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“There is no alternative” to managing the economy and the climate

Embracing industrial policy and economic planning is essential to reducing greenhouse gas emissions and environmental damage, says Kevin Cashman.

Embracing industrial policy and economic planning is essential to reducing greenhouse gas emissions and environmental damage.

By Kevin Cashman

One of Margaret Thatcher’s often-used slogans was TINA, or “there is no alternative.” There is no alternative, she meant, to the neoliberalism that became dominant in the 1970s and 1980s. After a coup led to the demise of the Soviet Union in 1991, this idea led to even more smug declarations of victory for the neoliberal order as well as the popularization of Francis Fukuyama’s articulation of the “end of history.”

With the countless failures of neoliberalism coming into focus for all sides of the political spectrum — one of those failures being climate change, which is already leading to potentially irreversible changes in ecological systems — it is worth considering different approaches to economics that could start to address these problems. These include some concepts, like industrial policy and economic planning, which have been summarily dismissed by powerful people in both major parties in the United States. In the context of a Green New Deal, these ideas provide valuable insights on what successful policy and outcomes would look like.

Industrial policy and economic planning

Industrial policy and economic planning and management are vital to reducing greenhouse gas emissions. Briefly, industrial policy is often thought of as policies that strategically supports certain industries, while economic planning involves government intervention in markets to various degrees. (Industrial policy is a type of economic planning.) Over the past 40 years, both concepts have been much maligned by Democrats and Republicans. Industrial policy is attacked as protectionism which spoils “free” trade, and economic planning is often tied to socialist and communist political and economic systems (and thus assumed to be implicitly harmful). Industrial policy is also often tied to economic planning as a way to discredit it.

The dirty secret in development is that the countries that have been most successful at raising living standards and growing their economies engage in planning that is outside what the neoliberal order considers acceptable. These include the Soviet Union, which oversaw vast improvements in living standards and transformed the country into a superpower, and China, which not only has the largest economy in the world today but has reduced poverty to a degree that can only be regarded as one of humanity’s most impressive achievements. The Soviet Union and China didn’t and don’t pretend to be guided by neoliberalism, but other countries, such as Japan and South Korea do. Their development was also characterized by industrial policy, “protectionism,” and currency management. Historically, countries like the United States and the United Kingdom, some of the most enthusiastic promoters of neoliberalism, are guilty of this as well. Simply put, government intervention in markets and industry is how the government can move the economy to solve large problems, like poverty, underdevelopment, and hopefully in the future, climate change.

Planning for the benefit of the rich

If these policies are so beneficial, why does neoliberalism eschew them? While this is perhaps an oversimplification, it’s because the interests that promote neoliberalism risk losing power and money from their adoption. The hollowing out of social welfare programs and the introduction of markets into various facets of life have led to the accrual of wealth and power for some, and those people, who might have been already rich or powerful to begin with, don’t want to lose those benefits. Neoliberalism also has different apparatuses that support it in academia, media, the state, and other institutions that give backing to its ideas. As an example, free trade in a vacuum might make sense, but “free” trade structured to benefit the rich does not. However, said apparatuses will continue to push the narrative that “free” trade is inevitable and unavoidable. Likewise, austerity — the idea the government should close budget deficits and reduce its debt — does not improve economies and makes very little sense, but it was the default policy prescription during the worst recession in 80 years, and it destroyed many lives.

That leads to another point: the United States and other countries committed to capitalism and neoliberalism actually practice industrial policy by enacting policies that largely benefit the rich. This protectionism can be found in many different parts of the economy. The supply of doctors, dentists, and lawyers is artificially restricted (thus raising wages), the Export–Import Bank subsidized large companies that had no need for subsidies, intellectual property rules allow rents to be extracted on drugs or software much longer than is necessary, the gains from government research and development are privatized, and the financial sector is largely waste — just to name a few examples.

Transportation and urbanism as examples of poor planning

Since economic planning in the United States is focused largely on extracting gains for the rich, it also means that there is inadequate planning around pressing problems, like climate change. The transportation sector illustrates these inefficiencies and coordination failures well.

The transportation sector is the largest or second-largest contributor of greenhouse gas emissions in the United States. Overwhelmingly, light-duty vehicles are responsible for most of these emissions — 60 percent — while Medium- and Heavy-Duty Trucks are 23 percent. Aircraft (9 percent), Rail (2 percent), Ships and Boats (2 percent), and everything else (4 percent) make up the rest.

In many cities in the United States, vehicles are the most common way to commute to work or get around. This is in large part due to poor and disjointed transportation policy and is also why light-duty vehicles contribute so much to emissions. Medium- and heavy-duty truck emissions are high as well (and rail, low) because trucks are the predominant way goods are transported across the country and within cities. A sensible climate policy to address this would 1) limit the emissions from vehicles and 2) shift to better ways of transporting people and goods.

