Reparations

It being Sunday in north Georgia, obviously, I was listening earlier to The Sunday Edition with Michael Enright on CBC Radio 1.  The well-curated program ranged across what one would expect in a North America ripping itself into pieces, but there was a gem in the middle that tried to explain Modern Monetary Theory or MMT, a recently fashionable idea in economics.  It’s not a difficult theory, really, and it is fundamentally correct.  The theory is as follows:

Predicate assumptions:

• • Value is defined by the confluence of the quantity of money in circulation, the velocity of circulation, and the relation of the rate of destruction of value (through absolute consumption, ie., when you eat a sandwich, it’s gone) to the rate of creation (ie., a primary good is converted into a tradeable or consumable good) to the rate of inertia of goods which have been created but not consumed.  Note this is not moral value or other “kinds” of value; it is simply economic or materialistic value – that is, the relative value of one good or service against another.
  • The economy is defined as a relatively closed society consisting of a state and a set of fluid marketplaces for both goods, services, and financial assets.  The state has full control over a fiat currency, and intersects only at the margin with other equivalent states (ie., this doesn’t work for commodity-centric political economies like Saudi Arabia, and the jury is out on economies like Canada or South Africa which are both primary good exporters and primary good importers in size).
  • The financial system consists of either (a) a non-monopolistic financial sector combined with a monopoly central bank controlled by the political sector, or (b) an oligopolistic financial sector which is too big to fail and thus is a quasi-political space.  Conditions which prevent MMT from working include (i) a non-monopolistic financial sector with no Bagehotian lender of last resort, and (ii) an oligopolistic financial sector without meaningful political oversight.
  • The technological achievement of the society should be capable of making the production of marginal basic consumption goods (food, clothing, simple but comfortable shelter) essentially friction-free.  So we’re talking about advanced high productivity economies – and we don’t relieve ourselves of the moral burden of helping the Senegals and the Mozambiques and the Laos’s of the world in achieving the conditions which would allow them to achieve the same.

Observations:

• • In a system which meets the predicate assumptions, the government has no meaningful constraints on its ability to meet basic consumption needs within the economy.  It can approve measures like a basic minimum income, or a welfare state, or a basic national health care system or what have you, without limit – as long as such expenditures only support consumption with a relatively short turnaround between the time of value creation (when ham and bread and mayo is produced and processed and ready for consumption) and the time of value destruction (when the sandwich is eaten).
  • MMT will not support the long-term creation of inertial value, which is to say, to support the production of goods which are not primarily consumed.  This includes capital goods like factories, also includes luxury items which tend to not be readily consumed, and especially applies to goods with an inverse price-demand function.  The use of de novo fiat money to support these simply leads to an acceleration of inflation and a dilution of the economy’s ability to relate the concepts which make up value correctly (that is, money supply, velocity, and the production/destruction cycle of economic goods).

What this means is that a government in an economy which meets the MMT predicate conditions can indeed guarantee a minimum income for all citizens based on what they consume – what they eat, wear, how they house themselves in a rental state with relatively well-known property depreciation rates, and what private consumables they choose to “want” without accumulation of property.  The government can simply give them checks for their income, which will then be spent, on assets which will immediately wear out / get eaten / depreciate within a known time and not accumulate excess value, and since the government will simply be floating the money during the time when the money is being actively spent (accelerated / achieving monetary velocity), which it will be borrowing from the central bank which will then destroy the money as soon as the value created is itself destroyed by writing off the debt associated with this spending, nothing really happens expect the creation of a scrip which is designed to stimulate the natural human impulse – and, frankly, need – to consume stuff.

Note the final predicate condition though, which I’ve talked about before: this has to happen in an environment where not only the political economy controls the money / value equation, but the society can produce basic consumption goods with effectively no marginal cost.  We’ve achieved this in North America, in all three economies – actually including Mexico, which makes Mexico an even greater tragedy – because we’ve integrated our basic consumption economies so tightly that we can transfer wheat and soybeans from Manitoba for corn and truck vegetables from Mexico for cotton and lumber from the United States with basically no economic friction costs (I’m going to put aside the labor equity issues involved in North American primary agricultural production for the moment).  Our three economies are – arguably; Canada’s petro-economy and Mexico’s black market being very plausible denying variables – all self-sustained, and the NAFTA region economy more broadly has therefore three self-sustaining economies.

