Crisis Archives

Minsky is more than a moment

After the Great Financial Crisis, Minsky rose to fame. But few people grasp the breadth and depth of his work beyond the “Minsky Moment”. If that’s you, Daniel Neilson’s recent book is a worthy read. By Ayoze Alfageme.

A decade after the Great Financial Crisis, Minsky presents a meticulous reconstruction of Hyman Minsky‘s lifework that goes well beyond the mere explanation of financial bubble bursts. Indeed, Neilson devotes only a few pages to what Minsky is best known for—his Financial Instability Hypothesis. The reason is not for its lack of relevance within Minsky’s theory, but because the author places it as one piece of an overall financial theory of capitalism that he painstakingly elaborates in a mere 150 pages. Presenting Minsky’s ideas in a comprehensive and exhaustive way is not an easy task, given that he worked out his thinking by sketching his theory piecemeal in various places as he witnessed history pass by. Thus, the author elaborates three different threads through which he deconstructs Minsky’s work into elements to be then reconstructed and presented as a thorough vision of capitalism.

A financial theory of capitalism

The first thread comprises four out of eight chapters of the book and deals with Minsky’s financial theory. In modern societies, a matrix of balance sheets connects all agents via debt and credit commitments—assets and liabilities—that have arisen from past payment decisions. Minsky shows that payment structure, intrinsic to capitalist societies, is prone to recurrent crises due to the imperative requirement to repay debts. This requirement, or ‘survival constraint’ as Minsky termed it, forces everyone to generate greater monetary inflows than outflows. When debts come due, debtors search for a liquid position that allows them to redeem their debts using money or, as Minsky said, whatever the lender will accept to write off the debt. Position making is the action through which assets and/or liabilities are sold if a unit is illiquid and in need of cash. The famous hedge, speculative, and Ponzi positions are nothing more than a form of position making—a search for liquidity. A crisis might be triggered by the effect upon other units of a unit’s inability to pay i.e. to find liquidity. A widespread financial crisis unfolds when the market for position making for liquidity comes to a halt. At this point, the role of the central bank is to step in as a lender of last resort—the market maker of last resort—that can blow liquidity into the system as its only initiative.

The making of a maverick economist

The second thread, interwoven with the first, narrates Minsky’s path to becoming the economist he was. For example, we learn from Henry Simons, his professor in Chicago, how Minsky adopted a practical outlook view of Simon’s view on the requirement to pay debts and how he added the theoretical and institutional issues of liquidity to Schumpeter and Keynes’ monetary theory of production. In Neilson’s account, liquidity is at the core of Minsky’s financial theory. Minsky’s considerations about liquidity, uncertainty, and time, stand as the main divergences between his approach and that of the mainstream.

The third and final thread of the book deals with the position Minsky took towards the rest of the economist profession, disentangling the contradictions between the two. In need of a new language through which he could express the knowledge he wanted to convey, Minsky found himself at the margins of the profession and in conscious opposition to the mainstream. Interestingly, the book also reveals how even interpretations by those who, as post-Keynesians of different strands claiming to Minsky’s insights, sometimes fail to understand his core contributions.

Throughout the book, Neilson successfully presents Minsky’s theory and policy and the intellectual challenges he faced during his career as an economist. The book also encompasses his Ph.D. thesis, the writing of his two books—John Maynard Keynes and Stabilizing an Unstable Economy—his collaborations with the financial sector, his financial analyses for the public sector, as well as the economic and financial crises he witnessed and eagerly strove to analyze. Overall, the author conveys, with a dash of critical insights of his own, what he and his professor, Perry Mehrling, consider to be the most important thing we can learn from Minsky: his vision of how financial capitalism works

Buy the book: Minsky. By Daniel H. Neilson. Polity Press: Cambridge, 2019. 224 pages, £16.99.

About the Author: Ayoze is teaching assistant and PhD candidate at the University of Geneva. Twitter: @_Ayoze_

Want to review a book you read? YSI will reimburse you for the price of the book, and will consider your piece for publication on Economic Questions. Reach out to contact@economicquestions.org to get started.

This article was originally posted in Economic Issues, Vol. 25, Part 1, 2020.
Access here.

Be Humble, Acknowledge Uncertainty, and Don’t Assume A Happy Ending

Rob Johnson, President of the Institute for New Economic Thinking, is not your average economist. He’s got heart and soul, or if you’ll have it, the blues! With his deep connection to the arts and humanities, Rob leads the new economic thinking not just with a sharp mind, but also with sensibility.

This article is part of an ongoing series in which Rob shares his life experiences, and biggest lessons learned. If you’re an aspiring expert in economics or a related field, this is for you. It might mitigate the depth and duration of your mid-life crisis. Earlier articles in this series can be found here.

Today, we pick up at Rob’s time at MIT, and see what lessons economists might be able to learn from sailors.

2 – Be Humble, Acknowledge Uncertainty, and Don’t Assume A Happy Ending

“MIT was tough. I had weird stuff happen to me there. One day, in a computer lab, I was sitting next to this black guy. He told me he’s working on his Ph.D. in medical engineering. And he’s 20 years old. I’m 19, an undergraduate. He’d been at MIT since he was twelve. He told me he’d bet me that he could multiply two numbers in his head faster than he could type them into an HP calculator. And he was right! I said how do you do that? He said he converts everything to base 2. He transformed the numbers in his mind like this. Not even a scratchpad! I just sat there and figured there’s a lot of people here smarter than me. It was humbling. And invigorating.