Over the last thirty years, the United States has largely failed at both of these goals. Vehicle fuel efficiency has increased modestly via standards (after efficiency decreased in the 1990s), although these are undermined by states in various ways. Gasoline is by far the most common fuel, despite the availability of technology that could have supplanted it. Electric vehicles and gasoline/electric hybrid vehicles were developed and viable in the 1990s, but absent incentives to produce them or require their adoption were not produced in large numbers. Electric vehicles were clearly superior in terms of their environmental impact because they relied on electricity generation, which could be from clean sources. Instead, the United States spent significant time and money developing hydrogen, ethanol, and compressed natural gas vehicles, which had significant disadvantages (ethanol subsidies also had significant harmful effects abroad, raising the prices of food in poor countries, some of which had been encouraged to adopt trade policies that exposed themselves to this danger). This mirrors the United States’ slow recognition that wind and solar power represented the future of electricity generation, which was in part due to the promotion of natural gas as supposedly a “transition fuel” and coal as “clean.”

The United States also has questionable priorities when organizing how people get around. Cities rely on car use to an unacceptable degree, which imposes large environmental and social costs. In Ivan Illich’s Energy and Equity, Illich argues that structures like the transportation system in the United States replicate class divisions and also reproduce and justify themselves without concern for whether they make sense at all. In this, he calculates that the “true” speed of a car, taking into account all of the costs, is 3.7 miles per hour. This serves more as a thought experiment than a calculation to rely on but makes his point. Given these costs, cities should focus on the ways of getting around that have the least social costs, like walking, cycling, and public transportation, as well as designing cities better in the first place so that the average person does not need to rely on cars to get around. Instead, cities are mostly doing the opposite: expanding car use, defunding public transportation, building boondoggles like Elon Musk’s under-city single-serve tunnels, expanding in irresponsible ways, relying on ride-hailing services, and indulging in poorly thought out services like dockless bikes and scooters. In this sense, venture capital is subsidizing modes of transportation that have high social and environmental costs, with the government’s backing. The promise of self-driving cars is also influencing the government’s actions. Self-driving cars, although useful in some respects, will exacerbate environmental and social problems in cities, and should represent only a small slice of how people travel in the future. Venture capital and Silicon Valley more broadly are changing how goods are transported as well. Deliveries, both within cities and between cities, are becoming more common. There are environmental costs to these distribution models, although there is scant acknowledgment of them. Packages sent from Amazon or a grocery delivery probably have more environmental costs than the equivalent trips to the store, for example.

A sensible way to limit emissions from transportation in the United States would be to rethink how cities develop and orient them around walking, cycling, and public transportation while restricting private car use. People should live close to where they work, cities should invest in free public transportation (especially buses, which are cheap and effective), and ban or discourage ride-hailing services or other in vogue technologies that have dubious environmental or social benefits. Electric cars should be rare but the norm and autonomous technology should be embraced (although their use should be also rare and used for the same special cases that normal car use would be used for, e.g. transporting the elderly). Rail should be expanded for both passenger and freight use. These are common sense and obvious solutions that the government should support.

China: an example for the world

The United States is the country most easily positioned to address climate change but it has done likely the least out of any rich country. China, a country significantly less wealthy than the United States, has likely done the most. In fact, a recent study provides some evidence that China’s carbon dioxide emissions peaked in 2013 and are declining in large part due to changes in China’s industrial structure, which includes pilot programs for pricing carbon, among many other things. China has:

Drastically reduced its reliance on coal;
Potentially reached peak emissions in a country that’s the world’s largest economy (but also significantly less developed than its peers);
Become the largest buyer and producer of solar panels; leader in wind power installation and generation;
Undertaken massive reforestation campaigns;
A high adoption rate of electric cars.

China’s stunning progress has been called its own Green New Deal. The significance of a middle-income country enacting these policies to its short-term detriment should not be understated. Richer countries have struggled to meet modest emissions goals, and have also insisted that poorer countries undertake large reductions as a prerequisite for their own action. China nevertheless independently adopted policies that led to these achievements. In addition, it did this while continuing to pursue other goals, like poverty reduction.

How was China able to do this? China’s Communist Party undertook significant economic reforms in the 1980s and 1990s in order to grow China’s economy. These changes moved the country into a socialist market economy that introduces some elements of the market into the economy but that also gives the state significant control. The government owns significant parts of the economy and sectors deemed important. It also has more controls on private business than in the West — with agreement from those business leaders. These changes were seen as essential to China developing its productive capabilities and competing in the global economy under the current conditions but also as a step toward socialism and eventually communism.

Unlike in market socialism, economic planning is essential to China’s economy and occurs at many levels of the economy, including the top-most levels. Like other countries that have developed in the 20th century, this planning included export-oriented policies, technology transfers, support for specific industries, and management of its currency. In addition, part of the government’s planning includes the development of an internal market for China’s good and services. This planning, as well as other government policies, probably helped China avoid most of the harmful effects from the Great Recession. Indeed, China’s system seems to be able to largely avoid economic crises that are commonplace in the West, despite near-constant predictions of its economic collapse.