Thus there’s really nothing (other than the exceptions noted above) preventing the US, Mexico, and Canada from doing the following:

• • Deciding on a regular basis what level of income is required for each [citizen / household / economic unit, as variously defined] to live an above poverty-level existence, but not one which enables the accumulation of excess wealth unless the economic unit decides to forgo some needs for future wants – which must remain an absolute individual right if we are to avoid falling into the Gosplan trap of seeing individuals as mindless and selfish stomachs, and then:
    • Paying each economic unit a time-regular (weekly / monthly / annual) stipend to enable them to live such existence;
    • Finance it through issuing debt bought by the central bank; and finally,
    • Having the central bank cancel the debt involved in this construct in the same time-regular period in which it is issued.

MMT basically says, let fiat central banks constantly finance the float involved in keeping a subsistence level of existence alive in an economy which has already achieved the ability to produce a significant excess over and above the physical needs of a society.  It’s not even the physical needs; as we engage in psychic needs – hey, everyone needs a smartphone and a laptop, which while physical require a high speed internet infrastructure to enable value creation even over a short term consumption cycle, especially today – and those needs are still consistently able to be produced without encountering scarcity, the MMT economy just adds them to the float that’s provided by the state-central bank-financial system velocity system.  It’s not that far removed from Keynesianism – in fact, it is Keynesianism with the assumption that the economy has achieved effectively zero-marginal-cost production capability for basic goods.  And it isn’t far from traditional Friedman monetarism, with again the limitation that the only goods floated by the system are those required for what are broadly defined as basic goods.

For those of you interested more intensely, I’d love to start a chat group to go over the macroeconomic mathematics of this.  But I’ve started to hack it out and it does, in fact, work – as long as you start with the basic assumptions.  Most macroeconomics is, for the worse, still kind of grounded in the accounting of a non-fiat money standard world.  In other words, it accepts that there is a “true” source of value in the world based on a fixed, or at least controlled and limited, set of fundamental monetary units (gold, dollars, Special Drawing Rights, Euros, whatever).  But if you accept the starting points above – which do exist in quite a few countries, although by no means all – then it does work.  And also, happy to discuss the logic behind those rules etc. etc.

Which leads us to the second observation, about where MMT breaks down.

The quantitative easing of the past twelve years has been an extended experiment in MMT without reference to basic consumption needs, and that’s led directly to the massive inflation in asset prices held by those who don’t, primarily, live or respond to basic consumption pressures.  Indeed, the QE “experiment” has led to a divergence in outcomes, where those who experience pressures in meeting basic demands suffer from the crowding out effect of the asset hoarders who use the misdirected QE excess to stifle productivity in order to have access to wealth acquisition.  Note that MMT – when thought of properly – prints money to people only in such quantities that allows for immediate, very immediate consumption, after which time the monetary base which circulated to allow for the consumption is consumed by the fiat currency issuer.  Also, MMT assumes direct delivery of fiat money to consumers – not to capital goods accumulators or to underregated financial intermediaries.  QE as was practiced in the US in versions 1, 2 and 3 – and elsewhere in similar versioning – had no reference point; it just basically turned on the printing presses and dumped it not on consumers, but on financial markets.  The Covid-19 stimulus packages have been better designed but it seems like that was almost random and driven by purile political objectives, not by a thoughtful consideration of the feedback loops of an economy.

MMT is valid when considered in light of both the foundation conditions of abundance (ie., close to zero marginal cost of production of basic human commodity needs, fiat money system with some controlled financial system participation, and a reasonably self-sufficient and semi-closed currency zone / fiscal zone economy), and – and this is where MMT theorists tend to be a bit fast and loose – a direct linkage of the amount of central bank money floated for individual spending with the amount of individual need in the extant socio-techno-physical world.  QE was MMT without any linkages to need; the money then went to organisations (corporations and banks) who then chased returns, not actual human need, and without any linkage of the aggregate amount of spending to the aggregate amount of human need either.  And the timing of the financing was not linked to anything either – QE as we experienced it in 2007-2009 was financed with long-term debt, meaning that we’ll be dealing with an overhang of asset price demand for an average life of seven to fifteen years.  MMT would link the timing of financing to the timing of consumption – ie., the central bank would issue money for about as long as people take to destroy what they’ve consumed.  Destruction here isn’t bad: it’s about eating sandwiches and drinking coffee and wearing out a new pair of shoes and paying for a year of amortisation of value on your rental 1 bedroom / 1 bath apartment, maybe larger as one’s son grows up to require a second bedroom.

