Black on monetary policy

“It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford

Black asks what would happen if the public really understood money.  It is obviously a question I find fascinating because I have been drawn to it from my early teenage years.  It is a question that has fascinated some of greatest political minds since well before the Declaration of Independence.

Part of the fascination comes from the fact that as Ken Galbraith put it "The process by which banks create money is so simple that the mind is repelled."  Compared to a subject that is really difficult like say, the structural analysis of a skyscraper, money really IS ridiculously simple.  But that doesn't mean that convincing folks to make political decisions about money is easy.  That's because it is even easier to believe the lies the moneychangers tell us.

This time, however, it really matters if the country gets the thinking about money straight.  It matters because if we do not create money to pay for better infrastructure, life as we know it on planet earth is most certainly doomed.

What if the Public Understood How Money Works?

By William K. Black January 13, 2015

Economists as the Secular Priestly Caste Guarding Knowledge of the Holy of Holies

There’s something invigorating about people freaking out about modern monetary theory (MMT). They treat MMT as akin to the Ark of the Covenant in the first Indiana Jones movie. They are petrified that knowledge of the financial equivalent of the “holy of holies” will be released to normal people because they project their greatest terrors onto the possibility that the public will be transformed and empowered by their knowledge of matters that much of the financial world has understood for at least a century.

The Other MMT: Monetary Myth Theory

Randy Wray has written about the time when the Nobel Laureate in Economics, Paul Samuelson, explained in an interview with Mark Blaug (in his film on Keynes, “John Maynard Keynes: Life/Ideas/Legacy 1995″) the need to limit the knowledge of true nature of money to the priestly caste of economists.

“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.”

Notice the breadth of ideology represented by the economic priesthood – from the hardest right represented by the Nobel Laureate James Buchanan to wherever one places Samuelson on the spectrum. One can see why Samuelson foisted a bowdlerized version of Keynes on economics students for decades in which massive unemployment is essential to avoiding “inefficiency.”

Notice also the depth of the disdain the priestly caste of economists has for democracy. Samuelson is vituperative about the folly of allowing the public to learn about the true nature of money – it will cause not just “chaos,” but “anarchistic chaos.” Normal humans cannot be trusted with the sacred knowledge of money because they lack the “discipline” of economists. They are at heart anarchists. Samuelson entered the University of Chicago at the age of 16 at a time when anarchists were the most infamous people in America and Chicago had been home to many of the Nation’s most famous anarchists. To Samuelson, anarchists were the willful destroyers of all the “bulwarks” necessary to the preservation of society. The mission of the priestly caste of economists was to ensure that the citizenry did not learn the great secret of money. It was meet and right that they should do so by creating and spreading “myths” about money designed to “scare” the citizenry into believing the myths.

But why can economists be trusted with the knowledge of the great secret of money? Economists differ (statistically) from human beings of similar intelligence in one key characteristic – they score lower in altruism when they begin their studies and by the time they complete their studies they are even worse – and proud of it. Normal human beings, seeing the misery of the unemployed would use their knowledge of money and the realization that helping the unemployed would improve the economy would rush to make that win-win occur. Altruism and empathy are related concepts.

Economists are not simply (statistically) low on altruism, they are taught to be proud of it. Ayn Rand famously condemned altruism as a vice and praised selfishness as a virtue. Many economists agree with her that “society” does not exist and that individuals owe no duties to the public. Keynes’ famous explanation of why Ricardo’s most specious claims proved so attractive to so many economists is instructive.

“It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.”

Economists and CEOs’ Enema Strategy

A long, slow recovery from a serious recession that depresses wages for a decade or more by creating a massive “reserve army of the unemployed” can be an enormous boon to CEOs. The statement that President Herbert Hoover (controversially) attributed to his Treasury Secretary Andrew Mellon shows that the powerful understood this dynamic. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system.”

Whether or not Mellon actually uttered these phrases, the key is that Hoover knew that conservatives often advised him to liquidate and purge. Hoover rejected that advice, but he also rejected effective stimulus. There is no dispute that a famous economist who is a hero among conservatives, Joseph Schumpeter, argued against government reducing the severity of depressions because “artificial stimulus leaves part of the work of depressions undone.” (Public education is “artificial,” baubles for the Gatsbies of the world are “real.”) Normal human beings, knowing that the government could avoid much of the pain of the recession and make the recovery stronger and faster while causing no harm, would promptly do so.

Economists and Sadomasochism

Many economists are not simply weak on altruism, they are strong on sadism. They write repeatedly about the need to inflict “pain” on the public through austerity. They’re not into masochism, of course, as one can observe at any economic conference in which turgid presentations about meaningless models echo off the walls of deserted rooms. Economists who shill shamelessly for CEOs know they will be well rewarded. As the secular priestly caste these economists perform some of the same functions that religious priestly castes have for millennia – they venerate and legitimize their powerful ruling patrons by creating myths such as the divine right of kings (and CEOs). They sell indulgences that immunize the wealthy from accountability for their crimes. Lawyers, another priestly caste in America that serve CEOs, use economists because they make great expert witnesses (for huge fees), for the defense in the (rare) cases they are sued or prosecuted. If the public were to learn the great secret of money and see through these myths these economists would be exposed as shills and lose income and prestige.

