The extraordinary measures that recently pulled the global economy from the brink not only revived neoliberalism, but also consolidated it. To see why, one needs to look at the nature of modern money and the use and abuse of public finance.
Pavlina Tcherneva is Founding Director of OSUN-EDI (Open Society University – Economic Democracy Initiative), Professor of Economics at Bard College, and a Research Scholar at the Levy Economics Institute, NY.
Cross-posted from Post-Neoliberalism
Mario Draghi: “Whatever it takes.”
The spectacular government spending post-2008 and post-2020 appeared to upend the neoliberal logic of the past decades, enabling bold public action and opening the door to a more just and democratic social order. Specific policy choices stamped out this opportunity. These pivotal moments did, however, point to policy levers that can facilitate a breakthrough.
It was widely believed that the Great Financial Crisis damaged the core ideology of neoliberalism, and some hold that the response to Covid-19 finished the job. This view is mistaken. Instead, the extraordinary measures that pulled the global economy from the brink in both episodes not only revived neoliberalism, but also consolidated it. To see why, one needs to look at the nature of modern money and the use and abuse of public finance.
The 2008 crisis did shake the economics profession. Mainstream equilibrium models do not account for the role of money and finance and had failed to predict it. Hamlet without the Prince is how Jan Kregel described this state of affairs a few decades earlier. Studying a market economy without its principal actor – money – was a farce. Meanwhile heterodox traditions, drawing on Keynes’s seminal work on money, were able to explain the crisis and the chronic failures of capitalism: mass unemployment, investment instability, financial crises and – as a result – pervasive and perennial economic insecurity. Worse, increasing financialization and global money manager capitalism only made insecurity more ubiquitous. As heterodox economists well understood, few if any modern households were insulated from the vagaries of high finance.
But even in heterodox economic circles there was little understanding of public money and public debt as qualitatively distinct from private money and private debts. Insights into this distinction existed, but a coherent and accessible analysis emerged only with the development of the modern money approach, or MMT, which built upon Keynes’s Treatise on Money and the earlier doctrine called Chartalism, which understood money as a political entity (that is, as a creature of the state, and not only of the banking system).1 MMT debunked the dangerous notion that the public purse is just a larger version of a household budget and should therefore be governed with the dictum of good husbandry “thou shalt not spend beyond your income”.
MMT debunked the dangerous notion that the public purse is just a larger version of a household budget and should therefore be governed with the dictum of good husbandry “thou shalt not spend beyond your income”.
Public money – the currency itself (in physical and electronic form) is the final means of settlement of all debts. It is fundamentally different from other forms of money such as bank deposits and private promissory notes. It is issued by public financing institutions (central banks, treasuries, and ministries of finance). It represents perhaps the purest form of monopoly and is necessarily a public good available to all members of society. Until recently, most economists had not explored the implications of the unique nature of government money.
Money as a Public Institution
MMT played a role in some seismic shifts in thinking about the economy and in policymaking post-2008. Understanding money as a public institution – as a political artefact – changes everything. Governments that are sovereign in the control of public money are self-financing. One of MMT’s signature contributions has been to clarify monetary operations: the technical and institutional processes by which sovereign governments are already self-financing (i.e. using their own resources independently from private creditors). This, in turn, brings to light the funding limitations that non-sovereign monetary regimes face. MMT laid out a framework for thinking about the spectrum of monetary sovereignty – why some governments enjoy full monetary sovereignty and others do not. Monetary sovereignty is predicated on an explicit or implicit coordination between monetary and fiscal authorities while non-sovereign states on institutional firewalls designed specifically to constrain public spending.
MMT also overturned the traditional understanding of government debts and deficits. Public debts denominated in sovereign currencies are sustainable and free of any risk of involuntary default. Government deficits are the accounting record of non-government sector surpluses, while government debt is the net private sector financial wealth. Any attempt to wipe out one is an attempt to wipe out the other – there are no winners from erasing public deficits or debts; to do so is to erase private savings and net financial wealth, dollar for dollar and bond for bond.
As the world watched the Big Monetary and Big Fiscal policies of 2008 and 2020 with bank bailouts and stimulus payments to households that appeared to defy then-prevailing economic wisdom, MMT easily made sense of government action: governments simply made free use of their monetary sovereignty. We are now witnessing the revival of Big Industrial policies in some corners of the world – a development engaging the same logic of financial sovereignty. And while these bold policies hold the key to a different economic paradigm, a post-neoliberal economic order if you will, far from undermining neoliberalism, the particular policies that were financed have instead thrown neoliberalism a lifeline. To understand why this is the case, we need to discern the constructive potential of big government spending and scrutinize the manner in which that spending is directed.
And while these bold policies hold the key to a different economic paradigm, a post-neoliberal economic order if you will, far from undermining neoliberalism, the particular policies that were financed have instead thrown neoliberalism a lifeline.
The big three (Big Monetary, Big Fiscal and Big Industrial) policies have demonstrated unambiguously that public finance is not scarce. The governments who responded most aggressively to the crises were self-financing and the extraordinary policy measures post-2008 did not diminish their capacity to respond to COVID. Far from it, the US, Canada, and Japan passed unprecedented postwar fiscal packages (26%, 20%, and 53% of GDP respectively) in just 2020.