Importantly also, MMT requires a linkage between fiscal policy (the issuing of checks to individuals for their basic needs, plus maybe a float for a national health care system of some sort) and monetary policy (which buys the paper issued by the fiscal authority to pay for short term expenditure, injecting the fiat money into the economy as a result, and willingly cancels the debt when it comes due).  This link is only arbitrary at the moment, although it appears as though Jerome Powell and others on the FOMC understand this link, both in terms of their willingness to purchase effectively unlimited amounts of short term Treasury debt and in their now relentless jawboning to convince Congress and the executive branch to approve additional taxpayer-level stimulus checks.   I think that’s an important angle which has been lost in the press: Powell has asked the fiscal branches of the political economy to issue direct stimulus to consumers, both individuals and the state and local governments which act effectively as individuals in that they are prohibited from borrowing beyond their capacity.  That means the Federal Reserve gets this joke: they can create money, via buying the debt issued by the federal government, and thoughtfully extinguishing it, by writing it off in its sole capacity as the creator of fiat money, as worthless on its repayment date.  The Chinese won’t allow the debt they purchased from the Treasury to be written off – but the Fed can.  Indeed, that is their purpose.  And until the MMT people came along, I’m not sure they realized that power.

Which brings me to my real point.

The fact that the conditions exist to allow MMT to operate as an effective, self-sustaining system also should give us pause.  The fact that society has evolved to the point where the basic goods required to thrive as a social, recursively thinking, expansive, creative individual means that something great has happened.  But it’s happened largely by exploiting huge numbers of underclass to get us here.  It’s easy to say – and I do – that this includes the Black Americans who have been denied access to fundamental civil rights, that it includes the First Nations people whose land was taken in order to be able to have the property to create the self-sustaining zero-marginal cost basic goods economy we now enjoy, that it includes many women who were abused and denigrated and died living in households led by men who were driven to drink and distraction by the need to produce for a capitalist overclass, and it includes poor whites who were sold a corrupt and immoral bill of goods that they could be racists and oppress their neighbours of colour as long as they would accept bad wages, no health care, and a likely opioid addiction.  Those people – those humans, those people who have been denied a place in the several century process of building up a society which finally has a sustainable abundance for all of us – deserve something, let’s say, a little extra.

Which is why a wealth tax at this moment makes perfect sense when paired with the implementation of an MMT basic goods regime.

Most of the overclass consists of people who just simply won the lottery in the last few generations.  They were dirt poor immigrants who got some capital, made some good bets, maybe avoided lending a lousy cousin some money, maybe had a rich uncle.  But the truly rich – and we’ll always be arbitrary about it, but as a starter for ten let’s call it those of us who have more than $50 million in net real assets – those fortunes were founded on exploiting an underclass to create an environment where not only is it sustainable to keep human beings, and the broader environment, in equilibrium, but it’s also still possible to have some pretty nice things as well.  It makes sense in such a world, where we know the economics of keeping money accelerating through the consumption of basic use goods, where we also know the meaninglessness of the accumulation of value through non-use goods, to tax the gradual accumulation of value in non-consumption goods.

Or alternatively – pace Musk and Bezos and Zuckerberg and their ilk – their wealth was, in a very real sense, created by the overproduction of the monetary base in the post-2001 environment.   QE really started, after all, when the Fed dropped rates far, far lower than required in the wake of the dot-com crash; that encouraged the banking system – under-regulated at the time (and refer back to the predicate conditions for MMT on that point which require some public oversight of the financial system; this was not a hallmark of the pre-financial crisis world) to create money via internal leverage and velocity acceleration.  Once the real crash occurred in 2007-2008, QE kicked in – but the gravy train for the new generation of technology overlords was already well out of the station.  That new generation was beyond lucky: they created new technologies at just the moment where the central bank had flooded the system with money that had nowhere to go except to speculate.  That money and the accrued wealth – of the era from call it 1998 to 2020 defined by unnecessarily loose monetary policy followed by massive quantitative expansion – is not value, as value is defined above: it is an accident of monetary history.

But to perceive that wealth creation as real value is, after all, is purely human.  There is no real value in gold, after all – it’s only in our perception of it.  There is no “value” – at least, not compared with our ability to feed children, or produce a vaccine which, once discovered, will immediately be simply a use good – in a work of art.  That isn’t to say there isn’t spiritual value, or emotional value.  But attaching physical value to such things is to shift phases: it’s to attach a physical price to a metaphysical asset.  That’s ridiculous.  Prices belong on that which we consume; that which we savour, that which we love, we not only don’t price, we find pricing to be an immoral act.  And to try to translate the accounting value of central bank money, created during an experimentalist flood in a moment of historical time that will never be repeated, into other notions of value – whether that of basic use goods of food, fuel, home, and clothes, or more transcendent notions of the value of art or music and other people – is more than misguided; surely it is immoral.