So everyone found out real fast that they were not the smartest person in the room. For some people, that was hard, especially for people who were a bit socially awkward, and didn’t have much other than their intellect. They had been a valedictorian at home and an average guy here. So for some time, MIT saw a lot of suicides among freshmen. But then they adapted and made freshman year pass-fail. That gave people a longer runway. More room to explore. But it was humbling to be there nonetheless.

The sea also taught me to be humble. When you go offshore, sailing, you know you don’t know. If you go way offshore like into the arctic ocean, you feel small. And you feel grateful that whatever there’s up there didn’t take your soul. There’s humility. When economists say things are uncertain, they still pretend to know. But when sailing, you can’t pretend. You have to function despite the fear. You do not have the power to extinguish the uncertainty you have to cope with. You can’t escape. There are things you do, of course, that are prudent. You wear life jackets, safety harnesses, you keep the more novice sailors off the deck. You decide who should go on the voyage because of needing competent people in a crisis to keep everybody safe. But at the end of it, you are coping with something that’s more powerful than you are.

So when I went to my first economics classes at MIT, I heard them talk about equilibrium. I raised my hand and, not trying to be a smart-ass, I said “isn’t that like assuming a happy ending?” I knew that the same math worked in engineering. But it doesn’t work that great in economics. We were doing Fourier transformations–looking at things in time and frequency domain. In an engineering lab, you can do that on electrical signals, and it fits like a glove. But if you use that stuff on economics data, it looks like mud. So I thought: what are these people doing? What they are doing is pretending to have certainty when they don’t have it.

For me, having experienced the social turmoil of growing up in Detroit, and knowing the uncertainty of the sea, this was crazy. But the work with Kindleberger resonated. I worked with him on Manias, Panics, and Crashes, which is a historical account of financial crises, and the radical uncertainty that underpin them.

In the end, I got a scholarship to go to Princeton, with Solow and Kindleberger backing me. And they told me the rising star at Princeton was going to be Joseph Stiglitz, and the faculty there was going to be amazing. I had applied to Harvard and Berkeley and all these places, but MIT had told me that if I got into Princeton, I had to go there. So I went to try graduate school…”

Enjoy sound with the story!

This playlist, put together by Rob, captures the spirit of the Sea.

Read along!

Recommended Read:
Charles P. Kindleberger – Manias, Panics, and Crashes: A History of Financial Crises

Subscribe to receive the next article directly to your inbox! And in the mean time, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

Not such a Great Equalizer after all

Because it has no regard for borders, the coronavirus has been referred to as the Great Equalizer. But its impact is not equal by any stretch of the imagination. While China, Europe, and Northern America may recover relatively fast, emerging market economies are less resilient. The combined health, economic, and financial tolls they now endure may cause them to face the greatest recession in decades.

By Jack Gao | When COVID-19 hit, China’s strong state and centralized public administration allowed it to suppress the domestic spread. In Europe, welfare systems and appropriate policy responses made sure workers have less to worry about when economies reopen. The United States (despite Trump’s handling leaving much to be desired) enjoys a unique status of its own. The American economy and “exorbitant privilege” of the US dollar mean that policy responses can be put forth in short order, and with relatively few negative repercussions. For most emerging market economies, however, none of this can be taken for granted. The coronavirus is shaping up to be the “perfect storm” that many feared. It could sink the developing world into a deep economic recession.

No Doctors and No Food

Let’s start with public health. While the increase of new deaths in the epicenters—US, UK, Italy, Spain—appears to be slowing, the virus rages on in major developing nations. Russia, India, Mexico, and Brazil continue to report well above a thousand new daily deaths, and many of them are still on an upward trajectory. In India, a brief relaxation of the lockdown was met with a jump in deaths, underscoring that the fight to contain the virus will be an uphill battle.

Although health systems are being tested everywhere, the ones in developing countries were already under strain before COVID-19 reared its head. For example, the average number of health workers per 1000 people in OCED countries is 12.3. In the African region, this ratio is only 1.4.

As if the health crisis is not crushing enough, the United Nations warns of a “hunger pandemic” as an additional 130 million people could be pushed to the brink of starvation this year, with the vast majority of them in developing countries. The coronavirus may cross borders easily, but the suffering it causes is not equal across countries.

Locked Down and Out of Work

If the human toll of the pandemic is appalling, the economic damages to countries are unprecedented as well, as countries implement lockdown and “social distancing” to combat the virus. In the latest World Economic Outlook growth projections by the IMF, emerging market economies as a whole are expected to contract 1% this year, for the first time since the Great Depression. Literally all developing countries may be in economic decline as a result of COVID-19, with India and China eking out paltry growth. Still, these headline numbers mask the true extent of economic hardship.

Take working from home, for example. Economists have documented a clear relationship between the share of jobs that can be done at home and the national income level. In a developed country like the United States, some 37 percent of jobs can be performed at home—education, finance and IT being at the top of the scale. In some developing economies, less than 10 percent of jobs can be done remotely.

On top of all this, global remittances are collapsing. The amount of money transferred to migrants’ home countries may fall by 20 percent as workers see dwindling employment. This is terrible news for countries like Lesotho, where remittances are as much as 16% of GDP.

Where’d the money go?

The global financial system exacerbates these struggles with its core and periphery topology. During good times, foreign capital flows into emerging markets, looking for higher yields. But in bad times, when that capital is needed most, it swiftly disappears. This dynamic is now on full display. As investors started to realize the true scale of the pandemic and major central banks initiated new rounds of monetary easing, emerging economies saw capital flight as investors rushed to safer assets. An estimated 100 billion portfolio dollars fled emerging markets in the first quarter alone.

