Here’s another review of Jim Stanford’s Economics for Everyone, 2nd edition, this one by guest contributor and MMT aficionado Larry Kazdan.
Review of Jim Stanford’s /Economics for Everyone
by Larry Kazdan
Jim Stanford has written a superb book which deserves pages of admiration and praise – a truly impressive body of work that introduces to the public an alternative vision of progressive economics. Yet his overview is not without its tragic policy flaw; a flaw which likely renders many of his objectives unachievable.
On page 352, we read this remarkable statement, “If money can be created out of thin air by the government’s own bank, to buy financial securities, why can’t it be created out of thin air to
do other things – like putting people back to work in real jobs? The answer is, ‘It can be.'” Yet this groundbreaking insight, which appears in this second edition in a new chapter on the recent financial crisis, is not integrated into the rest of the book. In fact, it is either ignored or downplayed in the
book’s other chapters.
For example, examine the diagram on page 325 which encapsulates the “complete system”, a “composite portrait of the real-world economy in all its complexity”. The government’s central bank
does not merit sufficient importance to appear. The government simply taxes and spends. This view is reinforced on page 279 in the discussion of fiscal policy with the explanation that
government collects taxes in order to fund its programs. There is also an acknowledgment that government can borrow, and (on page 288) can even borrow “from the government’s own central
bank”. But this option is lumped in with a general discussion of public debt with a stark warning that a too large debt accumulation can have “negative economic and financial consequences”.
When it comes to actual recommendations (page 381), Stanford’s fiscal policy advice is to “Run moderate annual deficits (including paying for public capital projects) and “Aim for long-run stability in public-debt ratio (as share of GDP) over the business cycle.” At a time when the private financial system
must be reined in, when the economy is struggling through lack of demand, when infrastructure is aging and must be renewed, when massive new public investments must be made to combat
climate change, when inequality and poverty must be addressed and over 1.3 million Canadians seeking jobs should be given the opportunity to work, what is the justification for restricting government spending to moderate deficits and an arbitrary debt-to-GDP ratio? These are actually conservative fiscal
policy settings which will prevent a proactive government from tapping the power of its central bank to drive the radical transformation that this book attempts to promote.
The justification given (on page 289) is that, “If debt grows too quickly, or becomes too large, investor confidence in government bonds, or even the country’s currency, can become rattled. This produces financial and economic instability (including higher interest rates and exchange rate instability
and – in severe cases – an outflow of financial capital from the country.”
First, if the Bank of Canada by creating money can purchase all the bonds that the government can issue, then what leverage do investors have if they “lose confidence”? They can buy the bonds or not; it doesn’t matter. The private sector is happy to purchase bonds which are risk-free financial assets. Bonds are
merely asset swaps with the private sector in return for low-interest bank reserves which were previously created through prior government spending. They do not provide the government with any additional capacity to spend (except by self-imposed limitations). (Footnote 1)
Second, the belief that higher public spending will lead to higher interest rates is refuted by the evidence. Government deficits flood the banks with excess reserves. If the government does not mop up these reserves by offering bonds in exchange, interest rates will drop. As an example, the country with the
highest debt-to-GDP ratio in the world – Japan – has no trouble issuing bonds at low interest rates, nor does it suffer from inflation. (Footnote 2)
Third, exchange rates can certainly be affected but this fear is exaggerated. Canadian exchange rates are affected by a variety of factors (such as commodity prices), and Canada has seen its dollar float from a range of 63 cents to $1.10 without disastrous consequences. A floating exchange rate is the price
paid for the fiscal flexibility that allows government to robustly manage the national economy and achieve full employment.
