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Why You’re Not Getting a Raise

By Nikos Bourtzis.

Much of the developed world has experienced stubbornly low real wage growth since the financial crisis of 2007. Currently, the British people are seeing their earnings decline in real terms. Even in Germany, where unemployment keeps falling to record lows, wage growth is stagnating. This phenomenon has squeezed living standards and has been one of the main culprits behind the rise of anti-establishment movements. Faster pay rises are desperately needed for the global recovery to accelerate and for ordinary people to actually be a part of it. This piece explains why rising labor compensation has been relatively minuscule during the current economic upturn and how this phenomenon could be remedied.

A bit of history

The lack of meaningful pay rises is not a phenomenon that started with the financial crisis of 2007. It can be traced back to the 1970s and 1980s, when monetarism started sweeping into academia and politics. The stagflation of the 1970s, the simultaneous rise of inflation and unemployment, led some governments to abandon the Keynesian policies of the past because apparently these policies could not deal with the stagflation. Monetary policy became the preferred tool to control inflation, together with a revived notion that markets, if left to their own devices, would bring the best social outcomes. The Thatcher and Reagan governments are some of the most famous examples of States adopting and implementing these beliefs. The first institution targeted for deregulation was the labor market. Wages increases were frozen and employment protection was scaled back, because it was believed that demand and supply forces would restore full employment. However, unemployment in the UK exploded after Thatcher came into office in 1980, increasing to over 10% and never returning to its post-World War II lows of between 1% and 2%.

Labor unions are one of the most important institutions regarding pay rises. In most industrial countries, they are responsible for wage and working conditions negotiations between employers and employees. Union membership in OECD countries grew until the mid-1970s but then started dropping. With the rise of neoliberal governments in the West, organized labor came under attack. Under the free-market ideology, unions disrupt economic activity with strikes and demand higher-than-optimal wages. Thus, their power needed to be kept in check. What is more important, though, is the shifting of ideas in what the goals of the State should be. In the post-War period, an expressed purpose of governments was to keep aggregate demand at full employment levels. The UK government, for example, stated full employment as its purpose after the War in its Economic Policy White Paper in 1944. That goal changed with the rise of neoliberalism.

When the commitment to keep employment levels high and stable was abandoned, and labor markets were deregulated, unemployment spiked in most countries and has never fallen at levels where it can be stated that full employment exists. Even during strong upturns unemployment levels in most countries did not dip below 4%. As a result, labor unions, and workers in general have lost their biggest bargaining chip. When there is full employment, and thus jobs are abundant, workers have more power to demand higher wages and better working conditions. With the neoliberal policies of the Reagan administration, real wages in the US got decoupled from productivity, meaning that workers stopped receiving their fair share of the output produced. The same phenomenon has been observed in many other industrialized countries, such as the UK. The policies introduced in the 1980s were pretty much sustained and expanded up until 2008.

The Financial Crisis: A turn for the worse

The situation became even worse after the financial crisis erupted. For example, in both the US and the UK the growth of wages slowed even more, as shown in the following figure, even as the headline unemployment returned to pre-crisis levels.

Moving towards a low headline unemployment rate, though, does not mean full employment is being achieved. In the US, the U-6 measure of the unemployment rate, which adds the underemployed to the headline rate, shows that the real unemployment rate is at 8.6%. Far from full employment! In the UK, it has been reported by the Office for National Statistics that the number of people employed in zero-hour contracts has risen by 400% since 2000 but most of the rise happened after the financial crisis. Thus, the employment situation is worse than before the crisis which leads to a further decline in wage growth.

Why is high wage growth important for the recovery?

It is essential to point out that one of the main reasons the current economic recovery has been weak is low wage growth. Wage income is the main propeller of consumer spending, which accounts for more than 60% of GDP in industrialized countries. Low wage growth means low consumer spending, thus low GDP growth and employment. Currently, households are borrowing to keep their living standards stable and that is what’s keeping consumer spending going. This process, though, is unsustainable and will not last long. When households cannot afford to borrow anymore another financial crisis will almost certainly occur. That’s why governments need to do everything in their power to restore wage growth.

What can be done?

The power of organized labor has been decimated since the 1980s. If workers cannot actually have a say in what happens in the workplace then they cannot fight for fair wages. This is why unions need to be strengthened and supported by governments. Employers should be forced to negotiate wages through collective bargaining and union coverage should be expanded above the current 50% OECD average. This will level the playing field between powerful employers and the currently weak labor class.

As mentioned before, productivity and real wages have been delinked since the 1980s. That’s where the minimum wage could potentially help. In the US, the real minimum wage fell after 1980 and has stayed relatively flat since then. With the liberalization “mania” sweeping the western world, governments are freezing public sector pay rises and Greece even cut the minimum wage in the name of restoring public finances and growth. That’s the exact opposite of what should be done to restore growth. Wages drive consumption and growth, cutting them can only depress the economy. Hiking the minimum wage will help sustain consumption based on wages, employment growth and, thus, wage growth.

