Episode 39 – Trade, Foreign Exchange and Modern Monetary Theory: A Field Guide with Bill Mitchell

Macro N Cheese – Episode 39 
Trade, Foreign Exchange and Modern Monetary Theory: A Field Guide with Bill Mitchell 
October 26, 2019 

 

Bill Mitchell [intro/music] (00:00:03): 

The US government’s capacity to bring every available resource that’s for sale in US dollars into productive use isn’t determined by the fact that the petroleum industry denominates its contract in international trading markets in US dollars. The majority of us are ignorant about most things. And I’m no exception. I hardly know anything about anything. 

Geoff Ginter [intro/music] (00:01:26): 

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine. 

Steve Grumbine (00:01:34): 

All right, folks. Welcome to Real Progressives. I’m Steve Grumbine. Thank you so much for all of you who have taken the time to tune in with us. I’m hoping that we will be able to really talk about trade, foreign exchange, the balance of payments, the concept of being a net importer versus a net exporter and what is a real benefit to the people is actually the imports, the actual goods and services, not the pieces of paper.  

But Bill Mitchell, who has been on our show several times now, is one of the original developers of Modern Monetary Theory and wrote two very extensive blog posts about the subject of balance of payments and the way money exchanges between countries as you purchase foreign goods. This is going to be a deep dive, folks.  

So understand there may be some things that you don’t understand in this. That’s okay. We will get you resources to read after the fact. So without further ado, let me bring on my guest, Dr. Bill Mitchell. Welcome to the show, sir. 

Bill Mitchell (00:02:42): 

Thank you, Steve. How you doing? 

Steve Grumbine (00:02:44): 

I’m doing very, very well, and I appreciate very much you making yourself available for this. What brought us to talking about a balance of payments and trade? 

Bill Mitchell (00:02:56): 

Well, look, I think this is one of the areas of Modern Monetary Theory that we’ve struggled with. We haven’t struggled, but the listeners have struggled with since we started talking about this. I remember back in the 90s when there were just a few of us, Warren and myself and Randy, and going around talking at conferences and seminars and workshops, and there’d be one statement: “Oh, this is just an American thing.  

It’s only applicable to America because America is a relatively closed economy.” And so that was the first point that Modern Monetary Theory was really an American contrivance that wasn’t applicable to other countries. And I always was quite amused by that, given that I come from a small open economy where we’re very susceptible to trade patterns, to currency movements. In the late 80s, we lost 10% of our GDP in value terms because of re-evaluation of exports and imports by our exchange rate changes in one quarter.  

So in three months we lost 10% of our economy in value terms. And soon after that all changed and we got it back again. Nothing real had changed. It was just the way in which exports and imports were priced because of terms of trade and then exchange rate effects. So I always found those comments, “Oh, this is just an American thing because it’s a closed economy and America is not susceptible to trade as much as other countries,” to be rather amusing.  

Another part of that story is that in the early 2000s, my American colleagues used to call us the “half price” country. And this is because the Australian dollar would only buy 50 cents US. And so we were the half price country, and then of course their smile was wiped off. It’s not that long after that, we were back close to parity – one to one – and our standard of living barely altered.  

And so it was always amusing to me, our real standard of living I’m talking . . . it was always amusing to me that there was so much fear about exchange rate effects and about what foreign capital movements could do. And a lot of my research has been, and it manifests in my most recent book “Reclaiming The State,” where Thomas and I examine the sort of key turning points where progressive political parties and commentators basically started to adopt what we now call a neoliberal narrative.  

And if you go back to it, it’s mid-70s in Britain where Britain was running a current account deficit and monetarism was becoming dominant in central banking and the British Labour Party were in power. And part of that Labour Party’s, particularly the chancellor’s, the treasurer, the finance minister, whatever you want to call them, was becoming enamored with monetarism.  

And, you know, they cooked up this thing that, “We’re running out of money, that our exchange rates going to collapse, that we need to borrow money from the IMF.” And all of these narratives have really permeated the progressive side of the debate. And they have such a pervasive, powerful dominating effect on the way in which progressive debate occurs. And most of the things that are considered to be truths, verities, are untruth. And, but no matter how many times we go through these things systematically to explain what the effects are, we’re still confronted with this idea: “Well, if you run deficits, you’ll destroy the currency.  

If you’re running a current account deficit, you’ll ultimately destroy the currency.” And all of these statements have under some circumstances have what we might call loose truths, but the circumstances are what’s important and they’re not eternal verities that apply in all circumstances. And I’m a testament. I live in a small open economy. We have huge fluctuations in our exchange rate, and yet we’re one of the wealthiest countries in the world.  

And when the exchange rate depreciates, we go camping up the coast. We don’t go to the Swiss Alps for skiing holidays and that’s about it. And so I think this is one of the ongoing challenges that Modern Monetary Theory faces to continue to clarify these issues. 

Steve Grumbine (00:08:00): 

One of the things that I’ve noticed when we talk to individuals is that much of their explanations about, whether it be global economics or whether it be domestic economics, they typically are speaking from a position of emotion. They’re typically speaking from a position of blending myths and legends, and maybe something they read in a book and they’re coming up with a salad of things.  