Integral to its more recent planning, is an emphasis on the ecological over the economic, which follows from Marx’s notion of metabolic rift and Soviet ideas about ecosocialism, that capitalism necessarily creates ecological crises and socialism must integrate the environment into the economy. Prioritizing ecological needs could lead to a slowing of the rate of exploitation of the earth’s resources, rather than just an avoidance of the most pressing ecological crisis. In China, this is the concept of an “ecological civilization,” which now has an underlying legal basis. While undoubtedly China believes that its focus on addressing environmental problems will help its long-term growth and stability, its understanding of the problems from a socialist perspective is important as well.

Despite these impressive achievements, China’s ability to set goals and achieve them has garnered little support or acknowledgment in the West. (In fact, poverty reductions from China are often misattributed to the “success” of capitalism elsewhere.) As the United States continues its slide from sole superpower to regional power, attacks on China have ramped up.

It is important to delineate the economic system in China with those of social democracies, like those in Europe. While some social democracies have had impressive achievements, their economic systems — based on exploitation historically and currently — do not fundamentally resolve the tension between classes nor give the government the power to act independently of the market to a large enough degree. Unsurprisingly, the social welfare aspects of these countries are under sustain attacks as politics have taken a turn to the right. As a different conception of neoliberalism, these countries nevertheless have austerity, anti-immigrant policies, and policies that encourage imperialism to various degrees.

Insights for climate action in the United States

China’s example provides general lessons for the United States. Capital does not naturally allocate itself to solutions that reduce environmental damage. Even if there were a price on carbon emissions, the government has tools that are needed to reach desired outcomes, which it also must set. The government also engages in research and development that would be unlikely to be conducted by the private sector, which is essential to taking action. These are examples of industrial policy and economic planning. Better management of the transportation sector, previously discussed, would have resulted in a large reduction of greenhouse gases, as would have management of other sectors of the economy. The government can also stop “wrong turns” before they happen, like the focus on developing hydrogen cars or technologies that have little practical or environmental benefits. The government should approach each sector of the economy with this mindset.

In order to use these economic approaches, international, national, and sub-national changes will need to be made. International financial institutions will need to abandon rules that limit industrial policy and economic planning, which have been baked into international financial systems. Given that the United States is probably the largest backer and enforcer of these rules, it would also have a lot of power to change them. Nationally, the United States needs to move past deficit politics and embrace the implications of Modern Monetary Theory, mainly, that taxes do not fund spending and that money is not a restraint on spending but inflation is. More simply put, the United States already has enough resources to enact ambitious policies, and taxes are a tool to keep people from getting too rich. Sub-nationally, the federal government would have to ensure that state and other jurisdictions would not undercut its policies. How cities are managed, in particular, needs to be rethought; the main economic engine of a metro area should control the policies of that area. More generally, the overarching drive toward growth, especially growth that does not take into account ecological damage, as opposed to specific policy outcomes, needs to be reevaluated.

Of course, the economic approaches discussed here and policies like the Green New Deal, in particular, will not be possible without political power. These approaches and policies are essential to taking effective action, however, so they should be integrated into the strategy to build that power as much as they should compose the solutions once that power is gained. Taking on neoliberalism is a daunting task, but it is necessary. It is a mistake to think that undertaking a transformation like that which is required to stop climate change will not require confronting capitalism, or the people who have obscured the ecological crises and contributed to it. China has already done much of the work necessary for creating an economic and political system that is able to make these changes, and there are many lessons to learn from it. Most importantly, is the realization that there is no alternative to increased management of the economy. The planet depends on it.

Neoliberalism in Action

Book Review: Democracy in Chains: The Deep History of The Radical Right’s Stealth Plan for America

How did a network of libertarian influencers mobilize ideas and resources to restructure American society to reflect their radical “free market” perspectives? In her recent book, Democracy in Chains: The Deep History of The Radical Right’s Stealth Plan for America, historian Nancy MacLean strives to provide an answer to this question.

MacLean views the radical right as a group of “true believers” in freedom, an idea they associate with market freedom, aiming to remove public services and replace them with privatized schools and prisons that respond the market, not voters within a democracy. In doing so, MacLean argues that the radical right will eventually reduce freedom for the majority while privileging the propertied minority. The more power the propertied minority has, the less democratic society becomes. The ultimate target of the radical right, which has gained control of the modern Republican Party, is to change American society to privilege capitalism over democracy even more than it does now.

For libertarian economist James Buchanan, the market mechanism was the most efficient method of allocating resources, which he views as a form of democracy. Educated at the University of Chicago under Frank Knight and Milton Friedman, Buchanan played a significant role in the “stealth plan” of changing the rules of American society, not just people who make the rules. MacLean argues that Buchanan was radicalized at Chicago, where he earned a PhD in economics and learned the “science to support his existing “antigovernment feelings” (p. 36). Buchanan spent most of his teaching and research career in Virginia where he co-authored The Calculus of Consent: The Logical Foundations of Constitutional Democracy with Gordon Tullock.

