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Dan Kervick's picture

Developing Nations

Matt Yglesias has described three popular contemporary political approaches to the challenge of maintaining our national commitment to “providing health care services to the elderly, the disabled, and the poor and also to bolstering the general incomes of elderly people.”  One is Congressman Paul Ryan’s approach of reducing the level of the future commitment in order to bring it in line with “historic norms about the level of taxation.”  The second is the liberal approach of preserving our existing level of commitment into the future, even if that means raising taxes in the aggregate.  The third is “the hazy Obama/Simpson-Bowlesish center that wants to raise taxes and cut programs.”

Perhaps this short list characterizes the main political answers reasonably well, if the main political question is how to tame the budget, and shrink or control the deficit.  But I would like to point out that all three answers have something in common:  Not a single one of these approaches, as usually presented, contains any call for the national government to engage seriously in what one might call “investing in our future”.  All three of them reflect the defeatist mindsets of different camps of worn out oldsters, each promoting a different way of giving up, making do, or just hanging on.  They are all pathologies of the dismal “No, we can’t!” era in which we now live.

The promoters of these three variations on the theme of austere, hard news pessimism no doubt fancy themselves realists and responsible grownups.  But they are nothing of the sort.  They are burned-out casualties of neoliberalism, afflicted with dead imaginations or ideological blinders, who have forgotten what it means to grow a country and build a society.  We need to move beyond their miserable and dismal trilemma.  If the die-hard adherents of these schools of thought want to mope around the shuffleboard courts at the End of History Home for Final Surrender, let them.  But it’s time for the rest of us to reject all three approaches and reignite our history.

[Read the rest at New Economic Perspectives.]

Love this, Dan.  I think it gets to the Pangloss problem in our current way of thinking.  Our leaders seem to think that we live in "the best of all possible worlds," or, at the very least, that we live darned close to it and all we have to do is tweak things a bit and we're there.

For example, we argue about maintaining or cutting Social Security, but there is no voice that says, "Actually, Social Security benefits are not generous enough for a population without pensions, meant to retire only on its savings."

We talk about "creating jobs."  But not about creating jobs with rising wages, or jobs that people like or jobs that people want to do.

We're not having any sort of conversation at all about how the government and the economy can be rallied to delivery increasing standards of living for the population at large.

The tragedy of neoliberalism is that it has taught a generation of people that the future isn't something that a society actually has to choose and build.  It's something that just happens and fatalistically arrives on our doorstep if we get out of the way of economic forces instead of commanding them.  And we're just supposed to take what we get.

So now we have a generation of 20-somethings and 30-somethings and 40-somethings with minds perpetually trapped in a dispirited present, and who thing that dreaming of so much as a new bridge or tunnel across a river is absurdly utopian.

Dan, many of the broad sentiments you voice are intuitively appealing, but the rhetoric echoes those who have historically argued for a limited federal government. The idea was that we could not afford to hobble our Great American Industry with regulations or taxes. We had to grow! grow! grow!

Traditionally, government has not been viewed by either left or right as the engine of "development" but as the arbiter that protects business and/or people. Even the New Deal was seen as a correctional action in the face of crisis, not a long-tern pattern for economic development.

Now perhaps this assumption is wrong, but if so, it's been wrong for a long time, not just in these latter years of ideological decline. To make the case for a new paradigm of government intervention based on MMT theory, I think that you would need to make a case for how the government could become an economic driver, with more detail than just spending money.

Take your introductory examples of Medicare and Medicaid. Providing health care for the poor and the elderly is certainly a moral obligation, but it's hard to see how it's a particularly good economic investment. Arguably, any government spending is good for the economy, but that doesn't mean that all spending is equal. I note that China, which as you remarked does see itself as developing, does not offer nearly as much to its poor and its hold.

So what does this new paradigm actually look like? If our government developed the will to seek full employment, how would it actually go about it?

(Full employment always makes me think of the movie Dave, with Kevin Klein as temp-agency entrepreneur turned president who promises a job to everyone who wants one.)

Dan, many of the broad sentiments you voice are intuitively appealing, but the rhetoric echoes those who have historically argued for a limited federal government. The idea was that we could not afford to hobble our Great American Industry with regulations or taxes. We had to grow! grow! grow!

I guess I don't see this at all Genghis.   I thought I was clearly arguing for "big government".  I don't want the government to get out of the way.  I want the government to very much get in the way and shove the private sector deadwood aside.  I expected people to jump on me more for proposing a socialist Great Leap Forward.  I'm calling for massive public investment; not the mere public enabling of private investment.