A sure way to speed up wage growth again is fiscal stimulus. Government spending lifts aggregate demand directly and effectively. If enough spending is injected into the economy, it will create enough jobs to bring full employment. The momentum and labor scarcity created by the stimulus will force wages up and give workers and labor unions more bargaining power. A Job Guarantee Program, if ever implemented, would effectively set a wage floor in the economy, since any person working at a lower wage than the Job Guarantee offers will be given work in the public sector.

The “curse” of low wage growth is not something new and it definitely got exacerbated with the financial crisis. Even though unemployment is currently falling in many countries, it is still way above full employment levels. With workers’ rights under attack for some time now, unions do not have the power they once did to promote strong pay growth. If the current recovery is to accelerate, and for ordinary people to participate in it, wage growth has to rise substantially. The only way to do this is for labor unions to be strengthened and governments to once again commit to full employment.

About the Author
Nikos Bourtzis is from Greece and recently graduated with a Bachelor in Economics from Tilburg University in the Netherlands. He will be pursuing a Master in Economics and Economic analysis at Groningen University. Research interests are heterodox macroeconomics, anti-cyclical policies, income inequality, and financial instability.

Let’s face it: Monetary Policy is Failing

By Nikolaos Bourtzis.

Monetary policy has become the first line of defense against economic slowdowns — it’s especially taken the driver’s seat in combating the crisis that began in 2007. Headlines everywhere comment on central bank’s (CB) decision-making processes and reinforce the idea that central bankers are non-political economic experts that we can rely on during downturns. They rarely address, however, that central banks’ monetary policies have failed repeatedly and continue to operate on flawed logic. This piece reviews recent monetary policy efforts and explains why central bank operations deserve our skepticism–not our blind faith.

What central banks try to do

To set monetary policy central banks usually target the interbank rate, the interest rate at which commercial banks borrow (or lend) reserves from one another. They do this by managing the level of reserves in the banking system to keep the interbank rate close to the target. By targeting how cheaply banks can borrow reserves, the central bank tries to persuade lending institutions to follow and adjust their interest rates, too. In times of economic struggle, the central bank attempts to push rates down, such that lending (and investing) becomes cheaper to do.

This operation is based on the theory that lower interest rates discourage savings and promote investment, even during a downturn. That’s the old “loanable funds” story. According to the neoclassical economists in charge at most central banks, due to rigidities in the short run, interest rates sometimes fail to respond to exogenous shocks. For example, if the private sector suddenly decides to save more, interest rates might not fall in response. This produces mismatches between savings and investment; too much saving and too little investment. As a result, unemployment arises since aggregate demand is lower than aggregate supply. In the long run, though, these mismatches will disappear and the loanable funds market will clear at the “natural” interest rate which guarantees full employment and a stable price level. But to speed things up, the CB tries to bring the market rate of interest towards that “natural” rate through its interventions.

Recent Attempts in Monetary Policy

However, interest rate cuts miserably failed to kick-start the recovery during the Great Recession. That prompted the use of unconventional tools. First came Quantitative Easing (QE). Under this policy, central banks buy long-term government bonds and/or other financial instruments (such as corporate bonds) from banks, financial institutions, and investors, which floods banks with reserves to lend out and financial markets with cash. The cash is then expected to eventually filter down to the real economy. But this did not work either. The US (the first country to implement QE in response to the Crash) is experiencing its longest and weakest recovery in years. And Japan has been stagnating for almost two decades, even though it started QE in the early 2000s.

Second came “the ‘natural rate’ is in negative territory” argument; Larry Summers’ secular stagnation hypothesis. The logic is that if QE is unable to increase inflation enough, negative nominal rates have to be imposed so real rates can drop to negative territory. Since markets cannot do that on their own, central banks will have to do the job. First came Sweden and Denmark, then Switzerland and the Eurozone, and last but not least, Japan.

Not surprisingly, the policy had the opposite effect of what was intended. Savings rates went up, instead of down, and businesses did not start borrowing more; they actually hoarded more cash. Some savers are taking their money out of bank accounts to put them in safe deposits or under their mattresses! The graph below shows how savings rate went up in countries that implemented negative rates, with companies also following suit by holding more cash.

Central bankers seem to be doing the same thing over and over again, while expecting a different outcome. That’s the definition of insanity! Of course, they cannot admit they failed. That would most definitely bring chaos to financial markets, which are addicted to monetary easing. Almost every time central bankers providea weaker response than expected, the stock market falls.

There is too much private debt.

So how did we get here? To understand why monetary policy has failed to lift economies out of crises, we have to talk about private debt.