In the face of such severe dollar shortages and liquidity crunch in developing countries, the Federal Reserve had to expand central bank liquidity swaps and launch a new lending facility to come to the rescue. The impact of such international measures is still an open question. But with currency depreciation, higher borrowing costs, declining official reserves, and falling commodity prices, it appears that the financial stress emerging economies are under may be difficult to reverse.

The Triple Whammy

This way, developing countries face a health-blow, and economic-blow, and a financial-blow, all at once. An emerging market economy faced with just one of those would have resulted in a crisis. But amid COVID-19, all emerging economies were are confronted with all three crises at the same time. The damage done by this “triple whammy” could plague the developing world for years to come.

Jack Gao is a Program Economist at the Institute for New Economic Thinking. He is interested in international economics and finance, energy policy, economic development, and the Chinese economy. He previously worked in financial product and data departments in Bloomberg Singapore, and reported on Asian financial markets in Bloomberg News from Shanghai. Jack holds a MPA in International Development from Harvard Kennedy School, and a B.S. in Economics from Singapore Management University. He has published articles on China Policy Review and Harvard Kennedy School Review.

Is Money View Ready to Be on Trial for its Assumptions about the Payment System?

A Review of Perry Mehrling’s Paper on the Law of Reflux

By Elham Saeidinezhad | Perry Mehrling’s new paper, “Payment vs. Funding: The Law of Reflux for Today,” is a seminal contribution to the “Money View” literature. This approach, which is put forward by Mehrling himself, highlights the importance of today’s cash flow for the survival of financial participants. Using Money View, this paper examines the implications of Fullarton’s 1844 “Law of Reflux” for today’s monetary system. Mehrling uses balance sheets to show that at the heart of the discrepancy between John Maynard Keynes’ and James Tobin’s view of money creation is their attention to two separate equilibrium conditions. The former focuses on the economy when the initial payment takes place while the latter is concerned about the adjustments in the interest rates and asset prices when the funding is finalized. To provide such insights into several controversies about the limits of money finance, Mehrling’s analysis relies deeply on one of the structural premises of the Money View; the notion that the payment system that enables the cash flow to transfer from a deficit agent to the surplus agent is essentially a credit system. However, when we investigate the future that the Money View faces, this sentiment is likely to be threatened by a few factors that are revolutionizing financial markets. These elements include but are not limited to the Fed’s Tapering and post-crisis financial regulations and constrain banks’ ability to expand credit. These restrictions force the payment system to rely less on credit and more on reserves. Hence, the future of Money View will hinge on its ability to function under new circumstances where the payment system is no longer a credit system. This puzzle should be investigated by those of us who consider ourselves as students of this View.

Mehrling, in his influential paper, puts on his historical and monetary hats to clarify a long-standing debate amongst Keynesian economists on the money creation process. In understanding the effect of money on the economy, “old” Keynesians’ primary focus has been on the market interest rate and asset prices when the initial payment is taking place. In other words, their chief concern is how asset prices change to make the new payment position an equilibrium. To answer this question, they use the “liquidity preference framework” and argue that asset prices are set as a markup over the money rate of interest. The idea is that once the new purchasing power is created, the final funding can happen without changing asset prices or interest rates. The reason is that the initial increase in the money supply remains entirely in circulation by creating a new demand for liquid balances for various reasons. Put it differently, although the new money will not disappear on the final settlement date, the excess supply of money will be eliminated by the growing demand for money. In this situation, there is no reflux of the new purchasing power.

In contrast, the new Keynesian orthodoxy, established by James Tobin, examines the effects of money creation on the economy by focusing on the final position rather than the initial payment. At this equilibrium, the interest rate and asset prices will be adjusted to ensure the final settlement, otherwise known as funding. In the process, they create discipline in the monetary system. Using “Liquidity Preference Framework”, these economists argue that the new purchasing power will be used to purchase long-term securities such as bonds. In other words, the newly created money will be absorbed by portfolio rebalancing which leads to a new portfolio equilibrium. In this new equilibrium, the interbank credit will be replaced by a long-term asset and the initial payment is funded by new long-term lending, all outside the traditional banking system. Tobin’s version of Keynesianism extracted from both the flux of bank credit expansion and the reflux of subsequent contraction by only focusing on the final funding equilibrium. It also shifts between one funding equilibrium and another since he is only interested in final positions. In the new view, bank checkable deposits are just one funding liability, among others, and their survival in the monetary system entirely depends on the portfolio preferences of asset managers.

The problem is that both views abstract from the cash flows that enable a continuous payment system. These cash flows are key to a successful transition from one equilibrium to another. Money View labels these cash flows as “liquidity” and puts it at the center of its analysis. Liquidity enables the economy to seamlessly transfer from initial equilibrium, when the payment takes place, to the final equilibrium, when the final funding happens, by ensuring the continuity of the payment system. In the initial equilibrium, payment takes place since banks expand their balance sheets and create new money. In this case, the deficit bank can borrow from the surplus bank in the interbank lending market. To clear the final settlement, the banks can take advantage of their access to the central bank’s balance sheet if they still have short positions in reserve. Mehrling uses these balance sheets operations to show that it is credit, rather than currency or reserves, that creates a continuous payment system. In other words, a credit-based payment system lets the financial transactions go through even when the buyers do not have means of payment today. These transactions, that depend on agents’ access to liquidity, move the economy from the initial equilibrium to the ultimate funding equilibrium.