One example is the Second World War   The size of the US economy actually doubled in five years' time during that war - amazing!  - when we had a virtual planned economy.  And then it kept right on growing for decades after the war.  It's easy to see why.  During the war, the government force-fed national resources into the construction of factories, transportation systems, ports, warehouses and housing.  Millions of people were trained to do the work required by the war effort, including women.  Then in the decades after the war those investments paid off handsomely for years.  We also kept investing nationally: the Highway system; the GI Bill, and more

And in earlier generations it was canals, the government purchase of the Louisiana territories, the militarized state-run conquest of the west, etc. The whole idea that America was built on entrepreneurialism and laissez faire is just a big a historical lie.

When I was a kid, we had a state-run space program which drove scientific progress and innovation in a hundred different fields, as well as firing the imaginations and creative spirit of a generation of young people and engineers.  More of that please.

The massive national investment in our time should be on building an entirely new energy production and distribution system, and a rebuilt state-backed education system including the educators to man it.  We need new transportation infrastructure on a global scale.  We should also be working with other countries to save the planet, which is going to be an extremely expensive task, but will also pay off handsomely in terms of the technologies, systems and bureaucracies which will have to be created to accomplish the job.

The public needs to take charge of these projects and stop putting their faith in private entrepreneurs and private sector finance to make these things happen.  The private sector doesn't do big and coordinated very well at all, and tends to piss away resources on thievery, stupidity and redundancy.

We need a war effort.  But instead of a war to slaughter Native Americans, or to hunt down and destroy Nazis and the Japanese empire on six continents, we need a war to rebuild the transportation infrastructure, energy systems and productive machinery of an entire planet.  It's going to be fun and exciting, and cost a boatload of our exiting resources and the work efforts of billions of people.  It's insane that we have mass unemployment when there is so much work to be done.  This is unimaginative, witless stupidity on a global scale.  The current generation of leaders in the United States and Europe are weak, pinheaded second-raters who don't understand human economic history and have no idea how things actually get done.  They are counting beans when they should be calling for throwing everything we have into the planetary effort.   I guess none of them actually wants to be a great leader, and is more interested in just cashing their government paycheck and phoning in their role in history so they can then retire to some consultancy.

Full employment should be the natural state of affairs for a society with ambition.  There is always way more work to be done than there are people to do it.

A society always cares for its retirees out of current resources, whether the systems used to deliver goods and services to these retirees are private or public.  These resources haven't been "saved" from a previous generation.   It's not like granny is eating frozen hamburgers and corn on the cob that were set aside for her 30 years ago. Nor is she buying those things with money that was "set aside" 30 years ago.  The savings contributions that granny made in her time went toward producing the output of 30 years ago, a portion of which was then given to the retirees of 30 years ago.   The current generations of productive earners and producers are doing the same thing.  Granny is buying the food that the current generation is producing, and she is using money that the current generation has created and is giving her.  The best way to make sure we can provide handsomely for the retirees of the future is to spend now on making our society richer and more prosperous.  If we start now building highly productive efficient energy systems; new transportation systems to deliver goods; new food technologies that deliver high yields of tasty and nutritious foods; a generation of intelligent whiz kids who will create who knows what else; and then secure a stabilized climate far into the future; then the granny of 2040 will be able to eat well, visit her children inexpensively, enjoy the toys and gadgetry and entertainments of the future, and live in a pleasant and healthy environment not wracked by climate catastrophes and ecosystems gone wild.  The retirees of any time will be wealthy if the people of their time are wealthy.

Ultimately, we don't spend and invest money.  We spend and invest real resources.  Money is the most trivial component of the system of investment and capital development: an endlessly flexible and easily-created tool.

For an easy start, it is hard to understand, at this moment in history, why there remain rooves to be found here and there without photovoltaic/thermal panels...

Thanks. This clears it up a bit. As I understand it, your point is not so much that supporting retirees fosters growth but that growth makes it easy to support retirees.

As for my point on the rhetoric, the notion that economic growth will cure America's ills by making everyone rich is a very old conservative idea. The difference is that you're arguing that government must spur the growth, whereas conservatives argue that government interferes with the invisible hand that makes the growth.

