This is part 2 of 3 in a series which I have extracted from a long interview with Warren Mosler held in Mallorca on October 14, 2021. It will be published in both English and Spanish
SMM: What do you think about this the obsession with the export-led growth model, which a lot of countries pursue?
WM: The old textbooks show that it is absurd. Imports are a real benefit, exports are a real cost. It couldn’t be more obvious.
SMM: Yes, even Paul Krugman or Milton Friedman or any classical economist would have said that some years ago.
WM: But not anymore.
SMM: They are just thinking in terms of export-led growth models.
WM: That’s just rhetoric demanded by fixed exchange rates to build reserves so that you can maintain that fixed exchange rate. That is what the IMF was created for: to help countries in the fixed exchange rate system to maintain reserves. So they would recommend these export-led growth models. Not because it served your population or standard of living or terms of trade or anything like that, but because, under the Bretton Woods system, that’s what had to be done to sustain that system for better or for worse.
The system is long gone but they’re still doing it and the whole understanding is still there. People are doing that unilaterally without even being pressured by the IMF.
SMM: I’m hoping some of the readers of this interview will be Latin Americans, where there’s a long tradition or obsession, you may call it, with fixing the exchange rate or pegging it to the US dollar or managing it some way or another to stabilize the exchange rate. What would you tell them? What’s the point of doing that?
WM: The place to start is to look at the real wealth of the nation. And then you can look at the distribution of that real wealth. So the real wealth is what I call your pile of stuff [for consumption] and everything you produce domestically makes your pile of stuff bigger. All the goods and services you produce, and the more people working, the bigger your pile of stuff that you have to allocate somehow, through market forces or whatever, to everyone.
So, if you want anything less than full employment, you’re sacrificing your pile of stuff. So why would you ever do that? Why don’t you just get as larger a pile of stuff as possible? Whatever you’re producing, you don’t want to give that up to adjust your prices, which is an allocation. You probably want to deal with your allocation problem separately. Don’t sacrifice your workers and your production of real output. Domestic real output, is yours, right? And that’s your wealth. Real wealth, plus anything you import from China, or Japan, or Korea, makes your pile bigger.
Your imports minus your exports, which make your pile smaller, are your real terms of trade. Just making your pile larger or smaller. Now, once you understand that, then you can go on to ask if fixing the exchange rate will help make my pile larger or smaller. And what happens if you use fixed exchange rates to maintain your foreign exchange reserves that requires periodic episodes, sometimes extended periods, even forever, of unemployment to stay competitive. It requires to keep your people working for fewer calories and you can’t afford to eat your own meat so that you can maintain your exchange rate. When your target is your exchange rate and your reserves, you’re at less than full employment. So your domestic pile of stuff is smaller than otherwise; you’re giving up that much real wealth.
If you use fixed exchange rates to maintain your foreign exchange reserves that requires periodic episodes, sometimes extended periods, even forever, of unemployment to stay competitive.
With a World unemployment rate that is probably 15% the losses of real output in one year are probably much larger than all the destruction of real goods and services done by all the wars in the history of the world. It’s unbelievably staggering!
SMM: Some of the economists who argue for this sort of exchange management policies would say that, given that your output capacity is limited and that employment or unemployment is determined by your productive capacity, hence we need to manage exchange rates so we can afford the capital goods that we need to increase the productive capacity of our economy [in the future].
WM: Two hundred years ago, when we were a totally agricultural society and 99% of people worked in the fields or they would starve, what was the unemployment rate?
WM: Then we started inventing tractors and everything else, creating unemployment in the process. So those people didn’t need to do [that work any longer]. And then manufacturing came along so we went from 99% in agriculture to 1% today. But unemployment is not 99%. Then people went to manufacturing but now manufacturing in the US is 7% of the employment. So at 8% in Agriculture and Manufacturing unemployment is not at 92, it’s 3%.
SMM: There is a twisted logic in the idea that, since we can’t create more employment, we have to create unemployment.
WM: The point is there’s always more to do than people to do it. Every day we start off with too many things to do and not enough time to do it with everybody working. So there is never a shortage of jobs. There’s only a shortage of funding.
…there is never a shortage of jobs. There’s only a shortage of funding.
SMM: I was reading a paper by the Reserve Bank of New Zealand, which was published some years ago when they decided to float their currency. One of the arguments they gave for free float is that managing the exchange rate creates more abrupt changes in the exchange rate, and hence more disruption to the economy and the financial system. Whereas the floating system makes for smoother adjustments in the exchange rate to changes in response to the trade imbalances.