But the simplifying beauty of money means that we extend its pricing realm without thinking to such transcendent things.  Even when we live in an economic world which allows us to differentiate and separate the world of prices – which can be floated by a benign loop of issuance of debt, financed by currency, which buys the goods needed, and is destroyed by the act of consumption.  We’ll probably always be tempted – or at least some of us will – to skim some of that “value” and acquire or try to convince others to sell goods which are ephemeral and beyond price, and some of us, for reasons good and bad, will succumb to the temptation.  Moreover, in that historical world of scarcity, it makes sense we’ll all be forced into that bargain.  We don’t live in that world any more.  And those who have, over the course of decades and centuries, found themselves in a position of not just plenty, but of wealth, well, thanks – in aggregate – for allowing the accumulation of capital so as to discover the systems and processes which have enabled our planet to achieve a kind of abundance.  But you’re still of us; you’re still of the planet.  It’s only natural to now repay those whose families and peoples and lands paid the hard price along the way to make it happen.

The use of the wealth tax proceeds, ideally, would be two-fold.  First, it would pay down past debt incurred by the state in the acquisition of capital goods like tanks, planes, dams, bridges and the like.  Remember debt spending on capital goods is distortive because the value creation is quasi-permanent, unlike the short-term temporary money created to enable the high-velocity personal spending on basic consumption goods that takes place under an MMT regime.  Easing past distortions is a good thing.  Wealth taxes can also then be used to support the financing of new capital construction – which, I believe, is a kind of reparations to the common good.  Spending money on non-defence state capital goods – primarily transportation infrastructure, educational infrastructure, large scale scientific research, and parks and other permanent use-goods – is a productive way to enhance the lives of everyone, especially those who have been historically disadvantaged and actively oppressed.  This is all a bit utopian, of course – functionally any wealth taxes will be spread around the fisc like a thick layer of mayo on a ham sandwich – but in the aggregate, the macroeconomics work.  In any event, the primary function of the wealth tax would be to dun those who have accumulated excess wealth via a poorly designed (albeit with the best of intentions) monetary policy.

One final observation, as I’m sure many readers will put up objections to the theory I’m describing above.  Remember I’m an historian by nature; I read Adam Smith, and David Ricardo, and Karl Marx, and John Maynard Keynes, and Paul Samuelson, and all the recent critics of the post-Cold War neo-liberal world through a lens of the broader world they lived in.  Adam Smith was basically pre-industrial; both Marx and Keynes wrote mostly about a failure of the industrial economies of their time to find a way to produce consumer goods so as to sustain a working class; and the neo-liberalists of the WTO generation wrote without understanding the lift in productivity that had occurred, was occurring and continues to occur still without end in sight.  Their writings also betray their biases about race, about gender, about the nature of other people as being either agents, or principals, or something else.  And I find much of the writing today betrays the fact that as a society, and as intellectuals within that society, we still have yet to absorb the implications of living in a world of effectively zero marginal cost basic goods production.  We still think we’re batting with one another across class and race and other boundaries.  But we’re not, and while that’s new, it’s a kind of novelty that needs to be embraced as we think about how to organise a society and imagine how we can live together on this planet.

A closing note: One thing I’ve come to realise recently – in our biweekly discussions between Mark and Viktoria and myself – is that I have to be honest about my own biases.  I’m firmly of the belief that I am fallible, and that you are fallible, and that we both need reluctantly to accept one another’s failings but still chase one another’s insights, those insights especially that we can’t see for ourselves on our own.  I have a responsibility to you but I also need to acknowledge my own sins, my own blind spots.  I’m a white guy, born in Maine in 1974, and it means I can’t understand or comprehend what most of the people in this world have to deal with daily as a psychic and moral burden.  I hope what I write is sensitive, but I also have no illusions that often I’m obtuse and blind.  This is dedicated to the ex-girlfriend, who turns – well, she celebrates a birthday today – and it’s also dedicated to all those who still read what I write even though I’m human.  Keep protesting, keep reminding us what you’ve given to the world to make it what it is, the best of all possible worlds, for all its failings.

And as always, thanks for reading.