Mitchell strikes back

Bill Mitchell has responded to my criticism at great length. I’ll try and boil down the points of disagreement, but this is still going to be pretty long in response!

1. Speculators

First, Mitchell skips right over my central criticism: that the expectations and opinions of wealth-holders matter even when they are wrong. Even if money works the way Mitchell thinks it does, if money managers expect a fall in the value of the currency, they’re going to speculate against it. Note the period after Hawke’s election when despite policymakers realising that monetary targeting was rubbish, they kept announcing targets to appease the wrong-headed markets. (See Simon Guttmann’s 2006 ‘The Rise and Fall of Monetary Targeting in Australia’.)

2. Tax and the demand for currency

Mitchell implies that the demand for domestic currency to pay domestic taxes underpins its value, such that the movements out of the currency by wealth managers would be foiled by their need to pay tax. A fixation on the fact that tax payments are denominated in national currency is common among cartalist (state) money theorists. I’m not entirely sure why – there will also be a demand for currency arising from its legal tender status, from the need to make all kinds of payments denominated in it – why single out tax payments? At any rate, if the government is running a deficit and not issuing equal amounts of bonds, it is – by definition of the word ‘deficit’ – injecting more money into the economy than it is calling back in taxation. Finally, the fact that wealth-holders are selling the local currency to buy foreign currency doesn’t destroy the local currency, which remains in someone’s hands. Even if at a lower value in terms of other currencies and goods, it still remains available to pay taxes, even if individuals have to borrow back some of the currency they’ve sold to do it. I’m sure people are aware that currencies can and do dive in the foreign exchange markets despite the government that issues the currency requiring tax payments in its own currency.

3. Banks and the supply of currency

My argument is not at all based on a money multiplier conception as Mitchell presents it. My thinking on money is also heavily influenced by post-Keynesian thought, especially the so-called ‘structuralists’ such as Hyman Minsky and Victoria Chick. I note that Mitchell includes Minsky as one of his ‘modern monetary theorists’ but Minsky is miles away from his cartalism.

To summarise very quickly a complex picture: Currency (or ‘high-powered money’) plays a special role within a country’s monetary system, mainly as bank reserves but also the paper cash we carry in wallets. But the bulk of the money supply is not currency but private bank liabilities – bank deposits, and also various other liquid financial instruments – where you draw the line between ‘money’ and just plain ‘debt’ depends on what you’re looking at.

Banks are traditionally constrained in their lending by a couple of factors. First, they need to be able to meet net withdrawals and net transfers to other banks with currency, and since their assets tend to be less liquid (i.e. readily saleable) than their liabilities, a bank needs either an adequate reserve of currency or a way to quickly get its hands on some when it needs it. Second, banks are often constrained by regulations requiring them to hold at least a certain portion of their assets in liquid form, and/or limiting their lending to some multiple of their capital.

Over the last several decades banks evolved various practices and markets to minimise reserve holdings – first ‘asset management’, involving the development of markets in which banks could quickly offload securities; then ‘liability management’, involving markets in which banks could quickly borrow to meet their reserve needs. (Finally, recent engagement in off-balance sheet activities was motivated by the capital requirement regulations, but we can leave that alone here.) Mitchell is quite right that individual banks are no longer really quantitatively constrained by their reserves, and this is why central banks are these days generally concerned instead with the interest rates on short-term borrowing in the money market, representing the cost of reserves to banks.

But for the banking system as a whole, the quantity of reserves available is limited, and the base interest rate represents supply and demand conditions in the money market. Supply is a real constraint on the system as a whole, though not a firm, clear-cut one. Of course, the central bank intervenes in this market in various ways, buying and selling short-term instruments, lending directly to banks, and entering into repurchase agreements. But the fact remains that it is intervening in a market in which it is powerful, but which it does not control. Notice that though the central bank has a good deal of power over short-term rates, its power diminishes more the further you go up the rate spectrum.

The question relevant to the discussion here is: will the central always be able to soak up extra currency that finds its way into the money market as a result of unfunded government deficits? I note that on this question Mitchell actually goes further than I would, claiming that attempts by the central bank to reduce the money supply always fail. I would say, rather, that sometimes it would be able to soak up the currency and sometimes not, depending on the state of demand for credit in the broader economy.

4. Sectoral balances

The fundamental problem here is that Mitchell is taking highly aggregated national accounting identities and trying to turn them into things of causal significance. He implies that given a structural current account deficit, it is better that the government run a deficit than the domestic private sector. Why? Because if the private sector keeps accumulating debt it will eventually have to try to pay it down, whereas the government is not constrained in such a way, and can continue to accumulate indefinitely.