The notion that the “payment system is a credit system” is a defining characteristic of Money View. However, a few developments in the financial market, generated by post-crisis interventions, are threatening the robustness of this critical assumption. The issue is that the Fed’s Tapering operations have reduced the level of reserves in the banking system. In the meantime, post-crisis financial regulations have produced a balance sheet constrained for the banking system, including surplus banks. These macroprudential requirements demand banks to keep a certain level of High-Quality Liquid Assets (HQLA) such as reserves. At the same time, the Global Financial Crisis has only worsened the stigma attached to using the discount loan. Banks have therefore become reluctant to borrow from the Fed to avoid sending wrong signals to the regulators regarding their liquidity status. These factors constrained banks’ ability to expand their balance sheets to make new loans to the deficit agents by making this activity more expensive. As a result, banks, who are the main providers of the payment system, have been relying less on credit and more on reserves to finance this financial service.

Most recently, Zoltan Pozsar, a prominent scholar of the Money View, has warned us that if these trends continue, the payment system will not be a credit system anymore. Those of us who study Money View realize that the assumption that a payment system is a credit system is the cornerstone of the Money View approach. Yet, the current developments in the financial ecosystem are fundamentally remodeling the very microstructure that has initially given birth to this conjecture. It is our job, therefore, as Money View scholars, to prepare this framework for a future that is going to put its premises on trial.

Elham Saeidinezhad is lecturer in Economics at UCLA. Before joining the Economics Department at UCLA, she was a research economist in International Finance and Macroeconomics research group at Milken Institute, Santa Monica, where she investigated the post-crisis structural changes in the capital market as a result of macroprudential regulations. Before that, she was a postdoctoral fellow at INET, working closely with Prof. Perry Mehrling and studying his “Money View”. Elham obtained her Ph.D. from the University of Sheffield, UK, in empirical Macroeconomics in 2013. You may contact Elham via the Young Scholars Directory

10 years after the financial crisis and its lasting effects on Americans

By Breshay Moore.

This year marks the 10th anniversary of the 2008 financial crisis. Although the crisis is remembered for foreclosures, bank failures and bailouts, many American citizens are still unaware of what caused it. Understanding this is important to prevent future crises and think about what kind of financial system we want to have: one that serves people and invests in communities, or one that enriches a handful of wealthy bankers and money managers while making our economy less fair and safe for the rest of us.

In simple terms, the financial crisis was a result of deregulation of the financial sector, and reckless and predatory practices by greedy financial players all across the board, from mortgage lenders to Wall Street traders to the largest credit rating agencies.

In the lead-up to the crisis, mortgage lenders were engaging in fraudulent and deceptive sales practices to make toxic mortgage loans to home buyers, which they knew the borrowers could not afford. Predatory lenders particularly targeted people of color, especially women of color, for these higher-rate loans. Meanwhile, these risky mortgages were packaged and sold to investors around the world, becoming implanted throughout the financial system. The economy went into a recession in late 2007, defaults on mortgage payments increased and housing prices plummeted, resulting in billions of dollars in mortgage losses. This had a chain reaction in the financial system because of the number of financial institutions that had stakes in the housing market. These string of events shook the entire economy, fueling the worst recession in the US since the Great Depression.

Millions of families lost their homes or jobs. Median wealth among households fell tremendously: From 2005 to 2009, median wealth among Hispanic households fell by 66 percent, by 53 percent among Black households, by 31 percent among Asian households, and by 16 percent among white households. Millions of people also suffered major drops in income, property values, retirement savings, and general economic well-being. The crisis produced lasting effects. Families are still struggling economically, especially in communities of color.

After all the damage was done, no one was held accountable. Financial players made billions of dollars in bonuses and profits. Instead of helping the communities that were most affected, Congress and The Federal Reserve began bailing out big banks with public money. We recently learned that 30 percent of the lawmakers and 40 percent of the top staffers involved in the congressional response to the crisis have since gone to work for Wall Street.

In 2010 President Barack Obama introduced legislation containing important reform measures in response to the crisis. The Dodd–Frank Wall Street Reform and Consumer Protection Act created rules to protect consumers and regulate the financial industry. This law created the Consumer Financial Protection Bureau (CFPB) to promote transparency and fairness in the consumer-finance industry, and to holding financial institutions accountable for engaging in predatory and discriminatory practices. This independent agency has done a lot for consumers, and has returned more than $12 billion in relief to more than 29 million cheated consumers.

In return for all the money that Wall Street has poured into political campaigns and lobbying, President Trump and Congress have been working hard to undo rules that regulate the financial sector. Countless bills have been introduced and passed in Congress to deregulate banks and lenders. One of these bills, S. 2155, which became law in May, not only increases the risk of future financial disasters and bank bailouts, but makes it easier for mortgage lenders to discriminate on the basis of race, ethnicity and gender. Sixteen Democrats and an Independent supported the GOP in pushing this deregulatory bill. The vote did not go unnoticed and public sentiment is not on their side. In fact, 88 percent of all likely voters — across party lines — support holding financial companies accountable if they discriminate against people because of their race or ethnicity. And 64 percent of voters think big banks and finance companies continue to require tough oversight to avoid another financial crisis.

The lack of restrictions on banks and other financial institutions put consumers and the economy at risk. The 10th anniversary of the financial crisis should encourage us to redouble our efforts to push for changes to our financial system so that it works for us not just for Wall Street.