And most of it doesn’t connect to anything. But when I hear Modern Monetary Theory spoken by the original developers and even the second generation MMTers and third generation, etc. is a logical progression that walks people through ledgers, you name it. Every step along the way, it’s traceable. One, two, three, and you can see clearly the flows.  

In your articles that you put out you were very, very good at putting together some scenarios that people should be able to readily understand and if they don’t, please come ask questions. But what I don’t understand is why economists play so fast and loose outside of the MMT world when it comes to actually walking through these traces.  

It seems almost as if it gives the bad name to economics when you’re not walking it through like that. I think that’s a lot of the reason why people are skeptical not to mention a lot of the predictions tend to be wrong, but explain to me how you guys were able to come up with these flows. What was the process by which you were able to examine each transaction to be able to come up with the understanding of how these balance of payments work, etc.,  

because it seems you guys are the only ones that really get this right. 

Bill Mitchell (00:09:47): 

I think we do get it right and I think it stems from where you start your analysis. If you’re a mainstream economist and you’ve studied in a mainstream program at a university, and I’ve been in universities all my life. So I know exactly what they are. You start analyzing problems from a very particular and very eccentric standpoint.  

You start off by making assumptions about human behavior that no psychologist would ever make. So we create this mythical entity, decision-making entity, and then they infer things about the environment that mythical individual interacts with, that bear no resemblance to the real world that we actually live in.  

So there’s a series of constraints that are imposed both on individuals and the currency issuer. There are a series of assumptions about what our intellectual capacities are in terms of analyzing the future out to infinity. And, you know, I won’t go into any more detail, but the point is, if you start from that position and then you start deductive process, so you start off with a series of assumptions and axioms that bear no relation to human decision making capacity or human behavior, or the environmental structure that humans interact in.  

And then you start making deductions based upon those axioms and you shock the analysis as the jargon goes – in other words, you introduce a change, too. You start off by saying all those individuals are in equilibrium and they’re realizing their expectations, etc. Then you shock it; so you change it a bit; and then you deduced what happens.  

Well, if you’d go down that path, which is the way my profession, the dominant arm of my profession behaves, and that constitutes economic analysis, unfortunately, then you’ll end up missing the detail. You’ll end up missing actually how the real world operates. And I think one of the ways in which the MMT academics started out and have prosecuted our case is to say, “Look, we live in a real world, and this is what the real world looks like.”  

So if you’re talking about financial flows associated with trade, well, it’s better to start off with the actual institutional detail. What happens when you go into a car dealer and you buy a car? What actually happens when you hand over a check or you waive your credit card in front of a sensor or whatever you do to buy the car, and where does those numbers go?  

And what options does the person who gets the money have? You know, a lot of people have this idea that when you buy an import, the money goes out of the country. And they’ve got some idea that those dollars disappear. For example, if we’re talking in dollars or, you know, all of these things, you’ve got to trace through really carefully, and it’s not high intellectual stuff, it’s just detail.  

And it’s careful analysis of accounting, conventions that we know exist in the real world, and banking conventions, and interactions between central banks and commercial banks and interactions across currencies through foreign exchange markets. Now, those things can all be traced, can all be detailed and I think that’s what we’ve done. And of course, when you do that, you clear up some of the misconceptions that were raised. 

Steve Grumbine (00:13:41): 

We got a question from an MMTer in Brazil who had spoken to me offline and said, “You know, ask Dr. Mitchell about developing countries,” countries that perhaps have immature economies, countries that maybe have fewer actual exports or fewer markets that they can actually play in that are subject to prey with foreign exchange rates, the ability to really harm them, because they don’t have a robust, mature economy.  

Can you talk a little bit about the difference between, you know, obviously the US that has a robust economy and some of these larger, more mature economies and some of the more immature economies that are subject to IMF type scenarios? 

Bill Mitchell (00:14:31): 

I wouldn’t necessarily say the US has got a robust economy, but that’s another story. 

Steve Grumbine (00:14:37): 

Okay. 

Bill Mitchell (00:14:37): 

I mean, one of the starting sort of misconceptions is that people often raise it that “Oh, so what you’re saying is if you’ve got currency sovereignty, that means that a government doesn’t have a financial constraint in its own currency, that everything will be fine.” And a lot of people say, “Oh, that’s ridiculous to say that,” and therefore, “MMT is stupid.” Well, one of the most important starting points, and I’ve written a fair bit about this, is that a nation, ultimately its standard of living and I’m talking about its material standard of living rather than the other sort of deeper concepts of spiritual standard of living.  

But in terms of material standard of living, a country can only achieve a level that’s commensurate with it – so real resource availability. So if a country has very few real resources available, either skill of people, numbers of people, natural resources, whatever, then it’s going to be poor and a country that’s very well endowed with natural resources and has high skills of its population are going to be better off.  

And so a poor country can improve its situation through trade if it can transform what real resources it has available that it can consider to be surplus to its own needs and exchange in trading markets for other goods and services that it can’t access or produce itself, and which are deemed to be of essential good for the well-being of its population.  

Now, then you’ve got really dire situations where a country is reliant on imported food and energy for survival yet its export profile isn’t sufficient to gain access to those essential food and energy commodities. Now, in that case, that country’s pretty well cooked. It wouldn’t matter what size deficit the nation could run in its own currency.  