WM: You can always use counter cyclical fiscal policy and a Job Guarantee to support full employment. But you can’t do that with fixed exchange without losing your reserves from time to time, which means you have to float.
SMM: The argument these economists retort with is that’s not real employment. You are not creating real jobs nor creating real output.
WM: Well, no, but it’s only short term, because if you have a job guarantee or a transition job guarantee, you then either hire them in regular public service out of the pool, or you relax fiscal policy and the private sector will hire them, which they will. Yes on day one, it’s not full employment, but on day two and day three it is and those people immediately transition out of there. And it’s a process where you’re keeping the number of people in the job guarantee somewhere between 2% or 5%, something like that, on a continuous basis. So in that sense, over time you’re at full employment-
SMM: What is your view on the proposals to use the job guarantee as part of the Green New Deal and employ those who are going to be rendered unemployed by shutting down coal mines or oil rigs in the ocean and employ them, presumably in a job guarantee program? Do you think that makes sense?
WM: I consider myself a progressive, okay. To me, that’s not a progressive way to provision the public sector with labor. If you want to hire these people, just hire them! Hire the coal miners to do whatever you want them to do. Don’t put them in a job guarantee at ten Euro an hour. If the regular public service job is €30, just hire them a 30 Euro. The whole point is not to undercut the base scale of the public sector. Once you fully provision the public sector with the green new jobs wherever you want, then the rest of those people you want to transition into private sector, they’re the ones in the job guarantee.
And then you conduct a fiscal policy, you give government grants, loans or whatever you want to do to get the private sector to hire them. If you don’t want them in the private sector, if you want them in the public sector, just hire them.
SMM: The size of the public sector is a political choice that depends on the preferences of the electorate or the elected representative.
WM: I met with a guy from the Pentagon in 1999 or so and, in about three minutes, everything that’s wrong with hiring in the public sector came out. He said, “We really need to build the military up so we’re going to do that.” And I said, “Well, look, unemployment is at 3% right now. We’re at full capacity. You can do it, but you’re going to be taking those people away from the private sector right now. It’s going to be transfer of real resources and you’re going to be competing with them for those. You should have done that seven or eight years ago when we had high unemployment because of the recession. That would have been the time to do it if you’re going to build up the military.” He said “Well we could not do that then because we were running a budget deficit. We didn’t have the money. Today, with a surplus, we can get this done.”
So that little story tells you everything wrong with how the public sector operates right now. The monetary system gives them no information as to what they should be doing. What gives the public sector information is the real economy. How many people do we want in the military? If we have too many then there’s nobody to grow the food and build cars. If we don’t have enough, we’re going to lose the war. That’s how you make your decisions. What’s our budget and what balance do we have has nothing to do with it. The thing that gives them no information is where they get 100% of their information.
What’s our budget and what balance do we have has nothing to do with it. The thing that gives them no information is where they get 100% of their information.
SMM: I think it’s Keynes who understood this in his famous treatise How to Pay for this War. He understood that it is the real resources that matter. He just wanted people to spend less and make sure that they were either taxed or put their money away in patriotic bonds or whatever
WM: Which is true but at the same time he has the government spend by getting money through taxes or borrowing to be able to spend, right? You could argue that under the fixed exchange rate those policies were true, and, although he wasn’t a supporter of those, he still was operating under that context.
SMM: Speaking of government deficits and debt, let’s talk about the trillion dollar platinum coin. What’s your take on that?
WM: Well, as you know, it came off a discussion by blogger Carlos Mucha (Beowulf), which was a very good comment and led to a discussion that I had with him at the time. He pointed out that under the Constitution, or whatever, the Treasury could mint a platinum coin, which would be an asset at face value and the Fed would be obliged to buy to it. That would put those funds in the Treasury’s account. My response to that was “that’s nice, but they really don’t need it. The treasury can sell three month bills and that is what it always has done.” But it’s certainly valid and it’s something they could do if they wanted to. And I don’t have any objection to it or anything like that. I thought it was a good find on his part. He was very perceptive on his part to pick that up as an option.
