationary would be enough for the dollar to dive.

And anyway, I don’t think Mitchell is right that it would not be inflationary, even if speculators happened to agree with him. When government expands spending with new currency, most of that currency will end up in bank reserves. This allows the banks to expand their lending and the money supply to a significantly higher degree, since they can carry deposits to a multiple of reserves. Mitchell would probably respond that if inflation developed, government could beat it by cutting back its spending again, or soak up the currency with open market operations. But this relies on some pretty heroic assumptions about the government having fine, well-timed control over its expenditure and ability to predict bank behaviour and its ultimate impact on demand.

Finally, Mitchell’s claim about the public sector deficit being the mirror-image of private sector saving (the balance of payments deficit/surplus aside): This is true by definition, but means very little. Perhaps he expects people to confuse ‘private sector saving’ with ‘household saving’. You can see why households as a group would want to have net savings over a period. But if their financial assets are to represent net claims over future real goods and services, they need to be claims on firms – shares and bonds, either directly or through banks, pension funds and other intermediaries. In other words, household savings are ultimately claims on firms, i.e. business debt.

But both firms and households combine to form Mitchell’s ‘private sector’. Why would firms and households collectively want to save over the long term in claims on the government? Except to the extent that governments are producing goods and services for sale, their income comes ultimately from taxation (or, if Mitchell ran the government, perhaps inflation) – which is a claim on the private sector! (It’s true, though, that the private sector is always going to want to hold currency and certain government securities, and to that extent the government does not need to worry about getting the deficit to zero – and in fact even when government debt was entirely paid off it still issued securities to fill certain asset needs of banks etc.)

I actually agree with Mitchell that much agonising over government deficits is bogus, and comes from the false idea that government finances work like household or firm finances. Government finance is always and everywhere a macroeconomic issue, as opposed to an accounting issue. But Mitchell’s proposals fall down on the macroeconomics.

The Greens should take full employment seriously. But they also need to realise the extent to which full employment requires a radical reorganisation of how wealth and investment is controlled. It would mean a full-on fight with wealth-owners. The fundamental problem with Mitchell’s analysis is that he makes it sound all too easy, just a technical problem that could be easily solved if only governments weren’t blinded by ideology.

Advertisement

1.1 Explaining policy

As promised, here’s the first section of the first chapter. In the final document it will be preceded by an introduction, but I haven’t written that yet… So here you’re dumped right into the action. I’ll give the chapter structure here, though, to give a vague idea of how things fit together:

1. Economic policy and inflation
2. Monetary policy: the state in the capitalist financial system
3. 1945-65: Inflation and ‘external balance’
4. 1945-65: Counter-inflation policy in general
5. 1945-65: Counter-inflation monetary policy
6. 1965-85: Inflation and the exchange rate
7. 1965-85: Counter-inflation policy in general
8. 1965-85: Counter-inflation monetary policy
9. Conclusion: the 1980s and beyond

So the first two chapters are theory chapters, and in fact the first may be split in two.

I’m sure no one will want to, but you never know what will happen once stuff’s on the web and it gets Googlified (my Keynes stuff has had a strange journey) so I’m putting a standard disclaimer on each page: This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

Explaining policy

My explanation for the development of policy is structural rather than ideological. By this I mean that I do not explain the shifts in policy in my forty-year period as an outcome of ideological struggles, first as the rise of ‘Keynesianism’ and then its fall at the hands of ‘neoliberalism’. I suggest that the relative strengths of the ideologies in political struggle was itself determined by the changing, interdependent structures of state and economy, which exerted strong pressures of selection. This is not to deny independent influence at specific points from the details and discursive structures of the warring ideologies, or from particularities of the actors and groups through which they warred, but I will argue baldly that this is the less enlightening part of the story, and in any case a story already many times told. Beyond the ‘Keynesians versus neoliberals’ story are more subtle questions about how the mainstreams of those ideologies were themselves sculpted by the political-economic field in which they sought to embed themselves: Why, from Keynes, effective demand and the IS-LM apparatus, and not “the euthanasia of the rentier”? On the other side, why Friedman’s strong, rule-bound central bank and not von Hayek’s free banking? Ideologies do not conquer by the superiority of their reasoning, and the structure of the social networks through which they take material political form and come into contest are shaped by selective pressures from the broader social conditions in which they emerge.