It’s going to really have a major human catastrophe and in the way I’ve constructed that problem is that that to me is the genuine role for what the IMF should be. I mean, as you know, I advocate scrapping the world bank and the IMF and creating a new multilateral institution that has the purpose not of imposing neoliberalism on poor countries, but has the purpose of transforming or being a conduit of real resources from rich countries to poor countries.  

So, you know, when a country doesn’t have enough food and it can’t export sufficiently to buy that food from other countries, well then to me, that’s the role of the world community, but that country can run whatever deficits it likes. It’s not going to improve the situation. That’s the first important thing that your real resource availability, whether it’s through the resources that the nation itself has, or the resources that it can gain from other nations through trade are the limits on the material standard of living.  

And within that context, a sovereign government, and remember by in MMT, when we talk about sovereign governments, we’re talking about a government that has its own currency and doesn’t borrow in foreign currency. Well then within the limits of your real resource availability, a sovereign government can always, without exception, ensure that what real resources that are available to it are fully used in a productive way.  

Now that doesn’t mean that full employment in a very poor country will generate high standards, material standards of living. It just means that you’re doing the best you can in a bad situation. And of course, in a more advanced country like Australia or the US or whatever, that currency issuing government can also bring all available resources into productive use.  

And the material standard of living that will arise in that situation will be at a much higher level than in the poor country. 

Steve Grumbine (00:19:30): 

So one of the things that jumps out, obviously within our progressive movement is this neoliberal taint that crosses all divides. It’s infected us at every level. Your book really helps dispel any notions that we are not living in a neoliberal hell, and you kind of lay the road map out of how to reclaim the state.  

But one of the big things that, you know, we have a lot of anti-central banking people around that don’t really know what the central bank does. They really have no concept of what a central bank does. And I guess in the context of this show and this interview, can you explain a little bit about the function of the central banks in regards to balance of trade and how they clear payments and so forth?  

Cause I think this is something that is completely foreign to most people. 

Bill Mitchell (00:20:24): 

Well, the role of central banks has changed dramatically over the last say, hundred years. And let’s just to keep it simple, let’s talk about the change from the end of the second world war to now in most countries. And that gives us two very contrasting monetary systems. At the end of the second world war, the advanced nations met at Bretton Woods in the US to decide how the peace era would deliver global financial security.  

And they decided that the way to achieve that security and what they were talking about, wasn’t military security, they were talking about currency security because prior to that, there’d been a lot of currency volatility. So at Bretton Woods, they decided to introduce a fixed exchange rate system.  

And this was a sort of derivative of the gold standard system, where at the center of the system would be the US dollar because that was the most pervasive currency in international circles. And that the US dollar would be tied at a specific price to an ounce of gold. So that would stabilize the price of the US dollar and remember, this was an era where all the major gold discoveries of that period had been made and they didn’t believe there’d be any massive new discoveries of gold.  

So gold was considered to be a very stable price commodity. And then of course, all of the other currencies would be set by agreement against the US dollar. And there were allowable bands of fluctuations within those agreed parities, but fairly narrow. And in that context, each government was committed to using its monetary resources to maintain their currency within those agreed bands so that the central bank then became a major player in the sense that for example, for a nation that was running a trade deficit – now what does that actually mean?  

That means that it’s importing more than it’s exporting. Now that’s in real goods and services, but that has a financial analog or manifestation in the foreign exchange market, because that means that there’s more people wanting to supply the currency of the deficit nation, the external deficit nation, than are wanting to demand that currency.  

Now, why is that? To get hold of the exports, that is that nation’s imports, they have to get hold of whatever the currency that the exporter wants, and they have to supply their own currency to do that. And so if there’s more people wanting imports than buying exports, well, then there’s going to be what an economist would call an excess supply of the currency of the deficit nation into the foreign exchange market.  

Now that excess supply, of course, because it’s a market, places downward pressure on that currency. And the central bank in that era was obliged then to intervene because they were required to maintain the agreed parities under the system. They were obliged to intervene and soak up that excess supply in that context by selling foreign currency reserves and buying its own currency.  

Now the opposite would be the case for countries that were running external surpluses. They were exporting more than they were importing. In that context, the currency would be in excess demand, and there’d be upward pressure on its value in the foreign exchange markets. And the central banks in that situation were required to sell its own currency and buy up foreign currencies and therefore relieve the excess demand and maintain the parities.  

So the central banks had an incredibly central role in the exchange rate system. And what that meant was that they had to maintain foreign reserves in the situation where they had to sell those reserves to defend the value of their currency that was then under downward pressure. And of course the system ultimately came unstuck because those countries would face shortages of foreign reserves.  

And that was the role of the IMF then. The IMF was created to be a resource for countries to ensure that they had sufficient foreign reserves in situations where they had to defend their currency from downward pressure. Now, ultimately, if the trade fundamentals, as the jargon goes, were such that the country had what were called chronic external deficits, well then that central bank would run out of foreign reserves.  

The IMF would stop lending them foreign reserves. And so they would have to then devalue and devaluation was an agreement between central banks and governments and the IMF that would be allowable under certain circumstances. Now, the problem was of course, that countries then used devaluation as a vehicle to gain competitive advantages on their trading partners.  