In extending the market rationality to American politics, Buchanan and Tullock argued that politicians only pursued their own self-interest rather than any broad interests of society. Given that public institutions are led by officials that only pursue their own interests, public governance should be based on the principles of the market. They called this public choice theory, a framework that focused on non-economic decision making and served as a basis for awarding Buchanan the Nobel Prize in Economic Science in 1986. The Cato Institute, a libertarian think tank that was funded by billionaire Charles Koch, viewed The Calculus of Consent as a form of protection for capitalism against government, while MacLean argues that “[i]t might more aptly be depicted as protecting capitalism from democracy” (p. 81).

As a Nobel Laureate, Buchanan created an influential research program at George Mason University, which gained the attention of the Koch Network, which funded and later controlled Buchanan’s program, aiming to leveraged the legitimacy of economic theory to produce a society that was governed by the market, not by democracy. The “stealth plan” of this radical right was to mobilize ideas and resources to change the rules of American society to reflect its free-market perspective, not just who rules. To do so, they had to change the way the rules were rationalized. Buchanan’s public choice theory offered a way to re-conceptualize American law and politics.

On the surface, MacLean’s book offers a critique of libertarianism, although, it could perhaps better be understood as a critique of public choice theory—or neoclassical economics more generally—as a way of thinking and rationalizing society, which became dominant through powerful libertarian social and economic networks. By examining these nuanced power dynamics, MacLean offers a brilliant look at neoliberalism in action. She reveals the real-life experience of neoliberalism by showing us how and why the radical right extended the principles of the market rationality to areas outside conventional limits of the economy.

In her discussion of law and economics, a field of law that draws on the principles of economics, MacLean frames the entire field—rather than elements of it—as an attempt to undermine the broader public interest, while privileging the corporate language of profit, which uses cost-benefit analyses to make decisions. While MacLean makes a very persuasive argument, she overlooks the idea that cost-benefit analyses can be useful, depending on the context and purpose for which they are used.

Beyond this and other minor issues with MacLean’s book, such as her conspiratorial tone, Democracy in Chains offers an excellent look at the American political process and how seemingly marginal ideas, can become powerful enough to radically alter it.

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.

The Neoliberal Tale

“The tide of Totalitarianism which we have to counter is an international phenomenon and the liberal renaissance which is needed to meet it and of which first signs can be discerned here and there will have little chance of success unless its forces can join and succeed in making the people of all the countries of the Western World aware of what is at stake.” (Friedrich Hayek)

In the past year we’ve seen a number of mentions to the maladies that neoliberalism and globalization have brought upon Western societies (e.g., see here, here, and here). It is well known that during the past decades the levels of inequality and wealth concentration have continued to increase in capitalist economies, leading to the arrival of “outsiders” to the established political powers such as Trump in the US and Macron in France, a turn to the right all over Latin America, and Brexit.

Neoliberalism, one of the main elements to blame, is better known for the policies that defined the world economy since the 1970s. Faithful devotees like Ronald Reagan and Margaret Thatcher, in the US and UK respectively, exported a number of their neoliberal policies to low and middle income countries through the Washington Consensus under the pretense that it would bring about development.

Neoliberal policies did not exactly turn out the way their creators envisioned. They wanted to reformulate the old liberal ideas of the 19^th century in a deeper and coherent social philosophy – something that was actually never accomplished. This article will review some of the origins of neoliberalism.

The first time the term “neoliberalism” appeared, according to Horn and Mirowski (2009), was at the Colloque Walter Lippmann in Paris, in 1938. The Colloque was organized to debate the ideas presented in Lippmann’s recent book The Good Society in which he proposed an outline for government intervention in the economy, establishing the boundaries between laissez-faire – a mark of the old liberalism – and state interventionism.

Lippmann set the foundations for a renovation of the liberal philosophy and the Colloque was a first opportunity to discuss the classical liberal ideas and to first draw a line in what the new liberal movement would or should differ from the old liberalism. It was a landmark that, in subsequent years, sparked several attempts to establish institutions that would reshape liberalism, such as the Free Market Study at the University of Chicago and Friedrich Hayek’s Mont Pelerin Society (MPS).

This event announced major difficulties among the peers of liberalism. Reservations and disagreements among free market advocates were not uncommon. A notable mention is Henry Simons, of the Chicago School, whose position against monopolies and how they should be addressed was a point of disagreement with fellow libertarians such as Hayek, Lionel Robbins – both at the London School of Economics (LSE) at the time – and Ludwig von Mises.

Simons’s view that the government should nationalize and dismantle monopolies would nowadays be viewed as a leftist attack on corporations but it fits perfectly under the classical liberal basis that Simons and Frank Knight, also from the University of Chicago, were following. Under their interpretation, any concentration of power that undermines the price system and therefore threatens market – and political, individual – freedoms should be countered, even if it meant using the government for that purpose.

It becomes clear that the reformulation of liberal ideas into what we know today as neoliberalism was not a smooth and certain project. In fact, market advocates struggled to make themselves heard in a world guarded by state interventionism that dominated the Great Depression and post-war period. Keynes’s publication of The General Theory in 1936 and the wake of the Keynesian revolution, swiped economic departments all over and further undermined the libertarian view.