To anyone who was looking, the crises were a lesson in the technical aspects of public finance: government spending does not depend on tax collections or private creditors, but on the legislative process and the coordination between public financing institutions to clear all payments. No wealthy households were asked to foot the bill, and no creditors were called upon to lend governments money. Governments created it, as they always do, by fiat, a process that is true in crises, as it is on any given day – no matter how small or large the expenditure. But COVID spending was large, large enough to concentrate the mind, bust economic dogma and reveal that money is fundamentally a public institution.
Areas like the Eurozone rediscovered, indeed reverse-engineered, temporary monetary sovereignty and a quasi-fiscal union to tackle COVID. The Maastricht criteria were suspended, public deficit and debt limits were lifted, and the ECB launched bond purchase programs that financed member states. Germany, Italy, France spent about 10% of GDP, which would have been impossible under the old rules.
Japan didn’t blink an eye. It had been using the big three policies for decades, all the while enjoying near zero interest rates and no possibility of government default, despite record debt-to-GDP ratios.
Let’s be very clear: 2008 and 2020 did not produce some fundamentally new paradigm in government financing. Whatever the political economy of money, and whatever laws, institutions, and power circumscribe government policies, there is a fundamental technical aspect of public finance that cannot be ignored: governments possess unparalleled spending firepower and those who have abdicated their monetary sovereignty scramble to rediscover it when faced with major crises.
Governments possess unparalleled spending firepower and those who have abdicated their monetary sovereignty scramble to rediscover it when faced with major crises.
Meanwhile, the big three policies rarely reach the shores of the global south, where monetary sovereignty is often denied to countries already crippled by foreign denominated debt, fixed exchange rates, and all the legacy institutional trappings of colonialism.
If 2008 and 2020 pointed to an existing monetary design that is most conducive to bold public action (a vital lesson for tackling the climate crisis), the next question then is, did the big three upend the neoliberal logic of the past decades and open the door to a more just and democratic social order. Here the answer is also ‘no’, even if the new “whatever-it-takes” financing paradigm provided a glimmer of what was possible.
“Whatever it Takes” Financing
“Whatever it takes” is how Mario Draghi described the new course he took in 2012 as President of the European Central Bank after four painful years of post-2008 austerity continued to rattle financial markets. It was a promise that the ECB would now act as a fiscal backstop to (most) member states, largely removing the fear of government default. But the goal of ECB lending and asset purchase programs was to lower bond yields and stabilize bank balance sheets, not to enable greater fiscal action geared to restarting growth, achieving full employment, and alleviating poverty.
Big Monetary
“Whatever it takes” was at the heart of the Big Monetary policy in the US. Since the Fed acts as market maker for government debt, risk of government default was never the problem. To stem widespread bank illiquidity and insolvency, the Fed lent against and purchased an unprecedented level of distressed financial assets. As I explain here and here, the success of these measures was largely due to the ‘fiscal components’ of monetary policy, meaning that the Fed has no unilateral ability to purchase assets (even if it has unlimited financing capacity) without the authorization of Congress and support of the Treasury. Meanwhile, Congress worked hard to constrain conventional fiscal policy. The logic of austerity ruled over government spending in a sovereign currency regime (US), just as it did in a non-sovereign one (Eurozone), even as public finance was abundant and flowing for the purposes of stabilizing financial markets.
The difficulties with relying on Big Monetary policy were clearly understood by central bankers themselves.
“Is this the best way to allocate liquidity”, Draghi asked “if you have in mind objectives like climate change or reduced inequality? Probably not. In fact, some of the new ideas like MMT… would suggest different ways of channeling money in the economy… so we should look at them.”
In his academic work, Ben Bernanke had also argued that monetary policy of the kind he himself pursued in 2008 would have muted effects on aggregate demand. Coordination between monetary and fiscal policy, a “Rooseveltian Resolve”, and a willingness to abandon failed paradigms are needed to “do whatever it [takes] to get the country moving again” (p. 165, 1999).
But the possibility of coordination between the Federal Reserve and the Treasury was clearly rejected by the mainstream as a radical new proposition – allegedly for fear of politicizing the purported neutrality of monetary policy. Only MMT zeroed in on how monetary and fiscal policies already coordinate, allowing for more aggressive fiscal action. What was required was for Congress to act.
The end result of Big Monetary policy was a far more consolidated and more difficult to regulate financial sector. Shadow banking continued to grow and now holds almost half of the world’s assets. The “whatever it takes” approach did not transform monetary policy in any fundamental way. If anything, it stands ready to roll out new forms of unprecedented support (e.g. SVB and Signature bank full deposit insurance and subsequent takeovers). A monetary policy approach based on “whatever-it-takes-to-rescue”, without “whatever-it-takes-to-regulate” has made the financial sector more unwieldy and more systemically dangerous.