Breshay Moore is a Senior at Towson University, studying Advertising and Public Relations. She was recently a Communications and Campaign intern for Americans for Financial Reform.

For Bold Solutions We Ought To Include MMT in Economic Discourse

By Justin R. Harbour, ALM

In a recent Financial Times article, Martin Sandbu identifies three major economic failures of competitive capitalism in the West: growing inequality; the disproportionate effects of The Great Recession on young people; and the threat of displacement in labor markets brought by improving technology and the presumed ubiquity of artificial intelligence. Sandbu connects these failures to recent victories of populist “extremist” parties in the EU, UK, and US, and asserts that if liberalism and competitive capitalism are to remain a viable and persuasive platform for the next generations a bolder thinking from the Western political economy is now more necessary than ever.

This need to revamp Western capitalism has brought renewed attention to Modern Monetary Theory (MMT), a school of thought that offers an important and bold perspective on economics and policy solutions. A universal basic income (UBI), universal basic services (UBS), and a job guarantee by the State are most commonly cited as a bold fix to current problems. So, it is worth asking, what are the merits of these aforementioned proposals, through the lens of MMT?

The Failures of Competitive Capitalism

To answer this question, we first look at the failures of the competitive capitalism. Growing inequality is nearly universal. According to the Organization for Economic and Cooperative Development (OECD), the growth in inequality between the incomes of the top 10% of earners and the bottom 10% has not stopped since 1985:

The Great Recession accelerated this trend and brought into stark relief the confounding need of the West to rescue and protect the Recession’s primary contributors (i.e., “too big to fail” banks). This approach made the resulting trends in unemployment all the harder to take, especially for the West’s younger workers. A 2012 report on the employment effects of The Great Recession by Stanford University found that those groups hit hardest were found those 25-54 years of age (i.e., the “prime working age” range, and hence a significant variable in overall economic growth). The report also found that minority groups found themselves bearing more of the burden than their racial-majority peers. A similar report from the Federal Reserve bank of St. Louis found that the recovery rates from unemployment after The Great Recession were lowest amongst younger prime-age workers and older workers. In Europe the young have fared even worse, according to a recent report from Eurostat:

The story for wealth creation and asset acquisition for younger citizens homeownership is similarly alarming. Since World War II, homeownership has been considered to be the financial outcome indicative of a successful economy due to its positive value as a long-term asset. The decline in home ownership thus includes a worrying picture, ceteris paribus. As shown in the graph below, declining home ownership in the United States accelerated during the Recession, and remains at a rate not experienced since the economic boom of the nineties:

Though homeownership is less likely to be understood as a sign of economic success and health in Europe, research suggests a similar trend in declining home ownership in the aftermath of the Great Recession was also seen in the EU. Taken together, these trends make a generation’s economic skepticism of the ability of our current economy to deliver prosperity more of a logical first principle than not.

Three bold proposals to address this skepticism have become nearly commonplace in such reform-minded discourse: a UBI, a UBS, and a job guarantee. What does each propose, and which is best suited to address the issues identified above?

Three Bold Proposals

A UBI offers all citizens a basic level of income. UBI’s proponents commonly claim that this income is necessary for a variety of reasons. The fear of artificial intelligence taking over traditional labor tasks is commonly cited in defense of UBI. Some UBI proponents also argue that such an income would enhance human freedom by providing an option free from coercive and freedom-reducing labor arrangements. A UBI could also streamline social entitlement spending to be more efficient and less bureaucratic. A UBS does not offer income, but a variety of services deemed essential to maximize freedom and economic potential. Though the services offered differ between advocates, they often include improved and free public transportation, access to the internet, and job training, among others. A job guarantee is just as it sounds: anyone needing or wanting work but currently out of work would be offered a job by the local government to provide labor and/or services toward local projects that a community needs.

Each of these proposals includes explicit costs that must be heavily weighed. For example, the literal cost of providing a UBI substantial enough to achieve its purpose is very high. Some have suggested that its cost could range in the 30-40 trillion-dollar range in the United States. Cost-of-living variations also diminish the streamlining argument for a UBI since adjusting it for regional purchasing parity may make it even more complex bureaucratically than the current system. Explicit costs also represent an issue for UBS, though ostensibly less so than a UBI. Though the job guarantee does face some cost concerns, important work has recently demonstrated that the opportunity costs of such a program are well worth the explicit costs it may incur.

Though each proposal is bold in its promises and its trade-offs, the more important question here is which offers a better redress of the concerns raised by the Great Recession. It appears that the job guarantee is the better situated to address all those concerns on both explicit and implicit cost fronts. The job guarantee addresses the unemployment problem and wages problem directly. The job guarantee has the additional appeal of making it more likely that the newly employed will accumulate enough wealth to make home ownership an attractive option, and thus satisfy the third concern. Conversely, a UBI only deals with the wage issue directly and therefore the unemployment problem indirectly, while a UBS program does not address any of the problems directly. There are several other variables at play that strengthen the argument for job guarantee over the others. Most importantly, the job guarantee is the only one that signals the value of work – an implication necessary for future growth if an economy hopes to move beyond its current frontier. In doing so, it is more likely to find traction in our polarized political paradigm by avoiding the typical debates associated with strengthening social safety nets.

