The Monetary Political Compass

Two areas where there’s increasing discussion in terms of economics are the issues of monetary theory and basic income. By putting attitudes towards UBI on one axis, and attitudes towards money creation on another we can create a kind of monetary “compass”, to help us navigate this intellectual terrain.

I drew this up to visualise where various thinkers/ideas fall in relation to the three economic ideas that are most interesting to me. A simplified version of it ended up in this essay of mine Remittances From Nowhere in which I argue for a Consumer Monetary Theory style basic income at the global level.

But I still had this more detailed version in my notes so I decided to give it a bit of a polish and share it in case it’s useful to anyone else. There’s also no methodology here beyond my own guestimation, and the choices of who to include are arbitrary and reflect my own interests rather than any kind of representative sample. That is why the bottom right corner, where unconventional thinking about both the desirability of employment and the nature of money collide, is over-represented — as that is where I see the potential for a kind of cambrian explosion in economic thinking to originate. There’s nothing to stop others placing thinkers that interest them within this matrix.

Let’s have a look at the people and positions in a little more detail:

Brittany Hunter (1). Writing for the Foundation for Economic Education, Hunter lays out the conventional thinking on the topic well. She is hostile to the idea of a basic income in the US context on at least two fronts. Firstly it will demotivate workers, secondly it’s two expensive, which would ultimately place an unfair burden on tax-payers, whom, she assumes, are the ultimate source of all public spending. Money in this paradigm is assumed to be essentially a neutral medium of exchange. Real economists, so they say, don’t actually think about money, which is merely a veil over barter, out of which it emerged.

Public Policy Discourse (2). Mostly figures in the public sphere agree with Hunter. In understanding how borrowing and spending works, they tend to model governments on households or individuals. There is some serious thawing of this consensus underway at the edges, but in general it still prevails, even during the pandemic. The need to balance the budget is presented as a technical neccessity, not a policy choice. The media presents, and the average layperson accepts, generally, this rule as “common sense”. By default, if a policy is proposed, “how will you pay for it” is among the first questions. Writing for the Poynter Institute, Al Tompkins urges his colleagues in the media to demand answers from politicians about how and when they will pay off all the debt required to pay for the stimulus. He says government borrowing:

It is not unlike you borrowing money when you want to buy a house or a car. Borrowing is not always a terrible idea, unless you do not have the income to pay the loan back. Federal spending works the same way.

Paul Krugman (3). On the leftward fringe of the mainstream spectrum are figures who balance the pressure to conform to this mainstream thinking with the need to maintain some contact with economic reality. One such figure is Krugman, an economist best known through his analysis and opinion work published in the new york times who will say things like “no, we don’t have to worry about paying off the debt; we never will, and that’s OK,” and link to this blog post by Morgan Housel, which explains that a government escapes debt by out-growing it, so that while absolute debt grows, GDP grows faster. This means that the debt to GDP ratio stays manageable, as do the obligations regarding interest and payments.

What neither of them suggests is that government spending could be (indeed is already) funded by simply creating money. That they implicitly leave to banks, including the quasi-private, nominally “independent” central reserve.

Those banks, he notes, are lending at phenomenally low rates. This makes it even easier for the government to borrow money, invest, and reap the rewards as economic growth in time to pay off the creditors, protecting future tax paying generations from crushing obligations.

There’s no doubt that he or she understands that money is a just social construct. They have been convinced though, that the inherent rules of money include a taboo on just printing more of it ,“on demand” as it were, or the fiction would collapse, and money would suffer a catastrophic loss of value. He might be naked, but he’s still the emperor.

Public Policy Practice (4)

The reality is that governments rarely balance budgets. Deficit years outnumber and out punch the surplus years, and interest piles on top of that to create an ever growing mound of debt

The 90 years of consistent deficit spending shown in the graph above (sourced from whitehouse.gov) has left America a more developed, better off, nation than it had been at the start.

Politicians always promise one thing, then end up doing another. But in this case what they promise is wrong and what they end up doing is right. The system would collapse if they did otherwise and always finds a way to force the decision makers hands’ into deficit spending as a perpetually temporary measure. Like now.