And so in that case, the central bank had very strict role. And after 1971, when the Bretton Woods system was effect, well, it wasn’t abandoned officially till 73, but effectively after August 1971, the Bretton Woods system collapsed because it failed to deliver currency stability. And in that context, when exchange rates floated, that means that they were determined by the foreign exchange markets, by the demand and supply in the foreign exchange markets, in that case, the central bank no longer had to intervene.  

It could, if it chose, just to allow the exchange rate to go up and down, according to the relative demands and supplies in the foreign exchange market. And it didn’t, no longer had to hold, foreign exchange reserves. Now in reality, central banks didn’t immediately go to that type of stance. They initially had what were called “dirty floats” or “managed floats.”  

So that allowed the foreign exchange markets to drive the currency in certain directions; but if they deemed the direction was not desirable for its perception of national policy, then it might intervene a bit. So they managed the float or they, it was a “dirty float.” It wasn’t a clean, free float.  

An example might be if the currency was depreciating quickly. So the terminology changed also. Devaluation and reevaluation are terms that are applicable to the fixed exchange rate system, where the government would approach the IMF and get an agreement to change the fixed parity that was agreed under the system.  

Whereas under the floating exchange rate system, we talk about depreciation and appreciation, which is really the market, the foreign exchange market, determining whether the currency is declining in value or increasing in value. 

Intermission (00:29:05): 

You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, and Instagram. 

Steve Grumbine (00:29:54): 

We had a question, Bill. It’s one of the ones that drives me crazy personally, and it’s on the petrodollar. Lot of right wing neoclassical, monetarist, you know, speculator, piker type papers, like Zero Hedge and others fan the flames of this idea that the entire US economy is propped up on this. And this is going to your statement about free floating, so you understand.  

They believe that the dollar is pegged to oil. They believe that because the world uses the US dollar as its petrodollar, which is agreed upon exchange for petroleum products, etc., that if that goes away, then the US economy is going to collapse and we’re all going to die, and no matter how many times I’ve told people it’s just an agreed upon exchange, the dollar is no way, shape, or form pegged to the value of gasoline.  

However, because it’s pervasive, a shortage in that could drive prices up because then everything the scarcity built into that commodity could impact the economy as a whole, because prices would go up, but that’s not backing our currency, not backing anything. And so when people say this, this is one of the big slap you in the forehead moments where we’ve got Lee Camp, who is one of the largest prognosticators, he’s a comedian, but he’s also an activist.  

He talks a lot about the petrodollar. Then you’ve got Jimmy Dore, God love him. Nice guy, great guy. Talks about the petrodollar. And then you’ve got some other alternative media outlets, such as Niko House and others that talk about the petrodollar and they wave the flag, “Oh my God. We’re all gonna die,” cause the petrodollar.  

You don’t realize that the dollar is free floating. No matter how many times we explain it to him, it just doesn’t penetrate. And they keep regurgitating this and the entire progressive movement ends up in standstill, like frozen solid, can’t move. Don’t know what’s going on. They’re dying to understand how the petrodollar is going to bring the world down.  

Can you talk a little bit about the petrodollar as it were, which is nothing really other than exchange rate. Can you talk a little bit about that? 

Bill Mitchell (00:32:10): 

Well, I mean, the petrodollar is just an agreement to express the price of oil that’s traded in the various markets in one particular currency. That’s all it means. And the concern you raise is really specific part of the general statement that because the US dollar is the so-called reserve currency for all trade that that gives the US a security that other countries don’t have in terms of having economic policy latitude.  

Now, a lot of people have raised this in the past: MMT is about America only. And we come back to the statements I made at the beginning because it’s the reserve currency, it doesn’t apply to non-reserve currencies. Well, that’s completely false. The fact is that look, having a lot of people wanting to hold US dollars has a certain impact on the US dollar exchange rate.  

There’s no doubt about that. So if a lot of contracts are denominated in US dollars, that creates a demand for US dollars in the foreign exchange market that other countries who don’t have that particular status would not – and I won’t say “enjoy,” but wouldn’t experience. So that’s one thing, but go back to basics.  

The things that determine the viability of the US economy are your real resources that you can make available for production and transformation into goods and services and the currency arrangements of the government. And even if nobody else in the world wanted to hold a US dollar in their pocket, and I’ve got some in my drawer here at work, but even if nobody wanted any US dollars, the US government could still buy whatever is for sale in that currency, including all labor that was idle, that wanted a job.  

That’s the fact. Now, it may not be, as I say, for a very poor country, that may not be a very elevated level of material standards of living; but in the US, there’s going to be a much higher level; but the US government’s capacity to bring every available resource that’s for sale in US dollars into productive use isn’t determined by the fact that the petroleum industry denominates its contracts in international trading markets in US dollars.  

And the US economy wouldn’t collapse if the petroleum producers decided to denominate it in Australian dollars. There’d be virtually no change. 

Steve Grumbine (00:35:25): 

It’s funny to me. I mean, even if you didn’t know any of this, you look over at Japan. There is no such thing as a Petroyen, and Japan has a debt to GDP ratio, for what that’s worth, 250%. 

Bill Mitchell (00:35:40): 

That’s gross. 