The Real Fear of Libertarians and Conservatives

The attacks on MMT and my UMKC colleagues’ development of job guarantee programs from the hard right and libertarians for informing the public about what people in finance have known for roughly a century are understandable. They both project their worst fears of government unto the proposals. Their worst fear, of course, is that democratic governments would be successful in helping people and that the people would view democratic decision-making favorably. They know, however, that openly stating their worst fears is a poor strategy. They have long talked instead of the sure ruin of inflation should the government fund effective social programs.

Freaking Out over Kelton’s Appointment

Senator Bernie Sanders’ appointment of our colleague Stephanie Kelton as Chief Economist of the Senate Budget Committee brought increased attention to MMT and the desirability of ensuring full employment through a jobs guarantee program. Dylan Matthews’ January 10, 2015 column explained the significance of her appointment – and promptly generated a full-fledged Forbes freak-out entitled “Watch Out, MMT’s About, As Bernie Sanders Hires Stephanie Kelton.” Tim Worstall wrote the column. His Forbes bio begins: “I’m a fellow at the Adam Smith Center in London….”

Worstall, as Randy Wray and Scott Fullwiler have aptly explained, is the most recent proof of our family saying that it is impossible to compete with unintentional self-parody. I won’t repeat Randy and Scott’s detailed takedown. The first key takeaway is that Worstall admits what my colleagues have been emphasizing for years – first and foremost, MMT explains how money actually functions, including how a sovereign currency functions v. how non-sovereign currencies function. This explains why finance practitioners have long been supporters – indeed, most famously in the case of Warren Mosler, developers – of MMT. It also explains why MMT’s core is actually not controversial – as Worstall admits.

Keynes as Prometheus and the Revenge of the Priestly Caste

There are variants of the story of the Titan Prometheus (foresight), but the common element is that he enrages Zeus by taking an action that aids humans. The variant I discuss is his bringing the secret of fire (symbolic of light, warmth, and knowledge) to humans. Zeus is pissed, and Zeus is really mean when he is pissed off. He chains Prometheus to a rock and sends an eagle (his avatar) to peck out and eat Prometheus’ liver every day. Prometheus is immortal, so his liver regenerates daily so the endless cycle of torture can continue.

Prometheus has for millennia been the greatest hero of humans. Indeed, it is another hero, Heracles who frees Prometheus after ages of torment. Prometheus never renounces humans even while suffering endless agony.

A comment by a reader of Scott’s column over at Naked Capitalism illustrates the continuing temptation to “unleash the eagle” at the liver of anyone who brings the secret of money to the public. The commentator agrees that MMT is correct, but believes that Keynes did a terrible disservice by trying to help the public understand money.

“Thankfully Mr. Worstall’s fears will dominate for the foreseeable future. Knowing how an Indy car is built and driving one are too [sic] different skill sets. Should MMT gain any traction it will not resemble itself by the time it comes out the end of Social Policy and Buchanan’s Public Choice. It would be like giving the keys to your ten year old. Now if you have a fondness or belief in an enlightened overlord class MMT in the hands of your favorite politico might sound wonderful.”

Humans are “ten year olds.” We must protect them from their crazed desire to be productively employed. Put everything in the hands of the economists who serve the biggest banks (the rapacious and corrupt overlord class) – but avoid democracy like the plague.

Worstall trots out the following parade of horribles – Kelton’s arrival could lead the Republican-dominated Congress to fund “another 7 carrier battle groups.” Worstall’s comment illustrates three serious flaws in his anti-democracy screed. First, we all know that the Republicans will not do so for multiple reasons.

• They do not believe that doing so would be desirable.
• The Pentagon, even the CNO, does not believe it would be desirable.
• The electorate does not want them to do it.
• If they tried to do it, Obama would veto their legislation and the Republicans would not be able to override his veto
• There would be (as MMT scholars repeatedly warn) real resource constraints if we tried to build another 7 carrier battle groups” in a very short time period.

To sum it up, Worstall’s example is false and the reasons it is false are important. It turns out that democratic governments and reasoning impose real constraints that limit terrible decisions.

We should look also at what Worstall does not take into account about defense spending. I think that U.S. defense spending is far too high and that much of the money is spent poorly because of the influence of government contractors. From my perspective, U.S. democracy is not working properly to prevent these defects. I don’t think democracy is even remotely perfect.