By the end of the 1930s and of Lippmann’s Colloque, however, the perception that neoliberalism would only thrive if there were a concerted collective effort by its representatives changed Hayek’s perception over his engagement in the normative discourse. In 1946-47, the establishment of the Chicago School and the MPS, were both results of a transnational effort to shape public policy and fit liberal ideas under a broader social philosophy. The main protagonists beyond Hayek were Simons, Aaron Director, and the liberal-conservative Harold Luhnow, then director of the William Volker Fund and responsible for devoting funds to the projects.

The condition for success, as remarked in the epigraph, was to “join and succeed in making the people of all the countries of the Western World aware of what is at stake.” What was at stake? Social and political freedom. Hayek and many early neoliberals understood that any social philosophy or praxis crippling market mechanisms would invariably lead to a “slippery slope” towards totalitarianism.

It is important to note, though, that the causation runs from market to social and political freedom and not the other way around. As Burgin (2012) indicates, while market freedom is a precondition to a free democratic society, the latter may threaten market freedom. Free market should not be subjected to popular vote, it should not be ruled over by any “populist” government (a common swear-word today), and there needs to exist mechanisms to protect that from happening.

Once we have that in mind, it is not so bugging the association that Hayek, Milton Friedman, and the Chicago School once had with authoritarian governments such as Pinochet’s in Chile, one of the most violent dictatorships in Latin American history.

Several liberal economists that occupied important public positions in the Chilean dictatorship had been trained at the Chicago School. The famously known “Chicago Boys” first experimented in Chile what later would be applied in the US and UK and then exported to the rest of the developing world through the Washington Consensus.

In brief, the adoption of some form of authoritarian control over popular sovereignty was deemed acceptable in order to guarantee market sovereignty.

Nevertheless, in the discussions within the early neoliberal groups the boundaries of disciplinary economics were trespassed, and the formulation of neoliberalism – and the Chicago School and MPS – was not grounded on any scientific analytical basis but simply on political affiliation.

The multidisciplinary character, dispersion, and incertitude are some of the reasons why it is hard to give a straightforward definition of what the term “neoliberalism” really means. In order to understand it, we have to mind the set of “dualisms” (capitalism vs. socialism; Keynesianism vs. liberalism; freedom vs. collectivism, and so on) that marked the period. Its defenders (academics, entrepreneurs, journalists, etc.) did not know what their own agenda was – they only knew what they were supposed to oppose. Neoliberalism was born out of a “negative” effort.

It wasn’t until many years later that the division between normative and positive economics came to surface with Friedman and his book Capitalism and Freedom, published in 1962. The increasing participation of economists in the MPS, and a more active public policy advocacy by Milton Friedman brought an end to Hayek’s intention to construct a new multidisciplinary social philosophy.

Economically, Friedman embraced laissez-faire; methodologically, he embraced empirical analysis and positive policy recommendations, getting ever further away from abstract notions of value and moral discussions that his earlier MPS fellows, such as Hayek, were worried about. Neoliberalism lost its path on the way to its triumph; it became a “science” that offered legitimacy to a new credo, a new “illusion”.

As the shadows of neoliberalism became more intertwined with the current neoclassical economics and Friedman’s monetarism, it not only lost its name but also gave birth to a corporate type of laissez-faire; one in which social relations are downgraded to market mechanisms; politics, education, health, employment, it all could fit under the market process in which individuals maximize their own utility. There’s nothing that the government can do that the market cannot do better and more efficiently. Monopolies, if anything, are to be blamed on government actions, while labor unions are disruptive to the economy’s wellbeing. Neoliberalism became a set of policies to be followed: privatization, deregulation, trade liberalization, tax cuts, etc. on a crusade to commoditize every single essential service – or every aspect of life itself.

Hayek believed that these ideas could spread and change the world. And they certainly did. What is worth noting is that there is no fatalistic understanding that neoliberalism was unavoidably a result of historical factors.

The rise of neoliberalism was not spontaneous but rather orchestrated and planned; it was a collective transnational movement to counteract the mainstream of the time; it was originated out of delusion in a period marked by wars, authoritarianism and economic crisis; it was grounded on political affiliations and supported by the dominant ruling class that funded its endeavors and transformed public opinion. These are the roots of what is now the mainstream economic thought.

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.

Using Minsky to Better Understand Economic Development – Part 2

The work of Hyman Minsky highlighted the essential role of finance in the capital development of an economy. The greater a nation’s reliance on debt relative to internal funds, the more “fragile” the economy becomes. The first part of this post used these insights to uncover the weaknesses of today’s global economy. This part will discuss an alternative international structure that could address these issues.

Minsky defines our current economic system as “money manager capitalism,” a structure composed of huge pools of highly leveraged private debt. He explains that this system originated in the US following the end of Bretton Woods, and has since been expanded with the help of financial innovations and a series of economic and institutional reforms. Observing how this system gave rise to fragile economies, Minsky looked to the work of John Maynard Keynes as a start point for an alternative.