Fourth, though not even mentioned, is the risk of inflation. Any kind of spending, private or public, has this potential so the real question is whether the type of spending is within the resource capacity of the economy. Government must target its spending in such a way as to prevent bottlenecks or supply
shortages in critical areas. (Footnote 3) A Job Guarantee program utilizing workers which the private sector does not require is an excellent use of government fiscal capacity, and a better means of anchoring prices than deflating the economy to restrain wages through unemployment. (Footnote 4)
Finally, the debt-to-GDP ratio was an important measure when countries were on the gold standard, could run out of bullion, and consequently could fail to pay their debts. But the world has been off the gold standard for more than 40 years. Countries with floating, non-convertible currencies can always service their debts provided they are denominated in their own currencies. Japan with the highest debt-to- GDP level has already been mentioned. One could raise the issue of Greece, but as Stanford notes (on page 290), Greece surrendered its monetary sovereignty by becoming part of the Eurozone and became subject to the power of bond vigilantes demanding higher interest rates. As a sovereign currency issuer, Canada is not subject to this pressure, and our debt-to-GDP ratio is an irrelevant focus of attention. (Footnote 5)
Stanford’s observation about the central bank quoted above in the first paragraph is a recognition that our government with its fiat currency is not revenue constrained. It can purchase whatever resources are left unused by the private sector. The only practical limit on this spending is the capacity of the
economy to respond without inflation. But we are far from inflation, and have many unused resources including 1.3 million people looking for work who could be mobilized to do useful things.
Timidity and subservience to private capital are not qualities we desire in a progressive government. Let us hope that in the third edition of this excellent book, there is a recognition that by aggressive use of its central bank, our federal government need not kowtow to money markets and can be bold and
effective in promoting the public purpose.
Larry Kazdan has undergraduate degrees in history and sociology, is a retired Chartered Professional Accountant and runs the website Modern Monetary Theory in Canada:
<http://mmtincanada.jimdo.com/> . He takes seriously Jim Stanford’s
suggestion that economics is too important to be left to economists.
1. Bond sales
William Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. /http://bilbo.economicoutlook.net/blog/?p=30105/
At any time of its choosing, the government could cease to issue public debt and continue deficit spending at will. It might have to change some regulations and statutes which have been put in place to give the impression that the debt issuance is funding its net spending, but that would be merely legislative activity.
Remember the government just borrows back what it spent in deficit in a previous period. Bond sales draw on private saving which is just a reflection of past deficits.”
William Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity(CofFEE), at the University of Newcastle, NSW, Australia /http://bilbo.economicoutlook.net/blog/?p=31021/
When QE was first introduced in Japan in the 1990s, mainstream economists rushed to predict that the massive expansion in central bank reserves would be inflationary.
Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should
have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.
Nothing like that happened.
Neo-liberal economists wrote off their mistakes by claiming that Japan is ‘so strange’ that it is a ‘special case’ and therefore not generally applicable.
Their ad hoc defense was convenient because the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with their economic theories.
It was a mind-boggling failure to explain reality.
*L. Randall Wray, Ph.D. is Professor of Economics at the
University of Missouri-Kansas City
“The danger of spending too much money is inflation; there might also be an impact on exchange rates. The solution to the first problem is to avoid spending more once full employment is reached; and to carefully target spending even before full employment to avoid bottlenecks. The solution to the second is to float the currency.”
*4. What is a Job Guarantee?
*William Mitchell is a Professor in Economics and Director of
the Centre of Full Employment and Equity (CofFEE), at the
University of Newcastle, NSW, Australia*
” …..the Job Guarantee is actually a macroeconomic policy framework designed to ensure full employment and price stability is maintained over the private sector business cycle.
The Job Guarantee jobs would ‘hire off the bottom’, in the sense that minimum wages are not in competition with the market-sector wage structure.
By not competing with the private market, the Job Guarantee would avoid the inflationary tendencies of
old-fashioned Keynesianism, which attempted to maintain full capacity utilisation by ‘hiring off the top’ (i.e. making purchases at market prices and competing for resources with all other demand elements).
Job Guarantee workers would enjoy stable incomes, and their increased spending would boost confidence throughout the economy and underpin a private-spending recovery.”
*5. Public Debt Ratio
*William Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia*
The public debt level relative to GDP is not a matter of economic concern ever if the government in question issues its own currency and only issues debt in that currency.
Under those circumstances the government can*always* service its nominal liabilities and the public debt ratio is an irrelevant focus of attention.
Forget the deficit. Forget the fiscal balance. Focus on what matters – employment, equity, environmental sustainability. And as we would soon see – the fiscal balance will just be
whatever it is – a relatively uninteresting and irrelevant
- Alternatives to Corporate Globalization: Cooperatives (February 6th, 2017)
- Summer reading! Review of Stanford’s second edition of Economics for Everyone (June 20th, 2016)
- PEF Summer School 2016 (May 6th, 2016)
- G20 meeting of world finance ministers too little too late (February 15th, 2015)
- Rethinking Economics Waterloo Conference, Feb 7 (January 22nd, 2015)