A Very Necessary Book: Kelton's "The Deficit Myth"

Back after the 2008 crisis, I had lost my job and was sitting around unemployed and I started to get interested in economics for the first time in my life. The reason was that for all my life to that point the broader economy had not really broken down during my lifetime. I had long considered myself a Marxist from the experience of being a worker at the point of the spear in the service economy. In food service you see the menu price and you know your price and there’s a huge discrepancy between the two.

I had a sense that in the shadow of that crisis that we were bounded by only being to push at the edge of the status quo. The bailouts, both TARP and ARRA were real money that had to be paid back, so the democratic-led government in 2010 and through pressure from their political opponents,  started to roll back the funding that was on offer through the state. “Austerity” was the name of the game and big debts were scary and more important than the mass of Americans who were still without jobs in the economy that had been showing “green shoots” every quarter for 18 months.

I was unemployed and reading as much as I could about economics and especially the crisis. There were scores of books written by commentators and economists trying to get their hands around just what happened and why it happened. But it was not the first crisis. I eventually found myself making my way through Keynes and Minsky – with some understanding but not 100% of it. Keynes had some integrals I just skipped over and hoped that he was explaining all of them in the text. It was during this time that I came up with what I thought was a fairly novel idea that the household metaphor that politicians used was completely wrong. The government lives forever, I said, and it creates money. A worker is constrained in the money they have and the only way to get more is to work more even if the can temporarily increase their spending by borrowing they eventually have to pay it off (or pass down the debt once they die). I created an imaginary currency called “EdgarBucks” and knew my biggest problem was making sure that people accepted these “EdgarBucks”.

My insight about the fallacy inherent in the household fallacy was not novel it seems. While politicians and many economists talked about spending money being the constraint, there was a then little-known school of thought who had fleshed out the idea that money is not the constraint in the economy, but real resources are that constraint. You cannot run out of money if you are a currency issuer, but you can run out of factories. It brings to mind Keynes looking at idle workers and idle factories and realizing that you can have suboptimal equilibria where resources are underutilized. But what this little-known school of thought had done was flesh out that idea, and it has a name – Modern Monetary Theory (MMT).

The basics of MMT are that the real constraints are the real economy and in the book Professor Kelton works through the implications of the idea that money is more a record keeping device than some sort of fetishized commodity through simple, easy to understand metaphors. What is dangerous through the world as described through MMT is inflation and not debt, and the way to pull that back is to increase taxation. Also embedded in the structure is a call for a Job Guarantee to make sure that people have and can spend money. I personally am not for a Job Guarantee but lean more towards a Basic Income, but that is outside the realm of this review but I think within the realm of possible debates, so MMT is not strictly dogmatic.

I was receptive to the ideas of MMT because I was not a slave to the old orthodoxy and especially because I thought that the old orthodoxy was in a large part to blame for not preventing and not really being able to predict the crisis of 2008, I was ready to throw it all out and find an explanation for how capitalism worked and if possible how it could be made better for people if we were going to keep putting off the eventual worker’s revolution. MMT was, and still is centered on a couple of institutions like UMKC and Bard College in the US and has a couple of figureheads like Professor Kelton but also Warren Mosler and Scott Fullwiler. Despite this, MMT punches above its weight in policy discussion because it has many passionate adherents in both the blogosphere and on Twitter. It is, to me, also inherently commonsensical as we are not constrained by the amount of a shiny rock in the vaults of the Federal Reserve in New York or in Fort Knox. 

I was sitting, unemployed though the summer of 2011, smart and a hard worker and ready to be put to use so I could get money to pay my rent but no one was answering my applications. It was confounding and scary and just a total failure of policy because there were tens of thousands of people like me who wanted to work. But I was reading. The biggest problem for me when I was learning more about different economic schools in terms of learning about MMT was that there was no centralized place to start learning about it. People would talk about it in blog comments and you would ask where to go for more details and they would send you a link to a pdf or a self-published book on amazon and that did not inspire a lot of confidence. If someone was asking where to start to learn about Marxism you could point them to many different publishers who had put out versions of the Manifesto but this was like if the only resource available was Marxists dot org. What “The Deficit Myth” does is not just synthesize the ideas of MMT in a simple and easy to read format, but it also formalizes the school as something to be taken seriously by readers of levels. And for that reason, it is an especially important and necessary book.

When everyone sees what is on the end of every fork: Oesterich's "Pandemic Capitalism"

The pandemic that we got going on around here has gotten me thinking of two separate but related things.