Nicos Poulantzas in days before smoking in the office was structurally selected against

Selective pressures of what form? I follow Jessop’s [1990: 260] analysis (adapted from Poulantzas) of the state as “a system of strategic selectivity,” that is

a system whose structure and modus operandi are more open to some types of political strategy than others. Thus a given type of state, a given state form, a given form of regime, will be more accessible to some forces than others according to the strategies they adopt to gain state power; and it will be more suited to the pursuit of some types of economic or political strategy than others because of the modes of intervention and resources which characterise that system.

Or, as he later developed the concept:

The state is an ensemble of power centres that offer unequal chances to different forces within and outside the state to act for different political purposes. How far and in what way their powers (and any associated liabilities or weak points) are actualised depends on the action, reaction, and interaction of specific social forces located both within and beyond this complex ensemble. [Jessop, 2008: 37]

This notion has the advantage of conceiving social structure in a way that does not neglect agency and subjective creativity; it merely emphasises that they are embedded in social structures that put up more resistance against some strategies than others, and thus tend to select some over others. It is not determinist; history remains open to choices and the chance outcomes of interactions between the intertwining strategies of many social actors, outcomes more often than not unintended by anyone in particular.

My object of study, therefore, is the structural pattern that tended to select counter-inflation policy as a dominant aspect of economic policy in Australia during my period, and tended to shape it in a particular form. It is not simply a narrative history of the development of counter-inflation policy; it seeks to go one step deeper to explain why, although other counterfactual histories were certainly possible, the structure of capitalist society was such that the dominance of counter-inflation policy was no accident, was in fact strategically selected, not by the arbitrary ideological whim of policymakers but by the structure of the interdependent state and economic systems in capitalist society at that point in their historical development.

The protagonists of my story are ‘policymakers’, a collective term which denotes a diverse assortment of individuals and institutional actors from Treasurers to central bankers. But in what sense can we consider ‘economic policymakers’ collectively as a strategically-acting subject/actor? For Poulantzas and Jessop subjectivity and agency are explicitly denied to the state as such. Rather, the state is a social relation, in the same sense in which for Marx, capital is a social relation – a structure reproduced through relationships between people, mediated by things. However, de Brunhoff [1978] – writing within the Poulantzian tradition – argues that economic policy, in specific historical conditions, came to act as if it were a unified strategic actor. I will retrace this argument, which explains my reasoning for centring my narrative on the strategic action of policymakers as a group.

Next section

References

Suzanne de Brunhoff [1978]: The State, Capital, and Economic Policy, translated by M. Sonenscher, Pluto Press, London.

Bob Jessop [1990]: State Theory: putting capitalist states in their place, Polity, Cambridge.

Bob Jessop [2008]: State Power: a strategic-relational approach, Polity, Cambridge.

Thesis

I might have mentioned before that I spend most of my days working on a PhD thesis, and have done for about four years now. It’s about time this thesis was done, and I do have drafts of almost every chapter in various states of completion, totalling well over the 80,000 word limit. Sometimes I think about it and think it could be brought up to scratch in a few weeks; other times I realise it needs to be completely rewritten from scratch.

Anyway I don’t think I’ve ever posted anything here from the thesis, for various reasons. But now that I’m confident the whole argument is settled I’m going to start posting bits and pieces. Partly because putting it out for an immediate and fresh audience (there are of course people who have been reading drafts all along) motivates me to clean up the messy bits, and the prospect of telling the story actually gets me excited about the whole damn thing again. I’m also going to use this space to exorcise offcuts that I know don’t fit into the structure but I still kind of like on their own merits. I’ll post in small chunks because I know people generally aren’t in the headspace to read thousands of words when they’re sifting through teh blogs. But I’m really interested to get feedback from anyone who feels like reading it.