Private debt levels are sky high in almost every developed country. As more and more debt is piled up, it becomes more costly to service it. Interest payments start taking up more and more out of disposable income, hurting consumption. Moreover, you cannot convince consumers and businesses to borrow money if they are up to their eyeballs in debt, even if rates are essentially zero. What’s more, some banks are drowning in non-performing loans so why would they lend out more money, if there is no one creditworthy enough to borrow? Even if private debt levels were not sky high, firms only borrow if capacity needs to expand. During recessions, low consumer spending means low capacity utilization, so investing in more capacity does not make sense for firms.

How to move forward

So, now what? Should we abolish central banks? God no! Central banks do play an important role. They are needed as a lender of last resort for banks and the government. But they should not try to fight the business cycle. Tinkering with interest rates and buying up financial instruments encourages speculation and accumulation of debt, which further increases the likelihood of financial crises. The recent pick-up in economic activity is again driven by private debt and even the Bank of England is worried that this is unsustainable and might be the trigger of the next financial crisis.

The success of monetary policy depends on market mechanisms. Since this is an unreliable channel that promotes economic activity through excessive private debt growth, governments should be in charge of dealing with the business cycle. The government is the only institution that can pump money into the economy effectively to boost demand when it is needed. But due to the current misguided fears of large deficits, governments have not provided the necessary fiscal response. Investment requires as little uncertainty as possible to take place and only fiscal policy can reduce uncertainty. Admittedly in previous decades, monetary responses might have been responsible for restoring some business confidence as shown in the figure below.

This effect, though, cannot always be relied upon during severe slumps. And no doubt, more attention needs to be given to private debt, which has reached unprecedented levels.

Monetary policy has obviously failed to produce a robust recovery in most countries. It might have even contributed in bringing about the financial crisis of 2008. But central bankers refuse to learn their lesson and keep doing the same thing again and again. They don’t understand that their policies have failed to kick-start our economies because the private sector is drowning in debt. It’s time to put governments back in charge of economic stabilization and let them open their spending spigots. A large fiscal stimulus is needed if our economies are to recover. Even a Debt Jubilee should not be ruled out!

About the Author
Nikos Bourtzis is from Greece, and recently graduated with a Bachelor in Economics from Tilburg University in the Netherlands. He will be pursuing a Master in Economics and Economic analysis at Groningen University. Research interests are heterodox macroeconomics, anti-cyclical policies, income inequality, and financial instability.

It’s gotta be true, because data says so

Data and statistics are everywhere, especially in economics. But we forget that empirical results are often manipulated, biased, or inconclusive. To ensure we design policies responsibly, we must meet empirical work with greater skepticism.

by Selim Yaman

In 2008, Doucouliagos and Ulubasoglu of Deakin University conducted a meta-analysis of 84 studies about democracy and economic growth. After evaluating 483 regression estimates from these studies, they find that every outcome about the political democracy and growth relationship is possible; they observe that

37% of the estimates are positive and statistically insignificant
27% of the estimates are positive and statistically significant
15% of the estimates are negative and statistically significant
21% of the estimates are negative and statistically insignificant.

The link between inequality and economic growth is equally difficult to identify. Dominics et al (2006) make a meta-analysis of studies focusing on this relationship. According to their study, most of the regressions yield a negative relationship between inequality and economic growth. Yet, when used different estimation techniques and panel datasets, this negative effect vanishes. So, after analyzing a vast amount of empirical literature, no clear relation appears.

Data and statistics grew increasingly important in recent decades. Big Data came to play a large role in many fields, from technology to healthcare. Economics is no different; regression analyses had already been popularized by the neoliberal school of thought. Economics was intentionally made “a real science,” within which basic connections between phenomena could be established, like in physics.

In the neoliberal world of economics, you are free from complicated, theoretical discussions, and able to draw firm conclusions. Unlike more nuanced fields like sociology or political science, neoliberal economics allows for simple, elegant arguments. With the help of mathematical modeling and statistical results, arguments take up just a few pages. This neoliberal methodology sounds pretty good in the first place: Direct scientific results, no chit chat. But it’s not as simple as it looks.

To what extent we can trust these statistical methods or the economists that use them? Economists can easily manipulate data to fit their ideological stances, or to comply with their initial hypothesis. Errors rooted in research design create unreliable results too: the type of the data used, the selection of the sample, differences in evaluation methods of estimates, availability of data, direction of causation, regional/country specific characteristics all influence the results. They jointly create a big divergence among empirical macroeconomic studies, leading to a conundrum in many questions.

These problems are not confined to economics; as the use of econometric methodology expands to other fields, the risk contained in data-interpretation increases. Say, there are studies on how religiosity levels affect people’s career paths. Knowing that even the large, carefully executed polls have failed at predicting Brexit, Trump’s victory, and Labour’s success in the UK, how can we trust other surveys to teach us about religion or social preferences? How can someone even build a theory on such data? Above all, how can these studies shape policy designs?