There’s always the possibility of too much of a good thing — when government largesse causes economy wide spending to outpace productive capacity and cause inflation — but below this threshold the general rule is that the more the government spends, the richer the nation becomes.

Stephanie Kelton (5)

Kelton’s approach is to advocate that governments should own up to reality and come out of the closet as deficit-lovers. Her reasoning for why this is ok is far more straightforward than, say, Krugman’s: A government with it’s own currency can’t go broke. It could just print money. There’s no reason it would ever default on a debt denominated in its own currency. Governments don’t tax and spend. They spend, then tax.

In conventional thinking, taxes fill a bucket, the “government coffers”, and spending is the hole in that bucket, through which money escapes. According to “Modern Monetary Theory”, which Kelton advocates, it’s not so much a bucket, but a flower-pot, waiting to be watered, and this doesn’t represent the government’s “coffers” but instead the economy. Government spending is the flow of money into the pot, and taxes are the drainage holes, the outflow which need only match inflow once the soil is saturated. Their purpose is to stop the water overflowing, which would mean more money chasing after goods than the economy could handle, and therefore inflation. Taxes are demanded by a government in a specific currency to help ensure it’s value. But the quantity received needn’t match spending. It shouldn’t.

The position isn’t so much, as it is sometimes described, that deficits don’t matter. It goes further. Deficits are mostly good. Surpluses are mostly bad. It’s the accumulate public debt that doesn’t matter. It’s just a historical record of what happened.

The real limit on spending, as described above, is production. The penalty for overshooting this limit is inflation, not bankruptcy.

But even with all that extra capacity that gives the government to spend, MMT advocates like Kelton still don’t think a UBI is a good idea, except perhaps as an emergency measure during the pandemic. This is partially because they believe a UBI would increase spending without increasing production, whereas the policy she does advocate, a job guarantee, would increase them in tandem, since the government created jobs would either be productive themselves (producing goods and services) or increase productive capacity (building infrastructure). I and others question this straightforward relationship between employment and production, noting that make-work could use up more of the economy’s resources than just giving people money, requiring equipment and transport and clothing and other items.

But Kelton has also defended working in and of itself as better than not working — not in the moral sense that a person should contribute, but in the sense that it is better for the person working to be working than it would be for them to be passively receiving income, which she contends would cause them to be depressed and isolated (as if work is universally enjoyable and fulfilling, and leisure is universally not), and as if a basic income and employment are mutually exclusive — whereas the whole idea is that (unlike work and unemployment payments) they are not.

She and other MMT advocates decry the evil of involuntary unemployment, but are unconcerned with involuntary employment — people who would rather not work who are forced to by the threat of poverty.

Andrew Yang (6) Yang, who ran in the US Democratic primary on the idea of a $1000 a month UBI funded primarily with a value added tax thinks robots are coming to take our jobs. Since his primary run he has joined with other politicians to call for emergency payments of $2000 a month to all Americans during the pandemic.

Karl Widerquist (7) Widerquist is an American philosopher who critiques Hobbesean and social contract theories of private property, and supports the UBI as a way of addressing the injustice inherent in the inequalities and unfreedoms our society imposes on people. He has produced costings for various models, emphasising that the “net” cost -after a proportion or all, of the UBI is taxed back from wealthier recipients through a progressive income tax — is lower than the gross cost, and relatively affordable.

Steve Keen (8) Keen is a leading post-keynesian thinker, unique in his focus on the role of private debt in the economy (and more recently on energy, but that’s beyond the scope of this article). This focus on the macroeconomic effect of money creation by banks led him to predict the 2008 crash. His interpretation is also backed by his ability to identify impressive correlations between debt and other economic indicators, as shown in the graph below showing change in debt and unemployment:

He’s also created his own modelling software called Minsky (after the economist Hyman Minsky, who he considers an intellectual predecessor. On the basis of this body of theory and modelling, he backs both debt jubilees and a basic income.