It’s specifically about the politics of counter-inflation policy in Australia between 1945 and the mid-1980s. But that’s really a keyhole through which I tell a story about capitalism, the capitalist state, and what the hell happened between the post-war boom and what often gets thought of as the neoliberal turn of the 1980s. In the middle there, of course, is the crisis of the 1970s. It’s about Australia, but I think aspects of the story in outline are generalisable at least to the other Anglo countries. In some ways focusing on little old Australia opens up new angles, because we’re all so used to hearing the story of the post-war boom, stagflationary bust, and neoliberalism with regard to the US and UK, and it’s interesting to see what’s different and what’s not. Interesting quirks like monetarism making its first political appearance through the Labor Party, and the great transition of the 1980s coming through Labor’s Keating and the labour movement acceptance of the Accord, rather than the hard face of Thatcher or Reagan.

I also happen to think the story makes a pretty exciting narrative, which I try to do justice to even though I’m trying to explain rather than tell the story (that last bit is my supervisor talking). There’s the Battle of the Banks, an enormous media battle of propaganda and counter-propaganda over Chifley’s plan to nationalise the banks; a decade of financial innovation in which a tower of mindboggling new financial instruments and institutions is built on the back of consumer debt, collapsing in a credit crunch (the 1950s); wild boom and bubble years of mineral discoveries and exploitation; Milton Friedman arriving on a plane direct from Chile followed by camera crews on a speaking tour in shopping malls up and down the east coast; Joan Robinson arriving a month later (fewer camera crews); Fraser’s coup and the nation of bastards, carried up and down on a whiplashing exchange rate… and dumped into the 1980s.

Attention deficit

It’s apparently really hard for the press gallery group mind to make sense of what the government deficit means. That’s OK, it’s confusing and there are a lot of unknowns. But in the absence of a clear framework for thinking about it, it’s tended to fall into what it thinks it knows: deficits are bad, governments are always waiting for an opportunity to slip into comfortable habits of profligacy, stimulus might seem like a good idea now, but we’ll be paying for it for years, etc. Since most of the deficit is due to a collapse in revenues rather than deliberate stimulus, the line is tempered somewhat, but because the Coalition is insinuating at every opportunity that the deficit, by its very existence, somehow reflects badly on the government, a ridiculous position has to be taken seriously.

Even prior to the deficit predicted for the coming year, the move from a 1.5%-of-GDP surplus in 2007-08 to a likely 2.5%-of-GDP deficit in 2008-09 is the biggest one-year turnaround since World War II. It is indeed a big deal. But unless you think the private sector has been chomping at the bit for more action but was ‘crowded out’ by government – in which case rush your manuscript on the real story of the Great Financial Crisis to a vanity press post haste – an attempt to balance the budget with 4%-of-GDP less spending would have just meant 4% less GDP, or worse, and almost certainly left us with a deficit still, as revenues collapsed further.

Again, government debt is always and everywhere a macroeconomic issue and not something to think about as if government were a household or a firm. There are limits to deficits, but they are very fluid and less tangible than a debt collector at the door or a bankruptcy court. They are macroeconomic limits, not balance sheet limits.

What makes the issue so confusing, besides sheer unpredictability, is that it has two relatively independent sides. There’s the problem of aggregate demand, unemployment and inflation, and then there’s the distributional problem of who’s paying in real terms in the long run.

The first side involves the question of how much the government can borrow, because if it gets into difficulties there it has to cut spending, which could aggravate the downturn. The Treasury comes to market as if it were a normal borrower, though the interest rates it pays are lower than the private sector on account of the certainty of repayment. The bond market is fairly global, so the yield on government bonds depends on global conditions. The ‘limit’ to borrowing doesn’t appear as a point where the government suddenly finds it can’t sell its bonds; rather, it manifests through higher interest rates. The stock of government debt ultimately determines the supply of government bonds, though the term make-up of the bonds (i.e., how many are 3-, 5- or 10-year bonds) may vary. (However, even in the years when the Commonwealth government had pretty much completely paid off its debt and was consistently running a surplus, it continued to maintain a $50 billion supply of bonds, because of their importance as an asset to the financial sector.)

