There is a lot of criticism on the Spanish left of the Social Democrat/Unidas Podemos coalition’s financial policy. Carlos Garcia Hernández analyses this from a Modern Monetary Theory perspective.
Carlos Garcia Hernández is managing director of the publishing house Lola Books
“No financial crisis is so deep that a sufficiently large fiscal adjustment cannot deal with it.” This is known as Mosler’s Law, formulated by the American economist Warren Mosler, one of the founders of Modern Monetary Theory. Through it I shall analyse the “Progressive Coalition” agreement between the Spanish Social Democrats (PSOE) and Unidas-Podemos (a coalition of Podemos and Izquierda Unida), especially regarding point 10.7 concerning “Compliance with fiscal discipline mechanisms to ensure the sustainability of public accounts”.
Mosler’s Law is applicable to Spain’s current situation because, unlike what is happening in other countries such as Zimbabwe or Venezuela, the economic crisis we are suffering does not have its origin in raw materials or real resources, but is of a financial nature. Therefore, we find that the Spanish economy has large amounts of real resources that cannot be mobilized due to lack of financial resources. In the case of the labour market, this inactivity affects 3,163,605 workers, resulting in a mass unemployment rate of around 14%.
Given this situation, what Mosler’s Law proposes is to increase public spending as much as necessary until the real idle resources are incorporated into productive activity, that is, the state should spend via deficit as much as needed to guarantee the full use of idle resources. This is achieved either through increased spending by the state, or through tax cuts, or a combination of both.
We are therefore dealing with two different types of assets, real and financial. The former are finite, the latter are not. In the case of the most important real asset, human labour, which is the source of all real wealth, we are referring to active workers. In the case of financial assets, we refer to money. In a productive monetary economy like ours, access to and accumulation of money is what sets the monetary circuit in motion. It is therefore vitally important to understand that money is only issued by states, not by private companies or families. The state is the issuer of money and the private sector is the user of money. This makes money an immaterial unit of account that reflects the expenditure made by the states, just as the centimetre reflects the distance between two points, or the second the time interval between two events. The state cannot run out of money because it creates it out of nothing by means of computer keystrokes in the Central Bank, the private sector can run out of money because it has to use it to pay taxes and acquire goods and services, but it does not have the capacity to create it.
What Mosler’s law tells us is that the state must use its unlimited capacity to create money until all the resources of the economy, especially human resources, are mobilised through full employment.
The programmatic agreement between the PSOE and Unidas-Podemos ignores what is expressed by Mosler’s Law. Instead, it argues that the state must collect taxes in order to be able to spend, as if money came from families and private companies. Specifically, in point 10.7 we read: “Compliance with the mechanisms of fiscal discipline to guarantee the sustainability of public accounts. We will develop a responsible fiscal policy, which guarantees budgetary stability and the reduction of the deficit and public debt […]’.
The Australian economist Bill Mitchell defines as neoliberal “any person who believes that the state has to collect taxes or issue debt in order to spend”. Point 10.7 of the agreement between the PSOE and Podemos fits this definition perfectly.
Instead of adopting an anti-neoliberal stance as expressed by Mosler’s Law, according to which a financial crisis such as the current one must be resolved by spending via state deficit, the PSOE and Unidas-Podemos intend to finance a large increase in public spending through taxes that above all will come from high income earners. In this way they make use of the erroneous analyses of well-known economists on the left like Thomas Piketty, who in his famous book “Capital in the 21st Century” states that “there are two main ways in which a state finances its expenses: taxes or debt”. The PSOE and Unidas-Podemos fall headlong into this error and do not understand that the state spends and collects in its own currency, and that therefore public spending must precede tax collection.
Public expenditure is just another name for private savings and the deficit is nothing more than public expenditure in the pockets of the private sector not yet collected by the State as tax payments. Carrying out a policy of deficit reduction such as that advocated in point 10.7 therefore invalidates the policies of job creation set out in the first nine points of the agreement.
Proposals aimed at improving the living conditions of the most impoverished workers, such as the increase in the minimum wage set out in point 1.4 of the agreement, can indeed stimulate demand and have positive effects. Formulas such as the monetary multiplier, in which Unidas-Podemos economists have so much faith, can indeed revive the economy, but always in a very anaemic manner. If, as everything suggests, we are heading for a new financial crisis, private banks and big companies will simply lay off workers or take their money elsewhere to satisfy their savings claims (after all, private banks and big companies always find a way to pass on the costs of tax increases to consumers). Then the PSOE and Unidas-Podemos government will hardly have anyone to collect taxes from, and we will again suffer the same hardships caused by austerity we had in 2008.
Something similar happens with the fight against tax fraud. The PSOE-UP agreement places great emphasis on reducing tax evasion, thus raising more to spend. Of course, the fight against tax fraud is fundamental, but the success or failure of this fight must not determine the state’s spending capacity, the fraudsters must not have that power of decision. It is therefore a mistake to establish a connection between the increase in revenue and the increase in the state’s spending capacity as if this were a substitute for the class struggle. It is not. The real class struggle is in the control of the level of employment by the State. The left should take control of the level of unemployment from the private sector by making access to decent work a right guaranteed by law. To this end, the state should carry out policies of permanent full employment that do not generate inflation and that incorporate job guarantees based on employment buffer stocks. In this way, tax collection would be able to carry out its true function, which is to moderate inflationary pressures, give value to money, and provide incentives or disincentives to different economic activities.
Then all the positive aspects of the agreement between the PSOE and Unidas-Podemos, which are many, would have the relevance they deserve, such as point 2.17 which says that “the subject of religion will be voluntary for students, without there being an alternative subject or the grade being computable for academic purposes” or point 5.4 which says that “we will develop actions of recognition and reparation for the victims of the Civil War and the Dictatorship, declaring 31 October as a day of remembrance for all the victims of Francoism, and 8 May as the day of recognition for the victims of exile”.
The reason for introducing neo-liberalism through point 10.7 can be found in point 10.8: the European Union. In this point we read the following: “We will establish mechanisms to evaluate public policies and their results and improve the efficiency of public spending, through the AIReF (Independent Authority for Fiscal Responsibility) Action Plan for the review of spending (spending reviews, tax benefits, hospital spending of the National Health System, transport infrastructure and incentives for contracting)”. The AIReF is the political police of the European Union and the Troika to ensure that Spain does not exceed the deficit limit imposed by the EU and Euro treaties. Instead of rejecting this encroachment on national sovereignty, the PSOE-UP pact embraces it, thereby thwarting any hope of economic recovery in favour of the working class. Accepting the mandates of the AIReF means admitting the falsehood that public deficits put the sustainability of public accounts at risk and that therefore any deficit must be combated.
Unfortunately, both the economic policies of the PSOE and Unidas-Podemos are in the hands of economists who could be called good-hearted neoliberals (as reflected in the Unidas-Podemos logo).
For all these reasons, the objective of the left in this legislature should be threefold: to do everything possible to eliminate point 10.7 of the coalition government’s policies, to replace the economic leaders of the PSOE and Unidas-Podemos with non-neoliberal economists, and to get Spain out of the Euro and the EU.
Euro delendus est.