Geoff Crocker (9) Crocker combines soft currency theory with a close look at technologically driven labour market trends (of the kind Job Guarantee advocates ignore, or hope to somehow overpower). One point he makes repeatedly is that consumer spending has already overtaken aggregate wages making unearned income a mathematical necessity. Both in the sense that it is, factually, a part of the economy already, and in the policy sense, that it needs to be provided to people fairly to prevent inequality and poverty. He suggests the creation of “debt free” sovereign money by central banks, distributed to people as a basic income. Whereas Steve Keen often points to the issue of private debt as a problem, Crocker argues this is only a proximate cause and the root cause is productivity growth outpacing wage growth, neccessitating non-wage income to fund consumption. Easy credit has been filling in the gap, but basic income should instead.

Alex Howlett (10) Howlett’s position is close to that of Crocker’s but he doesn’t see the need for explicitly debt free “sovereign” money creation, arguing that deficit spending and central bank behavior as currently structured is sufficient to achieve the same ends. He is also less concerned about inequality than Crocker, arguing that the immense wealth of billionaires, for example, being mostly tied up in stocks and other assets, and doesn’t compete with the spending of ordinary people for consumable resources.

Howlett is, even among UBI advocates, far more explicitly skeptical about the value of employment as a goal. Keen or Crocker might (seem to) be saying that full employment would be nice, it just isn’t possible or isn’t sufficient to overcome structural issues around money creation. Howlett explicitly argues against employment as a goal or explicitly desireable outcome. It is instead an input-like any other resource, which should be used as efficiently as possible to achieve production.

The labour market is a way to get people to do things they wouldn’t do for free, and shouldn’t be the way we get money to people for consumption — a UBI should be. He also describes a change in housing markets as a bonus effect of decoupling income from work, since people could move away from the major job markets (and stimulate depressed regional ones).

Howlett emphasises that in a functional economy, money would flow to consumers to producers, but that process is blocked because we expect money to flow to people primarily as a result (rather than a cause) of their productive labour. He calls this Consumer Monetary Theory, to distinguish this approach from MMT. and often uses the metaphor of the economy as a “giant vending machine”.

Oxfam (11)Oxfam advocates for a kind of Global MMT — suggesting that the IMF issue Special Drawing Rights, to developed nations. Theres are a unique interest bearing financial asset, which only governments can hold, and which are exchangeable for cash and can be used to pay back IMF loans.

This would give poor countries the liquidity they need to protect their populations from poverty. This was advocated lastyear as a response to the pandemic and its economic fallout. It might sound wild, but it’s happened before (in 2009) and the IMF is, or atleast was, apparently considering it.

World Basic Income (12)The NGO which advocates for a World Basic Income funded by “rents” on the global commons. These include a Carbon Dividend, Aviation Fees, Ocean Revenues and others. But they also say money creation could be used in extraordinary circumstances, such as now during the pandemic.

Me (13) I argue for a combination of the Oxfam and WBI positions — which ends up being very similar to a global version of Crocker’s proposal. I think the IMF should create accounts for every human being over a certain age and deposit into it a new digital currency which it could then guarantee the value of by allowing governments to purchase SDRs with it in auctions, or by charging a tax on national governments denominated in it. By giving it value to nation states, the IMF would encourage those nation states to exchange their established currencies for it. In the essay where I first proposed the idea, which frames the proposal as an emergency response to the coronavirus contraction, I suggest we could simply make this tax payable by each government in proportion to the total amount received by their citizens in WBI payments — so the government would be compelled to buy some proportion (say 10%) of the newly issued currency from its citizens, or accept it as tax payment, thereby validating it. In an as yet unpublished manifesto with political as well as economic content, I and other authors place this idea in the context of the longer term project of building a broader global state and suggest the tax could instead be charged in proportion to national military budgets, thereby helping drive a general disarmament.

In either case the tax would create demand for and validate the currency the WBI was issued in, and give it purchasing power which would dramatically reduce poverty, and reshape global labour markets, lowering cross-border wage competition without creating the contractionary pressures of tariffs and trade wars might.

I see this as uniquely addressing the contractionary pressures of decades of neo-liberal austerity and the dislocating effects of globalisation, which have combined to disempower ordinary people in developed and developing nations.