Demand for Australian government bonds depends on the demand for government bonds as a whole, and on how bond-buyers rate the Australian government bonds relative to the debt of other governments. Though the government is pretty certain of repaying its debt, movements in the Australian dollar relative to other countries change the effective return, so expectations about the future value of the currency make a difference to the present demand for Australian bonds.

So there are two things at play here: how much demand is there for government bonds, and how is Australian government debt rated relative to that of other governments? The answer to the first question is, lots but it has started to fall, and to the second, pretty well so far. Ever since the credit crunch began, investors have piled into government debt and away from private sector debt. Consequently, the price of government bonds has risen and therefore the yield has declined. Here is a chart made from Reserve Bank data showing the yields on Australian government bonds: they have fallen 2 to 3 percentage points compared to the 6 per cent average that has prevailed since the taming of inflation in the 1990s. (The spread between 10-year and 3-year bonds has also opened up, reflecting the expectation that in the long run rates will rise again.)

Notice, though, that there has been an uptick this year, reflecting both the huge amount of government debt around the world flooding onto the market, and to some extent the beginning of a shift in demand back to private bonds. There have been reports of ‘horrible auctions’ in the US, UK and Europe where governments have not been able to sell what they wanted at the price they wanted, but that doesn’t mean they haven’t been able to borrow, only that they have to do it at a higher interest rate. Inevitably investors will move back towards private lending and government bond yields will rise, but at present they still enjoy an historically-low cost of borrowing, and it seems highly unlikely that private borrowing will reach pre-crunch levels any time soon.

There is a continual rumble in the press about the potential for Australia’s government deficit to take us into ‘banana republic’ territory. This reflects a myopia – endemic to Australian political culture – of the same kind that sees the Whitlam government represented as to blame for the stagflation of the 1970s. In both cases, the crisis is global, and at this point in time Australia is relatively well-off. Treasury and the Reserve Bank are now projecting that the ‘worst crisis since the Great Depression’ will be milder for Australia than the recession of the early 1990s. This may be optimistic, based on projections of a quick recovery in China and elsewhere. But when it comes to financial markets, perceptions matter, and presently the market is rating Australian debt highly.

People (like Bernard Keane in Crikey) who are laughing about Rudd accepting vindication from the same ratings agencies he was so scathing about vis-a-vis their bubble ratings miss the point entirely. The ratings have power, whether they’re rational or not. It’s true that government finances are always held hostage by capital, which is prone to irrationality, and which, at its most rational, keeps a tight rein on the political possibilities. (Jeopardise the exchange rate or look like you’re going to spark inflation, and bam.) A few variables a percentage point or two the wrong way, and things would be looking very different, as they are in many parts of the world. But that’s capitalism, and that, of course, could not make it into the narrative structures of the faux-cynical Canberra press gallery or the business press.

The second side of the whole thing is distributive. Much of the fall in government revenue is a consequence of the evolution of the tax structure during the resources boom which left the finances structurally dependent on abnormally high minerals prices. It’s not just a cyclical development that will be automatically reversed by an upswing (unless commodities prices go crazy again). Exacerbated by inevitable pressures to pay down the debt, and the slowly-erupting volcano of superannuation, a good old-fashioned distributional struggle is upon us over what gets cut and/or who pays more tax. But I’ll leave that for another post.

Ah, civilisation

A great essay by Alex Ross provides a counterpoint to Scruton, who is the kind of guy Ross is talking about when he says: “I don’t identify with the listener who responds to the “Eroica” by saying, ‘Ah, civilisation.’”

As it happens, I’ve been reading Ross’s book The Rest is Noise: listening to the twentieth century, very slowly, because it’s unfamiliar territory so I’m tracking down the recommended listening as I go along (and then listening to it). From this essay it turns out I’m exactly the kind of reader Ross was writing for, having got into Terry Riley and Steve Reich backwards, not as the culmination of avant garde classical, but as forerunners of electronica, and having first heard Stockhausen and John Cage via Sonic Youth.