The trouble is, though, that there is absolutely no guarantee that a government deficit run deliberately to offset the structural current account balance would have the intended effect. By increasing domestic demand it is actually likely to have precisely the opposite effect. Factor in the inevitable reactive capital flows and movements in the exchange rate, and who knows what the ultimate effect would be (well, probably an increased current account deficit).

On a side point, Mitchell is wrong to say that “the non-government sector cannot fulfil its tax obligations unless the government has spent first”. Currency also enters private sector balance sheets via central bank activity. For example, in recent years of surplus, and consequence dearth of government debt as a bank ‘position-making instrument’, the Reserve Bank of Australia has operated primarily by entering into repurchase agreements with private banks, temporarily supplying currency when necessary. There’s no reason why this couldn’t go on indefinitely. (Not, of course, that I think it ought to – as noted previously, it is not my position that the government always needs to pay off all its debt.)

5. Finance, the Jobs Guarantee, and inflation

Mitchell points out that his costing of the Jobs Guarantee plan requires a deficit much smaller than the deficit we are presently running. This is a fair point, (though remember that he also implied that the government ought to run deficits matching the structural current account deficit, implying quite a different level of structural government deficit).

As I said in my original post, it’s not the Jobs Guarantee I have a problem with, it’s Mitchell’s idea that the government is completely unconstrained by budgetary concerns. If the Jobs Guarantee policy idea was uncoupled from these monetary eccentricities it might actually find more support, instead of Mitchell’s followers continually finding themselves butting up against a crazy world that doesn’t understand how bloody brilliant – and yet how utterly commonsensical – it all is.

In the right conditions, I would support a government trying out something like the Jobs Guarantee, which is basically a large extension of government employment at the minimum wage to mop up unemployment. But while Mitchell expects it to be a stable remedy for unemployment, I would expect it to be economically destabilising. The reason is that capitalism relies on a certain level of unemployment to discipline wages. The Jobs Guarantee is designed to be non-inflationary by setting its wage at the minimum wage. But I think even then it would remove much of the sting from unemployment, make employed workers feel more secure, and embolden labour.

Great, you might say, and I would agree – which is why I would support the policy. But it would destabilise in an inflationary direction, and present the government with choices it faced at the end of the full employment period in the 1970s: extend its controls in further reforms: price and wage controls, capital controls, public investment, etc., in other words completely politicising the economy; or abandon the policy. In the right political conditions, the Jobs Guarantee could be part of the opening salvo in a much broader social change. In the wrong political conditions it could be an abortive disaster.

I think the whole Mitchell system appeals to a certain kind of person, who is rightly sickened by a permanent pool of unemployment, sees policymakers as irrational, and thinks the whole thing could be put right, with no losers and no conflict, with a single Big Idea. As such, it risks being a Douglas Credit for the 21st century. I would rather see the energy joining a broader project which realises the extent to which capital shapes capitalist political possibilities, and recognises that there is no simple policy switch that would suddenly make everything rational without a serious confrontation with that power. Mitchell says that’s ‘quasi-Marxist’ and so it is!



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.

Bob Gould is back

Bob Gould’s Ozleft site has been quiet for so long I was wondering if it was ever coming back. But now Bob’s posted another of his patented election analyses. Check it out. It’s a little different from mine in that Bob stresses the value of work within the ALP. I can see why leftists in the ALP would not want abandon the field to the party’s right, and Bob’s right that it’s worth defending the position of the unions within one of the parties of government.

The left in the Greens and the left in the ALP are on the same side. But that sure doesn’t mean we refrain from attacking the ALP in government. Socialists in the party ought to welcome a serious challenge from the left as strengthening their own position within Labor. The party won’t change without external pressure. For all the constitutional power of union delegates within the party, they don’t have much to show for their efforts to get a decent industrial relations policy.

Where I most agree with Bob – and it’s a line he’s been running for ages – is the importance of engaging with real political forces rather than isolated little sects.

Published in: on 30 November, 2007 at 7:38 am  Comments (3)  

Six per cent

So many commentators treat electoral politics as somehow reflecting the mood of ‘the nation’ as if it had a collective psyche. A few years ago ‘Australia’ was relaxed and comfortable, aspirational, sick of out-of-touch inner-city elites. Now ‘Australia’ is ready for change. The Coalition lost ‘the Australian people’ by going too far with Work Choices and ignoring the mood of the nation on climate change.

What actually happened was that a net six per cent of voters switched from the Coalition to Labor since 2004. The great Australian mood swing involved just over one in twenty.

The parties’ electoral strategists don’t see politics like the above commentators. They see things much more concretely. It’s that six per cent margin that counted.

So when Rudd claims a mandate against the left of his own party, against the unions, against the public service, he’s being dishonest. Rudd surfed the centripetal force of modern electioneering to get where he is. It was chasing that six per cent that put him there.