Steve Grumbine (00:35:41): 

Thank you. Your point is, is that you’ve got this tiny little Island country that is able to do the things that we are talking about without the benefit of all these reserve currency, petrodollar this, I mean, they are a reserve currency. They are in the basket, but they don’t have the pervasiveness of the US dollar.  

So why do you suppose these doomsday sayers exist? Is it to sell books? Is it to get rich? Is it because they don’t know any better? I feel like this doomsday mindset has permeated the progressive movement and has literally created zombies out of us. There’s so many people that you say, “Yeah, you want a new deal?  

Yeah, you want a job guarantee. Yeah. You want health care,” but then when we talk about it, you come back and say something silly about the petrodollar, where you come back and say something even worse about the world reserve currency, etc. What fuels this kind of thinking? I mean, is there some nefarious being out there that is trying to push the students into a narrative, or it’s just good people that don’t know any better? 

Bill Mitchell (00:36:48): 

The majority of us are ignorant about most things, and I’m no exception. I hardly know anything about anything. And so we extemporize our own experience, which is, you know, really narrow and ill-informed and emotional. And we take advice from experts. So say for on climate change, for example, I have no idea about the science of climate and what have you.  

I have to take advice on that from people who hold themselves out as experts. And, you know, I mean, being an educated person, maybe my access to the sort of literature that will be of use to forming a view might be a different literature to that of a person who has less education on, that’s probably true and having better research skills means you’ve got better access to literature; but I have to take it on trust that these people who talk about, you know, glaciers melting here and there and the North Pole disappearing, and you know, all of that stuff.  

I have to take that and form a view on that, which then translates into the way in which I have political judgments through the voting system, for example, with respect to political parties, that advocate Kyoto Protocol and those who don’t and all that stuff. So when it comes to economic matters, we both take guidance by our own experience.  

So we get a credit card statement at the end of the month, and we go, “Holy, whatever. God, I’m maxing out today.” And we talked to each other about “Oh, God, we’ve maxed out our credit card and we’ve got to pay it back. We’ve got to pull our belt in,” and we’ve got all these metaphors to summarize our individual household experience about matters economic.  

And then we hear the experts, the so-called scientists, being my profession, come out with all this other stuff that reinforces that. And so it’s no surprise that in that sort of operating in that fog of ignorance, that we’re going to form views that reflect the views of the dominant academic view of my profession.  

And then, of course, what people like myself and the MMTers have done is I think expose the lack of science and lack of acumen of my profession. My profession is a disgrace and it’s created, as we were saying earlier, it’s created a fictional world and lured all of us ignoramuses into this fictional world where we had these narratives about things that aren’t true.  

Yet, we discuss them as if they are. And then of course, you’ve got the more venal motivations of the Koch Brothers and all these characters who have worked out that if they continue to perpetuate these sort of narratives, then that will advance their economic or ideological interests for themselves, and so you’ve got a whole crosscurrents of different motivations, different happenings, but ultimately if the economics profession came out and said, “Our fictional world is wrong.  

MMT has a much better understanding of the way the system operates,” then the narratives would start changing and all of the ignoramuses who rely on people in good faith and good trust to guide them. You know, academics are meant to be those who have got knowledge. And we support academics to have very luxurious lives, you know, reading books and sitting around thinking.  

We do that because we have faith that they will steer us non-experts in ways which will advance our well-being. Well, in the economic theory, we’ve been doubted badly. 

Steve Grumbine (00:41:08): 

So, Bill, one of the big things that I think is important for our audience to understand is the difference between what we would call a Modern Monetary Theory based real progressive, and a neoliberal. A lot of people when they hear the word “neoliberal” start pointing over there, but much of what comes out of their own mouth is quite frankly, neoliberalism.  

You did a great talk where you said most progressives are actually neoliberals and you know, the book “Reclaiming The State” speaks quite a bit about the role of neoliberalism and now it’s pervaded society. Can you talk a little bit about what neoliberalism is and what it is not and how progressives themselves can break themselves away from a neoliberal mindset? 

Bill Mitchell (00:41:58): 

Yeah, I think, you know, this goes back to the sort of 70s where, you know, progressive movements were starting to become seduced by monetarist ideas. And in a way, I mean, it was no surprise because there was a massive economic dislocation in that era. And I’m talking here about the, two big OPEC oil price rises, and for oil dependent countries, that created massive inflationary impact.  

And up until then, the sort of dominant Keynesian view was that inflation was a demand-side problem, too much demand, too much demand for goods and services pushing prices up. Whereas the inflation of the 70s was what we call a cost-push inflation. It was because suddenly countries had massive increases in essential raw materials and then had to pass them on in the form of price rises.  

And so, you know, the idea of monetarism that oh, you know, what they skillfully did was link government deficits and the full employment of that era to excessive wage demands and excessive price rises, and they were very successful at that. And you also had currency instability in the late 60s as the combination of things.  

One was the Vietnam War spending created massive US dollar deficits, but also the rise of speculative financial capital was attacking the fixed exchange rate system, like nothing else, making it unworkable basically; and that fed into the narrative also. And so, you know, progressives bought the story that government bureaucracy was bad, that government regulation was bad, that unemployment was a result of excessive, real wages and attempts by government to manipulate minimum wages, and that unemployment was a result of people being subsidized to be unemployed by income support systems like unemployment benefits and stuff.  