The Rise of Modern Monetary Theory

The economic school most strongly advocating for the affordability of a job guarantee program – Modern Monetary Theory (MMT) – has been experiencing a surge of public interest and acceptance as of late. This is not to say it is brand new or has not been trying to advocate for the policies its theory substantiates for a long time. But its appeal since the experience of the Great Recession is obvious once one digs into it. MMT is a theory of sovereign monetary policy that asserts that sovereign nations that issue debt in its own fiat currency cannot ever run out of money. Any restraint by a nation on their spending for any reason, including to stimulate demand or provide needed relief is, therefore, a purely political decision, and only restrained by the availability of real resources. MMT’s advocates thus model how under MMT’s reorientation of fiscal perspective, a nation’s fiscal and monetary policy options are much broader than under older and perhaps more dominant paradigms. The implication is that there are bolder and further reaching policy options always available to state to provide relief for distressed citizens during downturns if they can move beyond the unnecessary concerns for debt and deficits during such times.

The most notable of MMT’s more active contemporary economists include L. Randall Wray, Warren Mosler, and Stephanie Kelton. There are several websites dedicated to the defense of its theory by these authors and others: one by another of its theorists Bill Mitchell; and The Minskys, so named to honor one of the more prominent economists to set the foundations of MMT, Hyman Minsky. Of additional note would be Ms. Kelton’s work with the campaign of Bernie Sanders in 2016 and her recent inclusion into Bloomberg View’s stable of writers – an inclusion suggesting that MMT’s theories are gaining traction. There have also been recent news items such as a history of MMT in Vice News and a review of its contemporary appeal in The Nation. Finally, there has been the consistent work and advocacy of the Levy Economics Institute of Bard College. MMT, in other words, appears here to stay.

Important work has been produced recently by MMT economists as well. In the United States, the Levy Institute recently published a report on the macroeconomic effects of canceling all student debt. The report finds that effects of such a policy would have a greater economic stimulus on employment and GDP than its costs can reasonably argue against. So too did the Levy Institute publish a report on the feasibility of the guaranteed job program discussed above. The job guarantee has helpfully garnered bipartisan support from the political right, left, and center.

Though popular within certain corners of the public sphere and gaining traction, it is not without its legitimate faults and challenges. Nonetheless, an undergraduate or higher level secondary student is unlikely to be exposed to MMT during their introductory training. I am not here suggesting that the more traditional curriculum is not appropriate for introductory students, nor universally ambivalent about the inclusion of emerging theories. But I am saying that for some teachers and some curriculums, finding ways to include such exciting emerging work with profound implications on their economic thinking and potentially their communities are harder the more they are not engaged with by “mainstream” outlets. What’s more, some of the more ubiquitous and far-reaching introductory curriculums (Advanced Placement in America, for example, or the International Baccalaureate program) don’t consider it at all.

At a time when some are rightfully calling for economists to better communicate economic concepts, ignoring newer and bolder conceptions of economic pillars that have popular momentum and real-world applicability behind them – such as MMT – leaves a fruitful learning opportunity to advance economic thinking and communicating skills for the youngest of economists at the door. Mr. Sandbu is right; the experience of the Great Recession by Gen Xers, Millennials, and those closely on their heels demands bold reform to reanimate the economy’s perceived legitimacy. A generation of economists and their work will be informed by their experience with the Great Recession. Let us all hope that MMT and its similar promising competitors are taken as seriously as the older theories so that we can rethink and rebuild economics in a way that makes economic thinking and understanding economic theory a universal pillar to our civic discourse.

About the author

Justin Harbour is currently an Instructor for Advanced Placement Economics at La Salle College High School in Philadelphia, PA. Having studied history, government, and political economy at UMASS, Amherst and Harvard University, he has previously published book reviews on teaching and education for the Teacher’s College Record and essays in CLIO: Newsletter of Politics and History, The World History Bulletin, and Political Animal. Justin lives in Philadelphia with his wife and two children. Follow him on twitter @jrharbour1

It’s Time to Guarantee Jobs

The first half of the twentieth century was a challenging time for economics. The Great Depression wiped out incomes, investments, and most importantly, optimism. But when the traditional laissez-faire approach proved ineffective, the work of Keynes and FDR showed that there was another way. The New Deal employed American workers directly and restored confidence among business owners. Today, we could benefit from a similar program. It’s time for a new New Deal, or a Job Guarantee Program, that secures employment to all who are able and willing to work. We’ve done it before, and we can do it again. By Johnny Fulfer.

What We Learned from the Great Depression

According to the National Bureau of Economic Research, the U.S. economy was in a recession just over 48 percent of the time between 1871 and 1900. But none were as bad as the crisis that followed The Great Crash of 1929. Nevertheless, orthodox economic theorists urged policymakers to maintain the status quo and argued the economy would return to normal as long as it was left alone. This perspective was influential and often framed the ways in which political leaders such as Herbert Hoover understood the crisis. Hoover was not only politically committed to free-market ideas, he was psychologically invested in them, urging Americans to show thrift and self-reliance, practices which later resulted in more turmoil.

Elected president in 1932, Franklin Roosevelt did not have an all-embracing theory that would solve all America’s problems. Rather, he employed a wide range of policies, some of which failed, while others were successful in getting people to work. Perhaps the greatest impact Roosevelt’s New Deal had on American society was the change in perspective policymakers had toward government intervention. Earlier leaders like Theodore Roosevelt and Woodrow Wilson had had only moderate success producing government initiatives to restrain the predatory nature of American capitalism. But after the Great Depression, FDR helped policymakers and citizens markedly change their views in favor of government assistance, temporarily pushing the conservative opposition to the margins.