Some of the empirical studies that resulted in wrong conclusions remain unharmed in the ivory tower of academia, desperately waiting for a rare reader. But many of these studies do integrate to the real world, either through policy-making (top to bottom) or through media outlets (bottom to top).

Via the policy-route, developing countries have been one of the victims of empirical studies. The Washington Consensus, for example, suggested fiscal consolidation and trade liberalization. Later, however, it became clear that this was bad advice; copying the economic institutions from the Western world North and applying them to developing nations without considering country-specific environments can be devastating. While the Washington consensus was an elegant argument and supported by data from the West, it failed to account for the complexities of the Global South.

The second route of influence is the media; when people read the news and encounter headlines like “a recent study found…”, it sparks their attention. But that recent study’s sample size can be very low, and its data can be deficient, and neither editors in the media nor readers will be aware. To them, the study’s seemingly conclusive result are what is important.

To avoid that we act on false conclusions, academics, policy-makers, and media professionals all carry the responsibility to treat their empirical findings with skepticism. If it was physics, then a causal relationship based on data could be trusted. But for economics and politics, human factors create complications that statistical methods cannot always handle. Overall, it’s better not to overly believe in statistics, because data says so.

About the Author
Selim Yaman works at TRT World Research Centre. Yaman received his BSc from the Economics Department of Boğaziçi University. He is currently a graduate student in Political Economy of Development, at SOAS in London.

Taxes and Turmoil in Lebanese Politics

A series of protests have begun to rock Lebanon as of mid-March 2017. Protesters are taking to the streets to denounce the Lebanese government’s plan to introduce or increase 22 new taxes on citizens, most notably increasing the VAT tax from 10-11%, as well as various other taxes on food, drink, public notary services, and other categories that stand to impact daily purchases in the country. These measures will further reduce spending power of average Lebanese citizens during a time period when poverty has already risen by 66%(!) in the past 6 years, when around 30% of the population lives below the poverty line, when 9% of the Lebanese population lives on less than $1 per day, and when Syrian refugees continue to pour into Lebanon by the millions, further exacerbating Lebanese economic woes. Furthermore, Lebanon is the 3rd most unequal country on this planet in terms of wealth inequality, and this inequality implies that these new tax measures will primarily impact those who are already struggling to survive, let alone maintain a decent standard of living. In fact, these newly proposed taxes will be what economists call a “regressive tax,” since they will consume a bigger portion of the poor’s income compared to the rich.

The biggest complaint, rightfully so, of the protesters is that Lebanese politicians, with their entrenched system of confessionalism and nepotism, have stolen from public funds to aggrandize their own wealth, and have left the average Lebanese citizen struggling to survive off of the crumbs tossed to them. This rampant corruption, culture of excess, and paralysis of state oversight has contributed to a debt-to-GDP ratio of 140%, one of the highest in the world. Despite such mounting debt, the Lebanese government has little show for it in terms of providing services to the public.

For example, the Lebanese government cuts off electricity for several hours a day throughout the country— sometimes as much as 40-50% of the day, and claims that there are simply no public funds available to provide electricity for a full 24 hours. This is where the new tax proposal comes in; the government maintains that their hands are simply tied, and that these painful measures are needed to make a dent in paying off the public debt. However, when we examine the issue of public debt from the perspective of Modern Money Theory (MMT), we find that this idea is based on ignorance of how taxes and spending work at the public level.

MMT asserts that any sovereign government is capable of printing its own money into existence to pay for anything that it wishes to, from public healthcare to defense to infrastructure, or any other government-funded project. Because the government can create money out of nothing by simply printing it, or electronically transferring it to bank accounts, this by definition removes the necessity to collect taxes as a form of revenue to pay for things. The Lebanese government, for example, could have enough money to pay for electricity 24 hours a day if it simply created money to pay for it by electronically transferring the sum to the bank accounts to pay electricity companies. All of this can be done without ensuring that there is an equal amount of taxes flowing into the government, because the government does not use these taxes to pay for things. It pays for things by creating money out of nothing.

With this understanding, we can then reverse the causal relationship between taxes and public spending: taxes do not fund public spending. Rather, public spending creates the money by which citizens can conduct economic activity, including paying taxes. This is not an example of the classic “chicken vs. egg” conundrum. In this case, we can definitely say which side came first, for logical reasons. Citizens would simply not be able to pay taxes unless they had the money to pay for them in the first place, which in turn must be created by the government and released into the economy through public spending.