The first is from the novel / literary artefact “Naked Lunch”, where Burroughs described the titular meal as: "The title means exactly what the words say: naked lunch, a frozen moment when everyone sees what is on the end of every fork."

The second is from Warren Buffet describing the Minskyian Ponzi finance, “Only when the tide goes out do you discover who's been swimming naked.”

Both are about moments where everything freezes for a moment and we are allowed reflection in that period between when you realize the fragile bowl has slipped from your hand but right before it really starts falling – you really don’t have time to think but you’re just reacting. It is the filmstrip quality of living life as through a downtempo strobe light is all you have for illumination. 

We live moment to moment but need those periods where the moments stop and we can take a moment to reflect. I think that now is the time. The initial fear of the COVID-19 virus has passed as has the initial response in too-spotty but expensive fiscal and monetary reactions from the state (here I’m American-centric because that’s where I’m at). 

What the pandemic has done is really exposed where all the cracks have already been. Chris Oesterich in his book “Pandemic Capitalism” looks at both the problem of the virus and the early reactions but really focuses on how we can use these moments to create a more fair and equitable system. This is something that Oesterich has examined before. His Wicked Problems Collaborative put out a nice collection looking at the issue of inequality from several different angles only a few years back. The solution that he focuses on is the need for a basic income so that people have the money in times of crisis right now. This is especially pertinent because had we some such policy in place, we would not be in so much of a scramble trying to create second and third best options that had the political convenience but won’t be extended. 

Of course, I worry about a couple of things. I doubt that we have the will. Yang ran explicitly on a Basic Income platform and that couldn’t find a real traction amongst the primary voters in America’s center-left party. Then there’s the piece where as a Marxist I can applaud the idea of improving the material conditions for the workers and other citizens, but such policies are just tinkering at the edges and does nothing to change the social relationships that are characteristic of capitalism.

Pandemic Capitalism is timely not just because it is of the moment but also in left wing books that it stands against. I also just finished Professor Kelton’s primer on MMT, “The Deficit Myth” and though I am incredibly sympathetic to the MMT framework for fiscal policy at the state level, what they mostly propose, as a safety net is a job guarantee – centering work at all times. I am not the biggest fan of work. I happened to be part of the crew at the Big Rock Candy Mountain who hung the jerk who invented it, but on a broader perspective it is times like this where we need to ratchet down the work. (Though to be fair, I have seen people say that the job that would be guaranteed right now would be a job of staying home but that seems like extra steps). This debate is not explicit in the text of the book but exists in the argument over what is to be done, and Pandemic Capitalism makes a concise, forceful argument.   

On Vollrath's "Fully Grown"

In Fully Grown, Vollrath really takes you step by step through what was lowering the rate of GDP growth in the last couple of decades. For me, what really makes intuitive sense is the move from a more goods-producing, industrial economy to a more service-oriented economy. A service-oriented economy by nature has less opportunity to scale and thus is held back from growth. The classic example of Baumol’s cost disease here is a good illustration – 100 years ago you needed 4 musicians to play an hour of a quartet by Mozart, and even now you still need those same 4 musicians (OK, maybe not the same ones but four members of the set “musicians”) to play that quartet. In the same time our factory output has soared while seeing fewer workers.

Of course, this book, like any other economic books released before about 3/17/2020 is from the before-times but I feel that the general trend will hold as our new normal gets as close as possible back to the old normal. One final note – this book is systematic. While reading I noted to myself that it was very well organized. That’s not something that normally pops in my head while reading, so I must give the author and his editors kudos on that one.

Above the System: On General Laws of Capitalism

Capital starts with the commodity form of production, but Marx is not focused on the commodity in his grand work. Instead he is looking at the system which creates this commodity form, where there is a split between those who own the means of production and those who lend their hands in creating the only object that is not diminished by its use – labor power.  

Where the young Marx in 1848 would emphasize the importance of class struggle in the productive process, a more mature Marx looks at the system in Capital. He takes this to the point where he is analyzing how the system works in its totality such that he can offer up a general law of capitalist accumulation.  

What Marx illustrates in Chapter 25, “The General Law of Capitalist Accumulation” in the capitalist system is a theory of the business cycle, how production ebbs and flows with the size of the labor force. To read Marx you must go through the thick jungle of nineteenth century prose, but you do get some gem phrases like “the juggernaut of capital” (19). And this is Volume One where he had time to edit it. More fire breathing Marx working under a deadline like in the Manifesto gives you more quotable phrases but less developed theses.   