As such, FDR’s New Deal momentarily ended the ‘rugged individualism’ of the Hoover era and demonstrated that free-market economics could not be relied upon in a time of crisis. When the economy falls into a slump, the government must be used as a source of relief.

This, too, is the argument that John Maynard Keynes makes in his influential 1936 book, The General Theory of Employment, Interest, and Money. Keynes challenged the neoclassical principle that the market naturally adjusts itself to full employment. Along with the two held theories of unemployment—voluntary and frictional—Keynes wrote, there is also the involuntary, which was the result of a shortfall in aggregate demand.

The volatility of investment, Keynes argued, is dependent on our expectations of the future. The only way entrepreneurs would invest is if they expect sufficient demand for goods and services. This was a problem during the Depression—spending money was scarce. When people are unemployed, or fearful of losing their jobs, they are likely to reduce spending. This creates a cycle of insufficient demand, bringing profit-expectations down. Increasing savings, Keynes showed, would only make things worse. A rise in savings would reduce spending, and thus bring down the total level of employment and income. Surplus inventories with nobody to buy commercial products would force firms to contract operations and lay off even more workers.

Therefore, Keynes concluded, there is no automatic recovery from depression; supply does not create its own demand. The only solution is for the government to heavily invest in public works, creating jobs and increasing demand to rebuild confidence in the business community.

Roosevelt’s New Deal did exactly this. It produced nearly 13 million jobs, over 60 percent of which came from the Works Progress Administration, an organization which hired a wide range of individuals, from artists and writers to laborers who constructed roads, bridges, and schools. An incredible number of public goods were provided through these programs, and money was placed in the hands of the workers, whose purchasing power gave business owners’ profit expectations the much needed boost.

Why We Need a new New Deal

The U.S. Bureau of Labor Statistics recently published a report examining the current employment conditions in the United States. The unemployment rate stands at 4.1 percent, the BLS reports, which is roughly 6.6 million people in the labor force. While the unemployment rate is relatively low from a conventional perspective, Dantas and Wray argue that this does not consider the falling participation rate for prime-age workers and wide-spread income stagnation.

Moreover, we often gauge the economy based on the unemployment rate, although, this economic indicator does not consider the fact that 40.6 million Americans remain in poverty. A job paying the current federal minimum wage doesn’t mean a worker will make enough money to live without relying on various forms of welfare. In order to turn this around, we need a new New Deal.

While the New Deal of the 1930s was a centralized program, controlled by the federal government, Dantas and Wray propose that a “new New Deal” would be more efficient by creating a more decentralized workforce, hired by state and local governments to meet the needs of the local communities, with wages paid by the federal government. They propose a Job Guarantee program.

The idea behind this policy is that those who are involuntarily unemployed don’t have to be if the government supplied them with a job. Economist Carlos Maciel further argues that the Job Guarantee program would cost around 1 percent of the U.S. GDP, providing additional jobs through the multiplier effect. When the government invests $1, it multiplies through consumer spending, turning into $2 or $3 in the real economy. In his General Theory, Keynes estimated the multiplier to be somewhere between 2 ½ and 3.

Employment works in the same manner. If one new job is created from the initial government investment, the consumption created by the additional worker will produce more jobs in other industries, whose consumption will take the process further, until the multiplier is reached. Moreover, this program would redistribute money from current welfare programs toward the Job Guarantee program. Those who are currently under the poverty line will not need traditional welfare benefits if they have jobs that pay a living wage.

Perhaps the reason U.S. policymakers are hesitant towards a Job Guarantee program has less to do with economics, and more about an investment in the status quo, whether politically or psychologically. Many Americans are invested in the idea of ‘free markets’, whatever they envision that to be, pushing rational economic discourse and the notion of social justice to the margins, and elevating the politically constructed parallel between self-interest and the partial idea of the American Dream. We must move beyond the free-market ideology, which views everything as profit or loss, win or lose. Only time will tell how this polarized form of reasoning will impact the American people, especially the 40.6 million Americans that are currently below the poverty line, who stand to suffer the most.

About the Author: Johnny Fulfer received a B.S. in Economics and a B.S. in History from Eastern Oregon University. He is currently pursuing an M.A. in History at the University of South Florida and has an interest in political economy, the history of economic thought, intellectual and cultural history, and the history of the human sciences and their relation to the power in society.

PostCapitalism: A Guide to Our Future

By Hannah Temple.

It is difficult to get through a day without encountering the idea that we as a species and a planet are at some kind of a tipping point. Whether for environmental, economic or social factors (or a mix of them all) there is a growing collective of voices claiming that the fundamental ways in which we live our lives, often linked to the structures and incentives of capitalism, must change. And they must change both radically and soon if we are to protect the future of the human race. Paul Mason’s PostCapitalism: A Guide to Our Future adds another compelling voice to this increasingly hard-to-ignore din. However, what makes this book refreshingly different is the tangible picture it paints of our possible path to a “postcapitalist” world. Mason’s belief is that capitalism’s demise is in fact already happening, and it is happening in ways we both know and like.

The book starts by looking at Kondratieff waves– the idea developed by Nokolai Kondratieff in the 1920s that capitalist economies experience waves or cycles of prosperity and growth, followed by a downswing, characterised by regular recessions, and usually ending with a depression. This is then followed by another phase of growth, and so on and so on. Many people, especially those that benefit from the current economic model, argue that what we are experiencing currently is just another of these regular downswings and we all just have to hunker down and ride the wave until the going gets good again. Mason, however says that even a quick glance at whatever form of evidence takes your fancy (global GDP growth, interest rates, government debt to GDP, money in circulation, inequality, financialization, productivity), demonstrates that the 5th wave that we should currently be riding has stalled and is refusing to take off.