In the original discussions of the post-war Bretton Woods, Keynes proposed the creation of a stable financial system in which credits and debits between countries would clear off through an international clearing union (see Keynes’s collected writings, 1980).

This idea can be put in reasonably simple terms: countries would hold accounts in an International Clearing Union (ICU) that works like a “bank.” These accounts are denominated in a notional unit of account to which nation’s own currencies have a previously agreed to an exchange rate. The notional unit of account – Keynes called it the bancor – then serves to clear the trade imbalances between member countries. Nations would have a yearly adjusted quota of credits and debts that could be accumulated based on previous results of their trade balance. If this quota is surpassed, an “incentive” – e.g. taxes or interest charges – is applied. If the imbalances are more than a defined amount of the quota, further adjustments might be required, such as exchange, fiscal, and monetary policies.

The most interesting feature of this plan is the symmetric adjustment to both debtors and creditors. Instead of having the burden being placed only on the weakest party, surplus countries would also have to adapt their economies to meet the balance requirement. That means they would have to increase the monetary and fiscal stimulus to their domestic economies in order to raise the demand for foreign goods. Unlike a pro-cyclical contractionist policy forced onto debtor countries, the ICU system would act counter-cyclically by stimulating demand.

Because the bancor cannot be exchanged or accumulated, it would operate without a freely convertible international standard (which today is the dollar). This way, the system’s deflationary bias would be mitigated. Developing countries would no longer accumulate foreign reserves to counter potential balance-of-payment crises. Capital flows would also be controlled since no speculation or flow to finance excessive deficits would be required. Current accounts would be balanced by increasing trade rather than capital flows. Moreover, the ICU would be able to act as an international lender of last resort, providing liquidity in times of stress by crediting countries’ accounts.

Such a system would support international trade and domestic demand, countercyclical policies, and financial stability. It would pave the way not only for development in emerging economies (who would completely free their domestic policies from the boom-bust cycle of capital flows) but also for job creation in the developed world. Instead of curbing fiscal expansion and foreign trade, it would stimulate them – as it is much needed to take the world economy off the current low growth trap.

It should be noted that a balanced current account is not well suited for two common development strategies. The first is import substitution industrialization, which involves running a current account deficit. The second is export-led development, which involves a current account surplus. However, the ICU removes much of the need for such approaches to development. Since all payments would be expressed in the nation’s own currency, every country, regardless it’s size or economic power, would have the necessary policy space to fully mobilize its domestic resources while sustaining its hedge profile and monetary sovereignty.

Minsky showed that capable international institutions are crucial to creating the conditions for capital development. Thus far, our international institutions have failed in this respect, and we are due for a reform.

Undeniably, some measures towards a structural change have already been taken in the past decade. The IMF, for example, now has less power over emerging economies than before. But this is not sufficient, and it is up to the emerging economies to push for more. Unfortunately, the ICU system requires an international cooperation of a level that will be hard to accomplish. Aiming for a second-best solution is tempting. But let’s keep in mind that Brexit and Trump were improbable too. So why not consider that the next unlikely thing could be a positive one?

In the Spotlight: Stephanie Kelton

If you want to be at the cutting edge of economic policy-making, listen to Stephanie Kelton. She explains how a government spends, and how confusion about debt and deficits have held America back. Shaking up democrats and republicans alike, she shows there is nothing inherently dangerous about a large budget deficit. We should aim for a balanced economy, not a balanced budget.

Her encouragement of ambitious fiscal spending is rooted in Modern Money Theory, which reveals the true nature of money as a creature of the state (discussed in detail here). So long as a government is sovereign and has its own central bank, Kelton shows, it is the sole issuer of its currency. Being the sole issuer of its currency, it can never run out of money, and it will never fail to meet its debt obligations. It’s completely able to spend as needed.

Kelton is always quick to respond to the most common points of critique. Is she arguing for the government to run infinitely large deficits forever? No. She is advocating for the government to determine its spending level based on the state of the economy. Spending should be high enough to facilitate full employment, and low enough to keep inflation in check. The spending level should be chosen based on the impact it has on the economy. Not based on whether it allows for two columns to sum up nicely in Excel.

Over the past couple of decades, this school of thought has gained significant momentum. Kelton, who teaches at the University of Missouri Kansas-City, gained traction in the world of finance and more recently broke into Washington, where she served as Bernie Sanders’ chief economic advisor during his campaign. Providing the economic backbone behind Sanders’ plans to raise the incomes of the 99%, the vast potential of Kelton’s approach to fiscal policy gained recognition. Kelton still works with Bernie to further his movement and mobilize support across the globe.

It is worth keeping Kelton’s message in mind as the Trump presidency unfolds. Judging by this article in Politico, Trump plans to cut taxes on the wealthy, and “make the deficit great again.” Considering Kelton’s stance on the matter, such a move should be recognized as problematic because it worsens income disparities, not because it worsens the budget deficit. We should judge Trump on the impact he makes on the economy, not on his ability to balance the books.