Big Fiscal
As Bernanke and Draghi intimated, financing Big Monetary policies with fiscal components is not fundamentally different from financing conventional fiscal policy. The currency is a public monopoly and the ECB and the Fed cannot run out to money. See Draghi and Bernanke’s unambiguous statements on this point. What MMT clarified is that public financing institutions create public money in the act of spending and lending, and extinguish it in the act of taxation and loan repayment. Spending and lending must come first, as the currency must be injected into the system before tax payments or bond purchases could take place. The large-scale asset purchases post-2008 and the large-scale fiscal policies during COVID were financed the same way.
The return to fiscal policy was a welcome development and it delivered the fastest postwar recovery in the global north. In some ways, the experiment with Big Monetary policy unwittingly made the case for Big Fiscal policy during COVID. “Whatever it takes” is what the US government did to provide broad-based support to businesses (via tax credits, capital injections, firm loans), households (via generous income support and expanded healthcare) and industry (e.g., airline and other transportation services relief). Some European governments guaranteed the payroll of threatened workers and avoided mass layoffs. The US expanded unemployment insurance and healthcare coverage and passed universal child allowance in 2021.
For a brief moment in a highly uncertain time, for many families, economic security seemed possible. But all of that was temporary. In the US, as the policies expired, child poverty spiked, millions lost their healthcare eligibility, and work requirements for public assistance returned. In Europe, the most generous and equitable health system in the world faced an onslaught of problems and is further being threatened by the post-COVID budget crunch. Around the world, health systems are either nonexistent, weak, or have suffered legacy disinvestments.
Big Fiscal threw the global north a lifeline but never reached the global south. Neither did it address economic insecurity in any fundamental way. As it retreated from providing stronger safety-nets, it morphed into Big Industrial policy. While this turn is largely motivated by national security interests, many hope the strategy would deliver enough good jobs and the green transition. This too will be a dashed hope.
Big Industrial
Industrial policy is not new. China, Japan, and South Korea have long pursued successful industrialization strategies. What is new is the scale and scope of its revival in the US and Europe after decades of neglect and underinvestment. “Whatever it takes” is what produced COVID-19 vaccines on short order. Yet, companies which received public funds for their development and production refused to waive their patents. Vaccine apartheid blanketed the globe. The neoliberal market logic prevailed. A public health problem was being tackled by engineering a market mechanism and profit opportunities for a technology that was publicly funded and widely hailed as a global public good.
This is the fundamental logic of all industrial policies that followed, from the CHIPS and Science Act and Inflation Reduction Act in the US to the Green Deal Industrial Plan in Europe. It’s the Washington Consensus with a twist: rooted in free market principles but with fiscal guarantees.
This logic is nowhere more evident than in the de-risking approach to Big Industrial policy, which reifies the price signal as a solution to social and economic problems. Governments have enlisted large private capital, including institutional investors and private equity by way of devising risk/return profiles of investments in areas that were previously considered uninvestable (e.g., the green transition, healthcare, public utilities). The approach has ‘worked’ only insofar as public financing institutions (central banks, treasuries and ministries of finance) have stepped in to provide the necessary backstops to private finance thus shifting private risks onto public balance sheets.
This financing regime has created the appearance that the state needs private finance to pursue key policy objectives, whereas it is private finance that needs the assurances and guarantees that only the state and its public financing institutions can provide.
When the de-risking regime meets the “whatever-it-takes” public money regime, the New Industrial state is reproduced by the forces of financialization, consultification of government procurement, and mega contracts to price-setting firms. The planning system, as Galbraith put it, remains firmly in the hands of the big tech, big finance, and big multinational corporations. And all of it is underwritten by the public purse with devastating consequences for democratic governance.
This financing regime has created the appearance that the state needs private finance to pursue key policy objectives, whereas it is private finance that needs the assurances and guarantees that only the state and its public financing institutions can provide.
As MMT helped explain the financing operations behind the big three policies, it suffered a peculiar fate: it was held responsible for these policy experimentations and the subsequent inflation. MMT-informed policies of course were never tried. There was no consideration of an open-ended job guarantee policy, transition to Medicare for all, the downsizing of the financial sector, or permanently low and stable interest rates. What MMT did reveal is that the inflationary paradigm is the current one: the “whatever-it-takes” public-money-for-private-benefit paradigm; the very same paradigm that revives whole industries that depend on predatory pricing and labor practices.
What MMT did reveal is that the inflationary paradigm is the current one: the “whatever-it-takes” public-money-for-private-benefit paradigm; the very same paradigm that revives whole industries that depend on predatory pricing and labor practices.
Meanwhile, “whatever it takes” has never been the approach to economic development in the global south or to fighting economic insecurity in any corner of the world. There isn’t a single place in the world where investments for social or climate needs are fit for purpose. There is already a retreat from climate commitments, and the deficit and debt myths are again weaponized against essential public programs.
And yet the “whatever-it-takes” paradigm has illustrated unequivocally that public finance is abundant for funding democratic priorities too. It has shown that we can stabilize labor markets, eradicate poverty, provide public goods and relative economic security. At bottom, we don’t need to find the money. We have it. What we need is a way of emancipating the public purse from the neoliberal logic and using it to finance a comprehensive framework for structural transformation. Because the question of “How will you pay for it?” has already been answered. With public money.
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