The shift from the end of one wave and the start of a new one is always associated with some form of societal adaptation. Usually this is through attacks on skills and wages, pressure on redistribution projects such as the welfare state, business models evolving to grab what profit there is. However, if this de-skilling and wage reduction is successfully resisted then capitalism is forced instead into more fundamental mutation- the development of more radically innovative technologies and business models that can restore dynamism based on higher wages rather than exploitation. The 1980s saw the first adaptation stage in the history of long waves where worker resistance collapsed. This allowed capitalism to find solutions through lower wages, lower-value models of production and increasing financialization and thus rebalance the entire global economy in favour of capital. “Instead of being forced to innovate their way out of the crisis using technology, the 1 per cent simply imposed penury and atomization on the working class.”

This failure to resist the will of capital and the subsequent emergence of an increasingly atomised, poor and vulnerable global population is part of Mason’s explanation for our stalled 5th wave. The other half of the explanation comes from the nature of our recent technological innovations. Mason contends that the technologies of our time are fundamentally different to those of previous eras in that they are based on information. This is significant in that information doesn’t work in the ways that printing presses or telephones or steam engines work. Information throws all the basic tenets of capitalism- supply and demand, ownership, prices, competition- on their heads. Information technology essentially works to produce things that are increasingly cheap or even free. Think of music- from £10 for a CD in 1997 to 95p for an iTunes track in 2007 to completely free via sharing sites like Spotify in 2017. Over time, Mason claims the market mechanism for setting prices for certain information-based goods will gradually drive them down and down until they reach essentially or even actually zero – eroding profits in the process.

Capitalism’s response to this shift has basically been to put up lots of walls and retreat to stagnant rentier activity rather than productivity or genuine innovation. Legal walls such as patents, tariffs and IP property rights are used to try to maintain monopoly status so that profits can continue to be earnt. Politics is following in the same path with some real walls as well as plenty of metaphorical ones in the form of disintegrating international agreements and partnerships, import tariffs, immigration caps and so on. “With info-capitalism a monopoly is not just some clever tactic to maximise profit, it is the only way an industry can run. Today the main contradiction in modern capitalism is between the possibility of free, abundant socially-produced goods and a system of monopolies, banks and governments struggling to maintain control over power and information”.

However, what seems to be part of the problem is, according to Mason, a critical part of the solution. These new sharing, or “information” technologies, have led to what Mason sees as an already emerging postcapitalist sector of the economy. Time banks, peer-to-peer lending, open-source sharing like Linux and Wikipedia and other technologies are not based on a profit-making motive and instead enable individuals to do and share things of value socially, outside of the price system. This peer-to-peer activity represents an indication of the potential of non-market economies and what our future might look like.

Mason argues that we have now reached a juncture at which there are so many internal and external threats facing our existing system- from climate change, migration, overpopulation, ageing population, government debts- that we are in a similar position to that faced by feudalism before it dissolved into capitalism. The only way forward entails a break with business as usual. Mason emphasises that it is important to remember that capitalism is not a “natural” state of being, nor has it gone on for such a long time. We live in a world in which its existence is seen to be unquestionable but we must take time to teach our brains how to imagine something new again. For Mason, in rather sci-fi fashion, this “something new” is called Project Zero.

Project Zero aims to harness to full capabilities of information technologies to:

– Develop a zero-carbon energy system
– Produce machines, services and products with zero marginal costs (profits)
– Reduce labour time as close as possible to zero

“We need to inject into the environment and social justice movements things that have for 25 years seemed the sole property of the right: willpower, confidence and design.”

Mason provides us with a comprehensive and exciting list of activities to be cracking on with to shape our new world. Some of his ideas are excitingly fresh and new such as the development of an open, accurate and comprehensive computer simulation of current economic reality using real time data to enable the planning of major changes. Others are more familiar such as the shifting of the role of the state to be more inventive and supportive of human wellbeing by coordinating infrastructure, reshaping markets to favour sustainable, collaborative and socially just outcomes and reducing global debts. He also supports the introduction of a universal basic income, the expansion of collaborative business models with clear social outcomes and the removal of market forces- particularly in the energy sector in order to act swiftly to counter climate change. He calls for the socialisation of the finance system. This would involve the nationalization of central banks, setting them explicit sustainability targets and an inflation target on the high side of the recent average to stimulate a “socially just form of financial repression”. It would also involve the restructuring of the banking system into a mixture of non-profit local and regional banks, credit unions and peer-to-peer lenders, a state-owned provider of financial services and utilities earning capped profits. Complex, financial activities should still be allowed but should be separate and well-regulated, rewarding innovation and punishing rent-seeking behaviour.

This push towards a system that rewards and encourages genuine innovation underlies most of Mason’s suggestions for our postcapitalist future. He contends that, if we continue down our current path, it will suffocate us and lead to a world of growing division, inequality and war. We already have systems for valuing things without prices. Working on optimising the technologies we have available to expand these systems, allowing us to live more sustainable, equal and happy lives, Mason argues, should be the key focus for us all.

This book review of Paul Mason’s PostCapitalism by Hannah Temple is originally posted at Rethinking Economics. 