This implies that the government’s debt and deficit, as a matter of principle, does not matter to the public sector in the same way that a debt would matter to a household or firm. Government can always print more money in order to pay for things, including interest on debts. If a household tried to create its own play money and offer it to the credit card company at the end of the month, it would be rightfully ridiculed. However, because the government’s currency is universally recognized as bestowing the holder with value, it is accepted anywhere, and for “all debts, public and private.” In effect, it is the sovereignty of the state, and the credibility of their power to meet contractual financial obligations, that gives the money its value.

So, what then is the purpose of taxes, if they are not used to fund government spending? Primarily, taxes are a way of the government asserting sovereignty over its citizens. By denominating the taxes levied on citizens in the currency that they print, the government ensures that there will always be a widespread demand for its currency that people need to obtain to pay taxes. This ability to create money out of nothing and to generate widespread demand for it is a powerful component of state sovereignty, and, as other articles attest, the modern state as we know it would not even exist today without this power.

Taxes also serve another important economic function: they limit how much money a person can spend (purchasing power). When the government is worried about inflation (rising prices throughout society) brought about by rapid economic growth, for example, increasing taxes would be one way of decreasing spending in the entire economy, thus counteracting the threat of inflation. However, what does this mean for a country like Lebanon with a sizable percentage of its population living under the poverty line, and where the problem is too little spending and economic growth, not too much?

If Lebanese citizens have to pay increasingly higher taxes on daily necessities, their purchasing power will shrink. As their purchasing power and consumption declines, businesses will suffer. Investment and employment rates would likely decline, and poverty would increase. This increase in poverty would translate into citizens having even less money to contribute to taxes, since they would be consuming less and would have a smaller income. In such a situation, instead of these new tax measures decreasing the government debt, it is conceivable that they would actually do the exact opposite by increasing it, due to a decline in consumption and income, which are two of the biggest sources of taxes for the Lebanese government.

To conclude, it is time to admit the problems facing Lebanon are much more complex and fundamental than any new tax proposals would ever fix. Taxes do not create revenue for government spending, and in fact, new taxes in the country would even threaten to propel the already unacceptably high poverty line in the country even higher, as incomes and purchasing power are eroded. There is no reason to believe that the government debt even needs to be paid off in the first place, since government can never run out of money to pay for things, including debt servicing payments. Rather, the most fundamental problem in Lebanon is a political system characterized by diversionary religious sectarianism, and a culture of corruption and disdain for the masses that have allowed the Lebanese politicians to usurp public funds for personal gain, all while keeping a stranglehold on the people’s aspirations for freedom and dignity for decades.

Written by Stephanie Attar
Stephanie is part of the third group of students studying at the Levy Institute. Prior to coming to the Levy, she completed a masters degree in political science, with a concentration in political philosophy. Her research always incorporates Marxian dialectical materialism in order to analyze the interconnected nature between the state and the economy. She is also interested in the Arab world, global inequalities engendered by capitalism-imperialism, and radical solutions to advance the interests of humanity.

Community Currencies: A Ray of Light in the Rust Belt

In times of severe recession, cash can be hard to come by. To somewhat maintain their standard of living and avoid being further driven into poverty, some communities developed their own alternative currencies. These community currencies are parallel systems of exchange. They are growing in popularity in countries such as Greece, which is currently battling the failures of modern capitalism, and could also be implemented in parts of the United States. The Rust Belt states could benefit from the implementation of similar initiatives. We take a quick look at how:

Community Currencies in Europe: Volos

The existence of community currencies as parallel monetary systems is justified by ecological economics, a branch of research that focusses on the interdependence of human economics with the natural environment. The aim is to promote sustainable development through the revival of vital aspects of the socio-economic fabric that have taken a backseat with the rise of capitalism: rebuilding social capital, replacing material consumption and bringing back value to labor to mean more than just as a mere factor of production. In short, it brings the market and its dynamics back to the grassroots level where it is simply an arena for the facilitation of provisioning survival rather than primarily for capital gains and growth.

The way community currencies work is best explained through a real-life example. Take, for instance, the story of Volos, a fishing village located in central Greece. Volos has experienced hard times since the Greek debt crisis began several years ago. Now, barter forms the basis of their system of exchange. The underlying currency is a local alternative unit of account called the TEM.

The TEM acts as a temporary IOU that allows for a more immediate exchange of goods and services the villagers in Volos require to maintain their daily living standards. People can exchange ironing service for language lessons, or potatoes for fish, and so on. The exchanges are supported by an online platform where ads for community members’ needs are posted. The system has come into existence to resolve villagers’ limited access to cash. It’s helped to maintain demand and prevent an economic standstill.

Community Currencies in the US: Time Banks

The most popular form of community currency initiated in the US has been the Time Banking system. Time banks were originally set up to create a social support system within neighborhoods, allowing group members to trade goods and services without money. Each hour of community work is exchanged at the bank for a unit of time-based local credit that can be redeemed for other goods and services. In this way, the labor is valued based on time, not market prices.