Kelton’s message can also provide a powerful weapon against the republican majority that the democratic party will soon be up against. Her advice for democrats is as follows:

“Democrats face a difficult road ahead. Having failed to recapture the Senate, there may be few opportunities to advance progressive goals — e.g. raising the minimum wage or boosting infrastructure spending — without compromising other core values. Democrats may be tempted to give Republicans a taste of their own medicine by hollering about budget deficits as cover for obstructionism. That would be a mistake. Instead, they should stand firm against cuts to programs like Medicare and Social Security, exposing the truth about the government’s ability to sustain these programs indefinitely. And when they fight efforts to deliver huge tax cuts for those at the very top, they should make it clear that their opposition is not based on the budgetary impact but rather on the social and economic effects of widening income and wealth disparities.”

If you’re curious for more, be sure to follow Kelton on Twitter, and keep track of the blog she runs with Bill Black. You should also have a look at her crystal-clear presentations. Click here for a talk on the role of government, here for her ideas on inequality, and here to hear about her thoughts on the Bernie Sanders movement. And if you want to know how all this applies to the Euro-zone, this piece she wrote with Randall Wray is a great resource.

Brazil May Be About to Give Up its Financial Sovereingty

These are strange times. For those who have been drowning in the craziness milk-shake that is the United States presidential campaign and have not been able to follow other world events (we do not blame you), it should come with some assurance to know that the rest of the world is not doing much better. Case and point is that the acting president of Brasil, Michel Temer, who came to power for being the VP of impeached president Dilma Rousseff, is trying to make Brazil the least financially autonomous nation in the world.

Temer and his cabinet, who have been working towards the implementation of austerity measures in Brazil since they came to power, have proposed a constitutional amendment that will severely limit Brazil’s flexibility in government spending. It would be the 93rd amendment to Brazil’s ‘young’ 1988 constitution. In short, the Constitutional Amendment Proposal 241* (PEC 241 in Portuguese), would create an artificial limit to government spending, which would become pegged to the previous year’s inflation.

The Brazilian economy is facing a dire recession even though the Bovespa stock index and real currency BRBY rank among the world’s best-performing assets this year. The pressure towards austerity is coming from both internal and external players, and the financial markets have rallied well to the prognostic of the amendment’s approval. Despite its failure to produce meaningfully positive results elsewhere, austerity is still seen positively by international financial markets.

The amendment makes Brazilian fiscal policy hostage to inflation, thus inverting the hierarchy of economic policy in the country; instead of using of its taxes and spending to control inflation, inflation would control Brazilian economic policy. On one hand it makes the job of lawmakers and policymakers a lot easier, on another it takes away powers granted by the constitution to the Brazilian congress and it is, as put by Brazil’s Attorney General, unconstitutional.

The amendment has been approved by a special commission in Brazil’s lower house on the 6th, and four days later was approved by the lower house as a whole. It comes as a victory to Temer’s austere aspirations for austerity measures had been failing to be implemented in Brazil even during the final days of the previous government. Temer’s own efforts had been facing serious challenges until now.

It is not to say that it all good sailing weather for PRC 241. Portions of the public have come out against the measure. Notably, economists have argued that the debt problem in Brazil is caused by a fall in tax revenue and not because of overspending. Indeed, the high unemployment rates combined with high inflation – among other factors – have caused a real decline in revenue of 2.5%. Meanwhile small business owners in retail have experienced decreases of as high as 30% to their revenue streams.

For those versed in Functional Finance and Modern Monetary Theory this will seem as completely nonsensical. Brazil, currently, is a financially sovereign nation to a good extent. It prints its own currency and taxes on that currency. It, however, has emitted debt in foreign currency, namely the dollar. The amendment would limit this sovereignty, making the Brazilian economy work only within the limits set by the (interior and exterior) factors that affect inflation.

If you have followed our posts for a while, you have read some strong arguments on why austerity is not the remedy for countries facing as recession and that smart fiscal stimulus is much more likely to succeed.

*Some of the sources for this article are in Portuguese.

*This post was written by Carlos Maciel

Italy is Hungry for Expansionary Fiscal Policy

In a meeting with Angela Merkel and Francois Hollande on August 22, the Italian Prime Minister Matteo Renzi proudly announced that Italy has the lowest public deficit of the last 10 years, and will continue with structural reforms to reduce it further. Monti has long aimed to “restore credibility” by cutting the public deficit, and now the Finance Minister Pier Carlo Padoan enjoys praise on his achievement of a deficit as small as 2.4% of GDP. The FED (Financial and Economic Document) goes so far as say this makes Italy “among the most virtuous countries in the Eurozone.”