In the Marxian system, the worker is not tied to the individual capitalist, but the system itself. In this chapter Marx is looking at the growth of capital in terms of its ratio to labor, how more fixed capital grows and there is relatively less variable capital as the factories grow larger and capital is more centralized. This growth does not free the working class, they are still tied to the system with a “golden chain” (4) even as wages grow. But the system is not defined through a continual process of growth, but this dynamic process in which the amount of surplus labor stolen from the worker changes “If the quantity if unpaid labour supplied by the working-class, and accumulated by the capitalist class, increases so rapidly that its conversion into capital requires an extraordinary addition of paid labor, then wages rise, and, all other circumstances remaining equal, the unpaid labor diminishes in proportion” (5). Then the cycle peaks and returns. All the while the capitalistic relation between the classes persists.  

This whole process is driven by centralization and accumulation as “larger capitals beat the smaller” (8), but what is really what makes the immiseration of the working classes possible and yoking their lives to the wheel of capital is the army of the unemployed, a “relatively redundant population of laborers” (11).  This population in turn through labor and the continued accumulation of capital create their own servitude through their social reproduction rendering themselves redundant, a “disposable industrial reserve army, that belongs to capital quite as absolutely as if the latter had bred it at its own cost. The reserve army thus is a “mass of human material always at the ready for exploitation” (12) which can be set in motion in times of growth and then discarded to the dung heaps as soon as there is a general glut. Capitalism is not possible without this army. Further, the quality of the workers changes as there is the capital accumulation. Men are replaced with women and women with children and the exploitation is pushed to its limits, pulling as much surplus value out of the working day as possible (13), becoming the entire “pivot” on how the law of supply and demand works (15). Foe Marx, the growth of wealth is not possible without this scheme, labor and poverty being one side of the coin that includes capital and wealth on the other side (19).  

What we have with Marx’s general law of capitalist accumulation is a model. And with any model we have necessary simplification that makes it false, but we also have the potential to learn about the world. What we can say is that the Marxian laws were built on an economy that looks a lot different from the one we see in modern America. Manufacturing in this one country has shrunk as a fraction of employment of the potential labor force. What this did not lead to was wide immiseration (though there is still gross inequality) but instead the economy shifted to a service-driven economy. So that on one hand makes it tempting to dismiss the Marxian framework. We have fewer factory workers and are the richest country in the history of the world. We must revisit Marx’s placing of all value creation in the labor power of the manufacturing worker. Many of this nation’s most valuable companies do not produce anything. Their products are replicated with low marginal cost. It is more like the story where a dollar was introduced to a small town and that single dollar was enough for everyone to pay off their debts. Labor might not be the fount of all wealth. This ignores all the goods we consume that are not made or grown in the United States, however. Or it is not possible to lay Marshall’s scissors over an LTV-driven commodity analysis.  

While we may not be able to see the manufacturing base working from the bottom up, the more general law of capitalist accumulation feels true as someone who has been both in and out of that reserve army of the unemployed. The structure of society is such that you are defined by your profession. When you are in school you are asked what you want to be when you grow up, and then when you are in college you are asked what your major is, and then when you are an adult you are what you do. I was a contestant on the television quiz show program Jeopardy! in 2011, filming when I did not have a job. They introduce you by two bits of biographical information, where you are from and what you do. My local has always been fraught, but even worse was that I did not have a job at that point. I was trying to figure out what my next job was going to be, but in discussion with the production staff, they would not let me be “unemployed.” I was denied that status even though it was the best reflection of what was going on with my relationship to the workforce. Even in the shadow of the recession, the reserve army existed but it was not mentioned in good company.  

The worst thing during that episode of unemployment was that I wanted to be exploited. There is no effective way beyond the system. It makes me think of Edwin Abbott’s “Flatland” where the characters are two-dimensional shapes and they can only conceptualize in their two dimensions or lower, but it is impossible to see in an extended dimension. In Flatland, a sphere is just another circle. That is what Marx is trying to get at. The general law is beyond the class struggle of the Manifesto, in trying to pull away and see the system from above it. I am not sure if he fully realized that (or if as Robinson suggests, the project of Capital was abandoned because all the parts were not reconcilable).  

  Cited 

Marx, K., Engels, F., Mandel, E., & Fowkes, B. (1990). Capital: A critique of political economy. London: Penguin in association with New Left Review. 