The positive impact Time Banking leaves on a community extends well beyond just the ability for low-income groups to access goods and services that might otherwise be unaffordable. It also helps alleviate to some extent the systemic problems of inequality that are often not factored into its cost. Although such systems have sprouted around the United States, they have gained much recognition. Participation rates at Time Banks have remained very low, and it remains unclear why.

Can Community Currencies be used more extensively?

So if Community Currencies can improve economic well-being among low-income groups, why is it not more popular? First, the systems have not been studied sufficiently. A lack of research on Community Currencies and their benefits has limited our understanding of their potential, and their growth in popularity.

Second, there are inherent geographic constraints that community currencies have yet to overcome. Under the current format, payment in community currencies is only accepted within small areas. As such, they can only be used for the exchange of goods and services that were arbitrarily made available within those areas. In order to make the system more successful, the geographic reach should be extended, allowing for more goods and services to be taken up in the system.

State intervention could make this happen. A local government could offer tax incentives to private healthcare facilities within the geographic sector of the community currency. In exchange, the health-care facility would accept payment from uninsured low-income clients in the alternative currency. If more necessary goods and services can be included in the range of products made available there would be more sustainable.

Therefore, Community Currencies require the strong and continued support from their local government to remain successful. In Greece, a first step was made several years ago, when parliament passed a law that allowed barter groups to be classified as non-profit organizations. The local government in Volos was appreciative of the change, given that it allows for some semblance of normal everyday life to continue in a time of austerity.

One reason why government might be reluctant to endorse more of these programs is that it challenges the conventional payment system. However, a community currency as a limited IOU need not pose a threat and can be of significant help in keeping up demand. This allows for more stable incomes for a larger proportion of people in the economy and the capacity to generate more tax revenues in the long run. This is especially relevant in an economic environment that is highly dependent on bank credit to remain functional.

As such, the potential of community currencies should not go unrecognized. Governments should step in to help broaden the system, and allow for their participants to reap the full benefits. This way, community currencies can be an invaluable source of demand in times of crisis.

The Case for Community Currencies in the ‘Rust Belt’

The Rust Belt comprises the set of states bordering the Great Lakes, which were once famous for being the heart of manufacturing and industry in the US. This changed with the economic decline brought about by the recessions of the late 1970’s and early 80’s, which continued to worsen with the further decline of US manufacturing.

Entire towns and villages in this region have disappeared along with the core industry that once sustained them. Some towns were able to salvage their economies by capitalizing on tourism or education, but this is not a strategy that can be extended to the entire region. States such as Michigan and Ohio also cope with an aging population, male joblessness, and rising opiate addiction. There is a dire need for the region’s underprivileged to become active and positive contributors to society again.

If aided by the state, community currencies could be the starting point for the Rust Belt states to begin their journey back to being the productive contributors to the US economy that they once were. Just like in Volos, it could boost economic activity and allow members to contribute to the rebuilding of their community.

The economic benefits of State regulated Community Currencies could include incentives for sharing skill sets to allow more unskilled workers to become employed. There would be less dependence on welfare as the marginalized begin to seek more socially and individually meaningful ways of sustaining themselves. This would also offer a much-needed boost to local economies that would be limited to purchasing goods and services within the community

The success of such initiatives often depends on communities coming together and organizing to collectively achieve economic wellbeing, setting aside social and class differences. The effective implementation of community currencies in places like Volos was ultimately determined by the way such systems are maintained and nurtured by the entire community under the appropriate community leadership. Whether such social dynamics also exist to the required extent in the communities of the Rust Belt is still something to be discovered. If so, then there may well be a light on the horizon to guide them out from under the burden of years of poverty.

Written by Athulya Gopi
Athulya is originally Indian, born and brought up in the United Arab Emirates. She joined the Levy Masters Program in 2016 after leading a successful career in credit insurance over the last 8 years. She has a few more years of worldly wisdom than her fellow classmates! The choice to swap her role as the head of commercial underwriting with that of a full-time student came after being inspired to see how Economics works in the real world.

The Shortage of Money: A Fallacious Problem

Whether they are implemented in Latin America (1970-90s), in the UK (under Thatcher) or in Greece (since 2012), austerity measures are all justified by the fact that “there is not enough money.” People are told that “there is no alternative,” and that the state needs to implement structural adjustment programs—usually including across-the-board spending cuts—to restore investors’ confidence and to hope for a better future.

What if this shortage of money could be overcome? What if this problem was ultimately the wrong one? What if we could have money for everything we needed?

In her latest book, The Production of Money: how to break the power of Bankers, Ann Pettifor argues that:

YES the society can afford everything that it needs,
YES we are able to ensure enough money for education, healthcare, sustainable development and the well-being of our communities,
YES we can discard money shortage, contrary to the human or physical (land and resources) ones.