A closer look at Italy’s economy, however, shows this “virtuosity” has no basis in reality. In 2015, 1.5 million households lived in absolute poverty. Another 4.5 million individuals saw stagnant incomes. The situation has not been this bad since 2005. In addition, the Migrantes foundation informs us that there has been a boom of italians who go abroad, 107,000 in 2015 (+6,2%). Especially youth from 18 to 34 years old (36,7%).
Source: [Ansa.it “Rapporto fondazione Migrantes”]

The percentage of serious material deprivation index is 11,5% for total households members. Official unemployment rate is at 11,9% whereas the real unemployment rate is well above the 20%. The inactivity rate is at 36,0 % and the fixed capital investment ratio is stuck well below the pre-crises (2007-08) levels.
Source: [“Rapporto annuale Istat, 2016”]

It is clear that Italy is stuck in a deep depression. And it’s not alone. Many other euro countries are suffering the same fate. Cutting public spending cannot help them recover. We turn to Keynes to see why it cannot, and consult the work of Minsky and Wynne Godley to see what can.

Keynes and Aggregate Demand

In The General Theory, J.M. Keynes explains the challenges blocking achieving and maintaining full employment in a market economy. He argues that the booms and busts associated with capitalism make this state of equilibrium very difficult to reach. When a bust occurs, and businesses expect their profits to fall, there’s no reason to expect a magical market-force to step in and fix employment while costs are being cut.

This applies to Italy, too. After years of austerity and a Global Financial Crises, aggregate demand levels have declined sharply most people feel uncertain about the future. Additional demand for labor is close to zero and the private sector is pessimistic. Investment and spending is not sufficient to employ the unemployed. Cutting down government expenditure is not going to to help. It will simply make it worse.

Minsky and Fiscal Policy

A follower of Keynes, Hyman Minsky explained how any analysis of a monetary capitalist economy must start from the analysis of balance sheets and its relative financial interrelations ‘measured’ in of cash flows. If balance sheets and especially the relative financial relations are not taken into account within an analysis of an essentially financial and monetary economy, that analysis fails to reflect the full reality.

Minsky’s alternative analysis shows that in case of crisis, a nation needs a “Big Government” (The Treasury Department) and a “Big Bank” (The Central Bank) to step up. These institutions must focus on serving as an “Employer of Last Resort” and a “Lender of Last Resort”, respectively. This way, they can prevent wages and asset prices from dropping further, and tame the market economy. In the Euro-zone, this has not been realized. The Treasury Department is constrained, leaving them unable to reach full employment. Meanwhile, citizens continue suffer under austerity.

Wynne Godley and the Government Budget

Wynne Godley’s sectoral balance approach sheds more light on this Minskyian alternative. He shows the economy consists of two sectors: The government sector, and the private sector (all households and businesses).** The private sector can accumulate net financial assets only if the other sector, government, runs a budget deficit. That is, only if the flows of the government spends more than it receives in taxes. It is impossible for both sectors to run a surplus at the same time.

And as a simple matter of macro-accounting, for aggregate output to be sold, total spending must equal the total income generated in the production process. So given households’ decisions to consume and given firms’ decisions to invest, there will be involuntarily idle labour for sale with no buyers at current wages, if the government deficit spending is too small to accommodate the net desire to save of the private sector.

What Renzi and Padoan are Really Saying

We can now see what Renzi and Padoan are really congratulating themselves for. Having done nothing to lift a struggling private sector out of the recession, they patting themselves on the back for worsening it’s social and economic situation. Renzi may claim he will go to Brussels to “sbattere i pugni sul tavolo”, but his executives continue to respect the Stability and Growth pact regime, and decrease the deficit further.

From Wynne Godley, we know that further decreasing the government deficit corresponds to further deterioration the private sector surplus. So when the officials say they “need to put public accounts in order,” they are actually saying they will put households and business accounts in dis-order. So when they say that Italy has the lowest budget deficit of the last 10 years, they are actually stating that the government is draining more financial assets from the private sector than it has in a decade.

When they call Italy virtuous for keeping a smallest deficit, they assign virtue to the nation that most effectively perpetuates poverty and social disarray. When Renzi says that his non elected executive “will continue […] the reduction of the deficit for our children and grandchildren”, he is instead telling us that his government is going to reduce the net desire to save of the current population, to keep involuntary unemployment and part-time working levels high and to firmly deteriorate the (net) financial and real wealth of the future generations.

Unless Italy changes its approach and adopts expansionary fiscal policy, it will not serve the well-being of the society and its economy. The main goal of full employment will never be attained and maintained. Work will lack moral and economic dignity, public sector goods will fall short in quantity and quality, and basic human rights will be violated. Not only will policy goals fail to be achieved, they will be even farther out of reach. One thing is certain: either Renzi and his ministers don’t know what they’re doing, or they are doing it in bad faith. I am afraid of it may be both.

* To be as precise as possible, Italian public budget deficit has been systematically reduced from 1991, that is the year when the Treaty of Maastricht was ratified which, among other things, established the respect of the parameter of the 3% to the public deficit and 60% to the (flawed) public debt/gdp ratio.
** I do not take into account the foreign sector balance sheet, because the substance of my brief argument won’t be undermined.