The reality is more complicated. There are examples like the New Deal and WWII when government spending stimulated substantial economic growth, but there are plenty of counterexamples. Former communist countries like China and Russia have seen their share of both. I don't say that dismissively. The Soviets single handedly industrialized Russia; it was only later that the economy imploded. Capitalist countries have counterexamples as well. Japan transformed itself from the world's biggest creditor to the world's biggest debtor over the past two decades without much to show for it, and their pension system is now more precarious than our own.

In general, I find your ideas thought-provoking and even inspiring. The notion that we're not chained to a budget or the vagaries of the capitalist economy opens up exciting possibilities, of which full employment is one of the biggest. But the devil is details, and I need a more nuanced explanation of what it is that makes nations "develop" or recede before I sign onto anything.

As for my point on the rhetoric, the notion that economic growth will cure America's ills by making everyone rich is a very old conservative idea.

Genghis, I thought the idea that we should strive to make economic progress was an old idea shared by most Americans - including the ones called "progressives".  The main differences are over the role of government, as you say, and the value assigned to moving forward together rather than each moving forward as self-seeking individuals.  Achieving a higher level of prosperity doesn't cure all ills, but other things being equal, being prosperous is superior to lacking prosperity.  Weren't striking miners and dockworkers aiming for a more prosperous future too?

 I think maybe we've had a surfeit of nuance in recent years.  You can't eliminate the the element of risk and spirit of adventure from public policy.   It has scientific elements, but overall it is not a science.  More often than not we just don't know how things are going to turn out.  There is always going to be plenty of opportunity for debate and reasoned deliberation among alternatives.  Maybe we need to let go a little bit?

Avoiding the Soviet trap, it seems to me, means working hard to preserve democratic institutions, and not going in for "vanguards", "dictatorships of the proletariat", unelected committees, technocratic elites or other undemocratic forms of decision-making.

That's an evasion. I haven't asked for a dissertation, just more depth than the broad strokes with which you've painted the our glorious MMT future. Are you really proposing that we embrace a radically different economic policy without even considering cases in which heavy government spending hasn't worked out so well?

PS The old progressives weren't opposed to economic progress of course, but it wasn't really their thing, and they certainly didn't see it as a panacea the way conservatives did. The progressives were more concerned with political and economic inequalities than overall growth.

Well I don't know what you mean by "considering".  We can't invest in our future the way we did in the 40's and the 60's because we might turn into the Soviet Union if we do?  The Soviet Union attempted to plan the entire economy from the top of the government and eliminated the private sector entirely.  Anything like that in what I have proposed?  I'm not going to get dragged into legitimizing and responding to every Glenn Beck nightmare fear.

The MMT approach calls for running monetized deficits to drive the public investment.  But if you prefer to go with the approach of taxing he pants off of rich people, that's fine too.  They are just too different ways of mobilizing the nation's resources and putting them to work for public purpose.  But we manifestly need to invest.  Europe is facing a catastrophe.  In the US we still have inflation over 8.% and a collapsing labor force participation rate.  Growth is anemic and confined to the upper stratum of the economy.  Our current generation of leaders are delivering to us a decade of stagnation.  It is utterly insane for societies that are struggling to cope economically, and are faced with a mountain of challenges and abundant unutilized resources, and are losing capacity by the day, to leave large portions of their populations unemployed and just float along doing nothing .

Investment doesn't mean everything has to get bigger.  If you're driving a car that gets 30 mph from a given fuel input and we develop one that that is leaner and gets 90 from the same fuel input then we all just got richer.  We can drive back and forth to work for a third of the cost it takes us now.

We just had another lousy job report and more meager growth reports, and things are much worse in Europe.  I mean what does it take to convince people that we should stop strangling ourselves economically?

There is nothing radical about what I am proposing.  Governments have carried out massive public investment programs throughout history.   They carry one out every time they fight a war.  I'm just calling for them to do the same thing in peacetime.  We need a Global War on Stagnation.

Look, eventually one of the two national parties is going to choose optimism, activism and dynamism, because periods on national penitence, self-flagellation, austerity and pessimism are mentally exhausting.  They never last long.  Will it be the Democrats or the Republicans that lead the optimistic breakout?    The tide is already shifting.  Sarkozy is on the way out in France.  As crazy as they are at the moment, Europe isn't going to flush 2500 years of advanced civilization down the toilet.  They will get their asses in gear, and we should too.

