Fixing economic absurdities
Updated: Dec 19, 2020
If we were to start from scratch to arrange how money should be supplied to a democratic society – "nobody in their right mind would dream of setting it up as it is now." This is James Robertson's verdict in his book Future Money: Breakdown or Breakthrough? (2012). The system, as it now works, is self-inflicted, he says. We have allowed ourselves to become dependent on the commercial banks to provide our money supply as interest-bearing debt. Once we have got rid of that burden a good deal more than the present annual interest cost will become available for other public purposes. Robertson gives us hope. He asserts that if enough of us decide so, we should be able to change the way the money system now works to reduce the conflict between present money values and universal values such as democracy, the rule of law and human rights.
The gist of Robertson's proposals is that public agencies serving the common interest should create the public money supply. People and businesses and other organisations, both public service and non-profit organisations, should be taxed on the value they take from common resources (my emphasis). Taxes thus accrued should, after democratic decisions on what is needed to finance other public services, be equitably shared among us all as a citizen's income.
Robertson is by no means alone in his critique and proposals for changing the economy. There are a great variety of proposals for remedying the broken economy. I here wish to bring to the fore two scholars who argue along the same lines as Roberson. They are Geoff Crocker in his book Basic Income and Sovereign Money: The Alternative to Economic Crisis and Austerity Policy (2020) and Stephanie Kelton, in her book The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (2020).
Geoff Crocker points out that the system as it now works generates seriously dysfunctional outcomes. He lists economic crisis, actual or likely to repeat; pervasive debt, both household and government debts; continuous austerity policy; extensive poverty; low pay jobs; increased inequality as well as ecological damage.
Crocker stresses that his proposal requires a radical re-think and economic system re-engineering. There are many calls for new thinking in economics, Crocker observes. What is specific about my proposal, he says, is that it brings together two ideas, basic income and sovereign money. This combination offers a radical alternative paradigm to contemporary economic thinking. It counteracts crisis and austerity and offers an ecological advantage, while it, at the same time, lies within the established thinking of Keynesian economics that aggregate demand is the key policy target and tool in modern economic analysis and policy formulation.
My book Basic Income and Sovereign Money makes a big claim, Geoff Crocker says. A combination of basic income and sovereign money can counteract economic crisis and austerity policy. He gives a true-to-life explanation of the dysfunctional working of the economy. Consumer expenditure is consistently greater than labour income, and the gap is increasing fast. From 1948 to 1995, we lived from earned income, and labour income was more than sufficient to fund consumer expenditure. But from 1995 on, the opposite is the case. What we earn can no longer sustain our consumer lifestyle. Unearned income is therefore necessary in the economic structure. This unearned income consists of pensions, welfare benefits, dividends and consumer credit.
Technology is one major factor that has led to a decrease in real earnings as compared to work output. In this situation, debt-free sovereign money is required and justified (my emphasis) to supplement consumer income and sustain public expenditure. Both basic income and sovereign money proposals have a further crucial impact, namely, to reduce debt in the economy. Basic income can, thus, avoid the need for households to increase their borrowing to fund their expenditure, with the effect that consumer debt is radically reduced.
The massive increase in consumer debt was a main factor triggering the 2007 economic crisis. Crocker explains that to replace consumer debt with basic income will avoid such crisis. Equally, if governments issued direct sovereign money and defined this to be debt-free, i.e. issued without the matching sale of government bonds, then the government expenditure funded by this sovereign money would no longer be defined as deficit spending. Thereby, public sector debt would not be incurred, and austerity policy would then not be necessary to reduce government deficit. This would do away with escalating debt that in some counties may equal, or in some cases even exceed, the entire gross domestic product, GDP.
This may read like a dreamland proposal, Geoff Crocker observes. Nonetheless, his book works through the arguments and his hypothesis is underpinned by a three-year research project at the institute for Policy Research at the University of Bath in the UK.
The situation gets even better when we turn to Stephanie Kelton's book The Deficit Myth: Modern Theory and How to Build a Better Economy (2020). Kelton's message is that if we want to increase our public well-being, we have far more options than we realise. What we desperately need, though, is to see through the myths that have been holding us back. Kelton is a leading proponent of the Modern Monetary Theory (MMT) research orientation that argues that we need a Copernican shift in our understanding of the economy. Like Copernicus' revelation that the earth revolves around the sun and not the other way around, Kelton's message is that when it comes to deficits, in almost all instances deficits are good for the economy. They are even necessary, she insists. The way we have thought about them and treated them is often incomplete or inaccurate. Rather than chasing after the misguided goal of a balanced budget we should be pursuing the promise of harnessing what MMT calls our public money, or sovereign currency, to balance the economy so that prosperity is broadly shared and not concentrated in fewer and fewer hands.
Mainstream economists see the budget deficit, but they're missing the matching surplus on the other side, Stephanie Kelton asserts. And since many Americans are missing it, too, they end up applauding efforts to balance the budget, even though it could mean taking money out of their pockets.
As a share of the gross domestic product (GDP), the US national debt was at its highest—120 percent—in the period immediately following the Second World War. Yet, this was the same period during which the middle class was built, real median family income soared, and the next generation enjoyed a higher standard of living without the added burden of higher taxes. The reality is that government deficits don't force financial burdens forward onto future populations. Increasing the deficit doesn't make future generations poorer, and reducing deficits won't make them any richer, Stephanie Kelton asserts.
Is thinking within the International Monetary Fund, IMF, moving in the same direction? In a blog post Public Investment for the Recovery, Vitor Gaspar, Paolo Mauro, Catherine Pattillo and Raphael Espinoza from the IMF Fiscal Affairs Department advance the idea that public investment has a central role to play. Their new Fiscal Monitor shows that increasing public investment in advanced and emerging market economies could help revive economic activity from the sharpest and deepest global economic collapse in contemporary history.
"With the great force of common sense, Stephanie Kelton and the MMT team have broken through the closed circles of so-called sound finance, a stale orthodoxy that has weakened and impoverished us all", says James K. Galbraith from The University of Texas at Austin in praise of Kelson's book. The same could be said about the thinking of James Robertson and Geoff Crocker. Their advice should come handy to the International Monetary Fund that at its annual meeting 2020 stated: "We commit to using all available policy tools, individually and collectively, to restore confidence, jobs, and growth. We stand ready to assist the most vulnerable countries and people."
Sources I've relied on:
Crocker, Geoff, Basic Income and Sovereign Money: The Alternative to Economic Crisis and Austerity Policy (2020)
Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (2020)
International Monetary Fund
- IMF blog Public Investment for the Recovery October 5, 2020
- Communiqué of the Forty Second Meeting of the IMFC
Robertson, James, Future Money: Breakdown or Breakthrough? (2012)