Capitalism: Golden Ages?

Compare and contrast the analysis of the rise and fall of the Golden Age of Capitalism/Social Democracy in Bowles and Carlin’s CORE-ECON Chapter 17, “The Great Depression, the Golden Age Of Capitalism and the Global Financial Crisis”, with the analysis favored by your instructor. In what ways are they the same and in what ways are they different? Are the views of Bowles, Carlin and your instructor consistent with Thomas Piketty’s view that the Golden Age was an aberration, unique and non-repeatable, the result of a special set of historical circumstances (chiefly, the two world wars and great depression) and that the years after 1980 (the era of Neoliberalism / hypercapitalism) have been a return to normal?

 

Langer notes that there were several defining traits in the so-called golden age of capitalism. He emphasizes that they are a strong safety net; a high minimum wage; a situation where a good number of workers are in unions; a high top marginal tax rate; strong regulations on wall street; and low inequality. These were all caused through various mechanisms. First was the existence of the labor movement as a countervailing power. There was also the communist threat, so the postwar capitalist order was determined that a fair deal was possible under capitalism. Then there was the need to rebuild the economy and physical infrastructure after the destruction of war, so labor peace was needed. Then there were a couple self-reinforcing ideological where the decadence of the nineteenth century was seen as the result of rampant capitalism and greed, and Keynesianism was seen as the key to economic policy.   

For Langer, this all fell apart with the rise of Reagan’s and Thatcherism. This was pushed thorough with the decline of the labor movement and increased union busting, anti-labor legislation and the growth of globalization. Corporate profits had been squeezed, so there was pushback from big business and the wealthy. Geopolitically, the end of communism in the Soviet Union as a countervailing political / economic structure decreased the incentive to create an equitable social system.

A somewhat alternative view of the postwar economic utopia is seen in Bowles and Carlin’s CORE econ book. In their formulation, the defining traits of the golden age are low unemployment; high productivity growth; high growth rate of capital stock; falling tax rates on corporate profits; and falling inequality (7). Additionally, they note relative labor peace, as Langer does (21). They also note the falling profit rates (25) as a reason for the end of the golden age but seem to lay that more on worker militancy rising and less on government policy pushback. Overall, they seem to rely more on a productivity-led explanation for the growth than Langer does, as well as noting the effect of the outside oil shock (25-6).

One of the big questions in economic policy is if we can return to the period where everything worked. It is called a golden age because prosperity was shared between the workers and the capitalists in a sort of treaty (The treaty of Detroit on a grand scale perhaps?). But the returnability is under debate still. Thomas Piketty draws a giant asterisk on most of the 20^th century, saying that the period of 1914 to 1980, most of the whole “short twentieth century” at least does not count. Now, this feels mighty presumptuous to exclude a huge chunk history when your time period of examination is maybe 450 years. That is with dating the modern era generously. How far back do you go, Watt, Luther, or Columbus? Piketty is wrong, and that perhaps Langer and Bowels would agree in that we could get back to the economic conditions around the golden age of capitalism. However, Langer’s class-based analysis is closer to the key. Looking at how much emphasis Bowles et al put on productivity growth is to remind me that TFP is more a “measure of our ignorance” than someth8inga that can be gunned for in policy. Add to that my sympathy towards Robert Gordon’s argument that we have picked the low hanging fruit of productivity growth already, and the CORE golden age is less re-attainable. Of course, history does not repeat itself, it merely rhymes.  I hope that we are fortunate enough to come out the other side of the current crisis with a reevaluation of our economic priorities. I am just not that optimistic that we will.

Rational Class Consciousness

The “rational class consciousness'” hypothesis is that in a class-based model, each class, besides being modeled, will use the model to decide upon how it should act. Discuss the implications of this hypothesis when it is applied in a Goodwin-Mehrling style model.

 

The rational class consciousness is in looking at a model and using it to shape how you act. If we take the Goodwin-Mehrling model, we can see that there are the four outcomes that they model. Goodwin models the business cycle as wage shares go up and down while unemployment goes down and then up, baring a special case where unemployment and wages shares somehow hit on an equilibrium point and stay there. Mehrling extends this model and says what if the classes are not acting as autonomous individuals, but instead worked together. Through this assumption (and several others), he models three other outcomes. There are three possibilities. Two where the individual classes bargain as a class and where the opposite class bargains separately and a third possibility where both classes bargain.