____________________

If this capsule history of our progress teaches us anything, it is that man, in his quest for knowledge and progress, is determined and cannot be deterred. The exploration of space will go ahead, whether we join in it or not, and it is one of the great adventures of all time, and no nation which expects to be the leader of other nations can expect to stay behind in this race for space.

Those who came before us made certain that this country rode the first waves of the industrial revolution, the first waves of modern invention, and the first wave of nuclear power, and this generation does not intend to founder in the backwash of the coming age of space. We mean to be a part of it--we mean to lead it. For the eyes of the world now look into space, to the moon and to the planets beyond, and we have vowed that we shall not see it governed by a hostile flag of conquest, but by a banner of freedom and peace. We have vowed that we shall not see space filled with weapons of mass destruction, but with instruments of knowledge and understanding.

Yet the vows of this Nation can only be fulfilled if we in this Nation are first, and, therefore, we intend to be first. In short, our leadership in science and industry, our hopes for peace and security, our obligations to ourselves as well as others, all require us to make this effort, to solve these mysteries, to solve them for the good of all men, and to become the world's leading space-faring nation.

We set sail on this new sea because there is new knowledge to be gained, and new rights to be won, and they must be won and used for the progress of all people. For space science, like nuclear science and all technology, has no conscience of its own. Whether it will become a force for good or ill depends on man, and only if the United States occupies a position of pre-eminence can we help decide whether this new ocean will be a sea of peace or a new terrifying theater of war. I do not say that we should or will go unprotected against the hostile misuse of space any more than we go unprotected against the hostile use of land or sea, but I do say that space can be explored and mastered without feeding the fires of war, without repeating the mistakes that man has made in extending his writ around this globe of ours.

There is no strife, no prejudice, no national conflict in outer space as yet. Its hazards are hostile to us all. Its conquest deserves the best of all mankind, and its opportunity for peaceful cooperation many never come again. But why, some say, the moon? Why choose this as our goal? And they may well ask why climb the highest mountain? Why, 35 years ago, fly the Atlantic? Why does Rice play Texas?

We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.

I didn't mention the Soviets as a scare tactic, and I even used the early Soviet experience as a positive example of government driving development (if you overlook all the slaughter and starvation and repression). But it's a useful example because at some point it stopped working. Why? Because there was no democracy? But there was no democracy all along. What was it about the way the Politburo spent money that worked for a time and then stopped working?

But really there are so many differences between the US and USSR that it's a difficult example to work from, which is why I mentioned Japan. Japan has been spending like crazy since the early 90s. According to MMT, it's economy should be growing faster than more parsimonious spenders like the US and Europe. But it's not. Why not?

 

Japan doesn't spend that much.  Government spending as a share of GDP in Japan is about 37%, which puts it down at about #65 on the list of world nations.  Japan also has a fairly low tax burden, and the two facts are connected.  A lot of Japanese transfer programs are classified as borrowing and debt service.

Suppose Country A has borrows only $50 billion a year, but has social insurance programs that pay $500 billion a year, funded through a special tax.  The recipients are classified as the receivers of transfer payments, not the recipients of debt payments.  Official government debt and debt service are very small.

Now suppose in Country B they also pay out $500 billion per year, but each of the people who receives one of those payments holds "bonds" that they purchased throughout their work life, so when they receive the payment it is officially classified as debt service.  And suppose the payments are financed not by a special tax, but by current purchases of more of these bonds.  Then official government debt and debt service are very high.

But these are really just two different administrative versions of the same system - two different ways in which the income of younger people is transferred to older people.  In the second system, the government holds its own feet to the fire a bit more, which probably means its people have more security.  But an artifact of the system is higher official indebtedness.  In many countries, social insurance programs, while honored as an unofficial obligation, are not officially classified as debt.

Japan has also failed to do enough public investment for two decades under conservative neoliberal rule, and has a relatively stagnant economy as a result.  A lot of the spending is just transfer.

Can you point me to some references about the nature of Japanese debt? My understanding is that Japan's debt exploded in the 1990s as a result of construction bonds to finance infrastructure projects , which would seem to be precisely the kind of public investment that you're advocating.

You've forgotten the fourth approach, which is arguably the most popular (if completely unsound):

Keep the programs as they are and cut taxes

Of course, that approach is not limited to healthcare…

Yeah, but we all need a ride home sometimes. I mean we leave the bar with Juliet and it is 12:30 and we are in terrible trouble as soon as we wake up!

I mean we need a taxi.

Oh....

taxes

 

never mind!

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