And so you started to get all these strands of our neoliberal narrative operating. And, you know, one of the influential books was a book by James O’Connor, who was a lefty in the early 70s, “The Fiscal Crisis Of The State.” And this was a book that sort of said that, “Oh, well, we’re going to have an increasing demand by aging populations, etc.  

on state resources, yet their tax base is like being wiped out, and there’s a crisis.” Well, there was never a crisis, of course. And the left started to believe this. And in my country, I call the Greens Party, who otherwise have excellent policies with respect to social policy, environmental policy, but they’re neoliberals on bikes. You know, they ride bikes, not cars. And why are they neoliberals on bikes?  

Because they have adopted the macroeconomic narrative that says that the government will run out of money if it runs continuous deficits. And these are the most progressive political forces yet they have bought the macroeconomic story. Now, how we overcome that is something that we’ve been working on for years and years. 

Steve Grumbine (00:45:23): 

So with that in mind, let’s ask the question here about the federal job guarantee, cause I think this kind of plays into the role. Obviously the federal job guarantee, the buffer stock of employed people is now really gaining a lot of mainstream attention in the United States. You guys have been working diligently. I mean, you’re the godfather of the job guarantee going way back. Tell me a little bit about, 

Bill Mitchell (00:45:49): 

We won’t put any religious connotation on it: God. 

Steve Grumbine (00:45:55): 

We see a lot of people that are confused about what this all means and how can we afford it, and I hear people ask me the question of, “Can you tell me what it’s going to cost us?” and I’m like, “It’s not gonna cost us anything.” 

Bill Mitchell (00:46:13): 

It’ll cost us any extra real resources that the unemployed people are able to consume now, as a result of having the stable income. That’s what the cost is. 

Steve Grumbine (00:46:25): 

But it’s not a financial cost. Like for example, I know. 

Bill Mitchell (00:46:29): 

It’s a number in an account. Someone will just get on their typewriter and type in a number. That’s the financial implication. 

Steve Grumbine (00:46:37): 

We have a gentleman on our team. He’s relatively new to MMT. He’s just learning. He’s still kind of got his ears out there in the neoliberal world, and he just said, “We’ve got to come up with how much these programs costs. Otherwise, people aren’t going to take us seriously.” And I said, “Listen, my friend, if you listen to the MMT people, the people that are really, really doing the work, they’ll tell you that the dollar amount is irrelevant.  

The real consideration here is the real resource and it should be an inflation constraint, not a ‘budgetary constraint.'” Can you talk just a little bit about the budgetary constraint versus the inflation constraint? So people stop asking these silly, like CBO type questions where it’s like, “Well, how much is it going to cost?”  

Which is really, if you peel it back, it’s really founded in that idea of a money scarce. We’re running out of money. It’s still a neoliberal question. How do we deal with that? 

Bill Mitchell (00:47:33): 

The Economist Magazine came out with a massive attack on the discussions in the US in the last month, maybe about employment guarantees and specifically from some of the promoters of the job guarantee, so it’s out there. Now, if you read The Economist Magazine’s editorial about this, I think it was published yesterday, you just go, “You know, I’ve gotten so used to now reading these critiques and paragraph by paragraph, you just tick, tick, tick, tick, tick off, tick off.”  

And you can almost, I could almost write some computer code, some Java script or something that could, you know, so someone could log into a site and say, “I want to write a critique of the job guarantee,” and I’d get them to click a button and not have their 2000 word critique. Every one of the arguments that I’ve read in the last month in the US press or yesterday in The Economist Magazine, we’ve considered them 20 years ago and written about them 20 years ago.  

And the literature’s out there. And sometimes I get somewhat testy on my blog for commentators who come in new to the story and then hold themselves out as experts on employment guarantees, and then just reiterate all of the stories that we’ve been through time after time. And then they come back and say, “Oh yeah?  

How dare you demand that I read anything?” And to some extent, they’ve got a point that, you know, it’s not necessarily their role to be experts in the literature, but yeah, it’s frustrating. The story is quite clear that all of the criticisms that we’ve seen about the organizational capacity of a job guarantee, whether it can be administrated properly, whether these would be jobs that were, you know, I heard last week on your debate, this idea about “bullshit” jobs, this is this Graeber anthropologist guy in LSE, wanting to capture some headlines for himself.  

And so he decides to call them “bullshit” jobs. Well, they’re people’s jobs and they care about their jobs, but, and all the stories about government not being able to afford it, I mean, one of the paragraphs in The Economist article was, well, “How are we going to pay for this?” You know, a MMT-informed person knows how payments are made.  

They’ll say, someone’s going to click a few keys on a computer and transfer money from one account to another. That’s how it’s going to be paid for. And what’s the cost of it? Well, as I said, the cost of it is the real resources or are the real resources that that person who gets the job is going to be able to consume extra.  

Now that they’ve a job and previously they didn’t have, and some of the capital equipment that’s going to be required to complement that person’s employment – that’s the real cost. Now under certain circumstances, if the government was hiring those people at a market wage, well, then that could be inflationary.  