These three possibilities have different outcomes in terms of wage share and unemployment. If the capitalists bargain as a class and the workers bargain alone, the system operates in a situation where the capitalists share of output is the great majority and the workers only get enough to socially reproduce (iron law of wages here?). Even with the lowered wage share, the workers will still see unemployment in this model. If the opposite happens and the workers are united and the many small businesses organize on their own, unemployment does not exist, and the worker wage share is increased. It is in the third case where both classes bargain as one where the best outcome happens for both classes. There is full employment and the business class gets more of the wage share than if they did not organize. 

So, if you are a capitalist or a worker, you can look at this a menu with multiple outcomes. Either you are a capitalist and you bargain, or you do not, or you are a worker and you bargain, or you do not. Importantly, you must have your entire class with you. If you just try to bargain on your own what you are doing is making your ultimate outcome worse than if you did nothing at all (averaged over the course of the cycle). It is like the people on the stern of the Titanic, unable to believe that they are sinking when they are so high up. 

Money Saving Tips in the Time of Crisis

In times of crisis and great uncertainty it is easy to panic and to focus on the short term and to forget about the long term. The current economic situation is scary, but for most of us it will pass. How do I know this? Because in 2008 I faced the same thing. I was laid off from my job right as I was starting to develop my career in the face of a slow recovery. Despite that, I was able to meet financial goals – I paid off my student loans and bought a house. I do not want to pretend I did not have some advantages. I was lucky enough to have gone to college. I was married so we had a two-income household. However, these hints helped me, and I hope that they can help you too.

Photo by Andrea Piacquadio from Pexels

1) Have a plan. It is too easy to go from paycheck to paycheck and shuffle what you’re paying and then to splurge when you have a little bit more if all you’re doing is focusing on the next paycheck. By having concrete financial goals, you are saving FOR something and not just nebulously putting money away. This mental accounting means that if you decide to splurge you are taking something away from your future self that you have already decided you want. This goal can be something small like those Riotfest tickets or something bigger like a house. As the saying goes, if you fail to plan, you are planning to fail.

2) Track your money. The biggest thing I did to help myself was to start plugging in all my financial information into the website Mint.com. Mint acts as a central repository that allows you to track your spending and wealth growth across all your accounts. What this does is not only allow you to see what is going on in the short term with your money, but also what your larger trends are in terms of your spending month by month and you can watch your net wealth grow. If you have software that you trust, you must commit to staying on top of things. You will make better financial decisions when you have an ongoing snapshot of your financial position in your head.

3) Pay yourself. One of the best things you can do is to automatically have a set amount of funds go directly into a savings account. Set this up through direct deposit if you have the ability. If you have an account that is savings and you never see the money in your checking account then it was never yours to spend, but it goes into savings for your future self’s goals. If you do not have direct deposit you can set up a small deposit from your checking to a savings account on a regular basis. This does not have to be a lot. As little as five dollars a week can start to grow a nest egg. The other thing to note here is that if your company offers a match on a retirement account, you should save enough of your paycheck to at least get the match. Not only is it free money in the short term, depending on the kind of account you use, you might gain tax advantages.

4) Cheat. Though you do not want to steal from your long-term goals, the point of saving money is to meet those financial goals. The point is not to live like some Buddhist monk. If you want some ice cream or some avocado toast, get that threat. But you must do this in moderation. Enjoying small luxuries can help prevent the splurge when you have totally denied yourself.

5) Inherit Money. This might be the hardest one to pull off. Hopefully you have someone that is connected to you who is a bit older and has some capital put away somehow. This is the opportune time for them to die so that you can get some of that capital. Now, I hope it isn’t someone you care about a lot, since that would add in tragedy and we don’t want that. You don’t need to inherit a lot either. Back in about 2010 my wife’s grandma died and had a windfall of about ten thousand dollars. That was enough to pay off most of our debt and turn the cash that wasn’t being consumed from debt service to savings. Soon after that, we were putting a down payment on our house!

I hope that you can take away a couple of things here and help you meet your financial goals. I know it is a scary time and most of us have debt already – that should be paid down promptly. Some debt loads feel so crushing that it feels like you will never be able to get out from underneath it because you did all the right things and got the degrees and impressed your parents but still live on six figures of debt with a five figure job. The advice you hear to have six months of savings in cash just sitting around is hard to reconcile with studies that show 40% of Americans cannot cover a $400 emergency expense. But if you follow these steps you can start to turn around and face the uncertainty off the future with a small plan to make sure you have financial flexibility in the future.