Under Monetary Myth Theory, the proponents of the existing seven carrier battle groups (and the 600 vessel proponents) claim (1) their desires must be the overriding priority and (2) that even when there are zero real resource constraints their spending has paramount priority and should “crowd out” spending on education, health, infrastructure, prosecuting the elite banksters, regulating effectively to prevent the next financial crisis – or even caring adequately for our veterans when they are grievously wounded in our wars.

Even in response to the Great Recession, when increasing the deficit through increased net government spending would greatly aid the recovery of the economy and reduce future deficits, even when the programs that would be funded would be effective and would reduce suffering, and even when there are no real resource constraints Monetary Myth Theory teaches that we should adopt austerity by slashing helpful government spending and actively makes things worse. That is a nightmare result and Europe shows it isn’t hypothetical. Monetary Myth Theory is now law in the Eurozone in the form of the oxymoronic “Stability and Growth Pact,” which produces recurrent crises and cripples growth. The European priestly caste chants the “TINA” (there is no alternative to austerity) mantra. Unless Monetary Myth Theory is successfully countered it must corrupt the democratic governance process by not spreading a myth that prevents the alternative of what Worstall concedes is the ready alternative of the economic reality of how money actually functions from even being heard. Worstall wants to produce the same result in the U.S. – excluding reality in favor of myths that he knows cause, gratuitously, epic levels of harm.

Defense also raises the questions of “good wars.” I’m not a pacifist. I’m very happy that the Allies defeated the Axis in World War II. One of the great truths of fighting wars of survival like World War II is that national leaders discover MMT even if the priestly class of economists yammers on about the terror of deficits and sovereign debt. No UK leader would respond to a German invasion by saying: “Sadly, we’re ‘out of money’ because we’re already running a deficit and our sovereign debt to GDP ratio is high – so I’ve ordered our troops to lay down their arms and surrender.”

Notice the lack of a financial footnote in Winston Churchill’s famous speech on June 4, 1940 to the House of Commons about the military disaster in France, the hard-won miracle of Dunkirk, and the prospect of a German invasion.

“The British Empire and the French Republic, linked together in their cause and in their need, will defend to the death their native soil, aiding each other like good comrades to the utmost of their strength. Even though large tracts of Europe and many old and famous States have fallen or may fall into the grip of the Gestapo and all the odious apparatus of Nazi rule, we shall not flag or fail. We shall go on to the end, we shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our Island, whatever the cost may be, we shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender, and even if, which I do not for a moment believe, this Island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British Fleet, would carry on the struggle, until, in God’s good time, the New World, with all its power and might, steps forth to the rescue and the liberation of the old.”

His entire speech says not a word about financial constraints. His speech is filled with discussions of real resources, particularly limitations in those resources and how the government was working urgently to provide the monumental increases in real resources required for national survival. There is no footnote saying “we shall never surrender”* (*“until we ‘run out of money’”). Nations with sovereign currencies faced with threats to survival discover within hours that their problem is not “running out of money” but running out of bullets. If they have lead they can make bullets. The next thing that nations discover is that real resource constraints do start binding as they mobilize for a war of survival – it can make sense to have people volunteer their pots and pans – to beat plowshares into swords.

The Fear of Knowledge

Prometheus’ tales inherently include the Gods’ fear that regular people will learn the secrets of the Gods and priests – and that the result will be chaos. In one variant Zeus retaliates for Prometheus’ efforts to help humans by sending Pandora. Her box is not the key in some variants of this tale – the key is sending women. Women, of course, make men’s lives a living hell. This anti-female message played out again in the story of Eve, the snake, and the apple (symbolizing knowledge). Mary Shelley portrayed Frankenstein (the doctor, not the revived kind-of monster) as “The Modern Prometheus.” So, how many people wish we had never been “cursed” with knowledge (and women)? Right, this is why I find it bizarre for libertarians to freak out about the public learning the reality of money.

Worstall: It is “Intensely Dangerous” to my “Liberty and Freedom” to Cut Unemployment

I’ll leave you with Worstall’s admission that his real fear is that people would make different choices, such as full employment with price stability, if they learned the truth about money.

“And given that I tend to believe that there’s vast areas of life (not to mention quaint concepts like liberty and freedom) that work best in the absence of government MMT is a theory that I particularly don’t like. That I think is intensely dangerous in fact: even though I’m perfectly willing to accept many of the economic points they’re making….”

Yes, he actually wants to ensure that the governments not work effectively on behalf of their citizens, that tens of millions of people suffer in gratuitous Great Depressions, because he thinks ending their misery is “intensely dangerous” to his “liberty and freedom” even though he concedes that the stimulus would also help him personally by speeding the economic recovery. He is the very model of the Libertarian Looney. Again, his real concern is that if people learned that governments could use their potential for the citizens instead of for the CEOs by providing full employment the citizenry would respond to that success by voting to cause democratic governments to address other societal needs. Some of us still favor “quaint concepts” like candor, transparency, democracy, and the golden rule – and disfavor secular priests’ secrets. more