Not much happened since then, except that it was seen as some sort of a cool thing. Then now we ran into the debt ceiling and we said the Treasury can sell all the three month bills at once. But Congress is saying; “No, we don’t want you to sell three month bills. We don’t want you to pay your bills.” So the will of Congress is for the Treasury to not make its payments. Yes, we approve the spending, but we’re not approving you the means to get the money, presumably because we don’t want you to actually spend the money we appropriated.
So now the question is, what does the Treasury have to do: do they abide by the will of Congress immediately? Do they look at the Constitution, which says the government has to honor all its obligations? And President Obama said: “It’s the will of Congress”. I think President Biden is saying the same thing: “It’s the will of Congress”, and we are going to let Congress figure this out and then tell us what to do. We’re not going to try and undercut the will of Congress.
In the meantime, he could have said “We have a constitutional requirement to pay our bills. So we’re going to mint the coin.” But the political decision was made to go by the will of Congress. And Congress came back kicking the can down the road until December. You can argue which is right or wrong or what they should or shouldn’t do, but their position is a legitimate position.
My issue with this is they’re not well informed as to what happens if we do hit the debt ceiling limit. They’re saying that we would default on our bills or the Treasury bills won’t mature or that we won’t make payments on the bonds and our credit would be bad and so we wouldn’t be able to borrow.
That’s not the problem, though. None of that actually matters. They just start trading arrears like they did in Russia in 1989 and we get through that and they say, well, the government shut down.
We’ve had government shutdowns before. Nothing particularly bad happens. The national parks are closed, etc. The reason nothing bad happens is because, although workers don’t get paid -not because of the debt ceiling, but because the government is closed and there’s no budget- other things get paid and it causes spending to go on. A lot of automatic spending goes on such as Social Security checks. And the deficit goes up.
SMM: Yes, automatic stabilizers kick in because there’s more unemployment.
WM: Yes. So the automatic stabilizers kick in and the deficit is allowed to go up. But when you hit the debt ceiling you suspend all the stabilizers. A better way to explain it is that, when the government stops spending, tax revenues fall off. Before that was okay but this now means that now you’ve got to cut more. Which means within about three days, you’ve watched 25% of GDP wiped out. It’s unimaginable how pro cyclical deficit spending is. And also a lot of spending comes from bank lending. The banks can’t lend when the government shuts down and people are losing their jobs because their lending is pro cyclical. So now the automatic stabilizers required to get through are much higher and they’re accelerating. What you get is this accelerating race to the bottom.
I’ve never seen it described in any [analysis] of the consequences of hitting the debt ceiling. They assume the consequences are the same when the government shuts down, so they kind of slough over them. But they’re much, much more severe. If those consequences were understood, I think they won’t think of going anywhere near it because it’s seriously catastrophic; much worse than they think. It’s like nuclear weapons. One of the dangers is that we might hit it because they don’t understand the consequences.
the consequences of hitting the debt ceiling. … [are] seriously catastrophic; much worse than they think. It’s like nuclear weapons.
SMM: One of the implications of MMT and political theory is that really Parliament, or Congress, or whatever your legislator is called, is the creator of money.
WM: It’s the source of money. It’s the government that levies a tax liability and then it establishes what the tax credit is, the dollar or the Euro, that can be used to pay it.
SMM: In fact, in the Spanish [Government] budget, the items in the budget, the Appropriations for the government are called ‘budget credits’. I don’t know if it’s the same in the US. So that means the government has credit to spend and it’s authorized to spend to whatever limit is set in the budget.
WM: Very good.
SMM: So there’s a political theory implications that derive from MMT, which I think are profound and transcend economics.
WM: The whole system is based on coercive taxation. That’s not well understood because that taxation creates a not well understood anxiety in the population. It creates greed and people being money hungry who then can’t sleep and start taking all kinds of medications and everything else. That’s the anxiety created by ongoing tax liabilities. It’s like you’re in a bathtub with the water continuously going out and you’ve got to work to keep water coming in. And it literally drives people crazy and mad. And it’s a very powerful force to provision government, and it wins the war and creates this largest standard of living but it creates massive psychological consequence for the population. I’ve never seen it discussed.
SMM: You wouldn’t see that sort of behavior in the premonetary sort of tribal society. They would have other problems like finding food, but that wouldn’t have those psychological effects that you described.
WM: That’s not to say that there isn’t a better way to do it, whatever better means, or a different way to do it. There are probably alternative ways and the results are going to be very different. Maybe this is the desired way, but that doesn’t mean you don’t recognize it, understand it, and look into it to see what you’re doing and how you can modify some of these effects.