But if they’re hiring those people at fixed wages, well, then that’s unlikely to be inflationary. Now I read someone say, “Oh yeah, well, if we’re going to build new footpaths or something, we’ll run out of concrete and cement for them to work with.” Well, that might happen at that point in time in Florida, if there was a shortage of concrete, well then the job guarantee projects that required concrete wouldn’t happen at that particular time that you’d have some other projects.  

So it’s possible that a job guarantee could put a strain on real resources, but that your imagination is almost infinite. If you think about what can be done, that advances well-being in community welfare or environmental well-being or whatever, there’s just no shortage of things that can be done. So that real resource constraint argument, I don’t think flies.  

It just means that you’ve got to be clever in your design. The criticisms have got such a negative view of human capacity. I mean, in the late 1960s, we put a human on the moon. Can you imagine the complexity of the physics and the astronomy and the engineering that was required to achieve that 50 years ago?  

And you’re saying we can’t design a few jobs that improve people’s lives? I mean, this is just a farce. And so there’s no financial constraint in employing everybody. That’s clear. There could be some logistical constraints and that requires some planning and some foresight and some imagination which humans have got plenty of.  

And, you know, the idea “Oh, how would we create a bureaucracy to administer it?” Well, we already have massive bureaucracies running the industry that I call unemployment in most countries. In my country, we have an advanced government bureaucracy that just monitors the unemployed. Now, all you’d need to do was alter the sign on the building and say, “Take down Centrelink,” which is the unemployment industry office, and put “Job Guarantee Office” up there, and you’ve got your administrative structure, for God’s sake.  

You know, every country has got really advanced taxation departments, you know, Inland Revenue Service in the US and these are complex bureaucratic processes. We know how to do that sort of stuff. 

Steve Grumbine (00:53:22): 

What do we do as progressives? There’s no shortage of excuses out there, and these are not economic discussions totally, but they impact the economic acceptance. Number one, we’ve got a lot of people that are ready to throw in the towel before they’ve even tried, saying, “Well, we can’t do anything.  

Republicans are in office.” Drives me absolutely bonkers because the people don’t even know that we can do these things because they haven’t taken the time to learn the economics behind it, so they’re still willing to accept crumbs really, in my opinion, has less to do with the Republicans and more to do with us doing our own diligence and going out there and forcing the narrative as citizens of whatever nation we’re in and pushing to advance these things, because the people don’t make demands because they are still stuck in neoliberal mindset, the Republicans end up getting away with it because they always sound oh so logical as they go ahead and try and cut things.  

Can you talk a little bit about the progressive give-up strategy that many deploy? 

Bill Mitchell (00:54:26): 

Look, what I’ve observed among polities across many countries is that the left have, on economic matters, have a developed an inferiority complex. There seems to be a perception that the people who know how to run the economy and know about money are those who have the direct links with the top end of town – so the business community and the wealthy – “They’ve obviously been successful,” is the narrative; and it’s the conservatives who hang out with those guys.  

And so they’ve got the running on responsible economic management. And the progressive side of politics are the, you know, came from the trade union movements and the revolutionary cadres and all these characters. And, you know, they’re just “smash the system” types and they don’t hang out at the top end of town.  

They don’t play golf at the best Florida golf clubs and they don’t mix it. So they’ve got this sort of inferiority complex and certainly in my country and in Britain. But certainly what that’s meant is that the progressive side of politics have gone out of their way to appear to be responsible as a sort of overreaction to this view, that the perception among people is that the conservatives know how to run the economy and the progressives don’t.  

And so you hear, I mean, we had the annual fiscal statement also known as the budget delivered in Australia last Tuesday. It was a conservative government moment and it was very predictable what they’d say, but on the Thursday night, the opposition, which is the Labor Party, which is the trade union party, is the major opposition have their budget reply speech.  

And you just wouldn’t believe what they were saying. They’ll get the debt down quicker and, you know, they’ll get the deficit back into surplus more quickly and stuff like this; and that’s inferiority complex. And it’s also a reflection of the way in which the progressive side of politics has been captured by what I call “careerists.”  

And in many countries, the progressive side of politics, the social Democrats, the socialists, the Labor parties, the Democrats in your context, the breeding ground for those politicians were the working class movements, the trade union movements and worker associations and things. And now in many of countries, the recruiting grounds for progressive parties are university educated lawyers and accountants and bankers; and those characters don’t have the working class roots that progressive policies used to have, and they have a much different narrative.  

So that’s the sort of surrender mentality that’s developed on all the social democratic movements. And the challenge for progressive side of politics is to recapture the political parties meant to represent our voice and to then educate the masses to deprogram us from the neoliberal narratives that our progressive politicians have fed us for too long. 

Steve Grumbine (00:58:00): 

So Professor Mitchell. One last thing I wanted to ask, and this is probably the most difficult of the bunch. You know, you said something about the Green Party. Every time you critique anything and mind you you’re pulling for the same stuff, you want them to be successful. They just quite frankly have no valid economic background.  

They confuse socialism, which is the balance between labor and capital with understanding economics and how money is created, etc., you don’t realize they’re not the same thing. And so, you know, as we look at these things, they oftentimes, if you criticize the Green Party, oh it was like, “Well, I’m not going to take this anymore. Oh my God. He said something bad about the Green Party.” And it’s so dramatic. So emotionally flippant that they don’t hear anything beyond that.  