However, one condition needs to be fulfilled: our monetary system should be well-regulated and managed.

To understand how and why, Ann Pettifor takes us back to basics. She starts by defining money as a “social construct based primarily and ultimately on trust”. One of the reasons why we use money in the first place is because we know that others will accept it in the future; it is the means “not for which we use to exchange goods and services, but by which we undertake this exchange” (Law). Your 100-dollar bill would be worthless if others didn’t accept it. The value of money depends on the “acceptance” of money, i.e. on the trust you and others have in money.

Contrary to popular belief, 95% of (broad) money (i.e. cash and coins + bank deposits) is created by private banks and not by the central bank. When a bank makes a loan to a firm, it creates simultaneously a deposit account from which the firm withdraws the loan. Money is therefore created “out of thin air” when the account of the borrower is credited—i.e. when loans are made. This has two implications:

When money is created, so is debt. This debt needs to be repaid. Ann Pettifor uses the example of a credit card which allows you to purchase goods and services today. The spending (= purchasing power) on a credit card “is created out of thin air”. You will ultimately need to pay back the amount spent plus a pre-agreed interest rate. Money is therefore a promise of a future productive value.
The money supply depends on private borrowers and their demand for loans. Central banks influence (but do not control) the money supply by increasing or decreasing the cost of borrowing with their policy interest rate. Money creation is therefore a bottom-up process rather than a top-down one.

Does this mean that we should create as much money as people want loans? Of course not. According to Ann Pettifor, there are constraints that make unlimited borrowing impossible: inflation (and deflation). Indeed, if money is not channeled toward productive purposes, the claim associated to it might not be reimbursed. In other words, the promise of a future productive value might not be fulfilled. When there is too much money “chasing too few goods and services”, reflecting over-confidence in the economy, it results in inflation, eroding the value of assets (such as pensions). Similarly, when there is not enough borrowing (either because borrowers need to repay their debts, as it has been the case in Japan and the US right after the last recession, or because the cost of borrowing is effectively too high), reflecting distrust in the ability to repay debt, deflation steps in.

Therefore, as money can be created “out of thin air”, there is no reason to have a shortage of money as long as it is channeled towards productive purposes. An unlimited amount of money can be created for projects that will ultimately result in the production of value, which will allow the repayment of debt. However, the author does not define what “value” or “productive purposes” are, which in my opinion is the main drawback of the book.

Although Pettifor does give some hints by opposing “productive purposes” to “speculative” ones and by associating “value” to the notion of “income, employment and sustainability”, her approach is rather imprecise and in this sense disappointing. To her credit, defining value is a difficult task, especially if we want to define what is valuable to the society as a whole. Pinning down the definition of value is, in my opinion, ultimately a political debate. If one considers that democracies reflect “collective preferences”, it can be said that societies decide through elections on what is most valuable to them at a given point in time.

Unfortunately, the current monetary system does neither enable nor guarantee that money and credit are used for productive purposes. It is characterized by “easy” and “dear” money; the former refers to unregulated and easy access to borrowing, while the latter conveys the idea of expensive borrowing, i.e. with loans charged at high interest rate. The issue with this system is that (1) with unregulated borrowing, money will be used for unproductive purposes, (2) with high interests, debtors will meet difficulties reimbursing their loans.

Such a system is harmful to society. In the words of Ann Pettifor:

“If rates of interest are too high, debtors have to raise the funds of debt repayment by increasing rates of profits, and by the further extraction of value. These pressures to increase income at exponential rates for the repayment of debt implies that both labor and the land (defined broadly) must be exploited at ever-rising rates. Those who labor by hand or brain work harder and longer to repay rising, real levels of mortgage or credit card debt. It is no accident therefore that the deregulation of finance led to the deregulation of working hours.”

A sound financial and monetary system would precisely have opposite features, with “tight but cheap credit” (Keynes), in which loans are regulated but cheap. “Tight credit” would ensure the soundness and creditworthiness of loans, while “cheap credit”, secures the affordability and thus the repayment of loans.

Hence, Ann Pettifor makes a remarkable argument by providing an in-depth but accessible insight into the workings of the monetary system and the debates surrounding it. Both economists and non-economists should give it a read.

It is indeed quite astonishing that money, ever-present in our lives, is so poorly understood; even by many economic experts themselves. According to Ann Pettifor, this incomprehension stems from the deliberate efforts of the financial sector to “obscure its activities” in order to maintain its omnipotence. The Production of Money aims at addressing this “crisis of ignorance” by providing an intelligible and comprehensive overview of money in the hope of empowering people against finance’s grip over society.

By Céline Tcheng
Disclaimer: views are my own.