Anyway, check out the essay. Ross is my kind of music critic – sociologist and historian, he tries to explain what happened to music in the culture over the century, classical vs. jazz vs. rock:

The twenties saw a huge change in music’s social function. Classical music had given the middle class aristocratic airs; now popular music helped the middle class to feel down and dirty. There is American musical history in one brutally simplistic sentence. I recently watched a silly 1934 movie entitled “Murder at the Vanities,” which seemed to sum up the genre wars of the era. It is set behind the scenes of a Ziegfeld-style variety show, one of whose numbers features a performer, dressed vaguely as Franz Liszt, who plays the Second Hungarian Rhapsody. Duke Ellington and his band keep popping up behind the scenes, throwing in insolent riffs. Eventually, they drive away the effete classical musicians and play a takeoff called “Ebony Rhapsody”: “It’s got those licks, it’s got those tricks / That Mr. Liszt would never recognize.” Liszt comes back with a submachine gun and mows down the band. The metaphor wasn’t so far off the mark. Although many in the classical world were fulsome in their praise of jazz—Ernest Ansermet lobbed the word “genius” at Sidney Bechet—others fired verbal machine guns in an effort to slay the upstart. Daniel Gregory Mason, the man who wanted more throwing of mats, was one of the worst offenders, calling jazz a “sick moment in the progress of the human soul.”

The contempt flowed both ways. The culture of jazz, at least in its white precincts, was much affected by that inverse snobbery which endlessly congratulates itself on escaping the élite. (The singer in “Murder at the Vanities” brags of finding a rhythm that Liszt, of all people, could never comprehend: what a snob.) Classical music became a foil against which popular musicians could assert their earthy cool. Composers, in turn, were irritated by the suggestion that they constituted some sort of moneyed behemoth. They were the ones who were feeling bulldozed by the power of cash. Such was the complaint made by Lawrence Gilman, of the Tribune, after Paul Whiteman and his Palais Royal Orchestra played “Rhapsody in Blue” at Aeolian Hall. Gilman didn’t like the “Rhapsody,” but what really incensed him was Whiteman’s suggestion that jazz was an underdog fighting against symphony snobs. “It is the Palais Royalists who represent the conservative, reactionary, respectable elements in the music of today,” Gilman wrote. “They are the aristocrats, the Top Dogs, of contemporary music. They are the Shining Ones, the commanders of huge salaries, the friends of Royalty.” The facts back Gilman up. By the late twenties, Gershwin was making at least a hundred thousand dollars a year. In 1938, Copland, the best-regarded composer of American concert music, had $6.93 in his checking account.

All music becomes classical music in the end. Reading the histories of other genres, I often get a warm sense of déjà vu. The story of jazz, for example, seems to recapitulate classical history at high speed. First, the youth-rebellion period: Satchmo and the Duke and Bix and Jelly Roll teach a generation to lose itself in the music. Second, the era of bourgeois grandeur: the high-class swing band parallels the Romantic orchestra. Stage 3: artists rebel against the bourgeois image, echoing the classical modernist revolution, sometimes by direct citation (Charlie Parker works the opening notes of “The Rite of Spring” into “Salt Peanuts”). Stage 4: free jazz marks the point at which the vanguard loses touch with the mass and becomes a self-contained avant-garde. Stage 5: a period of retrenchment. Wynton Marsalis’s attempt to launch a traditionalist jazz revival parallels the neo-Romantic music of many late-twentieth-century composers. But this effort comes too late to restore the art to the popular mainstream. Jazz recordings sell about the same as classical recordings, three per cent of the market.

The same progression worms its way through rock and roll. What were my hyper-educated punk-rock friends but Stage 3 high modernists, rebelling against the bloated Romanticism of Stage 2 stadium rock? Right now, there seems to be a lot of Stage 5 classicism going on in what remains of rock and roll. The Strokes, the Hives, the Vines, the Stills, the Thrills, and so on hark back to some lost pure moment of the sixties or seventies. Their names are all variations on the Kinks. Many of them use old instruments, old amplifiers, old soundboards. One rocker was recently quoted as saying, “I intentionally won’t use something I haven’t heard before.”Macht Neues, kids! So far, hip-hop has proved resistant to this kind of classicizing cycle, but you never know. It is just a short step from old school to the Second Viennese School.