And this is a huge problem with the Green Party in the United States. I’m not sure about the rest of the world, but I do know within the United States, there is a movement within the Greens that they are beginning to open their mind. And they’re beginning to push back against the neoliberal narratives that live within, or the “burn-it-down” narratives that live, or the just “stories from the firepit” narratives that live in the Green Party.  

But what we’ve come to is this point where there’s like these roadblocks that have nothing to do with economics. That’s not, “Lay it out. Let me show you and trace it along here.” This is about people just truly throwing up emotional roadblocks. And you’ve talked extensively about re-framing Modern Monetary Theory, stating it differently, coming up with narratives that work for people at their level so that they understand these things.  

How might you suggest we work past these emotional blockers that people throw up the minute that you say something about their beloved party? They’re not worried about the beloved people. They’re worried about their beloved party. And it’s very, very difficult for all of us, quite frankly, that are trying to change the world to get past this recalcitrance, this indignation that comes with any seeming critique of their beloved party.  

Can you help me there? 

Bill Mitchell (01:00:18): 

Look, I’ve had very close dealings with Green Parties and the leadership of Green Parties in trying to persuade them to adopt a progressive economic narrative to support and complement their excellent social and environmental narratives in their mind. And I won’t say who, but at one particular point, I had a meeting with the Greens leader in Australia.  

No, I won’t tell you who, because you don’t know when, and that person said to me, “Look, Bill, you may be right on all this economic stuff, but we’re not going to ever take it on because it’s too hard for people to understand. And it will just distract us and them from our core business, which is environment and more recently social policy.”  

And my reply was “It is complex, but you’re not ever going to be able to achieve your social and environmental agenda because you’re never going to be able to address and refute the statement that we can’t afford any of that.” And the Green Parties are very interesting because in different countries, they have sort of schizophrenic structures. There are a mixture of very conservative, you know, in Australia we call them tree huggers. So these are people who have got very committed, but very narrow focus on what they want and that’s to preserve forests, native forests, rainforests, and things like that.  

They’re the tree huggers and they’re ultimately quite conservative. And there’s another element in Greens Parties that come from the sort of industrial left. And these people have been refugees, if you like, from the de-industrialization that our nations have gone through as manufacturing changed and shifted countries and shifted regions and their approach to greenness is very different.  

They are much more amenable to an economic discourse than the tree hugger type green, who’s not really interested in it at all. And who would be really, if you were just worried about preserving forests. And to me, that’s one of the problems of greens type parties historically now, how they get out of that bind .  

. . If they want to be truly progressive, they have to become MMT-oriented, in my view. They have to abandon statements. I mean, our Greens leader now is talking about, you know, cutting deficits and cutting debt and bringing in market-based trading systems for carbon. You know, that’s just pure neoliberalism.  

They have to get away from that to be truly progressive. I don’t see that they’re going to, and if you look at the national elections, almost in every country over the last several years, the Greens Parties in most countries have been going backwards. And that’s because they really can’t cut through the debate because no matter how progressive their social and environmental policy are, they always get picked off by how they’re going to pay for it.  

And the way they normally turn around is with this sort of ridiculous tax-the-rich arguments, which is sort of the progressive crevasse that they always fall down to. “Oh we’ll just tax the rich; and the middle class see tax-the-rich as taxing them as well.” And I’m not a political scientist or a psychologist, but I know the greens aren’t cutting through because they are still neoliberal mainly in economic matters.  

And what we really need is progressive forces to bypass them and create new political platforms that are both progressive in social environmental policy but also economic policy. 

Steve Grumbine (01:04:33): 

So, you know, being that you’re from Australia, you certainly understand the Australian side, I’m in the US and I happened to have been battling the US Green Party. And I’ve been to New Jersey, spoke at the national meeting and provided a full blown explanation of the basics of how to pay for a Green New Deal.  

And the leadership of the Green Party stayed out in the hall. They literally got up when they saw me going to present and they walked out because the Green Party in the US supports something called American Monetary Institute or AMI, which is a positive money spin, which is money crank nonsense. 

Bill Mitchell (01:05:14): 

Yeah. I mean, the point is, Steve, that, yeah, I know more about Australia, which is understandable, but I haven’t seen any statements from Green US leaders, Green Parties in Europe, in Britain, in South America. I haven’t seen any statements from them that indicative that they understand macroeconomics in an MMT way, which means that effectively, they’re riddled with what we now call mainstream economic concepts closed in progressive language and framing, but you can’t escape the underlying bias.  

That’s the reality. 

Steve Grumbine (01:05:56): 

Dr. Mitchell. I want to thank you right now so much for spending time with us. I appreciate your patience. And I look forward to having you back again. Everything that you’re doing is helping us and we are very, very grateful for all the support that you’ve given. You have been an incredible contributor for the work that we’re doing, and we hope that we’ve provided value to the cause as well. 

Bill Mitchell (01:06:22): 

Okay, take care. Thank you very much. 

Steve Grumbine (01:06:24): 

Thank you so much. We’ll see you soon. 

Bill Mitchell (01:06:27): 

See you later. 

End Credits [music] (01:06:34): 

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