About the Author

Céline grew up between Paris, China and Singapore. After graduating in a Master’s degree in Economics and Public Policy, she now works for a public policy institution in France. In her free time, she coordinates INET (Institute for New Economic Thinking) YSI (Young Scholars Initiative)’s Financial Stability Working Group and performs with her dance crew “Slash Art”. Her main interests are: macroprudential policy, financial stability, monetary policy. Follow her on Twitter: @celine_tcheng

The Tragedy of “The Tragedy of the Commons”

How should society manage its common-pool resources like fisheries, forests, and grasslands?

The problem, as presented in an Econ 101 course, is that these systems lack the proper incentives for sustainable use. Without private property or government regulation, people inevitably overuse and exploit them. This is the “tragedy of the commons” —famously formulated in a seminal 1968 paper by ecologist Garrett Hardin, and taught to thousands of economics undergraduates every year. There’s just one problem: Tragedy of the commons fails to explain real-world behavior.

Hardin’s argument runs something like this. First, he invites us to “picture a pasture open to all.” In this scenario, herdsmen of the pasture, if they are rational, self-interested agents, will figure that the benefits they receive from adding one additional cattle to the pasture outweigh the costs from overgrazing that are shared by all the other users. Each herdsman continues to add cattle to the pasture, but in this way, the resource is inevitably depleted.

For this reason, Hardin argued that “Ruin is the destination toward which all men rush.”

Scholars—many outside the economics discipline—have attacked this argument for its unrealistic assumptions and lack of evidence. One prominent critic is Elinor Ostrom. Elinor Ostrom is a lifelong researcher of the commons and Nobel Laureate in economics. Ostrom said that Hardin confused a joint property commons with an “open-access regime,” where restrictions on use are completely absent. Open-access regimes sometimes do exist (e.g., fishing on the high seas). However, in the real world, common-pool resources are often governed by rules and norms that their users develop. This means Hardin’s “pasture open to all” does not accurately map how the commons operate in practice.

There is ample empirical evidence for the sustainability of commons regimes—as defined by Ostrom.

The very existence of the commons, particularly where resources are scarce, proves neither private property nor state coercion is a prerequisite for their viability. In the words of Ostrom and her colleagues: “although tragedies have undoubtedly occurred, it is also obvious that for thousands of years people have self-organized to manage common-pool resources, and users often do devise long-term, sustainable institutions for governing these resources.” Commons are not always successful, but they are far from doomed to a tragic fate.

Take, for instance, the grasslands in northern China, Mongolia, and Southern Siberia. State-run and private methods of resource management implemented in Russia and China are not nearly as effective in conservation as the traditional Mongolian group-property institutions. Around three-fourths of grassland in Russia, and more than one-third in China has shown signs of degradation, compared to just one-tenth of grasslands in Mongolia.

The water commons in Bali provide another example.

Subak, the traditional institution for irrigation management, has been sustainable for centuries without state regulation or private ownership. With water flowing downhill, the position of upstream farmers seemingly puts them in a prime position to free-ride. It is diverting more water for their own crops, but in reality, the opposite occurs. Farmers, upstream and downstream, are able to create a synchronized cropping arrangement in which damage from pests is minimized and downstream farmers retain access to water. In the end, crop yields are increased while water is used sustainably by all.

The voluminous literature on the commons documents countless similar examples. In the West, these include the cod fishery in Newfoundland (before it collapsed due to government mismanagement) and the lobster fishery in Maine. Digital and intellectual domains can fall under commons management as well. Wikipedia and the Creative Commons license exist only because people are able to cooperate and discourage free-riding.

Policymakers, unfortunately, sometimes fail to see the nuances of these sustainable systems.

Under “tragedy of the commons” assumptions (no communication, self-interested, rational agents, etc.), arrangements like those found in Mongolia and Bali simply can’t exist. As a result, technocrats, looking to promote sustainability and growth. It has often designed policies that backfire because they fail to take into account the complexity of local conditions.

Case in point:

Bali in the 1970s. On advice from the Asian Development Bank, the Indonesian government, in an attempt to boost crop yields, instructed farmers to plant rice as often as they could—disrupting the synchronized cropping schedule. Pest populations exploded as a result, and crop losses were massive. In this example, simplistic and detached development policy had disastrous consequences for the Balinese farmers.

Thus we see a genuine understanding of the commons is imperative for coherent policymaking. Scholars have long shown that Hardin’s “tragedy of the commons” is an inaccurate representation of reality. Policymakers ought to adopt a more realistic view of the commons, and professors should jettison this fallacious model from their Econ 101 courses. A failure to do this and embrace the real world would, indeed, be the real tragedy.

Written by Jimmy Chin
Jimmy is an undergraduate studying economics and Asian studies at UNC-Chapel Hill. He hopes to continue his studies in graduate school and has interests in economic development, political economy, and China. Other sources of enjoyment for him include reading philosophy, writing, and hiking.