The fun bit of Saturday was when the Coalition got hammered. The sweetest moments were Howard (probably) losing Bennelong and Mal Brough’s much-deserved wipeout. There is something in the view that the ‘mood of the country’ has shifted – but it’s a consequence of the change in government, not a cause. It’s a morale boost for everyone left of the Liberals, and it changes the media playing field, precisely because it’s the journos who believe all that crap about the ‘mood of the country’.

But the less fun bit was watching Rudd’s ALP fill the vacuum. I say ‘Rudd’s ALP’ advisedly, because it’s not really the Labor Party of many of its members. ALP eminence and long time past president Barry Jones explained himself last year that the members and volunteers tend to be well to the left of the parliamentary party, but their energy is sucked away to the benefit of a party of the Centre Right.

The worst thing about the election – from the point of view of the Labor faithful themselves, surely, once the euphoria fades – is that it validates the strategy of the nomenklatura: what the US Democrats call ‘triangulation’, what Jones calls ‘small target’, and what Kim Beazley described as ‘under the radar’. It’s the recognition – entirely realistic – that it’s the six per cent, who once voted for the Coalition but could be turned, that count. The basic idea is that “oppositions don’t win elections, governments lose them”, so the best thing for the opposition to do is, in Jones’s words:

insist that they are above or between Left and Right in the political spectrum, emphasise immediate self-interest, avoid any public commitment to ethical or ideological causes, and never show courage in tackling unpopular issues. Pragmatism is everything. [“Where are we coming from? Where are we going?” in Coming to the Party, 2006: p. 17]

It’s a strategy that rules out any departure from the status quo, no matter who is in power. (At least, no departure for political reasons: there has been plenty of change in Australian society, but little of it has depended on one party or other being in government.)  But it’s an eminently rational strategy given the environment, and it’s hardly surprising that natural selection hones parties into machines for pursuing it.

Where does that leave the left? There’s a large number of us, really, inside and out of the ALP, and certainly more than six per cent of the electorate. On many issues we are well in the majority. It’s easy to diagnose the environment that generates the strategy that locks in the status quo. But that brings us no closer to strategies of our own.

My ultra-leftist devil, who is always talking about structure, thinks working with the Greens is a fool’s game. He sees the ALP volunteers as mugs, wasting their energy to support the state. And a Green is just another kind of ALP volunteer, since the preferences flow with the same effect. As a commenter at Leftwrites put it, you can see the Greens as a pressure valve for Labor, enabling it to move to the right because those who defect maintain the Pure Soul illusion of opposition without threatening the ALP’s two-party-preferred vote.

But my social democratic angel, who is always talking about agency, is more optimistic. The Greens are not the only way to change the political environment. But they could be part of it, if they redouble efforts to join with the traditional Labor base in the unions and public service.

In the coming months the ALP is not going to sustain the left’s euphoria. Rudd means what he says about taking on the unions and the left. He stated outright before the election that fighting inflation was going to be the government’s first priority. Yesterday he promised an elevation in the importance of Treasury advice. He has been throwing around the term ‘razor gang’, and not as a bugbear.

The Greens directly attacked Labor on industrial relations and public services during the election, and some tried to make it the centre of the Green message. I think there’s potential for the Greens to start seriously threatening the ALP base in the urban centres if it’s prepared to follow this up. Go for the most politically conscious section of the union movement. Ask loudly why Labor won’t overturn the most egregiously offensive elements of Work Choices (the ABCC building industry police force) or the most industrially important (the ban on pattern bargaining). And why is it talking ‘razor gang’?

The Greens seem worth getting involved with if they’re serious about this, because they’re the only force presently putting any fear into the ALP leadership. The fall in the ALP primary vote genuinely does worry them. They needed Greens preferences to win in more than 20 electorates this time around. As Lindsay Tanner – soon to be Finance Minister – put it in Jones’s book:

The end result has been a downward shift in the Labor primary vote, from the high forties to the high thirties. As Labor has become more entangled in the contradictions between its major support bases, more of its tertiary-educated supporters have shifted their allegiance to the Greens.

While this loss of support to the Greens only threatens a handful of Labor seats, including mine, and it is reasonable to assume that any Green MPs would probably vote for a Labor government, the threat is very serious. The Australian electoral system rewards parties that poll more than one-third of the primary vote, and punishes those that fall below it. We cannot afford for our primary vote to fall much further, and we cannot afford any more hollowing out of our activist and membership base. [“Let’s Start the Attacks”, in Jones, 2006: pp. 209-10]

If the Greens want to really hit the ALP leadership, they should go for its union base. The Green Party is hardly now seen as a working class party, but if it keeps making the effort, there is a chance it could be.

Published in: on 27 November, 2007 at 10:51 am  Comments (3)